<PAGE>
As filed with the Securities and Exchange Commission on April 4, 1997
Registration No. 333-19077
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------
Amendment No. 2
to
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------
SunSource Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 6719 23-2874736
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification No.)
</TABLE>
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Address, I ncluding zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
DONALD T. MARSHALL
President and Chief Executive Officer
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
SunSource Capital Trust
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 6719 23-2874735
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification No.)
</TABLE>
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------
DONALD T. MARSHALL
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C> <C>
DONALD A. SCOTT ANDREW R. KELLER WILLIAM G. LAWLOR
Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett Dechert Price & Rhoads
2000 One Logan Square 425 Lexington Avenue 1717 Arch Street
Philadelphia, PA 19103 New York, NY 10017 Philadelphia, PA 19103
(215) 963-5000 (212) 455-2000 (215) 994-4000
</TABLE>
<PAGE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effectiveness of this Registration Statement and
the satisfaction or waiver of all other conditions to the merger of SunSource
L.P. (the "Partnership") anda wholly-owned subsidiary of the Partnership with
and into the Registrant pursuant to the Agreement and Plan of Conversion dated
March __, 1997 among the Registrant, the Partnership, PartSub Inc., a Delaware
corporation, Lehman/SDI, Inc., a Delaware corporation and the limited partners
of SDI Partners I, L.P., described in the enclosed Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended, other than securities offered only in
connection with dividend or interest reinvestment plans, check the following box
[X].
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to such Section
8(a), may determine.
<PAGE>
Philadelphia, Pennsylvania
April __, 1997
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
To Be Held On April __, 1997
To the Limited Partners of SunSource L.P.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the limited partners
of SunSource L.P., a Delaware limited partnership (the "Partnership"), will be
held at _______________________, Philadelphia, Pennsylvania on April __, 1997 at
10:00 a.m., local time.
At the Special Meeting, the limited partners will vote upon a proposal
(the "Conversion Proposal") to convert the Partnership to corporate form (the
"Conversion"). If the limited partners approve the Conversion Proposal:
o Each Class A limited partnership interest ("A Interest") will be
exchanged for $1.30 in cash and 0.38 of an 11.6% Trust Preferred
Security of SunSource Capital Trust, a business trust holding 11.6%
Junior Subordinated Debentures of the Corporation. The Trust Preferred
Securities will have a liquidation preference of $25, will be entitled
to cumulative distributions of $2.90 per year payable monthly and will
mature in 30 years, subject to optional redemption after five years or
earlier upon the occurrence of a Tax Event.
o Each Class B limited partnership interest ("B Interest") will be
exchanged for 0.25 share of Common Stock of the Corporation (the
"Common Stock").
The Conversion will be accomplished by the following:
o The contribution by the Partnership of its limited partnership interest
in SDI Operating Partners, L.P. (the "Operating Partnership") and by
Lehman/SDI, Inc. ("Lehman/SDI") of its general partnership interest in
SDI Partners I, L.P., the general partner of the Partnership and the
Operating Partnership (the "General Partner"), to a subsidiary of the
Partnership ("LPSub") in exchange for common stock of LPSub.
o The contribution by certain current and former members of management of
their limited partnership interests in the General Partner to SunSource
Inc., a newly formed Delaware corporation (the "Corporation"), in
exchange for 462,000 shares of Common Stock, of which 75,000 shares
will be held in escrow to be distributed after two years if all
distributions on the Trust Preferred Securities have then been paid,
and the contribution by the Corporation of the limited partnership
interests to a wholly owned subsidiary.
o A merger (the "Merger") of the Partnership and LPSub with and into the
Corporation, in which (i) the A Interests will be converted into
4,217,837 Trust Preferred Securities and cash; (ii) the B Interests
will be converted into 5,418,936 shares of Common Stock and (iii) the
common stock of LPSub held by Lehman/SDI will be converted into 538,000
shares of Common Stock.
As a result of the Conversion, the Partnership will cease to exist and
subsidiaries of the Corporation will own all of the partnership interests in the
Operating Partnership and the General Partner. Unaffiliated holders of A
Interests will hold 4,187,543 and affiliated holders of A Interests will hold
30,294 Trust Preferred Securities (in each case, less the number of fractional
shares for which holders will receive cash in the Conversion) Trust Preferred
Securities and unaffiliated holders of B Interests will hold 2,954,601 (less the
number of fractional shares for which holders will receive cash in the
Conversion) shares of Common Stock (46.0% of the total outstanding). The
partners of the General Partner and other affiliates of the General Partner who
presently hold B Interests will hold 3,464,335 shares of Common Stock (54.0% of
the total outstanding).
The Conversion Proposal and related matters are more fully described in
the attached Proxy Statement/Prospectus, which (together with the exhibits
thereto and the documents incorporated by reference therein) forms a part of
this Notice and is incorporated herein by reference. Frequently used capitalized
terms are defined in Exhibit A thereto and a chart illustrating the relative
relationships of the entities before and after the Conversion is set forth
before the Summary to the Proxy Statement/Prospectus.
The Conversion will require (i) the approval of limited partners
holding a majority of the outstanding A Interests and B Interests, each voting
separately as a class, and (ii) the approval of unaffiliated limited partners
(limited partners other than affiliates of the General Partner) holding a
majority of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class. Only limited partners of the
Partnership of record at the close of business on March __, 1997 are entitled to
notice of and to vote at the Special Meeting.
<PAGE>
You are cordially invited to attend the Special Meeting. If you cannot
attend, please sign and date the accompanying form of proxy and return it
promptly in the enclosed envelope. If you attend the meeting, you may vote in
person regardless of whether you have given your proxy. Any proxy may be revoked
at any time before it is exercised, as indicated herein.
By Order of the General Partner
Joseph M. Corvino, Secretary
SDI Partners I, L.P.
Your vote is important. Accordingly, you are asked to complete, sign and return
the accompanying proxy card in the envelope provided, which requires no postage
if mailed in the United States.
<PAGE>
Proxy Statement/Prospectus
SUNSOURCE INC.
6,418,936 Shares of Common Stock
SUNSOURCE CAPITAL TRUST
4,217,837 11.6% Trust Preferred Securities
(Liquidation Amount $25 per Trust Preferred Security)
Fully and unconditionally guaranteed, as described herein, by
SUNSOURCE INC.
This Proxy Statement (which is also a Prospectus) relates to the
issuance of (i) Common Stock, par value $0.01 per share ("Common Stock"), of
SunSource Inc., a Delaware corporation which has been newly formed by SunSource
L.P., a Delaware limited partnership, and (ii) 11.6% Trust Preferred Securities
(the "Trust Preferred Securities") of SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"), representing preferred undivided
beneficial interests in the assets of the Trust, which will consist of 11.6%
Junior Subordinated Debentures ("Junior Subordinated Debentures") of SunSource
Inc. In this Proxy Statement/Prospectus, SunSource Inc. is referred to as the
"Corporation" and SunSource L.P. as the "Partnership." Other frequently used
capitalized terms are defined in Exhibit A hereto (located inside the back
cover).
This Proxy Statement is being sent by the Partnership to the holders of
Class A limited partnership interests ("A Interests") and Class B limited
partnership interests ("B Interests," and together with A Interests,
"Interests") in connection with the solicitation by SDI Partners I, L.P., a
Delaware limited partnership which is the general partner of the Partnership
(the "General Partner"), of proxies to be voted at a Special Meeting of the
Partnership's limited partners in Philadelphia on April __, 1997. At the Special
Meeting, the limited partners will vote on a proposal (the "Conversion
Proposal") that, if approved, will result in the conversion of the Partnership
to corporate form (the "Conversion").
The Conversion will be accomplished through a merger (the "Merger") of
the Partnership and a subsidiary of the Partnership ("LPSub") with and into the
Corporation. Upon consummation of the Merger, each A Interest will be exchanged
for 0.38 of a Trust Preferred Security and $1.30 in cash. The Trust Preferred
Securities will have a liquidation preference of $25, will be entitled to
cumulative distributions of $2.90 per year payable monthly and will mature in 30
years, subject to optional redemption after five years or earlier upon the
occurrence of a Tax Event. Each B Interest will be exchanged for 0.25 share of
Common Stock of the Corporation. The general partnership interest in the General
Partner held by Lehman/SDI, Inc. ("Lehman/SDI") will be exchanged for 538,000
shares of Common Stock. The limited partnership interests in the General Partner
held by current and former members of management will be exchanged with the
Corporation for 462,000 shares of Common Stock, of which 75,000 shares will be
held in escrow to be distributed after two years if all distributions on the
Trust Preferred Securities have then been paid. As a result of the Conversion,
(i) the Partnership will cease to exist and subsidiaries of the Corporation will
own all of the partnership interests in the Operating Partnership and the
General Partner; (ii) the unaffiliated holders of A Interests will hold
4,187,543 and affiliated holders of A Interests will hold 30,294 Trust Preferred
Securities (in each case, less the number of fractional shares for which holders
will receive cash in the Conversion); (iii) unaffiliated holders of B Interests
will hold 2,954,601 (less the number of fractional shares for which holders will
receive cash in the Conversion) shares of Common Stock (46.0% of the total
outstanding); and (iv) the partners of the General Partner and affiliates of the
General Partner who presently hold B Interests will hold 3,464,335 shares of
Common Stock (54.0% of the total outstanding).
(cover page continued)
----------
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION
OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The date of this Proxy Statement/Prospectus is April __, 1997.
<PAGE>
The General Partner believes that the Conversion is in the best
interests of the Partnership and its limited partners and recommends that the
limited partners approve the Conversion. There are conflicts of interest between
the General Partner and the limited partners with respect to certain matters
relating to the Conversion.
The Conversion involves certain factors that should be considered by
all limited partners. The effects of the Conversion may differ for each limited
partner and may be disadvantageous to some depending upon their individual
circumstances and investment objectives. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS" and "SPECIAL FACTORS." In
particular, limited partners should consider that:
o There are conflicts of interest between the General Partner and the limited
partners in the Conversion. A benefit to the partners of the General
Partner which is not shared by the limited partners is the elimination of
liability of the General Partner for liabilities of the Partnership which
occur after the Conversion. Limited partners were not separately
represented in establishing the terms of the Conversion. Such
representation might have caused the terms of the Conversion to be
different in some respects from those described herein. The fiduciary
duties owed by the directors of the Corporation after the Conversion may be
less than those owed by the General Partner of the Partnership before the
Conversion, which may result in decreased potential liability of the
directors of the Corporation. See "COMPARISON OF INTERESTS AND SECURITIES
TO BE ISSUED -- Fiduciary Duties." In addition, certain members of
management will receive accelerated payments under certain deferred
compensation plans of the Operating Partnership.
o If the Conversion is approved, the Partnership and the limited partners
will forego the potential future tax benefits associated with operating in
partnership form (e.g., no tax paid at the Partnership level on its taxable
income) immediately, rather than beginning after December 31, 1997.
o After the Conversion, holders of A Interests will no longer have their
contractual right under the Partnership Agreement to the Priority Return
(as defined herein), although they will be entitled to receive
distributions on the Trust Preferred Securities in an amount equal to such
Priority Return before dividends are paid on the Common Stock. Holders of B
Interests will no longer have the right to receive tax distributions with
respect to their allocable share of the Partnership's taxable income,
although they will no longer be taxed with respect to income of the
Corporation. If the Conversion is approved, the Board of Directors will
have discretion to defer payments on the Junior Subordinated Debentures for
up to five years. If such payments are deferred, the Trust will be unable
to make distributions on the Trust Preferred Securities, and the
Corporation will be prohibited from paying dividends on the Common Stock.
Provided distributions on the Trust Preferred Securities are not in
arrears, the Board of Directors will have discretion to declare and pay
dividends on the Common Stock, but there can be no assurance that the
Corporation will make dividend distributions. Management presently intends
not to recommend the payment of dividends on the Common Stock in order to
retain cash to fund the Corporation's acquisition program and general
corporate requirements.
o Limited partners have no dissenters' or appraisal rights in the Conversion.
Therefore, limited partners will not be entitled to receive a cash payment
from the Partnership for the fair value of their interests if they dissent
and the Conversion is approved and consummated.
o Prior to the Conversion, there has been no public market for the Trust
Preferred Securities or the Common Stock. Because the consideration
received by the holders of A Interests includes $1.30 in cash for each A
Interest, it is likely that the Trust Preferred Securities received in
respect of each A Interest will trade at prices below the market price of
the A Interests immediately prior to the Merger. The Common Stock received
by the holders of B Interests may trade at prices below the market price of
the B Interests. If a large number of holders of Trust Preferred Securities
or Common Stock were to offer their securities for sale immediately after
consummation of the Conversion, the market prices of the securities could
decline substantially absent a corresponding demand for the securities from
other investors.
o Transaction costs of approximately $3,600,000 will be incurred by the
Partnership, of which approximately $3,000,000 will be paid whether or not
the Conversion is completed.
ii
<PAGE>
Holders of A Interests should also consider the following additional risks:
o The receipt of Trust Preferred Securities and cash by the holders of A
Interests will be a taxable event. The receipt of Trust Preferred
Securities, Common Stock and cash by the holders who hold both A Interests
and B Interests will be a taxable event. In addition, holders of Trust
Preferred Securities will be required to accrue original issue discount
income with respect to any unpaid distributions on the Trust Preferred
Securities.
o Unlike the A Interests, which are not subject to mandatory or optional
redemption by the Partnership, the Junior Subordinated Debentures held by
the Trust may be redeemed by the Corporation at 100% of the principal
amount plus accrued and unpaid interest at any time after April 30, 2002 or
earlier at 101% of the principal amount plus accrued and unpaid interest
upon the occurrence of a Tax Event. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Optional Redemption."
o The obligations of the Corporation under the Junior Subordinated Debentures
will be unsecured obligations and will be subordinate and junior in right
of payment to senior indebtedness of the Corporation and will be
structurally subordinated to all liabilities and obligations of the
Operating Partnership and the Corporation's other subsidiaries. As of
December 31, 1996 (on a pro forma basis, assuming the Merger had occurred
on such date), the Corporation would have had approximately $99.3 million
principal amount of senior indebtedness outstanding, and the Operating
Partnership and the Corporation's other subsidiaries would have had
approximately $87.6 million of indebtedness and other liabilities. There
are no terms in the Trust Preferred Securities or the Junior Subordinated
Debentures that limit the Corporation's or its subsidiaries' ability to
incur additional indebtedness.
Holders of B Interests should also consider the following additional risks:
o There are conflicts of interest between the A Interests and the B Interests
and between the General Partner and the B Interests with respect to the
determination of the consideration to be received in the Conversion. To the
extent the partners of the General Partner receive Common Stock in the
Conversion, the interest in the Corporation represented by the shares of
Common Stock to be received by holders of B Interests will be diluted.
Also, the value of the consideration to be received by holders of B
Interests and by the partners of the General Partner will be reduced to the
extent of the consideration to be received by holders of A Interests.
o Certain provisions of Delaware law and the Corporation's organizational
documents may reduce the likelihood of a takeover of the Corporation that,
if successful, would permit stockholders to receive a premium over the
market price of the Common Stock.
o Issuances of additional shares of Common Stock or Preferred Stock by the
Corporation could adversely affect existing stockholders' equity interest
in the Corporation and the market price of the Common Stock.
o The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman/SDI and certain of its affiliates
(collectively, "Lehman Brothers") and, subject to certain limitations, by
management, after the Conversion. Lehman Brothers and management have
agreed to cooperate to execute an underwritten secondary offering of all or
some portion of their shares of Common Stock as soon as practicable after
the effective date of the Conversion, subject to market conditions. The
Corporation has agreed not to sell any additional shares of Common Stock
prior to the earlier of such initial secondary offering and the nine-month
anniversary of the Conversion, except in connection with acquisitions. In
addition, Lehman Brothers Capital Partners I, an affiliate of Lehman/SDI
holding 5,788,124 B Interests, may distribute the shares of Common Stock it
receives in the Merger (a majority of which shares would be freely
tradeable immediately after such distribution) to its partners. See "RESALE
OF SECURITIES -- Resales by Lehman Brothers and Management."
-iii-
<PAGE>
o The Corporation's unaudited pro forma balance sheet at September 30, 1996
reflect a stockholders' deficit of approximately $19 million and a negative
net book value per common share of $2.97. Counsel has advised the
Partnership and the Corporation that under Delaware law, dividends or
distributions on the stock of a Delaware corporation may be declared or
paid out of surplus, so that the net assets of the corporation after such
payment shall at least equal the amount of its capital. However, such a
dividend or distribution is permissible under such provision only if the
corporation's board of directors concludes that (a) immediately following
payment of such dividend or distribution, the fair market value of the
corporation's assets will exceed its liabilities and (b) the payment of
such dividend or distribution is being made out of the corporation's
surplus (net assets minus capital) and not out of capital in contravention
of Delaware law. In case there shall be no surplus, dividends may also be
paid out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. The foregoing restrictions will
not affect the payment of distributions on the Trust Preferred Securities
which are issued by the Trust rather than the Corporation. In addition, it
is the current intention of the Board of Directors of the Corporation not
to declare dividends on the Common Stock.
In addition to the factors noted above, an investment in SunSource
(whether in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and equity market conditions.
The General Partner believes that the Conversion will provide SunSource
and the holders of B Interests the following benefits:
o Expand the base of potential investors in SunSource to include persons and
institutional entities who do not typically invest in limited partnership
securities. In addition, the General Partner anticipates that the Common
Stock (as compared to Interests) will receive additional investor interest
through increased review and evaluation by research analysts.
o Conserve cash by the retention of the annual management fee of $3,330,000
and the retention of distributions on the General Partner's ownership in
the Partnership and the Operating Partnership amounting to approximately
$400,000 annually.
o Although the Corporation will have to pay tax on its income, SunSource will
conserve additional cash (i) because the interest payable on the Junior
Subordinated Debentures, which will approximately equal the distributions
currently paid on the A Interests, will be deductible for federal income
tax purposes, resulting in a corporate tax benefit of approximately
$4,900,000 annually and (ii) because of the difference in rates between the
B Tax Distribution (as defined herein), which will be eliminated, and the
tax that will become payable by the Corporation. Subject to changes in
federal income tax laws, approval of the Conversion Proposal should assure
tax deductibility on the distributions in respect of the Trust Preferred
Securities, which will replace the Priority Return. If the Conversion is
not approved, the Priority Return would have to be paid from net income
after corporate income taxes after December 31, 1997.
o Permit greater flexibility to consummate acquisitions due to conservation
of cash resources and the ability to use capital stock as acquisition
currency.
o Provide greater access to public and private debt and equity capital
markets at a potentially lower cost of capital.
o Simplify and reduce costs of tax reporting for investors in SunSource.
The General Partner also believes that the Conversion will provide the
holders of A Interests with benefits in the form of the cash payment of $1.30,
the continuation of the $1.10 distribution and a more readily tradeable
security, and will simplify and reduce costs of tax reporting for holders. In
addition, to the extent the benefits described above for the holders of B
Interests strengthen the financial condition of the Corporation, the risk that
distributions on the Trust Preferred Securities will not be paid will decrease.
-iv-
<PAGE>
The Conversion will require (i) the approval of limited partners holding a
majority of the outstanding A Interests and B Interests, each voting separately
as a class, and (ii) the approval of unaffiliated limited partners (limited
partners other than affiliates of the General Partner) holding a majority of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class. Such majority approvals will bind all limited partners
regardless of whether they vote against the Conversion. The affiliates of the
General Partner, who own approximately 46% of the B Interests, have advised the
Partnership that they will vote in favor of the Conversion Proposal. Failure to
forward a proxy or to vote in person at the Special Meeting will have the same
effect as if a limited partner had voted against the Conversion Proposal.
This Proxy Statement/Prospectus and the related form of proxy are first
being sent to limited partners on or about March __, 1997.
Application has been made to list the Trust Preferred Securities and Common
Stock on the New York Stock Exchange.
No person is authorized to give any information or to make any representation
not contained in this Proxy Statement/Prospectus, and any information or
representation not contained herein must not be relied upon as having been
authorized by the Partnership, the General Partner, the Corporation or the
Trust. This Proxy Statement/Prospectus does not constitute an offer of any
securities other than the registered securities to which it relates or an offer
to any person in any jurisdiction where such offer would be unlawful. Neither
the delivery of this Proxy Statement/Prospectus nor any sales made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Partnership or the Corporation since the date
hereof.
Until 25 days after the date of this Proxy Statement/Prospectus, all dealers
effecting transactions in the Trust Preferred Securities and the Common Stock,
whether or not participating in this distribution, may be required to deliver a
Proxy Statement/Prospectus.
-v-
<PAGE>
TABLE OF CONTENTS
ORGANIZATION CHART..........................................................1
SUMMARY.....................................................................2
RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS.............................................16
Risks Applicable to Holders of A Interests and B
Interests ........................................................16
Additional Risks Applicable to Holders of A
Interests.........................................................18
Additional Risks Applicable to Holders of
B Interests.......................................................21
VOTING AND PROXY INFORMATION...............................................22
SPECIAL FACTORS............................................................23
Background of the Conversion..........................................23
Existing Partnership Structure........................................24
Existing Economic Interests of the Partners...........................25
Alternatives to the Conversion........................................25
Reasons to Convert to Corporate Form..................................27
Terms of the Conversion...............................................28
Consequences if Conversion is Not Approved............................29
Limited Partner Litigation............................................30
Determinations of the Special Committee...............................30
Opinion of Smith Barney...............................................41
Recommendation of the General Partner and
Fairness Determination............................................46
Source and Amount of Funds............................................46
Accounting Treatment..................................................46
Fees and Expenses.....................................................47
Exchange of Depositary Receipts.......................................47
Treatment of Fractional Shares........................................47
COMPARISON OF INTERESTS AND SECURITIES
TO BE ISSUED..........................................................48
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES..........................................................55
Partnership Status and Taxation of the
Partnership.......................................................56
General Tax Treatment of the Conversion...............................56
Certain Tax Consequences of the Conversion
to Holders of B Interests.........................................57
Certain Tax Consequences of the Conversion
to Holders of A Interests.........................................58
Other Tax Issues Affecting Limited Partners...........................61
Tax Consequences to the Corporation
and the Partnership...............................................61
Unrelated Business Taxable Income.....................................61
Other Tax Aspects.....................................................62
MARKET PRICES AND DISTRIBUTIONS............................................62
<PAGE>
CAPITALIZATION.............................................................62
SELECTED HISTORICAL
FINANCIAL INFORMATION.................................................65
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.........................................................66
BUSINESS...................................................................80
General...............................................................80
Acquisition Strategy..................................................81
Products and Services.................................................82
Marketing.............................................................82
Competition...........................................................83
Insurance Arrangements................................................83
Employees.............................................................83
Backlog...............................................................84
Federal Income Tax Considerations.....................................84
Legal Proceedings.....................................................85
MANAGEMENT.................................................................86
Executive Officers and Directors......................................86
Directors and Executive Officers After the
Conversion........................................................87
Compensation..........................................................88
Deferred Compensation Plans...........................................89
Change in Control Arrangements........................................89
Management Fee........................................................89
Certain Business Relations............................................89
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT............................................................90
SUNSOURCE CAPITAL TRUST....................................................91
DESCRIPTION OF TRUST PREFERRED
SECURITIES............................................................93
General...............................................................94
Distributions.........................................................94
Mandatory Redemption..................................................95
Special Event Redemption or Distribution..............................96
Redemption Procedures.................................................97
Subordination of Trust Common Securities..............................98
Liquidation Distribution Upon Dissolution.............................98
No Merger, Consolidation or Amalgamation
of the Trust......................................................99
Declaration Events of Default.........................................99
Voting Rights.........................................................99
Modification and Amendment of the
Declaration......................................................101
Book-Entry; Delivery and Form........................................102
-vi-
<PAGE>
Expenses and Taxes...................................................103
Registrar, Transfer Agent and Paying Agent...........................103
Information Concerning the Property Trustee..........................104
Governing Law........................................................104
Miscellaneous........................................................104
DESCRIPTION OF PREFERRED
SECURITIES GUARANTEE.................................................104
General..............................................................104
Certain Covenants of the Corporation.................................104
Amendments and Assignment............................................104
Termination of the Preferred Securities
Guarantee........................................................105
Status of the Preferred Securities Guarantee.........................106
Governing Law........................................................106
DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES..............................................106
General..............................................................106
Optional Redemption..................................................107
Proposed Tax Legislation.............................................107
Interest.............................................................108
Option to Extend Interest Payment Period.............................108
Compounded Interest..................................................109
Certain Covenants of the Corporation
Applicable to the Junior Subordinated
Debentures.......................................................109
Subordination........................................................109
Indenture Events of Default..........................................109
Modification of the Indenture........................................110
Book-Entry and Settlement............................................110
Consolidation, Merger and Sale.......................................110
Defeasance and Discharge.............................................110
Governing Law........................................................111
Information Concerning the Indenture Trustee.........................111
Miscellaneous........................................................111
RELATIONSHIP AMONG THE TRUST
PREFERRED SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES
AND THE PREFERRED
SECURITIES GUARANTEE.................................................112
DESCRIPTION OF CAPITAL STOCK..............................................112
Preferred Stock......................................................114
Common Stock.........................................................114
Stockholders Agreement...............................................114
Anti-takeover Provisions.............................................115
Limitation of Liability..............................................116
Transfer Agent and Registrar.........................................116
RESALE OF SECURITIES......................................................116
LEGAL MATTERS.............................................................117
EXPERTS...................................................................118
AVAILABLE INFORMATION.....................................................118
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE.........................................................118
INDEX TO FINANCIAL STATEMENTS.............................................F-1
EXHIBIT A - GLOSSARY OF DEFINED TERMS.....................................A-1
EXHIBIT B - CONVERSION AGREEMENT..........................................B-1
EXHIBIT C - SMITH BARNEY FAIRNESS
OPINION..............................................................C-1
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<PAGE>
ORGANIZATION CHART
BEFORE CONVERSION
Lehman Brothers
Holdings, Inc.
(Lehman)
100%
Lehman/SDI, Management
Inc.
53.8% 46.2% A Holders Public B Lehman Management
GP LP Holders Affiliates
100% 53.7% 27.2% 19.1%
SDI Partners I, L.P. A B B B
(The General Partner) 1% Interests Interests Interests Interests
GP
SunSource L.P.
(The Partnership)
99%
LP
GP SDI Operating
1% and Fee Partners, L.P.
(The Operating Partnership)
AFTER CONVERSION
Former Public Former Lehman and
A Holders B Holders Affiliates Management
| | | |
| | | |
100% 46.0% 31.4% 22.6%
Preferred Common Common Common
Securities Stock Stock Stock
| |
- -------------- Junior ----------------------------------------------
SunSource Subordinated
Capital Trust Debentures SunSource Inc.
(The Trust) | (The Corporation)
- -------------- Common
Securities ----------------------------------------------
| |
100% 100%
| |
SunSub A SunSub B
| | |
LP LP GP
| | |
| |----------------- SDI Partners I, L.P.
| (The General Partner)
|
SDI Operating Partners, L.P.
(The Operating Partnership) ------- GP
Fee
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<PAGE>
SUMMARY
The following is not intended to be complete and is qualified in all
respects by the more detailed information set forth elsewhere in this Proxy
Statement/Prospectus and the documents incorporated by reference herein. Unless
otherwise indicated, all information in this Prospectus assumes a 1-for-4
reverse stock split that will be effected by the exchange ratio of 0.25 share of
Common Stock for each B Interest in the Conversion. A glossary of frequently
used capitalized and other specialized terms is attached as Exhibit A and a
chart describing the SunSource structure before and after the Conversion is set
forth immediately preceding this Summary. Limited partners are urged to review
carefully the entire Proxy Statement/Prospectus and to request such documents
incorporated by reference herein as they desire. This Proxy Statement/Prospectus
contains forward-looking statements that address, among other things, source and
amount of funds, amount of sales, projected capital expenditures and acquisition
strategy. These statements may be found under "SPECIAL FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and
"BUSINESS," as well as in the Proxy Statement/Prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation, those
discussed in "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS" and matters set forth in the Proxy Statement/Prospectus
generally.
The Partnership, the Corporation and the Trust
SunSource L.P.(the "Partnership") was organized as a Delaware limited
partnership in 1986 under the name Sun Distributors L.P. to conduct the business
formerly conducted by Sun Distributors, Inc. when it was a subsidiary of Sun
Company, Inc. The Partnership assumed its present name in April 1996. The
general partner of the Partnership is SDI Partners I, L.P. (the "General
Partner"), a Delaware limited partnership, whose general partner is Lehman/SDI,
Inc. ("Lehman/SDI"), a Delaware corporation, and whose limited partners are
current or former members of management of the Partnership and the Operating
Partnership. Lehman/SDI is an indirect wholly owned subsidiary of Lehman
Brothers Holdings Inc.
The business of the Partnership is conducted through SDI Operating
Partners, L.P. (the "Operating Partnership"), a Delaware limited partnership.
The General Partner is the general partner of the Operating Partnership and the
limited partner of the Operating Partnership is the Partnership. The Operating
Partnership is one of the largest wholesale distributors of industrial products
and services in the United States, organized in three segments: industrial
services, hardware merchandising and glass merchandising. See "BUSINESS." The
principal executive offices of the Partnership and the Operating Partnership are
located at 2600 One Logan Square, Philadelphia, PA 19103 and their telephone
number is (215) 665-3650.
SunSource Inc. (the "Corporation") is a Delaware corporation which has
been newly formed to accomplish the conversion of the Partnership to corporate
form (the "Conversion"). The outstanding shares of the Corporation are presently
owned by the Partnership. The Corporation's address and telephone number are the
same as the Partnership.
In this Proxy Statement/Prospectus, the term SunSource means the
Partnership prior to the Conversion and/or the Corporation after the Conversion,
in each case including subsidiaries.
SunSource Capital Trust (the "Trust") is a newly formed Delaware statutory
business trust which has been organized to issue the Trust Preferred Securities
(the "Trust Preferred Securities"), representing preferred undivided beneficial
interests in the assets of the Trust, which will be exchanged for A Interests in
the Merger. All of the Trust Common Securities, representing common undivided
beneficial interests in the assets of the Trust, are owned by the Corporation.
The Trust's address is 501 Silverside Road, Suite 17, Wilmington, DE and its
telephone number is (302) 798-6665.
Overview of the Conversion
In the Conversion:
o The Partnership and a subsidiary of the Partnership will merge with and
into the Corporation (the "Merger").
o In the Merger each A Interest will be exchanged for 0.38 (with a
liquidation preference of $9.50) of a Trust Preferred Security and $1.30 in
cash. Each B Interest will be exchanged for 0.25 share of Common Stock.
Through the Merger and other contributions, the interests of the general
and limited partners of the General Partner in the Partnership and the
Operating
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<PAGE>
Partnership will be exchanged for 1,000,000 shares of Common
Stock, of which 75,000 shares will be held in escrow to be distributed
after two years if all distributions on the Trust Preferred Securities have
then been paid.
o As a result of the Conversion, subsidiaries of the Corporation will own all
of the partnership interests in the Operating Partnership and the General
Partner.
o At the time of the Conversion, the existing bank credit agreement will be
canceled and the Partnership's long-term debt will be repaid and replaced
with new credit facilities at interest rates expected to be lower than
financing rates currently incurred by the Partnership. Prepayment of the
Partnership's long-term debt will result in the payment of a make-whole
penalty of approximately $5 million.
The chart on page 1 describes the ownership structure of SunSource before
and after the Conversion.
As a result of the Conversion, the Partnership will cease to exist, the
holders of A Interests will own 100% of the outstanding Trust Preferred
Securities, the holders of B Interests who are not affiliated with the General
Partner will own 46.0% of the Common Stock and affiliates of the General Partner
will own 54.0% of the Common Stock. The directors and certain officers of
Lehman/SDI will become directors and officers of the Corporation. The
Corporation will own, through its wholly owned subsidiaries, 100% of the equity
in the business and operations owned by the Operating Partnership which will
remain in partnership form after the Conversion. The employees of the Operating
Partnership will continue as employees after the Conversion.
The following table illustrates the proposed exchange of partnership interests
for Common Stock:
<TABLE>
<CAPTION>
Partnership Corporation
-------------------- --------------------
B Interests % Common Stock %
----------- ---- ------------ -----
<S> <C> <C> <C> <C>
Public Investors 11,633,603 53.7 2,954,601 46.0
Lehman Holdings and Affiliates 5,896,678 27.2 2,012,169 31.4
Executive Officers and Directors 4,145,465 19.1 1,452,166 22.6
----------- ------ --------- -----
21,675,746 100.0 6,418,936 100.0
========== ===== ========= =====
</TABLE>
The General Partner may decide not to pursue the Conversion at any time
before it becomes effective, whether before or after approval by the
Partnership's limited partners.
Existing Economic Interests of the Partners
All cash receipts of the Partnership, less cash used to pay or establish a
reserve for expenses ("Cash Available for Distribution"), are distributed 99% to
the holders of A Interests and 1% to the General Partner until holders of A
Interests have received annually a $1.10 simple, cumulative return (the
"Priority Return"), which has historically been paid on a monthly basis to
holders of record on the first day of the month.
After distribution of the Priority Return, Cash Available for Distribution
is distributed 1% to the General Partner and 99% to the holders of B Interests
until such holders have received an annual distribution (the "B Tax
Distribution") equal to the product of (i) 125% of the then applicable maximum
Federal income tax rate for individuals and (ii) the taxable income allocable to
the B Interests. The B Tax Distribution has historically been partially
distributed on a monthly basis to holders of record on the first day of the
month with the balance distributed by March 31 of the succeeding year. See Note
3 of Notes to Consolidated Financial Statements. The Partnership suspended the
payment of monthly advance B Tax Distributions effective January 1, 1997 through
March 31, 1997, pending the conversion to corporate form. Due to the delay in
completion of the proposed corporate conversion, the Partnership intends to
resume payment of monthly advance B Tax Distributions in April 1997 in the
amount of $.03 per B Interest. On March 20, 1997, the Partnership declared a B
Tax Distribution in the amount of $.03 per B Interest payable April 30, 1997, to
holders of record on April 1, 1997. The Partnership intends to pay this monthly
rate to holders of B Interests until the
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<PAGE>
effective date of the conversion, since it expects to allocate sufficient
taxable income on the B Interests in the shortened tax year from January 1, 1997
through the effective date to require the B Tax Distribution payment. The
balance of the required 1997 B Tax Distribution, if any, will be paid on or
before March 31, 1998.
Upon liquidation of the Partnership, after provision for all liabilities,
the holders of A Interests would receive a preferential distribution equal to
$10 per A Interest plus any unpaid Priority Return and the balance would be
distributed to the General Partner and the holders of B Interests in accordance
with their respective capital accounts.
The Operating Partnership distributes its Cash Available for Distribution
99% to the Partnership and 1% to the General Partner until the amount
distributed to the Partnership is sufficient to pay the Priority Return and the
B Tax Distribution. The General Partner also receives a management fee from the
Operating Partnership of $3,330,000 annually. To the extent that the Priority
Return and the B Tax Distribution have not been paid on a cumulative basis, the
management fee will not be paid, but will be deferred and be paid, together with
any management fees then owed with respect to any other year, after the Priority
Return and B Tax Distribution have been paid. In addition, the management fee
can be paid only if the Operating Partnership complies with the covenants
required by the Operating Partnership's credit agreements. See Notes 8 and 9 of
Notes to Consolidated Financial Statements.
Risk Factors, Conflicts of Interest and Other Important Considerations
In evaluating the Conversion, limited partners should take into account
the following risk factors and other special considerations, which are discussed
at greater length in "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS" and "SPECIAL FACTORS."
Risk Factors Applicable to Holders of A Interests and B Interests
o There are conflicts of interest between the General Partner and the limited
partners in the Conversion. The General Partner's economic and other
interests and risks in the Partnership differ from those of the limited
partners. A benefit to the partners of the General Partner of the
Conversion which is not shared by the limited partners is the elimination
of liability of the partners of the General Partner for obligations and
liabilities of SunSource which occur after the Conversion. Limited partners
were not separately represented in establishing the terms of the
Conversion. Such representation might have caused the terms of the
Conversion to be different in some respects from those described herein.
See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS
-- Risks Applicable to Holders of A Interests and B Interests -- Potential
Conflicts of Interest." The fiduciary duties owed by the directors of the
Corporation after the Conversion may be less than those owed by the General
Partner of the Partnership before the Conversion, which may result in
decreased potential liability of the directors of the Corporation. See
"COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED -- Fiduciary Duties."
In addition, certain members of management will receive accelerated
payments under certain deferred compensation plans of the Operating
Partnership.
o If the Conversion is approved, the Partnership and the limited partners
will forego the potential future tax benefits associated with operating in
partnership form immediately, rather than after December 31, 1997 and these
benefits will not therefore be available to the Partnership and the limited
partners. A corporation pays taxes on its taxable income and its
stockholders generally pay taxes on any dividends from the corporation,
whereas a partnership pays no tax and its partners pay tax on their share
of partnership net income whether or not distributions are made. Efforts
have been made over the last several years to have the December 31, 1997
deadline extended or eliminated. To date such efforts have been
unsuccessful. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Applicable to Holders of A Interests and B
Interests -- Adverse Tax Implications."
o If the Conversion is approved, holders of A Interests will no longer have
their contractual right under the Partnership Agreement to the Priority
Return, although they will be entitled to distributions on the Trust
Preferred Securities in an amount equal to such Priority Return before
dividends, if any, are paid on the Common Stock. If the Conversion is
approved, holders of B Interests will no longer have the right to receive
tax distributions with respect to their allocable share of the
Partnership's taxable income, although they will no longer be taxed with
respect to income of the Corporation. If the Conversion is approved, the
Board of Directors of the Corporation will have discretion to defer
payments on the Junior Subordinated Debentures for up to five years. If
such payments are deferred, the Trust will be unable to make distributions
on the Trust
-4-
<PAGE>
Preferred Securities, and the Corporation will be prohibited from paying
dividends on the Common Stock. Provided distributions on the Trust
Preferred Securities are not in arrears, the Board of Directors will have
discretion to declare and pay dividends on the Common Stock, and there can
be no assurance that the Corporation will make dividend distributions.
Management presently intends not to recommend the payment of dividends on
the Common Stock in order to retain cash to fund the Corporation's
acquisition program and corporate requirements.
o Limited partners have no dissenters' or appraisal rights in the Conversion.
Therefore, limited partners will not be entitled to receive cash payments
from SunSource for the fair value of their Interests if they dissent and
the Conversion is approved and consummated.
o Prior to the Conversion, there has been no public market for the Trust
Preferred Securities or Common Stock. Because the consideration received by
the holders of A Interests includes $1.30 in cash for each A Interest, it
is likely that the Trust Preferred Securities received in respect of each A
Interest will trade at prices below the market price of the A Interests
immediately prior to the Merger. The Common Stock received by the holders
of the B Interests may trade at prices below the historical trading levels
of the B Interests. If a large number of holders of Trust Preferred
Securities or Common Stock were to offer their securities for sale
immediately after consummation of the Conversion, the market price of the
particular security could decline. Various anti-takeover provisions which
would apply to the Corporation after the Conversion could also have a
negative effect on the market price of the Common Stock.
o Transaction costs of approximately $3,600,000 will be incurred by the
Partnership, of which approximately $3,000,000 will be paid, whether or not
the Conversion is completed.
Additional Risk Factors Applicable to Holders of A Interests
o The receipt of Trust Preferred Securities and cash by the holders of A
Interests will be a taxable event. The receipt of Trust Preferred
Securities, Common Stock and cash by holders who hold both A Interests and
B Interests will be a taxable event. In addition, holders of Trust
Preferred Securities will be required to accrue original issue discount
income with respect to any unpaid distributions on the Trust Preferred
Securities.
o Unlike the A Interests, which are not subject to mandatory or optional
redemption by the Partnership, the Junior Subordinated Debentures held by
the Trust may be redeemed by the Corporation at 100% of the principal
amount plus accrued and unpaid interest at any time after April 30, 2002 or
earlier at 101% of the principal amount plus accrued and unpaid interest
upon the occurrence of a Tax Event. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Optional Redemption."
o The obligations of the Corporation under the Junior Subordinated Debentures
will be unsecured obligations and will be subordinate and junior in right
of payment to senior indebtedness of the Corporation and will be
structurally subordinated to all liabilities and obligations of the
Operating Partnership and the Corporation's other subsidiaries. As of
December 31, 1996 (on a pro forma basis, assuming the Merger had occurred
on such date), the Corporation would have had approximately $99.3 million
principal amount of senior indebtedness outstanding, and the Operating
Partnership and the Corporation's other subsidiaries would have had
approximately $87.6 million of indebtedness and other liabilities. There
are no terms in the Trust Preferred Securities or the Junior Subordinated
Debentures that limit the Corporation's or its subsidiaries' ability to
incur additional indebtedness.
Additional Risk Factors Applicable to Holders of B Interests
o There are conflicts of interest between the A Interests and the B Interests
and between the General Partner and the B Interests with respect to the
determination of the consideration to be received in the Conversion. To the
extent the partners of the General Partner receive Common Stock in the
Conversion, the interest in the Corporation represented by the shares of
Common Stock to be received by holders of B Interests will be diluted.
Also, the value of the consideration to be received by holders of B
Interests and by the General Partner will be reduced to the extent of the
consideration to be received by holders of A Interests.
o Certain provisions of Delaware law and the Corporation's organizational
documents, as well as provisions of the Stockholders Agreement dated as of
March __, 1997 among the Corporation and certain of its stockholders (the
"Stockholders Agreement")
-5-
<PAGE>
and the stockholder rights plan, contain provisions that may reduce the
likelihood of a takeover of the Corporation that, if successful, might
permit stockholders to receive a premium over the market price for the
Common Stock. See "DESCRIPTION OF CAPITAL STOCK."
o Issuances of additional shares of Common Stock or Preferred Stock by the
Corporation could adversely affect existing stockholders' equity interest
in the Corporation and the market price of the Common Stock. Although it
has no present plans to do so, after the Conversion, the Corporation may
consider issuing additional shares of Common Stock or Preferred Stock to
raise capital or for acquisitions, subject to certain restrictions in the
Registration Rights Agreement. Issuances of additional shares may be more
likely after the Conversion because the General Partner believes that one
of the advantages of the Conversion is that the corporate form will expand
the potential investor base, provide greater access to equity markets and
permit the use of capital stock as acquisition currency.
o The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman Brothers and, subject to certain
limitations, by management, after the Conversion. Lehman Brothers and
management have agreed to cooperate to execute an underwritten secondary
offering of all or some portion of their shares of Common Stock as soon as
practicable after the effective date of the Conversion, subject to market
conditions. The Corporation has agreed not to sell any additional shares of
Common Stock prior to the earlier of such initial secondary offering and
the nine-month anniversary of the Conversion, except in connection with
acquisitions. In addition, Lehman Brothers Capital Partners I, an affiliate
of Lehman/SDI holding 5,788,124 B Interests, may distribute the shares of
Common Stock it receives in the Merger (a majority of which shares would be
freely tradeable immediately after such distribution) to its partners. See
"RESALES OF SECURITIES -- Resales by Lehman Brothers and Management."
o The Corporation's unaudited pro forma balance sheet at December 31, 1996
reflect a stockholders' deficit of approximately $22.7 million and a
negative net book value per common share of $3.54. Counsel has advised the
Partnership and the Corporation that under Delaware law, dividends or
distributions on the stock of a Delaware corporation may be declared or
paid out of surplus, so that the net assets of the corporation after such
payment shall at least equal the amount of its capital. However, such a
dividend or distribution is permissible under such provision only if the
corporation's board of directors concludes that (a) immediately following
payment of such dividend or distribution, the fair market value of the
corporation's assets will exceed its liabilities and (b) the payment of
such dividend or distribution is being made out of the corporation's
surplus (net assets minus capital) and not out of capital in contravention
of Delaware law. In case there shall be no surplus, dividends may also be
paid out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. The foregoing restrictions will
not affect the payment of distributions on the Trust Preferred Securities
which are issued by the Trust rather than the Corporation. In addition, it
is the current intention of the Board of Directors of the Corporation not
to declare dividends on the Common Stock.
In addition to the factors noted above, an investment in SunSource (whether
in partnership or corporate form) is subject to risks associated with operating
conditions, competitive factors, economic conditions, industry conditions and
equity market conditions.
Reasons to Convert to Corporate Form
The Conversion will convert SunSource to corporate form, replacing
partnership interests presently held by limited partners with securities of the
Corporation and the Trust. The General Partner believes that there are six
principal reasons for converting to corporate form at this time, which are
discussed at greater length in "SPECIAL FACTORS -- Reasons to Convert to
Corporate Form":
o Expansion of Potential Investor Base. The General Partner anticipates that
the Conversion will expand SunSource's potential investor base to include
institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons.
In addition, the General Partner anticipates that the Common Stock (as
compared to Interests) will receive additional investor interest through
increased review and evaluation by research analysts.
o Conservation of Cash. The Corporation will conserve cash by the retention
of the annual management fee of $3,330,000 and the retention of
distributions on the General Partner's ownership in the Partnership and the
Operating Partnership amounting to approximately $400,000 annually.
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<PAGE>
o Tax Consequences. The benefit of being taxed as a partnership will end
under current law after December 31, 1997.Although the Corporation will
also have to pay tax on its income, SunSource will conserve additional cash
(i) because the interest payable on the Junior Subordinated Debentures,
which will approximately equal the distributions currently paid on the A
Interests, is deductible for federal income tax purposes, resulting in a
corporate tax benefit of approximately $4,900,000 annually and (ii) because
of the difference in rates between the B Tax Distribution, which will be
eliminated, and the tax that will become payable by the Corporation.
Subject to changes in federal income tax laws, approval of the Conversion
Proposal should assure tax deductibility on the distributions in respect of
the Trust Preferred Securities, which will replace the Priority Return. If
the Conversion is not approved, the Priority Return would have to be paid
from net income after corporate income taxes after December 31, 1997.
o Acquisition Currency. The General Partner believes that current industry
conditions may provide opportunities for SunSource to grow through the
acquisition of businesses and assets which are complementary to its
existing businesses. In certain cases, SunSource may want to be able to
issue equity interests as payment of the purchase price for such
acquisitions. The General Partner believes that an equity interest in a
corporation will be a more attractive acquisition currency to sellers than
an interest in a partnership. SunSource is not presently party to any
agreement or understanding regarding a material acquisition and currently
has no plans to make a material acquisition.
o Greater Access to Equity Markets. The General Partner expects that the
Corporation will have greater access to the public and private equity
capital markets than the Partnership, potentially enabling it to raise
capital on more favorable terms than are now available to the Partnership.
This greater access may be of particular benefit if SunSource proposes to
issue equity securities to reduce existing debt or to seek additional funds
for capital expenditures or otherwise expand its business.
o Tax Reporting. The General Partner believes that the complexities of tax
reporting associated with partnership investments are regarded as unduly
burdensome for most limited partners under current conditions. The
ownership of stock rather than Interests will greatly simplify tax
reporting with respect to an investment in SunSource on each limited
partner's individual federal and state income tax returns for future years.
Alternatives to the Conversion
The alternatives to the Conversion which were considered by the General
Partner were continuing the existence of the Partnership as a limited
partnership and the liquidation of the Partnership. The Board of Directors of
Lehman/SDI believes that the Conversion will be more beneficial to the limited
partners than either of these alternatives. The General Partner believes that
other long-term strategies available to SunSource, such as diversification,
disposition of assets and acquisition of assets, are not materially adversely
affected by the decision to convert.
o The benefit of continuing the existence of the Partnership as a limited
partnership by reason of the possible reduction of aggregate federal
income taxes payable by the Partnership and its partners compared to the
aggregate federal income taxes payable by the Corporation and its
stockholders with respect to the income of SunSource, ends under current
law on December 31, 1997. See "SPECIAL FACTORS -- Alternatives to the
Conversion" and "-- Reasons to Convert to Corporate Form."
o The benefit of liquidating the Partnership at this time rather than
effecting the Conversion would be the possibility that the currently
realizable value of the Partnership assets may exceed the value of
SunSource as a continuing business. The General Partner believes that a
liquidation of the Partnership's assets at this time would not result in a
price which would produce an acceptable return to the limited partners,
after the repayment of debt and after paying all costs and expenses of
liquidating and winding up the Partnership, including taxes on the sale of
the assets. Furthermore, the holders of B Interests would not be able to
have a continuing equity interest in the business of the Partnership. See
"SPECIAL FACTORS -- Alternatives to the Conversion" and "-- Recommendation
of the General Partner and Fairness Determination."
Structure of the Conversion
If approved by the limited partners, the Conversion will be effected as
follows:
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<PAGE>
o The Partnership will contribute its limited partnership interest in the
Operating Partnership and Lehman/SDI, Inc. will contribute its general
partnership interest in the General Partner to a newly formed subsidiary of
the Partnership in exchange for common stock of such subsidiary. Certain
members of management of the General Partner will contribute their limited
partnership interests in the General Partner to the Corporation, in
exchange for 462,000 shares of Common Stock, of which 75,000 shares will be
held in escrow to distributed after two years if all distributions on the
Trust Preferred Securities have then been paid. The Partnership and its
subsidiary will then merge with and into the Corporation and (i) the A
Interests will be converted into 4,217,837 Trust Preferred Securities and
cash; (ii) the B Interests will be converted into 5,418,936 shares of
Common Stock and (iii) the common stock of LPSub held by Lehman/SDI will be
converted into 538,000 shares of Common Stock. The Corporation will
contribute the limited partnership interests in the Operating Partnership
and the General Partner and the general partnership interest in the General
Partner to a wholly owned subsidiary.
o As a result of the Conversion, the former holders of the A Interests will
be holders of Trust Preferred Securities and the former holders of B
Interests and the partners of the General Partner will be holders of
shares of Common Stock of the Corporation.
o The Corporation, through its subsidiaries, will then be the holder of the
general and limited partnership interests in the Operating Partnership and
the General Partner. See page 1 above for a diagram of the corporate
structure after the Conversion.
Control of SunSource
The directors and certain officers of Lehman/SDI will become the directors
and officers of the Corporation at the time of the Conversion. For a list of the
directors and executive officers of the Corporation at the time of the
Conversion, see "MANAGEMENT-- Directors and Executive Officers After the
Conversion."
Special Committee
Because of its concern regarding the conflicts of interest between the
General Partner and the limited partners with respect to the determination of
the exchange ratios for the exchange of partnership interests for shares of the
Corporation, in June 1996, the Board of Directors of Lehman/SDI appointed a
special committee consisting of two members of the Board of Directors, O. Gordon
Brewer, Jr. and Ernest L. Ransome, III (the "Special Committee"), to consider
and advise the Board with respect to the terms of the Conversion as to the
fairness of the terms of the Conversion to the limited partners, and to make a
recommendation to the Board of Directors with respect to the Conversion. The
members of the Special Committee were not otherwise affiliated with the
Partnership. Smith Barney Inc. ("Smith Barney") was retained to advise the
Special Committee as to the fairness from a financial point of view to the
limited partners of the exchange ratios. The Special Committee retained Dechert
Price & Rhoads as its counsel. The limited partners were not independently
represented in the evaluation or negotiation of the Conversion.
For a more detailed description of the deliberations of the Special
Committee and its determinations regarding certain matters related to the
Conversion, see "SPECIAL FACTORS -- Determinations of the Special Committee,"
and "-- Opinion of Smith Barney," and the opinion of Smith Barney attached as
Exhibit C to this Proxy Statement/Prospectus.
For its services, Smith Barney has been paid a fee of $1,250,000. The fee
was not contingent upon the consummation of the Conversion or any other
occurrence. Smith Barney will also be indemnified against certain liabilities,
including liabilities under the Securities Act and the Exchange Act.
SunSource and its affiliates have had no relationship with Smith Barney
other than that described above.
Recommendation of General Partner and Fairness Determination
The Board of Directors of Lehman/SDI has determined that the Conversion is
fair in all respects, including with regard to procedural matters, to the
limited partners. See "SPECIAL FACTORS--Recommendation of the General Partner
and Fairness Determination." This belief is principally based on the fairness
opinion of Smith Barney, the deliberations concerning the exchange ratios of the
Special Committee consisting of disinterested directors and the requirement that
the Conversion be approved by a majority of the unaffiliated holders of the A
Interests and the B Interests, each voting separately as a class. The Board of
Directors of Lehman/SDI took into account the benefits of the Conversion to
SunSource, the alternatives of continuing in existence as a
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<PAGE>
partnership and liquidation, and other considerations, including the fact that
the General Partner will no longer have a fiduciary duty to the Partnership and
its partners, and the fact that it will no longer have any liability for the
liabilities of SunSource after the Conversion. See "SPECIAL FACTORS --
Determinations of the Special Committee."
The General Partner believes that the Conversion is in the best interests
of the Partnership and the limited partners and recommends that the limited
partners approve the Conversion. There are conflicts of interest between the
General Partner and the limited partners with respect to certain matters
relating to the Conversion. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS," "SPECIAL FACTORS -- Determinations of the Special
Committee," "-- Opinion of Smith Barney," and "-- Recommendation of the General
Partner and Fairness Determination."
Summary Description of Trust Preferred Securities
The Trust is a statutory business trust that was formed under the Delaware
Business Trust Act (the "Business Trust Act") pursuant to a declaration of trust
(as amended and restated, the "Declaration"). The Declaration has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
The Trust exists, among other things, for the purpose of (a) issuing (i) its
Trust Preferred Securities to the Corporation in consideration for the deposit
by the Corporation of Junior Subordinated Debentures in the Trust as trust
assets, and (ii) the Trust Common Securities to the Corporation in exchange for
cash and investing the proceeds thereof in an equivalent amount of Junior
Subordinated Debentures. The rights of the holders of the Trust Securities,
including economic rights, rights to information and voting rights, are as set
forth in the Declaration, the Business Trust Act and the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). See "SUNSOURCE CAPITAL TRUST" and
"DESCRIPTION OF TRUST PREFERRED SECURITIES." The Corporation has agreed to pay
for all debts and obligations (other than with respect to the Trust Securities)
and all costs and expenses of the Trust, including the fees and expenses of the
Trustees and any income taxes, duties and other governmental charges, and all
costs and expenses with respect thereto, to which the Trust may become subject,
except for United States withholding taxes. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to
Holders of A Interests," "SUNSOURCE CAPITAL TRUST" and "DESCRIPTION OF TRUST
PREFERRED SECURITIES."
The Trust Preferred Securities evidence preferred undivided beneficial
interests in the assets of the Trust and will rank pari passu with, and have
terms equivalent to, the Trust Common Securities; provided that (i) if an Event
of Default under the Declaration occurs and is continuing, the holders of Trust
Preferred Securities will have a priority over holders of the Trust Common
Securities with respect to payments in respect of distributions and payments
upon liquidation, redemption or otherwise and (ii) holders of Trust Common
Securities have the exclusive right (subject to the terms of the Declaration) to
appoint, remove and replace Trustees and to increase or decrease the number of
Trustees, subject to the right of holders of Trust Preferred Securities to
appoint a Special Regular Trustee upon the occurrence of an Appointment Event
(as defined herein). The Declaration does not permit the issuance by the Trust
of any securities or beneficial interests in the assets of the Trust other than
the Trust Preferred Securities and the Trust Common Securities, the incurrence
of any indebtedness for borrowed money by the Trust or the making of any
investments other than in the Junior Subordinated Debentures. The Declaration
defines an event of default with respect to the Trust Securities (an "Event of
Default") as the occurrence and continuance of an "event of default" under the
Indenture with respect to the Junior Subordinated Debentures (an "Indenture
Event of Default").
Periodic cash distributions on each Trust Preferred Security will be fixed
at a rate per annum of $2.90 (11.6% of the stated liquidation amount of $25 per
Trust Preferred Security). Distributions in arrears will compound monthly at the
rate per annum of 11.6% of the amount in arrears. Distributions on the Trust
Preferred Securities will be cumulative, will accrue from the Accrual Date (as
defined herein) and, except as otherwise described herein, will be made monthly
in arrears, on the last day of each calendar month of each year, commencing on
May 31, 1997, but only if and to the extent that interest payments are made in
respect of the Junior Subordinated Debentures.
The distribution rate and the distribution and other payment dates for the
Trust Preferred Securities will correspond to the interest rate and the interest
and other payment dates on the Junior Subordinated Debentures deposited in the
Trust as trust assets. As a result, if principal or interest is not paid on the
Junior Subordinated Debentures, including as a result of the Corporation's
election to extend the interest payment period on the Junior Subordinated
Debentures as described below, the Trust will not make payments on the Trust
Securities. The Junior Subordinated Debentures provide that, so long as the
Corporation shall not be in default in the payment of interest on the
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<PAGE>
Junior Subordinated Debentures, the Corporation has the right under the
Indenture to defer payments of interest on the Junior Subordinated Debentures by
extending the interest payment period from time to time on the Junior
Subordinated Debentures for a period not exceeding 60 consecutive months (each,
an "Extension Period") and, as a consequence, monthly distributions on the Trust
Preferred Securities would not be made (but would continue to accrue with
interest thereon at the rate of 11.6% per annum, compounded monthly by the Trust
during any such Extension Period). During an Extension Period, the Corporation
may not declare or pay dividends on, or redeem, purchase, acquire or make a
distribution or liquidation payment with respect to, any of its Common Stock or
Preferred Stock or make any guarantee payments with respect thereto during such
Extension Period. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests";
"DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Interest" and "-- Option to
Extend Interest Payment Period."
The payment of distributions on the Trust Preferred Securities and
payments on liquidation of the Trust and the redemption of Trust Preferred
Securities, as set forth below, are guaranteed by the Corporation on a
subordinated basis as and to the extent set forth under "DESCRIPTION OF
PREFERRED SECURITIES GUARANTEE." The Preferred Securities Guarantee is a full
and unconditional guarantee from the time of issuance of the Trust Preferred
Securities, but the Preferred Securities Guarantee covers distributions and
other payments on the Trust Preferred Securities only if and to the extent that
the Corporation has made a payment to the Property Trustee of interest or
principal on the Junior Subordinated Debentures deposited in the Trust as trust
assets.
The Trust Preferred Securities and Trust Common Securities are redeemable
on a Pro Rata Basis (as defined herein) from time to time, in whole or in part,
to the same extent as the Junior Subordinated Debentures are redeemable by the
Corporation, on or after April 30, 2002, upon not less than 30 nor more than 60
days' notice, at $25 per Trust Preferred Security plus accrued and unpaid
distributions thereon to the date of redemption, including distributions accrued
as a result of the Corporation's election to defer payments of interest on the
Junior Subordinated Debentures (the "Redemption Price"), payable in cash. The
Trust Preferred Securities will be redeemed upon the maturity or earlier
redemption of the Junior Subordinated Debentures. See "DESCRIPTION OF TRUST
PREFERRED SECURITIES -- Mandatory Redemption." As used in this Proxy
Statement/Prospectus, the term "Pro Rata Basis" shall mean pro rata to each
holder of Trust Securities according to the aggregate liquidation amount of the
Trust Securities held by the relevant holder in relation to the aggregate
liquidation amount of all Trust Securities outstanding unless, in relation to a
payment, an Event of Default under the Declaration has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Trust Preferred Securities pro rata according to the
aggregate liquidation amount of the Trust Preferred Securities held by the
relevant holder in relation to the aggregate liquidation amount of all Trust
Preferred Securities outstanding, and only after satisfaction of all amounts
owed to the holders of the Trust Preferred Securities, to each holder of Trust
Common Securities pro rata according to the aggregate liquidation amount of the
Trust Common Securities held by the relevant holder in relation to the aggregate
liquidation amount of all the Trust Common Securities outstanding.
In addition, upon the occurrence and during the continuation of a Tax
Event or an Investment Company Event (each as defined herein) arising from a
change in law or a change in legal interpretation or other specified
circumstances, the Trust shall, unless the Junior Subordinated Debentures are
redeemed in the limited circumstances described below, be dissolved with the
result that, after satisfaction of creditors of the Trust, the Junior
Subordinated Debentures will be distributed to the holders of the Trust
Preferred Securities and the Trust Common Securities on a Pro Rata Basis, in
lieu of any cash distribution. If the Junior Subordinated Debentures are
distributed to the holders of the Trust Preferred Securities, the Corporation
will use its best efforts to have the Junior Subordinated Debentures listed on
the New York Stock Exchange or on such other exchange as Trust Preferred
Securities are then listed. In the case of a Tax Event, the Corporation will
have the right in certain circumstances to redeem the Junior Subordinated
Debentures at any time with the result that the Trust will redeem the Trust
Securities on a Pro Rata Basis to the same extent as the Junior Subordinated
Debentures are redeemed. Any redemption for a Tax Event will be at a Redemption
Price of $25.25 per Trust Preferred Security if the redemption occurs within
five years after the Effective Time of the Conversion and at $25 thereafter
plus, in each case, accrued and unpaid distributions to the date of redemption.
If such redemption occurs while the 75,000 shares of Common Stock are held in
escrow on behalf of management employees, Lehman Brothers has agreed that, to
the extent it has disposed of any shares of Common Stock it received in the
Conversion, it will pay to the Corporation a portion of the 1% premium paid by
the Corporation on such redemption proportionate to the percentage interest in
the Corporation that it so disposed of. See "DESCRIPTION OF TRUST PREFERRED
SECURITIES -- Special Event Redemption or Distribution."
<PAGE>
The Junior Subordinated Debentures will be issued pursuant to an
indenture, dated as of _______ (the "Indenture") between the Corporation and
Bank of New York, as trustee (the "Indenture Trustee"). See "DESCRIPTION OF
JUNIOR SUBORDINATED DEBENTURES." The Junior Subordinated Debentures will mature
on April 30, 2027 and will bear interest at an annual rate of 11.6% from the
Accrual Date. Interest will be payable monthly in arrears on the last day of
each calendar month of each year,
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<PAGE>
commencing on April 30, 1997; provided that, as described above, so long as the
Corporation shall not be in default in the payment of interest on the Junior
Subordinated Debentures, the Corporation shall have the right to extend the
interest payment period from time to time for a period not exceeding 60
consecutive months. The Corporation has no current intention of exercising its
right to extend an interest payment period. However, should the Corporation
determine to exercise such right in the future, the market price of the Trust
Preferred Securities is likely to be adversely affected. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks
Applicable to Holders of A Interests" and "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Option to Extend Interest Payment Period."
The Corporation shall have the right to redeem the Junior Subordinated
Debentures, in whole or in part, from time to time, on or after April 30, 2002,
upon not less than 30 nor more than 60 days' notice, at a redemption price equal
to 100% of the principal amount to be redeemed, plus any accrued and unpaid
interest to the redemption date, including interest accrued as a result of the
Corporation's election to defer payments of interest on the Junior Subordinated
Debentures, payable in cash. In addition, upon the occurrence of a Tax Event,
the Corporation will also have the right if certain conditions are met to redeem
the Junior Subordinated Debentures in whole (but not in part), upon not less
than 30 nor more than 60 days' notice, at a redemption price equal to 101% of
the principal amount to be redeemed if the redemption occurs within five years
after the Effective Time and 100% thereafter, plus, in each case, any accrued
and unpaid interest, to the redemption date.
Comparative Rights of the Interests and the Securities to be Issued
If the Conversion is approved, the rights and limitations to which holders
of Trust Preferred Securities and Common Stock will be subject will be similar
in some respects and will differ in other respects from those to which they are
subject as holders of Interests. These rights and limitations are discussed
below under "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED."
Summary of Certain Federal Income Tax Consequences
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" for a general description of
the tax consequences of the Merger and the Conversion to holders of A Interests
and B Interests and tax consequences generally.
Conditions to the Conversion
The principal conditions to the Conversion are (i) the affirmative vote of
limited partners holding an aggregate of more than 50% of the outstanding A
Interests and B Interests, each voting separately as a class; (ii) the
affirmative vote of unaffiliated limited partners (limited partners other than
affiliates of the General Partner) holding an aggregate of more than 50% of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class; (iii) approval of the Trust Preferred Securities and
Common Stock for listing on the NYSE; (iv) no withdrawal of the Special
Committee's determination that the Conversion is fair to the holders of A
Interests and B Interests or of the fairness opinion of Smith Barney; (v)
receipt of a satisfactory tax opinion; (vi) the availability of financing to
refinance existing senior debt on terms acceptable to the Corporation; and (vii)
no material change in applicable law, including with respect to the taxation of
the Conversion, the Corporation or the Trust Preferred Securities.
No Appraisal Rights
Limited partners who object to the Conversion will have no appraisal,
dissenters' or similar rights. Therefore, limited partners will not be entitled
to receive cash payments from SunSource for the fair value of their Interests if
they dissent and the Conversion is approved and consummated. See "VOTING AND
PROXY INFORMATION -- No Appraisal Rights."
Consequences if Conversion Is Not Approved
If the Conversion is not approved by the limited partners, or if the
Conversion is not consummated for any other reason, the Partnership presently
intends to continue to operate as an ongoing business in its current form,
although the General Partner anticipates that, after December 31, 1997, the
Partnership would be taxed as a corporation for federal income tax purposes and
there would be no tax distributions with respect to the B Interests. No other
transaction is currently being considered by the Partnership as an alternative
to the Conversion, although the Partnership may from time to time explore other
alternatives. See "SPECIAL FACTORS -- Consequences if Conversion is Not
Approved."
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<PAGE>
Limited Partner Litigation
On January 16, 1997, a holder of B Interests filed a purported class
action in the Delaware Court of Chancery seeking to enjoin the Conversion on the
terms proposed as well as an order requiring the defendants to account to the
plaintiff and the class for damages and requiring the General Partner or its
affiliates to hold the consideration received in trust pending a determination
of the amounts properly attributable to the General Partner's interest.
Defendants named in the complaint are the Partnership, the Corporation, the
General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the
directors of Lehman/SDI. The complaint alleges that the terms of the Conversion
unfairly transfer substantial equity to the General Partner to the detriment of
the B Interests and constitute a breach of fiduciary duty. A second complaint
containing substantially identical allegations was filed by a limited partner in
the Delaware Court of Chancery on February 11, 1997. The defendants believe the
complaints are without merit and intend to vigorously defend themselves.
Voting at the Special Meeting
<TABLE>
<CAPTION>
<S> <C>
The Special Meeting......................... The Special Meeting will be held at ____________________________,
Philadelphia, Pennsylvania on April __, 1997 at 10:00 a.m., local time.
Voting...................................... Each Interest entitles the holder thereof on the record date to one vote.
Only limited partners of the Partnership on the record date are entitled to
vote at the Special Meeting. March __, 1997 is the record date for the
determination of limited partners entitled to vote at the Special Meeting.
Interests Outstanding....................... On the record date, 11,099,573 A Interests and 21,675,746 B Interests
were outstanding.
Vote Required............................... Approval of the Conversion will require (i) the favorable vote of limited
partners holding a majority of the outstanding A Interests and B Interests,
each voting separately as a class and (ii) the favorable vote of unaffiliated
limited partners (limited partners other than affiliates of the General
Partner) holding a majority of the A Interests and B Interests held by
unaffiliated limited partners, each voting separately as a class. Directors,
executive officers and other affiliates of the General Partner own less than
1% of the outstanding A Interests and 46.3% of the outstanding B
Interests and have advised the Partnership that they each intend to vote
their Interests in favor of the Conversion in the first vote described above.
</TABLE>
List of Partners
Each limited partner has the right for a proper purpose reasonably related
to the limited partner's interest in the Partnership, upon reasonable demand and
at the limited partner's own expense, to have furnished to the limited partner,
upon notification to the General Partner at 2600 One Logan Square, Philadelphia,
PA 19103, Attention: Joseph M. Corvino, Secretary and Vice President - Finance,
a current list of the name and last known business, residence or mailing address
of each partner.
Delivery of Depositary Receipts
Promptly after the Effective Time, the Corporation will cause to be mailed
to all limited partners of record a letter of transmittal containing
instructions with respect to the surrender of Depositary Receipts for A and B
Interests in exchange for certificates representing Trust Preferred Securities
and shares of Common Stock and cash in the case of A Interests. Upon surrender
to the Corporation of one or more Depositary Receipts, together with a properly
completed letter of transmittal, there will be issued and mailed to former
limited partners a certificate or certificates representing the number of Trust
Preferred Securities and shares of Common Stock (and related Rights) to which
such holder is entitled and a check for cash in the case of A Interests. From
and after the Effective Time, each such Depositary Receipt will evidence only
the right to receive Trust Preferred Securities or shares of Common Stock. No
fractional shares will be issued. Instead, (i) each holder of A Interests will
be entitled to receive cash in an amount equal to the fraction of a share of
Trust Preferred Securities to which the holder is otherwise entitled multiplied
by the
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<PAGE>
average closing price of the Trust Preferred Securities for the five trading
days following the Effective Time; and (ii) each holder of B Interests shall be
entitled to receive cash in an amount equal to the fraction of a share of Common
Stock to which the holder is otherwise entitled multiplied by the average
closing price of the Common Stock for the five trading days following the
Effective Time. Limited partners should not send any Depositary Receipts with
the enclosed proxy. They should retain such Depositary Receipts until their
receipt of the letter of transmittal after the Effective Time. Reverse Stock
Split
As a result of the one-for-four reverse stock split, each holder of B
Interests will receive one post-split share of Common Stock for every four B
Interests held by such holder prior to the Conversion. The General Partner
believes that current trading prices for the B Interests reduce the
attractiveness of the Corporation's equity securities to the financial community
and the investing public. The reverse stock split will not affect a holder's
percentage ownership in the Corporation or of the outstanding Common Stock
(except for minor differences resulting from the elimination of fractional
shares as described herein). It is impossible to predict the market's reaction
to any reverse stock split or, in this case, to separate that reaction from the
market's reaction to the Conversion as a whole. However, the Corporation expects
that immediately after the reverse stock split each share of Common Stock would
be valued at a price approximately four times greater than without the split.
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<PAGE>
Summary Financial Information of the Partnership
and Summary Unaudited Pro Forma Financial Information of the Corporation
(dollars in thousands, except for per unit data)
The following tables set forth summary consolidated historical and unaudited pro
forma financial and operating data of the Partnership and the Corporation as of
the dates and for the periods indicated. The summary historical financial
information of the Partnership for the five years ended December 31, 1996 has
been derived from financial statements which have been audited by Coopers &
Lybrand L.L.P., independent accountants. The summary unaudited pro forma
financial information gives effect to the Conversion as if it occurred at the
beginning of the period for the pro forma income statement data presented and as
of the date presented with respect to the balance sheet data. The pro forma
financial information is also presented excluding gains and results of
operations from divested divisions, and other non-recurring charges. The summary
financial information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Partnership and the unaudited Pro
Forma Financial Statements and Notes thereto of the Corporation included
elsewhere herein. See "INDEX TO FINANCIAL STATEMENTS." See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for
acquisitions and divestitures that affect comparability, and for a discussion of
the Corporation's recently announced restructuring plans.
<TABLE>
<CAPTION>
P A R T N E R S H I P - H I S T O R I C A L
------------------------------------------------------------------------------
Years Ended December 31,
INCOME STATEMENT DATA: 1996 1995 1994 1993 1992
---------- ---------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Net sales $ 649,254 $ 628,935 $ 735,861 $ 655,707 $ 612,052
Income from operations 24,452 31,302 37,759 28,975 29,712
Gain on Sale of Divisions -- 20,644 3,523 -- --
Provision (benefit) for income taxes (1,140) 537 100 869 493
Income before extraordinary loss and
cumulative effect of change in
accounting principle 19,267 44,745 29,544 18,506 17,691
Extraordinary loss -- (629) -- -- (3,434)
Cumulative effect on prior years of
change in accounting principle -- -- -- -- 822
Net income $ 19,267 $ 44,116 $29,544 $ 18,506 $ 15,079
Net income per limited partner interest:
- Class A $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class B $ 0.32 $ 1.45 $ 0.79 $ 0.28 $ 0.13
Cash distributions declared per limited
partnership interest:
- Class A $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class B $ 0.33 $ 0.67 $ 0.49 $ 0.27 $ 0.13
Weighted average number of outstanding
limited partner interests
- Class A 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573
- Class B 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746
OTHER DATA: 1996 1995 1994 1993 1992
---------- ---------- ---------- -------- ----
Cash provided by operating activities $ 20,623 $ 17,050 $ 17,704 $ 23,571 $ 27,056
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
BALANCE SHEET DATA: 1996 1995 1994 1993 1992
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Total assets 262,555 254,591 266,186 273,493 261,588
Long-term debt and capitalized lease
obligations 69,043 63,934 74,781 104,185 115,503
</TABLE>
C O R P O R A T I O N - P R O F O R M A
-----------------------------------------------------------
Year Ended
December 31,
------------
INCOME STATEMENT DATA: 1995
----
Net sales $649,254
Income from operations 35,882
Distribution on guaranteed
preferred beneficial interest in the
Corporation's junior subordinated
debentures (12,232)
Income before income taxes 16,301
Net income 9,090
Net income per common share $1.42
Weighted average number of
outstanding common shares 6,418,936
As of
BALANCE SHEET DATA: December 31, 1996
-----------------
Total assets $269,441
Long-term debt 60,000
Bank revolving credit 39,298
Guaranteed preferred beneficial
interests in Corporation's Junior
Subordinated Debentures 105,446
Stockholders' deficit (22,693)
Book value per common share (3.54)
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<PAGE>
RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS
Before completing the enclosed form of proxy, each limited partner should
carefully read this entire Proxy Statement/Prospectus, including the Exhibits
and the Partnership's Form 10-K for the year ended December 31, 1995 and the
other documents incorporated herein by reference, and should give particular
attention to the following considerations.
Risks Applicable to Holders of A Interests and B Interests
Conflicts of Interest
The General Partner has conflicts of interest with the limited partners in
the Conversion. The General Partner's economic and other interests and risks in
the Partnership differ from those of the limited partners. A benefit to the
General Partner from the Conversion which is not shared by the limited partners
is the elimination of its liability for obligations and liabilities of SunSource
which may occur after the Conversion. If these conflicts of interest did not
exist, it is possible that the terms of the Conversion might be different than
the terms approved by the Board of Directors of the General Partner. For
additional information concerning the conflicts of interest between the General
Partner and the limited partners in the Conversion, see "SPECIAL FACTORS --
Background of the Conversion," "-- Determinations of the Special Committee," "--
Opinion of Smith Barney," and "-- Recommendation of the General Partner and
Fairness Determination." In addition, certain members of management will receive
accelerated payments under certain deferred compensation plans of the Operating
Partnership.
Possible Reduction in Fiduciary Standards
At least one Delaware court has stated that the fiduciary duties of a
general partner to limited partners are comparable to those of a director to
stockholders. Other courts, however, have indicated that the fiduciary duties of
a general partner are greater than those of a director to stockholders.
Therefore, although it is unclear whether or to what extent there are any
differences in such fiduciary duties, it is possible that the fiduciary duties
of directors of the Corporation to its stockholders could be less than those of
the General Partner to the limited partners, which may result in decreased
potential liability of the directors of the Corporation. The Certificate of
Incorporation of the Corporation expressly limits the potential liabilities of
the directors for certain breaches of their fiduciary duties. See "COMPARISON OF
INTERESTS AND SECURITIES TO BE ISSUED -- Fiduciary Duties."
No Independent Representation
The Conversion was proposed by the General Partner and negotiated by the
Special Committee with the General Partner without independent representation of
the limited partners. Independent representation on behalf of the limited
partners might have caused the terms of the Conversion to be different in
material respects from those described herein. In addition, Smith Barney, the
independent investment banking firm retained by the Special Committee on behalf
of the Partnership to render its opinion as to the fairness, from a financial
point of view, of the exchange ratios, was not separately selected by the
limited partners.
Adverse Tax Implications
A primary disadvantage of converting to corporate form is tax related. The
principal tax disadvantage is that a corporation pays taxes on its taxable
income, and its stockholders generally pay taxes on any dividends from the
corporation out of current or accumulated earnings and profits; whereas a
partnership pays no tax and its partners pay tax on their distributive share
(whether or not actually distributed) of the Partnership's taxable income, gain,
loss, deductions and credits. Under current law, the Partnership will be taxed
as a corporation after December 31, 1997; however, efforts have been made to
extend this date and there can be no assurance that further efforts in this
regard will not be successful. As a result of a conversion of the Partnership to
corporate form, limited partners will forego the potential future tax benefits
associated with operating in partnership form, including primarily the right,
through December 31, 1997, to have the Partnership income subject to only one
level of federal income taxation.
In addition, the Conversion will be a taxable transaction to holders of A
Interests, who will recognize gain or loss equal to the difference between the
cash and the fair market value of the Trust Preferred Securities received in the
Conversion and their tax basis in their A Interests, and to holders of both A
and B Interests. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Addition of Provisions that May Discourage Changes of Control
The Partnership Agreement of the Partnership contains many provisions
which are designed to vest in the General Partner
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<PAGE>
the right to manage the business of the Partnership and to restrict the right of
the limited partners to change management and to approve transactions of a type
which are generally subject to stockholder approval in the case of a
corporation. The Partnership does not hold annual meetings of limited partners
and does not permit limited partners to vote on many of the matters upon which
stockholders of the Corporation will be permitted to vote. Upon effectiveness of
the Conversion, the Partnership will terminate and the stockholders will have
the rights described under the captions "DESCRIPTION OF TRUST PREFERRED
SECURITIES," "DESCRIPTION OF CAPITAL STOCK" and "COMPARISON OF INTERESTS AND
SECURITIES TO BE ISSUED."
The Corporation's Certificate of Incorporation and By-laws, the
Stockholders Agreement and the stockholder rights plan contain certain
provisions that may have the effect of encouraging persons considering an
acquisition or takeover of the Corporation to negotiate with the Board of
Directors rather than to pursue non-negotiated acquisitions or takeover attempts
that a stockholder might consider to be in the stockholders' best interests,
including offers that might result in a premium over market price for the Common
Stock. These provisions include authorization for the Board of Directors to
issue classes or series of Preferred Stock, a prohibition on stockholder action
by written consent and a requirement that stockholders notify the Corporation in
advance of any director nominees or items of business to be proposed at any
meeting of stockholders. See "DESCRIPTION OF CAPITAL STOCK -- Anti-takeover
Provisions." In addition, the deferred compensation plans of the Operating
Partnership will continue to provide that, upon the occurrence of a change in
control as defined in the plans, the vesting provisions of awards under the
plans will be accelerated. See "MANAGEMENT -- Deferred Compensation Plans."
These provisions may reduce interest in the Corporation as a potential
acquisition target or reduce the likelihood of a change in the management or
voting control of the Corporation without the consent of the then incumbent
Board of Directors.
Loss of Contractual Right to Distributions
The Partnership Agreement requires the Partnership to distribute Cash
Available for Distribution to the A Interests to the extent of the Priority
Return and to the B Interests to the extent of the B Tax Distribution. However,
Cash Available for Distribution is determined after deducting such reserves as
the General Partner, in its sole discretion, determines to be necessary for
capital expenditures and other business purposes. After converting into
corporate form, limited partners will lose this contractual right. Payment of
distributions on the Trust Preferred Securities by the Trust will depend on
payments by the Corporation on the Junior Subordinated Debentures which can be
deferred for as long as five years. The Board of Directors of the Corporation
will have complete discretion as to the distribution of dividends on the Common
Stock. It is the current intention of the Board of Directors not to declare
dividends on the Common Stock; future dividends will depend on, among other
things, the future after-tax earnings, operations, capital requirements,
borrowing capacity and financial condition of the Corporation and general
business conditions.
Elimination of General Partner Liability for Corporation Obligations
The partners of the General Partner will receive a benefit from the
Conversion which is not shared by all limited partners generally in the
elimination of the General Partner's liability for obligations and liabilities
of SunSource which may occur after the Conversion. Under Delaware law, as a
general partner of the Partnership, the General Partner is liable to the extent
of its assets for the debts and obligations of the Partnership. If the
Conversion is consummated, the partners of the General Partner would be
stockholders of the Corporation and would not have liability for the debts and
obligations of the Corporation.
No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited
Partners
If the limited partners approve the Conversion, all holders of Interests
will be bound by such approval even though they, individually, may have voted
against the Conversion. Under applicable state law and the terms of the
Partnership Agreement, limited partners will have no dissenters', appraisal or
similar rights in connection with the Conversion, nor will such rights be
voluntarily accorded to limited partners by the Partnership or the Corporation.
Therefore, limited partners will not be entitled to receive cash payment from
SunSource for the fair value of their Interests if they dissent and the
Conversion is approved and consummated. See "VOTING AND PROXY INFORMATION -- No
Appraisal Rights ."
<PAGE>
Uncertainty Regarding Market Price for Trust Preferred Securities and
Common Stock
At present there is no trading market for the Trust Preferred Securities
and Common Stock. Application has been made to list these securities on the NYSE
under the trading symbols SDP for the Trust Preferred Securities and SDPB for
the Common Stock. There can be no assurance that holders will be able to sell
their securities at favorable prices or that the trading prices for the
securities will be comparable to the trading prices for the Interests prior to
consummation of the Conversion. A large number of securities may be traded by
former limited partners immediately following completion of the Conversion for
various reasons, including the perceived increased liquidity that the securities
may afford to limited partners. This might tend to depress the market
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price of the securities. The Corporation has agreed to file registration
statements for the sale of shares of Common Stock by Lehman Brothers and subject
to certain limitations, by management after the Conversion.
The closing prices on the New York Stock Exchange on March __, 1997 for A
Interests and B Interests were $____ and $___, respectively.
Various anti-takeover provisions which would apply to the Corporation
after the Conversion could also have a negative effect on the market price of
the Common Stock.
Transaction Costs
Transaction costs of approximately $3,600,000 will be incurred by the
Partnership, of which $3,000,000 will be paid by the Partnership whether or not
the Conversion is completed.
Change in Ownership Rights
As a result of the Conversion, limited partners will lose certain rights
associated with their ownership of Interests and will acquire certain rights
associated with their ownership of Trust Preferred Securities and shares of
Common Stock. A comparison of these factors, which may relate to investment
objectives of limited partners, is set forth in "COMPARISON OF INTERESTS AND
SECURITIES TO BE ISSUED."
Additional Risks Applicable to Holders of A Interests
Ranking of Subordinated Obligations under Preferred Securities Guarantee
and Junior Subordinated Debentures; Dependence on the Corporation
The obligations of the Corporation under the Junior Subordinated
Debentures are unsecured obligations of the Corporation and will be subordinate
and junior in right of payment to Senior Indebtedness of the Corporation but
senior to its capital stock. The Corporation's obligations under the Preferred
Securities Guarantee are unsecured and will rank (i) subordinate and junior in
right of payment to all other liabilities of the Corporation, including the
Junior Subordinated Debentures, except those made pari passu or subordinate by
their terms, and (ii) senior to all capital stock now or hereafter issued by the
Corporation and to any guarantee now or hereafter entered into by the
Corporation in respect of its capital stock. Because the Corporation is a
holding company, the Junior Subordinated Debentures (and the Corporation's
obligations under the Preferred Securities Guarantee) are also effectively
subordinated to all existing and future liabilities, including trade payables,
of the Operating Partnership and other subsidiaries of the Corporation, except
to the extent that the Corporation is a creditor of the subsidiaries recognized
as such. There are no terms in the Trust Preferred Securities, the Junior
Subordinated Debentures or the Preferred Securities Guarantee that limit the
Corporation's ability to incur additional indebtedness, including indebtedness
that ranks senior to or pari passu with the Junior Subordinated Debentures and
the Preferred Securities Guarantee, or the ability of its subsidiaries to incur
additional indebtedness. See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE --
Status of the Preferred Securities Guarantee" and "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Subordination."
The Indenture provides that the Corporation shall pay all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust, including any taxes and all costs and expenses with
respect thereto, to which the Trust may become subject, except for United States
withholding taxes. No assurance can be given that the Corporation will have
sufficient resources to enable it to pay such debts, obligations, costs and
expenses on behalf of the Trust.
Enforcement of Certain Rights by Holders of Trust Preferred Securities
If an Event of Default (as defined herein) under the Declaration occurs
and is continuing, then the holders of Trust Preferred Securities would rely on
the enforcement by the Property Trustee (as defined herein) of its rights as a
holder of the Junior Subordinated Debentures against the Corporation. The
holders of a majority in liquidation amount of the Trust Preferred Securities
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee or to direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, including the right to direct the Property Trustee to exercise the
remedies available to it as a holder of the Junior Subordinated Debentures. If
the Property Trustee fails to enforce its rights with respect to the Junior
Subordinated Debentures held by the Trust, any record holder of Trust Preferred
Securities may institute legal proceedings directly against the Corporation to
enforce the Property Trustee's rights under such Junior Subordinated Debentures
without first instituting any legal proceedings against such Property Trustee or
any
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<PAGE>
other person or entity.
The Trust's ability to make distributions and other payments on the Trust
Preferred Securities is solely dependent upon the Corporation making interest
and other payments on the Junior Subordinated Debentures deposited as trust
assets as and when required. If the Corporation were not to make distributions
or other payments on the Junior Subordinated Debentures for any reason,
including as a result of the Corporation's election to defer the payment of
interest on the Junior Subordinated Debentures by extending the interest period
on the Junior Subordinated Debentures, the Trust will not make payments on the
Trust Securities. In such an event, holders of the Trust Preferred Securities
would not be able to rely on the Preferred Securities Guarantee since
distributions and other payments on the Trust Preferred Securities are subject
to such Guarantee only if and to the extent that the Corporation has made a
payment to the Property Trustee of interest or principal on the Junior
Subordinated Debentures deposited in the Trust as trust assets. Instead, holders
of Trust Preferred Securities would rely on the enforcement by the Property
Trustee of its rights as registered holder of the Junior Subordinated Debentures
against the Corporation pursuant to the terms of the Indenture and may vote to
appoint a Special Regular Trustee. In the event the Corporation failed to pay
interest on or principal of the Junior Subordinated Debentures on the payment
date on which such payment is due and payable (or, in the case of redemption,
the redemption date), then a holder of Trust Preferred Securities may directly
institute a proceeding against the Corporation under the Indenture for
enforcement of payment to such holder of the interest on or principal of such
Junior Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of the Trust Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Corporation will be
subrogated to the rights of such holder of Trust Preferred Securities under the
Declaration to the extent of any payment made by the Corporation to such holder
of Trust Preferred Securities in such Direct Action. Except as set forth herein,
holders of Trust Preferred Securities will not be able to exercise directly any
other remedy available to the holders of Junior Subordinated Debentures or
assert directly any other rights in respect of the Junior Subordinated
Debentures. See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE," and
"DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Indenture Events of Default."
If the Trust's failure to make distributions on the Trust Preferred Securities
is a consequence of the Corporation's exercise of its right to extend the
interest payment period for the Junior Subordinated Debentures, the Property
Trustee will have no right to enforce the payment of distributions on the Trust
Preferred Securities until an Event of Default under the Declaration shall have
occurred.
Option to Extend Interest Payment Period; Tax Impact of Extension
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation has the right
under the Indenture to defer payments of interest on the Junior Subordinated
Debentures by extending the interest payment period from time to time for an
Extension Period not exceeding 60 consecutive months, during which no interest
shall be due and payable. In such an event, monthly distributions on the Trust
Preferred Securities would not be made (but would continue to compound monthly
at the rate of 11.6% per annum) by the Trust during any such Extension Period.
If the Corporation exercises the right to extend an interest payment period, the
Corporation may not during such Extension Period declare or pay dividends on, or
redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its Common Stock or Preferred Stock.
Prior to the termination of any Extension Period, the Corporation may
further extend such Extension Period; provided that such Extension Period
together with all such previous and further extensions thereof may not exceed 60
consecutive months. Upon the termination of any Extension Period and the payment
of all amounts then due, the Corporation may commence a new Extension Period,
subject to the above requirements. The Corporation may also prepay at any time
all or any portion of the interest accrued during an Extension Period.
Consequently, there could be multiple Extension Periods of varying lengths
throughout the term of the Junior Subordinated Debentures. See "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Distributions" and "DESCRIPTION OF THE JUNIOR
SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period."
Because the Corporation has the right to extend the interest payment
period up to 60 consecutive months on various occasions, the Junior Subordinated
Debentures will be treated as issued with "original issue discount" for United
States federal income tax purposes. As a result, holders of Trust Preferred
Securities will be required to include their pro rata share of original issue
discount in gross income as it accrues for United States federal income tax
purposes in advance of the receipt of cash. Generally, all of a securityholder's
taxable interest income with respect to the Junior Subordinated Debentures will
be accounted for as "original issue discount" and actual distributions of stated
interest will not be separately reported as taxable income. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders
of A Interests -- Accrual of Original Issue Discount and Premium" and "--
Potential Extension of Payment Period on the Junior Subordinated Debentures."
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<PAGE>
As described above, the Corporation has the right to extend an interest
payment period on the Junior Subordinated Debentures from time to time for a
period not exceeding 60 consecutive monthly interest periods. If the Corporation
determines to extend an interest payment period, or if the Corporation
thereafter extends an Extension Period or prepays interest accrued during an
Extension Period as described above, the market price of the Trust Preferred
Securities is likely to be adversely affected. In addition, as a result of such
rights, the market price of the Trust Preferred Securities (which represent an
undivided beneficial interest in Junior Subordinated Debentures) may be more
volatile than other securities on which original issue discount accrues that do
not have such rights. A holder that disposes of Trust Preferred Securities
during an Extension Period, therefore, may not receive the same return on
investment as a holder that continues to hold its Trust Preferred Securities.
See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Option to Extend Interest
Payment Period."
Unlike the A Interests, which are not subject to mandatory or optional
redemption by the Partnership, the Junior Subordinated Debentures held by the
Trust may be redeemed by the Corporation at 100% of the liquidation amount plus
accrued and unpaid distributions at any time after April 30, 2002.
Special Event Redemption or Distribution
Upon the occurrence and during the continuation of a Tax Event or
Investment Company Event (each as defined herein), which may occur at any time,
the Trust shall, unless the Junior Subordinated Debentures are redeemed in the
circumstances described below, be dissolved with the result that, in the manner
described in "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Liquidation
Distribution Upon Dissolution," Junior Subordinated Debentures having an
aggregate principal amount equal to the aggregate stated liquidation amount of,
and bearing accrued and unpaid interest equal to accrued and unpaid
distributions on, the Trust Preferred Securities and Trust Common Securities
would be distributed on a Pro Rata Basis to the holders of the Trust Preferred
Securities and Trust Common Securities in liquidation of the Trust. In the case
of a Tax Event, in certain circumstances, the Corporation shall have the right
to redeem at any time the Junior Subordinated Debentures, in whole or in part,
in which event the Trust will redeem Trust Preferred Securities and Trust Common
Securities on a Pro Rata Basis to the same extent as the Junior Subordinated
Debentures are redeemed. The price paid on such redemption will be $25.25 in
respect of each Trust Preferred Security if the redemption in the case of a Tax
Event occurs within five years of the Conversion and $25 thereafter. There can
be no assurance as to the market prices for Trust Preferred Securities or the
Junior Subordinated Debentures which may be distributed in exchange for Trust
Preferred Securities if a dissolution and liquidation of the Trust were to
occur. Accordingly, the Trust Preferred Securities or the Junior Subordinated
Debentures which the investor may receive on dissolution and liquidation of the
Trust, may trade at a discount. See "DESCRIPTION OF TRUST PREFERRED SECURITIES
- -- Special Event Redemption or Distribution" and "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- General."
Under current United States federal income tax law and interpretation
thereof and assuming, as expected, the Trust is treated as a grantor trust for
United States federal income tax purposes, a distribution by the Trust of the
Junior Subordinated Debentures pursuant to a liquidation of the Trust will not
be a taxable event to the Trust or to holders of the Trust Preferred Securities
and will result in a holder of the Trust Preferred Securities receiving directly
such holder's pro rata share of the Junior Subordinated Debentures (previously
held indirectly through the Trust). If, however, the liquidation of the Trust
were to occur because the Trust is subject to United States federal income tax
with respect to income accrued or received on the Junior Subordinated Debentures
as a result of the occurrence of a Tax Event or otherwise, the distribution of
Junior Subordinated Debentures to holders of the Trust Preferred Securities by
the Trust would be a taxable event to the Trust and each holder, and holders of
the Trust Preferred Securities would recognize gain or loss as if they had
exchanged their Trust Preferred Securities for the Junior Subordinated
Debentures they received upon the liquidation of the Trust. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders
of A Interests -- Distribution of Junior Subordinated Debentures to Holders of
Trust Preferred Securities."
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill")
was introduced in the 104th Congress which would have, among other things,
generally denied interest deductions on an instrument, issued by a corporation,
that has a maximum term of more than 20 years and that is not shown as
indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder or some other related party issues a related instrument that is not shown
as indebtedness on the issuer's consolidated balance sheet. The above-described
provisions of the Bill were proposed to be effective generally for instruments
issued on or after December 7, 1995. If this provision were to apply to the
Junior Subordinated Debentures, the Company would not be able to deduct interest
on the Junior Subordinated Debentures. However, on March 29, 1996, the Chairmen
of the Senate Finance and House Ways and Means Committees issued a joint
statement (the "Joint Statement") to the effect that it was their intention that
the effective date of the Bill, if enacted, would be no earlier than the date of
appropriate Congressional action. In addition, subsequent to the publication of
the Joint Statement, Senator Daniel Patrick
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Moynihan and Representatives Sam M. Gibbons and Charles B. Rangel wrote letters
to Treasury Department officials concurring with the view expressed in the Joint
Statement (the "Democrat Letters"). The 104th Congress adjourned without
enacting the Bill. Similar legislation was reproposed by the Treasury Department
on February 6, 1997, as part of President Clinton's Fiscal 1998 Budget Proposal
(the "Proposed Legislation"). The Proposed Legislation would, however, generally
deny an interest deduction with respect to an instrument not shown as
indebtedness on the separate or consolidated balance sheet of the issuer (as
described above) and with a maximum term of more than 15 years (as contrasted to
a maximum term of more than 20 years under the provision of the Bill). Such
provision is proposed to be effective generally for instruments issued on or
after the date of the first committee action. There can be no assurance that
current or future legislative or administrative proposals or final legislation
will not adversely affect the ability of the Company to deduct interest on the
Junior Subordinated Debentures or otherwise affect the tax treatment described
herein. Such a change, therefore, could give rise to a Tax Event, which would
permit the Company to cause a redemption of the Trust Preferred Securities or to
dissolve the Trust and distribute the Junior Subordinated Debentures to the
holders of Trust Securities in liquidation of the Trust upon receiving an
opinion of counsel as described more fully under "DESCRIPTION OF CAPITAL STOCK
- -- Redemption -- Special Event Redemption or Distribution of Junior Subordinated
Debentures."
Limited Voting Rights
Holders of Trust Preferred Securities will have limited voting rights and,
subject to the rights of holders of Trust Preferred Securities to appoint a
Special Regular Trustee upon the occurrence of an Appointment Event, will not be
able to appoint, remove or replace, or to increase or decrease the number of,
Trustees, which rights are vested exclusively in the holders of Trust Common
Securities.
Additional Risks Related to Holders of B Interests
Conflicts of Interest with A Interests and General Partner
The A Interests and the General Partner have conflicts of interest with
the B Interests with respect to the determination of the consideration to be
received in the Conversion. To the extent the partners of the General Partner
will receive Common Stock in the Conversion, the shares of Common Stock to be
received by holders of B Interests will be diluted. Also, the value of the
consideration to be received by holders of B Interests and by the General
Partner will be reduced to the extent of the consideration to be received by
holders of A Interests.
Future Dilution of Common Stock
The Corporation will be permitted to issue additional equity or debt
securities, including shares of Preferred Stock. Issuances of additional shares
of Common Stock or shares of Preferred Stock could adversely affect
stockholders' equity interest in the Corporation and the market price of the
Common Stock, and the interests in the assets, liabilities, cash flow and
results of operations of the Corporation represented by the shares of Common
Stock issued pursuant to the Conversion may be diluted. Issuances of additional
shares may be more likely after the Conversion if the corporate form expands the
potential investor base, provides greater access to equity markets and permits
the use of capital stock as acquisition currency. Holders of Common Stock will
not be entitled to preemptive rights.
Sale of Common Stock by Lehman Brothers and Management
The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman Brothers and, subject to certain limitations,
by management after the Conversion. Lehman Brothers and management have agreed
to cooperate to execute an underwritten secondary offering of all or some
portion of their shares of Common Stock as soon as practicable after the
effective date of the Conversion, subject to market conditions.
The Corporation has agreed not to sell any additional shares of Common
Stock prior to the earlier of such initial secondary offering and the nine-month
anniversary of the Conversion, except in connection with acquisitions. In
addition, Lehman Brothers Capital Partners I, an affiliate of Lehman/SDI holding
5,788,124 B Interests, may distribute the shares of Common Stock it receives in
the Merger (a majority of which shares would be freely tradeable immediately
after such distribution) to its partners. See "RESALES OF SECURITIES -- Resales
by Lehman Brothers and Management."
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<PAGE>
Certain Delaware Corporate Law Considerations
The Corporation's unaudited pro forma balance sheet at September 30, 1996
reflect a stockholders' deficit of approximately $19 million and a negative net
book value per common share of $2.97. Counsel has advised the Partnership and
the Corporation that under Delaware law, dividends or distributions on the stock
of a Delaware corporation may be declared or paid out of surplus, so that the
net assets of the corporation after such payment shall at least equal the amount
of its capital. However, such a dividend or distribution is permissible under
such provision only if the corporation's board of directors concludes that (a)
immediately following payment of such dividend or distribution, the fair market
value of the corporation's assets will exceed its liabilities and (b) the
payment of such dividend or distribution is being made out of the corporation's
surplus (net assets minus capital) and not out of capital in contravention of
Delaware law. In case there shall be no surplus, dividends may also be paid out
of net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. The foregoing restrictions will not affect the payment of
distributions on the Trust Preferred Securities which are issued by the Trust
rather than the Corporation. In addition, it is the current intention of the
Board of Directors of the Corporation not to declare dividends on the Common
Stock.
Other Considerations
In addition to the factors noted above, an investment in SunSource
(whether in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and equity market conditions. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent
Developments."
VOTING AND PROXY INFORMATION
Voting Procedures
Under the Partnership Agreement, a holder of an Interest may vote only if
the holder has been admitted as a limited partner of the Partnership on or
before the record date for the Special Meeting. Each Interest entitles the
holder thereof to one vote with respect to matters to be voted on at the Special
Meeting. The General Partner has set the close of business on March __, 1997 as
the record date (the "Record Date") for the determination of limited partners
entitled to vote at the Special Meeting.
The Partnership will accept proxies at any time before the Conversion is
voted on at the Special Meeting. The enclosed form of proxy, when properly
completed and returned, will constitute a limited partner's vote for or against,
or abstention on, the Conversion. If a limited partner returns a form of proxy
duly signed without voting, the limited partner will be deemed to have voted for
the Conversion.
Revocation of Proxies
A limited partner may revoke a proxy any time during the solicitation
period before its exercise by (i) delivering written notice of revocation to the
Partnership, (ii) executing and delivering to the Partnership a later dated form
of proxy or (iii) voting in person at the Special Meeting. Any such written
notice or later dated proxy should be sent to SunSource L.P., 2600 One Logan
Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino,
Secretary.
Vote Required; Quorum
Approval of the Conversion will require (i) the affirmative vote of
limited partners holding an aggregate of more than 50% of the outstanding A
Interests and B Interests, each voting separately as a class, and (ii) the
affirmative vote of unaffiliated limited partners (limited partners other than
affiliates of the General Partner) holding an aggregate of more than 50% of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class. As of the Record Date, there were 11,099,573 A Interests
outstanding, of which 11,019,850 were held by unaffiliated holders, and
21,675,746 B Interests outstanding, of which 11,633,603 were held by
unaffiliated holders. The presence, in person or by proxy, of limited partners
holding an aggregate of more than 50% of each class will constitute a quorum at
the Special Meeting. Abstentions and broker non-votes will be treated as present
for the purpose of determining a quorum but will have the effect of votes
against the Conversion Proposal.
The executive officers, directors and other affiliates of the General
Partner own less than 1% of the outstanding A Interests and 46.3% of the
outstanding B Interests. They have advised the Partnership that they each intend
to vote their Interests in favor
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of the Conversion, although they will not participate in the votes by the
unaffiliated holders of A Interests and B Interests. For further information
concerning the ownership of Interests by the General Partner's affiliates,
executive officers and directors, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
Solicitation of Proxies
This solicitation is being made by the General Partner on behalf of the
Partnership. The Partnership will pay the cost of soliciting proxies. The
Partnership will reimburse brokerage houses and other nominees for their
reasonable expenses of forwarding proxy materials to beneficial owners of
Interests. The Partnership has retained D.F. King & Co., Inc. to aid in the
solicitation of proxies and to verify certain records related to the
solicitation of proxies for a fee of $10,000, plus an additional fee of $3.00
for each incoming or outgoing limited partner contact, plus line charges and
other out-of-pocket expenses. In addition, representatives of SunSource may meet
with brokers, research analysts and other members of the investment community to
discuss the Conversion. Representatives of SunSource may also contact limited
partners in person or by telephone, or arrange meetings with limited partners to
discuss the Conversion.
Independent Auditors
Representatives of Coopers & Lybrand L.L.P., the Partnership's independent
accountants, are expected to be present at the Special Meeting.
No Appraisal Rights
Limited partners who object to the Conversion will have no appraisal,
dissenters' or similar rights (i.e., the right, instead of receiving securities
of the Corporation, to seek a judicial determination of the "fair value" of
their Interests and to compel SunSource to purchase their Interests for cash in
that amount) under state law or the Partnership Agreement, nor will such rights
be voluntarily accorded to limited partners by SunSource. Thus, approval of the
Conversion by the requisite vote of limited partners will bind all limited
partners, and objecting limited partners will have no alternative to receipt of
securities of the Corporation other than selling their Interests (or securities
of the Corporation) in the open market.
Other Matters
The enclosed form of proxy grants discretionary authority to the persons
named to vote on any other matters that may properly come before the Special
Meeting. The Partnership is not aware of any other proposals planned to be made
at the Special Meeting and has no current intention of making any additional
proposals.
SPECIAL FACTORS
Background of the Conversion
In October 1986, the predecessor to Lehman Brothers acquired all of the
capital stock of Sun Distributors, Inc. ("SDI") from Sun Company, Inc. In
December 1986, the Partnership and the Operating Partnership were organized as
Delaware limited partnerships, and in January 1987 the assets and liabilities of
SDI were transferred to the Operating Partnership in exchange for a note and a
99% limited partnership interest in the Operating Partnership. Lehman Brothers'
predecessor then contributed the limited partnership interest to the Partnership
in exchange for 11,099,573 A Interests and 22,199,146 B Interests. In February
1987, 10,653,990 units (each consisting of one A Interest and one B Interest)
were sold in an underwritten public offering.
At the time of organization, the limited partnership form offered
important tax advantages since there was no federal income tax at the
partnership level. However, in December 1987 Congress passed the Revenue Act of
1987, one of the provisions of which provided that publicly held limited
partnerships ("MLP's"), with certain exceptions not applicable to the
Partnership, would be taxed for federal income tax purposes as corporations.
MLP's existing on December 17, 1987 were "grandfathered" for ten years until
December 31, 1997.
In addition to the limited time period for the tax benefits, management
found that the structure of the Partnership impeded the strategic direction of
its business. Prior to 1987, the business had grown principally through
acquisitions made either with cash or Sun Company stock. With a limited
partnership, acquisitions with Interests became impracticable. Available cash is
limited by the required payment of the B Tax Distribution which has to be made
at 125% of the maximum individual federal income tax rate.
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This meant that, at the outset, 38.75% (125% x 31%) of federal taxable income
allocable to the B Interests had to be distributed. In 1993, the maximum tax
rate was increased to 39.6% meaning that the B Tax Distribution increased to
49.5% of federal taxable income allocable to the B Interests.
During the early 1990's the question whether to convert to a corporation
was examined from time to time. One of the advantages of conversion was that, if
the A Interests could be replaced with debt, the interest on the debt would be
deductible which would offset to some degree the tax disadvantages of being
taxed as a corporation. However, the amount of this much debt on the balance
sheet would have impaired SunSource's ability to borrow money. It therefore
became impracticable to convert without the sale of some assets to provide
additional net worth.
In the spring and summer of 1992, Lehman Brothers and Legg Mason Wood
Walker, Incorporated ("Legg Mason") were engaged to seek out buyers for the
entire Partnership. Lehman Brothers and Legg Mason prepared descriptive
memoranda for the operations of the divisions, solicited confidentiality
agreements from prospective buyers, assisted in the due diligence efforts of the
prospective buyers and received various offers. Approximately 60 companies were
contacted but the effort produced no proposals attractive to pursue, due in part
to the financial and economic climate at that time and its effect on the
Partnership's business.
On September 13, 1993, the Partnership publicly announced that the Board
had begun to explore the possible sale of assets or becoming a publicly traded
corporation and had authorized the engagement of financial advisors to assist in
the process. Lehman Brothers and Legg Mason (the "Advisors") were again engaged
and conducted an extensive search for buyers of the entire Partnership or of
divisions of the Partnership. Again, the Advisors prepared memoranda for the
operations of the divisions, solicited confidentiality agreements from and
assisted in the due diligence efforts of, the prospective buyers and received
various offers. The Advisors contacted 77 strategic and 44 financial buyers.
They received no interest in the Partnership as a whole from acquirors at an
acceptable level. They received a number of bids for divisions, some of which
were attractive. However, the Board determined that the realizable sale value of
all of the Partnership's assets was not adequate, and also decided that
conversion to a corporation at that time would be unattractive. Finally the
Board determined that the bids for the Electrical Group and for the Dorman
Products division should be pursued further and instructed the Advisors to
obtain final bids for these businesses.
The Operating Partnership sold its Electrical Group on December 5, 1994
and the Dorman Products division on January 3, 1995. In addition, although not
the result of the study of strategic alternatives in 1993-1994, the Downey Glass
division was sold on October 27, 1995. The Operating Partnership received an
aggregate cash consideration, net of expenses, of approximately $70 million, of
which $14.2 million was used for a mandatory prepayment on its senior debt. With
the regularly scheduled principal payment on the senior debt in December 1995,
the Partnership's total debt as a percentage of its consolidated capitalization
was reduced to 43.5% at December 31, 1995 compared with 55% at December 31,
1994. The sales not only strengthened the financial position of the Partnership
but enabled it to remove the restriction on acquisitions which had been imposed
by the lenders for 1993 and 1994.
The strengthened balance sheet therefore removed one of the negative
considerations for conversion to a corporation and, with the deadline of
December 31, 1997 approaching, management and Lehman Brothers began to develop a
concept for conversion to a corporation. This concept was presented to the Board
of Lehman/SDI at its June 12, 1996 meeting. The Board authorized further work on
the conversion and appointed the Special Committee to review the terms of the
conversion proposal to be prepared by the General Partner. See "--
Determinations of the Special Committee" below.
At the same meeting, the Board reviewed a presentation prepared by
management which outlined a range of values which might be realized if the
Partnership were to be liquidated. Because the valuations presented did not
suggest an attractive potential sale value for the Partnership and because of
the other difficulties in a liquidation described below, the Board decided that
pursuit of the conversion alternative offered a higher expected value for
Interest holders than the liquidation plan. For more information on the
liquidation alternative, see "-- Alternatives to the Conversion."
Existing Partnership Structure
The Partnership is a Delaware limited partnership. Unless earlier
terminated pursuant to the Conversion or the Partnership Agreement, the
Partnership will continue in existence until December 31, 2086. The General
Partner holds a 1% general partnership interest. The limited partnership
interests in the Partnership, representing a 99% limited partnership interest,
are represented by 11,099,573 A Interests and 21,675,746 B Interests, both of
which are traded on the NYSE. The Partnership holds a 99% limited partnership
interest in the Operating Partnership and the General Partner holds a 1% general
partnership interest. The Partnership conducts all of its business activities
through the Operating Partnership. Lehman/SDI is the general partner of the
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<PAGE>
General Partner and makes all the decisions relating to the management of the
Partnership and the Operating Partnership and manages and controls their
activities. Lehman Brothers Holdings Inc., as the sole stockholder of
Lehman/SDI, elects the members of the Board of Directors of Lehman/SDI. See the
chart on page 1 of this Proxy Statement/Prospectus.
The General Partner receives, as part of its general partnership interest
in the Operating Partnership, a management fee of $3,330,000 per year from the
Operating Partnership as well as distributions attributable to its general
partnership interests. The Partnership will continue to pay the management fee
until the Effective Time of the Conversion. See "-- Existing Economic Interests
of the Partners." All expenses incurred by the General Partner are paid or
reimbursed by the Operating Partnership, except for the compensation of the
non-management directors of Lehman/SDI.
Existing Economic Interests of the Partners
Cash Available for Distribution of the Partnership (i.e., all cash
receipts of the Partnership, less cash used to pay or establish a reserve for
expenses) is distributed 99% to the holders of A Interests and 1% to the General
Partner until holders of A Interests have received annually a $1.10 simple,
cumulative return. The Priority Return has been paid on a monthly basis to
holders of record on the first day of the month.
After distribution of the Priority Return, Cash Available for Distribution
is distributed 1% to the General Partner and 99% to the holders of B Interests
until such holders have received an annual distribution equal to the product of
(i) 125% of the then applicable maximum Federal income tax rate for individuals
and (ii) the taxable income allocable to the B Interests. The B Tax Distribution
has been partially distributed on a monthly basis to holders of record on the
first day of the month with the balance distributed by March 31 of the
succeeding year. See Note 3 of Notes to Consolidated Financial Statements. The
Partnership suspended the payment of monthly advance B Tax Distributions
effective January 1, 1997.
Upon liquidation of the Partnership, after provision for all liabilities,
the holders of A Interests will receive a preferential distribution equal to $10
per A Interest plus any unpaid Priority Return and the balance will be
distributed to the General Partner and the holders of B Interests in accordance
with their respective capital accounts.
The Operating Partnership distributes its available cash 99% to the
Partnership and 1% to the General Partner until the amount distributed to the
Partnership is sufficient to pay the Priority Return and the B Tax Distribution.
The General Partner also receives a management fee from the Operating
Partnership of $3,330,000 annually. To the extent that the Priority Return and
the B Tax Distribution have not been paid on a cumulative basis, the management
fee will not be paid, but will be deferred and be paid, together with any
management fees then owed with respect to any other year, after the Priority
Return and B Tax Distribution have been paid. In addition, the management fee
can be paid only if the Operating Partnership complies with the covenants
required by the Operating Partnership's credit agreements. See Notes 8 and 9 of
Notes to Consolidated Financial Statements.
Alternatives to the Conversion
The alternatives to the Conversion which were considered by the General
Partner were continuing the existence of the Partnership as a limited
partnership and the liquidation of the Partnership, either immediately or over
an extended period of time.
The benefit of continuing the existence of the Partnership as a limited
partnership is the possible reduction of aggregate federal income taxes payable
by the Partnership and its partners compared to the aggregate federal income
taxes payable by the Corporation with respect to the income of SunSource and its
stockholders with respect to any dividends received. See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES." This federal income tax benefit will end under current law on
December 31, 1997 and the Partnership will thereafter be taxed as a corporation.
The Partnership will then be subject to tax at the Partnership level and the
partners will also be subject to tax on any distributions received. In addition,
payments of the Priority Return would not be deductible for tax purposes. In
view of the impending double taxation at both the Partnership and the partner
levels, the General Partner no longer believes it would be in the best interests
of the Partnership and the limited partners to remain in partnership form.
Another alternative to the Conversion considered by the General Partner
was liquidation. One benefit of liquidating the Partnership at this time rather
than effecting the Conversion would be the possibility that the currently
realizable value of the Partnership assets may exceed the value of SunSource as
a continuing business. Another benefit of liquidating in partnership form is
that a liquidation of the Partnership would likely result in less federal income
taxes payable on any gains recognized by the Partnership than if the Partnership
were converted to a corporation and subsequently liquidated because the partners
of the Partnership would only pay federal income tax at the partner level on
liquidation gains, while a corporation would pay federal income tax on gains
derived from liquidating its assets and the corporation's stockholders would
also pay federal income tax on
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<PAGE>
the amount by which the liquidation proceeds received by the stockholders
exceeded their basis in the shares.
Management made a presentation to the Board on June 12, 1996 during which
it outlined a range of values which might be realized if the Partnership were to
be liquidated. Information presented included (i) current and projected earnings
before interest, taxes and amortization ("EBITA") for all of the Partnership's
business units, and (ii) management's estimate of the costs of liquidation,
including transaction costs, severance pay, make-whole penalties on long-term
debt, payment of unfunded deferred compensation liabilities, the expenses of
closing the Philadelphia home office and miscellaneous administrative expenses.
Management also presented a summary table showing how the above information
would translate into liquidation values per B Interest using an assumed 6.0x
multiple of EBITA, as follows:
Assumed Liquidation Values Per B Interest (1)
Years Ended December 31
<TABLE>
<CAPTION>
Assumed
EBITA Multiple 1996 1997 1998 1999 2000
- -------------- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C>
6.0 X $4.54 $5.84 $5.80 $6.74 $7.79
</TABLE>
(1) Figures after 1997 reflect payment of capital gains taxes at the corporate
level. The above figures assume redemption of the A Interests at $10.00,
plus accrued interest, each in accordance with the terms of the
Partnership Agreement. On the day of the presentation, the closing price
for the B Interests was $4.50 and the closing price for the A Interests
was $11.25.
The above EBITA multiples were selected based upon information developed
by the Partnership's investment bankers during the course of their work in 1992,
1993 and 1994. Management believed such multiples had not subsequently changed
materially based on several unsolicited indications of interest the Partnership
had received during 1995 and 1996. Also, the Partnership's EBITA from continuing
operations during 1995 and 1996 was only modestly higher than the 1994 level.
In discussing the liquidation alternative, the Board noted that previous
efforts by the Partnership's investment bankers had resulted neither in a bid
for the entire partnership nor bids as high as 6.0 X EBITA for two of the
Partnership's larger business units. In addition, the most aggressive previous
bidder for the Partnership's largest business group had sharply curtailed its
acquisition activity in the United States. In summary, the Board concluded that
there was substantial doubt that the Partnership could realize as much as 6.0 X
EBITA for all of its business units within a reasonable time frame.
The failure to sell all but a few units would prevent the Partnership from
liquidating. At the same time, the requirement to pay the A Interest Priority
Return would place an onerous cash burden upon the remaining operating units.
The Board determined that the administrative burdens that would result from an
attempt to sell simultaneously all business units in separate transactions made
liquidation an unattractive alternative.
An additional risk in the liquidation proposal was the amount of time it
could take to dispose of multiple businesses on satisfactory terms. Management
was concerned that morale could become a problem at those units not sold
quickly, and diminished performance and increased employee defections could
rapidly impair the value of the affected units. Finally, potential buyers of the
last few business units would have superior negotiating power when it became
clear that the Partnership had to sell the remaining assets in a short time
frame in order to complete the liquidation prior to December 31, 1997, after
which any capital gains from liquidation would become subject to corporate
taxation.
The Board also considered that liquidation would create an immediate large
taxable gain for the Partnership's investors while the Conversion would result
in a substantially smaller taxable gain.
Based on the considerations described below, the Board believes that a
liquidation of the Partnership's assets (either through individual or bulk asset
sales or the sale of the Partnership in its entirety) at this time would not
result in the limited partners receiving acceptable value. The Board did not
obtain an appraisal or other valuation of the assets because, in light of the
previous efforts to sell the Partnership's business units and the Board's
conclusions regarding the logistical and financial risks of liquidation, the
Board believed that a liquidation of assets would not result in sufficient value
to the limited partners.
The Board also rejected the liquidation alternative because liquidation
would not provide the limited partners and the General Partner with any
continuing equity interest in the Partnership and would be unlikely to be
accomplished on a tax-advantaged basis.
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<PAGE>
The General Partner believes that in the long term the value of the Partnership,
whether or not the Conversion is effected, to the General Partner and the
limited partners would exceed the value of the proceeds of a liquidation at this
time.
The General Partner believes that other long-term strategies available to
SunSource such as diversification, disposition of assets and acquisition of
assets are not materially adversely affected by the decision to convert and may
be enhanced by the decision to convert as set forth above. From time to time in
the past, the General Partner has considered, and in some cases effected, the
possibility of disposing of surplus assets, acquiring assets, diversifying its
operations geographically and engaging in new lines of business. For example in
1994 and 1995, the Partnership sold its Electrical Group, Dorman Products
division, and Downey Glass division. Similarly, the Partnership has acquired a
number of companies which complement its operations. See "BUSINESS -- General."
The General Partner believes that SunSource will continue to consider, and in
some cases effect, similar transactions in the future, regardless of whether
SunSource is organized in partnership or corporate form. However, the General
Partner believes that the Conversion will enhance SunSource's ability to pursue
its long-term strategies by conserving cash and creating the possibility of
using Common Stock in future acquisitions. The General Partner currently is not
considering any significant transaction involving the Partnership or SunSource's
business which is outside the ordinary course of business of the Partnership.
Reasons to Convert to Corporate Form
The General Partner believes that there are six principal reasons to
convert to corporate form at this time: (i) the potential for the Corporation's
and the Trust's equity securities to attain greater acceptance within the
investment community; (ii) the conservation of cash by the retention of the
management fee and reduction in tax payments; (iii) the ability to deduct
interest payments on the Junior Subordinated Debentures for federal income tax
purposes; (iv) the potential for the Corporation to issue equity in payment of
the purchase price for complementary acquisitions; (v) the potential for the
Corporation to have greater access to equity capital markets; and (vi) the
simplification and reduction in cost of tax reporting for investors in
SunSource.
o Expansion of Potential Investor Base. The General Partner anticipates that
the Conversion will expand SunSource's potential investor base to include
institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons.
In addition, the General Partner anticipates that the Common Stock (as
compared to Interests) will receive additional investor interest through
increased review and evaluation by research analysts.
o Conservation of Cash. The Corporation will conserve cash by the retention
of the annual management fee of $3,330,000 and the retention of
distributions on the General Partner's ownership in the Partnership and the
Operating Partnership amounting to approximately $400,000 annually.
o Tax Consequences. The benefit of being taxed as a partnership will end
under current law after December 31, 1997. Although the Corporation will
also have to pay tax on its income, SunSource will conserve additional cash
because (i) the interest payable on the Junior Subordinated Debentures,
which will approximately equal the distributions currently paid on the A
Interests, is deductible for federal income tax purposes, resulting in a
corporate tax benefit of approximately $4,900,000 annually and (ii) the
difference in rates between the B Tax Distribution, which will be
eliminated, and the tax that will become payable by the Corporation.
Subject to changes in federal income tax laws, approval of the Conversion
Proposal should assure tax deductibility on the distributions in respect of
the Trust Preferred Securities, which will replace the A Interest Priority
Return. If the Conversion is not approved, the Priority Return would have
to be paid from net income after corporate income taxes after December 31,
1997.
o Acquisition Currency. The General Partner believes that current industry
conditions may provide opportunities for SunSource to grow through the
acquisition of businesses and assets which are complementary to its
existing businesses. In certain cases, SunSource may want to be able to
issue equity interests as payment of the purchase price for such
acquisitions. The General Partner believes that an equity interest in a
corporation will be a more attractive acquisition currency to sellers than
an interest in a partnership. SunSource is not presently party to any
agreement or understanding regarding a material acquisition and currently
has no plans to make a material acquisition.
o Greater Access to Equity Markets. The General Partner expects that the
Corporation will have greater access to the public and private equity
capital markets than the Partnership, potentially enabling it to raise
capital on more favorable terms than are now available to the Partnership.
This greater access may be of particular benefit if SunSource proposes to
issue equity securities to reduce existing debt, or to raise additional
funds for capital expenditures or otherwise to expand its business.
o Tax Reporting. In addition, the General Partner believes that the
complexities of tax reporting associated with partnership investments are
regarded as unduly burdensome for most limited partners under current
conditions. The ownership of stock
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<PAGE>
rather than Interests will greatly simplify tax reporting with respect to
an investment in SunSource on each limited partner's individual federal and
state income tax returns for future years.
Terms of the Conversion
Structure of the Conversion. If approved by the limited partners, the
Conversion will be effected as follows:
If approved by the limited partners, the Conversion will be effected as
follows:
o The Partnership will contribute its limited partnership interest in the
Operating Partnership and Lehman/SDI, Inc. will contribute its general
partnership interest in the General Partner to LPSub in exchange for common
stock of such subsidiary. Certain members of management of the General
Partner will contribute their limited partnership interests in the General
Partner to the Corporation, in exchange for 462,000 shares of Common Stock,
of which 75,000 shares will be held in escrow to distributed after two
years if all distributions on the Trust Preferred Securities have then been
paid. The Partnership and its subsidiary will then merge with and into the
Corporation and (i) the A Interests will be converted into 4,217,837 Trust
Preferred Securities and cash; (ii) the B Interests will be converted into
5,418,936 shares of Common Stock and (iii) the common stock of LPSub held
by Lehman /SDI will be converted into 538,000 shares of Common Stock. The
Corporation will then contribute the limited partnership interests in the
Operating Partnership and the General Partner and the general partnership
interest in the General Partner to a wholly owned subsidiary.
o As a result of the Conversion, the former holders of A Interests will be
holders of Trust Preferred Securities and the former holders of B Interests
and the partners of the General Partner will be holders of shares of Common
Stock of the Corporation.
o The Corporation, through its subsidiaries, will then be the holder of the
general and limited partnership interests in the Operating Partnership and
the General Partner. See page 1 above for a diagram of the corporate
structure after the Conversion.
The Operating Partnership will be managed by the General Partner, whose
general partner will be Sun Sub B, which will act under the direction of its
parent, the Corporation. By reason of the Merger, the Corporation will be
responsible for all liabilities and obligations of the Partnership.
The Conversion is proposed to be effected pursuant to an Agreement and
Plan of Conversion, attached as Exhibit B and incorporated by reference herein,
among the Corporation, the Partnership, the Operating Partnership, the General
Partner, SunSub A, Lehman/SDI and the limited partners of the General Partner
(the "Conversion Agreement").
Diagrams illustrating the structure of SunSource and its subsidiaries,
both before and after the Conversion, are set forth immediately preceding the
Summary.
Effective Time. If approved at the Special Meeting, the Conversion is
expected to become effective on April __, 1997 (the "Effective Time").
Conditions to the Conversion. The principal conditions to the Conversion
are (i) the affirmative vote of limited partners holding an aggregate of more
than 50% of the outstanding A Interests and B Interests, each voting separately
as a class; (ii) the affirmative vote of unaffiliated limited partners (limited
partners other than affiliates of the General Partner) holding an aggregate of
more than 50% of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class; (iii) approval of the Trust
Preferred Securities and Common Stock for listing on the NYSE; (iv) no
withdrawal of the Special Committee's determination that the Conversion is fair
to the holders of A Interests and B Interests or of the fairness opinion of
Smith Barney; (v) receipt of a satisfactory tax opinion; (vi) the availability
of financing to refinance existing senior debt on terms acceptable to the
Corporation; and (vii) no material change in applicable law, including with
respect to the taxation of the Conversion, the Corporation or the Trust
Preferred Securities.
Termination; Amendment. The General Partner may terminate the Conversion
Agreement and abandon the Conversion at any time before it becomes effective,
whether before or after approval by the limited partners. Any provision of the
Conversion Agreement may be waived at any time by the party that is entitled to
the benefits thereof, and the Conversion Agreement may be amended at any time
before or after approval thereof by the limited partners by agreement of the
Board of Directors of Lehman/SDI and the other parties to the Conversion
Agreement. After any such approval, however, no amendment or waiver may be made
that decreases the amount or changes the type of the consideration or that in
any way materially and adversely affects the
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<PAGE>
rights of the holders of Interests without the approval of a majority of such
holders.
Consequences if Conversion is Not Approved
If the Conversion is not approved by the limited partners, or if the
Conversion is not consummated for any other reason, the Partnership presently
intends to continue to operate as an ongoing business in its current form. No
other transaction is currently being considered by the Partnership as an
alternative to the Conversion, although the Partnership may from time to time
explore other alternatives.
Failure to convert to corporate form could result in a substantial
reduction in income available to B Interests after December 31, 1997, since it
is likely that payment of the A Interest Priority Return would be distributed
from net income after payment of corporate income taxes. This result could also
impede the Partnership's ability to pay the Priority Return after December 31,
1997. The following table shows that the pro forma results for the year ended
December 31, 1996 would produce net income of $0.354 per existing B Interest if
the Partnership were to have converted to corporate form, but only $0.103 per
existing B Interest if the Conversion were not approved and the Partnership were
to be taxed as a corporation (as it will be after December 31, 1997 under
current tax law). Of the $0.251 increase in earnings per B Interest in the pro
forma results for the Conversion, $0.217 is attributable to the exchange of A
Interests for Trust Preferred Securities and cash (and the tax benefits of the
deduction of the interest payments on the related Junior Subordinated
Debentures) and $0.034 is attributable to the elimination of the General
Partner's management fee and respective 1% ownership interests in the
Partnership and the Operating Partnership in exchange for the issuance of
4,000,000 shares of Common Stock (before reverse stock split).
<TABLE>
<CAPTION>
Twelve Months Ended
December 31, 1996
-----------------
(dollars in thousands)
Pro Forma Partnership
Taxable as a Corporation Pro Forma Corporation
------------------------ ---------------------
<S> <C> <C>
Income from Operations $35,882 $35,882
Management Fee 3,330 N/A
Interest Expense, Net 6,875 8,094
Other Income, Net 745 745
Distribution on Trust Preferred Securities -- (12,232)
------------ ---------
Income Before Taxes $26,422 $16,301
Income Tax Provision 11,688 7,211
-------- --------
Net Income $14,734 $9,090
------- --------
General Partner Income Allocations 293 --
A Interest Priority Return Payments 12,210 --
-------- -------------
Net income to holders of B Interests $2,231 $9,090
-------- ---------
Number of B Interests Outstanding
(Before reverse stock split) 21,675,746 25,675,746
Earnings Per B Interest
(Before reverse stock split) $0.103 $0.354
-------- ---------
</TABLE>
Tax cash distributions to B Interest holders would be discontinued after
December 31, 1997 even if the Conversion is not approved, because income taxes
will be paid by the Partnership after that date.
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<PAGE>
Failure to convert pursuant to the terms of the Conversion will result in
reduced cash flow, which may inhibit the Partnership's ability to finance
adequately future growth by internal expansion or acquisition. The above table
shows pro forma net income of $9.1 million to holders of corporate B Interests
for the year ended December 31, 1996 versus $2.2 million to holders of B
Interests if the Partnership were taxed as a corporation. If the Conversion is
not approved, the General Partner might reconsider other alternatives, including
liquidation of the Partnership. In the event of a liquidation, the A Interests
would be entitled to a liquidation preference of $10 per Interest.
Limited Partner Litigation
On January 16, 1997, a holder of B Interests filed a purported class
action in the Delaware Court of Chancery seeking to enjoin the Conversion on the
terms proposed as well as an order requiring the defendants to account to the
plaintiff and the class for damages and requiring the General Partner or its
affiliates to hold the consideration received in trust pending a determination
of the amounts properly attributable to the General Partner's interest.
Defendants named in the complaint are the Partnership, the Corporation, the
General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the
directors of Lehman/SDI. The complaint alleges that the terms of the Conversion
unfairly transfer substantial equity to the General Partner to the detriment of
the B Interests and constitute a breach of fiduciary duty. A second complaint
containing substantially identical allegations was filed by a limited partner in
the Delaware Court of Chancery on February 11, 1997. The defendants believe the
complaints are without merit and intend to vigorously defend themselves.
Determinations of the Special Committee
Appointment of the Special Committee and its Independent Advisors. On June
12, 1996, the Board of Directors of Lehman/SDI appointed the Special Committee
to review, evaluate and reach a determination with respect to the fairness of
the terms of the Conversion to the limited partners, and to make a
recommendation to the Board of Directors with respect to the Conversion. In
connection with these instructions, the Special Committee was authorized to take
such action it deemed necessary or appropriate, including retaining, at the
expense of Lehman/SDI (which expenses are payable by the Partnership and
Operating Partnership pursuant to the terms of the Partnership Agreement and the
Operating Partnership Agreement), legal counsel and a financial advisor. The
Special Committee was also authorized to negotiate and document any agreement
with respect to the Conversion or any revisions thereto. The resolution
establishing the Special Committee provided that the Special Committee is only
advisory in nature and is not authorized or empowered to take any action on
behalf of, or binding upon, Lehman/SDI or its Board of Directors regarding the
Conversion or otherwise. The Board of Directors of Lehman/SDI did not instruct
the Special Committee to consider the relative merits of the Conversion as
compared to any alternative business strategies that might exist for the
Partnership or the effect of any alternative transaction in which the
Partnership might engage, including the acquisition by one or more third parties
of all or any part of the Partnership or its securities. For a discussion of the
review of certain alternatives to the Conversion considered by the Board of
Directors of Lehman/SDI, see "--Alternatives to the Conversion."
O. Gordon Brewer, Jr. and Ernest L. Ransome, III were appointed to serve
on the Special Committee and Mr. Brewer was elected to be the Special
Committee's Chairman. Except for their directorship in Lehman/SDI and the
Corporation and membership on the Special Committee, the members of the Special
Committee are not otherwise affiliated with the Partnership, Operating
Partnership, General Partner, Corporation or Lehman/SDI. As of December 10,
1996, Mr. Brewer beneficially owned 3,000 A Interests and 1,000 B Interests and
Mr. Ransome beneficially owned 5,000 A Interests and 5,000 B Interests. As
compensation for serving on the Special Committee, Lehman/SDI agreed to pay to
each member of the Special Committee a retainer of $10,000 (subsequently
increased to $20,000 in January 1997 at the request of the Special Committee) in
recognition of the substantial effort and time commitment invested in the
Conversion process by the Special Committee, plus a meeting fee of $1,000 per
meeting. Lehman/SDI also provided the Special Committee with a letter
acknowledging that the members of the Special Committee would be indemnified,
and have expenses advanced, under Lehman/SDI's bylaws to the fullest extent
permitted under law for any losses or claims arising out of the performance of
the Special Committee.
On June 24, 1996, the Special Committee selected Dechert Price & Rhoads as
its independent legal counsel to advise the Special Committee regarding its
fiduciary duties and the legal aspects of the Conversion and any other matters
related to fulfilling the purpose of the Special Committee. On July 16, 1996,
the Special Committee formally engaged Smith Barney to act as independent
financial advisor to the Special Committee and in that capacity, among other
things, to (i) assist the Special Committee in its review of the business and
operations of the Partnership and the Operating Partnership and their historical
and projected financial condition, (ii) assist the Special Committee in its
review, evaluation and negotiation of the financial terms and structure of the
Conversion and (iii) render an opinion to the Special Committee and to the Board
of Directors as to whether (x) the consideration to be received in the
Conversion by the holders of A Interests is fair from a financial point of view
to such
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<PAGE>
holders, (y) the consideration to be received in the Conversion by the
holders of B Interests is fair from a financial point of view to such holders,
and (z) the consideration (the "General Partner Consideration") to be received
by the General Partner in exchange for the General Partnership Interests (as
defined below) is fair from a financial point of view to the holders of A
Interests and to the holders of the B Interests, respectively.
Due Diligence, Evaluation and Preliminary Analysis of Initial Conversion
Proposal. Beginning in July 1996, at the instruction of the Special Committee,
Smith Barney and Dechert Price & Rhoads reviewed certain financial and legal
information relating to the Partnership and its operations to assist the Special
Committee. In addition, representatives of Smith Barney met with the senior
management team to discuss the Partnership's business, operations and prospects.
On August 8, 1996, the Special Committee received the General Partner's
proposal (the "Initial Conversion Proposal"), to convert the Partnership into a
corporation. The Initial Conversion Proposal provided for (i) each A Interest to
be exchanged for a package of preferred stock and subordinated debt of the
Corporation with an aggregate liquidation preference and face value of $10.00
per A Interest and aggregate annual cash distributions of $1.10 per year, (ii)
each B Interest to be exchanged for 0.25 share of Common Stock(1), and (iii) the
General Partner's general partnership interests in and rights under the
Partnership and the Operating Partnership (the "General Partnership Interests"),
to be exchanged for 2,285,750 shares of Common Stock. The General Partner
informed the Special Committee that the number of shares of Common Stock
proposed to be exchanged for the General Partnership Interests represented the
General Partner's determination of the value of the General Partnership
Interests, including the General Partner's percentage interest in each of the
Partnership and the Operating Partnership, the value attributable to the General
Partner's right to receive the Management Fee pursuant to the terms of the
Operating Partnership Agreement, and a "control premium" in addition to the
value attributable to the percentage interests and Management Fee. The Initial
Conversion Proposal was supplemented on August 16 with a description of the
terms of the preferred stock and subordinated debt to be exchanged for the A
Interests.
On August 26, 1996, the Special Committee met with its financial and legal
advisors to preliminarily discuss the Initial Conversion Proposal. Smith Barney
discussed with the Special Committee its preliminary views of the financial
aspects of the Initial Conversion Proposal. The Special Committee's advisors
reported on the status of their review of the Partnership and its operations.
After extensive discussion of the terms of the Initial Conversion Proposal, the
Special Committee instructed its advisors to arrange for a meeting with
representatives of the General Partner and its advisors to express a number of
areas of concern to the General Partner, including the likely effect on market
liquidity for holders of A Interests resulting from the proposed issuance of
multiple classes of securities in exchange for the A Interests.
On September 4, 1996, the General Partner modified the Initial Conversion
Proposal and provided the Special Committee and its advisors with draft terms
for trust preferred securities which were proposed to be exchanged for the A
Interests. Each A Interest would be exchanged for 0.40 trust preferred
securities, with a liquidation preference of $25.00 (or $10.00 for each A
Interest) and cumulative cash distributions of 11% per annum ($1.10 per year for
each A Interest).
Negotiations with the General Partner. On September 9, 1996, representatives of
Smith Barney and Dechert Price & Rhoads met with representatives of the General
Partner (including Lehman Brothers and the Partnership's management) and legal
counsel to Lehman Brothers. The Special Committee's advisors informed the
General Partner that in evaluating the fairness of any exchange
<PAGE>
of securities for A Interests in the Conversion, the Special Committee would
attribute significant weight to the current market price of the A Interests as
opposed to their liquidation value, and that the terms of the Conversion should
reflect the taxable nature of the exchange of A Interests and any elimination of
existing economic and other rights currently available to the A Interests. With
respect to the proposed consideration for the General Partnership Interests, the
General Partner was informed that the Special Committee believed the number of
shares of Common Stock proposed to be exchanged for General Partnership
Interests substantially overstated the value of the General Partnership
Interests. The Special Committee had taken note of certain limitations on the
value of the Management Fee, including the limited partners' right under the
Partnership Agreement to remove the General Partner by a vote of 80% of the
outstanding unaffiliated Interests and the termination of the General Partner's
right to receive the Management Fee upon the liquidation of the Partnership. The
General Partner was also advised that the Special Committee did not believe that
the General Partner was entitled to a "control premium" for the General
Partnership Interests (i.e., any value over and above the value attributable to
the General Partner's percentage interest in each of the Partnership and the
Operating Partnership and the Management Fee), especially in view of the
significant Common Stock ownership which Lehman Brothers, its affiliates and
management would have in the Corporation after the Conversion and their
representation on the Corporation's
- ----------
(1) All references to shares of Common Stock reflect the one-for-four reverse
stock split implied by the exchange ratio for B Interests in the Conversion.
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<PAGE>
Board of Directors. Moreover, the Special Committee's legal counsel conveyed the
Special Committee's concern with a number of issues relating to the governance
of the Corporation after the Conversion, including (i) the potential shift in
voting power from the current unaffiliated holders of A Interests and B
Interests to Lehman Brothers, its affiliates and management as a result of both
the issuance of a significant number of shares of Common Stock in exchange for
the General Partnership Interests and the loss of voting rights previously
belonging to the A Interests, (ii) the potential for a post-Conversion sale by
Lehman Brothers of a control block of Common Stock at a premium not available to
all holders of Common Stock generally or otherwise in a manner not in the best
interests of all holders, and (iii) the need for a meaningful independent check
on any decision by Lehman Brothers or management with respect to any major
transaction by the Corporation with change of control implications occurring
shortly after the Conversion, particularly given the substantial equity to be
received by the General Partner in exchange for the General Partnership
Interests, and Lehman Brothers' expression of interest in possibly liquidating
some or all of its Common Stock holdings after the Conversion.
From September 10-17, 1996, representatives of Lehman Brothers and Smith
Barney had a number of discussions regarding the value and terms of the proposed
trust preferred securities. Lehman Brothers indicated that, in response to the
Special Committee's concerns, the General Partner was prepared to increase the
annual yield on the proposed securities to 11.8%, resulting in the holders of A
Interests receiving cash distributions of $1.18 per annum with respect to the
trust preferred securities received in exchange for each A Interest. During the
same period, counsel to the Special Committee and Lehman Brothers discussed the
corporate governance issues raised by the Special Committee.
On September 17 and 18, 1996, the Special Committee met telephonically and
in person with its legal counsel and financial advisors to consider the
revisions to the Conversion proposal. The Special Committee received a report
from its advisors regarding the September 9 meeting and reviewed with them the
revised Conversion proposal. The Special Committee identified as its major areas
of concern (i) the value of the trust preferred securities, (ii) the taxable
nature of the Conversion to holders of the A Interests, (iii) the differences
between the trust preferred securities and the A Interests, including the
Corporation's right to call the trust preferred securities at par after five
years or at any time upon the occurrence of a Tax Event, and the Corporation's
ability to defer payments on the trust preferred securities at any time or from
time to time for up to 60 consecutive months, (iv) the number of shares of
Common Stock proposed to be issued with respect to the General Partnership
Interests, and (v) the need for certain corporate governance provisions for the
benefit of unaffiliated holders of Common Stock given the Special Committee's
concerns in this area noted above.
On October 22, 1996, the General Partner presented the Special Committee
with a new set of proposed terms for the Conversion (the "Second Conversion
Proposal"). The Second Conversion Proposal provided for (i) each A Interest to
be exchanged for (a) 0.38 of an 11.6% Trust Preferred Security with a
liquidation amount of $25.00 (or $9.50 per A Interest), callable at par in five
years, and (b) $1.00 in cash, (ii) each B Interest to be exchanged for 0.25
share of Common Stock, and (iii) the General Partnership Interests to be
exchanged for an aggregate of 1,375,000 shares of Common Stock, 1,000,000 shares
of which would be received by the General Partner upon consummation of the
Conversion, and the remaining 375,000 shares of which would be received by the
General Partner in 125,000 share installments on the first three anniversaries
of the Conversion, provided that if there were accrued and unpaid distributions
on the Trust Preferred Securities on such dates, such shares would not be
received by the General Partner until such distributions had been paid. The
Second Conversion Proposal also contained a restriction on the ability of Lehman
Brothers and management to vote or transfer the shares of Common Stock which
they received in exchange for the General Partnership Interests, although such
restrictions did not apply to Common Stock received by them with respect to
their B Interests. In response to the Special Committee's concerns regarding the
dominant influence of certain stockholders after the Conversion, the Second
Conversion Proposal also provided for the Corporation's Board of Directors to
consist of nine directors, up to two designated by Lehman Brothers and its
affiliates, three from management and four independent directors (the
"Independent Directors").
On October 23 and 24, 1996, the Special Committee met telephonically and
in person with its financial and legal advisors to discuss the Second Conversion
Proposal. At these meetings the Special Committee concluded that the Second
Conversion Proposal did not adequately compensate holders of the A Interests and
that the 1,375,000 shares of Common Stock proposed to be exchanged for the
General Partnership Interests was excessive. The Special Committee discussed
with its advisors various alternative structures regarding the timing of the
issuance of Common Stock for the General Partnership Interests, including the
possibility of issuing a smaller number of shares without any vesting
requirements, or linking a portion of the shares to a contingent vesting
schedule based on the financial performance of the Corporation after the
Conversion. As to the corporate governance aspects of the Second Conversion
Proposal, the Special Committee determined to continue negotiating for
additional provisions protecting minority, unaffiliated stockholders, including
as to voting and resale restrictions on Lehman Brothers' and management's Common
Stock, and a provision requiring approval of a majority of the Independent
Directors for some period of time following the Conversion with respect to
certain types of transactions.
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<PAGE>
Later on October 24, the Special Committee and its advisors met with Lehman
Brothers, management, and counsel to Lehman Brothers and the Partnership to
further negotiate the terms of the Second Conversion Proposal. The parties were
unable to reach an agreement with respect to the number of shares comprising the
General Partner Consideration, although they did reach agreement on the $1.30
cash payment to be included as part of the consideration for the A Interests and
the nature of the restrictions on the voting power of Lehman Brothers and
management after the Conversion. See "--Factors Considered by the Special
Committee - Certain Corporate Governance Matters" and "DESCRIPTION OF CAPITAL
STOCK - Stockholders Agreement."
During the next three weeks, the Special Committee's advisors continued to
discuss the General Partner Consideration, the terms of any vesting of
contingent shares and further refinements to the corporate governance provisions
with the General Partner and its counsel, including the prohibition on certain
resales of Common Stock by Lehman Brothers and certain senior members of
management, and the requirement of Independent Director approval of certain
types of transactions after the Conversion. See "-- Factors Considered by the
Special Committee - Certain Corporate Governance Matters" and "DESCRIPTION OF
CAPITAL STOCK - Stockholders Agreement." On November 15, 1996, the Special
Committee met with Mr. Donald T. Marshall, the Partnership's Chairman and Chief
Executive Officer. Mr. Marshall proposed various vesting alternatives and
performance targets which resulted in a maximum of 1,125,000 shares being paid
out for the General Partnership Interests if all such performance targets were
met. The parties were unable to reach agreement on the number of shares or
performance targets.
During telephonic meetings on November 7, 14, 15, 18 and 25 and December 3,
the Special Committee continued to examine with its advisors the terms of the
Conversion. The Special Committee concluded that it was unlikely that the
Special Committee and the General Partner would be able to reach agreement on
the appropriate performance vesting targets and determined to drop its request
for vesting based on performance targets in exchange for a reduction in the
aggregate number of shares to be paid for the General Partnership Interests.
During November and the first week of December 1996, the Special Committee
and its advisors had a series of discussions with Lehman Brothers, management,
counsel to Lehman Brothers and counsel to the Partnership regarding the
resolution of the remaining issues on the proposal, including the agreement that
1,000,000 shares of Common Stock be issued to the General Partner for the
General Partnership Interests. On December 4, 1996, during a telephone
conference among the members of the Special Committee, Lehman Brothers, Mr.
Marshall and Mr. Edmonson, the parties agreed upon a premium of 101% of
liquidation value upon a Tax Event redemption of the Trust Preferred Securities
and a two year vesting requirement for 75,000 shares of the Common Stock to be
issued to the General Partner. At the Special Committee's request, the General
Partner clarified that the three most senior members of management (Messrs.
Marshall, Edmonson and McDonnell) would agree to waive any right to receive
accelerated payments under the change in control provisions of the Partnership's
deferred compensation plans. See "MANAGEMENT -- Change in Control Arrangements."
On December 9, 1996, the Special Committee received the final draft of the
summary terms of the Conversion proposal (the "Term Sheet") from the General
Partner reflecting the terms agreed upon.
Initial Determination to Recommend the Conversion, Fairness Opinion. On
December 2, 1996, and again on December 10, 1996, the Special Committee met with
Smith Barney and Dechert Price & Rhoads for a comprehensive review of the terms
of the Conversion proposal. At both meetings, Smith Barney made a presentation
to the Special Committee regarding the fairness of the consideration to be
received in the Conversion from a financial point of view to the holders of the
A Interests and the B Interests, respectively, and the fairness from a financial
point of view of the General Partner Consideration to the holders of the A
Interests and the B Interests, respectively. At the December 10 meeting, Smith
Barney, upon the Special Committee's request, rendered its written fairness
opinion, dated December 10, 1996, to the effect that, as of such date based upon
and subject to certain matters as stated therein, (i) the consideration to be
received in the Conversion by the holders of A Interests is fair, from a
financial point of view to such holders, (ii) the consideration to be received
in the Conversion by the holders of B Interests is fair, from a financial point
of view to such holders, and (iii) the General Partner Consideration to be
received in the Conversion is fair from a financial point of view to the holders
of the A Interests and to the holders of B Interests, respectively. See "--
Opinion of Smith Barney."
<PAGE>
Upon receipt of Smith Barney's written fairness opinion, the Special
Committee unanimously determined to recommend to the Board of Directors that, as
of such date, (i) the terms of the Conversion set forth on the Term Sheet were
(x) fair to the holders of the A Interests and (y) fair to the holders of the B
Interests, and (ii) the consideration to be received in the Conversion by the
General Partner (the "General Partner Consideration") in exchange for its
general partnership interests in the Partnership and the Operating Partnership
is fair to the holders of the A Interests and the holders of the B Interests,
respectively. The Special Committee's recommendation was subject to its review
of, and satisfaction with, the definitive documentation effecting the Conversion
and to its receipt of an updated written fairness opinion of Smith Barney, in
form and substance satisfactory to the Special Committee, after such definitive
documentation had been completed. Consistent with its instructions from the
Board of Directors of Lehman/SDI, the Special Committee also noted that it had
not considered the relative merits of the Conversion as compared to any
alternative business strategies that might exist for the Partnership or the
effect of any alternative transaction in
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<PAGE>
which the Partnership might engage, including the acquisition by one or more
third parties of all or any part of the Partnership or its securities. For a
discussion of the review of certain alternatives to the Conversion considered by
the Board of Directors of Lehman/SDI, see "--Alternatives to the Conversion."
On December 11, 1996, the Special Committee and its financial and legal
advisors met with the Board of Directors and advised the Board of Directors that
the Special Committee had reviewed the proposed terms of the Conversion set
forth on the Term Sheet submitted to it by the General Partner and that at the
Special Committee meeting held the previous afternoon, the Special Committee had
received a written fairness opinion dated December 10, 1996 from Smith Barney
and the Special Committee delivered to the Board of Directors a letter of
recommendation as described above with respect to the proposed terms of the
Conversion. The Special Committee and Smith Barney advised the Board of
Directors that their analyses did not include any effects of the restructuring
charge related to the Partnership's Technology Services divisions and Glass
Merchandising business, which was finalized and announced later that day. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Recent Developments." The Special Committee informed the Board of
Directors that, when it convened to review the final documentation of the
Conversion prior to the mailing of the Proxy Statement/Prospectus, it and Smith
Barney would include the effects, if any, of such restructuring charge in any
updated recommendations by the Special Committee or fairness opinions rendered
by Smith Barney. The Board of Directors then considered the recommendation of
the Special Committee and unanimously approved the proposed terms of the
Conversion.
On December 11, 1996, the Partnership issued press releases announcing the
Conversion and the restructuring.
Factors Considered by Special Committee
In reaching its recommendations, the Special Committee considered a number
of factors. The Special Committee's recommendations were made after considering
all of the factors as a whole with respect to each such recommendation, and were
not based on any single factor. In making its recommendations, the members of
the Special Committee exercised their independent business judgment assisted by
their independent financial and legal advisors. The material factors considered
by the Special Committee included the following:
o Fairness Opinion and Related Presentations. The Special Committee reviewed,
considered and analyzed information provided by the Partnership and its
advisors during various meetings and telephone conferences, including the
information as to the historical and forecasted financial performance of
the Partnership and the Corporation and the pro forma effects of the
Conversion, the information and analyses relating to the Partnership, the
Corporation, the A Interests, the B Interests, the General Partnership
Interests (including the Management Fee), the Trust Preferred Securities
and the Common Stock, and the terms and conditions of the Trust Preferred
Securities and the corporate governance arrangements. In reaching its
determination as to the fairness of the Conversion to each of the A
Interests and the B Interests, the Special Committee placed particular
weight on the fairness opinion rendered by Smith Barney. See "-- Opinion of
Smith Barney."
o Trading Volumes and Market Prices. The Special Committee considered (i) the
relatively low trading volumes of the A Interests and the B Interests, (ii)
the relatively narrow trading ranges of $10 1/4 to $11 3/4 for the A
Interests and $4 to $5 1/8 for the B Interests between January 1, 1995 and
December 9, 1996, (iii) the absence of a trading market for the Trust
Preferred Securities and Common Stock at the time of the Special
Committee's recommendation, and (iv) the reverse stock split implied by the
exchange ratio of B Interests for Common Stock. The closing sales prices of
the A Interests and B Interests on December 9, 1996, were $10 1/2 and $4
3/8, respectively. For more information regarding the trading ranges and
market prices of the A Interests and the B Interests, see "MARKET PRICES
AND DISTRIBUTIONS."
As to the matters noted in (i) and (ii) above, the Special Committee
recognized that the Conversion will benefit the holders of Trust Preferred
Securities and Common Stock to the extent the Conversion expands the
potential investor base for the Corporation's securities. See "-- Reasons
to Convert to Corporate Form." As to the matter noted in (ii) above, the
Special Committee considered the presentations and analyses of Smith Barney
and its fairness opinion. See "-- Opinion of Smith Barney." In assessing
the fairness of the consideration to be received by the holders of the A
Interests in the Conversion, the Special Committee attributed significant
weight to the current market price of the A Interests (see "MARKET PRICES
AND DISTRIBUTIONS") as opposed to their liquidation value of $10.00 per
Interest. As to the matter noted in (iii) above, the Special Committee
recognized, and discussed with its financial advisor, the possibility of
short-term selling pressure on the Trust Preferred Securities and Common
Stock as a result of the change in the form of investment for holders of
the A Interests and B Interests. The Special Committee was also aware that
there could be downward pressure on the market price of the Common Stock
after the Conversion to the extent Lehman Brothers or management take steps
to sell any of their Common Stock holdings. See "RESALE OF SECURITIES --
Resales by Lehman Brothers and Management." As to the matters noted
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<PAGE>
in (iii) and (iv) above, the Special Committee consulted with Smith Barney
with respect to the level of market acceptance of the Trust Preferred
Securities and Common Stock. However, Smith Barney's fairness opinion did
not express any opinion as to what the value of the Trust Preferred
Securities or the Common Stock actually will be when issued to holders of A
Interests and B Interests, or the prices at which the Trust Preferred
Securities or Common Stock will trade subsequent to the Conversion. See "--
Opinion of Smith Barney." The Special Committee noted that the Trust
Preferred Securities and Common Stock will be new securities. See "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks
Applicable to Holders of A Interests and B Interests -- Uncertainty
Regarding Market Price for Trust Preferred Securities and Common Stock." In
addition, Smith Barney advised the Special Committee that the valuation of
the Trust Preferred Securities was further complicated by the limited
number of Trust Preferred Securities of issuers of generally comparable
credit quality. As to the matter noted in (iv) above, the Special Committee
noted that the General Partner had structured the reverse stock split
implied by the exchange ratio in the Conversion with respect to the B
Interests because it believes the current trading prices for the B
Interests reduce the attractiveness of the Corporation's equity securities
to the financial community and the investing public. After consultation
with Smith Barney, the Special Committee determined this stated reason was
reasonable and credible. See "THE SUMMARY -- Reverse Stock Split."
o General Partner's Reasons to Convert to Corporate Form. The Special
Committee considered the reasons expressed by the General Partner in
support of the Conversion. See "-- Reasons to Convert to Corporate Form."
The Special Committee consulted with its financial and legal advisors to
assess the validity of these reasons and determined that they were
reasonable and credible.
o Maintain Current Annual Distributions to Holders of A Interests. The
Special Committee recognized that holders of the Trust Preferred Securities
would receive distributions of $2.90 per annum for each Trust Preferred
Security, which equates to the Priority Return paid of $1.10 per annum on
each A Interest after giving effect to the exchange ratio of Trust
Preferred Securities for A Interests. The Special Committee believed that
maintaining the aggregate annual amount of distributions payable was a
benefit to the holders of the A Interests.
o Differences Between A Interests and Trust Preferred Securities. In
evaluating the Trust Preferred Securities, the Special Committee,
considered the various differences between the A Interests and the Trust
Preferred Securities. These differences included, among others: (i) the
Corporation's ability to defer interest payments on the Junior Subordinated
Debentures with respect to the Trust Preferred Securities at any time or
from time to time for a period up to 60 consecutive months, in which case
no distributions will be paid on the Trust Preferred Securities although
holders of Trust Preferred Securities will still be required to accrue
original issue discount income with respect to the unpaid distributions on
the Trust Preferred Securities (see "RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER CONSIDERATIONS -- Additional Risks Applicable to Holders of A
Interests -- Option to Extend Interest Payment Period; Tax Impact of
Extension"); (ii) the retention of the Management Fee as a payment
subordinated to the Priority Return on A Interests; (iii) the Corporation's
ability to redeem at par the Junior Subordinated Debentures on or after
April 30, 2002; (iv) the Corporation's ability to cause the Trust Preferred
Securities to be redeemed at 101% of their liquidation preference during
the first five years upon the occurrence of a Tax Event if certain
conditions are met (see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests --
Special Event Redemption or Distribution"; (v) that holders of A Interests
are entitled under the terms of the Partnership Agreement to receive in
liquidation, after the satisfaction of all liabilities of the Partnership,
an amount equal to their capital account ($10.00), whereas holders of Trust
Preferred Securities will receive in liquidation, after satisfaction of all
liabilities of the Trust, the equivalent of $9.50 for each A Interest
previously held; and (vi) the loss of certain rights associated with the
ownership of A Interests, such as voting rights, rights to remove the
General Partner, rights to compel dissolution and duration of the holder's
investment (see "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED").
<PAGE>
As to the matters noted in (i) and (ii) above, the Special Committee
discussed with its advisors the credit quality of the Junior Subordinated
Debentures and Trust Preferred Securities and the prospective terms of the
refinancing, including the circumstances under which the lenders could
block payment of the Junior Subordinated Debentures (see "-- Source and
Amount of Funds"). The Special Committee also noted that although the
Corporation could elect for any reason to defer interest payments on Junior
Subordinated Debentures, this unfettered deferral right was counterbalanced
by (a) the adverse consequences such a deferral would have on the
Corporation and the market value of the Common Stock and the Trust
Preferred Securities, (b) the fact that interest would accrue on such
unpaid distributions at a rate of 11.6% per annum compounded monthly, and
(c) the two-year escrow for some of the shares of Common Stock to be issued
to senior management of the Corporation in exchange for the General
Partnership Interests, with payment of such shares being contingent on
prior payment of all dividends due on the Trust Preferred Securities. See
"SUMMARY -- Overview of the Conversion." As to the matters noted in (iii)
above, the Special Committee discussed with Smith Barney its view of the
effect
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<PAGE>
of the optional redemption feature of the Junior Subordinated
Securities including its effect on the trading yield of the Trust Preferred
Securities. See "--Opinion of Smith Barney - Valuation of the A
Consideration." As to the matters noted in (iv) above, the Special
Committee discussed with its advisors the possibility of changes in federal
tax law which might give rise to a Tax Event redemption. The Special
Committee believed that any risk of a Tax Event redemption was mitigated by
the redemption price of $25.25 per Trust Preferred Security (101% of
liquidation value) negotiated by the Special Committee as well as the other
benefits of the Conversion to the holders of the A Interests, including the
maintenance of a level of income distributions on the Trust Preferred
Securities equivalent to the Priority Return, the $1.30 cash consideration,
the conservation of the Corporation's cash resulting from the retention of
the Management Fee and the tax deductibility of the interest on Junior
Subordinated Debentures, and the simplified tax reporting for investors in
the Corporation. The Special Committee considered and discussed with its
advisors the possibility of a change in federal tax law affecting
securities similar to the Junior Subordinated Securities or the Trust
Preferred Securities. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to Holders of A
Interests -- Special Event Redemption or Distribution." It is a condition
to the effectiveness of the Conversion that no tax legislation be pending
or in effect which would adversely affect the tax consequences of the Trust
Preferred Securities, although there can be no assurance that a Tax Event
will not occur after the Conversion is completed. As to the matters noted
in (v) above, the Special Committee believed that the difference in
liquidation value between the A Interests and the Trust Preferred
Securities was adequately compensated for by the higher distribution rate
of the Trust Preferred Securities and the $1.30 in cash to be received with
respect to each A Interest in the Conversion. As to the matters noted in
(vi) above, the Special Committee viewed the A Interests and Trust
Preferred Securities as principally yield-oriented securities and, after
consultation with its financial and legal advisors, the Special Committee
concluded that, on balance, the loss of such voting and other rights was
outweighed by the benefits of the Conversion to the holders of the A
Interests discussed herein.
o Certain Federal Income Tax Consequences of the Conversion. The Special
Committee considered the applicable federal income tax consequences of the
Conversion to the Partnership and to the Corporation and the holders of A
Interests and B Interests, including the tax consequences noted below:
o Tax Advantages to Corporation of Trust Preferred Securities. The
Special Committee considered the tax benefits to the Corporation of
the issuance of the Trust Preferred Securities. See "-- Reasons to
Convert to Corporate Form -- Deductibility of Interest."
o Corporate Level Tax. The Special Committee considered as a negative
factor the loss of the potential future tax benefits associated with
operating in partnership form, including primarily the right to have
Partnership income subject to only one level of federal income
taxation. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Applicable to Holders of A Interests and B
Interests -- Adverse Tax Implications." In addition, the Special
Committee considered the loss of the Partnership's favorable tax
status for the period from the date of consummation of the Conversion
until December 31, 1997.
o Exchange of A Interest for Trust Preferred Securities and Cash is
Taxable. The Special Committee considered the potential tax
consequences of the Conversion to holders of A Interests. The Special
Committee negotiated the cash portion of the consideration to be
exchanged for the A Interests in the Conversion in part to provide
that the holders of the A Interests would be compensated for, and have
the liquidity to pay, income tax which may be incurred by them as a
result of the Conversion. In connection with its consideration of the
tax position of holders of A Interests, the Special Committee
discussed with its advisors and the General Partner the historical
trading prices and volumes of the A Interests, as well as certain tax
basis estimates prepared by management. However, the Special Committee
realized that it could not determine precisely the financial impact of
those federal income tax consequences of the Conversion because the
tax basis of each holder of A Interests in his or her A Interests may
be different and tax rates vary depending on the circumstances and tax
status of each holder. Furthermore, in assessing the tax consequences
the Special Committee recognized that the taxes imposed on any gain
recognized as a result of the Conversion essentially represent an
acceleration of the tax gain which a holder of an A Interest would
incur when such holder sold his or her A Interests in the future. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax Consequences
of the Conversion to Holders of A Interests." The Special Committee
also considered the likely income tax consequences of the Conversion
to holders of A Interests and B Interests together. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- General Tax Treatment of the
Conversion."
<PAGE>
o Termination of Tax Distributions on B Interests. The Special Committee
considered the termination of the B Tax Distribution as a consequence
of the Conversion, and the Corporation's current intention of not
paying cash dividends on the Common Stock. The Special Committee noted
that the purpose of the B Tax Distribution was to provide
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<PAGE>
holders of the B Interests with the cash required to pay income taxes
on the Partnership's taxable income which is allocable and taxable to
holders of the B Interests. The Special Committee believed that
termination of the B Tax Distribution is mitigated by the fact that
holders of Common Stock generally will be taxed only on distributions
of money or other property received from the Corporation and not on
their allocable share of the Corporation's taxable income. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax Consequences
of the Conversion to Holders of the B Interests." The Special
Committee also compared the B Tax Distribution, which is made at the
rate of 49.5% of the taxable income allocated to the B Interests, with
the Corporation's estimate of federal, state and local income taxes
payable on its taxable income at the effective rate of approximately
40%. The Special Committee was aware that applicable tax rates vary
depending upon the individual circumstances and tax status of each
holder. The Special Committee viewed as a negative factor the
possibility that the B Tax Distribution was a cash resource to B
Interest holders to the extent of its monthly payout feature,
particularly for certain holders of B Interests with respect to the
portion of the B Tax Distribution which exceeded the holders' federal,
state and local income taxes on their allocable portion of the taxable
income of the Partnership. However, the Special Committee considered
that this factor was mitigated by the increased cash flow to the
Corporation from this aspect of the Conversion, which in the Special
Committee's view benefits both the A Interests and the B Interests,
and that, on balance, the loss of the B Tax Distribution was
outweighed by the benefits of the Conversion to the holders of the B
Interests, including the expansion of the potential investor base for
the Common Stock, the conservation of the Corporation's cash resulting
from the retention of the Management Fee and the tax deductibility of
interest on the Junior Subordinated Debentures, the Corporation's
potential for better access to equity markets and the potential use of
the Common Stock as an acquisition currency, the simplified tax
reporting for investors in the Corporation, and the restrictions on
Lehman Brothers' and management's voting power and ability to resell
shares under the Stockholders' Agreement.
o Possible Reduction in Fiduciary Duties. The Special Committee
considered the elimination of the fiduciary duties owed to the limited
partners by the General Partner, the nature of the fiduciary duties
owed to the holders of Common Stock and Trust Preferred Securities,
and the absence generally of fiduciary duties of the directors of the
Corporation to the Trust holding the Junior Subordinated Debentures or
the holders of the Trust Preferred Securities. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional
Risks Applicable to Holders of B Interests -- Possible Reduction in
Fiduciary Standards." The Special Committee believed the change in the
scope of the fiduciary duties owed to the former limited partners,
especially with respect to the A Interests exchanged for Trust
Preferred Securities, to be a negative factor, mitigated to some
extent because the Special Committee viewed the A Interests as
principally yield-oriented securities.
o Certain Effects of the Conversion. The Special Committee also considered
the pro forma effects of the Conversion (including the transaction costs
associated with the Conversion and the Corporation's pro forma negative
stockholders' equity). See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risks Applicable to Holders of A Interests and
B Interests -- Transaction Costs." For a discussion of the pro forma
effects of the Conversion, see the pro forma financial statements included
in "INDEX TO FINANCIAL STATEMENTS."
The Special Committee noted that after giving effect to the Conversion, the
Corporation would have pro forma negative stockholders' equity and the
Common Stock would have a pro forma negative book value per share,
resulting primarily from the exchange of Trust Preferred Securities for the
A Interests. The Special Committee did not consider this to be a
significant negative factor, because the accounting measures of
stockholders' equity and net book value per share are not viewed by Smith
Barney as useful benchmarks for determining the fairness of the Conversion
from a financial point of view. The Special Committee also considered the
effects of the foregoing pro forma computations with respect to the
Corporation's ability to legally pay dividends or other distributions on
the Trust Preferred Securities and the Common Stock. For a discussion of
these restrictions, see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risk Factors Applicable to Holders of B
Interests -- Certain Delaware Corporate Law Considerations."
<PAGE>
The Special Committee was aware that, as a result of the Conversion,
holders of the A Interests and the B Interests would no longer have a
contractual right to receive the Priority Return and the B Tax
Distribution. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Applicable to Holders of A Interests and B
Interests -- Loss of Contractual Right to Distributions." The Special
Committee was also aware that the shares of Common Stock issued in the
Conversion may be diluted by additional issuances, which may be more likely
as a result of the Conversion. See "RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to Holders of
B Interests -- Future Dilution of Common Stock."
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o Benefits to General Partner of Conversion. In evaluating the
fairness to the holders of the A Interests and the B Interests of
the allocation of the number of shares of Common Stock to be
issued with respect to the General Partnership Interests and the
effects of the Conversion, the Special Committee considered and
discussed with its financial and legal advisors a number of
factors benefiting the General Partner, including: (i) the
elimination of the General Partner's liability for obligations of
the Partnership and Operating Partnership (see "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS - Risks
Applicable to Holders of A Interests and B Interests --
Elimination of General Partner Liability for Corporation
Obligations"); (ii) the ability of the General Partner to convert
its illiquid General Partnership Interests into a liquid
security, thereby facilitating the possible sale by the former
general and limited partners of some or all of their Common Stock
in the Corporation, and the value to Lehman Brothers and
management of the registration rights they will receive pursuant
to the Registration Rights Agreement; (iii) the value to the
General Partner of monetizing the Management Fee and receiving
most of its shares of Common Stock immediately upon consummation
of the Conversion; (iv) the potential for the General Partner to
treat as capital gain income some or all of the income realized
by its partners as a result of the exchange of the General
Partnership Interests for shares of Common Stock; and (v) the
acceleration of benefits under the Operating Partnership's
deferred compensation plans due to certain limited partners of
the General Partner (although the Special Committee viewed as a
mitigating factor the waiver of such acceleration by the three
most senior members of the Partnership's management.) See
"MANAGEMENT -- Change in Control Arrangements."
o Valuation of General Partnership Interest. In evaluating the
fairness to the holders of the A Interests and the B Interests of
the number of shares of Common Stock to be issued with respect to
the General Partnership Interests, the Special Committee
considered and discussed with its financial and legal advisors a
number of factors, including: (i) the value of the General
Partner's 1% percentage interest in the capital and income of the
Partnership; (ii) the value of the General Partner's 1%
percentage interest in the capital and income of the Operating
Partnership; (iii) the present value of the General Partner's
right to receive the Management Fee pursuant to the terms of the
Operating Partnership Agreement; (iv) the value to the
Partnership of the services provided by the General Partner with
respect to the Management Fee; (v) the subordination of the
Management Fee to the liabilities and obligations of the
Operating Partnership and Partnership and to the Priority Return
on the A Interests and the B Tax Distribution on the B Interests;
(vi) the potential termination of the Management Fee upon the
liquidation of the Partnership; (vii) the potential removal of
the General Partner by a vote of 80% of the Interests owned by
unaffiliated limited partners, voting as a single class, which
would result in the payment to the General Partner of 1.01% of
the aggregate fair market value of the A Interests and the B
Interests (with no additional payment with respect to the
Management Fee); (viii) the potential for all or a portion of the
Management Fee to be deductible to the Corporation for income tax
purposes after the Conversion if the Corporation and the General
Partner entered into a management agreement providing for the
continuation of the Management Fee on the same terms and
conditions presently applicable; and (ix) the value of the shares
of Common Stock after the Conversion. In addition, the Special
Committee considered certain benefits to the General Partner
arising out of the Conversion discussed under "--Benefits to
General Partner of Conversion" above.
As to the matters noted above generally, the Special Committee
considered the presentations and analyses of Smith Barney and its
fairness opinion. See "-- Opinion of Smith Barney." As to the
matters noted in (vi) and (vii) above, the Special Committee
observed that, although the Partnership Agreement and the
Operating Partnership Agreement essentially provided for no
payment to the General Partner attributable to the General
Partner's right to receive the Management Fee upon liquidation or
removal of the General Partner, the Conversion was neither a
liquidation nor a removal of the General Partner. The Special
Committee recognized that the Board of Directors of Lehman/SDI
had considered and rejected the alternative of liquidation at
this time, and liquidation would likely be an unattractive option
in corporate form because of the two levels of income taxation
applicable to corporate liquidations. See "-- Alternatives to the
Conversion" and "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risks Related to the Conversion --
Adverse Tax Implications." In addition, the Special Committee
recognized that the right of the Unaffiliated Limited Partners to
remove the General Partner required a supermajority vote of the
outstanding Interests of the Unaffiliated Limited Partners, which
made it difficult for the Unaffiliated Limited Partners to
successfully remove the General Partner. The Special Committee
also recognized that the General Partner's cooperation was
required to engage in the Conversion, and that such cooperation
was unlikely to be forthcoming if the General Partner did not
receive some value for all of the economic components of its
General Partnership Interests, including the Management Fee. As
to the matter noted in (viii) above, the Special Committee
considered this tax aspect of the Management Fee and during
negotiations raised the possibility of continuation of the
Management Fee after the Conversion. The Special Committee
ultimately concluded that continuation of the Management Fee in
corporate form would be unduly burdensome to the Corporation and
that the
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retention of the Management Fee and the substitution of Common
Stock for its value, as provided for in the Conversion, more
closely aligns the interests of the beneficial owners of the
General Partner with the interests of holders of Common Stock.
The Special Committee also believed that the resulting
incremental cash flow to the Corporation was a benefit to the
holders of the A Interests and the B Interests. The Special
Committee did not attach any weight to the General Partner's
request for a "control premium" during its deliberations.
o No Appraisal Rights; Separate Class Vote. The Special Committee
noted the absence of appraisal or dissenters' rights for the
benefit of holders of Interests. The Special Committee believed
this factor was mitigated by the requirement that the Conversion
be approved by the affirmative vote of Unaffiliated Limited
Partners holding an aggregate of more than 50% of the A Interests
and B Interests, respectively, each voting separately as a class.
See "VOTING AND PROXY INFORMATION -- Vote Required; Quorum" and
"-- No Appraisal Rights."
o Certain Corporate Governance Matters. The Special Committee
recognized that the Conversion altered, or could potentially
alter, a number of the existing corporate governance
relationships among the General Partner, Lehman Brothers,
management, and the unaffiliated limited partners. These included
in particular (i) the increased voting power that could accrue to
Lehman Brothers or senior management, (ii) potential sales of
control blocks of stock, and (iii) the potential effect of
Conversion on major strategic decisions, in each case as
discussed in "-- Negotiations with the General Partner" above.
As to the matters noted in (i) above, the Special Committee was
aware that as a result of the loss of voting rights of the A
Interests and the issuance of Common Stock for the General
Partnership Interests, Lehman Brothers' and management's pro
forma voting power would have increased from 18.0% and 12.7%,
respectively, to 31.3% and 22.5%, respectively. Accordingly, the
Special Committee negotiated a provision in the Stockholders
Agreement with Lehman Brothers and certain members of senior
management that restricts the respective voting power of such
persons to the voting power held by each of them with respect to
a vote of the limited partners prior to the Conversion. See
"DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." Under
the terms of such restriction, such persons will agree to vote,
in the same proportion as the shares not owned by them (the
"Unaffiliated Shares") that are voted on any such matter, that
percentage of Excess Voting Shares held by them at such time that
equals the percentage of outstanding Unaffiliated Shares that are
voted on such matter. The Special Committee was aware of the
significant ownership of Interests by Lehman Brothers and
management in partnership form and the absence of any voting
restrictions on such Interests in the Partnership Agreement. The
Special Committee believed the voting restrictions obtained in
the Stockholders Agreement (which effectively provides that, as
to matters requiring a majority vote of stockholders of the
Corporation, the holders of approximately 73% of the Common Stock
held by persons other than Lehman Brothers and its affiliates and
certain members of senior management have the ability to control
the outcome of any such vote) were of benefit to the other
holders of Common Stock, particularly in view of the fact that
the provision in the Partnership Agreement providing for the
removal of the General Partner upon the affirmative vote of 80%
of the Interests of the Unaffiliated Limited Partners would not
be carried forward in the Corporation's Certificate of
Incorporation or Bylaws. See "COMPARISON OF INTERESTS AND
SECURITIES TO BE ISSUED."
As to the matter noted in (ii) above, the Special Committee
viewed the Conversion as significantly enhancing the possibility
of change of control transactions involving major stockholders of
the Corporation given its more simplified corporate structure and
the likelihood of broader market liquidity for its Common Stock.
After extensive negotiations with the General Partner, the
Special Committee concluded that the general prohibition on sales
to third persons which would beneficially own more than 10% (or
in certain cases involving institutional stockholders, 15%) of
the Common Stock substantially diminished the likelihood of
Lehman Brothers or management selling shares of Common Stock for
a premium not available to all stockholders, or effecting a
change of control transaction without the consent of the
Independent Directors. The Special Committee was not aware of any
plans or proposals on the part of the General Partner, Lehman
Brothers, management or their respective affiliates to engage in
any block sales of Common Stock, whether or not prohibited by the
terms of the Stockholders Agreement. See "DESCRIPTION OF CAPITAL
STOCK -- Stockholders Agreement."
As to the matter noted in (iii) above, the Special Committee
believed it important that there be some meaningful independent
check on any decision by Lehman Brothers or management with
respect to any major transaction by the Corporation with change
of control implications occurring shortly after the Conversion,
particularly in light of the substantial equity to be received by
the General Partner in exchange for the General Partnership
Interests and Lehman Brothers' expression of interest in possibly
liquidating some or all of its Common Stock holdings after the
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Conversion. Accordingly, the Special Committee negotiated
provisions in the Stockholders Agreement requiring that at least
four of the nine members of the Corporation's Board of Directors
be Independent Directors, and that, for three years after the
Conversion, certain specified transactions, including mergers,
asset sales, liquidations and tender and exchange offers for the
Corporation, be approved by a majority of the Independent
Directors on the Corporation's Board of Directors. Also, the
Stockholders Agreement provides for the approval by the
Independent Directors of certain transactions between management
and Lehman Brothers, on the one hand, and the Corporation, on the
other. See "DESCRIPTION OF CAPITAL STOCK -- Stockholders
Agreement."
As to the matters noted in (i), (ii) and (iii) above, the Special
Committee was also aware that certain provisions in the
Corporation's Certificate of Incorporation and Bylaws and the
Corporation's stockholder rights plan could have certain
anti-takeover effects. See "DESCRIPTION OF CAPITAL STOCK --
Anti-takeover Provisions." However, the Special Committee
believed such provisions and the stockholder rights plan could
also facilitate the Special Committee's objectives in preventing
sale of control transactions that were not in the best interests
of all holders of Common Stock as discussed above.
o Conflicts of Interest. In considering the proposed Conversion,
the Special Committee was aware of certain conflicts of interest
with respect to the Committee's deliberations (in addition to
those conflicts of interest noted under "RISK FACTORS, CONFLICTS
OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Conflicts of
Interest" applicable to the proposed Conversion generally). These
conflicts included the following: (i) the Special Committee
considered the fairness of the proposed Conversion with respect
to both the A Interests and the B Interests (as opposed to having
separate committees consider the terms of the proposed Conversion
with respect to the A Interests and B Interests, respectively);
(ii) Smith Barney's fairness opinion, upon which the Special
Committee relied in recommending the proposed Conversion to the
Board of Directors, dealt with fairness from a financial point of
view for both the A Interests and the B Interests (as opposed to
having separate investment banks render fairness opinions with
respect to the A Interests and B Interests, respectively); (iii)
the Special Committee members' beneficial ownership of A
Interests and B Interests; (iv) the Special Committee members'
compensation for serving on the Special Committee and
indemnification rights with respect to their service on the
Committee, as described in "--Appointment of the Special
Committee and its Independent Advisors" above; (v) the Special
Committee members' status as directors of Lehman/SDI with
fiduciary duties to the stockholders of Lehman/SDI; and (vi) the
designation of the Special Committee as a committee of the Board
of Directors (as opposed to formally and directly representing
the holders of the A Interests and B Interests, respectively--see
"RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Applicable to Holders of A Interests and
B Interests -- No Independent Representation" above), as well as
the general expectation of the Special Committee members'
continuing to serve on the Board of Directors of the Corporation
after the consummation of the proposed Conversion.
As to the matters noted in (i) and (ii) above, the Special
Committee believed that the conflicts of interest were mitigated
by the different terms of the A Interests and the B Interests.
The Special Committee viewed the A Interests as securities with
attributes generally like preferred stock, and therefore
principally as yield-oriented securities. On the other hand, the
Special Committee viewed the B Interests as securities with
attributes generally like common stock, and therefore principally
as growth-oriented securities. Consequently, the Special
Committee considered the two instruments as sufficiently
different vis-a-vis their competing claims on the Partnership's
resources to accommodate a single committee review and engagement
of one financial advisor to render fairness opinions for both
classes of securities. In addition, the Special Committee noted
the requirement that the Conversion be approved by a majority of
the outstanding unaffiliated A Interests and B Interests, voting
as separate classes. See "VOTING AND PROXY INFORMATION Vote
Required; Quorum.". As to the matter noted in (iii) above, the
members of the Special Committee did not consider their ownership
of A and B Interests to be meaningful in light of the relatively
small number of Interests involved. See "--Appointment of the
Special Committee and its Independent Advisors" above. As to the
matter noted in (iv) above, the Special Committee viewed as
mitigating factors the Committee's belief that the compensation
and indemnification provisions are generally customary for
transactions of this nature and beneficial to the overall process
in light of its complex and time-consuming nature. As to the
matters noted in (v) and (vi) above, the Special Committee
considered that its designation as a committee of the Board of
Directors of Lehman/SDI and its members' prospective continued
service on the Corporation's Board of Directors were mitigated by
the Special Committee's retention of independent advisors, as
well as the Special Committee's charge to negotiate any
modifications to the General Partner's proposal if necessary.
o Extent of Negotiations. The Special Committee and its independent
financial and legal advisors were involved in extensive
negotiations regarding the terms of the Conversion with the
General Partner, Lehman/SDI, management
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and counsel to Lehman/SDI and the Partnership. The Special
Committee believed that it had significant leverage in the these
negotiations, because it understood that the Conversion was not
likely to proceed without approval from the Special Committee.
The Special Committee considered whether further negotiations
would have resulted in more favorable results for the A Interests
or the B Interests, especially in relation to the amount of
consideration exchanged for the General Partnership Interests. In
addition, the Special Committee considered that additional delays
in the negotiation process could adversely affect the timing of
the Conversion or jeopardize the Corporation's ability to realize
the benefits of the Trust Preferred Securities in view of
possible changes in tax laws. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks
Applicable to Holders of A Interests -- Special Event Redemption
or Distribution".
o Limitation of Scope of Special Committee's Review. Consistent
with its instructions from the Board of Directors of Lehman/SDI,
the Special Committee did not specifically consider the relative
merits of the Conversion as compared to any alternative
strategies or transactions, including liquidation or sale of the
Partnership. See "-- Determinations of the Special Committee."
For a discussion of the review of certain alternatives to the
Conversion considered by the Board of Directors of Lehman/SDI,
see "-- Alternatives to the Conversion." Accordingly, the Special
Committee did not specifically consider the potential liquidation
values of the A Interests and B Interests, although the Special
Committee was aware of the $10.00 liquidation preference of the A
Interests and the liquidation analyses previously undertaken by
the Board of Directors of Lehman/SDI and the Board's
determination that liquidation was not an acceptable alternative
to the Partnership. In addition, the Special Committee did not
consider, and was not aware of, any firm offers during the
preceding 18 months for the Partnership or all or any substantial
part of its assets.
The foregoing is a summary of the information and factors considered by the
Special Committee and is not intended to be exhaustive but is believed to
include all material factors considered by the Special Committee. In reaching
its recommendation that the Conversion is fair to the holders of the A Interests
and fair to the holders of the B Interests, and that the General Partner
Consideration is fair to the holders of the A Interests and the holders of the B
Interests, respectively, the Special Committee did not assign specific or
relative weights to the foregoing factors, except that each member placed
significant weight on the fairness opinion of Smith Barney.
For additional information regarding certain risks relating to the
Conversion, limited partners should read carefully "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS" herein.
Opinion of Smith Barney
The Special Committee, Lehman/SDI, the Partnership, the Operating
Partnership and the General Partner have retained Smith Barney to act as
financial advisor to the Special Committee in connection with the Conversion. In
connection with its engagement, Smith Barney has delivered to the Special
Committee its written opinion, dated December 10, 1996, to the effect that, as
of such date based upon and subject to certain matters as stated therein, (i)
the consideration to be received in the Conversion by the holders of A Interests
is fair, from a financial point of view to such holders, (ii) the consideration
to be received in the Conversion by the holders of B Interests is fair, from a
financial point of view to such holders, and (iii) the General Partner
Consideration to be received in the Conversion is fair from a financial point of
view to the holders of the A Interests and to the holders of the B Interests,
respectively.
<PAGE>
In rendering its opinion, Smith Barney, among other things, reviewed the
Term Sheet and the partnership agreements of the Partnership, the Operating
Partnership and the General Partner and held discussions with certain of the
senior operating management of the Partnership and the Operating Partnership
("Management") and representatives and advisors of the Partnership, the
Operating Partnership and the General Partner to discuss the business,
operations and prospects of the Partnership. Smith Barney also examined certain
publicly available business and financial information relating to the
Partnership as well as internal financial statements, forecasts and other
financial and operating data concerning the Partnership prepared by Management.
Smith Barney reviewed the financial terms of the Conversion as set forth in the
Term Sheet in relation to, among other things, current and historical market
prices and trading volumes of the A Interests and B Interests, historical and
projected earnings and operating data of the Partnership and projected earnings
and operating data of the Corporation, and the capitalization and financial
condition of the Partnership. Smith Barney considered, to the extent publicly
available, the financial terms of certain other similar transactions which Smith
Barney considered comparable to the Conversion, and analyzed certain financial,
capital market and other publicly available information relating to the
businesses of other companies whose operations Smith Barney considered
comparable to those of the Partnership. In addition to the foregoing, Smith
Barney conducted such other analyses and examinations and considered such other
financial, economic and market criteria as it deemed necessary to arrive at its
opinion.
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In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts and other
information furnished to or otherwise reviewed by or discussed with Smith
Barney, Smith Barney was informed by Management that such forecasts and other
information were reasonably prepared on bases reflecting the best currently
available estimates and judgments of Management as to the expected future
financial performance of the Partnership or the Corporation, as the case may be.
Smith Barney further relied on the assurances of Management that it was unaware
of any facts that would make the information or forecasts provided to Smith
Barney incomplete or misleading. Smith Barney did not express any opinion as to
what the value of the Common Stock or the Trust Preferred Securities actually
will be when issued to holders of A Interests and B Interests, respectively, or
the prices at which the Common Stock or the Trust Preferred Securities will
trade subsequent to the Conversion. In addition, Smith Barney did not make and
was not provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Partnership. Smith Barney was not
asked to and did not express an opinion as to the relative merits of the
Conversion as compared to any alternative business strategies that might exist
for the Partnership or the effect of any other transaction in which the
Partnership might engage. Smith Barney was not asked to solicit third-party
indications of interest in acquiring all or any part of the Partnership. Smith
Barney's opinion is necessarily based upon financial, capital market and other
conditions and circumstances existing and disclosed to Smith Barney as of the
date of its opinion. No limitation was imposed by the Special Committee on the
scope of the investigation by Smith Barney in connection with its fairness
opinion.
The full text of the written opinion of Smith Barney, which sets forth the
assumptions made, matters considered and limitation on the review undertaken, is
attached as Exhibit C to this Proxy Statement/Prospectus and is incorporated
herein by reference. Holders of A Interests and B Interests are urged to read
this opinion carefully in its entirety. Smith Barney's opinion is directed only
to the fairness of the consideration to be received by holders of A Interests
and B Interests and of the General Partner Consideration from a financial point
of view to holders of A Interests and B Interests, respectively, and
has been provided for the use of the Special Committee and the Board of
Directors of Lehman/SDI, Inc. in their evaluation of the Conversion, does not
address any other aspect of the Conversion or any related transaction and does
not constitute a recommendation to any holder of A Interests or B Interests as
to how such holder should vote at the Special Meeting. The summary of the
opinion of Smith Barney set forth in this Proxy Statement/Prospectus is
qualified in its entirety by reference to the full text of such opinion.
In preparing its opinion to the Special Committee, Smith Barney performed a
variety of financial and comparative analyses, including those described below.
The summary of such analyses does not purport to be a complete description of
the analyses underlying Smith Barney's opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to the
most appropriate and relevant methods of financial analyses and the application
of those methods to the particular circumstances and, therefore, such an opinion
is not necessarily susceptible to summary description. In arriving at its
opinion, Smith Barney did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of such analyses and factors. Accordingly, Smith
Barney believes that its analyses must be considered as a whole and that
selecting portions of its analyses and factors, without considering all analyses
and factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, Smith Barney made
numerous assumptions with respect to the Partnership, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of the Partnership. The estimates contained
in such analyses are not necessarily indicative of actual values or predictive
of actual future results or values, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to the
value of the businesses or securities do not purport to be appraisals or to
reflect the prices at which the business or securities may actually be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
A Interests
Valuation of A Interests. In order to value the A Interests, Smith Barney
performed discounted cash flow analyses of the distributions payable to the
holders of A Interests taking into account the preferential distribution of $10
per A Interest that holders of A Interests are entitled to receive upon
liquidation. Due to the fact that holders of A Interests do not have a right to
immediately receive $10 per A Interest, Smith Barney performed discounted cash
flow analyses assuming the Partnership was liquidated at four different points
in time and utilizing three different discount rates. Smith Barney assumed (i)
the Partnership is liquidated immediately, (ii) the Partnership is liquidated on
12/31/97, (iii) the Partnership is liquidated on 12/31/2001 and (iv) the
Partnership is liquidated on 12/31/2036. In these analyses, discount rates of
9.4%, 10.6% and 12.5% were used. These discount rates were based on the
historical range of trading yields on the A Interests. The implied valuation
range for the A Interests resulting from these analyses was $98.0 million ($8.83
per A Interest) to $129.3 million ($11.65 per A Interest). The
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mid-point of the implied valuation range was then calculated to be $113.6
million ($10.24 per A Interest).
Valuation of the A Consideration. Upon consummation of the Merger, each A
Interest will be exchanged for 0.38 shares of Trust Preferred Securities and
$1.30 in cash (collectively, the "A Consideration"). Smith Barney analyzed the
value of the Trust Preferred Securities in relation to the trading value of the
A Interests. Unlike the A Interests which are not redeemable (other than in a
liquidation of the Partnership), the Trust Preferred Securities are callable by
the Corporation at liquidation value five years after the date of issuance.
Based on the treasury yield curve on December 6, 1996, assumed interest rate
volatility of 9% and a 40 year maturity, Smith Barney estimated that an
additional yield of 93 basis points (0.93%) would be required to compensate
holders of A Interests for this change in call protection.
In addition to the changes in the distribution rate and call protection in
the Trust Preferred Securities, in analyzing the differences between the A
Interests and the Trust Preferred Securities, Smith Barney also considered,
among other things, (i) the market risk associated with the Trust Preferred
Securities, (ii) the potential for the deferment for up to 60 months of the
monthly distributions on the Trust Preferred Securities, and (iii) the lack of
voting rights granted to holders of the Trust Preferred Securities. In comparing
the value of the A Consideration with the value of the A Interests, Smith Barney
also considered the potential payment of taxes by holders of A Interests in the
Conversion and the fact that the amount of monthly distributions to be received
by holders of A Interests after the Conversion would be the same as the monthly
distributions payable on the A Interests prior to the Conversion.
Smith Barney analyzed the value of the A Consideration assuming a range of
trading yields on the Trust Preferred Securities of 9.4% to 12.2% on a yield to
first call basis. The range of implied values for the A Consideration based on
such yields on the Trust Preferred Securities was calculated to be $10.59 to
$11.63.
The range of implied values of the A Consideration was compared to $10.50,
the average of the closing market prices of an A Interest on the five trading
days preceding December 12, 1996, the day the Partnership announced the terms of
the Conversion (the "Announcement Date"). The range of premiums of such implied
values over such average market price for an A Interest was .9% to 10.8%. The
range of implied values of the A Consideration was also compared to the
mid-point of the DCF valuation range of the A Interests and the range of
premiums over such valuation was 3.4% to 13.6%.
B Interests
Valuation of B Interests. In order to value the B Interests, Smith Barney
performed discounted cash flow analyses of the projected free cash flows of the
Partnership assuming the Partnership begins paying corporate income taxes in
1998. Smith Barney also assumed discount rates of 11.5%, 12.5% and 13.5% and
terminal multiples of earnings before interest, taxes, depreciation and
amortization ("EBITDA") of 5.5x to 7.0x. The discount rates used were based on
the cost of capital of the Partnership, adjusted to take into account that
beginning in 1998, distributions on the A Interests would not be tax deductible.
The terminal multiples used were based on the trading multiples of the
Comparable Companies (as defined below).
Smith Barney performed the discounted cash flow analyses on the operating
projections prepared by Management. These analyses resulted in an implied
valuation range for the B Interests of $93.3 million ($4.30 per B Interest) to
$165.8 million ($7.65 per B Interest). The mid-point of the implied valuation
range was then calculated to be $129.5 million ($5.97 per B Interest).
Valuation of the B Consideration. Upon consummation of the Merger, each B
Interest will be exchanged for 0.25 shares of Common Stock (the "B
Consideration"). Smith Barney analyzed the value of the Common Stock by
examining trading multiples of comparable companies and performing discounted
cash flow analyses of the Corporation's projected free cash flows.
Comparable Company Analysis. Using publicly available information,
Smith Barney analyzed the market values and trading multiples of a group of
eight selected comparable wholesale distributors of industrial products and
services comprised of Barnes Group, Inc., BMC West Corp., Bearings, Inc.,
Cameron Ashley Building Products, Inc., Hughes Supply, Inc., Lawson Products,
Inc., NCH Corporation and Rexel Inc. (collectively the "Comparable Companies").
Smith Barney compared market values as multiples of projected 1996 and 1997
net income. The multiples of projected 1996 and 1997 net income of the
Comparable Companies were between the following ranges: (i) projected 1996 net
income: 11.0x to 18.2x (with a mean of 12.8x and a median of 12.0x); and (ii)
projected 1997 net income: 9.5x to 14.1x (with a mean of 11.6x and a median of
11.7x). Smith Barney also compared market values as multiples of historical
EBITDA and projected 1996 and 1997 EBITDA. The multiples of latest twelve months
ended September 30, 1996 ("LTM") EBITDA and projected 1996 and 1997
-43-
<PAGE>
EBITDA of the Comparable Companies were between the following ranges: (i) LTM
EBITDA: 5.8x to 12.1x (with a mean of 7.2x and a median of 6.5x); (ii) projected
1996 EBITDA: 5.6x to 10.6x (with a mean of 6.6x and a median of 6.1x); and (iii)
projected 1997 EBITDA: 5.2x to 8.7x (with a mean of 6.2x and a median of 5.9x).
Smith Barney also compared the debt to capitalization ratios, interest
coverage ratios, historical profit margins, historical EBITDA and net income
growth, returns of average assets, equity and invested capital (total debt plus
book value of common equity plus book value of preferred equity plus book value
of minority interests plus deferred income tax liabilities), dividend yield and
projected earnings per share ("EPS") growth of the Comparable Companies. All
projected EPS figures for the Comparable Companies were based on the consensus
net income estimates of selected investment banking firms and all projections
for the Corporation were based on operating projections prepared by Management.
All multiples were based on closing stock prices as of December 6, 1996.
Smith Barney applied a range of trading multiples representative of the
Comparable Companies to pro forma historical and projected operating data of the
Corporation (derived by adjusting the operating data of the Partnership to
reflect consummation of the Conversion and application of a 40% corporate tax
rate) to arrive at a range of implied equity values for the shares of Common
Stock. Smith Barney applied the Comparable Companies' mean and median multiples
of 12.8x and 12.0x to projected 1996 net income, and 11.6x and 11.7x to
projected 1997 net income. Based on these multiples, Smith Barney arrived at an
implied valuation range of $18.96 to $22.92 per share of Common Stock or $4.74
to $5.73 for the B Consideration. Smith Barney also applied the Comparable
Companies' mean and median multiples of 7.2x and 6.5x to LTM EBITDA, 6.6x and
6.1x to projected 1996 EBITDA, and 6.2x and 5.9x to projected 1997 EBITDA. Based
on these multiples of EBITDA, Smith Barney arrived at an implied valuation range
of $9.56 to $15.00 per share of Common Stock or $2.39 to $3.75 for the B
Consideration. In valuing the Common Stock, Smith Barney relied more heavily on
the implied valuation range derived from the multiples of net income rather than
the multiples of EBITDA since they believe that net income multiples would be a
better indicator of the trading value of the Common Stock.
Smith Barney compared the implied equity valuation range for the B
Consideration based on multiples of net income to $4.35, the average closing
market price of a B Interest on the five trading days immediately preceding the
Announcement Date, and derived a range of premiums of 9.0% to 31.7%. The
above-described range of implied values for the B Consideration was also
compared to the mid-point of the implied valuation range of a B Interest ($5.97
per B Interest) and the range of discounts over such valuation was (4.0%) to
(20.6%).
None of the Comparable Companies is identical to the Corporation.
Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the public trading value of the Comparable Companies
or the company to which they are being compared.
Discounted Cash Flow Analyses. Smith Barney also performed discounted cash
flow analyses of the projected free cash flows of the Corporation for the five
fiscal years ended December 31, 2001. Smith Barney assumed discount rates of
9.0%, 10.0% and 11.0% and terminal multiples of EBITDA of 6.0x to 7.5x. The
discount rates used were based on the cost of capital of the Partnership,
adjusted to take into account the capital structure of the Corporation and the
fact that dividends on the Trust Preferred Securities will be tax deductible.
The terminal multiples used were based on the trading multiples of the
Comparable Companies. The discounted cash flow analyses were performed on the
operating projections prepared by Management and resulted in an implied equity
valuation range per share of Common Stock of $17.64 to $31.56 or $4.41 to $7.89
for the B Consideration.
Smith Barney compared the implied equity valuation range for the B
Consideration based on the discounted cash flow analyses to $4.35, the average
closing market price of a B Interest on the five trading days immediately
preceding the Announcement Date, and derived a range of premiums of 1.4% to
81.4%. The above-described range of implied values for the B Consideration was
also compared to $5.97, the mid-point of the implied valuation range of a B
Interest, and the range of premiums over such valuation was (26.1%) to 32.2%.
Smith Barney concluded that the range of values of the B Consideration
supported a fairness conclusion since such ranges represent a very significant
premium to the average closing market price of a B Interest on the five trading
days immediately preceding the Announcement Date and the implied valuation range
based on the discounted cash flow analyses represents a reasonable premium to
the mid-point of the implied valuation range of a B Interest.
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<PAGE>
General Partnership Interests
Valuation of the General Partnership interests. Smith Barney analyzed the
value of the General Partnership Interests consisting of (i) the Management Fee
and (ii) an effective percentage equity interest of 1.99% in the Operating
Partnership (the "1.99% Interest"). In order to determine the potential value
attributable to the General Partnership Interests, Smith Barney performed a net
present value calculation of the Management Fee in perpetuity assuming discount
rates of 9.4%, 10.5% and 12.5%. Based on these net present value calculations,
Smith Barney estimated the range of the total potential value of the Management
Fee to be $26.6 million to $35.6 million. Smith Barney also capitalized the
Management Fee based on the Comparable Companies' mean and median LTM EBITDA
multiples (6.5x and 7.2x) and capitalized the after-tax equivalent of the
Management Fee based on the Comparable Companies' mean and median LTM net income
multiples (13.0x and 13.4x). The capitalization of the Management Fee resulted
in a range of total potential value of $21.6 million to $26.8 million. The two
valuation methodologies produced a composite total potential valuation range for
the Management Fee of $21.6 million to $35.6 million.
In addition to looking at the valuation methodologies described in the
preceding paragraph, Smith Barney took into consideration the following factors
which detract from the value of the Management Fee in analyzing the value of the
Management Fee: (i) the accelerated timing of the receipt by the General Partner
of value for the Management Fee in the Conversion; (ii) the illiquidity of the
right to receive the Management Fee; (iii) the potential for the Management Fee
to be terminated in the event of (a) liquidation or sale of the Partnership, or
(b) removal of the General Partner upon the vote of 80% of the unaffiliated
limited partners; (iv) the subordination of the Management Fee to the payment of
distributions on the A Interests; and (v) the termination of the services
provided by the General Partner following the consummation of the Conversion.
Smith Barney estimated the value for the 1.99% Interest by taking 1.99% of
the enterprise value for the Partnership less net debt. Enterprise value for the
Partnership was calculated using discounted cash flow analyses of the projected
free cash flows of the Partnership assuming the Partnership begins paying
corporate income taxes in 1998. Smith Barney also assumed discount rates of
11.5%, 12.5% and 13.5% and terminal multiples of EBITDA of 5.5x to 7.0x. Smith
Barney performed these analyses on the operating projections prepared by
Management. These analyses resulted in an implied valuation range for the 1.99%
Interest of $4.1 million to $5.6 million. Smith Barney then added the range of
total potential values derived from the analysis of the Management Fee and the
range of implied values of the 1.99% Interest and derived a total potential
value range for the General Partnership Interests of $25.7 million to $41.2
million, with a resulting mid-point of $33.4 million. The total potential value
did not take into account the factors listed in the preceding paragraph that
detract from the value of the Management Fee.
Valuation of the General Partner Consideration. Upon consummation of the
Merger, the General Partnership Interests will be exchanged for 1,000,000 shares
of Common Stock (the "General Partner Consideration"). Smith Barney analyzed the
value of the Common Stock using the equity values implied by the comparable
company trading multiples and discounted cash flow analyses described above. See
"-- B Interests -- Valuation of the B Consideration." Smith Barney derived an
implied equity valuation range per share of Common Stock of $18.28 to $27.24 by
averaging the composite values derived through the comparable company analysis
based on net income multiples and the discounted cash flow analysis. The
valuation range for the General Partner Consideration was then calculated to be
$18.3 million to $27.2 million. The range of implied values of the General
Partner Consideration was compared to the mid-point of the total potential value
of the General Partnership Interests and the range of discounts from such
valuation was -45.2% to -18.4%.
Other Factors and Comparative Analyses
In rendering its opinion, Smith Barney considered certain other factors and
conducted certain other comparative analyses, including a review of (i) the
projected financial results of the Partnership, (ii) the history of trading
prices for the A and B Interests, (iii) the treatment of general partnership
interests in selected partnership conversions, (iv) certain pro forma effects on
the Partnership resulting from the Conversion and (v) the pro forma ownership of
the Corporation.
The Special Committee, Lehman/SDI, the Partnership, the Operating
Partnership and the General Partner entered into an engagement letter with Smith
Barney on July 16, 1996 pursuant to which the Partnership agreed to pay Smith
Barney fees of $1.25 million, comprised of a retainer fee of $250,000, which was
paid upon execution of the engagement letter and an opinion fee of $1.0 million,
which was paid shortly after delivery of Smith Barney's opinion, dated December
10, 1996. The Partnership has agreed to reimburse Smith Barney for its
out-of-pocket expenses, including reasonable fees and disbursements of counsel
provided that such fees and expenses of counsel shall not be in excess of
$25,000 in the aggregate without the prior written consent of the Special
Committee, which consent shall not be unreasonably withheld. Lehman/SDI, the
General Partner, the Partnership and the
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<PAGE>
Operating Partnership have also agreed, in a separate letter agreement, to
indemnify Smith Barney and its affiliates, their respective directors, officers,
agents and employees and each person, if any, controlling Smith Barney or any of
its affiliates against certain liabilities, including liabilities under the
federal securities laws and expenses related to Smith Barney's engagement.
In light of Smith Barney's familiarity with, and understanding of, the
operations of the Partnership as well as their experience in advising on matters
relating to the conversion of partnerships to corporate form generally, the
Special Committee believed that it was advisable to engage Smith Barney in
connection with the proposed Conversion. Smith Barney is a nationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Other than acting as financial advisor in connection with the
Conversion (and delivery of its fairness opinion), Smith Barney has not
previously rendered investment banking services to the Partnership, Lehman/SDI,
the Operating Partnership or the General Partner in the past two years. In the
ordinary course of its business, Smith Barney may, from time to time, buy and
sell securities of the Partnership.
The report of Smith Barney referred to above is filed as an exhibit to the
Rule 13e-3 Transaction Statement on Schedule 13E-3, as amended, filed with the
Commission by the Partnership, the General Partner and Lehman/SDI relating to
the Conversion and may be obtained in the manner described in "AVAILABLE
INFORMATION."
Recommendation of the General Partner and Fairness Determination
The General Partner believes the Conversion is fair to and in the best
interests of the Partnership and the limited partners. The General Partner
recommends that the limited partners approve the Conversion. There are conflicts
of interest between the General Partner and the limited partners with respect to
certain matters relating to the Conversion.
As described under "-- Alternatives to the Conversion," the General Partner
does not believe that liquidation is a viable alternative for the Partnership
because, among other things, there was substantial doubt that acceptable prices
could be found for all of the business units within an acceptable time period.
The General Partner's determination to recommend that SunSource convert to
corporate form is based on its belief that the Conversion will result in the
benefits to the limited partners and to the Corporation described above under
"-- Reasons to Convert to Corporate Form." On the other hand, the General
Partner considered the potential disadvantages of the Conversion, see "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" and, given
the alternatives to the Conversion, believes that the advantages of the
Conversion outweigh any potential disadvantages.
In reaching a recommendation with respect to the Conversion, the General
Partner also considered (i) the fact that the consideration to be received and
the other terms of the Conversion resulted from arms-length negotiation with the
Special Committee and were determined by the Special Committee to be fair to the
limited partners and (ii) the fact that Smith Barney has delivered its opinion
(and the basis for such opinion) to the Special Committee to the effect that,
(a) the consideration to be received in the Conversion by the holders of A
Interests is fair, from a financial point of view to such holders, (b) the
consideration to be received in the Conversion by the holders of B Interests is
fair, from a financial point of view to such holders, and (c) the General
Partner Consideration to be received in the Conversion is fair from a financial
point of view to the holders of the A Interests and to the holders of the B
Interests, respectively. The General Partner also considered the consequences to
the Partnership and its partners if the Conversion is not consummated, as
discussed under "-- Consequences if Conversion is Not Approved" and other
information about the Conversion and the Corporation included in this Proxy
Statement/Prospectus, and concluded that the Conversion was in the best
interests of the Partnership and the limited partners. No particular weight was
assigned to any one factor in arriving at its decision.
The General Partner sought to provide procedural fairness to the limited
partners in connection with the consideration of the Conversion by (i) creating
a Special Committee composed of disinterested directors to advise the Board of
Directors with respect to the terms of the Conversion as to its fairness to the
limited partners, and to make a recommendation to the Board of Directors with
respect to the Conversion, (ii) authorizing the Special Committee to select a
financial advisor and legal counsel to assist it in its deliberations, and (iii)
implementing the Conversion only if approved by the affirmative vote of a
majority of the unaffiliated A Interests and B Interests, each voting separately
as a class. Through these arrangements the General Partner believes it has
provided procedural fairness to the limited partners and to minimize the extent
to which the consideration of the Conversion was subject to conflicts of
interest of the management and affiliates of the General Partner.
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<PAGE>
Source and Amount of Funds
It is estimated that the funds required to make the $1.30 cash payment to
the A Interests and to pay for fractional shares and for the fees and expenses
described below will be less than $18,500,000. Payments to be made prior to the
Conversion will be made from funds borrowed under the Partnership's existing
bank credit agreement which is described in Note 8 of Notes to Consolidated
Financial Statements. Upon consummation of the Conversion, the existing bank
credit agreement and the Partnership's long-term debt will be repaid and
replaced with new credit facilities at interest rates expected to be lower than
financing rates currently incurred by the Partnership. Prepayment of the
Partnership's long-term debt will result in the payment of a make-whole penalty
of approximately $5 million.
Accounting Treatment
For financial accounting purposes, the Conversion will be treated as a
recapitalization. Therefore, the assets and liabilities of the Partnership will
be recorded by the Corporation at their historical cost basis, except that the
Corporation will also record incremental deferred tax assets in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), relating to
the temporary differences for certain assets and liabilities of the Partnership
at the date of conversion to corporate form. The existing values of the tax
basis in assets and liabilities of the Partnership at the date of conversion
will carry over to the Corporation which will also record a provision for U.S.
federal and state income taxes on its taxable earnings.
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Corporation and, accordingly, the accounts of the Trust will be included
in the consolidated financial statements of the Corporation. The Trust Preferred
Securities will be presented in the consolidated balance sheet of the
Corporation as a separate line item directly above stockholders' equity under
the caption "Guaranteed Preferred Beneficial Interest in the Corporation's
Junior Subordinated Debentures" and appropriate disclosures about the Trust
Preferred Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the Notes to the Consolidated Financial Statements. For financial
reporting purposes, the Corporation will record distributions payable on the
Trust Preferred Securities as an expense in its consolidated statements of
income.
Fees and Expenses
All legal and other costs and expenses incurred by the Corporation or the
Partnership in connection with the Conversion will be paid by the Partnership,
whether or not the Conversion is consummated. The following is a statement of
certain estimated fees and expenses incurred by the Corporation in connection
with the Conversion:
SEC registration fee................................... $ 67,000
New York Stock Exchange listing fee.................... 60,000
Legal fees and expenses................................ 850,000
Financial advisory fees and expenses................... 1,475,000
Accounting fees and expenses........................... 825,000
Solicitation fees and expenses......................... 200,000
Printing and engraving expenses........................ 100,000
Miscellaneous ......................................... 23,000
------------
Total ....................................... $3,600,000
Exchange of Depositary Receipts
Limited partners should not send any depositary receipts with the enclosed
proxy. They should retain the depositary receipts until they receive further
instructions if the Conversion is consummated.
Promptly after the Effective Time, the Corporation will mail to all limited
partners of record a letter of transmittal containing instructions with respect
to the surrender of depositary receipts for Interests in exchange for
certificates representing shares of Trust Preferred Securities or Common Stock
and cash in the case of A Interests. Upon surrender to the Corporation of one or
more depositary receipts, together with a properly completed letter of
transmittal, there will be issued and mailed to former limited partners of
record at the Effective Time a certificate or certificates representing the
number of shares of Trust Preferred Securities or Common Stock to which such
holder is entitled and a check for cash in the case of A Interests. From and
after the Effective Time, each depositary receipt will evidence only the right
to receive shares of Trust Preferred Securities and Common Stock and cash in the
case of A interests.
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<PAGE>
No distributions or dividends with respect to the Trust Preferred
Securities or Common Stock payable to the holders of record thereof after the
Effective Time will be paid to the holder of any unsurrendered depositary
receipts until such depositary receipts are surrendered for exchange, at which
time accumulated interest or dividends will be paid, without interest, subject
to any applicable escheat laws.
If any certificate representing Trust Preferred Securities or Common Stock
is to be issued in a name other than that in which the depositary receipt
surrendered in exchange therefor is registered on the books of the Partnership
as of the Effective Time, it will be a condition of such issuance that (i) the
depositary receipt so surrendered be properly endorsed and otherwise in proper
form for transfer, and (ii) the person requesting such exchange pay to the
Corporation any transfer or other taxes required by reason of the issuance of a
certificate representing Trust Preferred Securities or Common Stock in any name
other than that of the registered owner of the depositary receipt surrendered,
or the person requesting such exchange establish to the satisfaction of the
Corporation that such tax has been paid or is not applicable.
After the Effective Time, there will be no further registration of
transfers of Interests that were issued and outstanding immediately before such
time. If, after the Effective Time, depositary receipts representing Interests
are presented for transfer, they will be canceled and exchanged for one or more
certificates representing shares of Trust Preferred Securities or Common Stock
and cash in the case of A Interests.
Treatment of Fractional Shares
No fractional shares will be issued. Instead, (i) each holder of A
Interests will be entitled to receive cash in an amount equal to the fraction of
a Trust Preferred Security to which the holder is otherwise entitled multiplied
by the average closing price of the Trust Preferred Securities for the five
trading days following the Effective Time; and (ii) each holder of B Interests
shall be entitled to receive cash in an amount equal to the fraction of a share
of Common Stock to which the holder is otherwise entitled multiplied by the
average closing price of the Common Stock for the five trading days following
the Effective Time.
COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED
The following summary compares a number of differences between ownership of
Interests and ownership of Trust Preferred Securities and Common Stock and the
effects relating thereto.
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
Issuer
<S> <C> <C>
The Partnership The Corporation The Trust. Payment of
distributions and on
liquidation or redemption
is guaranteed on a
subordinated basis as and
to the extent described
herein by the
Corporation.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
Taxation
<S> <C> <C>
Under current law, the Partnership is not a The Corporation is a taxable entity with Each holder of Trust Preferred
taxpaying entity. Rather, each holder of respect to its income after allowable Securities will be considered to
Interests includes the holder's share of the deductions and credits. Stockholders will own a pro rata portion of the
income and gain and, subject to certain have taxable income from the Junior Subordinated Debentures
limitations, the losses, deductions and Corporation's operations only to the held by the trust and will be
credits of the Partnership in computing extent that taxable dividends and other required to include in gross income
taxable income without regard to the cash distributions are declared and paid on the the pro rata share of income
distributed to the limited partner. Common Stock. See "CERTAIN accrued on the Junior Subordinated
Generally, cash distributions to holders of FEDERAL INCOME TAX Debentures and any original issue
Interests are not taxable, unless CONSEQUENCES." discount attributable to the Junior
distributions exceed the limited partner's Subordinated Debentures. See
basis in the Interests. See "CERTAIN "CERTAIN FEDERAL INCOME
FEDERAL INCOME TAX TAX CONSEQUENCES."
CONSEQUENCES."
A tax-exempt limited partner's share of No portion of the earnings of, or any No portion of the income accrued
the Partnership's taxable income dividends received from, the Corporation or distributions received on the
constitutes unrelated business taxable will constitute unrelated business taxable Trust Preferred Securities will
income to the tax-exempt unitholder. See income to tax-exempt stockholders, constitute unrelated business
"CERTAIN FEDERAL INCOME TAX except to the extent their investment in taxable income to tax-exempt
CONSEQUENCES." stock of the Corporation is considered stockholders, except to the extent
debt-financed. See "CERTAIN FEDERAL their investment in the Trust
INCOME TAX CONSEQUENCES." Preferred Securities is considered
debt-financed. See CERTAIN
FEDERAL INCOME TAX
CONSEQUENCES."
Distributions and Dividends
The Partnership is required under the The Board of Directors of the Corporation The holders of Trust Preferred
Partnership Agreement to make has the discretion to determine whether or Securities will be entitled to
distributions of the Partnership's Cash not and when to declare and pay monthly distributions at the rate of
Available for Distribution, less certain dividends and the amount of any $2.90 per annum (11.6% of the
permitted retentions to the A Interests for dividend. Holders of Common Stock will $25 liquidation amount) to the
the Priority Return of $1.10 per annum have no contractual right to receive extent interest is paid by the
and to the B Interests for the Tax dividends. Corporation on the Junior
Distribution. Cash Available for Subordinated Debentures. The
Distribution generally means the Corporation has the right to defer
Partnership's cash receipts less (i) cash payment of interest on the Junior
operating expenses and other Subordinated Debentures for a
expenditures, and (ii) reserves, established period up to 60 consecutive
by the General Partner in its sole months in which case no
discretion for working capital, capital distributions will be paid on the
expenditures, debt service and other Trust Preferred Securities. Any
purposes and contingencies. unpaid distributions will cumulate
and must be paid prior to any
dividends on the Common Stock.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
Management
The business and affairs of the Partnership The business and affairs of the The Trust is managed by five
are managed by the General Partner. Corporation are managed by or under the trustees appointed by the
direction of the Board of Directors of the Corporation.
Corporation. The members of the Board
of Directors of Lehman/SDI will become
the members of the Board of Directors of
the Corporation after the Conversion.
Therefore, the personnel in control of the
Corporation will be identical to that of the
Partnership.
The General Partner may be removed only The holders of Common Stock of the The holders of Trust Preferred
by vote of 80% of the Interests held by Corporation will have the ability to elect Securities will have no rights to
unaffiliated limited partners. See members of the Board of Directors with a elect or remove management of
the "DESCRIPTION OF CAPITAL STOCK - plurality of the votes cast for such Corporation. The holders will be
- - Stockholders Agreement." election and to remove the Board of entitled to elect a Special Regular
Directors with a majority vote of the Trustee if the Trust fails to make
Common Stock outstanding and entitled distributions for 18 consecutive
to vote. months or there is an Event of
Default.
Voting Rights
Under Delaware law and the Partnership Holders of Common Stock will have the The holders of Trust Preferred
Agreement, limited partners have voting right to vote on matters specified by Securities will have no voting
rights with respect to (i) the removal and Delaware law affecting the corporate rights except to elect a Special
replacement of the General Partner, (ii) structure of the Corporation, including Regular Trustee as described above
the merger of the Partnership, (iii) the sale election of the Board of Directors. and with respect to certain
of all or substantially all of the assets Stockholders of the Corporation will have modifications and amendments.
owned, directly or indirectly, by the the right to vote on all matters on which
Partnership, (iv) the dissolution of the stockholders must be permitted to vote
Partnership or the Operating Partnership, including, as a general matter, election of
and (v) material amendments to the directors, fundamental changes in the
Partnership Agreement and the Operating Corporation, sale of all or substantially all
Partnership Agreement, subject to certain of the assets of the Corporation and
limitations. amendments to the Certificate of
Incorporation.
Each Interest entitles each holder thereof Each share of Common Stock entitles its Each of the Trust Preferred
who is admitted as a limited partner to the holder to cast one vote on each matter Securities entitles its holder to cast
Partnership to cast one vote on all matters presented to stockholders. one vote on each matter presented
presented to limited partners. to the holders of Trust Preferred
Securities.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
Approval of any matter submitted to Approval of any matter submitted to Approval on any matter on which
limited partners generally requires the stockholders generally requires the holders of Trust Preferred
affirmative vote of limited partners affirmative vote of holders of more than Securities are entitled to vote
holding more than 50% of the Interests 50% of the Common Stock outstanding requires the affirmative vote of a
then outstanding. The removal of the and entitled to vote. majority of the outstanding Trust
General Partner requires the affirmative Preferred Securities except that
vote of 80% of the unaffiliated limited modifications and amendments of
partners. the Declaration require a 66 2/3%
vote.
Holders of 25% of the Interests held by Amendment of the certificate of The holders of the Trust Preferred
limited partners may propose amendments incorporation or bylaws requires approval Securities have no right to amend
to the partnership agreement. of a majority of the members of the Board the Declaration of Trust.
of Directors and, in certain
cases, approval by the
stockholders. The Stockholders
Agreement has certain requirements
with regard to approval of
amendments by the Independent
Directors. In addition, the
Stockholders Agreement contains
provisions under which Lehman
Brothers and certain members of
management will agree to vote, in
the same proportion as the
"Unaffiliated Shares" that are
voted on any such matter, that
percentage of Excess Voting Shares
(as defined herein) held by them
at such time that equals the
percentage of outstanding
Unaffiliated Shares that are voted
on such matter. See "DESCRIPTION
OF CAPITAL STOCK - - Stockholders
Agreement."
Any action that may be taken at a meeting Stockholders may act by written consent Holders of Trust Preferred
of limited partners may be taken by in lieu of a meeting with a number of Securities may not act by written
written consent in lieu of a meeting votes sufficient for such action. consent in lieu of a meeting.
executed by limited partners sufficient to
authorize such action at a meeting of
limited partners.
Special Meetings
Special meetings of Limited Partners may Stockholders are permitted to call a Holders of Trust Preferred
be called by the General Partner or by special meeting or require that the board Securities may call a special
Limited Partners holding at least 25% of of directors call a special meeting of meeting of the Trust only to elect a
the outstanding Interests. stockholders if such meeting is called by Special Regular Trustee.
holders of at least 25% of outstanding
Common Stock.
Conversion Rights
The Interests are not convertible into any The Common Stock is not convertible The Trust Preferred Securities are
other securities. into any other securities. not convertible into any other
securities.
</TABLE>
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<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
Redemption
Interests are not subject to mandatory or The Common Stock is not subject to The Trust Preferred Securities will
optional redemption. mandatory or optional redemption. be redeemed upon maturity or
earlier redemption of the Junior
Subordinated Debentures at 100% of
the liquidation amount plus accrued
and unpaid distributions, provided
that any redemption by reason of a
Tax Event within the first five years
will be at 101%. The Junior
Subordinated Debentures may be
redeemed by the Corporation at any
time after April 30, 2002.
Liquidation Rights
In the event of the liquidation of the In the event of a liquidation of the In the event of a liquidation of the
Partnership the assets of the Partnership Corporation, the holders of Common Trust, the holders of Trust
remaining after the satisfaction of all Stock would be entitled to share ratably Preferred Securities would be
debts and liabilities of the Partnership are in any assets remaining after satisfaction entitled to receive a preferential
distributed to holders of A Interests in an of obligations to creditors and any distribution of $25 per Trust
amount equal to their capital account liquidation preferences on any series of Preferred Security plus accrued
($10) plus any unpaid Priority Return and preferred stock of the Corporation that and unpaid distributions except
the remainder is distributed to the General may then be outstanding. that, upon the occurrence of a
Partner and the B Interests in accordance Special Event, the Trust will be
with their capital accounts. liquidated and, after satisfaction of
creditors of the Trust, the holders
will receive Junior Subordinated
Debentures.
Right to Compel Dissolution
Under the Partnership Agreement, limited Under Delaware law, holders of Common Under the Declaration, holders of
partners may compel dissolution of the Stock may compel dissolution of the Trust Preferred Securities may not
Partnership by the affirmative vote of the Corporation, absent prior action by the compel dissolution of the Trust.
holders of a majority of outstanding board of directors, only if all holders
Interests. consent in writing. A plan of dissolution
adopted by the board of directors
must be approved by a majority of
the Common Stock outstanding and
entitled to vote.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
Limited Liability
In general, holders of Interests are limited Shares of Common Stock will be fully Holders of Trust Preferred
partners in a Delaware limited partnership, paid and nonassessable. Stockholders Securities will be entitled to the
and do not have personal liability for generally will not have personal liability same limitation of personal
obligations of the Partnership. for obligations of the Corporation. liability extended to stockholders
of private corporations for profit
organized under the general
corporation law of the State of
Delaware.
Liquidity and Marketability
The Interests are freely transferable and The Common Stock will be freely The Trust Preferred Securities will
are currently listed and traded on the New transferable and application has been be freely transferable and
York Stock Exchange. After the Effective made for listing the Common Stock on application has been made for
Time, the Interests will cease to be traded. the New York Stock Exchange. listing the Trust Preferred
Securities on the New York Stock
Exchange.
Continuity of Existence
The Partnership Agreement provides for The Corporation's Certificate of The Trust will dissolve on April
the Partnership to continue in existence Incorporation provides for perpetual 30, 2027 or upon the earlier
until December 31, 2086, unless earlier existence, subject to Delaware law. redemption of the Trust Preferred
terminated in accordance with the Securities or the distribution to the
Partnership Agreement. holders of the Junior Subordinated
Debentures.
Financial Reporting
The Partnership is subject to the reporting The Corporation will be subject to the The Corporation will provide
requirements of the Exchange Act and reporting requirements of the Exchange annual and quarterly reports of the
files annual and quarterly reports Act and will file annual and quarterly Corporation to the holders of the
thereunder. The Partnership also provides reports thereunder. The Corporation also Trust Preferred Securities. For the
annual and quarterly reports to its limited will provide annual and quarterly reports reasons set forth under "Available
partners. to its stockholders. Information," the Trust will not
issue any separate reports.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
Certain Legal Rights
Delaware law allows a limited partner to Delaware law affords stockholders of a Delaware law allows a beneficial
institute legal action on behalf of the corporation rights to bring stockholder owner of the Trust to institute legal
Partnership (a partnership derivative derivative actions when the board of action on behalf of the Trust (a
action) to recover damages from a third directors has failed to institute an action trust derivative action) to recover
party or a general partner where the against third parties or directors of the damages from a third party or a
general partner has failed to institute the corporation, and class actions to recover trustee where the trustees with
action. In addition, a limited partner may damages from directors for violations of authority to do so have failed to
have rights to institute legal action on their fiduciary duties. Stockholders may institute the action. In addition, a
behalf of the limited partner or all other also have rights to bring actions in federal beneficial owner of the Trust may
similarly situated limited partners (a class courts to enforce federal rights. These have rights to institute legal action
action) to recover damages from a general rights are comparable to the rights of the on behalf of himself or all other
partner for violations of fiduciary duties limited partners in the Partnership. similarly situated beneficial owners
to the limited partners. Limited partners (a class action) to recover damages
may also have rights to bring actions in from a trustee for violations of
federal courts to enforce federal rights. fiduciary duties to the beneficial
owners. Beneficial owners of the
Trust may also have rights to bring
actions in federal courts to enforce
federal rights.
Right to List of Holders; Inspection of Books and Records
Upon reasonable demand, at the limited Under Delaware law, upon written Upon reasonable demand [, at the
partner's own expense and for a purpose request, at reasonable times and for a expense of the requesting holder of
reasonably related to his interest in the proper purpose reasonably related to a Trust Preferred Securities] and for
Partnership, a limited partner may have stockholder's interest as a stockholder, a purpose reasonably related to his
access, at reasonable times, to certain any stockholder of record shall have the interest as a beneficial owner of the
information regarding the status of the right to examine and copy the Trust, a Holder of Trust Preferred
business and financial condition of the Corporation's stock ledger, a list of its Securities may have access, at
Partnership, tax returns, governing stockholders and its other books and reasonable times, to certain
instruments of the Partnership and a records. In certain circumstances under information regarding the status of
current list of the partners of the Delaware law, stockholders may not have the business and financial
Partnership, provided that the General the same right to information regarding condition of the Trust, governing
Partner may keep confidential any trade the Corporation that they currently have instruments of the Trust and a
secrets or any other information the under the Partnership Agreement with current list of the beneficial owners
disclosure of which could damage the respect to information regarding the and trustees of the Trust, provided
Partnership or violate any agreement or Partnership. that the trustees of the Trust may
applicable law. keep confidential any trade secrets
or other information the disclosure
of which could damage the Trust or
violate any agreement or applicable
law.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
Subordination
Subordinated to claims of creditors of the Subordinated to claims of creditors of the Subordinated to creditors of the
Partnership and Operating Partnership. Corporation and the Operating Partnership Trust, if any. The Preferred
Securities Guarantee and the Junior
Subordinated Debentures of the
Corporation will be subordinate to
all liabilities of the Corporation
and the Operating Partnership except
those made pari passu or subordinate
by their terms. @@
</TABLE>
Fiduciary Duties
As a general partner of a limited partnership, the General Partner owes the
limited partners, under Delaware law, the fiduciary duties of good faith and
loyalty in handling the affairs of the Partnership, including, in certain
instances, a duty to disclose material information concerning the Partnership's
affairs. The General Partner believes it has satisfied its fiduciary duties in
connection with the Conversion. Following consummation of the Conversion, the
directors of Lehman/SDI will become directors of the Corporation. Under Delaware
law, a director's fiduciary duties to the stockholders of the Corporation in
such capacity will be substantially similar to those currently owed by the
General Partner to limited partners under Delaware law.
The Partnership Agreement further provides that neither the General Partner
nor any of its affiliates will be liable to the Partnership or the limited
partners for any act or omission if (i) taken in good faith and in a manner
reasonably believed to be in, or not opposed to, the interests of the
Partnership, and (ii) the conduct did not constitute gross negligence or willful
or wanton misconduct. Thus, the General Partner and its affiliates may have a
more limited liability to the limited partners than would otherwise be the case
absent such provisions. Similarly, the Corporation's Certificate of
Incorporation provides that a director of the Corporation shall not be liable
for any act or omission in the director's capacity as director except to the
extent the director is found liable for (i) a breach of the duty of loyalty,
(ii) an act or omission not in good faith, (iii) a transaction in which the
director received an improper benefit or (iv) an act or omission for which the
liability of a director is expressly provided for by statute. Under the
Partnership Agreement, the Partnership is required to indemnify the General
Partner and the officers, directors, employees and agents of the General Partner
against liabilities and expenses incurred by the General Partner or such persons
if (i) the General Partner or such persons acted in good faith, and in a manner
reasonably believed to be in, or not opposed to, the interests of the
Partnership and, with respect to any criminal proceeding, had no reason to
believe the conduct was unlawful and (ii) the General Partner's or such persons'
conduct did not constitute actual fraud, gross negligence or willful misconduct.
The Corporation's By-laws provide indemnification to all its directors,
officers, employees and agents.
After the Conversion, the General Partner will dissolve and will not owe
any fiduciary duties to the Corporation or persons holding Trust Preferred
Securities or Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes certain federal income tax
considerations relating to the Conversion. These summaries are included herein
for general information only. They do not discuss all aspects of federal income
taxation that may be relevant to a particular taxpayer in light of the
taxpayer's personal tax circumstances or to certain types of taxpayers subject
to special treatment under the federal income tax laws. No legal opinion
regarding such tax considerations is being rendered hereby. Except as otherwise
indicated, statements of legal conclusion regarding tax treatments, tax effects
or tax consequences reflect the opinions of Morgan, Lewis & Bockius LLP, counsel
for the Corporation and the Partnership, which has rendered its opinion
regarding the accuracy of the discussion herein to the Partnership. A copy of
Morgan, Lewis & Bockius LLP's opinion has been filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus forms a part,
and a copy of the opinion may be obtained by written request addressed to
SunSource L.P., 2600 One Logan Square, Philadelphia, Pennsylvania 19103,
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<PAGE>
Attention: Joseph M. Corvino, Secretary, telephone number (215) 665-3650. The
Partnership has not requested, and does not intend to request, a ruling from the
Internal Revenue Service ("IRS"). An opinion of counsel is not binding on the
IRS or the courts, and no assurance can be given that the IRS will not challenge
the tax treatment of certain matters discussed herein, or if it does, that it
will be unsuccessful. Accordingly, each limited partner should consult the
limited partner's own tax advisor as to the specific tax consequences to the
limited partner including the application and effect of state or local income
and other tax laws.
The following discussion is based on existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
and existing administrative interpretations and court decisions. Future
legislation, regulations, administrative interpretations or court decisions
could significantly change such authorities either prospectively or
retroactively.
Partnership Status and Taxation of the Partnership
The Partnership is properly classified for federal income tax purposes as a
partnership rather than an association taxable as a corporation. Currently, the
Partnership is not itself subject to federal income tax. Rather, each limited
partner is subject to income tax based on the limited partner's allocable share
of Partnership taxable income, gain, loss, deduction, and credits, whether or
not any cash is actually distributed to such limited partner.
The Revenue Act of 1987 amended the Code to treat certain publicly-traded
partnerships as corporations rather than partnerships for federal income tax
purposes. Under a transition rule, however, an existing publicly-traded
partnership, such as the Partnership, will not be classified as a corporation
until the earlier of (i) the partnership's first taxable year beginning after
December 31, 1997 or (ii) the time at which the partnership adds a new line of
business that is substantial. Under the above-described transition rule, the
Partnership will be taxed as a corporation no later than its taxable year
beginning on January 1, 1998. At that time the Partnership will be treated as if
it had transferred all of its assets (subject to its liabilities) to a newly
formed corporation in exchange for the stock of the corporation, and then
distributed such stock to its partners in liquidation of their interests in the
Partnership. Upon classification as a corporation for tax purposes, the
Partnership would be subject to federal income tax on its earnings at corporate
tax rates.
General Tax Treatment of the Conversion
The Partnership has been a Delaware limited partnership since it began
operations in 1987. In the Conversion, the Partnership and the subsidiaries of
the Corporation will be merged with and into the Operating Partnership with each
A Interest being exchanged for Trust Preferred Securities and cash and each B
Interest being exchanged for Common Stock.
There is no specific authority dealing with a substantially similar
transaction. Accordingly, counsel cannot predict with certainty how the
Conversion will be treated for federal income tax purposes.
The exchange of A Interests for Trust Preferred Securities and cash
pursuant to the Merger will be a taxable transaction. In the case of a holder
who exchanges A Interests, gain or loss will be recognized in an amount equal to
the difference between the sum of the amount of cash and the fair market value
of Trust Preferred Securities received in the exchange and the exchanging
holder's tax basis in the A Interests exchanged. Such gain or loss will be
long-term capital gain or loss if the A Interests have been held for more than
one year as of such date and if such Interests have been held as capital assets.
The Corporation does not expect that any portion of the gain will be treated as
ordinary income pursuant to the rules of section 751 of the Code. A holder of A
Interests will have a tax basis in the Trust Preferred Securities received in
the Merger equal to the fair market value of such Trust Preferred Securities
received. A holder's aggregate tax basis in his pro rata share of the underlying
Junior Subordinated Debentures will be equal to his pro rata share of their
"issue price" on the Expiration Date as defined below.
As to holders of B Interests, counsel is of the opinion that the limited
partners will be treated as exchanging their B Interests for shares of Common
Stock in an exchange described in Section 351 of the Code, pursuant to which
such holders should not recognize gain or loss, except to the extent of any cash
received in lieu of fractional shares. Any such cash should result in capital
gain to the recipient, assuming that the B Interests are held as capital assets.
Counsel's opinion that holders of B Interests will be treated as exchanging
their Partnership interests for stock of the Corporation is based on the federal
income tax treatment of analogous transactions. It is well settled, and the
Service has issued published rulings to the effect that, if a parent corporation
forms a transitory subsidiary corporation and merges it into another corporation
to enable the parent to acquire the stock of such other corporation, the merger
of the transitory subsidiary corporation into such other corporation will be
ignored, and the stockholders of the target corporation will be treated as
receiving directly from
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<PAGE>
the parent corporation stock or other property of the parent in exchange for
their shares of the target. In addition, the Service has issued private letter
rulings addressing the treatment of transactions in which a corporation forms a
transitory partnership and merges it into an existing partnership as a means of
transforming the partners of the existing partnership into stockholders of the
corporation. The conclusions expressed in the private letter rulings are
consistent with the treatment of the Conversion expressed above. Holders of B
Interests should be aware that, unlike published rulings, private letter rulings
cannot be cited as authority, and may be relied upon only by the taxpayer
requesting the ruling, although the conclusions expressed therein are indicative
of the Service's thinking on a particular matter.
As to persons that hold both A Interests and B Interests at the time of the
Conversion, while not free from doubt, a likely result is that these investors
will recognize gain on an aggregate basis - i.e. the difference between their
aggregate tax basis in the A Interests and the B Interests and the aggregate
fair market value of the cash, Trust Preferred Securities and Common Stock
received in the Conversion will constitute the gain realized, which realized
gain will be recognized to the extent of the fair market value of cash or other
property ("boot") received in the Conversion - i.e. the sum of the cash and the
fair market value of the Trust Preferred Securities received. Such gain should
be treated as long-term capital gain, provided that the Interests have been held
for more than one year, and provided that such Interests have been held as
capital assets. As noted earlier, the Corporation does not expect that any
portion of the gain will be treated as ordinary income pursuant to section 751
of the Code. Such a holder's basis in the Common Stock received in the
Conversion will be equal to sum of such holder's basis in the A Interests and B
Interests exchanged therefor, plus the amount of gain recognized, less the
amount of cash and the value of the Trust Preferred Securities received. If the
aggregate tax basis of the A and B Interests exceeds the aggregate fair market
values of the cash, Trust Preferred Securities, and Common Stock received in the
Conversion, it is likely that no loss will be recognized. A person that holds
both A Interests and B Interests could take the position that a treatment of the
Conversion other than the aggregate basis approach described above should apply,
and such persons should consult their own tax advisors regarding the tax
consequences of the aggregate basis approach.
The Partnership and the Corporation intend to treat the Conversion in
accordance with the positions reflected in the foregoing description and to
prepare reports and tax information accordingly. Except as otherwise noted, the
following discussion assumes the correctness of such treatment.
Certain Tax Consequences of the Conversion to Holders of B Interests
Nonrecognition of Gain or Loss. Section 351 (a) of the Code provides, in
general, that no gain or loss is recognized upon the transfer by one or more
persons of property (such as partnership interests) to a corporation solely in
exchange for stock in such corporation if, immediately after the exchange, such
person or persons are in control of the corporation to which the property was
transferred. Section 368(c) of the Code defines control as the ownership of
stock possessing at least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of the total number of
shares of all other classes of stock. Section 351 (b) of the Code provides that
if boot is received in addition to stock in an otherwise qualifying transaction,
taxable income must be recognized in an amount equal to the lesser of (i) any
gain realized on the exchange or (ii) the amount of boot received. For this
purpose, gain realized is generally equal to the excess, if any, of (x) the
amount of cash and the fair market value of stock and other property received
from the corporation over (y) the adjusted basis of property transferred to the
corporation. In determining realized gain, a limited partner's share of
partnership liabilities is treated as cash received upon the transfer. Section
357(c) of the Code generally provides that if the sum of the liabilities assumed
in the Section 351 exchange exceeds the aggregate tax basis of the assets
transferred in the exchange, such excess is treated as gain from the sale or
exchange of the assets transferred. Section 752 of the Code generally provides
that a partner's tax basis for its partnership interest includes its share of
the liabilities of the partnership, as determined under Treasury regulations. A
published ruling issued by the Service holds that upon the transfer of a
partnership interest to a corporation in a Section 351 transaction, the
transferor's share of partnership liabilities is treated as assumed by the
corporation for purposes of Section 357(c) of the Code.
<PAGE>
Assuming the Conversion is treated for federal income tax purposes in the
manner described above under "General Tax Treatment of the Conversion," it is
counsel's opinion that the exchange by holders of B Interests of their Interests
for Common Stock will be treated as part of a transaction described in Code
Section 351(a). Accordingly, holders of B Interests should incur no federal
income tax liability as a result of the exchange, except to the extent of any
cash received in lieu of fractional shares. Any such cash should result in
capital gain to the recipient, assuming that such B Interests are held as
capital assets. This conclusion is based on the assumption that (i) such holders
do not own any A Interests (see the discussion above), (ii) holders of B
Interests and the parties exchanging their interests in the General Partner
(together, the "Transferors") as steps in the Conversion will own, immediately
after such transfers, more than 80 percent of each class of stock of the
Corporation and (iii) not more than 20 percent of the shares of stock
transferred to the Transferors pursuant to the Conversion will be subsequently
disposed of pursuant to contracts or other formal or informal agreements entered
into prior to the Conversion (the "Control Assumption"). If the Control
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<PAGE>
Assumption were not correct, each holder of B Interests could recognize gain or
loss on the Conversion as if such holder had sold the B Interests in a taxable
transaction for an amount equal to the value of stock received in the
Conversion. Counsel is not aware of any contracts or other formal or informal
agreements entered into by persons receiving shares of stock to dispose of such
shares.
Notwithstanding the above, any holders of B Interests who are treated as
receiving shares of stock in exchange for services will be taxed on the receipt
of the stock to the extent of the value thereof.
Any portion of the liabilities of the Partnership allocated to a holder of
B Interests would increase such holder's tax basis in such B Interest by an
amount equal to such allocated liability. As such allocated liability cannot
exceed such holder's tax basis in the B Interest, no gain recognition under
Section 357(c) of the Code will result from the Conversion for a holder of B
Interests.
Basis and Holding Period of Common Stock. The aggregate tax basis of the
Common Stock that a holder of B Interests receives in the exchange will be equal
to the tax basis of their B Interests immediately prior to the Conversion.
The holding period for Common Stock received in the Conversion will include
the exchanging holder's holding period for the B Interests, provided such holder
held such Interests as capital assets at the time of the Conversion.
Sale of Stock. In general, any gain or loss from the sale or exchange of
the Common Stock received in the Conversion will be characterized as capital
gain or loss provided such item was held as a capital asset. Gain or loss will
be measured by the difference between the amount realized and the holder's
adjusted tax basis in the Common Stock.
Ownership of Stock. After the Conversion, a holder of Common Stock
generally will be taxed only on distributions of money or other property
received from the Corporation, if any, out of current or accumulated earnings
and profits. Such income will be characterized as a dividend and as investment
or portfolio income for purposes of certain tax rules, e.g., those regarding
deductibility of interest expense, under Section 163 of the Code. To the extent
that the Corporation has no current or accumulated earnings and profits at the
time of a distribution, the amount of the distribution will first reduce a
stockholder's adjusted basis in the Common Stock and, thereafter, will be taxed
as an amount received from the sale or exchange of the Common Stock. The
Corporation will have no accumulated earnings and profits as it begins
operations following consummation of the Conversion. Distributions in connection
with a complete liquidation of the Corporation will be treated as amounts
received from the sale or exchange of the Common Stock. Distributions received
in connection with a redemption will be treated as dividends or as amounts
received from the sale or exchange of the stock depending upon the redeeming
stockholder's actual or constructive ownership of other stock of the
Corporation.
Certain Tax Consequences of the Conversion to Holders of A Interests
Classification of the Trust. In connection with the issuance of the Trust
Preferred Securities, Morgan, Lewis & Bockius LLP, counsel to the Corporation
and the Trust, will render its opinion generally to the effect that, under then
current law and assuming full compliance with the terms of the Declaration, the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
each holder of Trust Preferred Securities (a "Securityholder") will be
considered the owner of a pro rata portion of the Junior Subordinated Debentures
held by the Trust. Accordingly, each Securityholder will be required to include
in gross income the Securityholder's pro rata share of the income accrued on the
Junior Subordinated Debentures.
Recognition of Gain or Loss. The exchange of A Interests for Trust
Preferred Securities and cash pursuant to the Merger will be a taxable
transaction. Gain or loss will be recognized in an amount equal to the
difference between the sum of the cash and the fair market value of Trust
Preferred Securities received in the exchange and the exchanging holder's tax
basis in the A Interest exchanged. Such gain will be long-term capital gain or
loss if the A Interests has been held for more than one year as of such date and
if such Interests have been held as capital assets.
Basis and Holding Period of Junior Subordinated Debentures. A
Securityholder's initial tax basis for the Securityholder's pro rata share of
the Junior Subordinated Debentures will be equal to the Securityholder's pro
rata share of their "issue price" (for each $25 principal amount of Junior
Subordinated Debentures the "issue price" will be equal to the fair market value
of a Trust Preferred Security on the Expiration Date (reduced by Pre-Issuance
Accrued Interest (as defined below)), which may be more or less than $25) and
will be increased by original issue discount (as discussed below) accrued with
respect thereto, and reduced by the amount of cash distributions (including the
amount of any Pre-Issuance Accrued Interest) paid to such Securityholder.
Accrual of Original Issue Discount and Premium. The Junior Subordinated
Debentures will be considered to have been issued
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<PAGE>
with "original issue discount" and each Securityholder, including a taxpayer who
otherwise uses the cash method of accounting, will be required to include the
Securityholder's pro rata share of original issue discount on the Junior
Subordinated Debentures in income as it accrues, in accordance with a constant
yield method based on a compounding of interest, before the receipt of cash
distributions on the Trust Preferred Securities. Generally, all of a
Securityholder's taxable interest income with respect to the Junior Subordinated
Debentures will be accounted for as "original issue discount" and actual
distributions of stated interest will not be separately reported as taxable
income. So long as the interest payment period is not extended, cash
distributions received by an initial holder for any monthly interest period
(assuming no disposition prior to the record date for such distribution) will
equal or exceed the sum of the daily accruals of income for such monthly
interest period, unless the issue price of the Junior Subordinated Debentures is
less than $25.
The total amount of "original issue discount" on the Junior Subordinated
Debentures will equal the difference between the issue price of the Junior
Subordinated Debentures and their "stated redemption price at maturity." Because
the Corporation has the right to extend the interest payment period of the
Junior Subordinated Debentures, all of the stated interest payments on the
Junior Subordinated Debentures will be includible in determining their "stated
redemption price at maturity." The issue price of each $25 principal amount of
the Junior Subordinated Debentures will be equal to the fair market value of a
Trust Preferred Security on the Expiration Date (reduced by Pre-Issuance Accrued
Interest), which may be more or less than $25, with the result that the total
amount of original issue discount on the Junior Subordinated Debentures may be
more or less than the amount of stated interest payable with respect thereto.
No portion of the amounts received on the Trust Preferred Securities will
be eligible for the dividends received deduction applicable to holders that are
U.S. corporations, unless the Trust Preferred Securities constitute "high yield
discount obligations" ("HYDOs") under the Internal Revenue Code. If the Trust
Preferred Securities do constitute HYDOs, the original issue discount on the
Trust Preferred Securities will not be deductible by the Corporation until
actually paid by the Corporation, and depending upon the instrument's yield as
computed under the original issue discount rules, a portion of such original
issue discount (the "Disqualified Portion") may not be deductible by the
Corporation at any time. Such Disqualified Portion, if any, will be eligible for
the dividends received deduction for corporate holders of A Interests, however,
if the Corporation has sufficient earnings and profits. The question whether the
Trust Preferred Securities will constitute HYDOs cannot be determined at the
time of this writing, because the issue depends, in part, on factors that will
not be determined until the date of issuance of the Trust Preferred Securities
(including their "issue price" and the prevailing "applicable federal rate"
under the Code). In order to constitute HYDOs, the yield to maturity on the
Trust Preferred Securities must equal or exceed five percentage points over the
applicable federal rate. For March 1997, the applicable federal rate is 6.86%.
Potential Extension of Payment Period on the Junior Subordinated
Debentures. Securityholders will continue to accrue original issue discount with
respect to their pro rata share of the Junior Subordinated Debentures during an
extended interest payment period, and any holders who dispose of Trust Preferred
Securities prior to the record date for the payment of interest following such
extended interest payment period, will not receive from the Trust any cash
related thereto.
Distribution of Junior Subordinated Debentures to Holders of Trust
Preferred Securities. Under current law, except in the unlikely event that the
Trust were determined to be taxable as a corporation for tax purposes, a
distribution by the Trust of the Junior Subordinated Debentures as described in
the Prospectus detailing the terms of the Trust Preferred Securities under the
caption "Description of the Trust Preferred Securities -- Special Event
Redemption or Distribution," will be non-taxable and will result in the
Securityholder receiving directly his pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Trust, with a holding period
and tax basis equal to the holding period and adjusted tax basis such
Securityholder was considered to have had in his pro rata share of the
underlying Junior Subordinated Debentures prior to such distribution.
Treatment of the Payment of Pre-issuance Accrued Interest. "Pre-Issuance
Accrued Interest" payable on the first interest payment date should be treated
as a return of capital with respect to a Securityholder's pro rata interest in
the Junior Subordinated Debentures, reducing the Securityholder's tax basis in
his pro rata share of the Junior Subordinated Debentures.
Market Discount and Bond Premium. Securityholders other than initial
holders may be considered to have acquired their pro rata interest in the Junior
Subordinated Debentures with market discount, acquisition premium or amortizable
bond premium. Such holders are advised to consult their tax advisors as to the
income tax consequences of the acquisition, ownership and disposition of the
Trust Preferred Securities.
<PAGE>
Disposition of the Trust Preferred Securities. Upon on a sale, exchange or
other disposition of the Trust Preferred Securities (including a distribution of
cash in redemption of a Securityholder's Trust Preferred Securities upon
redemption or repayment of the underlying Junior Subordinated Debentures, but
excluding the distribution of Junior Subordinated Debentures), a Securityholder
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<PAGE>
will be considered to have disposed of all or part of the Securityholder's pro
rata share of the Junior Subordinated Debentures, and will recognize gain or
loss equal to the difference between the amount realized and the
Securityholder's adjusted tax basis in the Securityholder's pro rata share of
the underlying Junior Subordinated Debentures deemed disposed of. Gain or loss
will be capital gain or loss (except to the extent of any accrued market
discount with respect to such Securityholder's pro rata share of the Junior
Subordinated Debentures not previously included in income) provided the Trust
Preferred Securities are a capital asset in a Securityholder's hands. See
"Market Discount and Bond Premium" above. Such gain or loss will be long-term
capital gain or loss if the Trust Preferred Securities have been held for more
than one year.
The Trust Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. A Securityholder who disposes of his Trust
Preferred Securities between record dates for payments of distributions thereon
will nevertheless be required to include in income accrued but unpaid interest
on the Junior Subordinated Debentures through the date of disposition, and to
add such amount to the Securityholder's adjusted tax basis in the
Securityholder's pro rata share of the underlying Junior Subordinated Debentures
deemed disposed of. Accordingly, such a Securityholder will recognize a capital
loss to the extent the selling price (which may not fully reflect the value of
accrued but unpaid interest) is less than the Securityholder's adjusted tax
basis (which will include accrued but unpaid interest). Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
United States Alien Holders. For purposes of this discussion, a "United
States Alien Holder" is any corporation, individual, partnership, estate or
trust that is, as to the United States, a foreign corporation, a non-resident
alien individual, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust.
Under present United States federal income tax law:
(i) payments by the Trust or any of its paying agents to any
holder of a Trust Preferred Security who or which is a United States Alien
Holder will not be subject to United States federal withholding tax,
provided that (a) the beneficial owner of the Trust Preferred Security does
not actually or constructively own 10 percent or more of the total combined
voting power of all classes of stock of the Corporation entitled to vote,
(b) the beneficial owner of the Trust Preferred Security is not a
controlled foreign corporation that is related to the Corporation through
stock ownership, and (c) either (A) the beneficial owner of the Trust
Preferred Security certifies to the Trust or its agent, under penalties of
perjury, that it is not a United States holder and provides its name and
address or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution") and holds the Trust Preferred
Security certifies to the Trust or its agent under penalties of perjury
that such statement has been received from the beneficial owner by it or by
a Financial Institution between it and the beneficial owner and furnishes
the Trust or its agent with a copy thereof;
(ii) a United States Alien Holder of a Trust Preferred Security
will not be subject to United States federal withholding tax on any gain
realized upon the sale or other disposition of a Preferred Security; and
(iii) any gain realized by a United States Alien Holder upon the
exchange of A Interests for Trust Preferred Securities will not be subject
to United States federal withholding tax.
Information Reporting to Holders. The Trust will report the original issue
discount that accrued during the year with respect to the Junior Subordinated
Debentures, and any gross proceeds received by the Trust from the retirement or
redemption of the Junior Subordinated Debentures, annually to the holders of
record of the Trust Preferred Securities and the Internal Revenue Service. The
Trust currently intends to deliver such reports to holders of record prior to
January 31 following each calendar year. It is anticipated that persons who hold
Trust Preferred Securities as nominees for beneficial holders will report the
required tax information to beneficial holders on Form 1099.
Backup Withholding. Payments made on, and proceeds from the sale of Trust
Preferred Securities may be subject to a "backup" withholding tax of 31 percent
unless the holder complies with certain identification requirements. Any
withheld amounts will generally be allowed as a credit against the holder's
federal income tax, provided the required information is timely filed with the
Internal Revenue Service.
Other Tax Issues Affecting Limited Partners
Pre-Conversion Operations of the Partnership. The income and deductions of
the Partnership incurred during 1997 prior to
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<PAGE>
the Conversion will be allocated among the partners, and each partner's basis in
its general or limited partnership interest will be adjusted by such
allocations, in essentially the same manner they would have been allocated and
adjusted apart from the Conversion. Each partner will receive a Schedule K-1 for
1996 and 1997 reflecting the income and deductions allocated to the partner
during the period in 1996 and 1997 in which the partner owned such Interests,
even if the partner sells the Interests prior to the Conversion.
Pre-Conversion Sale of Interests. The tax consequences to a limited partner
who sells a Partnership Interest prior to the Conversion are not affected by the
Conversion.
(i) The limited partner may recognize both ordinary income and
capital gain or loss. The ordinary income amount will be approximately the
amount of ordinary income, including depreciation recapture and other
unrealized receivables as defined in Section 751 of the Code, that would
have been allocated to the limited partner if the Partnership had sold all
its assets. Such amount will vary depending on the amount paid for the
Partnership Interests, the date acquired and other factors. The capital
gain or loss amount will normally be the difference between the limited
partner's adjusted tax basis and the amount realized from the sale of the
Interest (reduced by the portion treated as ordinary income).
(ii) The deductibility of a noncorporate taxpayer's investment
interest expense is generally limited to the amount of such taxpayer's net
investment income. Investment interest expense includes (1) interest on
indebtedness incurred or continued to purchase or carry property held for
investment (such as the Common Stock); (2) a partnership's interest expense
attributed to the portfolio income of the Partnership under the passive
activity loss rules; and (3) that portion of interest expense incurred or
continued to purchase or carry an interest in a passive activity (such as a
limited partner's Interest in the Partnership) to the extent attributed to
portfolio income (within the meaning of the passive activity loss rules).
Investment interest deductions which are disallowed may be carried forward
and deducted in subsequent years to the extent of net investment income in
such years.
Reporting Requirements. Each limited partner who receives Common Stock in
the Conversion will be required to file with the limited partners' federal
income tax return a statement that provides details relating to the property
transferred and the stock received in the Conversion. The Corporation will
provide former limited partners with information to assist them in preparing
such statement.
Tax Consequences to the Corporation and the Partnership
The following discussion assumes that the Conversion will be treated for
federal income tax purposes in the manner described above under "--Tax Treatment
of the Conversion." In counsel's opinion, the acquisition by the Corporation of
the various partnership interests and other interests as a result of the
Conversion and issuance of cash, the Trust Preferred Securities and Common Stock
will not give rise to the recognition of gain or loss by the Corporation or the
Partnership, and the basis of the Partnership interests received by the
Corporation in exchange for cash, the Trust Preferred Securities and Common
Stock will generally be determined by reference to the tax basis of the B
Interests in the hands of the exchanging partners immediately prior to the
Conversion increased by the fair market value of the cash and Trust Preferred
Securities received by the holders of A Interests.
The acquisition of Partnership interests by the Corporation will result in
a constructive termination of the Partnership for federal income tax purposes
under Section 708 of the Code. This section provides that a "sale or exchange"
(which includes a transfer in connection with a Section 351 transaction) of 50
percent or more of the total interest in a partnership's capital and profits
within a 12-month period terminates a partnership for tax purposes. Upon such
termination, there is a hypothetical liquidation and distribution of the
partnership's assets to the transferees of the partnership interests and the
remaining partners, and a hypothetical contribution of the assets to the
partnership, which for tax purposes is considered a new partnership. The
constructive termination of the Partnership under Section 708 of the Code
results in a constructive termination of the Operating Partnership. The
Corporation does not expect that this termination will result in any material
adverse tax consequences to the Corporation or the Partnership.
As part of the Conversion, the Partnership will be merged with the
Operating Partnership. The merger of the Partnership and the transfer of its
assets to the Operating Partnership will not result in the recognition of gain
or loss to the Partnership or the Operating Partnership.
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<PAGE>
Unrelated Business Taxable Income
Certain persons otherwise generally exempt from federal income taxes (such
as pension plans and other exempt organizations) are taxed under Section 511 of
the Code on unrelated business taxable income. Currently, substantially all
taxable income generated by the Partnership is considered unrelated business
taxable income for tax-exempt organizations. Dividends distributed by the
Corporation will not be taxed under Section 511 of the Code, except to the
extent that the Common Stock is debt-financed property as that term is defined
in Section 514 of the Code.
Other Tax Aspects
Apart from federal income taxes, no attempt has been made to determine any
tax that may be imposed on limited partners by the country, state or
jurisdiction in which such partner resides or is a citizen. In addition to
federal income taxes, limited partners may be subject to other taxes, such as
state or local income taxes that may be imposed by various jurisdictions, and
may be required to file tax returns through the date of consummation of the
Conversion in those states in which properties owned by the Partnership (through
the Operating Partnership) are located. Limited partners may also be subject to
income, intangible property, estate, and inheritance taxes in their state of
domicile. Limited partners should consult their own tax advisors with regard to
state income, inheritance, and estate taxes.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED TO PROVIDE
ONLY A GENERAL SUMMARY AND DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY
WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION
DOES NOT ADDRESS ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF DISPOSITION OF
INTERESTS IN THE PARTNERSHIP PURSUANT TO THE CONVERSION. ACCORDINGLY, EACH
LIMITED PARTNER IS STRONGLY URGED TO CONSULT HIS OWN TAX ADVISOR TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES TO SUCH LIMITED PARTNER OF THE CONVERSION,
INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX
LAWS.
MARKET PRICES AND DISTRIBUTIONS
Effective May 1, 1990, the Partnership separated its publicly traded
limited partnership unit into one A Interest and one B Interest. The A Interests
and B Interests trade separately on the New York Stock Exchange under the
symbols SDP and SDPB, respectively.
The following table shows the quarterly range of high and low closing sales
prices for the A Interests and B Interests separately for the periods indicated.
<TABLE>
<CAPTION>
A Interests B Interests
----------- -----------
High Low High Low
---- --- ---- ---
1995
<S> <C> <C> <C> <C>
First Quarter 10 3/4 10 1/4 4 3/4 4
Second Quarter 11 10 3/8 4 3/8 4
Third Quarter 11 3/8 10 3/4 4 7/8 4
Fourth Quarter 11 3/8 10 7/8 5 1/8 4 1/2
1996
First Quarter 11 3/4 11 1/4 5 1/8 4
Second Quarter 11 1/2 10 7/8 4 1/2 4
Third Quarter 11 1/8 10 3/8 4 1/2 4 1/4
Fourth Quarter 11 1/4 10 3/8 4 5/8 4 1/8
1997
First Quarter 11 1/2 10 7/8 4 1/2 4 1/8
(through March 31)
</TABLE>
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<PAGE>
The closing sales prices on April __, 1997, the last trading day prior to
the mailing of this Proxy Statement/Prospectus, were ____ per A Interest and
____ per B Interest. The closing sales prices on December 11, 1996, the last
trading day before the Partnership publicly announced the planned Conversion,
were $10 1/2 per A Interest and $4 1/4 per B Interest.
As of December 31, 1996, the Partnership had 11,099,573 A Interests and
21,675,746 B Interests outstanding. The total number of record holders of A
Interests and B Interests as of December 31, 1996 was 1,743 and 1,023,
respectively.
The holders of the A Interests are entitled to receive annually $1.10 per A
Interest (the "Priority Return") to the extent that cash is available for
distribution. Priority Return distributions are paid monthly on the last day of
the month to holders of record on the first day of that month.
When federal taxable income is allocated to the holders of B Interests,
such holders are entitled to annual tax distributions (the "B Tax Distribution")
equal to the product of (i) 125% of the then applicable maximum federal income
tax rate for individuals and (ii) the federal taxable income allocated to the
holders of B Interests with respect to the preceding year.
The Priority Return and B Tax Distribution will be paid to the extent cash
is available for distribution and accumulate until paid. To the extent that the
Priority Return and B Tax Distribution have not been paid on a cumulative basis,
management fees due the General Partner will be deferred, and will be paid,
together with any management fees then owed with respect to any other year,
after the Priority Return and B Tax Distribution have been paid. If cash
available for distribution exceeds the amount necessary to pay the Priority
Return and B Tax Distribution, the General Partner may make additional
discretionary distributions to the holders of B Interests, provided that no
distribution, except the B Tax Distribution, may be made to holders of the B
Interests if, after such distribution, such holders' capital accounts with
respect to their B Interests would be below $.50 on a per Interest basis.
The Partnership paid Priority Return distributions of $1.10 per A Interest
in 1995 and 1996. For 1994, the B Tax Distribution amounted to $10,895,000 or
$.492619 per B Interest which was partially paid in the amount of $.009352 per B
Interest per month for the period January through March 1994 and $.02 per B
Interest per month during the period April through December 1994. The monthly
tax distributions were paid to holders of record on the first day of each month
during 1994 and aggregated $.208056 per B Interest for the full year 1994. On
March 31, 1995, the Partnership distributed the balance of the tax distribution
due of $.284563 per B Interest, as follows: approximately $.01981 per month to
holders of record of B Interests on the first day of the month during January
through March 1994; $.00916 per month for April through November 1994; and
$.15185 for December 1994 which included $.14269 related to the capital gain on
the sale of the Electrical Group divisions on December 5, 1994.
For 1995, the B Tax Distribution amounted to $14,807,000 or $.669517 per B
Interest which was partially paid in the amount of $.02 per B interest per month
for the period January through December, 1995, along with a partial distribution
of $.15 on April 10, 1995 to holders of record on December 30, 1994, related to
the taxable gain on the sale of Dorman Products. The monthly tax distributions
were paid to holders of record on the first day of each month during 1995 and
aggregated $.24 per B interest for the full year 1995. On March 29, 1996, the
Partnership distributed the balance of the tax distribution due of $.279517 per
B Interest, as follows: $.174544 to holders of record on December 30, 1994 for
the balance due on the taxable gain on the sale of Dorman Products; $.001968 per
month to holders of record of B Interests on the first day of the month during
January through December 1995 for the balance due on ordinary taxable income;
and $.081356 to holders of record on September 29, 1995 related to the taxable
gain on the sale of Downey Glass on October 27, 1995.
For 1996, the B Tax Distribution amounted to $7.7 million or $.35 per B
Interest, which was partially paid in the amount of $.02 per B Interest per
month for the period January through April 1996 and in the amount of $.03 per B
Interest per month for the period May through December 1996 (including a
distribution declared November 18, 1996, payable December 31, 1996, to holders
of record November 29, 1996). On March 31, 1997, the Partnership anticipates
distributing the balance of the tax distribution due of $.0265 per B Interest to
the holders of record for the entire year.
The Partnership suspended the payment of monthly advance B Tax Distributions
effective January 1, 1997 through March 31, 1997, pending the conversion to
corporate form. Due to the delay in completion of the proposed corporate
conversion, the Partnership intends to resume payment of monthly advance B Tax
Distributions in April 1997 in the amount of $.03 per B Interest. On March 20,
1997, the Partnership declared a B Tax Distribution in the amount of $.03 per B
Interest payable April 30, 1997, to holders of record on April 1, 1997. The
Partnership intends to pay this monthly rate to holders of B Interests until the
effective date of the conversion, since it expects to allocate sufficient
taxable income on the B Interests in the shortened tax year from January 1, 1997
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<PAGE>
through the effective date to require the B Tax Distribution payment. The
balance of the required 1997 B Tax Distribution, if any, will be paid on or
before March 31, 1998. For the period January 1, 1997 through the Effective
Time, the Partnership expects to pay Priority Return distributions of
approximately $.091666 per month per A Interest.
After the Effective Time, the former holders of A Interests will be
entitled to monthly distributions on the Trust Preferred Securities subject to
the right of the Corporation to defer payments on the Junior Subordinated
Debentures for up to five years in which case the distributions will accumulate,
compounding monthly. Dividends on the Common Stock will be payable when and as
declared by the Board of Directors of the Corporation. Management presently
intends not to recommend the payment of dividends on the Common Stock in order
to retain cash to fund the Corporation's acquisition program and corporate
requirements. The payment of dividends by the Corporation will be at the
discretion of the Board of Directors, will be subject to legal and contractual
limitations, and will depend upon the future earnings, operations, financial
conditions and capital and other requirements of the Corporation.
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<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the
Partnership at December 31, 1996, and the pro forma capitalization of the
Corporation as if the conversion had occurred on December 31, 1996. The table
should be read in conjunction with the historical and pro forma financial
statements of the Partnership and related Notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus.
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Pro Forma
Partnership Corporation
----------- -----------
<S> <C> <C>
Current portion of senior notes $ 6,395 $ --
============= ==========
Long-term portion of senior notes $ 57,539 $ 60,000
------------ ----------
Bank revolving credit facility 11,000 39,298
------------ ----------
Guaranteed preferred beneficial interests
in the Corporation's Junior Subordinated Debentures -- 105,446
------------ ----------
General Partner's minority interest in the
operating partnership 971 --
------------ ----------
Partners' capital:
General partner 960 --
Limited partners:
A interests 67,642 --
B interests 29,040 --
B interest held in treasury (1,514) --
Cumulative foreign currency
translation adjustment (1,509) --
------------ ---------
Total partners' capital 94,619 --
------------ ---------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000 shares
authorized, none issued -- --
Common Stock, $0.01 par; 20,000,000 shares
authorized; 6,418,936 shares issued and
outstanding -- 64
Accumulated deficit -- (21,248)
Cumulative foreign currency
translation adjustment -- (1,509)
----------- ----------
Total stockholders' deficit -- (22,963)
----------- ----------
Total capitalization $ 164,129 $ 182,051
=========== ==========
</TABLE>
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
(dollars in thousands, except for partnership interest data)
The following table sets forth selected consolidated historical financial
data of the Partnership as of the dates and for the periods indicated. The
selected historical financial information of the Partnership for the five years
ended December 31, 1996, has been derived from financial statements which have
been audited by Coopers & Lybrand L.L.P., independent accountants, as indicated
on their reports thereon. The selected financial information should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
appearing elsewhere herein. See "INDEX TO FINANCIAL STATEMENTS." See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" for acquisitions and divestitures that affect comparability.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $649,254 $628,935 $735,861 $655,707 $612,052
Income from operations 24,452 31,302 37,759 28,975 29,712
Gain on Sale of Divisions -- 20,644 3,523 -- --
Provision (benefit) for income taxes (1,140) 537 100 869 493
Income before extraordinary loss and cumulative effect of
change in accounting principle 19,267 44,745 29,544 18,506 17,691
Extraordinary loss -- (629) -- -- (3,434)
Cumulative effect on prior years of change in accounting
principle -- -- -- -- 822
Net income $19,267 $44,116 $29,544 $18,506 $15,079
Earnings per limited partnership interest:
Income before extraordinary loss and cumulative effect
of change in accounting principle
- Class A $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $0.32 $1.48 $0.79 $0.28 $0.25
Extraordinary loss
- Class A -- -- -- -- --
- Class B -- $(0.03) -- -- $(0.16)
Cumulative effect on prior years of change in accounting
principal
- Class A -- -- -- -- --
- Class B -- -- -- -- $0.04
Net income per limited partnership interest
- Class A $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $0.32 $1.45 $0.79 $0.28 $0.13
Cash distributions declared per limited partnership interest
- Class A
- Class B $1.10 $1.10 $1.10 $1.10 $1.10
$0.33 $0.67 $0.49 $0.27 $0.13
Weighted average number of outstanding limited partnership
interests
- Class A 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573
- Class B 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
OTHER DATA: 1996 1995 1994 1993 1992
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Cash provided by operating activities $23,298 $17,050 $17,704 $23,571 $27,056
BALANCE SHEET DATA AT DECEMBER 31:
Total assets 262,555 254,591 266,186 273,493 261,588
Long-term debt and capitalized lease obligations 69,043 63,934 74,781 104,185 115,503
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Partnership's operations and
financial condition. The discussion pertains to the audited consolidated
statements of income of the Partnership and subsidiary for the years ended
December 31, 1994, 1995 and 1996 and the audited consolidated balance sheets
dated December 31, 1995 and 1996 and should be read in conjunction with these
consolidated financial statements and notes thereto appearing elsewhere herein.
In connection with the proposed conversion of the partnership to a C
corporation, references are also made, where appropriate, to the unaudited pro
forma financial statements contained elsewhere herein.
General
The Partnership is a publicly held master limited partnership operating in
the wholesale industrial distribution industry through a subsidiary partnership,
SDI Operating Partners, L.P. (the "Operating Partnership"). The Partnership
consists of a headquarters operation and three business segments which are
Industrial Services, Hardware Merchandising and Glass Merchandising.
The Partnership's Industrial Services segment is comprised of the Sun
Inventory Management ("SIMCO") divisions and the SunSource Technology Services
divisions. The SIMCO divisions are Kar Products, A&H Bolt,
SIMCO/Special-T-Metals and SIMCO de Mexico. The SIMCO divisions provide
maintenance products and inventory management services to both original
equipment manufacturers and maintenance and repair facilities, including
in-plant systems. SunSource Technology Services, formerly the Fluid Power group,
is comprised of Activation, Air-Dreco, J.N. Fauver Co., Hydra-Power de Mexico,
Walter Norris and Warren Fluid Power. The Technology Services divisions provide
fluid power products, engineering design, and equipment repair services to a
wide variety of industrial customers.
The Partnership's Hardware Merchandising segment consists of the Hillman
division. Hillman distributes hardware items and related products and also
provides merchan-dising systems service and support to both large and small
hardware retailers.
The Partnership's Glass Merchandising segment consists of the Harding Glass
division. Harding provides glass products and point-of-sale related services
such as the installation and repair of automobile and flat glass.
Conversion to Corporate Form
In connection with the proposed conversion of the limited partnership to a
C corporation, limited partnership interests in the Partnership will be
exchanged for securities and cash. Holders of A Interests will receive $119.9
million in the aggregate, consisting of $105.5 million of Trust Preferred
Securities of SunSource Capital Trust, a business trust holding Junior
Subordinated Debentures of the Corporation and $14.4 million of cash. Per A
Interest, each holder will receive 0.38 of a Trust Preferred Security, with a
liquidation preference of $25 and $1.30 in cash. The Trust Preferred Securities
will be payable monthly at a rate of 11.6% which will result in $1.102 per annum
payable to each current holder of an A Interest, substantially equivalent to the
pre- conversion Priority Return paid to each A Interest. Holders of B Interests
will receive .25 share of Common Stock for each outstanding B Interest or one
share of Common Stock for each four B Interests. Lehman/SDI and limited partners
(current and former executive offers of the Partnership) will receive 1,000,000
shares of Common Stock immediately upon consummation of the Conversion in
exchange for their interests in the General Partner.
The holders of A interests will be subject to federal income tax on the
gain recognized as the difference between the tax basis in their A interests and
the total consideration received in Trust Preferred Securities and cash. The
holders of only B Interests will not be subject to federal income tax on the
receipt of Common Stock. Investors holding both A Interests and B Interests will
be subject to federal income tax on the gain recognized as the difference
between the aggregate tax basis in their A and B interests and the aggregate
fair market value of the consideration received (Trust Preferred Securities,
cash and Common Stock) to the extent of boot received (Trust Preferred
Securities and cash only).
The Partnership has recorded $2.1 million of transaction costs related to
the proposed conversion as of December 31, 1996 and anticipates spending an
additional $1.5 million of transaction costs in 1997 to complete the conversion
process. See Note 1 of Notes to Consolidated Financial Statements for a
discussion of the accounting recognition of these costs.
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<PAGE>
Sale of Certain Divisions
The Operating Partnership sold its Downey Glass division on October 27,
1995, its Dorman Products division on January 3, 1995 and its three Electrical
Group divisions on December 5, 1994, for an aggregate cash consideration, net of
expenses, of approximately $70.6 million (subject to certain post-closing
adjustments) and the assumption of certain liabilities. The proceeds from these
divestitures were used to reduce debt and for general Partnership purposes,
including acquisitions for integration with its remaining businesses.
Sales from the divested divisions aggregated $ 29.1 million for the year
ended December 31, 1995, $177.1 million for the year ended December 31, 1994,
and $162.3 million for the year ended December 31, 1993. Income contributions
from these divisions aggregated $.3 million or $.01 per Class B interest in
1995, $8.6 million or $.39 per Class B interest in 1994, and $6.6 million or
$.30 per Class B interest in 1993.
Acquisitions
On April 11, 1996, the Partnership's Industrial Services segment, through
its Warren Fluid Power division, purchased certain assets of Hydraulic Depot,
Inc. of Reno, Nevada for an aggregate purchase price of $.7 million. Annual
sales of Hydraulic Depot, Inc. are approximately $2.5 million. This acquisition
expands Warren's previous geographic markets.
On November 13, 1995, the Partnership's Hardware Merchandising segment,
through its Hillman division, purchased certain assets of the Retail Division of
Curtis Industries of Eastlake, Ohio for an aggregate purchase price of $8.0
million and the assumption of certain liabilities. The Curtis Retail operation
was integrated with the Hillman division. Curtis' sales were $1.6 million from
the acquisition date through December 31, 1995 and approximately $11.0 million
for the twelve months ended December 31, 1996.
Results of Operations
Market Developments
In 1996, the Industrial Services and Hardware Merchandising segments
continued to expand as a result of economic strength in most product markets and
the addition of new product lines and value-added services. However, the Glass
business has experienced a decline in sales volume primarily attributable to the
discontinuation of certain product lines and markets served and competitive
pressures from major glass manufacturers who have more aggressively pursued the
wholesale distribution business in recent years. This decline has been partially
offset by real growth in Harding's retail glass business, it's primary strategic
focus. Growth in the retail glass business is expected to continue, complemented
by internal expansion and acquisition growth opportunities.
Operating expense control and liquidity in working capital investment
allows the operating divisions to respond quickly to market conditions affected
by economic recession or growth. Management will continue to respond to changing
market conditions.
Restructuring Charges
On December 11, 1996, the Board of Directors of Lehman/SDI approved
management's plan to restructure its Technology Services divisions and its Glass
Merchandising business. During the fourth quarter of 1996, the Partnership
recorded a $6.0 million restructuring charge, of which only $.2 million was paid
in cash by December 31, 1996, related to the integration and consolidation of
its five domestic Technology Services divisions and the write-off of certain
non-performing assets in the Glass Merchandising segment. The restructuring plan
is expected to result in the elimination of 175 employees in the Technology
Services divisions by December 31, 1998, and is expected to produce net
annualized cost savings of approximately $5.0 million per year upon its
completion. See Note 1 of Notes to Consolidated Financial Statements for the
accounting recognition of the restructuring charges.
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<PAGE>
Operating Results Excluding Divisions Sold
As previously stated, the Operating Partnership sold certain divisions in
1994 and 1995. In order to provide an analysis of the results of ongoing
operations, the sales, gross profit and operating expenses of these divisions
have been excluded from the following discussion of results of operations. The
table below reflects the results from ongoing operations of the Partnership for
each year:
<TABLE>
<CAPTION>
(dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $649,254 $599,865 $558,754
Cost of sales 386,251 355,004 331,609
---------- ---------- ----------
Gross profit 263,003 244,861 227,145
---------- ---------- ----------
Operating expenses:
Selling, general and admin. expenses 221,574 205,180 189,252
Management fee to general partner 3,330 3,330 3,330
Depreciation 3,623 3,358 3,249
Amortization 1,924 1,961 2,143
---------- ------------ ------------
Total operating expenses 230,451 213,829 197,974
---------- ---------- ----------
Restructuring charges 5,950 -- --
Transaction costs 2,150 -- --
---------- ------------ ------------
Income from operations $24,452 $31,032 $29,171
========== ========== ==========
</TABLE>
Years Ended December 31, 1996 and 1995
Net income for the year ended December 31, 1996 was $19.3 million compared
with $44.1 million in 1995. As previously mentioned, 1996 results included a
$4.9 million charge (net of $1.1 million in deferred tax benefits), related to
the restructuring of the Technology Services and Glass Merchandising divisions
and a $2.1 million charge for transaction costs associated with the conversion
to a C corporation. The 1995 results included a combined gain of $20.6 million
from the sale of the Downey Glass division in October 1995 and the Dorman
Products division in January 1995. Results for 1995 also included a $.6 million
charge related to the early retirement of debt and $.3 million of operating
income from Downey Glass. Excluding these non-recurring items, net income for
1996 amounted to $26.3 million or 10.5% above the comparable 1995 earnings of
$23.8 million.
Net sales increased $49.4 million or 8.2% over 1995 resulting primarily
from an increase in the volume of products sold due to continued strengthening
in existing product markets as well as additional market penetration from new
product lines and value-added services. Sales recorded in 1996 were $649.3
million compared with 1995 sales of $599.9 million, excluding divisions sold.
Sales increases (decreases) by business segment are as follows:
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<PAGE>
<TABLE>
<CAPTION>
Sales Increase (Decrease)
Amount %
------ -
<S> <C> <C>
Industrial Services
Technology Services 13.6 million 4.8 %
Inventory Management 18.2 million 13.1 %
----
Total Industrial Services 31.8 million 7.5 %
Hardware Merchandising 18.8 million 22.2 %
Glass Merchandising (1.2) million (1.3) %
------
Total Partnership $49.4 million 8.2 %
=====
</TABLE>
The sales increase in the Hardware Merchandising segment includes
approximately $11.0 million which is due to the Curtis acquisition and the
balance of $7.8 million in growth from new accounts, expansion of existing
product lines and market penetration of new product lines. The increase in sales
in the SIMCO divisions is comprised of sales growth from new inventory
management programs of $10.5 million or 42.9% and in maintenance products of
$7.7 million or 6.7%.
The decline in sales volume in the Glass Merchandising segment is
attributable to the discontinuation of certain product lines and markets served,
accounting for $.2 million of the sales decline and a decrease in wholesale
glass, brokerage and other product line sales of $2.8 million, offset by an
increase in retail glass sales of $1.8 million, or 4.2%.
Cost of sales increased $31.2 million or 8.8% from the twelve months ended
December 31, 1995, due primarily to increased sales levels in the comparison
period.
Gross margins were 40.5% in 1996 compared with 40.8% in 1995, excluding
divisions sold, comprised by business segment as follows:
Year Ended December 31,
-------------------------
1996 1995
---- ----
Industrial Services
Technology Services 26.7% 27.4%
Inventory Management 61.1% 64.5%
Total Industrial Services 38.6% 39.5%
Hardware Merchandising 50.8% 52.4%
Glass Merchandising 38.8% 35.9%
The erosion in gross margin in the SIMCO divisions is due mainly to
competitive pricing pressures and changes in sales mix. Gross margins in the
Hardware Merchandising segment decreased due to reduced packaging productivity
levels and costs associated with integration costs for the Curtis acquisition
and other business expansion programs.
Gross margins in the Glass Merchandising segment increased due primarily to
improved purchasing management and better sales in retail glass which carries
higher margins than the other product lines in this segment.
Selling, warehouse and delivery, and general and administrative ("S,G&A")
expenses increased by $16.4 million or 8.0% over 1995, excluding divisions sold,
comprised as follows: increased selling expenses of $7.4 million or 7.5%,
supporting increased 1996 sales levels; increased warehouse and delivery
expenses of $6.3 million or 17.2% due to the integration of the Curtis retail
division, expansion programs by certain operating units, and the addition of
seven large in-plant accounts in the
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<PAGE>
SIMCO divisions; and increased general and administrative expenses of $2.8
million or 3.9% due primarily to cost containment efforts.
Excluding divisions sold, S,G&A expenses as a percentage of sales, were as
follows:
Year Ended December 31,
------------------------
1996 1995
---- ----
Selling Expenses 16.3% 16.4%
Warehouse and Delivery Expenses 6.6% 6.1%
General and Administrative Expenses 11.2% 11.7%
----- -----
Total S,G&A Expenses 34.1% 34.2%
As calculated in accordance with the partnership agreement, the management
fee due the General Partner is accrued in the amount of $3.3 million annually
which is based on 3% of the aggregate initial capital investment ($111 million)
of the limited partners.
Depreciation expense increased $.3 million in the comparison period due
primarily to an increase in the depreciable fixed asset base.
Interest income decreased $.3 million in 1996 due primarily to the reduced
investment of excess cash that was generated during the fourth quarter of 1994
and the first quarter of 1995 from divisions sold.
Interest expense decreased $.4 million in 1996 due primarily to reduced
financing costs from the prepayment of senior notes on March 14, 1995, offset by
higher interest expense from increased borrowing levels under the Partnership's
revolving credit facility.
Other income increased $.3 million in the comparison period due primarily
to lowered minority interest expense.
Currently, the Partnership incurs state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
Operations. Also, the Partnership provides for deferred income taxes as
determined in accordance with Statement of Financial Accounting Standard No. 109
("SFAS #109"). As currently calculated, deferred income taxes represent state
and federal income tax benefits expected to be realized after December 31, 1997,
when the Partnership will be taxed as a corporation.
The Partnership's provision for income taxes in 1996 decreased $1.7 million
from 1995 due to the recording of the following: $.5 million deferred income tax
benefit relating to book/tax differences in the Partnership's casualty loss
insurance program, a $1.1 million deferred income tax benefit relating to
book/tax differences from restructuring costs and a $.1 million favorable
adjustment to prior year's state income tax provisions. See "Income Taxes" below
for a discussion of the effect of the proposed conversion to corporate form on
deferred income taxes.
The allocation of net income to the General Partner is based on the General
Partner's 1% ownership interest in the profits of the Partnership. The
allocation of net income to the limited partners for financial statement
purposes represents a 99% interest in the profits of the Partnership. The net
income allocation resulted in $1.10 of income per Class A limited partnership
interest for the years ended December 31, 1996 and December 31, 1995; and $.32
of income per Class B limited partnership interest in 1996 compared with $1.45
of income per B Interest for the year ended December 31, 1995. Income per B
Interest in 1996 was reduced by the restructuring charge, net of deferred tax
benefits and transaction costs amounting to $.22 and $.10, respectively. Income
per B Interest for the twelve months ended December 31, 1995 included a combined
gain of $.94 from the sale of the Dorman Products and Downey Glass divisions, an
extraordinary loss of $.03 from the early extinguishment of debt and $.01 of
income from the divested Downey Glass division. Excluding these non-recurring
items, income per B Interest was $.64 compared with $.53 in 1995, an increase of
approximately 21%.
-72-
<PAGE>
Years Ended December 31, 1995 and 1994
Net income for the year ended December 31, 1995 was $44.1 million including
a combined gain of $20.6 million from the sale of the Dorman Products and Downey
Glass divisions, compared with $29.5 million earned in 1994, which included a
gain of $3.5 million from the sale of the Electrical Group divisions in December
1994. Results for 1995 also included a $.6 million charge related to the early
retirement of debt and a reduction in net financing costs of almost $3.2 million
from the prior year. 1994 net income included income from the Electrical Group
of $4.1 million, from Dorman Products of $2.8 million, and from Downey Glass of
$1.7 million. Excluding income contributions and gains from divisions sold, as
well as the extraordinary loss on early extinguishment of debt, net income for
1995 amounted to $23.8 million or 36.7% above the comparable 1994 earnings of
$17.4 million.
Net sales increased $41.1 million or 7.4% over 1994 resulting primarily
from an increase in the volume of products sold due to strengthening in most
product markets and significant growth from sales programs and services
initiated since 1992. Substantially all of the Partnership's growth in revenues
is related to increases in the volume of products sold. Excluding divisions
sold, sales recorded in 1995 were $599.9 million compared with 1994 sales of
$558.8 million. Sales increases (decreases) by business segment were as follows:
Sales Increase (Decrease)
Amount %
------ ----
Industrial Services
Technology Services 25.0 million 9.6 %
Inventory Management 10.1 million 7.9 %
-----
Total Industrial Services 35.1 million 9.1 %
Hardware Merchandising 11.9 million 16.3 %
Glass Merchandising (5.9) million (6.1) %
------
Total Partnership $41.1 million 7.4 %
=====
The decline in sales volume in the Glass Merchandising segment was
primarily attributable to the discontinuation of certain product lines and
markets served, resulting in a sales reduction of $5.0 million from 1994. On a
comparable basis sales decreased $.9 million, or .9%, in the Glass Merchandising
segment.
Cost of sales increased $23.4 million or 7.1%, due primarily to increased
sales levels in the existing businesses in the comparison period.
Excluding divisions sold, gross margins were 40.8% in 1995 compared with
40.7% in 1994, comprised by business segment as follows:
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<PAGE>
Year Ended December 31,
------------------------
1995 1994
---- ----
Industrial Services
Technology Services 27.4% 27.7%
Inventory Management 64.5% 65.9%
Total Industrial Services 39.5% 40.3%
Hardware Merchandising 52.4% 51.0%
Glass Merchandising 35.9% 34.4%
Sales mix was the principal contributor to the changes in gross margins.
S,G&A expenses, excluding divisions sold, increased by $15.9 million or
8.4% over 1994, comprised as follows: increased selling expenses of $8.9 million
or 9.9%, increased warehouse and delivery expenses of $3.2 million or 10.0% and
increased general and administrative expenses of $3.9 million or 5.7%. The
increase in S,G&A expenses supported increased 1995 sales levels and expansion
programs by certain operating units.
Excluding divisions sold, S,G&A expenses, as a percentage of sales were as
follows:
Year Ended December 31
----------------------
1995 1994
---- ----
Selling Expenses 16.4% 16.1%
Warehouse and Delivery Expenses 6.1% 5.7%
General and Administrative Expenses 11.7% 12.1%
----- -----
Total S,G&A Expenses 34.2% 33.9%
===== =====
The increase in S, G&A as a percentage of sales was due mainly to increased
support payments, incentive programs and marketing efforts for the sales force.
The management fee due the General Partner is accrued in the amount of $3.3
million annually, as previously discussed.
Depreciation expense increased $.1 million in the comparison period due
primarily to an increase in the depreciable fixed asset base at the remaining
divisions of the Partnership.
Amortization expense decreased $.2 million in the comparison period due
primarily to the expiration of non-compete agreements in the Glass Merchandising
segment.
Interest income increased $.3 million in the comparison period due
primarily to the investment of excess cash generated from divisions sold.
Interest expense decreased $2.6 million in the comparison period due to
reduced financing costs of approximately $1.5 million from the prepayment of
senior notes on March 14, 1995, and $1.1 million from reduced borrowing levels
under the Partnership's revolving credit facility.
Other income was $.3 million for the twelve months ended December 31, 1995,
compared to $1.7 million of other expense
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<PAGE>
recorded in the 1994 comparison period. This change was primarily due to the
favorable settlement of certain non-recurring insurance and legal matters in the
1995 period.
As previously stated, the Partnership incurs state, local and foreign
income taxes and provides for deferred income taxes as determined in accordance
with SFAS #109. The Partnership's provision for income taxes in 1995 increased
$.4 million from 1994 due primarily to an increase in state taxes as a result of
gains on divisions sold.
The allocation of net income, which was discussed previously, resulted in
$1.10 of income per A Interest for the years ended December 31, 1995 and
December 31, 1994; and $1.45 of income per B Interest in 1995 compared with $.79
of income per B Interest for the year ended December 31, 1994. Income per B
Interest in 1995 included a combined gain of $.94 from the sale of the Dorman
Products and Downey Glass divisions and an extraordinary loss of $.03 from the
early extinguishment of debt. Income per B Interest for the twelve months ended
December 31, 1994 included a gain of $.16 on the sale of the Electrical Group
divisions. Income per B Interest for the twelve months ended December 31, 1995
and 1994 included $.01 and $.39, respectively, of income from divisions sold.
Liquidity and Capital Resources
Net cash provided by operations for the twelve months ended December 31,
1996 was $23.3 million, an increase of $6.2 million from the prior year level of
$17.1 million. The Partnership's net interest coverage ratio (earnings before
interest, taxes, gain on sale of divisions, and 1996 restructuring charges and
transaction costs over net interest expense) improved to 4.81X in 1996 from the
1995 level of 4.56X.
The Partnership's cash position of $1.7 million as of December 31, 1996,
decreased $4.2 million from the balance at December 31, 1995. Cash was provided
during 1996 primarily from operations of $23.3 and borrowings under the bank
credit agreement of $11.0 million. Cash was used during this period
predominantly for distributions to the general and limited partners ($25.6
million), repayment of debt obligations ($6.4 million), acquisitions ($.7
million), capital expenditures ($4.3 million), repayments under other credit
facilities($.1 million) and the purchase of life insurance ($1.4 million).
The Partnership's working capital position of $100.2 million at December
31, 1996, represents an increase of $4.4 million from the December 31, 1995
level of $95.8 million. The increase is primarily attributable to reinvestment
in working capital of $2.7 million, a decrease in distributions payable of $5.4
million and acquired working capital of $.5 million related to the Hydraulic
Depot acquisition, offset by a decrease in cash of $4.2 million. The
Partnership's current ratio increased to 2.15 at December 31, 1996 from the
December 31, 1995 level of 2.11.
On December 1, 1996 and 1995, the Operating Partnership paid scheduled
principal repayments on its senior notes aggregating $6.4 million and $4.8
million, respectively. On March 14, 1995, the Partnership prepaid a portion of
its senior notes in the amount of $14.2 million, including accrued interest
thereon of $.4 million and a make-whole penalty of $.6 million. As of December
31, 1996, the Partnership's total debt as a percentage of its consolidated
capitalization is 43.9% compared with 42.3% as of December 31, 1995.
The Partnership anticipates spending approximately $4.5 million for capital
expenditures in 1997, primarily for machinery and equipment.
As of December 31, 1996, the Operating Partnership had $33.2 million
available under its $50.0 million Bank Credit Agreement which provides revolving
credit for working capital purposes and acquisitions through December 31, 1997.
The Partnership had $11.0 million in bank borrowings outstanding at December 31,
1996 under the Bank Credit Agreement and $5.8 million outstanding representing
letter of credit commitments. In addition, an indirect, wholly-owned Canadian
subsidiary of the Operating Partnership has a $2.5 million Canadian dollar line
of credit for working capital purposes of which $.6 million USD was outstanding
at December 31, 1996.
The Partnership was restricted from making acquisition investments in 1994
under the Senior Note and Bank Credit Agreements. The acquisition restriction in
1994 was a result of an amendment to the credit agreements executed in the first
quarter of 1994 that eased certain coverage ratios and other financial
requirements of the credit agreements. Acquisition spending amounted to $.7
million and $8.0 million in 1996 and 1995, respectively. Management intends to
continue its
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<PAGE>
acquisition strategy in 1997, with authorized spending of up to $15.0 million
per year in the aggregate, to complement internal growth.
The Operating Partnership was required to reduce permanently the bank
revolver commitment under the bank credit agreement by approximately $13.0
million as a result of the sale of certain operating divisions. However, the
banks have waived this permanent reduction and maintained the existing bank
credit commitment of $50.0 million. For 1995 and future years, the lenders have
agreed to revise certain covenant tests to exclude the impact of cash
distributions to holders of Class B interests related solely to tax gains on
divisions sold.
The Partnership suspended the payment of monthly advance B Tax
Distributions effective January 1, 1997 through March 31, 1997, pending the
conversion to corporate form. Due to the delay in completion of the proposed
corporate conversion, the Partnership intends to resume payment of monthly
advance Class B Tax Distributions in April 1997 in the amount of $.03 per B
Interest. On March 20, 1997, the Partnership declared a B Tax Distribution in
the amount of $.03 per B Interest payable April 30, 1997, to holders of record
on April 1, 1997. The Partnership intends to pay this monthly rate to holders of
B Interests until the effective date of the conversion since it expects to
allocate sufficient Class B taxable income in the shortened tax year from
January 1, 1997, through the effective date to require the B Tax Distribution
payment. The balance of the required 1997 B Tax Distribution, if any will be
paid on or before March 31, 1998. As a result of the proposed conversion, the
Corporation would not be required to make tax-related cash distributions to the
holders of B Interests. Accordingly, a decision regarding dividends on common
stock received in exchange for B Interests would solely be within the discretion
of the Board of Directors of the Corporation.
For 1996, the B Tax Distribution amounted to $7.7 million or $.35 per B
Interest, which was partially paid in the amount of $.02 per B Interest per
month for the period January through April 1996 and in the amount of $.03 per B
Interest per month for the period May through December 1996. On March 31, 1997,
the Partnership will distribute the balance of the tax distribution due of
$.0265 per B Interest to holders of record for the entire year.
The taxable gain from the sale of the Dorman Products and Downey Glass
divisions in 1995 amounted to $.927 and $.232 per B Interest, respectively. The
sale of the Electrical Group divisions in December 1994 resulted in a taxable
gain of $.408 per B Interest. With respect to the sale of Dorman Products on
January 3, 1995, the Operating Partnership paid a partial tax distribution on
April 10, 1995 to holders of B Interests of record as of December 30, 1994, in
the amount of $.15 per B Interest. The remaining balance of the tax distribution
for the taxable gain on the sale of Dorman Products in the amount of $.175 per B
Interest was paid on March 29, 1996, along with a tax distribution in the amount
of $.081 per B Interest to holders of record as of September 29, 1995 related to
the sale of the Downey Glass division on October 27, 1995. Related to the sale
of the Electrical Group divisions, the Partnership made a tax distribution on
March 31, 1995 to holders of B Interests of record as of December 30, 1994,
equal to approximately $.143 per B Interest.
See Item 3 - Legal Proceedings of Form 10K dated December 31, 1996, and
Note 14 of Notes to Consolidated Financial Statements included herein, for the
description of a lawsuit with respect to the sale of the Partnership's Dorman
Products division and recent lawsuits involving the Partnership's General
Partner related to the proposed conversion to corporate form. Certain other
legal proceedings are pending which are either in the ordinary course of
business or incidental to the Partnership's business. Those legal proceedings
incidental to the business of the Partnership are generally not covered by
insurance or other indemnity. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial position, operations or cash flows of the Partnership.
Pro Forma Liquidity and Capital Resources
In connection with the proposed conversion of the Partnership to a
Corporation, SunSource's cashflow is expected to improve due to the following:
(i) retention of General Partner management fees in the amount of $3.3 million
per year, (ii) retention of distributions on the General Partner's ownership in
the Partnership and the Operating Partnership amounting to approximately $.4
million annually, and (iii) a reduction in income tax rates, offset in part by
increased interest expense as discussed below. As a Corporation, the
Corporation's current effective tax rate for state and federal income taxes is
expected to be approximately 40% compared with the Partnership's current tax
distribution rate of 49.5% (based on 125% of the maximum individual federal
income tax rate of 39.6% applied to B Interest taxable ordinary income in
accordance with the partnership agreement) plus the elimination of certain
partnership-only state and local taxes of approximately 1.5% of Partnership
taxable income.
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<PAGE>
The proposed conversion to corporate form will result in SunSource
reporting a negative net worth due to the exchange of Trust Preferred Securities
and cash for the A Interests. The Trust Preferred Securities have certain equity
characteristics but also have certain creditors' rights, thereby being
classified between liabilities and equity on the balance sheet. The new 11.6%
Trust Preferred Securities are cumulative, callable after five years at the
SunSource's option and the interest on the Junior Subordinated Debentures is
deductible for income tax purposes. SunSource's fixed charge to its Class A
holders will remain at $12.2 million annually after the exchange of Trust
Preferred Securities for A interests. The holders of A Interests will continue
to receive approximately $.092 per month for each current Class A interest
owned, which will aggregate approximately $1.10 annually.
Also, SunSource anticipates financing cost savings of approximately 100
basis points through refinancing of its current outstanding debt of $74.9
million as of December 31, 1996, with a combination of new long-term fixed rate
debt of $60 million and a bank revolver of $90 million, of which approximately
$99.3 million would be outstanding on a pro forma basis as a corporation at
December 31, 1996. As a result of its refinancing, SunSource will prepay its
outstanding senior notes in whole upon consummation of the proposed conversion.
SunSource would incur a make-whole penalty of approximately $5.0 million as a
result of prepayment of the senior notes in their entirety. The refinancing is
expected to provide SunSource with additional working capital for reinvestment
in its businesses and acquisition capital for future growth.
Overall, debt will increase as a result of the proposed conversion due to
the payment of $14.4 million to the Class A holders as part of the exchange
offer previously discussed and $3.6 million in transaction costs. Also, debt
will increase due to the prepayment of the senior notes previously mentioned
resulting in an expected make-whole payment of about $5.0 million. Interest
expense, net for the year ended December 31, 1996, is $8.1 million on a
pro-forma corporate basis compared with $6.9 million as a partnership. The
increase in interest expense is the result of incremental debt incurred directly
related to the conversion as noted herein.
The Partnership's consolidated capitalization as of December 31, 1996, was
$164.1 million in its current partnership form compared to $182.1 million as a
corporation on a pro forma basis. Total debt as a percentage of SunSource's
consolidated capitalization is expected to increase to 54.5% as a corporation on
a pro forma basis from its current 45.7% as of December 31, 1996.
Income Taxes
As a result of the Partnership's adoption of SFAS No. 109 in 1992, the
Partnership has a deferred tax asset aggregating $5.0 million as of December 31,
1996. Management believes that the Partnership's deferred tax asset will be
realized through the reversal of existing temporary differences at the earlier
of the date of conversion to a C corporation should the proposed conversion be
approved, or after December 31, 1997, when the Partnership will be treated as a
corporation for federal income tax purposes. The temporary differences expected
to reverse at the date of conversion to a C corporation or after December 31,
1997, between the financial statement and tax bases, are composed of prepayment
penalties in the amount of $.8 million, insurance casualty loss liabilities in
the amount of $1.4 and deferred compensation liabilities in the amount of $8.3
million, net of a valuation allowance of $.2 million. See Note 13 of Notes to
Consolidated Financial Statements.
The minimum level of future taxable income necessary to realize the
Partnership's recorded deferred tax asset at December 31, 1996, is approximately
$12.5 million. For the three years ended December 31, 1996, the Partnership's
consolidated net income per the financial statements reconciled to federal
taxable income in thousands of dollars is shown below:
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<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Consolidated Net Income per the
<S> <C> <C> <C> <C>
Financial Statements ("Book") $19,267 $44,116 $29,544
Tax Adjustments to Book Income:
- -------------------------------
Goodwill & Other Amortization 1,013 1,252 1,634
Depreciation 607 467 506
Deferred Compensation, net (96) 942 2,917
Self-Insurance Accrued Expenses, net (943) (776) 844
Tax gain in excess of book gain from
sale of Divisions -- 1,977 1,216
Restructuring Charges 5,783 -- --
Transaction Costs 2,150 -- --
Other Increase (Decrease) to Book Income, net 853 1,893 451
------- ------- -------
Federal Taxable Income $28,634 $49,871 $37,112
======= ======= =======
</TABLE>
Partnership Tax Status
As previously stated, the Partnership will be taxed as a corporation for
federal income tax purposes either upon conversion to a corporation should the
proposed conversion be approved, or after December 31, 1997, whichever is
earlier. If the proposed conversion is approved and the Partnership converts to
a corporation, the Corporation will record a provision for U.S. federal, state
and foreign income taxes on its taxable earnings.
If the Partnership remains a limited partnership, the effect of the change
in taxation after December 31, 1997 will result in the Partnership paying a
corporate income tax at the Partnership level. Therefore, in accordance with the
Partnership Agreement, the Partnership's income will not be allocated for tax
purposes to the partners as is currently being done, and limited partners will
pay taxes only on distributions from the Partnership, if any. Additionally, in
accordance with the Partnership Agreement, the Partnership would no longer make
tax distributions with respect to B Interests. Accordingly, a decision on
whether any other distribution will be made with respect to the B Interests is
solely within the discretion of the General Partner. Based on current
operations, it is likely that cash would be retained in the Partnership to fund
its acquisition program and other partnership requirements. If the Partnership
remains a limited partnership, payment of the Priority Return distribution is
expected to continue to the A Interests in the amount of $.0917 per month to
each A Interest to aggregate $1.10 annually.
Inflation
Inflation in recent years has had a modest impact on the operations of the
Partnership. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Partnership's operating divisions to raise prices is dependent on competitive
market conditions.
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<PAGE>
BUSINESS
General
The Partnership through the Operating Partnership is one of the largest
wholesale distributors of industrial products and services in the United States.
Since January 1987, the business of the Partnership and the Operating
Partnership has been managed by the General Partner, a limited partnership whose
general partner is Lehman/SDI, a Delaware corporation and an indirect, wholly
owned subsidiary of Lehman Brothers Holdings Inc. ("Lehman Holdings"). The
General Partner owns 1% of the Partnership and 1% of the Operating Partnership.
All of the limited partnership interests in the General Partner are beneficially
owned by members of management of the Partnership and the Operating Partnership
(current and former executive officers, the "Management Employees").
The current organization consists of its headquarters operation and three
business segments comprised of twelve operating divisions, as follows:
<TABLE>
<CAPTION>
Principal Year Acquired/
Location Organized
-------- ---------
<S> <C> <C>
SunSource Headquarters Philadelphia, PA 1975
Industrial Services Segment Chicago, IL 1996
Sun Inventory Management Company ("SIMCO") Divisions
- Kar Products Chicago, IL 1977
- A&H Bolt & Nut Company Windsor, Ontario 1989
- SIMCO/Special-T-Metals Lenexa, KS 1992/1981
Sun Technology Services Divisions
- Walter Norris Rosemont, IL 1976
- J.N. Fauver Company Madison Heights, MI 1978
- Warren Fluid Power Denver, CO 1987
- Air-Dreco Houston, TX 1988
- Activation Birmingham, AL 1991
International
- Hydra Power de Mexico Tlalnepantla, C.P., 1992
Mexico
- SIMCO de Mexico Mexico City, Mexico 1992
Hardware Merchandising Segment
- Hillman Cincinnati, OH 1982
Glass Merchandising Segment
- Harding Glass Kansas City, MI 1980
</TABLE>
On December 11, 1996, the Board of Directors of Lehman/SDI, approved
management's plan to restructure its Technology Services divisions and its Glass
Merchandising business. During the fourth quarter of 1996, the Partnership
recorded a $6.0 million restructuring charges related to the integration and
consolidation of its five domestic Technology Services divisions and the
write-off of certain non-performing assets in the Glass Merchandising segment.
The restructuring plan is expected to result in the elimination of 175 employees
in the Technology Services divisions by December 31, 1998, through integration
of its finance, administration, purchasing, warehousing and service center
functions. Redeployment of the Partnership's assets in its Glass business will
focus management's attention on the strategic growth in the retail sector. See
Note 1 of Notes to Consolidated Financial Statements.
In November 1995, the Operating Partnership's Hillman division acquired the
retail hardware business of Curtis
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<PAGE>
Industries for $8.0 million. Annual sales of Curtis' Retail division are
approximately $11 million. The acquisition of Curtis significantly expanded
Hillman's position as a supplier of goods and services to the hardware home
center market where Curtis has concentrated much of its attention. In addition,
the Curtis product line can now be offered to Hillman's present customer base.
This acquisition continues Hillman's long-term growth strategy to become a major
provider of products and services to all segments of the Hardware merchandising
business.
On April 11, 1996, the Partnership's Industrial Services Segment, through
its Warren Fluid Power Division, purchased certain assets of Hydraulic Depot,
Inc. of Reno, Nevada, for an aggregate purchase price of $0.7 million. Annual
sales of Hydraulic Depot, Inc., are approximately $2.5 million. This acquisition
expands Warren's previous geographic markets.
The Operating Partnership sold the Electrical Products Group divisions on
December 5, 1994, the Dorman Products division on January 3, 1995, and the
Downey Glass division on October 27, 1995, (the "divested operations or
divisions sold") as listed below:
Divisions Sold Principal Location
- -------------- ------------------
Electrical Products Group Divisions
- - American Electric Company St. Joseph, MI
- - Philips & Company Columbia, MI
- - Keathley-Patterson Electric Co. N. Little Rock, AR
Dorman Products Division Warsaw, KY
Downey Glass Division Los Angeles, CA
For the year ended December 31, 1996, the Partnership had net sales of
approximately $649 million, with the largest operating division contributing
approximately $164 million.
The Partnership's business strategy has been to identify and develop
specific industrial distribution markets. However, the Partnership's current
strategic plan seeks to increase its emphasis on sales of high gross-margin
products by providing its customers with value added services, such as
engineering design services through its Sun Technology Services divisions and
inventory management and integrated supply services primarily through its SIMCO
divisions. In addition, the Partnership has opened new service centers for
repair of fluid power equipment and seeks to expand this service outside its
core geography and across Canada. The Partnership also continues to enhance its
retail service offerings in the glass segment and broaden its retail
merchandising of hardware related products.
Presidents of the Partnership's operating divisions exercise broad
discretion in the conduct of their businesses, including responsibility for the
management of their suppliers, customers and employees. Strong formal and
informal planning and monitoring functions are performed by the General Partner,
and the individual presidents of operating units are evaluated against the
financial and non-financial goals established jointly each year with the General
Partner. A substantial portion of each president's compensation is tied to the
performance of his division against its annual plan. Also, certain presidents
can earn substantial deferred compensation for maintaining the results of their
operations in the upper quartile within the industrial distribution industry.
Management believes that much of the Partnership's prior success has been the
result of fostering and perpetuating the entrepreneurial drive of operating
management.
The Partnership evaluates on an ongoing basis the performance and prospects
of each of its operating divisions in light of the Partnership's overall
business strategy.
Acquisition Strategy
Since the organization of its predecessor in 1975, the business of the
Partnership has grown primarily through acquisitions of existing distribution
companies. The acquisition strategy has expanded the Partnership's operations,
both geographically and in the number and type of products offered. The
Partnership evaluates companies that have developed attractive product/market
niches and have demonstrated their ability to achieve high returns on invested
capital. The Partnership looks for companies with strong management capabilities
and stable growth patterns. Prior to making certain acquisitions, an extensive
operational review is performed by an external consulting firm. Prior to most
acquisitions, certain agreed upon procedures are performed by internal
and external auditors.
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<PAGE>
In accordance with the terms of its credit agreements, the Partnership was not
permitted to make acquisitions in 1994. Acquisition spending amounted to $8.0
million and $0.7 million in 1995 and 1996, respectively. See Notes 5, 8 and 9 of
Notes to Consolidated Financial Statements.
As the result of an analysis of strategic alternatives by the Partnership, the
Partnership sold the non-strategic businesses described above in 1994 and 1995.
Through the sale, the Partnership strengthened its balance sheet and positioned
itself to resume its acquisition program by focusing on businesses which fit its
current strategic plan. The Partnership has authorized spending of up to $15.0
million per year for acquisitions in accordance with the terms of its credit
agreements.
Products and Services
Excluding the divested operations discussed previously, the Partnership
provides distribution and value-added services related to over 1,300 product
lines. Such value-added services are typically provided to the Partnership's
customers on a non-fee basis and are an integral component of the Partnership's
marketing strategy. These products and services are provided in three main
business segments: (1) industrial services which consist of inventory
management, engineering and integrated supply services to industrial businesses
through sales of products such as fasteners (nuts, bolts, screws, etc.),
hydraulic, pneumatic and electronic systems and parts; (2) retail merchandising
services through sales of fasteners and related products to hardware and home
center retail stores; and (3) retail glass services consisting of installation
and repair through sales of glass products such as large sheet glass, auto
glass, insulated glass, mirrors and specialty glass. The average single sale
during the year ended December 31, 1996, was approximately $297.
Inasmuch as the Partnership is principally providing distribution and
related services, most of the products sold are manufactured by others. However,
several divisions sell a majority of their products under their own labels. In
some cases, most notably through its Technology Services divisions, the
Partnership assembles products or designs systems to the specifications of the
end-users and performs related product repairs. Through its Glass Merchandising
segment, the Partnership produces insulated glass units according to customer
specifications. In addition, several of the products which the Partnership
distributes are purchased by the Partnership in bulk and subsequently repackaged
in small quantities.
The Partnership regularly uses a large number of suppliers and has
long-term relationships with many of them. Most items which the Partnership
distributes are purchased from several sources, and the Partnership believes
that the loss of any single supplier would not significantly affect the
operations of the Partnership viewed as a whole. No single supplier accounted
for more than 5% of the Partnership's purchases for the year ended December 31,
1996.
The following table shows the percentages of consolidated net sales
reported for the years ended December 31, 1996, 1995 and 1994 derived from the
Partnership's current business segments, excluding divisions sold:
Percentage of Consolidated Net Sales for
Year Ended December 31,
----------------------------------------
Business Segment 1996 1995 1994
- ---------------- ---- ---- ----
Industrial Services
Technology Services divisions 46.1% 47.6% 46.6%
SIMCO divisions 24.1% 23.0% 22.9%
----- ----- -----
Total Industrial Services 70.2% 70.6% 69.5%
Hardware Merchandising 15.9% 14.1% 13.1%
Glass Merchandising 13.9% 15.3% 17.4%
----- ----- -----
100.0% 100.0% 100.0%
Marketing
While the Partnership sells across three main business segments (industrial
services, hardware merchandising and glass
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<PAGE>
merchandising), a substantial portion of its sales are industrially based, and
sales performance is tied closely to the overall performance of the
non-defense-goods producing sector of Gross Domestic Product in the United
States. However, risks and economic changes in the marketplace demand a
customer-based focus on value-added services which vary by business segment. The
principal markets for the Partnership's products and services by business
segment, as determined by management are as follows:
Maintenance and Repair Markets and Original Equipment Manufacturers
Customers in this market are served by the divisions in the Industrial
Services segment. These customers include diverse industrial plants and
commercial establishments as well as producers of automotive equipment,
farm equipment, machine tools and a broad range of other equipment.
Hardware Merchandising
This market is primarily comprised of retail hardware stores, home service
centers, and lumberyards seeking merchandising services for hardware
related products.
Glass Merchandising
This market is primarily comprised of individuals seeking automotive and
residential glass replacement as well as contractors seeking glazing
materials and services.
The Partnership has over 180,000 customers, the largest of which accounted
for less than 5% of net sales for the year ended December 31, 1996. Each
division maintains its own sales force which is compensated for the most part on
a commission basis. The divisions' sales forces vary in size, the largest of
which has approximately 740 sales people.
The Partnership's products and services are sold in all 50 states. While
its Glass Merchandising segment sells in regional markets, the remaining two
segments sell on a national scale. In general, fluid power products and
technology services are sold primarily in the upper Midwest, Southeast,
Southwest, Canada and Mexico; maintenance products and inventory management
services are sold nationwide in the U.S., Canada, and Mexico; retail
merchandising products and services are sold nationally in the U.S. and Mexico;
and retail glass products and services are sold primarily in the West, the
Midwest, the Mid-Atlantic and the Southeast.
Competition
The distribution business is highly competitive, with the principal methods
of competition being quality of service, quality of products, product
availability, credit terms, price and the provision of value-added services such
as engineering design, integrated supply and inventory management. The
Partnership encounters competition from a large number of regional and local
distributors and from several national distributors, some of which have greater
financial resources than the Partnership. The wholesale distribution business is
highly fragmented, with a majority of the wholesale distributors in the United
States being operated as family-owned businesses. The Partnership's competitors
have annual sales of approximately $5 million on the average with approximately
one-half under $2 million. The Partnership believes that its business differs
from that of other large national distributors in that the Partnership carries a
diverse range of product lines and provides significant value-added services,
while most large distributors concentrate on only one or two product groups.
Insurance Arrangements
Under the Partnership's current insurance programs, commercial umbrella
coverage is obtained for catastrophic exposure and aggregate losses in excess of
expected claims. Since October 1991, the Partnership has retained the exposure
on certain expected losses related to workman's compensation, general liability
and automobile. The Partnership also retains the exposure on expected losses
related to health benefits of certain employees. The Partnership believes that
its present insurance is adequate for its businesses. See Note 14 of Notes to
Consolidated Financial Statements.
Employees
As of December 31, 1996, the Partnership, through the Operating
Partnership, employs 3,984 employees, of which 1,675 are sales personnel, 1,308
are employed as warehouse and delivery personnel, and 1,001 hold administrative
positions. The Operating Partnership has collective bargaining agreements with
five unions representing a total of 80 employees. In the opinion of management,
employee relations are good.
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<PAGE>
Backlog
The Partnership's sales backlog excluding divested operations was
$59,531,000 as of December 31, 1996, and $54,935,000 as of December 31, 1995.
Normally, in the distribution business, orders are shipped within a week of
receipt. On average, the Partnership's backlog is less than one month's sales.
Federal Income Tax Considerations
The Revenue Act of 1987 (the "1987 Act") amended the Code with respect to
the tax treatment of publicly traded partnerships, such as the Partnership, and
the passive activity losses and credits attributable thereto. Section 7704 of
the Code provides that publicly traded partnerships generally will be treated as
corporations for tax purposes commencing in tax years beginning after 1987. The
effective date of this amendment was delayed, however, for certain "existing
partnerships," such as the Partnership, until the taxable year beginning after
December 31, 1997, provided that such partnerships do not add any substantial
new line of business before the delayed effective date. The Partnership does not
intend to add any substantial new line of business during the period when it
otherwise qualifies for delayed effectiveness under Section 7704.
Section 469 of the Code provides that, in the case of publicly traded
partnerships that are not treated as corporations under Section 7704, net losses
and credits attributable to an interest in each such partnership shall not be
applied against the partner's other income. Such net losses and credits are
suspended and carried forward to be applied against net income from the
Partnership in succeeding years. Since the commencement of operations, the
Partnership has not incurred a net loss for federal income tax purposes.
However, if the Partnership should incur a net loss for federal income tax
purposes in any subsequent year until taxable years beginning after December 31,
1997, such net losses will be suspended at the limited partner level, carried
forward and netted in a later year or years against the limited partner's share
of the net income of the Partnership, or will be used when the entire investment
is disposed of in a taxable transaction. Similarly, a limited partner's share of
any credits of the Partnership in excess of the tax liability attributable to
his or her interest in the Partnership will be suspended, carried forward and
applied against the tax liability attributable to the Partnership in a
subsequent year or years, or may be used to increase the basis of such
partnership interest when the entire investment is disposed of in a taxable
transaction. Generally, these credits may not be applied against tax liability
attributable to other activities.
Assuming the continued effectiveness of Section 7704 of the Code in its
current form, if the Partnership remains a publicly traded partnership, the
Partnership would be treated as a corporation for tax purposes beginning in
fiscal year 1998. Section 469 would then be inapplicable to the limited
partners' treatment of income or credits attributable to the Partnership. The
income of the Partnership would be taxed to it as a separate entity, and any
losses of the Partnership would not be deductible by limited partners. This tax
at the corporate level would reduce the amount distributable to partners and
cash distributions to limited partners would be taxed at the individual level as
dividends to the extent of earnings and profits. See Part II, Item 5, Market for
Registrant's Partnership Interests and Related Matters - Partnership Tax Status.
The Revenue Reconciliation Act of 1993 (the "1993 Act") amended the Code
with respect to the tax treatment of unrelated business taxable income ("UBTI")
in an effort to allow pension funds and other tax-exempt organizations (such as
individual retirement accounts and charitable organizations) to invest in
publicly traded partnerships. Such entities are subject to federal income tax on
net UBTI in excess of $1,000.
The 1993 Act repeals the rule that automatically treats income from
publicly traded partnerships as gross income that is derived from an unrelated
trade or business. As a result, investments in publicly traded partnerships will
be treated the same as investments in other partnerships for purposes of the
UBTI rules for partnership years beginning on or after January 1, 1994.
Section 708 of the Code, in general, provides for termination of a
partnership if 50 percent or more of the total interest in partnership capital
and profits is sold or exchanged within a twelve-month period. However, the
legislative history to the Technical and Miscellaneous Revenue Act of 1988
indicates that termination of a partnership within the meaning of Section 708
will not cause a partnership to cease to qualify as an "existing partnership"
for purposes of Section 7704. Accordingly, sales or exchanges of Interests in
the Partnership pursuant to trading of the Partnership's Interests on the New
York Stock Exchange will not impair the status of the Partnership as an
"existing partnership" that qualifies for a delayed effective date under Section
7704.
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<PAGE>
Properties
The Partnership currently has approximately 200 warehouse and stocking
facilities located throughout the United States, Canada and Mexico. Most of
these include sales offices. Approximately 16% of these facilities are owned and
the remainder are leased. The Partnership's principal properties are warehouse
facilities used by the Operating Partnership, as follows:
Division Location Description
- -------- -------- -----------
Hillman Cincinnati, Ohio 190,000 sq. ft. (leased)
Harding Glass Denver, Colorado 184,000 sq. ft. (owned)
Kar Products Itasca, Illinois 80,000 sq. ft. (owned)
In the opinion of management, the Partnership's existing facilities are in
good condition.
Legal Proceedings
A civil complaint was filed by Dorman Products of America, Ltd. ("Dorman"),
a subsidiary of R&B, Inc. ("R&B"), against the Operating Partnership, in the
United States District Court for the Eastern District of Pennsylvania on
February 27, 1996, alleging misrepresentation of certain facts by the Operating
Partnership upon which R&B allegedly based their offer to purchase the assets of
the Dorman Products division of the Operating Partnership. The complaint sought
damages of approximately $21 million. The Operating Partnership moved to dismiss
for lack of jurisdiction and the complaint was withdrawn. On April 25, 1996, the
Operating Partnership filed an action against Dorman and R&B in the Court of
Common Pleas of Montgomery County, Pennsylvania alleging breach of contract,
intentional interference with contractual relations and negligence and
requesting a declaratory judgment that the Operating Partnership did not make
any misrepresentations in connection with the sale of the division. Dorman and
R&B have counterclaimed making the same allegations which were made in the
original complaint.
On January 16, 1997, a holder of B Interests filed a purported class action
in the Delaware Court of Chancery seeking to enjoin the Conversion on the terms
proposed as well as an order requiring the defendants to account to the
plaintiff and the class for damages and requiring the General Partner or its
affiliates to hold the consideration received in trust pending a determination
of the amounts properly attributable to the General Partner's interest.
Defendants named in the complaint are the Partnership, the Corporation, the
General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the
directors of Lehman/SDI. The complaint alleges that the terms of the Conversion
unfairly transfer substantial equity to the General Partner to the detriment of
the B Interests and constitute a breach of fiduciary duty. A second complaint
containing substantially identical allegations was filed by a limited partner in
the Delaware Court of Chancery on February 11, 1997. The defendants believe the
complaints are without merit and intend to vigorously defend themselves.
In the opinion of management, the ultimate resolution of these matters will
not have a material effect on the consolidated financial position, operations or
cash flows of the Partnership.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The business of the Partnership and the Operating Partnership is managed by
the General Partner, whose general partner is Lehman/SDI. The directors of
Lehman/SDI, each of whom has served as such since February 1987, except for Mr.
Eliot M. Fried, April 2, 1997who has served since December 1994, Mr. Henri I.
Talerman, who has served since March 1995, and Mr. John P. McDonnell, who has
served since May 1995, are set forth below. The description of the principal
occupation is for the entire five-year period unless otherwise indicated.
<TABLE>
<CAPTION>
Principal Occupation; Five-Year
Name, Age and Address Employment History; Other Directorships
--------------------- ---------------------------------------
<S> <C>
O. Gordon Brewer, Jr.,60 Vice President-Finance, Ikon Office Solutions, formerly Alco
Alco Standard Corp. Standard Corporation (distributor of office and paper products);
P. O. Box 834 Executive Officer, Alco Standard Corporation from 1970 to
Valley Forge, PA 19482 present; Director, Corporate Insurance and Reinsurance Limited.
Norman V. Edmonson, 56 Executive Vice President of the Partnership since December 1994;
2600 One Logan Square Group Vice President of the Partnership from January 1991 to
Philadelphia, PA 19103 December 1994.
Eliot M. Fried, 64 Managing Director, Lehman Brothers Inc.; Director, Axysis
Lehman Brothers Technologies, Inc. from January 1993 to present; Bridgeport
American Express Tower - 17th Floor Machines, Inc.; Energy Ventures, Inc.; Walter Industries, January
World Financial Center 1994 to present.
New York, NY 10285
Arnold S. Hoffman, 61 Senior Managing Director, Legg Mason Wood Walker,
Legg Mason Wood Walker Incorporated Incorporated; Director, Intelligent Electronics Incorporated.
Mellon Bank Center, Suite 1100
1735 Market Street
Philadelphia, PA 19103
Donald T. Marshall, 63 Chairman and Chief Executive Officer of the Partnership.
2600 One Logan Square
Philadelphia, PA 19103
John P. McDonnell, 61 President of the Partnership since December 1994; Group Vice
2600 One Logan Square President of the Partnership from 1987 to December 1994.
Philadelphia, PA 19103
Ernest L. Ransome, III, 70 Chairman, Giles & Ransome, Inc. (distributor of construction
Giles & Ransome equipment).
2975 Galloway Road
Bensalem, PA 19020
Donald A. Scott, 67 Senior Partner, Morgan, Lewis & Bockius LLP; Director, Provident
2000 One Logan Square Mutual Life Insurance Company.
Philadelphia, PA 19103
Henri I. Talerman, 39 Managing Director, Lehman Brothers Inc. from June 1952 to
Lehman Brothers present; Senior V.P., Lehman Brothers prior to 1992; Director,
American Express Tower - 18th Floor McBride plc from May 1993 to present; Financier Gerflor SA,
World Financial Center 1992 to present; Advisory Director, Europe Capital Partners.
New York, NY 10285
</TABLE>
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<PAGE>
All directors hold office until the next annual meeting of the sole
stockholder of Lehman/SDI and until their successors are duly elected and
qualified.
The executive officers of the Partnership and the Operating Partnership
(constituting, except for Mr. Brus, the "Management Employees" referred to
herein), each of whom has served as such for the past five years, except as
noted, are set forth below:
<TABLE>
<CAPTION>
Principal Occupation; Five-Year
Name, Age and Address Employment History; Other
--------------------- -------------------------
Directorships
-------------
<S> <C>
Richard J. Brus, 59 President, Sun Technology Services since 1995; President,
153 W. Valley Avenue Activation Division 1992 to 1995; and Vice President-Sales
& Birmingham, AL 35259 Marketing, Activation Division, prior to 1992.
Harold J. Cornelius, 48 Group Vice President.
Harding Glass Industries
7201 W. 110th Street
Overland Park, KS 66210
Joseph M. Corvino, 42 Vice President-Finance, Chief Financial Officer, Treasurer and
2600 One Logan Square Secretary since December 1995; Vice President and Controller
Philadelphia, PA 19103 prior to December 1995.
Norman V. Edmonson, 56 Executive Vice President since December 1994; Group Vice
2600 One Logan Square President prior to December 1994.
Philadelphia, PA 19103
Max W. Hillman, Jr., 50 Group Vice President.
Hillman Fastener
10590 Hamilton Avenue
Cincinnati, OH 45231
Donald T. Marshall, 63 Chairman and Chief Executive Officer.
2600 One Logan Square
Philadelphia, PA 19103
John P. McDonnell, 61 President and Chief Operating Officer since December 1994;
2600 One Logan Square Group Vice President prior to December 1994.
Philadelphia, PA 19103
</TABLE>
All executive officers hold office at the pleasure of the board of
directors.
Directors and Executive Officers After the Conversion
The directors of the Corporation after the Conversion will be the same as
the existing directors of Lehman/SDI. Pursuant to the terms of the Stockholders
Agreement, the nine directors will consist of three directors nominated by
management, two directors nominated by Lehman/SDI as long as it (together with
its affiliates) holds 20% or more of the outstanding Common Stock or one member
if it (together with its affiliates) holds between 10% and 20% of the
outstanding Common Stock, and four independent directors. The officers of the
Corporation will be: Donald T. Marshall, Chairman Officer of the Corporation;
John P. McDonnell, President and Chief Operating Officer; Norman V. Edmonson,
Executive Vice President and Joseph M. Corvino, Vice President - Finance, Chief
Financial Officer, Treasurer and Secretary.
Compensation
The following table sets forth all cash compensation paid and accrued by
the Operating Partnership for services rendered during the three years ended
December 31, 1996, by each of the Chief Executive Officer and the four other
most highly compensated executive officers of the Partnership and the Operating
Partnership whose remuneration exceeded $100,000.
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<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Name and Principal Position Annual Compensation
- --------------------------- -------------------
All Other
Year Salary Bonus Compensation
---- ------ ----- --------------
<S> <C> <C> <C> <C>
Donald T. Marshall 1996 $452,509 $45,230 $11,749 (2)
Chairman and Chief Executive Officer 1995 488,688 4,347 10,234 (2)
1994 454,043 221,144 8,185 (2)
John P. McDonnell 1996 358,105 22,692 3,273 (2)
President and Chief Operating Officer 1995 374,451 32,812 2,500 (2)
1994 295,354 96,915 2,135 (2)
Norman V. Edmonson 1996 308,125 105,600 1,923 (2)
Executive Vice President 1995 333,849 82,200 1,638 (2)
1994 300,477 94,400 1,418 (2)
Harold J. Cornelius 1996 280,107 7,101 19,000 (3)
Group Vice President 1995 291,609 27,400 --
1994 275,375 102,729 90,128 (2)
Max W. Hillman, Jr. 1996 269,816 -- 29,000 (3)
Group Vice President 1995 268,920 36,250 50,186 (3)
1994 294,793 104,898 107,632 (3)
</TABLE>
- ----------------
(1) Represents Earned Bonus for services rendered in each year. Does not
include the management fee payable to the General Partner. See "Management
Fee" under Item 13.
(2) Represents primarily term life insurance premiums paid by the Operating
Partnership for the benefit of the named executive officer.
(3) Represents deferred compensation earned and awarded for services rendered
in the year which unconditionally vests at the rate of 20% per year over
the five-year period from the date earned.
The above table excludes deferred compensation awards earned through 1996
by the executive officers in accordance with the Partnership's Long-Term
Performance Share Plan since the awards earned are subject to reduction or
forfeiture through 1998 if performance goals are not achieved. The value of the
awards credited as of December 31, 1996, for each executive officer are as
follows: Donald T. Marshall, $1,126,486; Norman V. Edmonson, $740,261; John P.
McDonnell, $354,036; Harold J.
Cornelius, $354,036; and Max W. Hillman, $354,036.
Directors of Lehman/SDI who are not employees of the Partnership or Lehman
Brothers Inc. are paid an annual fee of $14,000 and a fee of $1,000 for each
board or committee meeting attended. Such fees are paid by the General Partner.
Deferred Compensation Plans
The Partnership's deferred compensation plans are described in Note 11 to
Consolidated Financial Statements. Completion of the Conversion will result in
100% vesting for all participant balances as of the date of the Conversion. The
present intention is to continue operation of the plans following the
Conversion.
The Partnership's Long-Term Performance Share Plan (the "Share Plan") is
based upon annual and cumulative performance for a five year term ending
December 31, 1998. If the Conversion is approved, the participants will be
entitled to 100% vesting of the awards earned through December 31, 1996 in
accordance with the change of control provision of the Share Plan. See "--
Change in Control Arrangements." If the conversion is approved, the Share Plan
will continue to run
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<PAGE>
from January 1, 1997 to December 31, 1998, to complete the Share Plan's original
five-year performance cycle.
Change in Control Arrangements
The executive officers named above were participants in the Operating
Partnership's Deferred Compensation Plans (the "Plans") in certain years. Upon a
change in control, the Plans provide for payment of all vested and non-vested
amounts including accrued interest. The change in control provision is triggered
upon a sale of all of the Operating Partnership's business, a change in the
General Partner, or a change, other than due to death or retirement, in a
majority of the directors of Lehman/SDI during any one-year period. See Note 11
of Notes to Consolidated Financial Statements. As a result of the proposed
conversion, the change of control provisions of the Plans will be triggered.
Participants will be offered an opportunity to defer receipt of amounts
available for payment under a new deferred compensation plan, the "Deferred
Compensation Plan for Key Employees of SDI Operating Partners, L.P.," effective
December 1, 1996. The Partnership estimates that approximately $9.2 million of
deferred compensation balances will become payable as a result of the change of
control provision and eligible for elective deferral. Management expects
approximately $6.5 million of these balances eligible for payment to be deferred
and $2.7 million to be paid. Payments to current and former executive officers
are expected to aggregate about $0.1 million. Messrs. Marshall, McDonnell and
Edmonson have waived their rights to accelerate payments.
Management Fee
The Operating Partnership pays the Management Fee to the General Partner.
The Management Fee, payable annually on March 31 (with respect to the preceding
year), is equal to 3% of the aggregate initial capital investment of
$110,995,730 by the limited partners. The amount of the Management Fee paid on
March 31, 1997, was $3,329,872. The amount of management fee paid in 1996 with
respect to 1995 was $3,329,872. See footnotes (1) and (2) to the table under
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" for ownership
of the General Partner. The interests of Lehman/SDI and the Management
Employees, in the fee for 1996 were as follows: Lehman/SDI, $1,791,471; Harold
J. Cornelius, $92,304; Joseph M. Corvino, $30,768; Norman V. Edmonson, $384,600;
Max W. Hillman, Jr., $92,304; Donald T. Marshall, $599,977; and John P.
McDonnell, $184,608.
Certain Business Relations
Mr. Scott is a partner in Morgan, Lewis & Bockius LLP, a law firm that has
performed services for the Partnership during the last fiscal year.
Messrs. Fried and Talerman are officers of Lehman Brothers Inc., which
performed investment banking services for the Partnership during 1995 and 1996.
Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which
performed investment banking services for the Partnership during 1996.
The Partnership and the Corporation propose to have these firms perform
similar services as needed during the current fiscal year.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
Since the Partnership is managed by its General Partner and has no Board of
Directors, there are no "voting securities" of the Partnership outstanding
within the meaning of Item 403(a) of Regulation S-K and Rule 12b-2 under the
Securities Exchange Act of 1934. As set forth above, the general partner of the
General Partner is Lehman/SDI, an indirect, wholly owned subsidiary of Lehman
Brothers Holdings Inc., American Express Tower, World Financial Center, New
York, NY 10285-1800.
Security Ownership of Certain Beneficial Owners and Management
The following table shows for (i) each director, (ii) executive officer
named in the Summary Compensation Table, (iii) certain persons known to the
Company to own beneficially more than 5% of the outstanding interests and (iv)
for all officers and directors as a group, the beneficial ownership of A and B
Interests of the Partnership as of December 1, 1996. None of the amounts equals
more than 1% of the outstanding A Interests.
<TABLE>
<CAPTION>
Ownership Before Conversion Ownership After Conversion
--------------------------- --------------------------
Percent of
Name of Beneficial A Interest B Interest Percent of B Shares of Common Stock
------------------ ---------- ----------- ------------ --------- ------------
Owner Amount(1) Amount(1) Interest Held Common Stock Held
----- --------- --------- ------------- ------------ ----
<S> <C> <C> <C> <C> <C>
Lehman LTD I, Inc. -- 108,554 --(5) 27,138 --(5)
Lehman Brothers
Capital Partners I -- 5,788,124 26.7% 1,447,031 22.5%
Lehman/SDI, Inc. -- -- -- 538,000 8.4%
O. Gordon Brewer, Jr. 3,000 1,000 --(5) 250 --(5)
Harold J. Cornelius 200 200 --(5) 27,770 --(5)
Joseph M. Corvino 1,415 105,546 --(5) 35,626 --(5)
Richard J. Brus 1,186 2,500 --(5) 625 --(5)
Norman V. Edmonson 4,900 1,300,916 6.0% 440,729 6.9%
Eliot M. Fried --(2) --(2) --(2) -- --(6)
Max W. Hillman, Jr. 4,000 10,000 --(5) 30,220 --(5)
Arnold S. Hoffman 13,000(2)(3) 13,000(2)(3) --(5) 3,250 --(6)
Donald T. Marshall 30,311 2,075,232 9.6% 698,988 10.9%
John P. McDonnell 7,711 623,071 2.9%(5) 211,208 3.3%
Ernest L. Ransome, III 5,000(4) 5,000 -- 1,250 --(5)
Donald A. Scott 9,000 9,000 -- 2,250 --(5)
Henri I. Talerman --(2) -- -- -- --(5)
All directors and 79,723 4,145,465 19.1% 1,452,166 22.6%
executive officers as a
group (13 persons)
</TABLE>
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<PAGE>
- ----------------------
(1) In addition to the Interests listed, the Management Employees beneficially
own limited partnership interests in the General Partner (the "GP Interests").
The GP Interests held by the Management Employees collectively represent 46.2%
of the limited partnership interests in the General Partner. The General Partner
owns 1% of the Partnership and the Operating Partnership. The table does not
include the GP Interests owned by the Management Employees.
(2) Does not include (i) 108,554 B Interests owned by Lehman LTD I, Inc., or
(ii) 5,788,124 B Interests owned by Lehman Brothers Capital Partners I ("Capital
Partners"), affiliates of Lehman Brothers Inc. Messrs. Hoffman and Fried, as
limited partners of Capital Partners, derive economic benefit of approximately
1% from interests held by Capital Partners. An affiliate of Lehman Brothers
Inc., of which Messrs. Fried and Talerman are officers, also owns all of the
capital stock of Lehman/SDI, which is the general partner of the General Partner
and holds the remaining interest in the General Partner not owned by the
Management Employees.
(3) 3,000 of these A and B Interests are owned by Hoffman Investment Co., of
which Mr. Hoffman is Managing Partner. In addition, Mr. Hoffman's children own
4,000 A and B Interests with respect to which he disclaims beneficial ownership.
(4) 2,500 of these A and B Interests are held in a trust, of which Mr. Ransome
is a trustee.
(5) Represents less than 1% of the outstanding B Interests.
(6) Does not include 1,447,031 shares of Common Stock expected to be owned by
Lehman Brothers Capital Partners I ("Capital Partners") after the Conversion.
Messrs. Hoffman and Fried, as limited partners of Capital Partners, derive
economic benefit of approximately 1% from interests held by Capital Partners.
- -----------------------
SUNSOURCE CAPITAL TRUST
The Trust is a statutory business trust that was formed under the Business
Trust Act pursuant to a declaration of trust (as amended and restated, the
"Declaration") among the Trustees and the Corporation and the filing of a
certificate of trust with the Secretary of State of Delaware. The Declaration is
qualified under the Trust Indenture Act. Upon issuance of the Trust Preferred
Securities, the holders thereof will own all of the issued and outstanding Trust
Preferred Securities. The Corporation has agreed to acquire Trust Common
Securities in an amount equal to at least 3% of the total capital of the Trust
and will own, directly or indirectly, all of the issued and outstanding Trust
Common Securities. The Trust Preferred Securities and the Trust Common
Securities will rank pari passu with each other and will have equivalent terms;
provided that (i) if an Event of Default under the Declaration occurs and is
continuing, the holders of Trust Preferred Securities will have a priority over
holders of the Trust Common Securities with respect to payments in respect of
distributions and payments upon liquidation, redemption or otherwise and (ii)
holders of Trust Common Securities have the exclusive right (subject to the
terms of the Declaration) to appoint, remove or replace Trustees and to increase
or decrease the number of Trustees, subject to the right of holders of Trust
Preferred Securities to appoint a Special Regular Trustee upon the occurrence of
an Appointment Event.
The number of Trustees of the Trust shall initially be five. Three of the
Trustees will be the Regular Trustees. The fourth trustee is Bank of New York
which is unaffiliated with the Corporation and which will serve as the Property
Trustee and act as the indenture trustee for purposes of the Trust Indenture
Act. The fifth trustee is an affiliate of Bank of New York and will serve as the
Delaware Trustee. Pursuant to the Declaration, legal title to the Junior
Subordinated Debentures will be held by the Property Trustee for the benefit of
the holders of the Trust Securities and the Property Trustee will have the power
to exercise all rights, powers and privileges under the Indenture with respect
to the Junior Subordinated Debentures. In addition, the Property Trustee will
maintain exclusive control of the Property Account to hold all payments in
respect of the Junior Subordinated Debentures for the benefit of the holders of
Trust Securities. The Property Trustee will promptly make distributions to the
holders of the Trust Securities out of funds from the Property Account. The
Preferred Securities Guarantee is separately qualified under the Trust Indenture
Act and will be held by Bank of New York acting in its capacity as indenture
trustee with respect thereto, for the benefit of the holders of the Trust
Preferred Securities. Subject to the right of holders of Trust Preferred
Securities to appoint a Special Regular Trustee upon the occurrence of an
Appointment Event, the Corporation, as the direct or indirect owner of all of
the Trust Common Securities, has the exclusive right (subject to the terms of
the Declaration) to appoint, remove or replace Trustees and to increase or
decrease the number of Trustees, provided that the number of Trustees shall at
least be three, a majority of which shall Regular Trustees.
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<PAGE>
The Trust exists for the purpose of (a) issuing (i) its Trust Preferred
Securities to the Corporation in consideration of the deposit by the Corporation
of Junior Subordinated Debentures in the Trust as trust assets, and (ii) its
Trust Common Securities to the Corporation in exchange for cash and investing
the proceeds thereof in an equivalent amount of Junior Subordinated Debentures
and (b) engaging in such other activities as are necessary or incidental
thereto. The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Declaration, the Business Trust Act and the Trust Indenture Act.
Under the Declaration, the Trust shall not, and the Trustees shall cause
the Trust not to, engage in any activity other than in connection with the
purposes of the Trust or other than as required or authorized by the
Declaration. In particular, the Trust shall not and the Trustees shall not (a)
invest any proceeds received by the Trust from holding the Junior Subordinated
Debentures but shall promptly distribute from the Property Account all such
proceeds to holders of Trust Securities pursuant to the terms of the Declaration
and of the Trust Securities; (b) acquire any assets other than as expressly
provided in the Declaration; (c) possess Trust property for other than a Trust
purpose; (d) make any loans, other than loans represented by the Junior
Subordinated Debentures; (e) possess any power or otherwise act in such a way as
to vary the Trust assets or the terms of the Trust Securities in any way
whatsoever; (f) issue any securities or other evidences of beneficial ownership
of, or beneficial interests in, the assets of the Trust other than the Trust
Securities; (g) incur any indebtedness for borrowed money or (h)(i) direct the
time, method and place of exercising any trust or power conferred upon the
Indenture Trustee with respect to the Junior Subordinated Debentures or the
Property Trustee with respect to the Trust Preferred Securities, (ii) waive any
past default that is waivable under the Indenture or the Declaration, (iii)
exercise any right to rescind or annul any declaration that the principal of all
of the Junior Subordinated Debentures shall be due and payable or (iv) consent
to any amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures or the Declaration, in each case where such consent
shall be required, unless in the case of this clause (h) the Property Trustee
shall have received an unqualified opinion of nationally recognized independent
tax counsel recognized as expert in such matters to the effect that such action
will not cause the Trust to be classified for the United States federal income
tax purposes as an association taxable as a corporation or a partnership and
that the Trust will continue to be classified as a grantor trust for United
States federal income tax purposes.
The books and records of the Trust will be maintained at the principal
office of the Trust and will be open for inspection by a holder of Trust
Preferred Securities or the holder's representative for any purpose reasonably
related to the holder's interest in the Trust during normal business hours. Each
holder of Trust Preferred Securities will be furnished annually with unaudited
financial statements of the Trust as soon as available after the end of the
Trust's fiscal year.
Except as provided below or under the Business Trust Act and the Trust
Indenture Act, holders of Trust Preferred Securities have no voting rights. If
(i) distributions on the Trust Preferred Securities are in arrears for 18
consecutive months or (ii) an Event of Default under the Declaration occurs and
is continuing, holders of Trust Preferred Securities shall have the right to
vote, as a single class, for the appointment of a Special Regular Trustee who
need not be an employee or officer of or otherwise affiliated with the
Corporation. The Special Regular Trustee shall have the same rights, powers and
privileges under the Declaration as the Regular Trustees. See "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Voting Rights."
The Property Trustee, for the benefit of the holders of the Trust
Securities, is authorized under the Declaration to exercise all rights under the
Indenture with respect to the Junior Subordinated Debentures to enforce the
Corporation's obligations under the Junior Subordinated Debentures upon the
occurrence of an Indenture Event of Default. The Property Trustee shall also be
authorized to enforce the rights of holders of Trust Preferred Securities under
the Preferred Securities Guarantee. If the Trust's failure to make distributions
on the Trust Preferred Securities is a consequence of the Corporation's exercise
of its right to extend the interest payment period for the Junior Subordinated
Debentures, the Property Trustee will have no right to enforce the payment of
distributions on the Trust Preferred Securities until an Event of Default shall
have occurred. Holders of at least a majority in liquidation amount of the Trust
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and the Preferred Securities
Guarantee. If the Property Trustee fails to enforce its rights under the
Indenture or fails to enforce the Preferred Securities Guarantee, any holder of
Trust Preferred Securities may, after a period of 30 days has elapsed from such
holder's written request to the Property Trustee to enforce such rights or the
Preferred Securities Guarantee, to the fullest extent permitted by law,
institute a legal proceeding against the Corporation to enforce such rights or
the Preferred Securities Guarantee, as the case may be, See "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Voting Rights."
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<PAGE>
If an Indenture Event of Default occurs and is continuing with respect to
Junior Subordinated Debentures, an Event of Default under the Declaration will
occur and be continuing with respect to the Trust Securities. In such event, the
Declaration provides that the holder of Trust Common Securities will be deemed
to have waived any such Event of Default with respect to the Trust Common
Securities until all Events of Default with respect to the Trust Preferred
Securities have been so cured or waived, the Property Trustee will be deemed to
be acting solely on behalf of the holders of the Trust Preferred Securities and
only the holders of the Trust Preferred Securities will have the right to direct
the Property Trustee with respect to certain matters under the Declaration and
consequently under the Indenture. In the event that any Event of Default with
respect to the Trust Preferred Securities is waived by the holders of the Trust
Preferred Securities as provided in the Declaration, the holders of Trust Common
Securities pursuant to the Declaration have agreed that such waiver also
constitutes a waiver of such Event of Default with respect to the Trust Common
Securities for all purposes under the Declaration without any further act, vote
or consent of the holders of the Trust Common Securities. See "DESCRIPTION OF
TRUST PREFERRED SECURITIES."
The Declaration provides that the Trustees may treat the person in whose
name a Trust Preferred Security is registered on the books and records of the
Trust as the sole holder thereof and of the Trust Preferred Securities
represented thereby for purposes of receiving distributions and for all other
purposes and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such certificate or in the Trust Preferred
Securities represented thereby on the part of any person, whether or not the
Trust shall have actual or other notice thereof. Trust Preferred Securities will
be issued in fully registered form. Investors may elect to hold their Trust
Preferred Securities directly or, subject to the rules and procedures of The
Depository Trust Company ("DTC") described under "DESCRIPTION OF TRUST PREFERRED
SECURITIES -- Book-Entry; Delivery and Form," hold interests in a global
certificate registered on the books and records of the Trust in the name of DTC
or its nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal
with DTC (or any successor depositary) for all purposes,
including the payment of distributions and receiving approvals,
votes or consents under the Declaration, and except as set forth
in the Declaration with respect to the Property Trustee, shall
have no obligation to persons owning Trust Preferred Securities
("Beneficial Owners") registered in the name of and held by DTC
or its nominee; and
(ii) the rights of Beneficial Owners shall be exercised
only through DTC (or any successor depositary) and shall be
limited to those established by law and agreements between such
Owners and DTC and/or its participants. See "DESCRIPTION OF TRUST
PREFERRED SECURITIES -- Book-Entry; Delivery and Form." With
respect to Trust Preferred Securities registered in the name of
and held by DTC or its nominee, all notices and other
communications required under the Declaration shall be given to,
and all distributions on such Trust Preferred Securities shall be
given or made to, DTC (or its successor).
In the Declaration, the Corporation has agreed to pay for all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust, including the fees and expenses of the Trustees and any
taxes and all costs and expenses with respect thereto, to which the Trust may
become subject, except for United States withholding taxes. The foregoing
obligations of the Corporation under the Declaration are for the benefit of, and
shall be enforceable by, any person to whom any such debts, obligations, costs,
expenses and taxes are owed (a "Creditor") whether or not such Creditor has
received notice hereof. Any such Creditor may enforce such obligations of the
Corporation directly against the Corporation and the Corporation has irrevocably
waived any right or remedy to require that any such Creditor take any action
against the Trust or any other person before proceeding against the Corporation.
The Corporation has agreed in the Declaration to execute such additional
agreements as may be necessary or desirable in order to give full effect to the
foregoing.
THE FOREGOING SUMMARY OF CERTAIN PROVISIONS OF THE DECLARATION CONTAINS
ALL MATERIAL ELEMENTS OF THE DECLARATION BUT DOES NOT PURPORT TO BE COMPLETE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION WHICH HAS BEEN
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROXY
STATEMENT/PROSPECTUS IS A PART.
The business address of the Trust is 2600 One Logan Square, Philadelphia,
PA 19103, telephone number (215) 665-3650.
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<PAGE>
DESCRIPTION OF TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be issued pursuant to the terms of the
Declaration which is qualified under the Trust Indenture Act. The Property
Trustee, Bank of New York, but not the other Trustees of the Trust, will act as
the indenture trustee for purposes of the Trust Indenture Act. The terms of the
Trust Preferred Securities and the Declaration include those stated in the
Declaration and those made part of the Declaration by the Trust Indenture Act.
The summary of material terms and provisions of the Trust Preferred Securities
and the Declaration set forth below does not purport to be complete and is
subject to and qualified in its entirety by reference to the Declaration, which
has been filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part, the Business Trust Act and the Trust
Indenture Act.
General
The Declaration authorizes the Trust to issue the Trust Preferred
Securities, which represent preferred undivided beneficial interests in the
assets of the Trust, and the Trust Common Securities, which represent common
undivided beneficial interests in the assets of the Trust. All of the Trust
Common Securities will be owned, directly or indirectly, by the Corporation. The
Trust Common Securities and the Trust Preferred Securities will have equivalent
terms except that (i) if an Event of Default under the Declaration occurs and is
continuing, the rights of the holders of the Trust Common Securities to payment
in respect of periodic distributions and payments upon liquidation, redemption
or otherwise are subordinated to the rights of the holders of the Trust
Preferred Securities and (ii) holders of Trust Common Securities have the
exclusive right (subject to the terms of the Declaration) to appoint, remove or
replace Trustees and to increase or decrease the number of Trustees, subject to
the right of holders of Trust Preferred Securities to appoint a Special Regular
Trustee upon the occurrence of an Appointment Event. The Declaration does not
permit the issuance by the Trust of any securities or other evidences of
beneficial ownership of, or beneficial interests in, the assets of the Trust
other than the Trust Preferred Securities and the Trust Common Securities, the
incurrence of any indebtedness for borrowed money by the Trust or the making of
any investment other than in the Junior Subordinated Debentures. Pursuant to the
Declaration, the Property Trustee will own and hold the Junior Subordinated
Debentures as trust assets for the benefit of the holders of the Trust Preferred
Securities and the Trust Common Securities. The payment of distributions out of
moneys held by the Property Trustee and payments on redemption of the Trust
Preferred Securities or liquidation of the Trust are guaranteed by the
Corporation on a subordinated basis as and to the extent described under
"DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Property Trustee will hold
the Preferred Securities Guarantee for the benefit of holders of the Trust
Preferred Securities. The Preferred Securities Guarantee is a full and
unconditional guarantee from the time of issuance of the Trust Preferred
Securities, but the Preferred Securities Guarantee covers distributions and
other payments on the Trust Preferred Securities only if and to the extent that
the Corporation has made a payment to the Property Trustee of interest or
principal on the Junior Subordinated Debentures deposited in the Trust as trust
assets. See "-Voting Rights."
Distributions
Distributions on the Trust Preferred Securities will be fixed at a rate
per annum of $2.90 (11.6% of the stated liquidation amount of $25) per Trust
Preferred Security. Distributions in arrears will compound monthly thereon at
the rate per annum of 11.6% thereof. The term "distributions" as used herein
includes any such interest payable unless otherwise stated. The amount of
distributions payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months and for any period shorter than a full monthly
period for which distributions are computed, the amount of the distribution
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month.
Distributions on the Trust Preferred Securities will be cumulative, will
accrue from the first day following the Effective Time (the "Accrual Date") and,
except as otherwise described below, will be payable monthly in arrears, on the
last day of each calendar month of each year, commencing on April 30, 1997, but
only if, and to the extent that, interest payments are made in respect of Junior
Subordinated Debentures held by the Property Trustee.
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation has the right
under the Indenture to defer payments of interest on the Junior Subordinated
Debentures by extending the interest payment period from time to time on the
Junior Subordinated Debentures for a period not exceeding 60 consecutive months
and, as a consequence, distributions on the Trust Preferred Securities would not
be made (but would continue to accrue with interest thereon at the rate of 11.6%
per annum, compounded monthly) by the Trust during any such Extension Period. If
the Corporation exercises the right to extend an interest payment period, the
Corporation may not declare or pay dividends on, or redeem, purchase, acquire or
make a distribution or liquidation payment with respect to, any of its Common
Stock or Preferred Stock during such Extension Period. Prior to the termination
of any such Extension Period, the Corporation may further extend such Extension
Period; provided that such Extension Period together with all such previous and
further extensions thereof may not exceed 60 consecutive months. Upon the
termination of any Extension Period and the payment of all amounts then due, the
Corporation may commence a new Extension Period, subject to the above
requirements. The Corporation may also prepay at any time all or any portion of
the interest accrued during an Extension Period. Consequently, there could be
multiple Extension Periods of varying lengths (up to five Extension Periods of
60 consecutive monthly interest periods each or more numerous shorter Extension
Periods) throughout the term of the Junior Subordinated Debentures. See "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Additional Risks
Applicable to Holders of A Interests," "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Interest" and "-- Option to Extend Interest Payment Period."
Payments of accrued distributions will be payable to holders of Trust Preferred
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<PAGE>
Securities as they appear on the books and records of the Trust on the first
record date after the end of an Extension Period.
Distributions on the Trust Preferred Securities must be paid on the dates
payable to the extent that the Property Trustee has cash on hand in the Property
Account to permit such payment. The funds available for distribution to the
holders of the Trust Preferred Securities will be limited to payments received
by the Property Trustee in respect of the Junior Subordinated Debentures that
are deposited in the Trust as trust assets. See "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES." If the Corporation does not make interest payments on
the Junior Subordinated Debentures, the Property Trustee will not make
distributions on the Trust Preferred Securities. Under the Declaration, if and
to the extent the Corporation does make interest payments on the Junior
Subordinated Debentures deposited in the Trust as trust assets, the Property
Trustee is obligated to make distributions on the Trust Securities on a Pro Rata
Basis. The payment of distributions on the Trust Preferred Securities is
guaranteed by the Corporation on a subordinated basis as and to the extent set
forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Preferred
Securities Guarantee is a full and unconditional guarantee from the time of
issuance of the Trust Preferred Securities but the Preferred Securities
Guarantee covers distributions and other payments on the Trust Preferred
Securities only if and to the extent that the Corporation has made a payment to
the Property Trustee of interest or principal on the Junior Subordinated
Debentures deposited in the Trust as trust assets. As used in this Proxy
Statement/Prospectus the term "Pro Rata Basis" shall mean pro rata to each
holder of Trust Securities according to the aggregate liquidation amount of the
Trust Securities held by the relevant holder in relation to the aggregate
liquidation amount of all Trust Securities outstanding unless, in relation to a
payment, an Event of Default under the Declaration has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Trust Preferred Securities pro rata according to the
aggregate liquidation amount of the Trust Preferred Securities held by the
relevant holder in relation to the aggregate liquidation amount of all the Trust
Preferred Securities outstanding, and only after satisfaction of all amounts
owed to the holders of the Trust Preferred Securities, to each holder of Trust
Common Securities pro rata according to the aggregate liquidation amount of the
Trust Common Securities held by the relevant holder in relation to the aggregate
liquidation amount of all the Trust Common Securities outstanding.
Distributions on the Trust Preferred Securities will be made to the
holders thereof as they appear on the books and records of the Trust on the
relevant record dates, which will be the first business day of the month of the
relevant distribution payment date. The Declaration provides that the payment
dates or record dates for the Trust Preferred Securities shall be the same as
the payment dates and record dates for the Junior Subordinated Debentures.
Distributions payable on any Trust Preferred Securities that are not punctually
paid on any distribution date as a result of the Corporation having failed to
make the corresponding interest payment on the Junior Subordinated Debentures
will forthwith cease to be payable to the person in whose name such Trust
Preferred Security is registered on the relevant record date, and such defaulted
distribution will instead be payable to the person in whose name such Trust
Preferred Security is registered on the special record date established by the
Regular Trustees, which record date shall correspond to the special record date
or other specified date determined in accordance with the Indenture; provided,
however, that distributions shall not be considered payable on any distribution
payment date falling within an Extension Period unless the Corporation has
elected to make a full or partial payment of interest accrued on the Junior
Subordinated Debentures on such distribution payment date. Distributions on the
Trust Preferred Securities will be paid through the Property Trustee who will
hold amounts received in respect of the Junior Subordinated Debentures in the
Property Account for the benefit of the holders of the Preferred and Trust
Common Securities. All distributions paid with respect to the Trust Securities
shall be paid on a Pro Rata Basis to the holders thereof entitled thereto. If
any date on which distributions are to be made on the Trust Preferred Securities
is not a Business Day, then payment of the distribution to be made on such date
will be made on the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay) except that, if such
Business Day is in the next succeeding calendar year, such payment shall be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on such date.
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Mandatory Redemption
Upon the repayment of the Junior Subordinated Debentures, whether at
maturity, upon redemption or otherwise, the proceeds from such repayment or
payment will be promptly applied to redeem Trust Preferred Securities and Trust
Common Securities having an aggregate liquidation amount equal to the Junior
Subordinated Debentures so repaid, upon not less than 30 nor more than 60 days'
notice, at the Redemption Price. The Trust Common Securities will be entitled to
be redeemed on a Pro Rata Basis with the Trust Preferred Securities, except that
if an Event of Default under the Declaration has occurred and is continuing, the
Trust Preferred Securities will have a priority over the Trust Common Securities
with respect to payment of the Redemption Price. Subject to the foregoing, if
fewer than all outstanding Trust Preferred Securities and Trust Common
Securities are to be redeemed, the Trust Preferred Securities and Trust Common
Securities will be redeemed on a Pro Rata Basis.
Special Event Redemption or Distribution
If, at any time, a Tax Event or an Investment Company Event (each as
defined herein, and each a "Special Event") shall occur and be continuing, the
Trust shall, unless the Junior Subordinated Debentures are redeemed in the
circumstances described below, be dissolved with the result that, after
satisfaction of creditors of the Trust, Junior Subordinated Debentures with an
aggregate principal amount equal to the aggregate stated liquidation amount of
the Trust Preferred Securities and the Trust Common Securities would be
distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities
and the Trust Common Securities in liquidation of such holders' interests in the
Trust, within 90 days following the occurrence of such Special Event; provided,
however, that in the case of the occurrence of a Tax Event, as a condition of
such dissolution and distribution, the Regular Trustees shall have received an
opinion of nationally recognized independent tax counsel experienced in such
matters (a "No Recognition Opinion"), which opinion may rely on any then
applicable published revenue rulings of the Internal Revenue Service, to the
effect that the holders of the Trust Preferred Securities will not recognize any
gain or loss for United States federal income tax purposes as a result of such
dissolution and distribution of Junior Subordinated Debentures; and, provided,
further, that, if at the time there is available to the Trust the opportunity to
eliminate, within such 90-day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure, which has no adverse effect on the Trust
or the Corporation or the holders of the Trust Preferred Securities, the Trust
will pursue such measure in lieu of dissolution. Furthermore, if in the case of
the occurrence of a Tax Event, (i) the Regular Trustees have received an opinion
(a "Redemption Tax Opinion") of nationally recognized independent tax counsel
experienced in such matters that, as a result of a Tax Event, there is more than
an insubstantial risk that the Corporation would be precluded from deducting the
interest on the Junior Subordinated Debentures for United States federal income
tax purposes even if the Junior Subordinated Debentures were distributed to the
holders of Trust Preferred Securities and Trust Common Securities in liquidation
of such holders' interests in the Trust as described above or (ii) the Regular
Trustees shall have been informed by such tax counsel that a No Recognition
Opinion cannot be delivered to the Trust, the Corporation shall have the right,
upon not less than 30 nor more than 60 days notice, to redeem the Junior
Subordinated Debentures in whole or in part for cash within 90 days following
the occurrence of such Tax Event, and promptly following such redemption Trust
Preferred Securities and Trust Common Securities with an aggregate liquidation
amount equal to the aggregate principal amount of the Junior Subordinated
Debentures so redeemed will be redeemed by the Trust at the Redemption Price on
a Pro Rata Basis at $25.25 if the redemption occurs within five years after the
Effective Time of the Conversion and at $25.00 thereafter; provided, however,
that if at the time there is available to the Corporation or the Regular
Trustees the opportunity to eliminate, within such 90-day period, the Tax Event
by taking some ministerial action, such as filing a form or making an election,
or pursuing some other similar reasonable measure, which has no adverse effect
on the Trust, the Corporation or the holders of the Trust Preferred Securities,
the Corporation, or the Regular Trustees on behalf of the Trust, will pursue
such measure in lieu of redemption and provided further that the Corporation
shall have no right to redeem the Junior Subordinated Debentures while the
Regular Trustees on behalf of the Trust are pursuing any such ministerial
action. The Trust Common Securities will be redeemed on a Pro Rata Basis with
the Trust Preferred Securities, except that, if an Event of Default under the
Declaration has occurred and is continuing, the Trust Preferred Securities will
have a priority over the Trust Common Securities with respect to payment of the
Redemption Price.
"Tax Event" means that the Regular Trustees shall have obtained an opinion
(a "Dissolution Tax Opinion") of nationally recognized independent tax counsel
experienced in such matters to the effect that on or after the Effective Time as
a result of (a) any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, (b) any amendment
to, or change in, an interpretation or application of any such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination), (c) any interpretation or
pronouncement that provides for a position with respect to such laws or
regulations that differs from the theretofore generally accepted position or (d)
any action taken by any governmental agency or regulatory authority, which
amendment or change is enacted, promulgated, issued or effective or which
interpretation or pronouncement is issued or announced or which action is taken,
in each case on or after the Effective Time, there is more than an insubstantial
risk that (i) the Trust is, or will be within 90 days of the date thereof,
subject to United States federal income tax with respect to income accrued or
received on the Junior Subordinated Debentures, (ii) the Trust is, or will be
within 90 days of the date thereof, subject to more than a de minimis amount of
other taxes, duties or other governmental charges or (iii) interest payable by
the Corporation to the Trust on the Junior Subordinated Debentures is not, or
within 90 days of the date thereof will not be, deductible by the Corporation
for United States federal income tax purposes.
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It should be noted that certain legislation proposed as recently as
February 1997 would have applied to securities similar to the Junior
Subordinated Debentures, with the result that the Corporation would not have
been entitled to an interest deduction with respect to the payments on the
Junior Subordinated Debentures. See the discussion above under "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS." No prediction can be
made as to the likelihood that such legislation will be enacted or as to whether
such legislation would be effective retroactively to deny interest deductions
with respect to securities issued prior to the date of enactment of such
legislation. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests --
Special Event Redemption or Distribution."
"Investment Company Event" means that the Regular Trustees shall have
received an opinion of nationally recognized independent counsel experienced in
practice under the Investment Company Act of 1940, as amended (the "1940 Act"),
that as a result of the occurrence of a change in law or regulation or a change
in interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
there is more than an insubstantial risk that the Trust is or will be considered
an "investment company" which is required to be registered under the 1940 Act,
which Change in 1940 Act Law becomes effective on or after the Effective Time.
On the date fixed for any distribution of Junior Subordinated Debentures,
upon dissolution of the Trust, (i) the Trust Preferred Securities and the Trust
Common Securities will no longer be deemed to be outstanding and (ii)
certificates representing Trust Preferred Securities will be deemed to represent
Junior Subordinated Debentures having an aggregate principal amount equal to the
stated liquidation amount of, and bearing accrued and unpaid interest equal to
accrued and unpaid distributions on, such Trust Preferred Securities until such
certificates are presented to the Corporation or its agent for transfer or
reissuance.
There can be no assurance as to the market price for the Junior
Subordinated Debentures which may be distributed in exchange for Trust Preferred
Securities if a dissolution and liquidation of the Trust were to occur.
Accordingly, the Junior Subordinated Debentures which the investor may
subsequently receive on dissolution and liquidation of the Trust may trade at a
discount to the price of the Trust Preferred Securities exchanged. If the Junior
Subordinated Debentures are distributed to the holders of Trust Preferred
Securities upon the dissolution of the Trust, the Corporation will use its best
efforts to list the Junior Subordinated Debentures on the NYSE or on such other
exchange on which the Trust Preferred Securities are then listed.
Redemption Procedures
The Trust may not redeem fewer than all the outstanding Trust Preferred
Securities unless all accrued and unpaid distributions have been paid on all
Trust Preferred Securities for all monthly distribution periods terminating on
or prior to the date of redemption.
If the Trust gives a notice of redemption in respect of Trust Preferred
Securities (which notice will be irrevocable) then immediately prior to the
close of business on the redemption date, provided that the Corporation has paid
to the Property Trustee a sufficient amount of cash in connection with the
related redemption or maturity of the Junior Subordinated Debentures,
distributions will cease to accrue on the Trust Preferred Securities called for
redemption, such Trust Preferred Securities shall no longer be deemed to be
outstanding and all rights of holders of such Trust Preferred Securities so
called for redemption will cease, except the right of the holders of such Trust
Preferred Securities to receive the Redemption Price, but without interest on
such Redemption Price. Neither the Trustees nor the Trust shall be required to
register or cause to be registered the transfer of any Trust Preferred
Securities which have been so called for redemption. If any date fixed for
redemption of Trust Preferred Securities is not a Business Day, then payment of
the Redemption Price payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay) except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on such date fixed for
redemption. If the Corporation fails to repay Junior Subordinated Debentures on
maturity or on the date fixed for this redemption or if payment of the
Redemption Price in respect of Trust Preferred Securities is improperly withheld
or refused and not paid by the Property Trustee or by the Corporation pursuant
to the Preferred Securities Guarantee described under "Description of the
Preferred Securities Guarantee," distributions on such Trust Preferred
Securities will continue to accrue, from the original redemption date of the
Trust Preferred Securities to the date of payment, in which case the actual
payment date will be considered the date fixed for redemption for purposes of
calculating the Redemption Price.
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If a partial redemption of the Trust Preferred Securities would result in
the delisting of the Trust Preferred Securities by any national securities
exchange or other organization on which the Trust Preferred Securities are then
listed, the Corporation pursuant to the Indenture will only redeem Junior
Subordinated Debentures in whole and, as a result, the Trust may only redeem the
Trust Preferred Securities in whole.
Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Corporation or any of
its subsidiaries may at any time and from time to time purchase outstanding
Trust Preferred Securities by tender, in the open market or by private
agreement.
Subordination of Trust Common Securities
Payment of distributions on, and the redemption price of, the Trust
Preferred Securities and the Trust Common Securities, as applicable, shall be
made pro rata based on the liquidation amount of such Trust Preferred Securities
and Trust Common Securities; provided, however, that if on any distribution date
or redemption date an Indenture Event of Default shall have occurred and be
continuing, no payment of any distribution on, or redemption price of, any of
the Trust Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Trust Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid distributions on
all of the outstanding Trust Preferred Securities for all distribution periods
terminating on or prior thereto, or in the case of payment of the redemption
price, the full amount of such redemption price on all of the outstanding Trust
Preferred Securities then called for redemption, shall have been made or
provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all distributions on, or redemption
price of, the Trust Preferred Securities then due and payable.
Liquidation Distribution Upon Dissolution
In the event of any voluntary or involuntary dissolution, winding-up or
termination of the Trust, the holders of the Trust Preferred Securities and
Trust Common Securities at the date of dissolution, winding-up or termination of
the Trust will be entitled to receive on a Pro Rata Basis solely out of the
assets of the Trust, after satisfaction of creditors of the Trust (to the extent
not satisfied by the Corporation as provided in the Declaration), an amount
equal to the aggregate of the stated liquidation amount of $25 per Trust
Security plus accrued and unpaid distributions thereon to the date of payment
(such amount being the "Liquidation Distribution"), unless, in connection with
such dissolution, winding-up or termination, Junior Subordinated Debentures in
an aggregate principal amount equal to the aggregate stated liquidation amount
of such Trust Securities and bearing accrued and unpaid interest in an amount
equal to the accrued and unpaid distributions on such Trust Securities, shall be
distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities
and Trust Common Securities in exchange therefor, after satisfaction of
creditors of the Trust (to the extent not satisfied by the Corporation as
provided in the Declaration).
If, upon any such dissolution, the Liquidation Distribution can be paid
only in part because the Trust has insufficient assets available to pay in full
the aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Trust Preferred Securities and the Trust Common Securities shall be
paid on a Pro Rata Basis. The holders of the Trust Common Securities will be
entitled to receive distributions upon any such dissolution on a Pro Rata Basis
with the holders of the Trust Preferred Securities, except that if an Event of
Default under the Declaration has occurred and is continuing, the Trust
Preferred Securities shall have a priority over the Trust Common Securities with
respect to payment of the Liquidation Distribution.
Pursuant to the Declaration, the Trust shall dissolve: (i) on April 30,
2027, (ii) when all of the Trust Securities shall have been called for
redemption and the amounts necessary for redemption thereof shall have been paid
to the holders of Trust Securities in accordance with the terms of the Trust
Securities, (iii) when all of the Junior Subordinated Debentures shall have been
distributed to the holders of Trust Securities in exchange for all of the Trust
Securities in accordance with the terms of the Trust Securities, (iv) upon the
bankruptcy of the Corporation or the Trust, (v) upon the filing of a certificate
of dissolution or the equivalent with respect to the Corporation, the filing of
a certificate of cancellation with respect to the Trust after having obtained
the consent of at least a majority in liquidation amount of the trust
Securities, voting together as a single class, to file such certificate of
cancellation, or the revocation of the charter of the Corporation and the
expiration of 90 days after the date of revocation without a reinstatement
thereof, or (vi) upon the entry of a decree of judicial dissolution of the
Corporation or the Trust.
<PAGE>
No Merger, Consolidation or Amalgamation of the Trust
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets to, any
corporation or other entity.
Declaration Events of Default
An Indenture Event of Default will constitute an event of default under
the Declaration with respect to the Trust Securities (an "Event of Default");
provided that pursuant to the Declaration, the holder of the Trust Common
Securities will be deemed to have waived any such Event of Default with respect
to the Trust Common Securities until all Events of Default
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with respect to the Trust Preferred Securities have been cured or waived. Until
all such Events of Default with respect to the Trust Preferred Securities have
been so cured or waived, the Property Trustee will be deemed to be acting solely
on behalf of the holders of the Trust Preferred Securities, and only the holders
of the Trust Preferred Securities will have the right to direct the Property
Trustee with respect to certain matters under the Declaration and consequently
under the Indenture. In the event that any Event of Default with respect to the
Trust Preferred Securities is waived by the holders of the Trust Preferred
Securities as provided in the Declaration, the holders of Trust Common
Securities pursuant to the Declaration have agreed that such waiver also
constitutes a waiver of such Event of Default with respect to the Trust Common
Securities for all purposes under the Declaration without any further act, vote
or consent of the holders of the Trust Common Securities. See "-- Voting
Rights."
Upon the occurrence of an Event of Default, the Property Trustee as the
holder of all of the Junior Subordinated Debentures will have the right under
the Indenture to declare the principal of and interest on the Junior
Subordinated Debentures to be immediately due and payable. In addition, the
Property Trustee will have the power to exercise all rights, powers and
privileges under the Indenture. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES."
If the Property Trustee fails to enforce its rights with respect to the
Junior Subordinated Debentures held by the Trust to the fullest extent permitted
by law, any record holder of Trust Preferred Securities may institute legal
proceedings directly against the Corporation to enforce the Property Trustee's
rights under such Junior Subordinated Debentures without first instituting any
legal proceedings against such Property Trustee or any other person or entity.
In addition, if an Event of Default under the Declaration has occurred and is
continuing and such event is attributable to the failure of the Corporation to
pay interest, principal or other required payments on the Junior Subordinated
Debentures issued to the Trust on the date such interest, principal or other
payment is otherwise payable (or, in the case of redemption, the redemption
date), then a record holder of Trust Preferred Securities may, on or after the
respective due dates specified in the Junior Subordinated Debentures, institute
a proceeding directly or indirectly against the Corporation under the Indenture
for enforcement of payment on Junior Subordinated Debentures having a principal
amount equal to the aggregate liquidation amount of the Trust Preferred
Securities held by such holder without first (i) directing the Property Trustee
to enforce the terms of the Junior Subordinated Debentures or (ii) instituting a
legal proceeding against the Corporation to enforce the Property Trustee's
rights under the Junior Subordinated Debentures. In connection with such Direct
Action, the Corporation will be subrogated to the rights of such record holder
of Trust Preferred Securities to the extent of any payment made by the
Corporation to such record holder of Trust Preferred Securities in such Direct
Action. See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES."
Voting Rights
Except as provided below, under "Modification and Amendment of the
Declaration" and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE -- Amendments
and Assignment" and as otherwise required by the Business Trust Act, the Trust
Indenture Act and the Declaration, the holders of the Trust Preferred Securities
will have no voting rights.
<PAGE>
If (i) the Trust fails to make distributions in full on the Trust
Preferred Securities for 18 consecutive months or (ii) an Event of Default under
the Declaration occurs and is continuing (each, an "Appointment Event"), then
the holders of the Trust Preferred Securities, acting as a single class, will be
entitled, by the vote of holders of Trust Preferred Securities representing a
majority in aggregate liquidation amount of the outstanding Trust Preferred
Securities, to appoint a Special Regular Trustee (who need not be an officer or
an employee of or otherwise affiliated with the Corporation) who shall have the
same rights, powers and privileges under the Declaration as the Regular
Trustees. Any holder of Trust Preferred Securities (other than the Corporation
or any of its affiliates) shall have the right to nominate any person to be
appointed as Special Regular Trustee. For purposes of determining whether the
Trust has failed to pay distributions in full for 18 consecutive months,
distributions shall be deemed to remain in arrears, notwithstanding any payments
in respect thereof, until full cumulative distributions have been or
contemporaneously are paid with respect to all monthly distribution periods
terminating on or prior to the date of payment of such cumulative distributions.
Not later than 30 days after such right to appoint a Special Regular Trustee
arises, the Regular Trustees will convene a meeting for the purpose of
appointing a Special Regular Trustee. If the Regular Trustees fail to convene
such meeting within such 30-day period, the holders of Trust Preferred
Securities representing 10% in liquidation amount of the outstanding Trust
Preferred Securities will be entitled to convene such meeting. The provisions of
the Declaration relating to the convening and conduct of the meetings of the
holders will apply with respect to any such meeting. If, at any such meeting,
holders of less than a majority in aggregate liquidation amount of Trust
Preferred Securities entitled to vote for the appointment of a Special Regular
Trustee vote for such appointment, no Special Regular Trustee shall be
appointed. Any Special Regular Trustee may be removed without cause at any time
by holders of Trust Preferred Securities representing a majority in liquidation
amount of the Trust Preferred Securities and holders of Trust Preferred
Securities representing 10% in liquidation amount of the Trust Preferred
Securities shall be entitled to convene a meeting for such purpose. Any Special
Regular Trustee appointed shall cease to be a Special Regular Trustee if the
Appointment Event
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pursuant to which the Special Regular Trustee was appointed and all other
Appointment Events have been cured and cease to be continuing. Notwithstanding
the appointment of any such Special Regular Trustee, the Corporation shall
retain all rights under the Indenture, including the right to extend the
interest payment period as provided under "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Option to Extend Interest Payment Period." If such an extension
occurs, there will be no Indenture Event of Default for failure to make any
scheduled interest payment during the Extension Period on the date originally
scheduled.
The holders of a majority in aggregate liquidation amount of the Trust
Preferred Securities have the right (i) on behalf of all holders of Trust
Securities, to waive any past default that is waivable under the Declaration and
(ii) to direct the time, method and place of conducting any proceeding for any
remedy available to the Property Trustee, or exercising any trust or power
conferred upon the Property Trustee under the Declaration, including the right
to direct the Property Trustee, as the holder of the Junior Subordinated
Debentures, to (a) direct the time, method and place of conducting any
proceeding for any remedy available to the Indenture Trustee, or exercising any
trust or power conferred on the Indenture Trustee with respect to the Junior
Subordinated Debentures, (b) waive any past default that is waivable under the
Indenture, or (c) exercise any right to rescind or annul a declaration that the
principal of all the Junior Subordinated Debentures shall be due and payable;
provided that where a consent under the Indenture would require the consent of
(1) holders of Junior Subordinated Debentures representing a specified
percentage greater than a majority in principal amount of the Junior
Subordinated Debentures or (2) each holder of Junior Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of, in the case of clause (1) above, holders of Trust
Preferred Securities representing such specified percentage of the aggregate
liquidation amount of the Trust Preferred Securities or, in the case of clause
(2) above, each holder of all Trust Preferred Securities affected thereby. The
Property Trustee shall not revoke any action previously authorized or approved
by a vote of the holders of Trust Preferred Securities. The Property Trustee
shall notify all holders of record of Trust Preferred Securities of any notice
of default received from the Indenture Trustee with respect to the Junior
Subordinated Debentures. Other than with respect to directing the time, method
and place of conducting any proceeding for any remedy available to the Property
Trustee or the Indenture Trustee as set forth above, the Property Trustee shall
be under no obligation to take any of the foregoing actions at the direction of
the holders of the Trust Preferred Securities unless the Property Trustee shall
have obtained an opinion of nationally recognized independent tax counsel
recognized as expert in such matters to the effect that the Trust will not be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership on account of such action and will be
treated as a grantor trust for United States federal income tax purposes
following such action. If the Property Trustee fails to enforce its rights under
the Declaration (including, without limitation, its rights, powers and
privileges as a holder of the Junior Subordinated Debentures under the
Indenture) to the fullest extent permitted by law, any holder of Trust Preferred
Securities may, upon such holder's written request to the Property Trustee to
enforce such rights, institute a legal proceeding directly against the
Corporation to enforce the Property Trustee's rights under the Declaration,
without first instituting a legal proceeding against the Property Trustee or any
other Person; provided that any holder may institute a direct action without
prior request to the Property Trustee to enforce the Corporation's payment
obligations on the Junior Subordinated Debentures.
A waiver of an Indenture Event of Default by the Property Trustee at the
direction of holders of the Trust Preferred Securities will constitute a waiver
of the corresponding Event of Default under the Declaration in respect of the
Trust Securities.
In the event the consent of the Property Trustee as the holder of the
Junior Subordinated Debentures is required under the Indenture with respect to
any amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures, the Property Trustee shall request the direction of the
holders of the Trust Securities with respect to such amendment, modification or
termination and shall vote with respect to such amendment, modification or
termination as directed by a majority in liquidation amount of the Trust
Securities voting together as a single class; provided, however, that where any
such amendment, modification or termination under the Indenture would require
the consent of (i) holders of Junior Subordinated Debentures representing a
specified percentage greater than a majority in principal amount of the Junior
Subordinated Debentures or (ii) each holder of Junior Subordinated Debentures
affected thereby, the Property Trustee may only give such consent at the
direction of the holders of Trust Securities representing such specified
percentage of the aggregate liquidation amount of the Trust Securities in the
case of clause (i) above, or each holder of Trust Securities affected thereby,
in the case of clause (ii) above; and, provided, further, that the Property
Trustee shall be under no obligation to take any such action in accordance with
the directions of the holders of the Trust Securities unless the Property
Trustee has obtained an opinion of nationally recognized independent tax counsel
recognized as expert in such matters to the effect that the Trust will not be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership on account of such action and will be
treated as a grantor trust for United States federal income tax purposes
following such action.
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Any required approval or direction of holders of Trust Preferred
Securities may be given at a separate meeting of holders of Trust Preferred
Securities convened for such purpose, at a meeting of all of the holders of
Trust Securities or pursuant to written consent. The Regular Trustees will cause
a notice of any meeting at which holders of Trust Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be mailed to each holder of record of Trust Preferred
Securities. Each such notice will include a statement setting forth (i) the date
of such meeting or the date by which such action is to be taken, (ii) a
description of any resolution proposed for adoption at such meeting on which
such holders are entitled to vote or of such matter upon which written consent
is sought and (iii) instructions for the delivery of proxies or consents.
No vote or consent of the holders of Trust Preferred Securities will be
required for the Trust to redeem and cancel Trust Preferred Securities or
distribute Junior Subordinated Debentures in accordance with the Declaration.
Notwithstanding that holders of Trust Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the Trust
Preferred Securities at such time that are owned by the Corporation or by any
entity directly or indirectly controlling or controlled by or under direct or
indirect common control with the Corporation shall not be entitled to vote or
consent and shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
The procedures by which persons owning Trust Preferred Securities
registered in the name of and held by DTC or its nominee may exercise their
voting rights are described under "Book-Entry; Delivery and Form" below.
Subject to the right of holders of Trust Preferred Securities to appoint a
Special Regular Trustee upon the occurrence of an Appointment Event, holders of
the Trust Preferred Securities will have no rights to increase or decrease the
number of Trustees or to appoint, remove or replace a Trustee, which rights are
vested exclusively in the holders of the Trust Common Securities.
Modification and Amendment of the Declaration
The Declaration may be modified and amended on approval of a majority of
the Regular Trustees, provided that, if any proposed modification or amendment
provides for, or the Regular Trustees otherwise propose to effect, (i) any
action that would adversely affect the powers, preferences or special rights of
the Trust Securities, whether by way of amendment to the Declaration or
otherwise, or (ii) the dissolution, winding-up or termination of the Trust other
than pursuant to the terms of the Declaration, then the holders of the
outstanding Trust Securities as a class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of at least 66 2/3% in liquidation amount of the Trust
Securities, provided that if any amendment or proposal referred to in clause (i)
above would adversely affect only the Trust Preferred Securities or the Trust
Common Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of 66 2/3% in liquidation amount of such class of
securities.
Notwithstanding the foregoing, (i) no amendment or modification may be
made to the Declaration unless the Regular Trustees shall have obtained (A)
either a ruling from the Internal Revenue Service or a written unqualified
opinion of nationally recognized independent tax counsel experienced in such
matters to the effect that such amendment will not cause the Trust to be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership and to the effect that the Trust will
continue to be treated as a grantor trust for purposes of United States federal
income taxation and (B) a written unqualified opinion of nationally recognized
independent counsel experienced in such matters to the effect that such
amendment will not cause the Trust to be an "investment company" which is
required to be registered under the 1940 Act; (ii) certain specified provisions
of the Declaration may not be amended without the consent of all of the holders
of the Trust Securities; (iii) no amendment which adversely affects the rights,
powers and privileges of the Property Trustee shall be made without the consent
of the Property Trustee; (iv) Article IV of the Declaration relating to the
obligation of the Corporation to purchase the Trust Common Securities and to pay
certain obligations and expenses of the Trust as described under "SUNSOURCE
CAPITAL TRUST" may not be amended without the consent of the Corporation; (v)
the rights of holders of Trust Common Securities under Article V of the
Declaration to increase or decrease the number of, and to appoint, replace or
remove, Trustees (other than a Special Regular Trustee) shall not be amended
without the consent of each holder of Trust Common Securities; and (vi) the
rights of holders of Trust Preferred Securities under the Declaration to appoint
or remove a Special Regular Trustee shall not be amended without the consent of
each holder of Trust Preferred Securities.
The Declaration further provides that it may be amended without the
consent of the holders of the Trust Securities to (i) cure any ambiguity, (ii)
correct or supplement any provision in the Declaration that may be defective or
inconsistent with any
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other provision of the Declaration, (iii) add to the covenants, restrictions or
obligations of the Corporation, (iv) preserve the status of the Trust as a
grantor trust for federal income tax purposes, and (v) to conform to changes in,
or a change in interpretation or application of certain 1940 Act requirements by
the SEC, which amendment does not adversely affect the rights, preferences or
privileges of the holders.
Book-Entry; Delivery and Form
Trust Preferred Securities will be issued in fully registered form.
Investors may elect to hold their Trust Preferred Securities directly or,
subject to the rules and procedures of DTC described below, hold interests in a
global certificate (the "Trust Preferred Securities Global Certificate")
registered in the name of DTC or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in a global Trust
Preferred Security.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the NYSE, the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Securities and Exchange Commission.
Upon issuance of a Trust Preferred Securities Global Certificate, DTC will
credit on its book-entry registration and transfer system the number of Trust
Preferred Securities represented by such Trust Preferred Securities Global
Certificate to the accounts of institutions that have accounts with DTC.
Ownership of beneficial interests in a Trust Preferred Securities Global
Certificate will be limited to Participants or persons that may hold interests
through Participants. The ownership interest of each actual purchaser of each
Trust Preferred Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Trust Preferred
Securities. Transfers of ownership interests in the Trust Preferred Securities
are to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of the Trust
Preferred Securities; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Trust Preferred Securities are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
So long as DTC, or its nominee, is the owner of a Trust Preferred Securities
Global Certificate, DTC or such nominee, as the case may be, will be considered
the sole owner and holder of record of the Trust Preferred Securities
represented by such Trust Preferred Securities Global Certificate for all
purposes.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Trust Preferred Securities are being redeemed, DTC will reduce pro rata (subject
to adjustment to eliminate fractional Trust Preferred Securities) the amount of
interest of each Direct Participant in the Trust Preferred Securities to be
redeemed.
Although voting with respect to the Trust Preferred Securities is limited,
in those instances in which a vote is required, neither DTC nor Cede & Co.
itself will consent or vote with respect to Trust Preferred Securities. Under
its usual procedures, DTC would mail an Omnibus Proxy to the Trust as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Trust Preferred Securities are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
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Distribution payments on the Trust Preferred Securities represented by a
Preferred Series Global Certificate will be made by the Property Trustee to DTC.
DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participants and not of DTC, the Trust or the Corporation, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of distributions to DTC is the responsibility of the Trust, disbursement
of such payments to Direct Participants is the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners is the responsibility of
Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Trust Preferred Securities at any time by giving reasonable
notice to the Trust. Under such circumstances, if a successor securities
depository is not obtained, Trust Preferred Security certificates will be
required to be printed and delivered. Additionally, the Trust may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depository). In that event, certificates for the Trust Preferred
Securities will be printed and delivered.
Expenses and Taxes
In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Trust Preferred
Securities) and all costs and expenses of the Trust (including costs and
expenses relating to the organization of the Trust, the fees and expenses of the
Trustees and the costs and expenses relating to the operation of the Trust) and
to pay any and all taxes and all costs and expenses with respect thereto (other
than United States withholding taxes) to which the Trust might become subject.
The foregoing obligations of the Company under the Indenture are for the benefit
of, and shall be enforceable by, any person to whom any such debts, obligations,
costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor
has received notice thereof. Any such Creditor may enforce such obligations of
the Corporation directly against the Corporation, and the Corporation has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Company. The Corporation has also agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give effect to the
foregoing.
Registrar, Transfer Agent and Paying Agent
Payment of distributions and payments on redemption of the Trust Preferred
Securities will be payable, the transfer of the Trust Preferred Securities will
be registrable, and Trust Preferred Securities will be exchangeable for Trust
Preferred Securities of other denominations of a like aggregate liquidation
amount, at the principal corporate trust office of the Property Trustee in The
City of New York; provided that payment of distributions may be made at the
option of the Regular Trustees on behalf of the Trust by check mailed to the
address of the persons entitled thereto and that the payment on redemption of
any Trust Preferred Security will be made only upon surrender of such Trust
Preferred Security to the Property Trustee.
Registrar and Transfer Company or one of its affiliates will act as
registrar and transfer agent for the Trust Preferred Securities. Registrar and
Transfer Company will also act as paying agent and, with the consent of the
Regular Trustees, may designate additional paying agents.
Registration of transfers of Trust Preferred Securities will be effected
without charge by or on behalf of the Trust, but upon payment (with the giving
of such indemnity as the Trust or the Corporation may require) in respect of any
tax or other governmental charges that may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Trust Preferred Securities after such Trust Preferred Securities
have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, prior to a default with respect to the Trust
Securities, undertakes to perform only such duties as are specifically set forth
in the Declaration and, after default, shall exercise the same degree of care as
a prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provision, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the Declaration at the request of any
holder of Trust Preferred Securities, unless offered reasonable indemnity by
such holder against the costs, expenses and liabilities which might be incurred
thereby. The Property Trustee is not required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties if
the Property Trustee reasonably believes that repayment or adequate indemnity is
not reasonably assured to it.
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Governing Law
The Declaration and the Trust Preferred Securities will be governed by,
and construed in accordance with, the internal laws of the State of Delaware.
Miscellaneous
Application has been made to list the Trust Preferred Securities on the
NYSE, subject to notice of issuance.
The Regular Trustees are authorized and directed to take such action as
they deem reasonable in order that the Trust will not be deemed to be an
"investment company" required to be registered under the 1940 Act or that the
Trust will not be classified for United States federal income tax purposes as an
association taxable as a corporation or a partnership and will be treated as a
grantor trust for United States federal income tax purposes. In this connection,
the Regular Trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust or the Declaration, that the Regular
Trustees determine in their discretion to be reasonable and necessary or
desirable for such purposes, as long as such action does not adversely affect
the interests of holders of the Trust Securities.
The Corporation and the Regular Trustees on behalf of the Trust will be
required to provide to the Property Trustee annually a certificate as to whether
the Corporation and the Trust, respectively, are in compliance with all the
conditions and covenants under the Declaration.
DESCRIPTION OF PREFERRED SECURITIES GUARANTEE
Set forth below is a summary of information concerning the Preferred
Securities Guarantee that will be executed and delivered by the Corporation for
the benefit of the holders from time to time of Trust Preferred Securities. The
Preferred Securities Guarantee is separately qualified under the Trust Indenture
Act and will be held by Bank of New York acting in its capacity as indenture
trustee with respect thereto, for the benefit of the holders of the Trust
Preferred Securities. The terms of the Preferred Securities Guarantee include
those stated in such Guarantee and those made part of the Preferred Securities
Guarantee by the Trust Indenture Act. The summary set forth below contains all
material elements of the Preferred Securities Guarantee but does not purport to
be complete and is subject in all respects to the provisions of, and is
qualified in its entirety by reference to, the Preferred Securities Guarantee,
which is filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part, and the Trust Indenture Act.
General
Pursuant to the Preferred Securities Guarantee, the Corporation will
irrevocably and unconditionally agree, to the extent set forth therein, to pay
in full, to the holders of the Trust Preferred Securities, the Guarantee
Payments (as defined below) (without duplication of amounts theretofore paid by
the Trust), to the extent not paid by the Trust, regardless of any defense,
right of set-off or counterclaim that the Trust may have or assert. The
following payments or distributions with respect to the Trust Preferred
Securities to the extent not paid or made by the Trust (the "Guarantee
Payments") will be subject to the Guarantee (without duplication): (i) any
accrued and unpaid distributions on the Trust Preferred Securities and the
redemption price, including all accrued and unpaid distributions to the date of
the redemption, with respect to the Trust Preferred Securities called for
redemption by the Trust but if and only to the extent that in each case the
Corporation has made a payment to the Property Trustee of interest or principal
on the Junior Subordinated Debentures and (ii) upon a voluntary or involuntary
dissolution, winding-up or termination of the Trust (other than in connection
with the distribution of Junior Subordinated Debentures to holders of Trust
Preferred Securities or the redemption of all of the Trust Preferred Securities
upon the maturity or redemption of the Junior Subordinated Debentures), the
lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid
distributions on the Trust Preferred Securities to the date of payment, to the
extent the Trust has funds available therefor, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Trust Preferred
Securities in liquidation of the Trust. The Corporation's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Corporation to the holders of Trust Preferred Securities or by causing the
Trust to pay such amounts to such holders. The Preferred Securities Guarantee,
when taken together with the Corporation's obligations under the Junior
Subordinated Debentures and the Indenture and its obligations under the
Declaration, including its obligation to pay costs, expenses and certain
liabilities of the Trust, constitutes a full and unconditional guarantee of
amounts due on the Trust Preferred Securities.
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Certain Covenants of the Corporation
In the Preferred Securities Guarantee, the Corporation will covenant that,
so long as the Trust Preferred Securities remain outstanding, the Corporation
will not declare or pay any dividends on, or redeem, purchase, acquire or make a
distribution or liquidation payment with respect to, any of its common stock or
preferred stock or make any guarantee payment with respect thereto if at such
time (i) the Corporation shall be in default with respect to its Guarantee
Payments or other payment obligations under the Preferred Securities Guarantee,
(ii) there shall have occurred any Indenture Event of Default or any Event of
Default under the Declaration or (iii) the Corporation shall have given notice
of its selection of an Extension Period as provided in the Indenture and such
period, or any extension thereof, is continuing. In addition, so long as any
Trust Preferred Securities remain outstanding, the Corporation has agreed (i) to
remain the sole direct or indirect owner of all of the outstanding Trust Common
Securities and shall not cause or permit the Trust Common Securities to be
transferred except to the extent permitted by the Declaration; provided that any
permitted successor of the Corporation under the Indenture may succeed to the
Corporation's ownership of the Trust Common Securities and (ii) to use
reasonable efforts to cause the Trust to continue to be treated as a grantor
trust for United States federal income tax purposes except in connection with a
distribution of Junior Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes that do not adversely affect the rights
of holders of Trust Preferred Securities (in which case no consent will be
required), the Preferred Securities Guarantee may be amended only with the prior
approval of the holders of not less than 66 2/3% in liquidation amount of the
outstanding Trust Preferred Securities. The manner of obtaining any such
approval of holders of the Trust Preferred Securities will be as set forth under
"DESCRIPTION OF TRUST PREFERRED SECURITIES -- Voting Rights." All guarantees and
agreements contained in the Preferred Securities Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Corporation
and shall inure to the benefit of the holders of the Trust Preferred Securities
then outstanding. Except in connection with a consolidation, merger or sale
involving the Corporation that is permitted under the Indenture, the Corporation
may not assign its obligations under the Preferred Securities Guarantee.
Termination of the Preferred Securities Guarantee
The Preferred Securities Guarantee will terminate and be of no further
force and effect as to the Trust Preferred Securities upon full payment of the
Redemption Price of all Trust Preferred Securities, or upon distribution of the
Junior Subordinated Debentures to the holders of Trust Preferred Securities in
exchange for all of the Trust Preferred Securities, or upon full payment of the
amounts payable upon liquidation of the Trust. Notwithstanding the foregoing,
the Preferred Securities Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of Trust Preferred
Securities must restore payment of any sums paid with respect to the Trust
Preferred Securities or the Preferred Securities Guarantee.
Status of the Preferred Securities Guarantee
The Corporation's obligations under the Preferred Securities Guarantee to
make the Guarantee Payments will constitute an unsecured obligation of the
Corporation and will rank (i) subordinate and junior in right of payment to all
other liabilities of the Corporation, including the Junior Subordinated
Debentures, except those made pari passu or subordinate by their terms, and (ii)
senior to all capital stock now or hereafter issued by the Corporation and to
any guarantee now or hereafter entered into by the Corporation in respect of any
of its capital stock. Because the Corporation is a holding company, the
Corporation's obligations under the Preferred Securities Guarantee are also
effectively subordinated to all existing and future liabilities, including trade
payables, of the Corporation's subsidiaries, except to the extent that the
Corporation is a creditor of the subsidiaries recognized as such. The
Declaration provides that each holder of Trust Preferred Securities by
acceptance thereof agrees to the subordination provisions and other terms of the
Preferred Securities Guarantee.
The Preferred Securities Guarantee will constitute a guarantee of payment
and not of collection (that is, the guaranteed party may institute a legal
proceeding directly against the guarantor to enforce its rights under the
guarantee without first instituting a legal proceeding against any other person
or entity). The Preferred Securities Guarantee will be deposited with the
Property Trustee, to be held in trust for the benefit of the holders of the
Trust Preferred Securities. The Property Trustee shall enforce the Preferred
Securities Guarantee on behalf of the holders of the Trust Preferred Securities
although any holder of Trust Preferred Securities may bring a direct action
against the Corporation to enforce the Preferred Securities Guarantee
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without prior notice to the Property Trustee. The holders of not less than a
majority in aggregate liquidation amount of the Trust Preferred Securities, have
the right to direct the time, method and place of conducting any proceeding for
any remedy available in respect of the Preferred Securities Guarantee, including
the giving of directions to the Property Trustee.
Governing Law
The Preferred Securities Guarantee will be governed by and construed in
accordance with the laws of the State of New York.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
Set forth below is a description of the Junior Subordinated Debentures
which will be deposited in the Trust as trust assets. The terms of the Junior
Subordinated Debentures include those stated in the Indenture dated
_____________ (the "Indenture"), between the Corporation and Bank of New York,
as trustee (the "Indenture Trustee"), the form of which has been filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
forms a part, and those made part of the Indenture by the Trust Indenture Act.
The following description contains all material elements of the Junior
Subordinated Debentures but does not purport to be complete and is qualified in
its entirety by reference to the Indenture and the Trust Indenture Act. Whenever
particular provisions or defined terms in the Indenture are referred to herein,
such provisions or defined terms are incorporated by reference herein. Section
and Article references used herein are references to provisions of the
Indenture.
Under certain circumstances involving the dissolution of the Trust
following the occurrence of a Special Event, Junior Subordinated Debentures may
be distributed to the holders of the Trust Securities in liquidation of the
Trust. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event
Redemption or Distribution."
General
The Junior Subordinated Debentures are unsecured, subordinated obligations
of the Corporation, limited in aggregate principal amount to an amount equal to
the sum of (i) the stated liquidation amount of the Trust Preferred Securities
issued by the Trust in the Conversion and (ii) the proceeds received by the
Trust upon issuance of the Trust Common Securities to the Corporation (which
proceeds will be used to purchase an equal principal amount of Junior
Subordinated Debentures).
The entire principal amount of the Junior Subordinated Debentures will
become due and payable, together with any accrued and unpaid interest thereon,
on April 30, 2027. The Junior Subordinated Debentures are not subject to any
sinking fund.
If Junior Subordinated Debentures are distributed to holders of Trust
Preferred Securities in dissolution of the Trust, such Junior Subordinated
Debentures will be so issued in certificated form in denominations of $25 and
integral multiples thereof and may be transferred or exchanged at the offices
described below.
Payments of principal and interest on Junior Subordinated Debentures will
be payable, the transfer of the Junior Subordinated Debentures will be
registrable, and Junior Subordinated Debentures will be exchangeable for Junior
Subordinated Debentures of other denominations of a like aggregate principal
amount, at the corporate trust office of the Indenture Trustee in The City of
New York; provided that payment of interest may be made at the option of the
Corporation by check mailed to the address of the persons entitled thereto and
that the payment of principal with respect to any Junior Subordinated Debenture
will be made only upon surrender of such Junior Subordinated Debenture to the
Indenture Trustee.
If the Junior Subordinated Debentures are distributed to the holders of
Trust Preferred Securities upon the dissolution of the Trust, the Corporation
will use its best efforts to list the Junior Subordinated Debentures on the NYSE
or on such other exchange on which the Trust Preferred Securities are then
listed.
Optional Redemption
Except as provided below, the Junior Subordinated Debentures may not be
redeemed prior to April 30, 2002. The Corporation shall have the right to redeem
the Junior Subordinated Debentures, in whole or in part, from time to time, on
or after April 30, 2002, upon not less than 30 nor more than 60 days' notice, at
a redemption price equal to 100% of the principal amount to be redeemed, plus
any accrued and unpaid interest, to the redemption date, including interest
accrued
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during an Extension Period. The Corporation will also have the right to redeem
the Junior Subordinated Debentures at any time upon the occurrence of a Tax
Event if certain conditions are met as described under "DESCRIPTION OF THE TRUST
PREFERRED SECURITIES -- Special Event Redemption or Distribution." The
redemption price for such redemption within five years of the Conversion will be
101% of the principal amount of the Junior Subordinated Debentures plus accrued
and unpaid interest.
If the Corporation gives a notice of redemption in respect of Junior
Subordinated Debentures (which notice will be irrevocable) then, by 12:00 noon,
New York City time, on the redemption date, the Corporation will deposit
irrevocably with the Indenture Trustee funds sufficient to pay the applicable
redemption price and will give irrevocable instructions and authority to pay
such redemption price to the holders of the Junior Subordinated Debentures. If
notice of redemption shall have been given and funds deposited as required, then
upon the date of such deposit, interest will cease to accrue on the Junior
Subordinated Debentures called for redemption, such Junior Subordinated
Debentures will no longer be deemed to be outstanding and all rights of holders
of such Junior Subordinated Debentures so called for redemption will cease,
except the right of the holders of such Junior Subordinated Debentures to
receive the applicable redemption price, but without interest on such redemption
price. If any date fixed for redemption of Junior Subordinated Debentures is not
a Business Day, then payment of the redemption price payable on such date will
be made on the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay) except that, if such
Business Day falls in the next calendar year, such payment will be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date fixed for redemption. If payment of the redemption price
in respect of Junior Subordinated Debentures is improperly withheld or refused
and not paid by the Corporation, interest on such Junior Subordinated Debentures
will continue to accrue compounded monthly, from the original redemption date to
the date of payment, in which case the actual payment date will be considered
the date fixed for redemption for purposes of calculating the applicable
redemption price. If fewer than all of the Junior Subordinated Debentures are to
be redeemed, the Junior Subordinated Debentures to be redeemed shall be selected
by lot or pro rata or in some other equitable manner determined by the Indenture
Trustee.
In the event of any redemption in part, the Corporation shall not be
required to (i) issue, register the transfer of or exchange any Junior
Subordinated Debentures during a period beginning at the opening of business 15
days before any selection for redemption of Junior Subordinated Debentures and
ending at the close of business on the earliest date on which the relevant
notice of redemption is deemed to have been given to all holders of Junior
Subordinated Debentures to be redeemed and (ii) register the transfer of or
exchange any Junior Subordinated Debentures so selected for redemption, in whole
or in part, except the unredeemed portion of any Junior Subordinated Debentures
being redeemed in part.
Proposed Tax Legislation
Certain tax law changes have been proposed that may, if enacted, deny
corporate issuers a deduction for interest in respect of certain debt
obligations, such as the Junior Subordinated Debentures. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks
Applicable to Holders of A Interests -- Special Event Redemption or
Distribution."
Interest
The Junior Subordinated Debentures will bear interest at an annual rate of
11.6% from the Accrual Date. Interest will be payable monthly in arrears on the
last day of each calendar month of each year (each, an "Interest Payment Date"),
commencing on May 31, 1997, to the person in whose name such Junior Subordinated
Debenture is registered, subject to certain exceptions, at the close of business
on the first day of the month in which such Interest Payment Date occurs.
Interest payable on any Junior Subordinated Debenture that is not punctually
paid or duly provided for on any Interest Payment Date will forthwith cease to
be payable to the person in whose name such Junior Subordinated Debenture is
registered on the relevant record date, and such defaulted interest will instead
be payable to the person in whose name such Junior Subordinated Debenture is
registered on the special record date or other specified date determined in
accordance with the Indenture; provided, however, that interest shall not be
considered payable by the Corporation on any Interest Payment Date falling
within an Extension Period unless the Corporation has elected to make a full or
partial payment of interest accrued on the Junior Subordinated Debentures on
such Interest Payment Date.
The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months and for any period shorter than
a full monthly period for which interest is computed, the amount of interest
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month. If any Interest Payment Date is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on such date.
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Option to Extend Interest Payment Period
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation shall have the
right to extend the interest payment period from time to time for a period not
exceeding 60 consecutive months. The Corporation has no current intention of
exercising its right to extend an interest payment period. No interest shall be
due and payable during an Extension Period, except at the end thereof. During
any Extension Period, the Corporation shall not declare or pay any dividends on,
or redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its common stock or preferred stock or make any guarantee
payments with respect thereto. Prior to the termination of any such Extension
Period, the Corporation may further extend the interest payment period; provided
that such Extension Period together with all such previous and further
extensions thereof may not exceed 60 consecutive months. On the Interest Payment
Date occurring after the end of each Extension Period, the Corporation shall pay
to the holders of Junior Subordinated Debentures of record on the record date
for such Interest Payment Date (regardless of who the holders of record may have
been on other dates during the Extension Period) all accrued and unpaid interest
on the Junior Subordinated Debentures, together with interest thereon at the
rate specified for the Junior Subordinated Debentures to the extent permitted by
applicable law, compounded monthly, ("Compounded Interest"). Upon the
termination of any Extension Period and the payment of all amounts then due, the
Corporation may commence a new Extension Period, subject to the above
requirements. The Corporation may also prepay at any time all or any portion of
the interest accrued during an Extension Period. Consequently, there could be
multiple Extension Periods of varying lengths (up to five Extension Periods of
60 consecutive months each or more numerous shorter Extension Periods)
throughout the term of the Junior Subordinated Debentures. The failure by the
Corporation to make interest payments during an Extension Period would not
constitute a default or an event of default under the Indenture or the
Corporation's currently outstanding indebtedness.
If the Trust shall be the sole holder of the Junior Subordinated
Debentures, the Corporation shall give the Property Trustee and the Indenture
Trustee notice of its selection of such Extension Period ten Business Days prior
to the earlier of (i) the date the distributions on the Trust Preferred
Securities are payable or (ii) the date the Trust is required to give notice to
the NYSE or other applicable self-regulatory organization or to holders of the
Trust Preferred Securities of the record date or the date such distribution is
payable, but in any event not less than one Business Day prior to such record
date. The Trust shall give notice of the Corporation's selection of such
Extension Period to the holders of the Trust Preferred Securities.
If Junior Subordinated Debentures have been distributed to holders of
Trust Securities, the Corporation shall give the holders of the Junior
Subordinated Debentures notice of its selection of such Extension Period ten
Business Days prior to the earlier of (i) the next succeeding interest payment
date or (ii) the date the Corporation is required to give notice to the NYSE (if
the Junior Subordinated Debentures are then listed thereon) or other applicable
self-regulatory organization or to holders of the Junior Subordinated Debentures
of the record or payment date of such related interest payment.
Compounded Interest
The Corporation will make payments of Compounded Interest to the Trust
with respect to the Junior Subordinated Debentures held by the Trust, and the
Property Trustee will make such funds available to pay any interest on
distributions in arrears in respect of the Trust Preferred Securities pursuant
to the terms thereof.
Certain Covenants of the Corporation Applicable to the Junior Subordinated
Debentures
In the Indenture, the Corporation will covenant that, so long as any Trust
Preferred Securities remain outstanding, the Corporation will not declare or pay
any dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its common stock or preferred stock
or make any guarantee payment with respect thereto if at such time (i) the
Corporation shall be in default with respect to its Guarantee Payments or other
payment obligations under the Preferred Securities Guarantee, (ii) there shall
have occurred any Indenture Event of Default with respect to the Junior
Subordinated Debentures or (iii) the Corporation shall have given notice of its
selection of an Extension Period as provided in the Indenture and such period,
or any extension thereof, is continuing. In addition, so long as the Trust
Preferred Securities remain outstanding, the Corporation has agreed (i) not to
cause or permit the Trust Common Securities to be transferred except to the
extent permitted by the Declaration, provided that any permitted successor of
the Corporation under the Indenture may succeed to the Corporation's ownership
of the Trust Common Securities, (ii) to comply fully with all of its obligations
and agreements contained in the Declaration and (iii) not to take any action
which would cause the Trust to cease to be treated as a grantor trust for United
States federal income tax purposes except in connection with a distribution of
Junior Subordinated Debentures.
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Subordination
The Indenture provides that the Junior Subordinated Debentures are
subordinate and junior in right of payment to all Senior Indebtedness of the
Corporation. In the event (a) of any insolvency or bankruptcy proceedings, or
any receivership, liquidation, reorganization or other similar proceedings in
respect of the Corporation or its property or any proceeding for voluntary
liquidation, dissolution or other winding up of the Corporation, or (b) Junior
Subordinated Debentures are declared due and payable before their expressed
maturity because of the occurrence of an Indenture Event of Default (under
circumstances other than as set forth in clause (a) above), then the holders of
all Senior Indebtedness shall first be entitled to receive payment of the full
amount due thereon in money, before the holders of any of the Junior
Subordinated Debentures are entitled to receive a payment on account of the
principal of, premium, if any, or interest on the indebtedness evidenced by such
Junior Subordinated Debentures. In the event and during the continuation of any
default in payment of any Senior Indebtedness or if any event of default shall
exist under any Senior Indebtedness resulting in the acceleration of the
maturity thereof, or the right to accelerate maturity thereof, as "event of
default" is defined therein or in the agreement under which the same is
outstanding, then no payment of the principal of, premium, if any, or interest
on the Subordinated Debentures shall be made.
The term "Senior Indebtedness" shall mean the principal of and premium, if
any, and interest on (a) all indebtedness of the Corporation, whether
outstanding on the date of the Indenture or thereafter created, (i) for money
borrowed by the Corporation,(ii) for money borrowed by, or obligations of,
others and either assumed or guaranteed, directly or indirectly, by the
Corporation, (iii) in respect of letters of credit and acceptances issued or
made by banks, or (iv) constituting purchase money indebtedness, or indebtedness
secured by property included in the property, plant and equipment accounts of
the Corporation at the time of the acquisition of such property by the
Corporation, for the payment of which the Corporation is directly liable, and
(b) all deferrals, renewals, extensions and refundings of, and amendments,
modifications and supplements to, any such indebtedness. As used in the
preceding sentence the term "purchase money indebtedness" means indebtedness
evidenced by a note, debenture, bond or other instrument (whether or not secured
by any lien or other security interest) issued or assumed as all or a part of
the consideration for the acquisition of property, whether by purchase, merger,
consolidation or otherwise, unless by its terms such indebtedness is subordinate
to other indebtedness of the Corporation. Notwithstanding anything to the
contrary in the Indenture or the Junior Subordinated Debentures, Senior
Indebtedness shall not include (i) amounts owed to trade creditors in the
ordinary course of business, (ii) any indebtedness of the Corporation which, by
its terms or the terms of the instrument creating or evidencing it, is
subordinate in right of payment to or pari passu with the Junior Subordinated
Debentures, as the case may be, and, in particular, the Junior Subordinated
Debentures shall rank pari passu with respect to all other debt securities and
guarantees in respect thereof issued to any other trusts, partnerships or other
entity affiliated with the Corporation which is a financing vehicle of the
Corporation in connection with the issuance of preferred securities by such
financing vehicle, or (iii) any indebtedness of the Corporation to a subsidiary
of the Corporation.
The Indenture does not limit the aggregate amount of indebtedness,
including Senior Indebtedness, that may be issued. Because the Corporation will
be a holding company after the Merger, the Junior Subordinated Debentures will
be effectively subordinated to all existing and future liabilities, including
trade payables, of the Corporation's subsidiaries. Any right of the Corporation
to participate in any distribution of the assets of any of the Corporation's
subsidiaries, including the Operating Partnership, upon the liquidation,
reorganization or insolvency of such subsidiary (and the consequent right of the
holders of the Junior Subordinated Debentures to participate in those assets)
will be subject to the claims of the creditors (including trade creditors) and
preferred stockholders of such subsidiary, except to the extent that claims of
the Corporation itself as a creditor of such subsidiary may be recognized, in
which case the claims of the Corporation would still be subordinate to any
security interest in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Corporation. At September 30, 1996, the
Operating Partnership had outstanding indebtedness of $81,186,000, all of which
had been guaranteed by the Partnership. For a discussion of indebtedness to be
outstanding after the Merger, see "CAPITALIZATION." There are no terms in the
Trust Preferred Securities, the Junior Subordinated Debentures or the Preferred
Securities Guarantee that limit the Corporation's ability to incur additional
indebtedness, including indebtedness that ranks senior to or pari passu with the
Junior Subordinated Debentures and the Preferred Securities Guarantee, or the
ability of its subsidiaries to incur additional indebtedness. See "DESCRIPTION
OF PREFERRED SECURITIES GUARANTEE -- Status of the Preferred Securities
Guarantee."
Indenture Events of Default
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Indenture Event of
Default" with respect to the Junior Subordinated Debentures:
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(a) failure for 30 days to pay interest on the Subordinated
Debentures when due; provided that a valid extension of the interest payment
period by the Corporation shall not constitute a default in the payment of
interest for this purpose; or
(b) failure to pay principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at maturity, upon redemption, by
declaration or otherwise; or
(c) failure to observe or perform any other covenant contained in
the Indenture with respect to the Junior Subordinated Debentures for 90 days
after written notice to the Corporation from the Indenture Trustee or the
holders of at least 25% in principal amount of the outstanding Junior
Subordinated Debentures; or
(d) certain events in bankruptcy, insolvency or reorganization of
the Corporation.
In each and every such case, unless the principal of all the Junior
Subordinated Debentures of shall have already become due and payable, either the
Indenture Trustee or the holders of not less than 25% in aggregate principal
amount of the Junior Subordinated Debentures then outstanding, by notice in
writing to the Corporation (and to the Indenture Trustee if given by such
holders), may declare the principal of all the Junior Subordinated Debentures to
be due and payable immediately, and upon any such declaration the same shall
become and shall be immediately due and payable.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon an Indenture Event of Default,
but the holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures may annul such declaration and waive the default
if the default has been cured and a sum sufficient to pay all matured
installments of interest and principal otherwise than by acceleration and any
premium has been deposited with the Indenture Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures then outstanding may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal, premium, if any, or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal otherwise than by acceleration and any premium has been deposited
with the Indenture Trustee) or a call for redemption of Junior Subordinated
Debentures. The Corporation is required to file annually with the Indenture
Trustee a certificate as to whether or not the Corporation is in compliance with
all the conditions and covenants under the Indenture.
An Indenture Event of Default also constitutes an Event of Default under
the Declaration. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -Declaration
Events of Default."
Modification of the Indenture
The Indenture contains provisions permitting the Corporation and the
Indenture Trustee, with the consent of the holders of not less than a majority
in principal amount of the outstanding Junior Subordinated Debentures, to modify
the Indenture or any supplemental indenture affecting the rights of the holders
of such Junior Subordinated Debentures; provided that no such modification may,
without the consent of the holder of each outstanding Junior Subordinated
Debenture affected thereby, (i) change the time for payment of principal or
interest on any Junior Subordinated Debenture; (ii) reduce the principal of , or
any installment of principal of, or interest on, or reduce any premium payable
upon the redemption of, any Junior Subordinated Debenture; (iii) change the coin
or currency in which any Junior Subordinated Debenture or interest thereon is
payable; (iv) impair the right to institute suit for the enforcement of any
payment on or with respect to any Junior Subordinated Debenture; (v) reduce the
percentage in principal amount of the outstanding Junior Subordinated Debentures
the consent of which holders is required for modification or amendment of the
Indenture or for waiver of compliance with certain provisions of the Indenture
or for waiver of certain defaults; (vi) change the obligation of the Corporation
to maintain an office or agency in the places and for the purposes specified in
the Indenture; (vii) modify the provisions relating to waiver of certain
defaults or any of the foregoing provisions; or (viii) modify the provisions
with respect to the subordination of the Junior Subordinated Debentures.
Book-Entry and Settlement
If any Junior Subordinated Debentures are distributed to holders of Trust
Preferred Securities (see "DESCRIPTION OF TRUST PREFERRED SECURITIES"), such
Junior Subordinated Debentures will be issued in fully registered form. In such
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event, investors may elect to hold their Junior Subordinated Debentures directly
or, subject to the rules and procedures of DTC, hold interests in a global
certificate registered in the name of DTC or its nominee.
For a description of DTC and DTC's book-entry system, see "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Book-Entry; Delivery and Form." As of the date of
this Proxy Statement/Prospectus, the description herein of DTC's book-entry
system and DTC's practices as they relate to purchases, transfers, notices and
payments with respect to the Trust Preferred Securities apply in all material
respects to any Junior Subordinated Debentures registered in the name of and
held by DTC or its nominee.
Consolidation, Merger and Sale
The Indenture provides that the Corporation may not consolidate with or
merge into any other person or sell, convey, transfer or lease or otherwise
dispose of all or substantially all of its properties and assets to any person
and may not permit any person to merge into or consolidate with the Corporation
unless (i) either the Corporation will be the resulting or surviving entity or
any successor or purchaser is a corporation organized under the laws of the
United States of America, any State or the District of Columbia, and any such
successor or purchaser expressly assumes the Corporation's obligations under the
Indenture and (ii) immediately after giving effect to the transaction no
Indenture Event of Default, and no event which, after notice or lapse of time or
both, would become an Indenture Event of Default, shall have occurred and be
continuing.
Defeasance and Discharge
Under the terms of the Indenture, the Corporation will be discharged from
any and all obligations in respect of the Junior Subordinated Debentures (except
in each case for certain obligations to register the transfer or exchange of
Junior Subordinated Debentures, replace stolen, lost or mutilated Junior
Subordinated Debentures, maintain paying agencies and hold moneys for payment in
trust) if (i) the Corporation irrevocably deposits with the Indenture Trustee
cash or U.S. Government Obligations, as trust funds in an amount certified to be
sufficient to pay at maturity (or upon redemption) the principal of, premium, if
any, and interest on all outstanding Junior Subordinated Debentures; (ii) the
Corporation delivers to the Indenture Trustee an opinion of counsel to the
effect that the holders of the Junior Subordinated Debentures will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance and that defeasance will not otherwise alter such holders'
United States federal income tax treatment of principal, premium and interest
payments on such Junior Subordinated Debentures (such opinion must be based on a
ruling of the Internal Revenue Service or a change in United States federal
income tax law occurring after the date of such Indenture, since such a result
would not occur under current tax law); and (iii) no event or condition shall
exist that, pursuant to certain provisions described under "Subordination"
above, would prevent the Corporation from making payments of principal of,
premium, if any, and interest on the Junior Subordinated Debentures at the date
of the irrevocable deposit referred to above.
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed by,
and construed in accordance with, the laws of the State of New York.
Information Concerning the Indenture Trustee
The Indenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Junior Subordinated Debentures, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities that might be incurred thereby. The Indenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it. The
Indenture Trustee is one of a number of banks with which the Corporation and its
subsidiaries maintain ordinary banking and trust relationships.
Miscellaneous
The Corporation will have the right at all times to assign any of its
rights or obligations under the Indenture to a direct or indirect wholly owned
subsidiary of the Corporation; provided that, in the event of any such
assignment, the Corporation will remain jointly and severally liable for all
such obligations. Subject to the foregoing, the Indenture will be binding upon
and inure to the benefit of the parties thereto and their respective successors
and assigns. The Indenture provides that it may not
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otherwise be assigned by the parties thereto other than by the Corporation to a
successor or purchaser pursuant to a consolidation, merger or sale permitted by
the Indenture.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
distributions and other payments due on the Trust Preferred Securities primarily
because (i) the aggregate principal amount of Junior Subordinated Debentures
held as trust assets will be equal to the sum of the aggregate stated
liquidation amount of the Trust Preferred Securities and the proceeds received
by the Trust upon issuance of the Trust Common Securities to the Corporation;
(ii) the interest rate and interest and other payment dates on the Junior
Subordinated Debentures will match the distribution rate and distribution and
other payment dates for the Trust Preferred Securities; (iii) the Indenture and
Declaration provides that the Corporation shall pay for all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust, including any taxes and all costs and expenses with
respect thereto, to which the Trust may become subject, except for United States
withholding taxes; and (iv) the Declaration further provides that the Trustees
shall not cause or permit the Trust, among other things, to engage in any
activity that is not consistent with the limited purposes of the Trust. With
respect to clause (iii) above, however, no assurance can be given that the
Corporation will have sufficient resources to enable it to pay such debts,
obligations, costs and expenses on behalf of the Trust.
Payments of distributions and other payments due on the Trust Preferred
Securities are guaranteed by the Corporation on a subordinated basis as and to
the extent set forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." If
the Corporation does not make interest or other payments on the Junior
Subordinated Debentures, the Trust will not make distributions or other payments
on the Trust Preferred Securities. Under the Declaration, if and to the extent
the Corporation does make interest or other payments on the Junior Subordinated
Debentures, the Property Trustee is obligated to make distributions or other
payments on the Trust Preferred Securities. The Preferred Securities Guarantee
is a guarantee from the time of issuance of the Trust Preferred Securities, but
the Preferred Securities Guarantee covers distributions and other payments on
the Trust Preferred Securities only if and to the extent that the Corporation
has made a payment to the Property Trustee of interest or principal on the
Junior Subordinated Debentures deposited in the Trust as trust assets. In the
event the Corporation fails to make such payments, a holder of Trust Preferred
Securities may institute a legal proceeding directly against the Corporation
under the Indenture to enforce payment of such distributions to such holder
after the respective due dates. Taken together, the Corporation's obligations
under the Junior Subordinated Debentures, the Indenture and the Preferred
Securities Guarantee provide, in the aggregate, a full and unconditional
guarantee of payments of distributions and other amounts due on the Trust
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full and unconditional guarantee of the Trust's
obligations under the Trust Preferred Securities.
If an Appointment Event occurs, the Declaration provides that the holders
of the Trust Preferred Securities may appoint a Special Regular Trustee who will
have the same rights, powers and privileges under the Declaration as the Regular
Trustees. The Property Trustee will have the power to exercise all rights,
powers and privileges under the Indenture with respect to the Junior
Subordinated Debentures, including its rights as the holder of the Junior
Subordinated Debentures to enforce the Corporation's obligations under the
Junior Subordinated Debentures upon the occurrence of an Indenture Event of
Default, and will also have the right to enforce the Preferred Securities
Guarantee on behalf of the holders of the Trust Preferred Securities. In
addition, the holders of at least a majority in liquidation amount of the Trust
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and the Preferred Securities
Guarantee. Under certain circumstances, holders of Trust Preferred Securities
may institute a legal proceeding against the Corporation to enforce the
Preferred Securities Guarantee and the Corporation's payment obligations on the
Junior Subordinated Debentures. See "DESCRIPTION OF TRUST PREFERRED SECURITIES"
and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE."
The above mechanisms and obligations, taken together, constitute a full
and unconditional guarantee by the Corporation of payments due on the Trust
Preferred Securities.
If a Special Event shall occur and be continuing, the Trust shall be
dissolved unless the Junior Subordinated Debentures are redeemed in the limited
circumstances described below, with the result that Junior Subordinated
Debentures held by the
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Trust having an aggregate principal amount equal to the aggregate stated
liquidation amount of the Trust Preferred Securities and Trust Common Securities
will be distributed on a Pro Rata Basis in exchange for the outstanding Trust
Preferred Securities and Trust Common Securities, subject in the case of a Tax
Event to the Corporation's right in certain circumstances to redeem Junior
Subordinated Debentures as described under "DESCRIPTION OF TRUST PREFERRED
SECURITIES -- Special Event Redemption or Distribution." The Trust Preferred
Securities represent preferred undivided beneficial interests in the assets of
the Trust, a statutory business trust which exists for the purpose of (a)
issuing (i) its Trust Preferred Securities pursuant to the Conversion to holders
of A Interests in consideration for the deposit by the Corporation of Junior
Subordinated Debentures in the Trust as trust assets, and (ii) its Trust Common
Securities to the Corporation in exchange for cash and investing the proceeds
thereof in an equivalent amount of Junior Subordinated Debentures and (b)
engaging in such other activities as are necessary or incidental thereto.
Upon any voluntary or involuntary dissolution, winding-up or termination
of the Trust, the holders of Trust Preferred Securities will be entitled to
receive the Liquidation Distribution in cash or Junior Subordinated Debentures
and will be entitled to the benefits of the Preferred Securities Guarantee with
respect to any such distribution. See "DESCRIPTION OF TRUST PREFERRED SECURITIES
- -- Liquidation Distribution Upon Dissolution." Upon any voluntary or involuntary
liquidation or bankruptcy of the Corporation, the holders of Junior Subordinated
Debentures would be subordinated creditors of the Corporation, subordinated in
right of payment to all Senior Indebtedness, but entitled to receive payment in
full of principal, premium, if any, and interest, before any stockholders of the
Corporation receive payments or distributions.
A default or event of default under any Senior Indebtedness would not
constitute a default or event of default under the Junior Subordinated
Debentures. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness, the subordination provisions of the Junior Subordinated
Debentures provide that no payments may be made in respect of the Junior
Subordinated Debentures. Failure to make required payments on the Junior
Subordinated Debentures would constitute an event of default under the
Indenture.
DESCRIPTION OF CAPITAL STOCK
Preferred Stock
The Certificate of Incorporation of the Corporation authorizes the
issuance of 1,000,000 shares of Preferred Stock, par value $.01 per share, by
the Board of Directors in one or more classes or series and with such voting
powers, designations, preferences and relative participating, optional or other
special rights and such qualifications, limitations, or restrictions thereof as
shall be set forth in the resolutions of the Board of Directors authorizing such
issuance. There will be no shares of Preferred Stock outstanding after the
Merger. There will be reserved for issuance 64,189 shares of Series A Junior
Participating Preferred Shares pursuant to the Corporation's Stockholder Rights
Plan. See "-- Stockholder Rights Plan."
Common Stock
The Certificate of Incorporation of the Incorporation authorizes the
issuance of 20,000,000 shares of Common Stock, par value of $.01 per share, of
which 1,000 shares are currently outstanding and owned by the Partnership. After
the Merger, there will be 6,418,936 shares of Common Stock outstanding.
Holders of shares of the Corporation's Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders. There are no
cumulative voting rights with respect to the election of directors. Subject to
preferences that may be applicable to any outstanding Preferred Stock, holders
of shares of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Corporation, the holders of shares of Common Stock are entitled to
share ratably in all assets after satisfaction of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. Shares of
Common Stock have no preemptive, conversion or other subscription rights and
there are no redemption or sinking fund provisions applicable to the Common
Stock.
Stockholders Agreement
The Corporation and certain of its stockholders have entered into a
Stockholders Agreement dated as of _____________, that contains certain
restrictions with respect to voting and sale of shares of Common Stock. The
Stockholders Agreement requires the Corporation to include certain provisions in
its bylaws. See "-- Bylaw Provisions." In addition, the Stockholders Agreement
provides that Lehman Brothers and each of the following members of management,
Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J. Cornelius,
Max W. Hillman and Joseph M.
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Corvino (the "Senior Executives") will agree with the Corporation not to sell
any shares of Common Stock that they beneficially own, in a single transaction
or series of related transactions, to any third person(s) which, to the
knowledge of Lehman Brothers and its affiliates and the Senior Executives, after
reasonable inquiry, would beneficially own after such transactions more than 10%
of the outstanding Common Stock (or more than 15% of the outstanding common
stock if such third person(s) are eligible to report the acquisition of such
shares on Schedule 13G pursuant to clauses (i), (ii) and (iii) of Rule
13d-1(b)(1) under the Exchange Act, as such rule is currently in effect.) The
Stockholders Agreement also contains provisions that restrict the respective
voting power of Lehman Brothers and the Senior Executives. Under the terms of
such restriction, such persons will agree to vote, in the same proportion as the
"Unaffiliated Shares" that are voted on any such matter, that percentage of
Excess Voting Shares held by them at such time that equals the percentage of
outstanding Unaffiliated Shares that are voted on such matter. "Excess Voting
Shares" means the shares of Common Stock beneficially owned by Lehman Brothers
and its affiliates and the Senior Executives, at any time, that represents
voting power in excess of the respective voting powers immediately prior to the
Conversion that they would have had in a vote of the holders of A Interests and
B Interests voting together as a single class. See also "-- Bylaw Provisions"
below.
The Stockholders Agreement contains a provision regarding nomination of
the Board of Directors of the Corporation. The Board of Directors of the
Corporation will consist of up to nine members, of whom three will be nominated
by management, four will be independent and either one or two will be appointed
by Lehman Brothers, depending upon the percentage of Common Stock held by Lehman
Brothers. Anti-takeover Provisions
Certain provisions of the Corporation's Bylaws, the Stockholder Rights
Plan and the change in control provisions in the Deferred Compensation Plans
could have an anti-takeover effect. See "MANAGEMENT -- Change in Control
Arrangements." These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Corporation's Board of
Directors and management and in the policies formulated by the Board of
Directors and to discourage an unsolicited takeover of the Corporation if the
Board of Directors determines that the takeover is not in the best interests of
the Corporation and its stockholders. However, these provisions could have the
effect of discouraging certain attempts to acquire the Corporation or remove
incumbent management even if some or a majority of stockholders deemed such an
attempt to be in their best interests.
Bylaws Provisions. The Bylaws provide that any action required or
permitted to be taken by the stockholders of the Corporation may be effected
only at an annual or special meeting of stockholders. Stockholders are permitted
to call a special meeting or to require that the Board of Directors call a
special meeting of stockholders if such meeting is called by holders of at least
25% of outstanding Common Stock. In addition, the stockholders may act by
written consent in lieu of a meeting with a number of votes sufficient for such
action.
The Bylaws establish an advance notice procedure for the nomination of
candidates for election as directors, other than by or at the direction of the
Board of Directors, as well as for other stockholder proposals to be considered
at annual meetings of stockholders. In general, notice of intent to nominate a
director or raise business at such meetings must be received at least 60 days
prior to any annual meeting and must contain certain specified information
concerning the persons to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.
Pursuant to the terms of the Stockholders Agreement, the Bylaws provide
that prior to the third anniversary of the date of the Conversion, the approval
of at least a majority of the Corporation's Independent Directors is required to
approve and authorize (i) amendments to the Corporation's Certificate of
Incorporation or Bylaws or any stockholder rights plan of the Corporation
(including the redemption of the rights thereunder or waiver of any provision
thereof) or any waiver of, or "opt- out" from, the benefit or effect of any
anti-takeover statute or other provision applicable to the Corporation
(including Section 203 of the Delaware General Corporation Law) or (ii) any
agreement binding the Corporation in respect of the sale, in a single
transaction or a series of related transactions, of all or a substantial part of
the Corporation. In addition, the approval of at least a majority of the
Corporation's Independent Directors is required to approve and authorize (i) any
transaction or series of related transactions between the Corporation or any of
its subsidiaries, on the one hand, and SDI Partners I, L.P., Lehman Brothers
Capital Partners I, Lehman/SDI, Inc. or Lehman Brothers Inc. or any affiliate of
these entities on the other, so long as any of such entities and its affiliates
own, in the aggregate, at least 10% of the outstanding Common Stock, (ii) any
amendment to, or waiver of, any provision of the Stockholders Agreement, or
(iii) any amendment to the Certificate of Incorporation or Bylaws that would
amend these restrictive provisions.
Stockholder Rights Plan. The Corporation has adopted a Stockholder Rights
Plan pursuant to a Rights Agreement, dated as of the Effective Time, between the
Corporation and ___________. The Plan is designed to insure that all
stockholders of the Corporation receive fair value for their shares of Common
Stock in the event of any proposed takeover of
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the Corporation and to guard against the use of partial tender offers or other
coercive tactics to gain control of the Corporation without offering fair value
to the Corporation's stockholders. Under the Rights Plan, each share of Common
Stock will have attached thereto a Right. Each Right entitles the registered
holder to purchase from the Corporation one one-hundredth of a share of Series A
Junior Participating Preferred Shares, par value $.01 per share, of the
Corporation (the "Preferred Shares"), or a combination of securities and assets
of equivalent value, at a Purchase Price of ________, subject to adjustment. The
Purchase Price may be paid, at the option of the holder, in cash or shares of
Common Stock having a value at the time of exercise equal to the Purchase Price.
Until the Distribution Date, ownership of the Rights will be evidenced by
and will be transferred with and only with the certificates representing the
shares of Common Stock, and no separate Rights Certificates will be distributed.
The Distribution Date will occur upon the earlier of (i) 10 days following a
public announcement that a person or group has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding shares of
Common Stock, or (ii) the close of business on a date fixed by the Board of
Directors following the commencement of a tender offer or exchange offer that
would result in a person or group beneficially owning 20% or more of the
outstanding shares of Common Stock. The Rights are not exercisable until the
Distribution Date and will expire at the close of business on April 30, 2007,
unless earlier redeemed by the corporation as described below. The percentage
ownership of shares of Common Stock by Lehman Brothers after the Conversion will
not cause a Distribution Date to occur.
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable into one one-hundredth of a Preferred Share (a
"Preferred Share Fraction"). Each Preferred Share Fraction carries voting and
dividend rights that are intended to produce the equivalent of one share of
Common Stock. Each Preferred Share Fraction will entitle the holder to receive
dividends each calendar quarter in an amount equal to the greater of $.02 or the
aggregate per share amount in cash of all dividends or other distributions
(other than dividends payable in Common Stock) declared on the Common Stock
during the preceding quarter. Each Preferred Share Fraction will entitle the
holder to one vote on all matters submitted to a vote of the stockholders of the
Corporation. Each Preferred Share Fraction will have a liquidation preference
equal to the greater of $1.00 per share, plus accrued dividends, or an amount
per share equal to the aggregate amount to be distributed per share to holders
of Common Stock. The Preferred Share Fractions are not redeemable.
It is unlikely that a holder of a Right will ever exercise the Right to
receive Preferred Shares. The Rights may be exercised if a "Flip-in" or
"Flip-over" event occurs.
If a "Flip-in" event occurs and the Distribution Date has passed, the
holder of each Right, with the exception of the Acquiror, is entitled to
purchase $______ worth of Common Shares for $_____. The Rights will no longer be
exercisable into Preferred Shares at that time. A "Flip-in" event takes place if
one of the following happens:
o A person or group acquires 20% or more of the outstanding Common
Stock.
o A 20% stockholder merges with or acquires the Corporation and an
equity security of the Corporation remains outstanding.
o A 20% stockholder engages in "self-dealing" transactions with the
Corporation. Examples of this are the receipt of stock from the
Corporation or the sale of assets by the 20% stockholder to the
Corporation on the terms and conditions less favorable to the
Company than the Company would be able to obtain in an arm's
length negotiation with an unaffiliated third party.
If a "Flip-over" event occurs, the holder of Rights is entitled to
purchase $_____ worth of the Acquiror's stock for $_____ for each Right held. A
"Flip-over" event occurs if the Corporation is acquired or merged and no
outstanding shares remain or if 50% of the Corporation's assets or earning power
is sold or transferred. The Rights Plan prohibits the Corporation from entering
into this sort of transaction unless the Acquiror agrees to comply with the
"Flip-over" provisions of the Plan.
The Rights can be redeemed by the Corporation for $.01 per right until up
to ten days after the public announcement that someone has acquired 20% or more
of the Corporation's Common Shares or the Board can extend the redemption period
for as long as it determines appropriate. If the Rights are not redeemed or
substituted by the Corporation, they will expire on April 30, 2007.
-114-
<PAGE>
Limitation of Liability
As permitted by the Delaware General Corporation Law (the "DGCL"), the
Corporation's Certificate of Incorporation provides that directors of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to prohibited dividends or distributions or
the repurchase or redemption of stock, or (iv) for any transaction from which
the director derives an improper personal benefit.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is Registrar and
Transfer Company.
RESALE OF SECURITIES
Securities Act Restrictions
Trust Preferred Securities and shares of Common Stock received by persons
who may be deemed to be "affiliates" of the Partnership may be sold by those
persons only in accordance with the provisions of Rule 145 under the Securities
Act, pursuant to an effective registration under the Securities Act or in
transactions that are exempt from registration under the Securities Act. Rule
145 provides, in general, that the securities may be sold by the affiliate
during the one year following the date the securities were acquired from the
Corporation if (i) there is available adequate current public information with
respect to the Corporation and (ii) the number of Trust Preferred Securities or
shares of Common Stock sold within any three month period does not exceed the
greater of 1% of the total number of outstanding Trust Preferred Securities or
shares of Common Stock, as the case may be, or the average weekly trading volume
of the particular security during the four calendar weeks immediately preceding
the date of receipt of the order to execute the transaction by a broker or the
date of execution of the transaction directly with a market maker and (iii) the
securities are sold in transactions directly with a "market maker" or in
"brokers' transactions" within the meaning of Rule 144 under the Securities Act.
Rule 145 further provides that during the second year following the date the
securities were acquired from the Corporation the affiliate may sell such
securities if the affiliate is not an affiliate of the Corporation and there is
available adequate public information with respect to the Corporation, and
thereafter the affiliate may sell the securities without restriction if the
affiliate is not, and has not been for at least three months, an affiliate of
the Corporation.
Resales by Lehman Brothers and Management
Lehman Brothers and Messrs. Marshall, McDonnell and Edmonson have agreed
to cooperate to execute an underwritten secondary offering of their shares of
Common Stock, as soon as practicable after the effective date of the Conversion
pursuant to the registration rights described below, subject to market
conditions. Such parties have agreed not to sell their shares of Common Stock
prior to such secondary offering; provided that such restriction will lapse with
respect to sales pursuant to Rule 144 or Rule 145 under the Securities Act if
the secondary offering has not been consummated within nine months after the
effective date of the Conversion. Notwithstanding the foregoing, such parties
have agreed that Lehman Brothers Capital Partners I L.P. may distribute shares
of Common Stock that it holds to its partners at any time and that the
subsequent sale or transfer of such shares by such partners (other than shares
distributed to the general partner of Lehman Brothers Capital Partners I L.P.)
is not restricted.
In connection with the foregoing, the Corporation has entered into a
registration rights agreement with Lehman Brothers and Messrs. Marshall,
McDonnell and Edmonson affording registration rights with respect to all of the
shares of Common Stock to be acquired by Lehman Brothers pursuant to the
Conversion and 20% of the shares of Common Stock to be acquired by such
individuals pursuant to the Conversion. Lehman Bothers has the right to demand
registration of all or part of its registrable shares in the contemplated
initial secondary offering and registration of any remaining shares pursuant to
a shelf registration statement. Such individuals have the right to register
their registrable shares on a pro rata basis with Lehman Brothers in the initial
secondary offering. In addition, Lehman Brothers and such individuals have
piggy-back registration rights with respect to all subsequent primary and
secondary offerings of Common Stock.
The Corporation has agreed not to sell any additional shares of Common
Stock prior to the earlier of such initial secondary offering and the nine-month
anniversary of the Conversion, except in connection with acquisitions.
-115-
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby, and certain federal income
tax matters set forth under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," will be
passed upon for the Partnership by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Morgan, Lewis & Bockius LLP will rely as to certain matters of
Delaware law on Richards, Layton & Finger, Wilmington, Delaware. Donald A.
Scott, a partner in Morgan, Lewis & Bockius LLP, is a director of the
Partnership and will become a director of the Corporation.
EXPERTS
The consolidated financial statements of the Partnership at December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants, as
set forth in their report dated March 8, 1996, and are included in reliance upon
such report and the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Partnership is (and following the Conversion, the Corporation will be)
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files (and
will file) reports and other information with the Securities and Exchange
Commission (the "SEC"). Such reports and other information may be inspected and
copied at the public reference facilities maintained by the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven
World Trade Center, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this
material should also be available on-line through EDGAR and may be obtained at
the prescribed rates from the Public Reference Section of the SEC at its
principal office in Washington, D.C. The SEC also maintains a Web site
(http://www.sec.gov) that contains reports and other information regarding
SunSource. Such reports and other information concerning the Partnership can
also be inspected at the office of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005, the exchange on which the limited partnership
interests are listed (and on which application has been made to list the Trust
Preferred Securities and Common Stock).
The Partnership, the General Partner and Lehman/SDI have filed with the
SEC a Schedule 13E-3 under the Exchange Act. The Corporation and the Trust have
filed with the SEC a Registration Statement on Form S-4 under the Securities Act
of 1933, as amended (the "Securities Act") with respect to the securities
offered hereby. This Proxy Statement/Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Schedule 13E-3 and in the Registration Statement and the exhibits and schedules
thereto on file with the SEC pursuant to the Exchange Act and the Securities Act
and the rules and regulations of the SEC thereunder. Statements contained in
this Proxy Statement/Prospectus as to the contents of any contract or other
document are necessarily summaries of such documents, and, although all material
elements of such documents or descriptions are set forth in this Proxy
Statement/Prospectus, such statements are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or Schedule 13E-3, each such
statement being qualified in all respects by such reference.
No separate financial statements of the Trust have been included or
incorporated by reference herein. The Corporation and the Trust do not consider
that such financial statements would be material to holders of Trust Preferred
Securities because (i) all of the voting securities of the Trust will be owned,
directly or indirectly, by the Corporation, a reporting company under the
Exchange Act, (ii) the Trust has no independent operations but exists for the
sole purpose of issuing securities representing undivided beneficial interests
in its assets and investing the proceeds thereof in Junior Subordinated
Debentures issued by the Corporation, and (iii) the obligations of the Trust
under the Trust Preferred Securities are fully and unconditionally guaranteed by
the Corporation as described herein. See "RELATIONSHIP AMONG THE TRUST PREFERRED
SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES
GUARANTEE."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement/Prospectus incorporates documents by reference which
are not presented herewith. These documents (without exhibits, unless such
exhibits are specifically incorporated by reference herein) are available
without charge to each person to whom a copy of this Proxy Statement/Prospectus
is delivered, upon written or oral request addressed to SunSource L.P., 2600 One
Logan Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino,
Secretary, telephone number (215) 665-3650. In order to ensure timely delivery
of the documents, any request should be made by April __, 1997.
-116-
<PAGE>
The following documents of the Partnership have been filed with the SEC
and are incorporated herein by reference:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
(b) Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 1996, June 30, 1996 and September 30, 1996.
(c) Current Report on Form 8-K filed on December 19, 1996.
All documents filed by the Partnership pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement/Prospectus and to
be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
which also is incorporated herein) modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed to constitute a
part hereof except as so modified or superseded.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SunSource L.P. and Subsidiaries
<TABLE>
<CAPTION>
<S> <C>
Unaudited Pro Forma Consolidated Financial Statements - Page
------
Introduction to Unaudited Pro Forma Consolidated Financial Statements F-2
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1996................................................... F-3
Unaudited Pro Forma Consolidated Statement of Income for the twelve
months ended December 31, 1996...................................... F-4
Notes to Unaudited Pro Forma Consolidated Financial Statements....... F-5:10
SunSource, Inc. - Unaudited Balance Sheet as of December 31, 1996 F-11:12
Audited Historical Consolidated Financial Statements
Report of Independent Accountants.................................... F-13
Consolidated Balance Sheets as of December 31, 1996 and 1995......... F-14
Consolidated Statements of Income for the Years ended
December 31, 1996, 1995 and 1994.................................... F-15
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994.................................... F-16
Consolidated Statements of Changes in Partners' Capital
for the Years ended December 31, 1996, 1995 and 1994................ F-17
Notes to Consolidated Financial Statements........................... F-18:38
</TABLE>
F - 1
<PAGE>
SunSource L.P. and Subsidiaries
Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated financial statements of SunSource
L.P. ("the Partnership"), give effect to the proposed conversion of the
Partnership to corporate form. In connection with the conversion, the
Partnership intends to recapitalize its outstanding long-term debt. The
Conversion and recapitalization ("the transaction") will be effected through the
formation of a new corporation, SunSource, Inc.
The unaudited pro forma consolidated statement of income for the twelve months
ended December 31, 1996, assumes the transaction occurred on January 1, 1996.
The pro forma balance sheet assumes the transaction occurred on December 31,
1996.
The pro forma consolidated financial statements are not necessarily indicative
of operating results or financial position that would have been achieved had the
transaction occurred on the dates indicated and should not be construed as
representative of future operating results or financial position.
The pro forma consolidated financial statements and accompanying notes should be
read in conjunction with the historical financial statements and related notes
thereto included in this Proxy/Prospectus.
F - 2
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 (UNAUDITED)
-------------------------------------------------------
PRO FORMA
ADJUSTMENTS
-----------------------
ASSETS PARTNERSHIP AMOUNT NOTE* CORPORATION
------ ----------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,666 $ (1,666) 2A $ --
Accounts and notes receivable, net 78,578 -- 78,578
Inventories 102,396 -- 102,396
Deferred income taxes -- 9,667 2B 9,667
Other current assets 4,672 4,672
----------- ---------- -----------
Total current assets 187,312 8,001 195,313
Property and equipment, net 21,409 -- 21,409
Goodwill 43,036 -- 43,036
Deferred income taxes 5,007 (1,461) 2B 3,546
Other assets 5,791 346 2C 6,137
----------- ----------- -----------
Total assets $ 262,555 $ 6,886 $ 269,441
=========== =========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts and notes payable, trade $ 51,227 $ -- $ 51,227
Current portion of senior notes 6,395 (6,395) 2D --
Distributions payable 1,857 (838) 2E 1,019
Accrued expenses:
Interest on senior notes 473 (473) 2D --
Management fee due the general partner 3,330 (3,330) 2F --
Other accrued expenses 23,249 -- 23,249
----------- ----------- -----------
Total current liabilities 86,531 (11,036) 75,495
Senior notes 57,539 2,461 2D 60,000
Bank revolving credit 11,000 28,298 2D 39,298
Other liabilities 12,866 (971) 2G 11,895
----------- ----------- -----------
Total liabilities 167,936 18,752 186,688
----------- ----------- -----------
Guaranteed preferred beneficial
interests in the Corporation's
junior subordinated debentures -- 105,446 2G 105,446
----------- ----------- -----------
Partners' Capital:
General partner 960 (960) 2G --
Limited partners:
Class A interests 67,642 (67,642) 2G --
Class B interests 29,040 (29,040) 2G --
Class B interests held in treasury (1,514) 1,514 2G --
Cumulative foreign currency
translation adjustment (1,509) 1,509 2G --
----------- ----------- -----------
Total partners' capital 94,619 (94,619) --
----------- ----------- -----------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000
shares authorized, none issued -- -- 2G --
Common stock $0.01 par, 20,000,000
shares authorized; 6,418,936 shares
issued and outstanding -- 64 2G 64
Accumulated deficit -- (21,248) 2G (21,248)
Cumulative foreign currency
translation adjustment -- (1,509) 2G (1,509)
----------- ----------- ------------
Total stockholders' deficit -- (22,693) (22,693)
----------- ----------- ------------
Total liabilities, partners' capital,
preferred beneficial interests and
stockholders' deficit $ 262,555 $ 6,886 $ 269,441
=========== =========== ===========
Pro forma negative net book value per common share: $ (3.54)
============
</TABLE>
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 3
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1996
-------------------------------------------------------------------------
Pro Forma * Non-recurring *
Partnership Adjustments Note Item Note Corporation
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 649,254 $ -- $ -- $ 649,254
Cost of sales 386,251 -- -- 386,251
------------ ----------- ----------- -----------
Gross profit 263,003 -- -- 263,003
------------ ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative expenses 221,574 -- -- 221,574
Management fee to general partner 3,330 (3,330) 3A -- --
Depreciation 3,623 -- -- 3,623
Amortization 1,924 -- -- 1,924
------------ ----------- ----------- -----------
Total operating expenses 230,451 (3,330) -- 227,121
------------ ----------- ----------- -----------
Restructuring charges 5,950 (5,950) 3G --
Transaction costs 2,150 (2,150) 3B -- --
------------ ----------- ----------- -----------
Income from operations 24,452 5,480 5,950 35,882
Interest expense, net 6,875 1,219 3C 8,094
Other income, net 550 195 3D 745
Distribution on guaranteed preferred
beneficial interests in Corporation's
junior subordinated debentures -- (12,232) 3E (12,232)
----------- ----------- ----------- ------------
Income before income taxes 18,127 (7,776) 5,950 16,301
Provision (benefit) for income taxes (1,140) 7,317 3F 1,034 3G 7,211
------------ ----------- ----------- -----------
Net income $ 19,267 $ (15,093) $ 4,916 3G $ 9,090
============ =========== =========== ===========
Net income allocated to partners:
General partner $ 193
-----------
Class A limited partners $ 12,210
-----------
Class B limited partners $ 6,864
-----------
Earnings per limited partnership interest:
- Class A interest $ 1.10
- Class B interest $ 0.32
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573
- Class B interests 21,675,746
Net income per common share $ 1.42
Weighted average number of outstanding common shares 6,418,936
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 4
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include pro forma consolidated accounts of
SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). On December 11, 1996, the
Partnership announced the terms of a plan to convert from its current limited
partnership structure to a taxable C corporation, which must be approved by a
majority of the holders of the Class A and Class B interests unaffiliated with
SDI Partners I, L.P., the General Partner ("GP"), and Lehman Brothers Holdings,
Inc. ("Lehman Holdings") and affiliates, each voting separately as a class. In
connection with the conversion of the partnership to corporate form, the
Partnership intends to refinance its outstanding long-term debt (see Note 2D).
The conversion and refinancing ("the transaction") will be effected through the
formation of a new corporation, SunSource Inc. ("the Corporation").
The transaction, as proposed, does not result in a change of control and is
essentially a recapitalization. The assets and liabilities of the Partnership
will be recorded by the Corporation at their historical amounts. The Class B
Interests and the GP Interests will also be transferred at historical basis. The
Corporation will, however, record incremental deferred tax assets in accordance
with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
relating to the temporary differences for certain assets and liabilities at the
date of conversion to corporate form (see note 2B below). The Corporation will
also record a tax provision on its taxable income for federal and state
corporate income taxes. Transaction costs of the conversion are estimated to be
$3,600, of which $2,150 has been recorded by the Partnership through December
31, 1996 and the remaining $1,450 will be recorded by the Partnership in the
consolidated statement of income prior to the conversion. The Corporation will
incur a make-whole penalty after the conversion, estimated at $5,000, related to
the repayment of its existing senior notes with borrowing under new credit
facilities.
See Notes 2 and 3 for a description of the adjustments made on the pro forma
financial statements to effect the transaction. The accompanying pro forma
consolidated financial statements and related notes have not been audited. In
management's opinion, all adjustments considered necessary for the fair
presentation of financial position and income for the unaudited pro forma
financial statements presented have been reflected. Results for periods for
which pro forma statements are provided are not necessarily indicative of those
to be expected in future periods, should the proposed transaction be approved.
Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted for the unaudited pro forma statements, although
management believes that disclosures are adequate to make the information
presented not misleading.
The unaudited pro forma financial information has been prepared based on the
historical financial statements of the Partnership as if the proposed
transaction had occurred on January 1, 1996 for the consolidated statement of
income and as of December 31, 1996 for the balance sheet. The incremental
deferred tax benefits have not been included in the pro forma income statement
due to their non-recurring nature. In addition, adjustments are included in the
pro forma statements of income to exclude non-recurring restructuring charges
recorded by the Partnership for the year ended December 31, 1996, in order to
show pro forma financial statements on a corporate basis which are more
representative of ongoing operations.
F - 5
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation, continued:
Exchange of Partnership Interests:
The general and limited partners of the GP and the Limited Partners of the
Partnership will exchange with the Corporation, their respective partnership
interests for Guaranteed Preferred Beneficial Interests in the Corporation's
Junior Subordinated Debentures ("Trust Preferred Securities"), Common Stock and
cash, which have been recorded in the accompanying pro forma Balance Sheet as of
December 31, 1996 as follows:
o 11,099,573 Class A Limited Partnership Interests in the Partnership
will be exchanged for 4,217,838 Trust Preferred Securities valued at
$25.00 per interest. Accordingly, the Preferred Securities will be
recorded at fair value of $105,446.
o Class A Limited Partnership Interests will also receive $14,429, which
will be recorded as a charge to the Class A Partners' Capital Account.
o Class B Limited Partnership Interests in the Partnership and the
general and limited partnership interests in the GP will be exchanged
for 6,418,936 shares of Common Stock of the Corporation. This exchange
was recorded at the historical amounts of the Class B Limited
Partnership Interests and General Partnership Interests in the
Partnership.
The following table illustrates the proposed exchange of Partnership Interests
for Common Stock:
<TABLE>
<CAPTION>
Partnership Conversion to Common Stock Corporation
------------------ ------------------------------------- ----------------
Class B Class B General Common
Interests % Holders % Partner Stock %
----------- ----- ---------- ----- ---------- --------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Public Investors 11,633,603 53.7% 2,908,401 53.7% 46,200 (c) 2,954,601 46.0%
Lehman Holdings
and Affiliates 5,896,678 27.2% 1,474,169 27.2% 538,000 (d) 2,012,169 31.4%
Executive Officers
and Directors 4,145,465 19.1% 1,036,366 19.1% 415,800 (e) 1,452,166 22.6%
---------- ------ ---------- ------ --------- --------- ------
Total 21,675,746 100.0% 5,418,936 100.0% 1,000,000 6,418,936 100.0%
========== ====== ========== ====== ========= ========= ======
(a) (b)
</TABLE>
(a) Net of 523,400 Class B interests held in the Partnership's treasury.
(b) Represents exchange of each Class B interest for .25 shares of the
Corporation's Common Stock.
(c) Represents limited partnership ownership of 4.62% in the GP exchanged
by former officers of the Partnership.
(d) Represents general partnership ownership of 53.8% in the GP exchanged
by Lehman/SDI, Inc.
(e) Represents limited partnership ownership of 41.58% in the GP exchanged
by current officers of the Partnership.
F - 6
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation, continued:
Conversion of Partners' Capital:
The following table illustrates the pro forma conversion of Partners' Capital of
the Partnership to Stockholder's Deficit of the Corporation as of December 31,
1996:
<TABLE>
<CAPTION>
Pro forma
Partnership Adjustments Corporation
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated deficit
Minority interest of the GP
in the Operating Partnership $ -- (a) $ 971 $ 971
Partner's Capital:
General Partner 960 -- 960
Class A Interests 67,642 (119,875)(b) (52,233)
Class B Interests 29,040 (64)(c) 28,976
Conversion (charges) credits:
Transaction costs -- (1,450)(d) (1,450)
Make-whole penalty -- (5,000)(d) (5,000)
Deferred financing fees -- (164)(d) (164)
Deferred tax assets -- 8,206 (e) 8,206
Class B Interests held
in treasury (1,514) -- (1,514)
----------
Total accumulated deficit -- -- (21,248)
Common stock -- 64 (c) 64
Cumulative foreign currency
translation adjustment (1,509) -- (1,509)
---------- ---------- ----------
Total Partners' capital
/Stockholders' deficit $ 94,619 $(117,312) $ (22,693)
========== ========== ==========
</TABLE>
(a) Minority interest of $971 is classified by the Partnership as Other
liabilities in the Consolidated Balance Sheet.
(b) Valuation of the Class A exchange package (see Note 2G).
(c) Charge for par value of common stock - classified as a separate
component of stockholder's deficit (see Note 2G).
(d) Estimated charges to be recognized at the time of conversion, including
unpaid transaction costs of $1,450, make-whole penalty on the
prepayment of Senior Notes of $5,000, and write-off of deferred
financing fees on existing debt of $164 (see Note 2C).
(e) Credit for recognition of incremental deferred tax assets upon
conversion (see Note 2B).
F - 7
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated December 31, 1996:
A. Reclassify cash to replacement credit facilities; all excess cash is
assumed to reduce current borrowing.
B. Upon conversion, under SFAS No. 109, the Corporation will be entitled
to record additional deferred tax assets not previously available to
the Partnership due to its partnership status. These deferred tax
assets represent temporary differences between book and tax bases of
assets and liabilities which are expected to reverse before December
31, 1997. The net incremental deferred tax asset of $8,206 (current and
long-term portion) is recorded on a pro forma basis as a credit to
corporate accumulated deficit upon conversion. Additionally, the
Corporation may receive a step-up in the tax basis of assets and
liabilities acquired from the Partnership and, as a result, would
record additional deferred tax assets at the conversion date. Should
the transaction be approved, the actual amount of the aggregate
additional deferred tax assets will be calculated based on temporary
differences existing at the date of conversion to a C corporation. The
following is the composition of the pro forma adjustment to historical
deferred tax assets at December 31, 1996:
<TABLE>
<CAPTION>
Pro Forma
Current deferred tax assets: Partnership Adjustment Corporation
----------- ---------- -----------
<S> <C> <C> <C>
Inventory $ -- $ 4,486 $ 4,486
Self-insurance liability -- 1,875 1,875
Accounts receivable -- 841 841
Vacation pay liability -- 772 772
Other current liabilities -- 792 792
Other current items, net -- 901 901
---------- ----------- ---------
Net current deferred tax assets $ -- $ 9,667 $ 9,667
========== =========== =========
Long-term gross deferred
tax assets:
Deferred compensation $ 3,292 $ 254 $ 3,546
Restructuring charges 1,034 (1,034) --
Other items, net 852 (852) --
----------- ----------- ---------
5,178 (1,632) 3,546
Valuation allowance for long-
term deferred tax assets (171) 171 --
----------- ----------- ---------
Net long-term deferred tax assets $ 5,007 $ (1,461) $ 3,546
=========== =========== =========
</TABLE>
C. Write-off historical balance of deferred financing fees of $164, which
relate to Series A and B Senior Notes, to the Class B capital account.
Capitalize estimated deferred financing fees of $510 related to
commitment fees on the replacement credit facilities.
D. Record the proposed refinancing of existing credit facilities. On March
4, 1997, the Operating Partnership received the last of two financing
commitments, which together aggregate $150,000, from lenders. These
commitments are available to the Partnership until May 30, 1997. The
new financing commitments consist of a $60,000 five-year fixed rate
note at 7.66% and a $90,000 five-year bank revolver based on the London
Interbank Offered Rate ("LIBOR") plus 1% to 1.5% resulting in an
effective interest rate reduction of approximately 1% on a combined
basis.
F - 8
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated December 31, 1996,
continued:
The following table summarizes the pro forma adjustments to the
existing credit facilities at December 31, 1996 based on incremental
debt requirements and the proposed refinancing commitments (see related
note disclosures):
<TABLE>
<CAPTION>
<S> <C>
Reclassification of available cash (Note 2A) $ (1,666)
Accrued interest on senior notes 473
Make-whole penalty on pre-payment of existing senior notes (Note 1) 5,000
New bank credit facility commitment fees (Note 2C) 510
Transaction costs (unpaid) (Note 1) 1,450
Distribution to Class A interests ($1.30 per interest)(Note 2G) 14,429
Payment of management fee due (Note 2F) 3,330
Payment of distributions payable (Note 2E) 838
--------
Net incremental pro-forma debt requirement 24,364
Less pro-forma adjustments for new $60,000 7.66% senior notes:
Elimination of current portion of existing senior notes 6,395
Increase in long-term portion of senior notes (2,461)
--------
Required pro-forma increase in bank revolving credit $ 28,298
========
</TABLE>
E. Record payment of $838 of the historical liability of $1,857 for
distributions payable as of December 31, 1996, leaving a balance of
$1,019 which represents the initial distribution payable to the new
Trust Preferred Securities.
F. Record payment of the management fee payable to GP at December 31,
1996.
G. Issue 4,217,838 shares of Trust Preferred Securities with a liquidation
value of $25.00, in exchange for all 11,099,573 Class A limited
partnership interests, which amounts to .38 preferred shares for each
Class A interest. The Trust Preferred Securities will be credited at
fair value of $105,446 for the newly issued shares. Holders of Class A
interests will also receive $1.30 of cash per A interest, or $14,429 in
the aggregate. The beginning accumulated deficit of the Corporation
will be charged for the difference between the fair value of the total
Class A exchange package, aggregating $119,875, and the stated value of
the Class A capital account at December 31, 1996 of $67,642, or $52,233
(see Note 1). The Preferred Securities have equity characteristics but
creditors' rights, thereby being classified between liabilities and
stockholders' equity on the balance sheet.
Authorize 1,000,000 shares of preferred stock, none being issued.
Authorize 20,000,000 shares and issue 6,418,936 shares of common stock
with a par value of $0.01. Holders of existing Class B limited
partnership interests will be issued 5,418,936 shares of Common Stock
upon conversion, in exchange for all 21,675,756 outstanding Class B
interests, which amounts to .25 common shares for each Class B
interest. The general partner, Lehman/SDI, Inc., and limited partners,
current and former executive officers of the Partnership, in the GP,
SDI Partners I, L.P., will receive 1,000,000 shares of the
Corporation's Common Stock in exchange for their respective partnership
interests. Common stock of the new corporation will be credited $64
from the Class B capital account for the newly issued shares. The
Cumulative Foreign Currency Translation Adjustment of $1,509 will be
classified as a separate component of stockholders' deficit of the
Corporation. See Note 1 for a description of additional charges and
credits which make up the beginning accumulated deficit of the
Corporation at December 31, 1996 in the amount of $21,248.
F - 9
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
3. Pro Forma Adjustments to Consolidated Statements of Income:
A. To eliminate, in consolidation, the management fee paid to the GP.
B. To eliminate transaction costs related entirely to the proposed
conversion which have been recorded by the Partnership through December
31, 1996.
C. Adjust interest expense, net, to reflect incremental debt incurred
directly related to the conversion (the Class A distribution of $1.30
per A interest, or $14,429, and the transaction costs of $3,600). The
interest rate utilized to calculate the pro forma interest expense
adjustment was based on historical LIBOR rates plus 125 basis points,
which reflects pricing under the new revolving credit facility on the
incremental debt. For the year-ended December 31, 1996, the interest
rate used is 6.76%.
D. Eliminate minority interest expense as a result of the conversion.
E. Record an expense for the monthly distributions on Trust Preferred
Securities; the annual yield is 11.6% on the value of the debentures of
$105,446, resulting in an approximate charge of $1,019 per month.
F. Adjust the provision or benefit for income taxes to reflect current and
deferred income tax expense or benefit that would be expected under
corporate form. Under partnership form, the Partnership books a current
provision for state partnership and foreign taxes only and a deferred
tax benefit relating only to those temporary differences between book
and tax assets that are expected to reverse after December 31, 1997,
when the Partnership would begin paying federal corporate income taxes.
For pro forma purposes, the assumed combined federal and state
corporate tax rate utilized is 39.875%, applied to taxable income.
The following table summarizes the pro forma adjustment required to
record a provision for income taxes on a corporate basis:
Pro forma adjustments
to provision (benefit) Year Ended
for income taxes 12/31/96
---------------------- -----------
Eliminate state
partnership taxes $ (418)
Record current tax
provision based
on taxable income 7,612
Adjustment to deferred
portion 123
----------
Total pro forma adjustments $ 7,317
==========
G. To eliminate the net charge of $4,916 recorded by the Partnership in
December 1996, related to the restructuring of the Partnership's
Technology Services divisions and its Glass Merchandising business, as
a non-recurring item. The total amount of the restructuring charges
recorded was $5,950 along with an associated deferred tax asset related
to amounts not expected to be paid until 1998 in the amount of $1,034.
F - 10
<PAGE>
SUNSOURCE INC.
BALANCE SHEET
as of DECEMBER 31, 1996
ASSETS
- ------
Cash $1,000
======
STOCKHOLDER'S EQUITY
- --------------------
Common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding $ 10
Paid-In-Capital in excess of par value of common stock 990
-------
Total Stockholders' Equity $ 1,000
=======
See accompanying note to balance sheet
F - 11
<PAGE>
SUNSOURCE INC.
NOTE TO BALANCE SHEET
as of DECEMBER 31, 1996
Organization
SunSource Inc., a Delaware corporation, was incorporated on December 30, 1996
and has conducted no business activity since inception.
The Corporation's common stock is held by SunSource L.P., pending consummation
of the Conversion described in this Proxy Statement.
F - 12
<PAGE>
Report of Independent Accountants
The Board of Directors
Lehman/SDI, Inc.
We have audited the accompanying consolidated balance sheets of SunSource L.P.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in partners' capital and cash flows for each of
the three years in the period ended December 31, 1996. We have also audited the
financial statement schedules listed in Item 14 (a)(2) of this Form 10-K. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of SunSource L.P. and
subsidiary as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 29, 1997, except for
Note 9 as to which the date is
March 21, 1997 and Note 19 as to
which the date is March 4, 1997
F - 13
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1996 1995
------------ ----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,666 $ 5,900
Accounts and notes receivable, net of
allowance for doubtful accounts of
$2,208 and $1,827, respectively 78,578 75,824
Inventories 102,396 96,022
Other current assets 4,672 4,742
----------- -----------
Total current assets 187,312 182,488
Property and equipment, net 21,409 20,181
Goodwill (net of accumulated amortization
of $12,879 and $11,739, respectively) 43,036 44,250
Other intangibles (net of accumulated
amortization of $14,372 and $13,724, respectively) 667 1,312
Deferred income taxes 5,007 2,844
Cash surrender value of life insurance policies 4,566 3,009
Other assets 558 507
----------- -----------
Total assets $ 262,555 $ 254,591
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 48,557 $ 42,437
Notes payable 2,670 2,753
Current portion of senior notes 6,395 6,395
Current portion of capitalized lease obligations 107 --
Distributions payable to partners 1,857 7,819
Accrued expenses:
Salaries and wages 5,696 5,022
Management fee due the general partner 3,330 3,330
Income and other taxes 2,695 3,398
Other accrued expenses 15,224 15,493
----------- -----------
Total current liabilities 86,531 86,647
Senior notes 57,539 63,934
Bank revolving credit 11,000 --
Capitalized lease obligations 504 --
Deferred compensation 8,644 7,829
Other liabilities 3,718 1,238
----------- -----------
Total liabilities 167,936 159,648
----------- -----------
Commitments and contingencies
Partners' capital:
General partner 960 963
Limited partners:
Class A interests 67,642 67,642
Class B interests 29,040 29,252
Class B interests held in treasury (1,514) (1,514)
Cumulative foreign currency translation adjustment (1,509) (1,400)
------------ ------------
Total partners' capital 94,619 94,943
------------ -----------
Total liabilities and partners' capital $ 262,555 $ 254,591
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 14
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
<S> <C> <C> <C>
Net sales $ 649,254 $ 628,935 $ 735,861
Cost of sales 386,251 375,425 451,785
---------- ---------- ---------
Gross profit 263,003 253,510 284,076
---------- ---------- ---------
Operating expenses:
Selling, general and administrative expenses 221,574 213,221 235,845
Management fee to general partner 3,330 3,330 3,330
Depreciation 3,623 3,661 4,502
Amortization 1,924 1,996 2,640
---------- ---------- ---------
Total operating expenses 230,451 222,208 246,317
---------- ---------- ---------
Restructuring charges 5,950 -- --
Transaction costs 2,150 -- --
---------- ---------- ---------
Income from operations 24,452 31,302 37,759
Interest income 69 412 66
Interest expense 6,944 7,332 9,956
Other income (expense), net 550 256 (1,748)
Gain on sale of division (note 5) -- 20,644 3,523
---------- ---------- ---------
Income before provision for income taxes 18,127 45,282 29,644
Provision (benefit) for income taxes (1,140) 537 100
---------- ---------- ---------
Income before extraordinary loss 19,267 44,745 29,544
Extraordinary loss from early extinguishment
of debt (note 4) -- (629) --
---------- ---------- ---------
Net income $ 19,267 $ 44,116 $ 29,544
========== ========== =========
Net income allocated to partners:
General partner $ 193 $ 441 $ 295
--------- --------- ---------
Class A limited partners $ 12,210 $ 12,210 $ 12,210
--------- --------- ---------
Class B limited partners $ 6,864 $ 31,465 $ 17,039
--------- --------- ---------
Earnings per Limited partnership interest:
Income before extraordinary loss
- Class A interest $ 1.10 $ 1.10 $ 1.10
- Class B interest $ 0.32 $ 1.48 $ 0.79
Extraordinary loss
- Class A interest -- -- --
- Class B interest -- $ (0.03) --
Net income
- Class A interest $ 1.10 $ 1.10 $ 1.10
- Class B interest $ 0.32 $ 1.45 $ 0.79
Weighted average number of outstanding
limited partnership interests:
- Class A interests 11,099,573 11,099,573 11,099,573
- Class B interests 21,675,746 21,675,746 21,675,746
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 15
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 19,267 $ 44,116 $ 29,544
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization:
- Existing divisions 5,547 5,319 5,392
- Divested divisions -- 338 1,750
Decrease in cash value of life insurance (157) 58 --
Gain on sale of divisions -- (20,644) (3,523)
Extraordinary loss -- 629 --
Restructuring charges 5,950 -- --
Transaction costs 2,150 -- --
Provision for deferred compensation 1,070 2,340 3,187
Deferred income tax benefit (2,163) (700) (734)
Changes in current operating items:
Increase in accounts and notes receivable (2,465) (3,666) (11,783)
Increase in inventories (7,572) (8,209) (9,436)
Decrease (increase) in other current assets 70 857 347
Increase in accounts payable 6,062 2,531 1,865
Decrease in accrued interest (47) (141) (42)
Decrease in accrued restructuring charges
and transaction costs (1,899) -- --
Increase (decrease) in other
accrued liabilities (2,769) (6,062) 4,836
Other items, net 253 284 (3,699)
---------- ---------- ---------
Net cash provided by operating activities 23,298 17,050 17,704
---------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of divisions -- 44,873 26,561
Proceeds from sale of property and equipment 62 757 724
Payment for purchase of assets (683) (7,385) --
Capital expenditures (4,341) (4,299) (4,263)
Investment in life insurance policies (1,400) (3,067) --
Other, net (39) (93) 228
---------- ---------- ---------
Net cash provided by (used for)
investing activities (6,401) 30,786 23,250
---------- ---------- ---------
Cash flows from financing activities:
Cash distributions to partners (25,641) (27,218) (20,357)
Repayment of senior notes (6,395) (18,971) (5,700)
Borrowings (repayments) under the bank credit
agreement, net 11,000 -- (10,000)
Prepayment penalties and related costs -- (629) --
Borrowings (repayments) under other
credit facilities, net (83) 44 (702)
Principal payments under capitalized
lease obligations (12) (65) (619)
---------- ---------- ----------
Net cash used for financing activities (21,131) (46,839) (37,378)
---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents (4,234) 997 3,576
Cash and cash equivalents at beginning of period 5,900 4,903 1,327
---------- ---------- ---------
Cash and cash equivalents at end of period $ 1,666 $ 5,900 $ 4,903
========== ========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 16
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED
(dollars in thousands)
PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Cumulative
Foreign
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment TOTAL
-------- ---------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 729 $ 67,642 $ 6,025 $ (1,514) $ (694) $ 72,188
Net income 295 12,210 17,039 -- -- 29,544
Cash distributions paid and/or
declared to partners (233) (12,210) (10,764) -- -- (23,207)
Change in cumulative foreign
translation adjustment -- -- -- -- (644) (644)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1994 791 67,642 12,300 (1,514) (1,338) 77,881
Net income 441 12,210 31,465 -- -- 44,116
Cash distributions paid and/or
declared to partners (269) (12,210) (14,513) -- -- (26,992)
Change in cumulative foreign
translation adjustment -- -- -- -- (62) (62)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 963 67,642 29,252 (1,514) (1,400) 94,943
Net income 193 12,210 6,864 -- -- 19,267
Cash distributions paid and/or
declared to partners (196) (12,210) (7,076) -- -- (19,482)
Change in cumulative foreign
translation adjustment -- -- -- -- (109) (109)
--------- --------- --------- --------- ---------- --------
Balance, December 31, 1996 $ 960 $ 67,642 $ 29,040 $ (1,514) $ (1,509) $ 94,619
========= ========= ========= ========= ========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 17
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). All significant intercompany
balances and transactions have been eliminated.
Nature of Operations:
The Partnership is one of the largest wholesale distributors of industrial
products and related services in the United States. The Partnership's three
segments are: (1) industrial products and services, primarily maintenance and
fluid power products and inventory management services sold to industrial
customers for machine and plant maintenance and for manufacturing of original
equipment; (2) retail merchandising products and services, primarily fasteners
and related products sold to retail hardware stores; and (3) retail glass
products and services sold to construction and retail markets. Based on net
sales of existing divisions for the year ended December 31, 1996, the Industrial
Services Segment provides approximately 70% of the Partnership's sales through
its Sun Technology Services divisions (46% of net sales) and the Sun Inventory
Management Company ("SIMCO") divisions (24% of net sales). The Hardware
Merchandising and Glass Merchandising segments provide approximately 16% and
14%, respectively, of the Partnership's net sales.
Although its sales are primarily industrially-based, the Partnership has over
180,000 customers, the largest of which accounted for less than 5% of net sales
for the year ended December 31, 1996. The Partnership's products and services
are sold throughout all 50 states as well as in Canada and Mexico. Foreign sales
account for less than 5% of total revenues. The average single sale during the
year ended December 31, 1996 was less than three hundred dollars. Sales
performance is tied closely to the overall performance of the non-defense-goods
producing sector of Gross Domestic Product in the United States.
Restructuring Charges:
On December 11, 1996 (the "commitment date"), the Board of Directors of
Lehman/SDI, Inc. ("Lehman/SDI"), the general partner of the Partnership's
General Partner, approved the Partnership's plan to restructure its Technology
Services divisions and its Glass Merchandising business. The Partnership
recorded a provision for these charges on the commitment date in the amount of
$5,950, of which $4,400 related to Technology Services and $1,550 to Glass
Merchandising. The following disclosures are made in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity."
F - 18
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
1. Basis of Presentation, continued:
The following is a summary of the balance sheet classification of the accrued
restructuring charges in the accompanying balance sheet at December 31, 1996:
<TABLE>
<CAPTION>
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ---------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
Current - other accrued expenses $ 829 $896 $1,725
Long-term - other liabilities $2,014 $573 $2,587
</TABLE>
Restructuring Charges - Technology Services Divisions
The restructuring charges for the Technology Services Divisions include
termination benefits of $2,955 covering 175 employees, including sales (40),
warehouse (27), purchasing (16), branch operations (56) and accounting (36).
Other exit costs for Technology Services include legal and consulting costs of
$525 to develop severance agreements and to conduct employee meetings and lease
termination and related costs of $920 to close ten leased warehouse and office
facilities. The Board's approval on the commitment date provided the
Partnership's management with the authority to involuntarily terminate
employees. The Partnership has established the levels of benefits that the
terminated employees would receive and informed the employees of their
termination benefits prior to December 31, 1996.
The following table summarizes the restructuring costs charged, the balance
sheet classification, and payments or adjustments between the commitment date
and December 31, 1996:
<TABLE>
<CAPTION>
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ---------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
Opening Balance at
December 11, 1996:
Current - other accrued expense $ 941 $ 872 $ 1,813
Long-term - other liabilities $ 2,014 $ 573 $ 2,587
Payments during period:
Current - other accrued expense * $ (112) $ (55) $ (167)
Ending Balance at
December 31, 1996:
Current - other accrued expense $ 829 $ 817 $ 1,646
Long-term - other liabilities $ 2,014 $ 573 $ 2,587
</TABLE>
* termination benefits paid to 9 employees; other exit costs for legal and
consulting charges paid.
F - 19
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
1. Basis of Presentation, continued:
Restructuring Charges - Glass Merchandising Divisions
The restructuring charges for the Glass Merchandising division represent
primarily costs to withdraw from certain geographic markets as part of the
Partnership's restructuring plan. The largest component of these charges is the
write-off of unamortized goodwill from purchase business combinations in the
amount of $1,321, which is not recoverable. The remaining charges represent the
excess of undepreciated fixed assets over their fair value, in the amount of
$150, with fair value determined using the estimated prices of similar assets.
The Partnership applied the provisions of SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in
connection with the determination of these charges. The decision to withdraw
from these markets was primarily strategic based on an overall review of the
operations of the Glass Merchandising segment; in the Partnership's view, any
recognition of asset impairment prior to the commitment date would not have been
appropriate under SFAS No. 121., since the specific locations to be closed were
decided upon only in the process of finalizing the restructuring plan. These
amounts are included as restructuring charges since they were recognized at the
commitment date as part of the overall plan of restructuring. Also included are
$79 of lease termination costs recognized in accordance with EITF No. 94-3 as
exit costs.
The following table summarizes other exit costs charged, the balance sheet
classification, and payments or adjustments between the commitment date and
December 31, 1996:
Balance Sheet Classification
- ----------------------------
Total
--------
Opening Balance at December 11, 1996
Unamortized Goodwill $ 1,321
Excess of undepreciated fixed assets $ 150
Current - other accrued expenses $ 79
Charges during period:
Unamortized Goodwill $ (1,321)
Excess of undepreciated fixed assets $ (150)
Ending Balance at December 31, 1996:
Current - other accrued expenses $ 79
Transaction Costs:
On December 11, 1996, the Partnership announced the terms of a plan to convert
from its current limited partnership structure to a taxable C corporation, which
must be approved by a majority of the holders of the Class A and Class B
interests unaffiliated with SDI Partners I, L.P., the General Partner, each
voting separately as a class.
In connection with the proposed conversion, the Partnership has incurred certain
costs related to the transaction which are included as a separate component of
income from operations, due to the infrequent nature of the conversion
transaction.
F - 20
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies:
Cash Equivalents:
Cash equivalents consist of commercial paper, U.S. Treasury obligations and
other liquid securities purchased with initial maturities less than 90 days and
are stated at cost which approximates market value.
Inventories:
Inventories, which consist of products purchased for resale, are valued at the
lower of cost or market, cost being determined principally on the first-in,
first-out method.
Property and Equipment:
Property and equipment, including assets acquired under capital leases, is
carried at cost and includes expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold, or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations.
Depreciation:
For financial accounting purposes, depreciation, including that related to plant
and equipment acquired under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets, generally three to
twenty-five years, or, if shorter, over the terms of the related leases.
Goodwill and Other Intangible Assets:
Goodwill related to the excess of acquisition cost over the fair value of net
assets acquired is amortized on a straight-line basis over forty years. Other
intangible assets arising principally from acquisitions by the Operating
Partnership are amortized on a straight-line basis over periods ranging from
three to ten years.
F - 21
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Income Taxes:
As a partnership, taxable income and losses are included on the federal tax
returns of the partners; accordingly, the Partnership incurs no liability for
U.S. federal income taxes. Accordingly, no current provision for federal income
taxes is reflected in the accompanying consolidated financial statements.
However, the Partnership does incur certain state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
operations. Therefore, a current provision for state, local and foreign income
taxes is reflected in the accompanying consolidated financial statements.
The Revenue Act of 1987 provides that certain "existing publicly traded
partnerships", such as the Partnership, generally will not be treated as
corporations for federal income tax purposes until after December 31, 1997,
provided that such partnerships do not add any substantial new line of business
before the effective date.
Statement of Financial Accounting Standards ("SFAS") No. 109 requires the
Partnership to recognize deferred tax assets and liabilities for expected future
tax consequences of events that have been recognized in the consolidated
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the temporary differences are expected to reverse.
The Partnership's deferred taxes are determined from temporary differences
expected to reverse after December 31, 1997, or the date of conversion, if
earlier, when the Partnership will be taxed as a corporation. Therefore, a
deferred provision or benefit for state and federal income taxes is reflected in
the accompanying consolidated statements of income.
Retirement Benefits:
Certain employees are covered under profit-sharing retirement plans ("defined
contribution plans") for which contributions are determined on an annual basis
in accordance with the requirements of each plan.
Defined benefit plan contributions covering certain employees are funded, at a
minimum, in accordance with the requirements of the Employee Retirement Income
Security Act of 1974, as amended.
In accordance with collective bargaining agreements, annual contributions to
multi-employer pension plans are made. These contributions, which are based on
fixed contributions per month for each hour worked, are charged to income as
incurred.
Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan. The
Partnership has elected to amortize the accumulated post-retirement benefit
liability (transition obligation) resulting in delayed recognition. The impact
of the adoption on the Partnership's financial position and results of
operations is immaterial.
F - 22
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Fair Value of Financial Instruments:
Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value because of the short-term maturity or
revolving nature of these instruments. The fair values of the Partnership's debt
instruments are disclosed in Note 9.
Translation of Foreign Currencies:
The translation of applicable foreign-currency-based financial statements into
U.S. dollars is performed for balance sheet accounts using exchange rates in
effect at the balance sheet date and for revenue and expense accounts using an
average exchange rate during the period. The changes in the cumulative foreign
translation adjustment for each period relate to translation adjustments in
their entirety.
Exchange adjustments resulting from foreign currency transactions are recognized
in net income and were immaterial for the three years ending December 31, 1996.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F - 23
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure:
The General Partner of the Partnership and the Operating Partnership is SDI
Partners I, L.P. (the "GP"), a Delaware limited partnership whose sole general
partner is Lehman/SDI, formerly known as Shearson/SDI, Inc., an indirect,
wholly-owned subsidiary of Lehman Brothers Holdings, Inc. ("Lehman Holdings"),
formerly known as Shearson Lehman Brothers Holdings, Inc.
The Partnership's Class A and Class B limited partnership interests outstanding,
as of December 31, 1996, are held as follows:
<TABLE>
<CAPTION>
Class A Class B
Interests Interests
--------- ---------
<S> <C> <C> <C> <C>
Public Investors 11,019,850 ( 99.3%) 11,633,603 ( 53.7%)
Lehman Holdings
And Affiliates -- 5,896,678 ( 27.2%)
Executive Officers and
Directors (a) 79,723 ( 0.7%) 4,145,465 ( 19.1%)
------------------- -------------------
Total 11,099,573 (100.0%) 21,675,746 (100.0%)(b)
=================== ======================
</TABLE>
(a) Executive officers of the Partnership and the Operating Partnership
and Directors of Lehman/SDI, including beneficial ownership.
(b) Net of 523,400 Class B interests held in the Partnership's treasury
as of December 31, 1996.
Except as expressly limited by the partnership agreement, the GP has complete
and exclusive discretion in the management and control of the affairs and
business of the Partnership and its subsidiary partnership. The holders of Class
A and Class B interests have certain limited voting rights under the partnership
agreement generally regarding the removal of the GP and the sale of all or
substantially all of the assets of the Partnership or the Operating Partnership
or dissolution of the Partnership.
Holders of Class A interests are entitled to receive, to the extent cash is
available, $1.10 annually (the "priority return") per Class A interest, which is
currently paid monthly. On December 19, 1996, the Partnership declared a
priority return distribution for the month of January 1997 in the amount of
$1,038 or $.091666 per Class A interest payable January 31, 1997, to holders of
record December 31, 1996. The Class A capital account as of December 31, 1996
and 1995, was $10.00 per Class A interest.
All items of income and loss and cash distributions of the Operating Partnership
are allocated 99% to the Partnership and l% to the GP. The GP is allocated l% of
the Partnership's share of income or loss and cash distributions, with the
remaining 99% allocated to the limited partners.
Income for federal income tax purposes is allocated to the holders of Class A
interests, until the Class A capital account of each holder is equal to the sum
of their initial capital investment ($10.00 per Class A interest), plus any
unpaid priority return. For years 1996, 1995, and 1994, federal taxable income
per Class A interest amounted to $1.10 per year, all of which represented
ordinary income. Any remaining income after the Class A allocation is allocated
to the holders of Class B interests. The holders of Class B interests receive an
allocable share of loss until the Class B capital account (as defined in the
partnership agreement) of each holder is reduced to zero. Thereafter, any
unallocated loss is allocated to the holders of Class A interests.
F - 24
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
For 1996, 1995 and 1994, federal taxable income amounted to $.70, $1.6923 and
$1.1146 per Class B interest, respectively. In 1996, federal taxable income
consisted of ordinary income only. Federal taxable income in 1995 consisted of
ordinary income of $.5326 per Class B interest and a combined capital gain of
$1.1597 per Class B interest related to the sale of the Dorman Products and
Downey Glass divisions (see Note 5, Acquisitions/Divestitures). Federal taxable
income in 1994 consisted of ordinary income of $.7069 per Class B interest and a
capital gain of $.4077 per Class B interest related to the sale of the
Electrical Products Group divisions. The Class B capital account as of December
31, 1996 and 1995, was approximately $2.89 and $2.54 per Class B interest,
respectively.
Holders of Class B interests are entitled to receive annual cash distributions
sufficient to cover their tax liabilities on taxable income allocated to the
Class B interests (the "Class B Tax Distribution"). For 1996, the Class B Tax
Distribution amounted to $7,663 or $.3465 per Class B interest which was
partially paid in the amount of $.02 per Class B interest per month for the
period January through April 1996 and $.03 for the period May through December
1996. On March 31, 1997, the Partnership intends to distribute the balance of
the tax distribution due of $.0265 per Class B interest to holders of record for
the entire year.
For 1995, the Class B Tax Distribution amounted to $14,807 or $.6695 per Class B
interest which was partially paid in the amount of $.02 per Class B interest per
month for the period January through December 1995 and a partial distribution of
$.15 paid on April 10, 1995 to holders of record on December 30, 1994, related
to the taxable gain on the sale of the Dorman Products division on January 3,
1995. On March 29, 1996, the Partnership distributed the balance of the tax
distribution of $.2795 per Class B interest, as follows: approximately $.1745 to
holders of record on December 30, 1994 for the balance due on the taxable gain
on the sale of Dorman Products; $.00197 per month to holders of record of Class
B interests on the first day of the month during January through December 1995
for the balance due on ordinary income; and $.0814 to holders of record on
September 29, 1995 related to the taxable gain on the sale of the Downey Glass
division (see Note 5, Acquisitions/Divestitures).
For 1994, the Class B Tax Distribution amounted to $10,895 or $.492619 per Class
B interest which was partially paid in the amount of $.009352 per Class B
interest per month for the period January through March 1994 and $.02 per Class
B interest per month during the period April through December 1994. The monthly
tax distributions were paid to holders of record on the first day of each month
during 1994 and aggregated $.208056 per Class B interest for the full year 1994.
On March 31, 1995, the Partnership paid the balance of the tax distribution due
of $.284563 per Class B interest, as follows: approximately $.01981 per month to
holders of record of Class B interests on the first day of the month during
January through March 1994, $.00916 per month for April through November 1994,
and $.15185 for December 1994 which includes $.14269 related to the capital gain
on the sale of the Electrical Products Group divisions. (See Note 5,
Acquisitions/ Divestitures.)
F - 25
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
On December 19, 1996, the Partnership in anticipation of its conversion to
corporate form, suspended payment of the monthly tax-related distributions to
Class B interest holders effective January 1, 1997, through March 31, 1997. Due
to the delay in completion of the proposed corporate conversion, the Partnership
intends to resume payment of monthly advance Class B tax distributions in April
1997 in the amount of $.03 per B Interest. On March 20, 1997, the Partnership
declared a B tax distribution in the amount of $.03 per B Interest payable April
30, 1997, to holders of record April 1, 1997. The Partnership intends to pay
this monthly rate to Class B holders until the effective date of the conversion
since it expects to allocate sufficient Class B taxable income in the shortened
tax year from January 1, 1997, through the effective date to require the B tax
distribution payment. The balance of the required 1997 Class B tax distribution,
if any will be paid on or before March 31, 1998.
4. Extraordinary Loss:
In 1995, the Partnership recorded an extraordinary loss of $629 or approximately
$.03 per Class B limited partnership interest, due to early extinguishment of a
portion of the Operating Partnership's Series A 9.08% and Series B 8.44% Senior
Notes (See Note 9, Long-Term Debt).
5. Acquisitions/Divestitures:
On April 11, 1996, the Partnership's Industrial Services segment, through its
Warren Fluid Power division purchased certain assets of Hydraulic Depot, Inc.,
of Reno, Nevada, for an aggregate purchase price of $700. Annual sales of
Hydraulic Depot, Inc., are approximately $2,500.
In November 1995, the Partnership's Hillman Fastener division purchased certain
assets of the Retail division of Curtis Industries of Eastlake, Ohio, for an
aggregate purchase price of $8,011 and the assumption of certain liabilities.
The aggregate purchase price includes goodwill of $3,442. The purchase price and
goodwill amounts include post-closing adjustments recorded in 1996. This
acquisition has been accounted for as a purchase and, accordingly, the results
of operations have been included in the accompanying consolidated financial
statements from the date of acquisition.
On October 27, 1995, the Operating Partnership sold certain assets of its Downey
Glass division for a cash consideration, net of expenses, of approximately
$6,237 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $4,144 or $.19 per Class B interest included in the 1995
consolidated statement of income. The aggregate assets sold, net of liabilities,
in connection with the sale of the Downey Glass division was approximately
$2,093.
On January 3, 1995, the Operating Partnership sold certain assets of its Dorman
Products division for a cash consideration, net of expenses, of approximately
$36,600 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $16,500 or $.75 per Class B interest included in the 1995
consolidated statement of income. The aggregate assets sold, net of liabilities,
in connection with the sale of Dorman Products was approximately $20,100.
F - 26
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
5. Acquisitions/Divestitures, continued:
On December 5, 1994, the Operating Partnership sold certain assets of its
Electrical Products Group divisions for a cash consideration, net of expenses,
of approximately $27,800 (subject to certain post-closing adjustments) and the
assumption of certain liabilities. The Operating Partnership recorded a gain on
the sale in the amount of $3,523 or $.16 per Class B interest included in the
1994 consolidated statement of income. The aggregate assets sold, net of
liabilities, in connection with the sale of the Electrical Products Group
divisions was approximately $24,300.
6. Related Party Transactions:
The GP earns a management fee annually from the Operating Partnership equal to
3% of the aggregate initial Capital Investment of the holders of Class A
interests ($110,996). The management fee will be paid only after cumulative
outstanding priority returns and additional required cash distributions are
paid. In addition, the management fee can be paid only if the Partnership
complies with covenants required by the credit agreements (see Note 8, Lines of
Credit, and Note 9, Long-Term Debt). Management fees earned but not paid
accumulate until paid. Management fees earned in each of years 1996, 1995 and
1994 were $3,330. The management fees for the years 1995 and 1994 were paid in
full in March 1996 and 1995, respectively. Management expects to pay in full the
1996 management fee due March 31, 1997.
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1996 and 1995:
1996 1995
-------- ------
Land $ 3,289 $ 3,319
Buildings and leasehold improvements 18,642 18,048
Machinery and equipment 18,680 16,290
Furniture and fixtures 10,368 9,208
------- -------
50,979 46,865
Less accumulated depreciation 29,570 26,684
------- -------
$21,409 $20,181
======= =======
8. Lines of Credit:
On December 22, 1992, the Operating Partnership entered into a $50,000 bank
credit agreement with three lenders. This agreement provides borrowings on a
revolving credit basis at interest rates based on the London Interbank Offered
Rate ("LIBOR") plus 1 and 3/4% and prime. Letters of credit commitments are
issued at varying rates. The bank credit agreement's original termination date
of December 22, 1995 has been extended to December 31, 1997. The credit facility
requires a commitment fee of 1/2 of 1% per year on the average daily unused
portion of the commitment and an annual agent's fee. There is no compensating
balance requirement under this facility. As of December 31, 1996, the Operating
Partnership had $33,152 available under this Credit Agreement. The $16,848
outstanding consists of bank borrowings amounting to $11,000 as reflected on the
Partnership's consolidated balance sheet at December 31, 1996, and letter of
credit commitments aggregating $5,848.
F - 27
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
8. Lines of Credit, continued:
The bank credit agreement contains covenants restricting distributions from the
Operating Partnership to the Partnership and the GP. Amounts available for
distribution in accordance with the bank credit agreement at December 31, 1996,
were $4,164. The agreement also requires the maintenance of specific coverage
ratios and levels of financial position and restricts incurrence of additional
debt and the sale of assets. The bank credit agreement did not permit the
Partnership to consummate acquisitions in 1994. Amendments to the agreement were
negotiated in March and December of 1994 to ease certain coverage ratios and
other financial requirements in 1994 and future years. The December 1994
amendment allows for acquisition spending in 1995 and future years up to $15,000
in any calendar year, absent a default or event of default as defined in the
bank credit agreement.
In connection with the sale of operating divisions (see note 5, Acquisitions/
Divestitures), the Operating Partnership was required to reduce permanently the
bank revolver commitment under the bank credit agreement by approximately
$13,000. However, the banks waived this permanent reduction and maintained the
existing bank credit commitment of $50,000. For 1995 and future years, the
lenders have agreed to revise certain covenant tests to exclude the impact of
cash distributions to holders of Class B interests related solely to tax gains
on divisions sold.
The Operating Partnership has another credit facility available in the amount of
$500 for letters of credit of which no amount was outstanding at December 31,
1996. The letters of credit commitments are issued at varying rates. This
facility, renewable annually, is not subject to compensating balance
requirements or unused commitment fees.
An indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a
$2,500 Canadian dollar line of credit with a local lender for working capital
purposes of which $557 USD was outstanding at December 31, 1996. This facility,
which is renewable annually, provides bank borrowings at an interest rate of
prime plus 1/4 of 1%. There are no compensating balance requirements or
commitment fees associated with this facility.
Notes payable consisted of the following at December 31, 1996 and 1995:
1996 1995
---- ----
Short-term bank borrowings drawn on
working capital lines of credit 557 $ 463
Trade notes payable in accordance with
glass inventory financing arrangements 1,193 1,474
Notes payable in accordance with insurance
financing arrangements 920 816
----- ------
$2,670 $2,753
====== ======
The weighted average interest rate on the outstanding notes payable borrowings
at December 31, 1996 and 1995 was 3.05% and 3.01%, respectively.
F - 28
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt:
On December 22, 1992, the Operating Partnership issued $95,000 of senior notes
with a final maturity of December 1, 2002, through a private placement with
several institutional investors.
The new senior notes were issued in two series, as follows: $65,000 Series A
notes at 9.08% and $30,000 Series B notes at 8.44%. Interest is required to be
paid semiannually on June 1 and December 1 on the outstanding principal of the
senior notes. The Operating Partnership repaid $4,375, $3,282 and $3,900 in
Series A notes, and $2,020, $1,514 and $1,800 in Series B notes in 1996, 1995
and 1994, respectively. Principal repayments required on the senior notes during
each of the five years subsequent to December 31, 1996, are as follows:
Series A Series B
-------- --------
December 1, 1997 $4,375 $2,020
December 1, 1998 5,468 2,522
December 1, 1999 6,562 3,030
December 1, 2000 8,201 3,786
December 1, 2001 9,297 4,290
Optional prepayments, in multiples of $100, may be made at anytime, as a whole
or in part, with accrued interest thereon plus a penalty ("make-whole amount"),
if any, as defined in the note agreement.
If the Partnership sells a significant amount of assets as defined in the note
agreement, it must make an offer of prepayment of note principal to the senior
noteholders determined on an applicable share basis with the bank credit
agreement. The prepayment offer also must include accrued interest thereon plus
a make-whole amount, if any, as defined in the note agreement. Related to the
sale of operating divisions in December 1994 and January 1995 (see Note 5,
Acquisition/Divestitures), the Operating Partnership was required to offer the
noteholders prepayment of senior notes in the amount of $14,175. The noteholders
accepted the prepayment offer which the Operating Partnership paid on March 14,
1995, including accrued interest thereon of $360 and a prepayment penalty of
$629 (see Note 4, Extraordinary Loss).
The senior note agreement contains covenants restricting distributions from the
Operating Partnership to the Partnership and the GP. Additionally, the note
agreement restricts the incurrence of additional debt and the sale of assets and
requires the maintenance of specific coverage ratios and levels of financial
position. Also, the senior note agreement did not permit the Partnership to
consummate acquisitions in 1994. For 1994 and future years, the senior
noteholders have agreed to ease certain coverage ratios and other financial
requirements.
Provisions made during the year for restructuring charges and transaction costs
(Note 7) rendered the Operating Partnership unable to comply with certain
financial covenants of the bank credit agreement and the senior note agreement.
On March 21, 1997, the Partnership received the final consent in which the banks
and senior note holders agreed to a modification of these covenants effective
for the fiscal quarters ending December 31, 1996 through: (i) June 30, 1997 for
the bank credit agreement; and (ii) September 30, 1997 for the senior note
agreement. The Partnership is in compliance with the modified covenants.
F - 29
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt, continued:
As of December 31, 1996, the fair value estimate of the Partnership's senior
notes is approximately $65,000 as determined in accordance with SFAS No. 107.
The Partnership discounted the future cash flows of its senior notes based on
borrowing rates for debt with similar terms and remaining maturities. The fair
value estimate is made at a specific point in time and is subjective in nature
and involves uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly
affect the estimate.
10. Leases:
Certain warehouse and office space and equipment are leased under capital and
operating leases with terms in excess of one year. Future minimum lease payments
under noncancellable leases consisted of the following at December 31, 1996:
Capital Operating
Leases Leases
------- ----------
1997 $151 $ 9,210
1998 151 7,696
1999 151 5,475
2000 151 4,204
2001 134 2,875
Later years -- 10,692
---- -------
Total minimum lease payments $738 $40,152
=======
Less amounts representing interest (127)
-----
Present value of Net Minimum Lease
payments (including $107 currently
payable) $611
====
Total rental expenses for all operating leases amounted to $15,239 in 1996,
$14,232 in 1995, and $15,153 in 1994.
11. Deferred Compensation Plans:
Certain officers and employees earn performance-based compensation, payment of
which is deferred until future periods.
The Partnership adopted a new deferred compensation plan for its officers
effective January 1, 1994. Under this plan, awards are earned based on operating
performance over a five-year period which vest and are paid in cash only at the
end of the fifth year. At the end of any year within the five-year program, the
cumulative award is subject to reduction or forfeiture if performance goals are
not achieved. Upon a change in control of the Operating Partnership,
participants are entitled to payment of awards earned through completion of the
most recent plan year. The amounts charged to income under this plan were $378
in 1996, $1,186 in 1995 and $850 in 1994. The portion of the Operating
Partnership's deferred compensation liability attributable to this plan is
$2,414 as of December 31, 1996.
F - 30
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
11. Deferred Compensation Plans, continued:
For a plan adopted in 1987 and amended thereafter, certain employees earned
awards which vest at the rate of 20% per year over the 5-year period following
the year in which the award was earned. The awards will be paid at age 60, if
elected by the employee, or upon death, disability or retirement and accrue
investment earnings until paid. Upon a change in control of the Operating
Partnership, participants are entitled to payment of all vested and non-vested
amounts including accrued interest. The full award is charged to operations in
the year earned. The amounts charged to income under the plan were $677, $1,135
and $2,295 in 1996, 1995 and 1994, respectively. During the three years ended
December 31, 1996, distributions from the plan amounted to $1,160 in 1996,
$1,422 in 1995, and $240 in 1994. The deferred compensation liability
attributable to the plan amounted to $5,998 at December 31, 1996 of which $564
is included in other accrued expenses.
Under a former plan, effective through December 31, 1986, certain employees and
officers earned deferred compensation amounts which unconditionally vested at
the rate of 20% per year over the 5-year period following the year in which the
award was earned. Participants of the former plan have elected to defer all
outstanding awards until retirement. Upon a change in control of the Operating
Partnership, participants are entitled to payment of their total account balance
including accrued interest. Amounts charged to income and distributions related
to the former plan for the three years ended December 31, 1996 were immaterial.
The portion of the Operating Partnership's deferred compensation liability
attributable to this plan is $796 at December 31, 1996.
In December 1995, the Operating Partnership established a Rabbi trust to assist
in funding the liabilities of the Deferred Compensation plans described above.
This trust purchased insurance policies on the lives of certain participants in
the Deferred Compensation plans. The Operating Partnership is the sole
beneficiary of these insurance policies. The cash surrender value of these
insurance policies was $4,566 at December 31, 1996.
The change of control provision in the deferred compensation plans is triggered
upon a sale of all of the Operating Partnership's business, a change in the GP
including its reorganization or a change, other than due to death or retirement,
in a majority of the directors of Lehman/SDI during any one-year period.
The Partnership adopted a new deferred compensation plan effective December 1,
1996, to offer key employees an opportunity to defer a portion of their
compensation including bonuses and any amounts credited to the accounts of such
employees which otherwise may become payable to such employees under other
incentive compensation programs maintained by the Partnership. This new plan
would allow participants eligible for accelerated payments under the change in
control provision of the Partnership's deferred compensation plans an election
to continue to defer their balances.
F - 31
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits, continued:
Net periodic pension cost (income) in 1996, 1995, and 1994 for non-contributory
defined benefit plans consists of:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Service cost during the period $ 879 $ 675 $ 1,102
Interest cost on projected benefit obligations 1,656 1,578 1,534
Actual return on assets (3,432) (3,503) (2,100)
Net amortization and deferral 917 1,509 (270)
-------- -------- --------
Net periodic pension cost $ 20 $ 259 $ 266
======== ======== =======
</TABLE>
Significant assumptions used in determining pension cost (income) include:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.25% 8.25% 7.00%
Rates of increase in compensation levels 6.50% 6.50% 6.50%
Expected long-term rate of return
on plan assets 9.75% 8.50% 9.50%
</TABLE>
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Partnership's balance sheets at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------------------- ------------------------------------
Assets Accumulated Assets Accumulated
Exceed Benefit Exceed Benefit
Accumulated Obligations Accumulated Obligations
Actuarial present value of Benefit Exceed Benefit Exceed
beneficial obligations: Obligations Assets Obligations Assets
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Vested benefit obligation $ 19,019 $ -0- $ 17,304 $ 1,016
======== ======== ======== ========
Accumulated benefit obligation $ 19,290 $ -0- $ 17,450 $ 1,016
======== ======== ======== ========
Projected benefit obligation $ 23,716 $ -0- $ 21,467 $ 1,016
Plan assets at fair value 26,519 -0- 24,220 897
-------- -------- -------- --------
Projected benefit obligation
less than(in excess of)
plan assets 2,803 -0- 2,753 (119)
Unrecognized net loss (1,247) -0- (668) 161
Prior service cost not yet
recognized in net periodic
pension cost (328) - (352) -
Unamortized balance of
unrecognized net transition
asset established at
January 1, 1987 (1,648) -0- (1,693) (189)
--------- --------- --------- ---------
Prepaid pension cost (pension
liability) recognized
in the balance sheet $ (420) $ -0- $ 40 $ (469)
========= ========= ========= =========
</TABLE>
F - 32
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits, continued:
The discount rate assumptions used in determining actuarial present value of
benefit obligations at December 31, 1996 and 1995 was 7.25%.
Certain employees of the Partnership's Kar Products, J.N. Fauver Co., and its
divested Dorman Products and American Electric Co. divisions are covered by
these defined benefit retirement plans. Assets of the defined benefit plans
consist of insurance contracts and assets managed under a commingled trust
agreement. The trust assets are invested primarily in equity and fixed income
holdings.
Costs charged to operations under all retirement benefit plans are as follows:
1996 1995 1994
---- ---- ----
Defined contribution plans $1,327 $2,693 $3,498
Multi-employer pension plans 189 374 362
Defined benefit plans 20 259 266
------ ------ ------
Total $1,536 $3,326 $4,126
====== ====== ======
Management estimates that its share of unfunded vested liabilities under
multi-employer pension plans is not material.
For the years ended December 31, 1996, 1995 and 1994, the costs of
post-retirement benefits charged to income were $87, $81 and $115, respectively.
The 1996 and 1995 charges were determined in accordance with SFAS No. 106 on an
accrual basis with costs recognized in prior years upon payment of the
post-retirement obligations. The Partnership's unrecognized accumulated
post-retirement benefit liability as of December 31, 1996, 1995 and 1994 was
$477, $516 and $744, respectively.
13. Income Taxes:
Deferred tax assets are comprised of the following at December 31, 1996 and
1995:
1996 1995
---- ----
Gross deferred tax assets:
Deferred compensation $3,292 $2,936
Deferred restructuring changes 1,034 --
Casualty Loss Insurance Program 548 --
Prepayment penalties related to
early extinguishment of debt 304 299
------ ------
5,178 3,235
Valuation allowance for deferred
tax assets (171) (391)
------- -------
Net deferred tax asset $5,007 $2,844
======= ======
Management has determined, based on the Partnership's history of prior operating
earnings and its expectations for the future, that operating income of the
Partnership will more likely than not be sufficient to recognize fully these net
deferred tax assets. The Partnership has no deferred tax liability at December
31, 1996 or December 31, 1995.
As of December 31, 1996, the Partnership's tax basis of its assets and
liabilities was greater than its financial statement basis by approximately
$77,000.
F - 33
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
13. Income Taxes, continued:
The provision (benefit) for income taxes consists of the following:
1996 1995 1994
-------- ------- ------
Current income taxes
State and local $ 605 $ 608 $ 276
Foreign 418 629 558
------- ------ -----
1,023 1,237 834
------- ------ -----
Deferred income taxes
Federal (1,897) (627) (657)
State and local (266) (73) (77)
-------- ------- ------
(2,163) (700) (734)
-------- ------- ------
Total income taxes $(1,140) $ 537 $ 100
======== ======= ======
14. Commitments and Contingencies:
Performance and bid bonds are issued on the Partnership's behalf during the
ordinary course of business through surety bonding companies as required by
certain contractors. As of December 31, 1996, the Partnership had outstanding
performance and bid bonds aggregating $234. As required by sureties, the
Partnership has standby letters of credit outstanding in the amount of $650 as
of December 31, 1996.
Letters of credit are issued by the Partnership during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 1996, the
Partnership had outstanding letters of credit in the aggregate amount of $1,872
related to these activities.
As of December 31, 1996 the Partnership has guaranteed approximately $1,181
worth of lease obligations, principally relating to businesses previously
divested. The Partnership is not currently aware of any existing conditions
which would cause a financial loss related to these guarantees.
Under the Partnership's insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of normal
claims. Beginning in 1991, the Partnership has retained risk on certain expected
losses from both asserted and unasserted claims related to workman's
compensation, general liability and automobile as well as the health benefits of
certain employees. Provisions for losses expected under these programs are
recorded based on an analysis of historical insurance claim data and certain
actuarial assumptions. As of December 31, 1996, the Partnership has provided
insurers letters of credit aggregating $3,326 related to certain insurance
programs.
On February 27, 1996, a lawsuit was filed against the Operating Partnership by
the buyer of its Dorman Products division for alleged misrepresentation of
certain facts by the Partnership upon which the buyer allegedly based its offer
to purchase Dorman. The complaint seeks damages of approximately $21,000.
On January 16, 1997, a holder of B Interests filed a purported class action
alleging that the terms of the Conversion unfairly transfer substantial equity
to the General Partner to the detriment of the B Interests and constitute a
breach of fiduciary duty. A second complaint containing substantially identical
allegations was filed by a limited partner on February 11, 1997.
In the opinion of management, the ultimate resolution of these matters will not
have a material effect on the consolidated financial position, operations or
cash flows of the Partnership.
F - 34
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
14. Commitments and Contingencies, continued:
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Partnership's business. Those legal
proceedings incidental to the business of the Partnership are generally not
covered by insurance or other indemnity. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial position, operations or cash flows of the Partnership.
15. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 6,769 $ 7,304 $10,097
------- ------- -------
Income taxes $ 1,189 $ 1,190 $ 792
------- ------- -------
Supplemental schedule of non-cash investing
activities:
Assumed liabilities in connection with
the purchase of assets (See Note 5,
Acquisitions/Divestitures) $ -- $ 232 $ --
------- ------- -----
</TABLE>
F - 35
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
16. Quarterly Data (unaudited):
<TABLE>
<CAPTION>
1996 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $154,892 $167,500 $167,125 $159,737
Gross profit 62,464 67,104 68,029 65,406
Net income 4,010 8,313 8,286 (1,342)*
Net income (loss) per limited
partnership interest
- Class A $.27 $.28 $.27 $.28
- Class B $.04 $.24 $.24 ($.20)
* Includes non-recurring restructuring charges and transaction costs of of
$5,950 and $2,150, respectively.
1995 First Second Third Fourth
---- ----- ------ ----- ------
Net sales $154,792 $163,820 $163,214 $147,109
Gross profit 61,441 65,902 66,510 59,657
Income before extraordinary loss 19,862** 8,377 7,828 8,678***
Extraordinary loss (Note 4) (629) -- -- --
Net income 19,233 8,377 7,828 8,678
Net income per limited partnership interest:
Income before extraordinary loss:
- Class A $.27 $.28 $.27 $.28
- Class B $.77 $.24 $.22 $.25
Extraordinary loss:
- Class A $ -- $ -- $ -- $ --
- Class B $(.03) $ -- $ -- $ --
Net Income:
- Class A $.27 $.28 $.27 $.28
- Class B $.74 $.24 $.22 $.25
</TABLE>
** Includes gain on sale of Dorman Products division of $16,500.
*** Includes gain on sale of Downey Glass division of $4,144.
17. Concentration of Credit Risk:
Financial instruments which potentially subject the Partnership to concentration
of credit risk consist principally of cash and cash equivalents and trade
receivables. The Partnership places its cash and cash equivalents with high
credit quality financial institutions. Concentrations of credit risk with
respect to sales and trade receivables are limited due to the large number of
customers comprising the Partnership's customer base, and their dispersion
across many different industries and geographies. The Partnership performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.
F - 36
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
18. Segment Information:
The following are the segment disclosures required under SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," with respect to the
Partnership's reportable segments as identified in Note 1, "Basis of
Presentation" under "Nature of Operations":
<TABLE>
<CAPTION>
======================================================================================================================
Year Ended December 31,
-----------------------------------------------------------------------
Industry Segment Data: 1996 1995 1994
======================================================================================================================
<S> <C> <C> <C>
Net Sales
Industrial Services $ 456,798 $ 424,978 $ 532,719
Hardware Merchandising 103,503 84,720 72,841
Glass Merchandising 90,369 120,650 132,063
Adjustments and eliminations (1,416) (1,413) (1,762)
---------- ----------- ----------
Consolidated Net Sales $ 649,254 $ 628,935 $ 735,861
- -----------------------------------------------------------------------------------------------------------------------
Income from Operations
Industrial Services $ 33,437 $ 31,834 $ 39,773
Hardware Merchandising 9,074 9,592 7,096
Glass Merchandising 3,037 3,387 5,756
Corporate Expenses (21,096)* (13,511) (14,866)
------------ ----------- -----------
Consolidated Income from Operations $ 24,452 $ 31,302 $ 37,759
- -----------------------------------------------------------------------------------------------------------------------
Identifiable Assets
Industrial Services $ 166,849 $ 162,681 $ 181,545
Hardware Merchandising 46,331 36,340 24,357
Glass Merchandising 37,734 42,041 53,058
Corporate Assets 13,140 13,635 7,352
Adjustments and Eliminations (1,499) (106) (126)
----------- ----------- -----------
Consolidated Assets $ 262,555 $ 254,591 $ 266,186
- -----------------------------------------------------------------------------------------------------------------------
Capital Expenditures
Industrial Services $ 2,180 $ 2,315 $ 2,736
Hardware Merchandising 1,985 539 339
Glass Merchandising 640 1,254 1,094
Corporate 159 191 94
----------- ----------- ----------
Consolidated Capital Expenditures $ 4,964 $ 4,299 $ 4,263
- -----------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization
Industrial Services $ 3,448 $ 3,339 $ 4,458
Hardware Merchandising 639 401 364
Glass Merchandising 1,355 1,839 2,271
Corporate 105 78 49
----------- ----------- ---------
Consolidated Total $ 5,547 $ 5,657 $ 7,142
=======================================================================================================================
</TABLE>
* Includes non-recurring restructuring charges and transaction costs of
$5,950 and $2,150, respectively.
F - 37
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
19. Subsequent Event:
On March 4, 1997, the Operating Partnership received the last of two financing
commitments which together aggregate $150,000 from lenders. These commitments
are available to the Partnership until May 30, 1997. The Partnership intends to
utilize the debt capacity to fund transaction costs and other payments related
to its conversion to corporate form, refinance its current outstanding senior
notes of $63,934 as of December 31, 1996, including interest thereon and related
make-whole amount of approximately $5,000, and outstanding bank revolver
borrowings of $11,000 as of December 31, 1996. Also, the new credit facilities
will provide working capital for reinvestment in its businesses and acquisition
capital for future growth. The new financing commitments consist of a $60,000
five-year fixed rate note at 7.66% and a $90,000 five-year bank revolver with
terms and conditions more favorable than the Partnership's existing senior notes
and bank credit lines including less restrictive covenants and an effective
interest rate reduction of approximately 1.00%.
Consummation of the refinancing with the new credit facilities is contingent
upon approval of the Partnership's conversion into corporate form and certain
other terms and conditions of closing being satisfied in a manner acceptable to
the lenders.
F - 38
<PAGE>
EXHIBIT A
GLOSSARY OF DEFINED TERMS
A Interests Class A limited partnership interests in the
Partnership including depositary receipts therefor.
Appointment Event When the Trust has failed to make full
distributions on the Trust Preferred Securities for
18 consecutive months or an Event of Default under
the Declaration.
B Interests Class B limited partnership interests in the
Partnership including depositary receipts therefor
B Tax Distribution Distribution to B Interests from Cash Available for
Distribution equal to the product of (i) 125% of the
then applicable maximum Federal income tax rate for
individuals and (ii) the taxable income allocable to
the B Interests.
Business Trust Act Delaware Business Trust Act.
Cash Available for All cash receipts of the Partnership less cash used
Distribution to pay or establish a reserve for expenses.
Code Internal Revenue Code of 1986, as amended.
Common Stock Common Stock, par value $.01 per share, of the
Corporation.
Contribution Agreement Contribution Agreement dated _______, 1997 between
the Corporation and Lehman Brothers Holdings Inc.
Conversion The conversion of the Partnership to corporate form
as generally described in this Proxy
Statement/Prospectus and related transactions entered
into pursuant to the Conversion Agreement.
Conversion Agreement Agreement and Plan of Conversion, dated ______ 1997,
among the Partnership, LPSub, the Operating
Partnership, the General Partner, SunSub A and
SunSub B.
Conversion Proposal The proposal to convert the Partnership to corporate
form.
Corporation SunSource Inc., a Delaware corporation.
Creditor Person to whom the Trust owes any debts, obligations,
costs, expenses and taxes.
Declaration Declaration of trust of the Trust.
depositary receipts Depositary receipts for A Interests or B Interests.
Delaware Trustee __________, an affiliate of the Indenture Trustee.
DGCL Delaware General Corporation Law.
Direct Participants Securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other
organizations that are participants in DTC.
Distributions Payments with respect to the Trust Preferred
Securities.
DTC The Depository Trust Company
Effective Time The date on which the Conversion will become
effective. The specific date will be determined by
the General Partner and will be publicly announced no
later than the date of the Special Meeting.
-1-
<PAGE>
Event of Default Event of Default with respect to the Trust
Securities.
Exchange Act Securities and Exchange Act of 1934, as amended.
Expiration Date
Guarantee Payments Payments on distributions guaranteed by the
Corporation pursuant to the Preferred Securities
Guarantee.
General Partner SDI Partners I, L.P., a Delaware limited partnership.
Indenture Indenture dated as of ______________, 1997 between
the Corporation and Bank of New York, as Trustee
governing the Junior Subordinated Debentures.
Indenture Event Event of default under the Indenture with respect to
of Default the Junior Subordinated Debentures. Indenture Trustee
Bank of New York Indirect Participants Securities
brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship
with a Direct Participant of DTC, either directly or
indirectly.
Interests Limited partnership interests in the Partnership.
Investment Company Event The Regular Trustees shall have
received a legal opinion that the Trust may be
considered an investment company under the Investment
Company Act of 1940, as amended.
IRS Internal Revenue Service
Junior Subordinated Junior Subordinated Debentures of the Corporation.
Debentures
Lehman Brothers Lehman/SDI and any of its affiliates.
Lehman/SDI Lehman/SDI, Inc., a Delaware corporation, general
partner of the General Partner.
limited partners Holders of Interests, including holders that are
admitted to the Partnership as limited partners, and
holders who are merely assignees of the Interests.
Liquidation Distribution Distribution on dissolution or liquidation of the
Trust.
LPSub LPSub Inc., a wholly owned subsidiary of the
Partnership.
Management Fee Management fee payable by the Operating Partnership
to the General Partner of $3,330,000 annually.
Merger Merger of the Partnership, SunSub A and SunSub B with
and into the Operating Partnership pursuant to the
Conversion Agreement.
NYSE New York Stock Exchange.
Operating Partnership SDI Operating Partners, L.P., a Delaware limited
partnership.
Operating Partnership Amended and Restated Agreement of Limited
Agreement Partnership of the Operating Partnership.
Pari passu Equal in priority.
Partners Both the holder of the general partnership interest
in the Partnership and holders of A Interests and B
Interests.
Partnership SunSource L.P., a Delaware limited partnership.
Partnership Agreement Amended and Restated Agreement of Limited Partnership
of the Partnership.
-2-
<PAGE>
Preferred Securities Guarantee by the Corporation on a subordinated basis
Guarantee of the payment of distributions on the Trust
Preferred Securities and payments on liquidation of
the Trust and redemption of Trust Preferred
Securities.
Preferred Share Fraction One one-hundredth of a Preferred Share, carrying
voting and dividend rights that are intended to
produce the equivalent of one share of Common Stock.
Preferred Shares Series A Junior Participating Preferred Shares, par
value $0.01 per share, of the Corporation.
Priority Return Distribution to A Interests from Cash Available for
Distribution annually of $1.10 simple cumulative
return.
Pro Rata Basis Pro rata to each holder of Trust Securities according
to the aggregate liquidation amount of the Trust
Securities held by the relevant holder in relation to
the aggregate liquidation amount of all Trust
Securities outstanding.
Property Trustee Bank of New York.
Record Date Close of business on March , 1997, for the
determination of limited partners entitled to vote at
the Special Meeting.
Redemption Price $25 plus accrued and unpaid distributions on the
Trust Preferred Securities to the date of redemption.
Regular Trustees Three individual trustees of the Trust.
Rights Rights to purchase shares of Preferred Stock of the
Corporation and, in certain cases, Common Stock of
the Corporation, as described in the Rights
Agreement.
SEC Securities and Exchange Commission.
Securities Act Securities Act of 1933, as amended.
Smith Barney Smith Barney, Inc., financial adviser to the Special
Committee.
Special Committee Elected by the Board of Directors of Lehman/SDI to
consider and advise the entire Board concerning the
fairness to the limited partners of the terms of the
Conversion related to the exchange of general and
limited partnership interests in the Partnership. The
members of the Special Committee are O. Gordon
Brewer, Jr. and Ernest L. Ransome, III.
Special Event A Tax Event or Investment Company Event.
Special Meeting The Special Meeting of the limited partners of
SunSource L.P., to be held at __________________,
Philadelphia, Pennsylvania on April _____, 1997 at
10:00 a.m., local time. At the Special Meeting, the
limited partners will vote upon the proposed
Conversion.
Special Regular Trustee Trustee to be elected by holders of Trust Preferred
Securities if distributions are in arrears for 18
consecutive months or there is an Event of Default.
SunSource The Partnership, prior to the Conversion, and the
Corporation, after the Conversion, including in each
case their respective subsidiaries.
SunSub A SunSub A, Inc., a wholly owned subsidiary of the
Corporation.
SunSub B SunSub B Inc., a wholly owned subsidiary of the
Corporation.
-3-
<PAGE>
Tax Event The Regular Trustees shall have received a tax
opinion to the effect that the payment of interest to
the Trust may be taxable to the Trust or interest
payable by the Corporation on the Junior Subordinated
Debentures may not be deductible by the Corporation
for federal income tax.
Trust SunSource Capital Trust, a Delaware statutory
business trust.
Trust Indenture Act Trust Indenture Act of 1939, as amended.
Trust Common Securities Common Securities of the Trust.
Trust Preferred 11.6% Trust Preferred Securities of the Trust.
Securities
Trust Preferred Certificate representing interests in Trust
Securities Global Preferred Securities registered in the name of DTC
Certificate or its nominee.
Trust Securities Trust Preferred Securities and Trust Common
Securities.
-4-
<PAGE>
CONVERSION AGREEMENT
EXHIBIT B
AGREEMENT AND PLAN OF CONVERSION
AGREEMENT AND PLAN OF CONVERSION, dated as of December __, 1996, by and
among SunSource Inc., a Delaware corporation (the "Corporation"); SunSource
L.P., a Delaware limited partnership (the "Partnership"); SDI Operating
Partners, L.P., a Delaware limited partnership (the "Operating Partnership");
SDI Partners I, L.P., a Delaware limited partnership (the "General Partner");
SunSub A, a Delaware corporation ("SunSub A"); and SunSub B, a Delaware
corporation ("SunSub B").
B A C K G R O U N D
The Partnership is a master limited partnership whose general partner
is the General Partner and whose Class A and Class B limited partnership
interests ("A Interests" and "B Interests") are publicly held. The parties
desire to convert the Partnership to corporate form (the "Conversion") and to
that end have newly formed the Corporation and its two wholly-owned
subsidiaries, SunSub A and SunSub B. The Partnership owns the limited
partnership interest in the Operating Partnership with the general partnership
interest being also owned by General Partner.
The parties have also newly formed SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"). The Corporation will contribute Junior
Subordinated Debentures to the Trust in exchange for 11.6% Trust Preferred
Securities (the "Preferred Securities") and Trust Common Securities (the "Common
Securities").
The parties desire to accomplish the Conversion through the merger
provided for herein (the "Merger") by which the Partnership and SunSub A and
SunSub B will be merged into the Operating Partnership and the A Interests will
receive Preferred Securities of the Trust and cash and the B Interests and the
General Partner will receive Common Stock of the Corporation.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Merger and the mode of carrying the
same into effect, the parties hereto, intending to be legally bound, hereby
agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as hereinafter defined), the Partnership and
SunSub A and SunSub B shall be merged with and into the Operating Partnership
(such parties to the Merger being sometimes hereinafter collectively referred to
as the "Constituent Entities") pursuant to the Agreement of Merger attached
hereto as Annex 1 (the "Merger Agreement") and the separate existence of the
Partnership and SunSub A and SunSub B shall cease. The Operating Partnership
shall be the surviving entity in the Merger (sometimes hereinafter referred to
as the "Surviving Entity") and shall continue to be governed by the laws of the
State of Delaware, and all rights, privileges, immunities and franchises of the
Constituent Entities shall vest in the Surviving Entity and continue unaffected
by the Merger.
SECTION 1.2 Terms and Conditions of The Merger. The manner of
converting the securities of the Constituent Entities shall be as set forth in
Section 5 of the Merger Agreement.
B-1
<PAGE>
SECTION 1.3 Timing.
(a) Limited Partner Approval. The Partnership shall submit the
proposal to convert to corporate form (the "Conversion Proposal") to its limited
partners for approval and adoption at a meeting to be held as soon as
practicable. In connection with such meeting, the Partnership shall take such
reasonable steps as shall be necessary for the prompt preparation and filing by
the Partnership of a proxy statement (the "Proxy Statement") under the
Securities Exchange Act of 1934 (the "Exchange Act") and by the Corporation of a
registration statement (the "Registration Statement") and prospectus (the
"Prospectus") under the Securities Act of 1933 (the "Securities Act"), with the
Securities and Exchange Commission ("SEC") and shall cause the Proxy
Statement/Prospectus to be mailed to the limited partners of the Partnership as
soon as practicable. Adoption of the Conversion Proposal requires (I) the
approval of limited partners holding a majority of the outstanding A Interests
and B Interests, each voting separately as a class, and (ii) the approval of
unaffiliated limited partners (limited partners other than affiliates of the
General Partner) holding a majority of the outstanding A Interests and B
Interests held by unaffiliated limited partners, each voting separately as a
class (the "Class Votes").
(b) Closing and Effective Time. Subject to the Conversion
Proposal receiving the requisite approval by the limited partners and subject to
the provisions of this Agreement, the parties shall hold a closing (the
"Closing") on (i) the later of (A) the business day following the meeting of the
limited partners of the Partnership to consider and vote upon the Conversion
Proposal or (B) the business day on which the last of the conditions set forth
in Article IV is fulfilled or waived or (ii) at such other date as the parties
hereto may agree (the "Closing Date"), at 10:00 A.M., (local time) at the
offices of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, or at such
other place or time as the parties hereto may agree. The Merger shall become
effective as set forth in Section 3 of the Merger Agreement (the "Effective
Time").
(c) Certificate of Incorporation and Bylaws. From and after
the Effective Time, and pursuant to the Merger, the Certificate of Incorporation
and Bylaws of the Corporation as attached as Annexes 2 and 3, respectively,
shall continue to be the Certificate of Incorporation and Bylaws of the
Corporation as the surviving entity without change or amendment until further
amended in accordance with the provisions thereof and applicable law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Representations and Warranties by the Partnership. Each of
the Partnership and the Operating Partnership represents and warrants to the
other parties that:
(a) Organization and Good Standing of the Partnership and the
Operating Partnership. Each of the Partnership and the Operating Partnership is
a limited partnership duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) Capitalization. The sole general partner of the
Partnership is the General Partner and there are issued and outstanding
11,099,573 A Interests and 21,675,746 B Interests of the Partnership. The sole
general partner of the Operating Partnership is the General Partner and the sole
limited partner of the Operating Partnership is the Partnership.
There is no outstanding option, warrant or other agreement or
commitment to which either the Partnership or the Operating Partnership is a
party or by which it is bound providing for the issuance of any additional
securities of the Partnership or the Operating Partnership.
B-2
<PAGE>
(c) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary
partnership action on the part of the Partnership and the Operating Partnership
other than the approval of the Conversion Proposal by the limited partners of
the Partnership. This Agreement has been duly executed and delivered by the
Partnership and the Operating Partnership and is enforceable against the
Partnership and the Operating Partnership, respectively, in accordance with its
terms.
(d) Proxy Statement; Other Information. Each of the
Partnership and the Operating Partnership represents that the Registration
Statement, the Proxy Statement, the Schedule 13E-3 and all other filings with
the SEC in connection with the Conversion comply in all material respects with
the Securities Act and the Exchange Act, as the case may be and that these
materials do not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the
circumstances under which they were made, not misleading.
(e) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Partnership and the Operating
Partnership nor the consummation of the transactions contemplated hereby will
(i) conflict with or result in any breach of any provision of the Partnership
Agreement; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and the DGCL, (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the Partnership or the Operating Partnership; (iii) result in a
default (or give rise to any right of termination, unilateral modification or
amendment, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, license, agreement or other instrument or obligation to
which the Partnership or the Operating Partnership is a party or by which the
Partnership or the Operating Partnership or any of their respective assets may
be bound, except for such defaults (or rights of termination, unilateral
modification or amendment, cancellation or acceleration) which in the aggregate
would not have a material adverse effect on the Partnership or the Operating
Partnership; or (iv) violate any order, writ, injunction, decree, judgment,
ordinance, statute, rule or regulation applicable to the Partnership or the
Operating Partnership or any of their respective properties or businesses,
except for violations (other than of orders, writs, injunctions or decrees)
which would not in the aggregate have a material adverse effect on the
Partnership or the Operating Partnership.
SECTION 2.2 Representations and Warranties by the Corporation.
The Corporation represents and warrants to the other parties that:
(a) Organization and Good Standing of the Corporation, SunSub
A, SunSub B and the Trust. Each of the Corporation and SunSub A and SunSub B is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Trust is a statutory business trust duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
B-3
<PAGE>
(b) Capitalization. The authorized capital stock of the
Corporation consists of 1,000,000 shares of Preferred Stock, par value $.01 per
share, of which none are outstanding, and 20,000,000 shares of Common Stock, par
value $.01 per share, of which 1,000 shares are outstanding and owned by the
Partnership. The authorized capital stock of each of SunSub A and SunSub B
consists of 1,000 shares of Common Stock, par value $.01 per share, all of which
are outstanding and owned by the Corporation. The authorized securities of the
Trust consist of 4,217,837 shares of Preferred Securities, of which none are
outstanding, and 130,449 shares of Common Securities, of which 1,000 shares are
outstanding and owned by the Corporation.
There is no outstanding option, warrant or other agreement or
commitment to which either the Corporation, SunSub A, SunSub B or the Trust is a
party or by which it is bound providing for the issuance of any additional
securities of the Corporation, SunSub A, SunSub B or the Trust except for the
issuance by the Trust to the Corporation of _________________ shares of
Preferred Securities in exchange for Junior Subordinated Debentures and
___________ shares of Common Securities for cash and except pursuant to this
Agreement.
(c) Authorization. The execution, delivery and performance of
this Agreement has been duly and validly authorized by all necessary corporate
action on the part of the Corporation, SunSub A and SunSub B. This Agreement has
been duly executed and delivered by the Corporation, SunSub A and SunSub B and
is enforceable against each of them in accordance with its terms.
(d) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Corporation nor the consummation
of the transactions contemplated hereby will (i) conflict with or result in any
breach of any provision of the Corporation's Certificate of Incorporation or
Bylaws; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and the DGCL, (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the Corporation; (iii) result in a default (or give rise to any right
of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which the Corporation is
a party or by which it or any of its assets may be bound, except for such
defaults (or rights of termination, unilateral modification or amendment,
cancellation or acceleration) which in the aggregate would not have a material
adverse effect on the Corporation; or (iv) violate any order, writ, injunction,
decree, judgment, ordinance, statute, rule or regulation applicable to the
Corporation or any of its properties or businesses, except for violations (other
than of orders, writs, injunctions or decrees) which would not in the aggregate
have a material adverse effect on the Corporation.
SECTION 2.3 Representations and Warranties by the General Partner.
(a) Organization and Good Standing. The General Partner is a
limited partnership duly organized, validly existing and in good standing under
the laws of the State of Delaware. The general partner of the General Partner is
Lehman/SDI, Inc., a Delaware corporation ("Lehman/SDI").
(b) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary
partnership action on the part of the General Partner. This Agreement has been
duly executed and delivered by the General Partner.
(c) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the General Partner nor the
consummation of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the General Partnership Agreement or
the Partnership Agreement; (ii) require any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or
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regulatory authority or body, except (A) pursuant to the Securities Act and the
Exchange Act or the rules and requirements of any national securities exchange
or the National Association of Securities Dealers, Inc., (B) the filing of a
certificate of merger pursuant to the Delaware RULPA and DGCL, (C) filings under
state securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the General Partner; (iii) result in a default (or give rise to any
right of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which the General
Partner is a party or by which it or any of its assets may be bound, except for
such defaults (or rights of termination, unilateral modification or amendment,
cancellation or acceleration) which in the aggregate would not have a material
adverse effect on the General Partner; or (iv) violate any order, writ,
injunction, decree, judgment, ordinance, statute, rule or regulation applicable
to the General Partner or any of its properties or businesses, except for
violations (other than of orders, writs, injunctions or decrees) which would not
in the aggregate have a material adverse effect on the General Partner.
(d) Certain Agreements. Except as disclosed in the
Registration Statement, (I) there are no agreements in effect between the
General Partner or any of its affiliates, on the one hand, and the Partnership
and the Operating Partnership, on the other; and (ii) there are no written
agreements in effect between Lehman Brothers or any of its affiliates, on the
one hand, and any member of management, on the other.
(e) Ownership of Partnership Interests; Title. The General
Partner is the owner of record and beneficially of the general partnership
interests in the Partnership and the Operating Partnership (the "GP Interests")
as disclosed in the Registration Statement. The General Partner has not received
any notice of any adverse claim to the ownership of any such GP Interests and
does not have any reason to know of any such adverse claim that may be
justified. On the Closing Date, the General Partner shall have good and
transferable title to the GP Interests, free and clear of all liens.
ARTICLE III
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 3.1 Legal Conditions to Merger. Each of the parties hereto will
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Merger.
SECTION 3.2 Affiliates. Prior to the Closing Date the General Partner
shall deliver to the Corporation a letter identifying all persons who are, at
the time the Conversion Proposal is submitted for approval to the limited
partners of the Partnership, "affiliates" of the Partnership for purposes of
Rule 145 under the Securities Act. The General Partner shall use its best
efforts to cause each such person to deliver to the Corporation on or prior to
the Closing Date executed affiliates' letters in customary form.
SECTION 3.3 Fees and Expenses. Whether or not the Merger is
consummated, all costs and expenses incurred by the Partnership in connection
with this Agreement and the transactions contemplated hereunder shall be paid by
the Partnership.
SECTION 3.4 Stock Exchange Listing. The Corporation shall use its best
efforts to cause the Preferred Securities and Common Stock to be issued in the
Merger to be approved for listing on the New York Stock Exchange (the "NYSE"),
subject to official notice of issuance, prior to the Closing Date. The A
Interests and the B Interests will be delisted at or immediately after the
Effective Time.
SECTION 3.5 Indemnification.
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(a) The Partnership shall, and from and after the Effective
Time, the Corporation shall, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director, partner, shareholder,
agent or fiduciary of the Partnership, the Operating Partnership, the General
Partner, Lehman/SDI or the Corporation (the "Companies") or an affiliate of such
person (the "Indemnified Parties") against all losses, claims, damages, costs,
expenses, liabilities or judgments, or amounts that are paid in settlement with
the approval of the indemnifying party (which approval shall not be unreasonably
withheld) of, or in connection with, any claim, action, suit, proceeding or
investigation ("Proceeding") based in whole or in part out of the fact that such
person is or was an officer, director, partner or shareholder of one or more of
the Companies or an affiliate of such person, whether pertaining to any matter
existing or occurring at or prior to the Effective Time and whether asserted or
claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities")
in each case to the full extent a partnership or a corporation is permitted
under Delaware law to indemnify such persons or entities; and the Partnership
(and after the Effective Time, the Corporation) will pay or reimburse expenses
in advance of the final disposition of any such Proceeding to each Indemnified
Party to the full extent permitted by law upon receipt of an undertaking to
repay such expenses if and when requested to do so under applicable law. Without
limiting the foregoing, in the event any such Proceeding is brought against any
Indemnified Party (whether arising before or after the Effective Time), (I) the
Indemnified Parties may retain counsel satisfactory to them, (ii) the
Partnership (and after the Effective Time, the Corporation) shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received, and (iii) the Partnership (and
after the Effective Time, the Corporation) will use all reasonable efforts to
assist in the vigorous defense of any such matter, provided that neither the
Partnership nor the Corporation shall be liable for any settlement of any claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 3.5, upon learning of any Proceeding, shall notify the
Partnership (and after the Effective Time, the Corporation) (but the failure so
to notify the Partnership or the Corporation, as the case may be, shall not
relieve the Partnership or the Corporation from any liability which it may have
under this Section 3.5 except to the extent such failure prejudices the
indemnifying party) and shall deliver to the Partnership (and after the
Effective Time, the Corporation) the undertaking referred to above. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to each such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties.
(b) The provisions of this Section 3.5 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and the
Indemnified Party's heirs, representatives, successors and assigns.
ARTICLE IV
CONDITIONS TO THE MERGER
SECTION 4.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of the parties to effect the Merger shall be subject
to the satisfaction, on or before the Closing Date, of each of the following
conditions:
(a) Representations and Warranties and Performance. The
representations and warranties of each of the other parties herein contained
shall be true and correct on the Closing Date with the same effect as though
made at such time. Each of the other parties shall have performed in all
material respects all obligations and complied in all material respects with all
agreements, undertakings, covenants and conditions required by this Agreement to
be performed or complied with by it at or prior to the Closing Date.
(b) Pending Litigation. There shall not be any litigation or
other proceeding pending or threatened to restrain or invalidate the
transactions contemplated by this Agreement.
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<PAGE>
(c) Limited Partner Approval. The Conversion Proposal shall
have been approved and adopted by the requisite vote of the holders of the A
Interests and B Interests pursuant to the Class Votes.
(d) Regulatory Approval. All authorizations, consents and
permits required to perform this Agreement and the Merger Agreement shall have
been obtained and the required statutory waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, shall have
expired or been terminated.
(e) Registration Statement. The Registration Statement filed
pursuant to Section 1.3 (a) shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceeding seeking a stop
order.
(f) NYSE Listing. The Preferred Securities and the Common
Stock to be issued in the Merger shall have been approved for listing on the
NYSE upon official notice of issuance.
(g) Blue Sky Compliance. The Corporation shall have complied
with all requirements of state securities or "blue sky" laws with respect to the
issuance of the securities in the Merger.
(h) Special Committee Determination. The Special Committee
shall not have withdrawn its determination that the Conversion is fair to the
holders of A Interests and B Interests.
(I) Fairness Opinion. The fairness opinion delivered to the
Partnership by Smith Barney Inc. and included as an exhibit to the Proxy
Statement/Prospectus shall not have been rescinded prior to the Closing Date.
(j) Tax Opinion. The tax opinion of Morgan, Lewis & Bockius
LLP delivered to the Partnership and filed as an exhibit to the Registration
Statement shall not have been rescinded prior to the Closing Date.
(k) Securities Opinion. The securities law opinion of
Richards, Layton & Finger delivered to the Corporation and filed as an exhibit
to the Registration Statement shall not have been rescinded prior to the Closing
Date.
(l) Available Financing. The Corporation shall have available
financing to refinance existing senior debt on terms acceptable to the
Corporation and the General Partner or shall have received approval of the
Conversion by the existing senior lenders.
(m) Deferred Compensation Plan. The Corporation shall have
received from Donald T. Marshall, John P. McDonnell and Norman V. Edmonson
("Management") undertakings to defer into the Deferred Compensation Plan for Key
Employees of the Operating Partnership all payments due under the previous
Deferred Compensation Plans and Long Term Performance Share Plan of the
Operating Partnership.
(n) Changes in Applicable Law. There shall have been no
material change, in effect or pending, in applicable law , including with
respect to the taxation of the Conversion, the Corporation or the Preferred
Securities.
(o) Contribution Agreement. The Corporation shall have entered
into a Contribution Agreement with Lehman Brothers Inc. on terms satisfactory to
the parties hereto.
(p) Stockholders Agreement. The Corporation, Lehman Brothers
Inc. and Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J.
Cornelius, Max W. Hillman and Joseph M. Corvino shall have entered into a
Stockholders Agreement on terms satisfactory to the parties.
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(q) Registration Rights Agreement. The Corporation, Lehman
Brothers Inc. and Management shall have entered into a Registration Rights
Agreement on terms satisfactory to the parties.
(r) Escrow Agreement. The Corporation and the Escrow Agent
shall have entered into an Escrow Agreement on terms satisfactory to the
parties.
(s) Resale Agreement. The Corporation, Lehman and Management
shall have entered into an agreement regarding resale of the Corporation's
Common Stock.
(t) Other Documentation. The parties hereto shall have entered
into such other agreements as are contemplated by the Conversion, including,
without limitation, the Indenture and Declaration of Trust in respect of the
Junior Subordinated Debentures and Preferred Securities, on terms satisfactory
to the parties.
ARTICLE V
TERMINATION AND ABANDONMENT
SECTION 5.1 Termination and Abandonment. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after approval by the limited partners of the
Partnership, by action of the Board of Directors of Lehman/SDI.
SECTION 5.2 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that after approval of the Conversion Proposal by the limited partners
of the Partnership, no amendment may be made which decreases the amount or
changes the type of consideration to which the limited partners of the
Partnership are entitled under this Agreement or otherwise materially adversely
affects the rights of the limited partners of the Partnership without the
further approval of the limited partners.
SECTION 5.3 Waiver. Any time prior to the Effective Time, whether
before or after the meeting referred to in Section 1.3(a), any party hereto may
waive compliance with any of the agreements of any other party or with any
conditions to the obligations of such party; provided, however, that after
approval of the Conversion Proposal by the limited partners of the Partnership,
no waiver may be given which materially adversely affects the rights of the
limited partners of the Partnership without the further approval of the limited
partners . Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party by a duly authorized officer.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Notices. Any notices or other communications required or
permitted hereunder shall be sufficiently given if sent by telecopy or facsimile
transmission (with hard
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<PAGE>
copy to follow), registered or certified mail, postage prepaid, or Federal
Express or similar overnight delivery services addressed, in the case of all
parties at
2600 One Logan Square
Philadelphia, PA 19103
Attn: Norman V. Edmonson
with required copies to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Attn: Donald A. Scott, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attn: Andrew R. Keller, Esq.
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attn: William G. Lawlor, Esq.
or such other address as shall be furnished in writing by any party to the
others prior to the giving of the applicable notice or communication.
SECTION 6.2 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.3 Headings. The headings herein are for convenience of
reference only, do not constitute a part of this Agreement, and shall not be
deemed to limit or affect any of the provisions hereof.
SECTION 6.4 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties, with respect to the subject matter hereof.
SECTION 6.5 Cooperation. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its reasonable efforts to take,
or cause to be taken, such action, to execute and deliver, or cause to be
executed and delivered, such governmental notifications and additional documents
and instruments and to do, or cause to be done, all things necessary, proper or
advisable under the provisions of this Agreement and under applicable law to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 6.6 No Rights, Etc.. Nothing in this Agreement express or
implied is intended to confer upon any other person any rights or remedies under
or by reason of this Agreement.
SECTION 6.7 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Delaware applicable to contracts made and to be performed in that
State.
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<PAGE>
SECTION 6.8 Special Committee. Any determination by the Corporation or
the General Partner that any of the conditions in Article IV hereof have been
satisfied or waived, or any amendment of this Agreement, shall require the
affirmative vote of the Special Committee (as defined in the Registration
Statement).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Conversion to be duly executed as of the date first above written.
SUNSOURCE L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By________________________________
Chairman
SDI OPERATING PARTNERS, L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By________________________________
Chairman
SDI PARTNERS I, L.P.
By Lehman/SDI, Inc.
Its General Partner
By________________________________
Chairman
SUNSUB A
By________________________________
President
SUNSUB B
By________________________________
President
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<PAGE>
ANNEX 1
AGREEMENT OF MERGER
OF
SUNSOURCE L.P.
(a Delaware limited partnership)
SUNSUB A
(a Delaware corporation)
AND
SUNSUB B
(a Delaware corporation)
WITH AND INTO
SDI OPERATING PARTNERS, L.P.
(a Delaware limited partnership)
AGREEMENT OF MERGER, dated as of ___________, 1997, by and
among SunSource L.P., a Delaware limited partnership (the "Partnership"), SunSub
A, a Delaware corporation ("SunSub A"), SunSub B, a Delaware corporation
("SunSub B"; and together with the Partnership and SunSub A, the "Disappearing
Entities"), and SDI Operating Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), with reference to the following RECITALS:
A. The Partnership is a Delaware limited partnership whose
general partner is SDI Partners I, L.P., a Delaware limited partnership (the
"General Partner"). Its limited partnership interests are publicly held,
consisting of 11,099,573 Class A limited partnership interests ("A Interests")
and 21,675,746 Class B limited partnership interests ("B Interests).
B. SunSub A is a Delaware corporation having all of its issued
and outstanding capital stock, consisting of 1,000 shares of common stock, par
value $.01 per share, owned of record and beneficially by SunSource Inc., a
Delaware corporation (the "Corporation").
C. SunSub B is a Delaware corporation having all of its issued
and outstanding capital stock, consisting of 1,000 shares of common stock, par
value $.01 per share, owned of record and beneficially by the Corporation.
D. The Operating Partnership is a Delaware limited partnership
whose general partner is the General Partner and whose limited partner is the
Partnership.
E. The Corporation has organized SunSource Capital Trust, a
Delaware statutory business trust (the "Trust"), which has authorized and issued
[4,217,837] 11.6% Trust Preferred Securities (the "Preferred Securities") and [
] Trust Common Securities, all of which are owned by the Corporation.
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F. The partners of the Partnership and the Operating
Partnership and the Boards of Directors and shareholder of SunSub A and SunSub B
have approved and adopted resolutions approving and adopting this Agreement of
Merger in accordance with the General Corporation Law of the State of Delaware
(the "DGCL").
NOW, THEREFORE, the parties hereto, in consideration of the
mutual covenants herein contained and intending to be legally bound, agree as
follows:
1. Parties to Merger. The Disappearing Entities and the
Operating Partnership (such parties to the merger being hereinafter sometimes
collectively referred to as the "Constituent Entities") shall effect a merger
(the "Merger") in accordance with and subject to the terms and conditions of
this Agreement of Merger (the "Agreement").
2. Merger. At the Effective Time (as defined in Section 3
hereof), each of the Disappearing Entities shall be merged with and into the
Operating Partnership (which latter entity shall be, and is hereinafter
sometimes referred to as, the "Surviving Entity").
3. Filing and Effective Time. A certificate of merger and such
other documents and instruments as are required by, and complying in all
respects with, the DGCL shall be filed in the Office of the Secretary of State
of Delaware. The Merger shall become effective, following the filing of all such
documents and instruments, at 11:59 p.m. on __________, 1997 (the "Effective
Time").
4. Effect of Merger. At the Effective Time, the separate
existence of each of the Disappearing Entities shall cease, the Surviving Entity
shall continue to be a limited partnership organized and governed by the laws of
the State of Delaware and the Merger shall have the effects provided therefor by
the DGCL.
5. Partnership Interests and Capital Stock. At the Effective
Time:
(a) Each A Interest of the Partnership issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holders thereof, be converted
into 0.38 share of Preferred Securities and $1.30 in cash;
(b) Each B Interest of the Partnership issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holders thereof, be converted
into 0.25 share of common stock, par value $.01, of the Corporation (the "Common
Stock");
(c) The general partner interests in the Partnership
and the Operating Partnership issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into 1,000,000 shares of Common Stock,
provided that 75,000 of such shares shall be held in escrow until the second
anniversary of the Effective Time and shall only be distributed thereafter to
the limited partners of the General Partner when the Corporation is current on
distributions on the Preferred Securities;
(d) The shares of common stock of SunSub A issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into a 1% general partnership interest in the Operating Partnership;
(e) The shares of common stock of SunSub B issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into a 99% limited partnership interest in the Operating Partnership;
(f) The limited partnership interest in the Operating
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be canceled; and
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(g) No fractional shares shall be issued in the
Merger but in lieu thereof each holder of A Interests shall be entitled to
receive cash in an amount equal to the fraction of a share of Preferred
Securities to which the holder is otherwise entitled multiplied by the average
closing price of the Preferred Securities for the five trading days following
the Effective Time and each holder of B Interests shall be entitled to receive
cash in an amount equal to the fraction of a share of Common Stock to which the
holder is otherwise entitled multiplied by the average closing price of the
Common Stock for the five trading days following the Effective Time.
6. Exchange of Certificates. Promptly after the Effective
Time, the Corporation will mail to all limited partners of record a letter of
transmittal containing instructions with respect to the surrender of depositary
receipts for A Interests in exchange for certificates representing shares of
Preferred Securities and cash and the surrender of depositary receipts for B
Interests in exchange for certificates representing shares of Common Stock. Upon
surrender to the Corporation of one or more depositary receipts, together with a
properly completed letter of transmittal, there will be issued and mailed to
former limited partners of record at the Effective Time a certificate or
certificates representing the number of shares of Preferred Securities and cash
or a certificate or certificates for shares of Common Stock to which such holder
is entitled. From and after the Effective Time, each depositary receipt will
evidence only the right to receive shares of Preferred Securities and cash or
shares of Common Stock. No distributions or dividends with respect to the
Preferred Securities or Common Stock payable to the holders of record thereof
after the Effective Time will be paid to the holder of any unsurrendered
depositary receipts until such depositary receipts are surrendered for exchange,
at which time accumulated distributions or dividends will be paid, without
interest, subject to any applicable escheat laws.
7. Further Assurances. Each of the Disappearing Entities shall
at any time, or from time to time, as and when requested by the Surviving
Entity, or by its successors and assigns, execute and deliver, or cause to be
executed and delivered in its name by its last acting officers, or by the
corresponding officers of the Surviving Entity, all such conveyances,
assignments, transfers, deeds, or other instruments, and shall take, or cause to
be taken, such further or other action as the Surviving Entity, or its
successors and assigns, may deem required or convenient in order to evidence the
transfer, vesting or devolution of any property, right, privilege, immunity,
power or purpose, or to vest or perfect in or confirm to the Surviving Entity,
or its successors and assigns, title to and possession of all the properties,
rights, privileges, immunities, powers and purposes of the Disappearing Entities
and otherwise to carry out the intent and purposes hereof.
11. Termination. Notwithstanding approval by the partners and
shareholders of the Constituent Entities of this Agreement, this Agreement may
be terminated at any time prior to the Effective Time by action of the General
Partner.
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IN WITNESS WHEREOF, the parties hereto, pursuant to the
approval and authority duly given by resolutions approved and adopted by their
respective partners and Boards of Directors and shareholders, have duly executed
this Agreement of Merger as of the day and year first written above.
SDI OPERATING PARTNERS, L.P. SUNSOURCE L.P.
By SDI Partners I, L.P. By SDI Partners I, L.P.
Its General Partner Its General Partner
By Lehman/SDI, Inc. By Lehman/SDI, Inc.
Its General Partner Its General Partner
By____________________ By____________________
Chairman Chairman
[SUNSUB A]
By____________________
President
[SUNSUB B]
By____________________
President
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EXHIBIT C
SMITH BARNEY FAIRNESS OPINION
<PAGE>
December 10, 1996
The Special Committee of the Board of Directors of Lehman/SDI, Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attention: O. Gordon Brewer, Jr. and Ernest L. Ransome, III The Special
Committee of the Board of Directors of Lehman/SDI, Inc.
Gentlemen:
In connection with the proposed conversion of SunSource L.P.
("SunSource" or the "Partnership") to corporate form (the "Conversion"), you
have requested our opinion as to the fairness, from a financial point of view,
to holders of SunSource's Class A Limited Partnership Interests ("Class A
Interests") and Class B Limited Partnership Interests ("Class B Interests") of
the Partnership of (i) the consideration to be received by holders of Class A
Interests and holders of Class B Interests, respectively, and (ii) the General
Partner Consideration (as defined herein) in the Conversion. The terms of the
Conversion are summarized in the Summary Terms of the Conversion Proposal dated
December 9, 1996 (the "Term Sheet") prepared by SDI Partners I, L.P (the
"General Partner"). The Term Sheet provides that (i) holders of Class A
Interests will receive in exchange for each Class A Interest, 0.38 shares of
11.6% Trust Preferred Securities, par value $25.00 per share (the "Preferred
Securities") of SunSource Capital Trust and $1.30 in cash, (ii) holders of Class
B Interests will receive in exchange for each Class B Interest one share of
common stock, par value $.01 per share (the "Common Stock") of a newly formed
Delaware corporation (the "Company"), and (iii) the General Partner will receive
4,000,000 shares of Common Stock in exchange for its general partnership
interests in SunSource and the Operating Partnership (as defined below). The
Common Stock to be received by the General Partner is referred to herein as the
"General Partner Consideration."
In arriving at our opinion, we have reviewed the Term Sheet and the limited
partnership agreements of the Partnership, SDI Operating Partners L.P. (the
p"Operating Partnership"), and the General Partner, and held discussions with
certain senior operating management of the Operating Partnership ("Management")
and representatives and advisors of the Partnership, the Operating Partnership
and the General Partner to discuss the business, operations and prospects of the
Partnership. We have examined certain publicly available business and financial
information relating to the Partnership as well as internal financial
statements, forecasts and other financial and operating data concerning the
Partnership prepared by Management. We have reviewed the financial terms of the
Conversion as set forth in the Term Sheet in relation to, among other things:
current and historical market prices and trading volumes of the Class A
Interests and Class B Interests; historical and projected earnings and operating
data of the Partnership; the capitalization and financial condition of the
Partnership;
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<PAGE>
and the pro forma effect of the Conversion. We also considered, to the extent
publicly available, the financial terms of certain other similar transactions
which we considered comparable to the Conversion and analyzed certain financial,
capital market and other publicly available information relating to the business
of other companies whose operations we considered comparable to those of the
Partnership. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
furnished to or otherwise reviewed by or discussed with us, we have been advised
by Management that such forecasts and other information were reasonably prepared
on bases reflecting the best currently available estimates and judgments of
Management as to the expected future financial performance of the Partnership or
the Company, as the case may be, and we further relied on the assurances of
management that it is unaware of any facts that would make the information or
forecasts provided to us incomplete or misleading.
We are not expressing any opinion as to what the value of the Preferred
Securities or the Common Stock actually will be when issued to holders of Class
A Interests and Class B Interests, respectively, or the prices at which the
Preferred Securities or Common Stock will trade subsequent to the Conversion. We
have not made or been provided with an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of the Partnership. We have
not been asked to express an opinion as to the relative merits of the Conversion
as compared to any alternative business strategies that might exist for the
Partnership or the effect of any alternative transaction in which the
Partnership might engage. We were not asked to solicit third-party indications
of interest in acquiring all or any part of the Partnership. Our opinion is
necessarily based upon financial, capital market and other conditions and
circumstances existing and disclosed to us as of the date hereof.
We have been engaged to render financial advisory services to the Special
Committee (the "Special Committee") of the Board of Directors of Lehman/SDI,
Inc. in connection with the Conversion and will receive a fee for our services,
including a fee for the delivery of this opinion. In the ordinary course of
business, we and our affiliates may actively trade or hold the Class A Interests
and Class B Interests for our own account or for the account of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
C-2
<PAGE>
It is understood that this opinion is for the information of the Special
Committee and the Board of Directors of Lehman/SDI, Inc. only and may not be
used for any other purpose without prior written consent, except that this
opinion may be included in any proxy statement, registration statement or
similar document prepared in connection with a Conversion. Provided however,
that the opinion shall be included in its entirety and any other reference to
Smith Barney shall be accurate and complete and shall not be included without
the consent of Smith Barney, which consent shall not be unreasonably withheld.
Based upon and subject to the foregoing, our experience as investment bankers
and other factors we deemed relevant, we are of the opinion that, as of the date
hereof, (i) the consideration to be received in the Conversion by the holders of
Class A Interests is fair from a financial point of view to such holders, (ii)
the consideration to be received in the Conversion by the holders of Class B
Interests is fair from a financial point of view to such holders, and (iii) the
General Partner Consideration to be received in the Conversion is fair from a
financial point of view to the holders of Class A Interests and to the holders
of the Class B Interests, respectively.
Very truly yours,
SMITH BARNEY INC.
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("Section
145") permits indemnification of directors, officers, agents and controlling
persons of a corporation under certain conditions and subject to certain
limitations. Article VII of the Registrant's Bylaws, requires the Registrant to
indemnify directors and officers of the Registrant or any other authorized
representative against expenses, judgments and any settlement amounts incurred
in a third party proceeding brought by reason of the fact that the person is an
authorized representative of the Registrant. The Bylaws also permit
indemnification of expenses incurred by an authorized representative in
connection with a proceeding brought in the name of the corporation. The Bylaws
further specify procedures for such indemnification. Section 145 also empowers
the Registrant to purchase and maintain insurance that protects its officers,
directors, employees and agents against any liabilities incurred in connection
with their service in such positions.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------
<C> <C>
2.1+ Agreement and Plan of Conversion dated as of March __, 1997 among
the Registrant, SunSource L.P., LPSub Inc., Lehman/SDI, Inc.
and the limited partners of SDI Partners I, L.P.
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Bylaws
4.1** Indenture dated as of ___________, 1997 between the Registrant and Bank of
New York
5.1** Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
shares of common stock being registered
5.2** Opinion of Richards, Layton & Finger regarding legality of the
Trust Preferred Securities being registered
8.1+ Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters
10.1+ Registration Rights Agreement dated as of _____________, 1997 among the Registrant,
Lehman Brothers and the Senior Executives
10.2+ Stockholders Agreement dated as of _____________, 1997 among the Registrant, Lehman
Brothers and certain stockholders of the Registrant
10.3+ Contribution Agreement dated as of _____________, 1997 between the Registrant and Lehman
Brothers
10.4** Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P.
10.5+ Rights Agreement dated as of _____________, 1997 between the Registrant and
_____________, as Rights Agent
23.1* Consent of Coopers & Lybrand L.L.P.
23.2+ Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1
hereto)
23.3** Consent of Richards, Layton & Finger (included in its opinion filed as Exhibit 5.2 hereto)
23.4+ Consent of Smith Barney Inc.
24+ Powers of Attorney (included on the signature page)
27.1+ Financial Data Schedule
99.1** Form of Proxy
- ------------------
* Filed herewith.
** To be filed by amendment.
+ Previously filed.
</TABLE>
II-1
<PAGE>
(b) Financial Statement Schedules:
Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
Item 22. Undertakings
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
(b) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(2) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(3) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(6) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Philadelphia,
Pennsylvania on April 4, 1997.
SUNSOURCE INC.
By: /s/ Donald T. Marshall
-------------------------------------
Donald T. Marshall
President and Chief Executive Officer
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Donald T. Marshall President, Chief Executive April 4, 1997
- --------------------------------------- Officer and Director (principal
Donald T. Marshall executive officer)
/s/ Joseph M. Corvino Vice President - Finance April 4, 1997
- --------------------------------------- (principal financial and
Joseph M. Corvino accounting officer)
/s/ Norman V. Edmonson April 4, 1997
- --------------------------------------- Director
Norman V. Edmonson
Director April 4, 1997
- ---------------------------------------
Eliot M. Fried
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
- ------ ----------- --------
<C> <C> <C>
2.1+ Agreement and Plan of Conversion dated as of March __, 1997 among
the Registrant, SunSource L.P., LPSub Inc., Lehman/SDI, Inc.
and the limited partners of SDI Partners I, L.P.
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Bylaws
4.1** Indenture dated as of ___________, 1997 between the Registrant and Bank of
New York
5.1** Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
shares of common stock being registered
5.2** Opinion of Richards, Layton & Finger regarding legality of the
Trust Preferred Securities being registered
8.1+ Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters
10.1+ Registration Rights Agreement dated as of _____________, 1997 among the Registrant,
Lehman Brothers and the Senior Executives
10.2+ Stockholders Agreement dated as of _____________, 1997 among the Registrant, Lehman
Brothers and certain stockholders of the Registrant
10.3+ Contribution Agreement dated as of _____________, 1997 between the Registrant and Lehman
Brothers
10.4** Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P.
10.5+ Rights Agreement dated as of _____________, 1997 between the Registrant and
_____________, as Rights Agent
23.1* Consent of Coopers & Lybrand L.L.P.
23.2+ Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1
hereto)
23.3** Consent of Richards, Layton & Finger (included in its opinion filed as Exhibit 5.2 hereto)
23.4+ Consent of Smith Barney Inc.
24+ Powers of Attorney (included on the signature page)
27.1+ Financial Data Schedule
99.1** Form of Proxy
- ------------------
* Filed herewith.
** To be filed by amendment.
+ Previously filed.
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We consent to the incorporation by reference and inclusion in this registration
statement on Form S-4 (File No. 333-19077) of our report dated January 29, 1997,
except for Note 7 as to which the date is March 21, 1997 and Note 19 as to which
the date is March 4, 1997, on our audits of the consolidated financial
statements and financial statement schedules of SunSource L.P. We also consent
to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 3, 1997
<PAGE>
CONSENT OF SMITH BARNEY
The Special Committee of the Board of Directors
Lehman/SDI, Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attention: O. Gordon Brewer, Jr. and Ernest L. Ransome, III
Members of the Special Committee
We hereby consent to the (i) inclusion of our opinion letter to the
Special Committee of the Board of Directors of Lehman/SDI, Inc. as Exhibit C to
the Proxy Statement/Prospectus of SunSource Inc. and SunSource Capital Trust
relating to the proposed corporate conversion and merger of SunSource, L.P. into
SunSource, Inc., and (ii) references made to our firm and such opinion in such
Proxy Statement/Prospectus. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under, and we do not
admit that we are "experts" for purposes of, the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
By: /s/
-----------------------------------
Smith Barney Inc.
New York, NY
April 4, 1997
