<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission file number 1-9375
Sun Distributors L.P.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2439550
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 One Logan Square
Philadelphia, Pennsylvania 19103
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 665-3650
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Limited Partnership New York
Interests and Depositary Stock Exchange
Receipts therefore.
Class B Limited Partnership New York
Interests and Depositary Stock Exchange
Receipts therefore.
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for, such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES . NO X .
----- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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<PAGE>
PART I
Item 1 - Business.
-----------------
General
-------
Sun Distributors L.P., a Delaware limited partnership (the "Company"), through
its subsidiary limited partnership (the "Operating Partnership"), is one of the
largest wholesale distributors of industrial products in the United States.
Since January 1987, the business of the Company and the Operating Partnership
has been managed by SDI Partners I, L.P. (the "General Partner"), a limited
partnership whose general partner is Lehman/SDI, Inc., formerly known as
Shearson/SDI, Inc., a Delaware corporation and an indirect, wholly owned
subsidiary of Lehman Brothers Holdings, Inc. ("Lehman Holdings"). The General
Partner owns 1% of the Company 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 Company and the Operating Partnership (the
"Management Employees").
The Company's current organization consists of its headquarters operation,
three product groups comprised of eleven operating divisions and its inventory
management services division, as follows:
<TABLE>
<CAPTION>
Principal Year Acquired/
Location Organized
------------------- --------------
<S> <C> <C>
Sun Distributors Headquarters Phila., Pa. 1975
Maintenance Products Group
- Kar Products Chicago, Il. 1977
- Hillman Fastener Cincinnati, Oh. 1982
- A&H Bolt & Nut Company Windsor, Ontario 1989
Fluid Power Products Group
- Walter Norris Rosemont, Il. 1976
- J.N. Fauver Company Madison Heights, Mi. 1978
- Warren Fluid Power Denver, Co. 1987
- Air-Dreco Houston, Tx. 1988
- Hydra Power Systems El Paso, Tx. 1991
- Activation Birmingham, Al. 1991
Glass Products Group
- Harding Glass Industries Kansas City, Mo. 1980
- Downey Glass Los Angeles, Ca. 1984
SIMCO/STM Division
- Special-T Metals ("STM") Lenexa, Ks. 1981
- Sun Inventory Management Co.
("SIMCO") Lenexa, Ks. 1992
</TABLE>
2
<PAGE>
General, continued
------------------
During 1990 and 1991, the Operating Partnership acquired other businesses and
integrated those operations with existing divisions, as follows:
<TABLE>
<CAPTION>
Acquired Operations Date(s) Acquired Division(s) Integrated With
------------------- ---------------- ---------------------------
<S> <C> <C>
Rogers Electric August, 1991 American Electric
Retail Glass Shops 1990 & 1991 Harding Glass Industries
Industrial Air & Hydraulics April, 1990 Air-Dreco
</TABLE>
No acquisitions were made by the Company during the period 1992 through 1994.
The Company integrated its Sun Distributors Glass operation into Harding Glass
Industries in 1993 and integrated its Air-Draulics operation into the Warren
Fluid Power division in 1991.
The Operating Partnership sold the Electrical Products Group divisions on
December 5, 1994, and Dorman Products, a division of its Maintenance Products
Group, on January 3, 1995 (the "divested operations or divisions") as listed
below:
<TABLE>
<CAPTION>
Divested Divisions Principal Location
------------------ ------------------
<S> <C>
Electrical Products Group
- American Electric Company St. Joseph, Mo.
- Philips & Company Columbia, Mo.
- Keathley-Patterson Electric Co. N. Little Rock, Ar.
Maintenance Products Group
- Dorman Products Warsaw, Ky.
</TABLE>
For the year ended December 31, 1994, the Company had net sales of over $735
million, with the largest operating division contributing approximately $133
million. Excluding divested operations, 1994 net sales were $592 million.
The Company's business strategy is to identify and develop specific industrial
distribution markets and to provide an array of services designed to add value
to the Company's products. The Company also seeks to increase its emphasis on
sales of high gross-margin products and to provide engineering design services,
particularly in the area of fluid power products. In addition, the Company 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 Company
also continues to seek customers for its inventory management services.
The Company's management strategy has been to maintain a decentralized
management system which permits the presidents of its operating units 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 their operations in
the
3
<PAGE>
General, continued
------------------
upper quartile within the industrial distribution industry. Management
believes that a significant factor in the Company's prior success has been the
result of fostering and perpetuating the entrepreneurial drive of operating
management.
The Company evaluates, on an ongoing basis, the performance and prospects of
each of its operating divisions in light of the Company's overall business
strategy.
Acquisition Strategy
--------------------
Since its inception in 1975 through 1991, the business of the Company has grown
primarily through acquisitions of existing distribution companies. The
acquisition strategy has expanded the Company's operations, both geographically
and in the number and type of products offered. The Company evaluates companies
that have developed attractive product/market niches and have demonstrated their
ability to achieve high returns on invested capital. The Company 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. Subsequent to most acquisitions, certain agreed
upon procedures are performed by internal and external auditors.
In December 1992, the Company refinanced its then outstanding $110.0 million
9 1/2% Senior Notes through proceeds provided by institutional investors in the
amount of $95.0 million and the balance from a $50.0 million Bank Credit
Agreement. Under the credit agreements, the Company was not permitted to make
acquisitions in 1993 and 1994. The Company intends to resume making
acquisitions in 1995. See Notes 8 and 9 of Notes to Consolidated Financial
Statements.
Products
--------
Excluding the divested operations discussed previously, the Company distributes
in excess of 2,000 different product lines consisting of over 100,000 different
products which fall into three basic groups: maintenance products, such as
fasteners (nuts, bolts, screws, etc.); fluid power products, such as hydraulic,
pneumatic and electronic systems and parts; and glass products, such as large
sheet glass, auto glass, insulated glass, mirrors and specialty glass. Also,
the Company provides inventory management services. The average single sale
during the year ended December 31, 1994, was approximately $290.
The following table shows the percentages of consolidated net sales reported
for the years ended December 31, 1994, 1993, and 1992 derived from the Company's
major product groups and divisions:
<TABLE>
<CAPTION>
Percentage of Consolidated Net Sales for
----------------------------------------
Year Ended December 31,
-----------------------
Product Group/Divisions 1994 1993 1992
----------------------- ------ ------ ------
<S> <C> <C> <C>
Fluid Power Group 35.4% 34.2% 33.2%
Maintenance Group 24.4% 23.7% 23.8%
Glass Group 17.9% 18.3% 18.6%
SIMCO/STM Division 2.9% 2.9% 3.0%
Divested Divisions 19.4% 20.9% 21.4%
----- ----- -----
100.0% 100.0% 100.0%
</TABLE>
4
<PAGE>
Products, continued
-------------------
Inasmuch as the Company is principally a distributor, most of its products are
manufactured by others. However, several divisions sell a majority of their
products under their own labels. In some cases, most notably the fluid power
products, the Company assembles products or designs systems to the
specifications of the end-user and performs related product repairs. With glass
products, the Company produces a wide range of fabricated flat glass products
including tempered glass, mirrors and insulating glass. In addition, several of
the products which the Company distributes are purchased by the Company in bulk
and subsequently repackaged in small quantities. The Company regularly uses a
large number of suppliers and has long-term relationships with many of them.
Most items which the Company distributes are purchased from several sources, and
the Company believes that the loss of any single supplier would not
significantly affect the operations of the Company viewed as a whole. No single
supplier accounted for more than 5% of the Company's purchases for the year
ended December 31, 1994.
Marketing
---------
While the Company sells across three broad product groups, the bulk 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. While the markets for products sold by each
division vary, the principal markets for the Company's products as determined by
management are as follows, excluding divested operations:
Replacement/Maintenance Markets. Customers in this market include diverse
-------------------------------
industrial plants and commercial establishments. Approximately 35.9% of the
Company's 1994 sales were made to customers in this market.
Original Equipment Manufacturers. Customers in this market include producers
--------------------------------
of automotive equipment, farm equipment, machine tools and a broad range of
other equipment. Approximately 21.8% of the Company's 1994 sales were made
to customers in this market.
Construction. Customers in this market include glazing contractors.
------------
Approximately 15.4% of the Company's sales for the year ended December 31,
1994, were made to customers in this market.
Retail and Other. This market is comprised of retail hardware stores, glass
----------------
shops and other distributors. Approximately 26.9% of the Company's 1994
sales were made to customers in this market.
The Company has over 179,000 customers, the largest of which accounted for less
than 4% of net sales for the year ended December 31, 1994. 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 750 sales people.
The Company's products are sold in all 50 states. Some of its divisions sell
in regional markets and some sell on a national scale. In general, maintenance
product sales are national in the U. S. and Canada; fluid power products are
sold primarily in the upper Midwest, Southeast, Southwest, Canada and Mexico;
glass products are sold primarily in the West, the Midwest, the Mid-Atlantic and
the Southeast; and inventory management services are offered in the U.S. and
also in Mexico.
5
<PAGE>
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 or fabrication. The Company encounters competition from a
large number of regional and local distributors and from several national
distributors, some of which have greater financial resources than the Company.
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 Company's competitors have annual sales of approximately $5
million on the average with approximately one-half under $2 million. The Company
believes that its business differs from that of other large national
distributors in that the Company carries a diverse range of product lines, while
most large distributors concentrate on only one or two product groups.
Insurance Arrangements
----------------------
Under the Company's current insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of expected
claims. Since October 1991, the Company has retained the exposure on certain
expected losses related to workman's compensation, general liability and
automobile. The Company also retains the exposure on expected losses related to
health benefits of certain employees. The General Partner believes that its
present insurance is adequate for its businesses. See Note 14 of Notes to
Consolidated Financial Statements.
Employees
---------
Currently, the Company, through the Operating Partnership, employs 4,103
employees, of which 1,611 are sales personnel, 1,411 are employed as warehouse
and delivery personnel, and 1,081 hold administrative positions. The Operating
Partnership has collective bargaining agreements with 7 unions representing a
total of 348 employees. In the opinion of management, employee relations are
good.
Backlog
-------
The Company's sales backlog excluding divested operations was $57,253,000 as of
December 31, 1994, and $43,772,000 as of December 31, 1993. Normally, in the
distribution business, orders are shipped within a week of receipt. On average,
the Company's backlog is less than one month's sales.
6
<PAGE>
Federal Income Tax Considerations
---------------------------------
The Revenue Act of 1987 (the "1987 Act") amended the Internal Revenue Code of
1986, as amended (the "Code") with respect to the tax treatment of publicly
traded partnerships, such as the Company, 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 is delayed, however,
for certain "existing partnerships," such as the Company, 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
Company 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
Company has not incurred a net loss for federal income tax purposes. However,
if the Company 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 Company, 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 Company in excess of the tax liability attributable to his or her
interest in the Company will be suspended, carried forward and applied against
the tax liability attributable to the Company 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 Company remains a publicly traded partnership, the Company 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 Company. The income of the Company would
be taxed to it as a separate entity, and any losses of the Company 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.
7
<PAGE>
Federal Income Tax Considerations, continued
--------------------------------------------
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 Company
pursuant to trading of the Company's Interests on the New York Stock Exchange
will not impair the status of the Company as an "existing partnership" that
qualifies for a delayed effective date under Section 7704.
Item 2 - Properties.
--------------------
The Company currently has 196 warehouse and stocking facilities located
throughout the United States, Canada and Mexico. Most of these include sales
offices. Approximately 19% of these facilities are owned and the remainder are
leased. The Company's principal properties are warehouse facilities used by the
Operating Partnership, as follows:
<TABLE>
<CAPTION>
Division Location Description
-------- -------- -----------
<S> <C> <C>
Downey Glass City of Commerce, 204,000 sq.ft. (leased)
California
Harding Glass Denver, Colorado 184,000 sq.ft. (owned)
Hillman Fastener Cincinnati, Ohio 150,000 sq.ft. (leased)
Kar Products Itasca, Illinois 80,000 sq.ft. (owned)
</TABLE>
In the opinion of management, the Company's existing facilities are in good
condition.
8
<PAGE>
Item 3 - Legal Proceedings.
---------------------------
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
Not applicable.
9
<PAGE>
PART II
Item 5 - Market for Registrant's Partnership Interests and Related Matters.
--------------------------------------------------------------------------
Market Prices
-------------
Effective May 1, 1990, the Company separated its publicly traded limited
partnership Unit consisting of one Class A Limited Partnership Interest and one
Class B Limited Partnership Interest. The Class A Interests and Class 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 Class A and Class B Interests separately during 1994 and 1993.
<TABLE>
<CAPTION>
CLOSING SALES PRICE
----------------------------------
1994 1993
---------------- ----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
Class A Interests
-------------------
First Quarter $10 3/4 $10 1/4 $11 1/2 $10 3/8
Second Quarter 10 3/4 10 1/4 11 5/8 10 7/8
Third Quarter 10 7/8 10 1/4 11 7/8 10 1/8
Fourth Quarter 10 5/8 10 1/8 10 3/8 10 1/8
Class B Interests
-------------------
First Quarter $ 4 3/4 $ 4 $ 3 5/8 $ 3 1/8
Second Quarter 6 1/8 4 3 3/8 3
Third Quarter 6 5 1/4 4 5/8 3 1/8
Fourth Quarter 5 5/8 4 1/8 4 5/8 4
</TABLE>
The total number of Class A Interests outstanding as of December 31, 1994 and
1993, was 11,099,573. The total number of Class B Interests outstanding as of
December 31, 1994 and 1993 was 21,675,746. The total number of Class A Interest
holders and Class B Interest holders as of December 31, 1994 was 10,584 and
7,706, respectively.
10
<PAGE>
Cash Distributions
------------------
The holders of the Class A Interests are entitled to receive annually $1.10 per
Class 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 Class B Interests,
such holders are entitled to annual tax distributions (the "Class 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 Class B Interests with respect to the preceding
year.
The Priority Return and Class 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 Class 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 Class B Tax Distribution have been paid. If
cash available for distribution exceeds the amount necessary to pay the Priority
Return and Class B Tax Distribution, the General Partner may make additional
discretionary distributions to the holders of Class B Interests, provided that
no distribution, except the Class B Tax Distribution, may be made to holders of
the Class B Interests if, after such distribution, such holders' capital
accounts with respect to their Class B Interests would be below $.50 on a per
Interest basis.
The Company paid Priority Return distributions of $1.10 per Class A Interest in
1994 and 1993. For 1994, the Class B Tax Distribution amounted to $10,895,000
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 will
distribute 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 on December 5, 1994.
In 1993, the Class B Tax Distribution amounted to $5,925,000 or $.267864 per
Class B Interest which was paid in the amount of $.009352 per Class B Interest
per month during 1993 to holders of record on the first day of each month. The
remaining balance due of $.15564 per Class B Interest was paid on March 31, 1994
to holders of record on the first day of each month during 1993 in the amount of
$.01297 per Class B Interest. Cash generated from operations will be sufficient,
in management's judgment, to fund future Priority Return distributions and Class
B Tax Distributions.
Upon dissolution of the Company, the assets of the Company will be liquidated
and after payment of, or provision for, liabilities of the Company, the
remaining proceeds will be distributed in accordance with the partners'
respective ownership Interests. As a result, the holders of Class A Interests
generally will receive a preferential distribution, to the extent available,
equal to the amount of their initial capital investment ($10 per Class A
Interest) plus the amount, if any, of the Priority Return not previously
distributed to the holders of Class A Interests. The remaining proceeds will be
distributed to the General Partner and the holders of Class B Interests in
accordance with their respective ownership interests.
11
<PAGE>
Taxable Income Allocations
--------------------------
Income taxes with respect to the Class A and Class B Interests are payable by
limited partners based upon the allocation of taxable income or loss pursuant to
the provisions of the Partnership Agreement. The allocation is made on a
monthly basis to the holders of record on the first day of each month. For
1994, federal taxable income (ordinary income) was allocated to each Class A
Interest in the amount of $.0917 per month or an aggregate of $1.10 for the
entire year. Federal taxable income allocated to each Class B Interest in 1994
amounted to ordinary income of $.7069 and a capital gain of $.4077 related to
the sale of the Electrical Products Group divisions on December 5, 1994. For
1993, income for federal income tax purposes was allocated to each Class A
Interest in the amount of $.0917 per month or an aggregate of $1.10 for the
entire year and to each Class B Interest in the amount of $.0451 per month or an
aggregate of $.5411 for the entire year. All income allocated to investors for
the 1993 year was classified as ordinary income.
Capital Accounts
----------------
The Class A capital account (as defined in the Partnership Agreement) was $10.00
per Class A Interest as of December 31, 1994 and 1993. The Class B Capital
Account (as defined in the Partnership Agreement) at December 31, 1994 and 1993,
was approximately $1.52 and $.905 per Class B Interest, respectively.
12
<PAGE>
Item 6 - Selected Financial Data.
--------------------------------
The following table sets forth selected consolidated financial data of the
Company as of and for the five years ended December 31, 1994. Data for all
periods shown is derived from financial statements of the Company which have
been audited by Coopers & Lybrand L.L.P., independent accountants, as
indicated in their reports thereon.
(dollars in thousands, except per partnership interest amounts)
<TABLE>
<CAPTION>
Income Statement Data for Years 1994 1993 1992 1991 1990
Ended December 31: -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $735,861 $655,707 $612,052 $573,457 $594,649
Income from operations 37,672 28,881 29,793 27,512 36,075
Gain on sale of
divisions (Note 5) 3,523 -- -- -- --
Provision for income taxes 100 869 493 630 1,024
Income before extraordinary loss
and cumulative effect of change
in accounting principle 29,544 18,506 17,691 15,073 23,146
Extraordinary loss (Note 4) -- -- (3,434) -- --
Cumulative effect on prior years
of change in accounting
principle (Note 2) -- -- 822 -- --
Net income 29,544 18,506 15,079 15,073 23,146
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 $ 1.25
- Class B $ .79 $ .28 $ .25 $ .13 $ .41
Extraordinary loss
- Class A $ -- $ -- $ -- $ -- $ --
- Class B $ -- $ -- $ (.16) $ -- $ --
Cumulative effect on prior years
of change in accounting principle
- Class A $ -- $ -- $ -- $ -- $ --
- Class B $ -- $ -- $ .04 $ -- $ --
Net income
- Class A $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.25
- Class B $ .79 $ .28 $ .13 $ .13 $ .41
Cash provided by operations $ 17,704 $ 23,571 $ 27,056 $ 30,038 $ 36,130
Cash distributions declared per
limited partnership interest
- Class A $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.26
- Class B $ .49 $ .27 $ .13 $ .13 $ .14
Balance Sheet Data at December 31:
Total assets $266,186 $273,493 $261,588 $264,544 $263,549
Long-term debt and capitalized
lease obligations 74,781 104,185 115,503 120,108 116,681
</TABLE>
See accompanying Notes to Consolidated Financial Statements
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for divestitures that affect comparability.
13
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Company's operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein.
General
The Company is a publicly held partnership operating in the wholesale industrial
distribution industry through a subsidiary partnership, SDI Operating Partners,
L.P. (the "Operating Partnership"). The Operating Partnership consists of a
headquarters operation, three product groups comprised of eleven operating
divisions and an inventory management services division. Certain divisions have
operations in Canada and Mexico.
Results of Operations
Market Developments
-------------------
In 1994, the Operating Partnership's business expanded substantially as a result
of economic strength across all product markets and internal growth strategies
developed since 1992. Market strength is expected to continue through the first
half of 1995.
Most markets served by the Company recovered in 1993 from the 1991 economic
recession and strengthened in the latter half of that year. In 1992, the
Company experienced modest economic strengthening in its Fluid Power and
Maintenance Products Groups and continued market deterioration in its Glass and
Electrical Product Groups from the economic recession which was widespread
throughout 1991.
Operating expense control and liquidity in working capital investment allows the
operating divisions to respond quickly to market conditions effected by economic
recession or growth. Management has and will continue to respond to changing
market conditions.
Sale of Certain Divisions
The Operating Partnership sold its three Electrical Group divisions on December
5, 1994 and one of its Maintenance Group divisions, Dorman Products, on January
3, 1995, for an aggregate cash consideration, net of expenses, of approximately
$63.3 million (subject to certain post-closing adjustments) and the assumption
of certain liabilities. Sales from these operating divisions aggregated $142.7
million for the year ended December 31, 1994. Income generated from these
operations contributed $6.9 million or $.32 per Class B interest to the
Company's 1994 net income results. The proceeds from these divestitures will be
used to reduce debt and for general Company purposes including acquisitions for
integration with its remaining three product groups and possible repurchase of
limited partnership interests.
14
<PAGE>
The Company considered a number of strategic alternatives as part of the process
which led to the decision to sell these divisions. Other alternatives
considered but which were not ultimately pursued, included a sale of the entire
Company; the sale of all of its divisions followed by liquidation; or a
recapitalization and conversion to a corporate structure from the current
partnership form.
The sale of the Electrical Group divisions and the Dorman Products division
brings to a conclusion the process of considering strategic alternatives. The
Company believes that the sale of these non-strategic businesses will benefit
the Operating Partnership by strengthening its balance sheet, positioning it to
resume its acquisition program and providing increased management focus on its
remaining businesses.
Results of Operations
Years Ended December 31, 1994 and 1993
--------------------------------------
Net income amounted to $29.5 million in 1994, 59.6% above the $18.5 million
earned in 1993 as a result of continued economic expansion across all product
markets and internal growth strategies implemented primarily within the last two
years. 1994 net income included a gain of $3.5 million from the sale of the
Electrical Products Group divisions in December 1994. Excluding this gain, net
income for 1994 amounted to $26.0 million or 40.6% above the 1993 reported
earnings. Results for 1994 include income from the Electrical Group of $4.1
million for eleven months of 1994 compared with $3.3 million for the twelve
months ended December 31, 1993.
Net sales during 1994 increased $80.2 million or 12.2% compared with 1993 as a
result of substantial strengthening in all product markets and significant
growth from sales programs and services initiated since 1992. Sales increases
by product group are as follows:
<TABLE>
<CAPTION>
Sales Increase
---------------------
Amount %
-------------- -----
<S> <C> <C>
Fluid Power Products $35.9 million 16.0%
Maintenance Products 27.0 million 13.3%
Glass Products 12.1 million 10.1%
Electrical Products 4.1 million 4.1%
Sun Inventory Management Company ("SIMCO") 1.1 million 17.0%
</TABLE>
The sales increase in Electrical Products includes results for eleven months in
1994 compared with twelve months in 1993. Sales for Electrical Products
increased 13.9% in the comparable eleven-month period ended November 30, 1994
and 1993.
Total cost of sales in 1994 increased $49.3 million or 12.3% from the 1993 year
due primarily to increased sales levels in the comparison period.
Gross margins for the year ended December 31, 1994, were 38.6%, the same as in
1993. A comparative summary of gross margins by product group is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1994 1993
------------ -----------
<S> <C> <C>
Maintenance Products 60.9% 61.8%
Glass Products 34.4% 34.3%
Fluid Power Products 27.7% 27.2%
Electrical Products 23.4% 23.7%
SIMCO 22.4% 20.5%
</TABLE>
15
<PAGE>
The erosion in gross margin in the Maintenance Products Group is due mainly to
increased sales allowances related to business expansion programs and
competitive pricing pressures. Changes in sales mix contributed principally to
the change in gross margins in the remaining product groups.
Total selling, general and administrative ("S,G&A") expenses increased $22.8
million or 10.7% during the year ended December 31, 1994, compared with 1993,
comprised as follows: increased selling expenses of $13.5 million or 14.3%,
increased warehouse and delivery expenses of $4.4 million or 10.8% and increased
general and administrative expenses of $4.9 million or 6.3%.
Selling and warehouse and delivery expenses increased during 1994 to support the
substantial increase in 1994 sales levels and expansion programs by certain
operating divisions. General and administrative expenses in 1994 increased
primarily by inflationary growth in fixed costs and increased incentive-based
compensation for the management group as a result of 1994 net income
performance.
S,G&A expenses, as a percentage of sales were as follows in 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Selling Expenses 14.6% 14.4%
Warehouse and Delivery Expenses 6.2% 6.3%
General and Administrative Expenses 11.3% 11.8%
----- -----
Total S,G&A Expenses 32.1% 32.5%
----- -----
</TABLE>
Overall, as a percentage of sales, total S,G&A expenses decreased due mainly to
the increase in sales levels in relation to the fixed cost component of S,G&A
expenses.
As calculated in accordance with the partnership agreement, the management fee
due the General Partner (the "GP") annually amounts to $3.3 million which is
based on 3% of the aggregate initial capital investment ($111 million) of the
limited partners.
Depreciation expense decreased $.6 million in the comparison period due
primarily to a reduction in the depreciable fixed asset base as a result of
fully depreciated assets.
Amortization expense decreased $.2 million in 1994 compared with 1993 due
primarily to the expiration of non-compete agreements in the Glass Products
Group.
Interest expense increased $.1 million in the comparison period due mainly to
higher interest rates in 1994 over the comparable 1993 year.
Other expense of $1.4 million in 1994 consisted primarily of provisions for
legal, insurance and investment banking matters compared with favorable
resolution of legal and insurance matters in 1993 resulting in other income of
$.5 million.
16
<PAGE>
Currently, the Company incurs state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican Operations.
Also, the Company provides for deferred income taxes as determined in accordance
with Statement of Financial Accounting Standard No. 109 ("SFAS #109"). Deferred
income taxes represent state and federal income tax benefits expected to be
realized after December 31, 1997, when the Company will be taxed as a
corporation. The Company's provision for income taxes in 1994 decreased $.8
million from 1993 due to increased deferred tax benefits related to deferred
compensation.
The allocation of net income to the GP is based on the GP's 1% ownership
interest in the profits of the Company. The allocation of net income to the
limited partners for financial statement purposes represents a 99% interest in
the profits of the Company. The net income allocation resulted in $1.10 of
income per Class A limited partnership interest for the year ended December 31,
1994, and December 31, 1993; and $.79 of income per Class B limited partnership
interest in 1994 including a gain of $.16 per Class B interest from the sale of
the Electrical Group divisions, compared with $.28 of income per Class B limited
partnership interest in 1993.
Years Ended December 31, 1993 and 1992
--------------------------------------
The Company recorded net income of $18.5 million for the year ended December 31,
1993, compared with $15.1 million for the year ended December 31, 1992. The
1992 results included a $3.4 million extraordinary loss from the early
extinguishment of debt, offset partially by a $.8 million deferred income tax
benefit resulting from the cumulative effect of a change in an accounting
principle (adoption of SFAS No. 109, Accounting for Income Taxes, effective
January 1, 1992). Income in 1993 amounted to $18.5 million or 4.6% greater than
the $17.7 million earned in the 1992 year before the extraordinary loss and the
accounting change as a result of modest economic recovery, new growth programs,
particularly in the Fluid Power Group, and reduced financing costs.
Net sales during 1993 increased $43.7 million or 7.1% compared with 1992 as a
result of substantial strength in Fluid Power products sales, a continuation of
the economic recovery, as well as various sales development programs, in all
product groups. Sales growth by product group is summarized as follows:
<TABLE>
<CAPTION>
Sales Increase
--------------
Amount %
------ -
<S> <C> <C>
Fluid Power Products $21.5 million 10.6%
Maintenance Products 10.5 million 5.4%
Electrical Products including SIMCO 6.0 million 5.8%
Glass Products 5.7 million 5.0%
</TABLE>
Sales from the Company's new inventory management service, SIMCO, included in
the Electrical Products Group, were $6.1 million in 1993, an increase of $.8
million from the 1992 level of $5.3 million.
Total cost of sales in 1993 increased $32.0 million or 8.6% from the 1992 year
due primarily to increased sales levels in the comparison period.
Gross margins in 1993 were 38.6% compared with 39.5% in the 1992 year. A
comparative summary of gross margins by product group is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1993 1992
---- ----
<S> <C> <C>
Maintenance Products 61.8% 63.0%
Glass Products 34.3% 35.5%
Fluid Power Products 27.2% 27.3%
Electrical Products including SIMCO 23.5% 23.9%
</TABLE>
17
<PAGE>
The erosion in gross margin in the Maintenance Products Group is due mainly to
increased sales allowances of approximately $2.1 million related to business
expansion programs during 1993. Competitive pricing pressures and changes in
sales mix contributed primarily to the decline in gross margins in the Glass,
Fluid Power and Electrical Product Groups.
Total S,G&A expenses increased $12.9 million or 6.5% in 1993, compared with the
1992 year, comprised as follows: increased selling expenses of $6.3 million or
7.2%, increased warehouse and delivery expenses of $3.0 million or 8.0% and
increased general and administrative expenses of $3.6 million or 4.8%.
Selling and warehouse and delivery expenses increased in 1993 to support the
1993 sales growth and geographic expansion by certain operating units. General
and administrative expenses in 1993 includes a $1.2 million provision for
expected losses on unasserted claims related to the Company's insurance
programs. Excluding this charge, general and administrative expenses increased
only 3.2% in 1993 over the prior year.
S,G&A expenses, as a percentage of sales in 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1993 1992
----------- -----------
<S> <C> <C>
Selling Expenses 14.4% 14.3%
Warehouse and Delivery Expenses 6.3% 6.3%
General and Administrative Expenses 11.8% 12.1%
----- -----
Total S,G&A Expenses 32.5% 32.7%
----- -----
</TABLE>
As calculated in accordance with the partnership agreement, the management fee
due the GP annually amounts to $3.3 million which is based on 3% of the
aggregate initial capital investment ($111 million) of the limited partners.
Depreciation expense decreased $.4 million in the comparison period due to a
reduction in the depreciable fixed asset base as a result of fully depreciated
assets and the disposal of certain facilities and equipment.
Interest expense decreased $1.5 million in 1993 from the prior year level as a
result of the Company refinancing its $110.0 million 9 1/2% Senior Notes in
December 1992. The refinancing reduced long-term interest rates by
approximately 5/8 of 1% on $95.0 million of debt and converted $15.0 million of
long-term debt to revolving credit at borrowing rates based on the London
Interbank Offered Rate ("LIBOR") plus 1 and 3/4% and prime.
Other income increased $.6 million in 1993 compared with the 1992 year due
primarily to the recognition of favorable insurance settlements during 1993.
The Company incurred state and local income taxes on its domestic operations and
foreign income taxes on its Canadian and Mexican Operations. The Company's
provision for income taxes increased $.4 million in 1993 over the prior year due
principally to a reduction in the Company's deferred income tax benefit
resulting from the payment of certain deferred compensation arrangements. The
provision for income taxes in 1993 consists of $.7 million in current taxes plus
$.2 million in deferred taxes compared with the 1992 provision consisting of
$1.0 million of current tax expense offset by $.5 million of deferred tax
benefit.
The Company's provision for deferred income taxes is determined in accordance
with SFAS No. 109, which represents state and federal income tax benefits
expected to be realized after December 31, 1997 when the Company will be taxed
as a corporation. The cumulative effect of the accounting change on years prior
to January 1, 1992, amounted to $.8 million of deferred tax benefit which was
recognized in 1992.
18
<PAGE>
The allocation of net income to the GP is based on the GP's 1% ownership
interest in the profits of the Company. The allocation of net income to the
limited partners for financial statement purposes represents a 99% interest in
the profits of the Company. The net income allocation resulted in $1.10 of
income per Class A limited partnership interest for the years ended December 31,
1993 and 1992; and $.28 of income per Class B limited partnership interest in
1993 compared with $.13 of income per Class B limited partnership interest in
1992. Results for 1992 were restated as required by the adoption of SFAS No. 109
during the fourth quarter of 1992, which was effective January 1, 1992. See Note
2 of Notes to Consolidated Financial Statements.
Excluding the extraordinary loss and the accounting change previously mentioned,
income per Class B limited partnership interest amounted to $.28 in 1993
compared with $.25 in the 1992 year.
Liquidity and Capital Resources
Net cash provided by operations decreased $5.9 million or 24.9% in 1994 from the
prior year level of $23.6 million due principally to increased net working
capital reinvestment in operations to support 1994 sales levels. However, the
Company's net interest coverage ratio (earnings before interest, taxes and gain
on sale of divisions over net interest expense) improved to 3.58X in 1994 from
the 1993 level of 2.94X.
The Company's cash position of $4.9 million as of December 31, 1994, increased
$3.6 million from the balance at December 31, 1993. Cash was provided during
1994 primarily from operations in the amount of $17.7 million and proceeds from
the sale of divisions and property and equipment in the aggregate amount of
$27.3 million. Cash was used during this period predominantly for distributions
to the general and limited partners, repayment of debt obligations and capital
expenditures in the amounts of $20.4 million, $17.0 million and $4.3 million,
respectively.
The Company's working capital position of $76.1 million at December 31, 1994,
represents a decrease of $16.0 million from the December 31, 1993 level of $92.1
million. The decrease is attributable to an increase in the current portion of
Senior Notes of $13.3 million, increased distributions payable to Class B
investors of $3.1 million at December 31, 1994 from the prior year level and the
disposition of net working capital from the sale of the Electrical Products
divisions in the amount of approximately $16.9 million; offset by reinvestment
in net working capital during 1994 of $17.2 million to support increased sales
levels. As a result, the Company's current ratio decreased to 1.72 at December
31, 1994 from the December 31, 1993, level of 2.02. Excluding the increased
amounts in the current portion of senior notes and distributions payable, the
Company's current ratio was 2.03 at December 31, 1994. These increases are
directly related to the aforementioned sale of operating divisions in December
1994 and January 1995.
The Company anticipates spending approximately $3.5 million for capital
expenditures in 1995, primarily for machinery and equipment.
On December 22, 1992, the Operating Partnership prepaid its outstanding $110.0
million 9 1/2% Senior Notes that had a final maturity of February 15, 1997.
Proceeds to accomplish the refinancing were provided from institutional
investors in the amount of $95.0 million and the balance from a $50.0 million
Bank Credit Agreement. Senior Notes with a final maturity December 1, 2002, were
issued in the amounts of $65.0 million at 9.08% and $30.0 million at 8.44%, with
interest due semi-annually. On December 1, 1994, the Operating Partnership paid
its first principal repayment aggregating $5.7 million.
19
<PAGE>
As of December 31, 1994, the Operating Partnership had $41.0 million available
under its $50.0 million Bank Credit Agreement which provides revolving credit
for working capital purposes and acquisitions. The Company had no bank
borrowings outstanding at December 31, 1994 under the Bank Credit Agreement.
The $9.0 million outstanding under the Bank Credit Agreement represented letter
of credit commitments only.
In accordance with its Senior Note and Bank Credit Agreements, the Company was
not permitted to make acquisitions in 1993 and 1994. The acquisition
restriction in 1994 is 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. Management intends to
resume its acquisition strategy in 1995, spending up to a $15.0 million in the
aggregate to complement internal growth.
The Operating Partnership has other confirmed credit facilities available in the
amount of $6.0 million for letter of credit commitments of which $5.1 million
were issued as of December 31, 1994. 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 $.4 million USD was
outstanding at December 31, 1994.
In connection with the sale of the operating divisions described previously, the
Operating Partnership was required to offer the holders of its senior notes
prepayment in the amount of $14.2 million which the noteholders accepted.
Prepayment of the senior notes was made on March 14, 1995, including accrued
interest thereon and a make-whole penalty. Also, 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
operating divisions. However, the banks have waived this permanent reduction
and maintained the existing bank credit commitment of $50.0 million.
The capital gain from the sale of the four divisions will be allocated entirely
to Class B Interest holders of record on the first day of the month within which
each transaction was closed. The sale of the Electrical Group divisions in
December 1994 resulted in a capital gain of approximately $.408 per Class B
Interest. The Partnership intends to make a capital gain tax distribution on
March 31, 1995 to Class B holders of record as of December 1, 1994, equal to
approximately 35% of the capital gain or $.143 per Class B Interest. With
respect to the sale of Dorman Products on January 3, 1995, the Operating
Partnership estimates the tax gain on the sale to be approximately $.80 per
Class B Interest which will be allocated to holders of record on the first day
of January 1995.
Certain legal proceedings are pending which are either in the ordinary course of
business or incidental to the Company's business. Those legal proceedings
incidental to the business of the Company are generally not covered by insurance
or other indemnity. In the opinion of counsel and management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial position, operations or cashflows of the Company.
Income Taxes
As a result of the Company's adoption of SFAS No. 109 in 1992, the Company has a
deferred tax asset aggregating $2.1 million as of December 31, 1994. Management
believes that the Company's deferred tax asset is expected to be realized
through the reversal of existing temporary differences after December 31, 1997,
when the Company will be treated as a corporation for federal income tax
purposes. The temporary differences expected to reverse after December 31,
1997, between the financial statement and tax bases, are composed of prepayment
penalties in the amount of $.9 million and deferred compensation liabilities in
the amount of $5.4 million, net of a valuation allowance of $.3. See Note 13 of
Notes to Consolidated Financial Statements.
20
<PAGE>
The minimum level of future taxable income necessary to realize the Company's
recorded deferred tax asset at December 31, 1994, is approximately $5.5 million.
For the three years ended December 31, 1994, the Company's consolidated net
income per the financial statements reconciled to federal taxable income in
thousands of dollars is shown below:
<TABLE>
<CAPTION>
1994 1993 1992*
-------- -------- --------
<S> <C> <C> <C>
Consolidated Net Income per the
Financial Statements ("Book") $29,544 $18,506 $15,079
Tax Adjustments to Book Income:
------------------------------
Deferred Income Tax Expense
(Benefit) (734) 208 (1,618)
Goodwill & Other Intangible Asset
Amortization 1,634 1,807 1,681
Depreciation 506 796 535
Deferred Compensation, net 2,917 384 1,253
Prepayment Penalties Related
to Refinancing of Senior Notes (177) (177) 1,770
Self-Insurance Accrued Expenses 844 3,331 1,983
Tax gain in excess of book gain from
sale of Electrical Group Divisions 1,216 -- --
Other Increase (Decrease) to
Book Income, net 1,362 (423) (1,020)
------- ------- -------
Federal Taxable Income $37,112 $24,432 $19,663
======= ======= =======
</TABLE>
* Reclassified for comparative purposes.
Inflation
Inflation in recent years has had a modest impact on the operations of the
Company. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of its
operating divisions to raise prices is dependent upon competitive market
conditions.
21
<PAGE>
Item 8 - Financial Statements and Supplementary Data.
----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants 23
Financial Statements:
Consolidated Balance Sheets, December 31, 1994 and 1993 24
Consolidated Statements of Income, Years ended
December 31, 1994, 1993 and 1992 25-26
Consolidated Statements of Cash Flows, Years ended
December 31, 1994, 1993 and 1992 27
Consolidated Statements of Changes in Partners' Capital,
Years ended December 31, 1994, 1993 and 1992 28
Notes to Consolidated Financial Statements 29-41
Financial Statement Schedules:
I Condensed Financial Information of Registrant 42
II Valuation Accounts 43
</TABLE>
22
<PAGE>
Report of Independent Accountants
The Board of Directors
Lehman/SDI, Inc.
We have audited the accompanying consolidated balance sheets of Sun Distributors
L.P. and subsidiary as of December 31, 1994 and 1993, 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, 1994. 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 Sun Distributors L.P.
and subsidiary as of December 31, 1994 and 1993, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, 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.
As discussed in Note 2 to the Consolidated Financial Statements, the Company
changed its method of accounting for income taxes in 1992.
/s/ Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 15, 1995
23
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $4,903 $1,327
Accounts and notes receivable, net of
allowance for doubtful accounts of
$2,472 and $2,382, respectively 77,521 80,006
Inventories 92,653 95,617
Other current assets 6,703 5,294
--------- ---------
Total current assets 181,780 182,244
Property and equipment, net 27,514 29,629
Goodwill (net of accumulated amortization
of $11,259 and $10,605, respectively) 48,458 55,608
Other intangibles (net of accumulated
amortization of $14,396 and $13,821,
respectively) 2,477 3,838
Deferred income taxes 2,144 1,410
Other assets 3,813 764
--------- ---------
Total assets $266,186 $273,493
========= =========
LIABILITIES AND PARTNERS' CAPITAL
--------------------------------------------------
Current liabilities:
Accounts payable $44,435 $50,333
Notes payable 2,709 3,411
Current portion of senior notes 18,970 5,700
Current portion of capitalized lease obligations 387 619
Distributions payable to partners 7,774 4,688
Accrued expenses:
Salaries and wages 7,131 5,426
Management fee due the general partner 3,330 3,330
Income and other taxes 3,338 2,484
Other accrued expenses 17,646 14,162
--------- ---------
Total current liabilities 105,720 90,153
Senior notes 70,330 89,300
Bank revolving credit --- 10,000
Capitalized lease obligations 4,451 4,885
Deferred compensation 6,398 5,363
Other liabilities 68 910
--------- ---------
Total liabilities 186,967 200,611
--------- ---------
Commitments and contingencies
Partners' capital:
General partner 791 729
Limited partners:
Class A interests 67,642 67,642
Class B interests 12,300 6,025
Class B interests held in treasury ( 1,514) ( 1,514)
--------- ---------
Total partners' capital 79,219 72,882
--------- ---------
Total liabilities and partners' capital $266,186 $273,493
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net sales $735,861 $655,707 $612,052
Cost of sales 451,785 402,441 370,435
-------- -------- --------
Gross profit 284,076 253,266 241,617
-------- -------- --------
Operating expenses:
Selling, general and administrative expenses 235,932 213,101 200,161
Management fee to general partner 3,330 3,330 3,330
Depreciation 4,502 5,106 5,472
Amortization 2,640 2,848 2,861
-------- -------- --------
Total operating expenses 246,404 224,385 211,824
-------- -------- --------
Income from operations 37,672 28,881 29,793
Interest income 70 92 79
Interest expense 10,191 10,096 11,619
Other income (expense), net ( 1,430) 498 ( 69)
Gain on sale of divisions (note 5) 3,523 -- --
-------- -------- --------
Income before provision for income taxes 29,644 19,375 18,184
Provision for income taxes 100 869 493
-------- -------- --------
Income before extraordinary loss and cumulative
effect of change in accounting principle 29,544 18,506 17,691
Extraordinary loss from early extinguishment
of debt, net of deferred income tax
benefit of $ 338 (note 4) -- -- ( 3,434)
Cumulative effect on prior years (to January 1, 1992)
of change in accounting principle-adoption of
SFAS No. 109 (note 2) -- -- 822
-------- -------- --------
Net income $29,544 $18,506 $15,079
======== ======== ========
Net income allocated to partners:
General partner $295 $185 $151
-------- -------- --------
Class A limited partners $12,210 $12,210 $12,210
-------- -------- --------
Class B limited partners $17,039 $6,111 $2,718
-------- -------- --------
</TABLE>
Continued
25
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME, continued
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Earnings per limited partnership interest:
Income before extraordinary loss and cumulative
effect of change in accounting principle
- Class A interest $1.10 $1.10 $1.10
- Class B interest $.79 $.28 $.25
Extraordinary loss
- Class A interest -- -- --
- Class B interest -- -- ( $.16)
Cumulative effect on prior years (to January 1, 1992)
of change in accounting principle
- Class A interest -- -- --
- Class B interest -- -- $.04
Net income
- Class A interest $1.10 $1.10 $1.10
- Class B interest $.79 $.28 $.13
Weighted average number of outstanding
limited partnership interest:
- 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
26
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $29,544 $18,506 $15,079
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,142 7,954 8,333
Gain on sale of divisions ( 3,523)
Extraordinary loss --- --- 3,772
Provision for deferred compensation 3,187 721 1,293
Deferred income tax expense (benefit) ( 734) 208 ( 1,618)
Changes in current operating items:
Increase in accounts and notes receivable ( 11,783) ( 4,855) ( 2,946)
Decrease (increase) in inventories ( 9,436) ( 10,689) 583
Decrease (increase) in other current assets 347 ( 815) 337
Increase in accounts payable 1,865 10,542 4,951
Increase (decrease) in accrued interest ( 42) 516 ( 3,732)
Increase in other accrued liabilities 4,836 2,415 1,766
Other items, net ( 3,699) ( 932) ( 762)
--------- --------- ---------
Net cash provided by operating activities 17,704 23,571 27,056
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of divisions 26,561 --- ---
Proceeds from sale of property and equipment 724 384 424
Capital expenditures ( 4,263) ( 3,734) ( 2,947)
Other, net 228 55 614
--------- --------- ---------
Net cash provided by (used for) investing activities 23,250 ( 3,295) ( 1,909)
--------- --------- ---------
Cash flows from financing activities:
Early extinguishment of senior notes --- --- (110,000)
Proceeds from issuance of senior notes --- --- 95,000
Repayment of senior notes ( 5,700) --- ---
Borrowings (repayments) under the bank credit agreement, net ( 10,000) ( 5,000) 15,000
Prepayment penalties and related costs --- --- ( 2,868)
Cash distributions to partners ( 20,357) ( 14,940) ( 15,384)
Borrowings (repayments) under other credit facilities, net ( 702) 817 ( 5,165)
Principal payments under capitalized lease obligations ( 619) ( 618) ( 782)
Other, net --- 47 ( 879)
--------- --------- ---------
Net cash used for financing activities ( 37,378) ( 19,694) ( 25,078)
--------- --------- ---------
Net increase in cash and cash equivalents 3,576 582 69
Cash and cash equivalents at beginning of period 1,327 745 676
--------- --------- ---------
Cash and cash equivalents at end of period $4,903 $1,327 $745
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
----------------------------------------------------
Class A Class B Class B
General Limited Limited Treasury TOTAL
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991 727 67,642 5,835 (1,514) $72,690
Net income 151 12,210 2,718 --- 15,079
Cash distributions paid and/or declared
to partners (152) (12,210) (2,832) --- (15,194)
----- -------- -------- ------- --------
Balance, December 31, 1992 726 67,642 5,721 (1,514) 72,575
Net income 185 12,210 6,111 --- 18,506
Cash distributions paid and/or declared
to partners (182) (12,210) (5,807) --- (18,199)
----- -------- -------- ------- --------
Balance, December 31, 1993 729 67,642 6,025 (1,514) 72,882
Net income 295 12,210 17,039 --- 29,544
Cash distributions paid and/or declared
to partners (233) (12,210) (10,764) --- (23,207)
----- -------- -------- ------- --------
Balance, December 31, 1994 $791 $67,642 $12,300 ($1,514) $79,219
===== ======== ======== ======= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28
<PAGE>
SUN DISTRIBUTORS 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 Sun
Distributors L.P. (the "Company") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). All significant intercompany
balances and transactions have been eliminated. The Operating Partnership is a
wholesale distributor of industrial products comprised of three product groups
with eleven operating divisions and an inventory management services division.
Certain divisions have operations in Canada and Mexico.
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. For
income tax purposes, depreciation is computed under accelerated methods.
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.
29
<PAGE>
SUN DISTRIBUTORS 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, the Company incurs no liability for federal income taxes.
Accordingly, no current provision for federal income taxes is reflected in the
accompanying consolidated financial statements. However, the Company 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 Company, 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.
Effective January 1, 1992, the company elected to adopt Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" and has
reported the cumulative effect of the change in method of accounting for income
taxes in the 1992 consolidated statement of income. Financial statements for
years prior to 1992 have not been restated. SFAS No. 109 requires the Company
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 Company's deferred taxes are determined from temporary differences expected
to reverse after December 31, 1997, when the Company will be taxed as a
corporation. Therefore, a deferred provision 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.
30
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Retirement Benefits, continued:
------------------------------
Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers
Accounting for Post-retirement Benefits Other Than Pensions". The Company has
elected to amortize the accumulated post-retirement benefit liability
(transition obligation) resulting in delayed recognition. The impact of the
adoption on the Company's financial position and results of operations is
immaterial.
Fair Value of Financial Instruments:
-----------------------------------
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" requires
disclosure of the fair value of certain 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 Company's debt instruments are disclosed in
Note 9.
3. Ownership Structure:
The General Partner of the Company and the Operating Partnership is SDI
Partners I, L.P. (the "GP"), a Delaware limited partnership whose sole general
partner is Lehman/SDI, Inc., 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 Company's Class A and Class B limited partnership interests outstanding, as
of December 31, 1994, are held as follows:
<TABLE>
<CAPTION>
Class A Class B
Interests Interests
--------- ---------
<S> <C> <C>
Public Investors 10,958,434 ( 98.7%) 11,408,740 ( 52.6%)
Lehman Holdings and
Affiliates 38,324 ( 0.4%) 5,896,678 ( 27.2%)
Executive Officers and
Directors (a) 102,815 ( 0.9%) 4,370,328 ( 20.2%)
------------------- -------------------
Total 11,099,573 (100.0%) 21,675,746 (100.0%)(b)
=================== ======================
</TABLE>
(a) Executive officers of the Company and the Operating Partnership and
Directors of Lehman/SDI, Inc., including beneficial ownership.
(b) Net of 523,400 Class B interests held in the Company's treasury
as of December 31, 1994.
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 Company 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 Company or the Operating Partnership or
dissolution of the Company.
31
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
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 16, 1994, the Company declared a priority
return distribution for the month of January 1995 in the amount of $1,038 or
$.091666 per Class A interest payable January 31, 1995, to holders of record
December 30, 1994. The Class A capital account as of December 31, 1994 and
1993, 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 Company and l% to the GP. The GP is
allocated l% of the Company'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 1994, 1993, and 1992, 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. For 1994, 1993 and 1992,
federal taxable income amounted to $1.1146, $.5411 and $.3257 per Class B
interest, respectively. Federal taxable income in 1994 consists 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 (see
Note 4). In 1993 and 1992, federal taxable income consisted of ordinary income
only. The Class B capital account as of December 31, 1994 and 1993, was
approximately $1.52 and $.905 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 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 intends to distribute 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 4.)
32
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
For year 1993, the Class B Tax Distribution amounted to $5,925 or $.267864 per
Class B interest which was paid in the amount of $.009352 per Class B interest
per month during 1993 to holders of record on the first day of each month. The
remaining balance due of $.15564 per Class B Interest was paid on March 31, 1994
to holders of record on the first day of each month during 1993 in the amount of
$.01297 per Class B Interest. For year 1992, the Class B Tax Distribution
amounted to $2,927 or $.132 per Class B interest which was paid monthly during
the year. On December 16, 1994, the Company declared a Class B Tax Distribution
for the month of January 1995 in the amount of $442 or $.02 per Class B interest
payable January 31, 1995, to holders of record on December 30, 1994.
4. Extraordinary Loss:
In 1992, the Company recorded an extraordinary loss of $3,434 or approximately
$.16 per Class B limited partnership interest, net of a deferred income tax
benefit in the amount of $338, due to early extinguishment of the Company's 9
1/2% senior notes (see Note 9, Long-Term Debt). The extraordinary loss consists
of prepayment penalties aggregating $2,742 and related costs of $1,030.
5. Acquisitions/Divestitures:
No acquisitions were consummated during the three years ended December 31,
1994. The credit agreements of the Operating Partnership restricted acquisition
expenditures in 1994 and 1993. (See Note 8, Lines of Credit and Note 9, Long-
Term Debt.)
On December 5, 1994, the Operating Partnership sold certain assets of its
Electrical 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 Group divisions was
approximately $24,300.
33
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
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 Company 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 1994, 1993 and 1992 were
$3,330. In March 1994, the Operating Partnership paid $1,665 of the 1993
management fee and deferred payment of the remaining $1,665 until June 1994 to
maintain compliance with requirements of the credit agreements. In March of
1993, the Operating Partnership paid $1,665 of the 1992 management fee and
deferred payment of the remaining $1,665 until June 1993 to maintain compliance
with requirements of credit agreements. Management expects to pay in full the
1994 management fee due March 31, 1995.
Certain warehouse and office facilities are leased from employees under various
operating leases. Charges to income applicable to these leases totaled $405 in
1994, $367 in 1993, and $361 in 1992. Aggregate future minimum lease
obligations under these leases at December 31, 1994, were $756.
7. Property and Equipment:
Property and equipment consists of the following at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Land $ 3,589 $ 3,918
Buildings and leasehold improvements 24,133 25,906
Machinery and equipment 23,526 24,873
Furniture and fixtures 9,316 9,722
------- -------
60,564 64,419
Less accumulated depreciation 33,050 34,790
------- -------
$27,514 $29,629
======= =======
</TABLE>
34
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
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 had an original termination
date of December 22, 1995, but has been extended to December 31, 1996. 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. The Company had no bank
borrowings outstanding at December 31, 1994, under the bank credit agreement.
The $9,034 outstanding balance under the facility at December 31, 1994,
represents letter of credit commitments only.
The bank credit agreement contains covenants restricting distributions from the
Operating Partnership to the Company and the GP. Amounts available for
distribution in accordance with the bank credit agreement at December 31, 1994,
were $3,434. 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
Company to consummate acquisitions in 1994 and 1993. 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, and Note 18, Subsequent Event), 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.
The Operating Partnership has other confirmed credit facilities available in
the amount of $6,005 for letters of credit of which $5,135 was outstanding at
December 31, 1994. The letters of credit commitments are issued at varying
rates. These facilities, renewable annually, are 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 $449 USD was outstanding at December 31, 1994. 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, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Short-term bank borrowings drawn on
working capital lines of credit $ 449 $1,307
Trade notes payable in accordance with
glass inventory financing arrangements 1,474 1,374
Notes payable in accordance with insurance
financing arrangements 786 730
------ ------
$2,709 $3,411
====== ======
</TABLE>
35
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
8. Lines of Credit, continued:
The weighted average interest rate on the outstanding notes payable borrowings
at December 31, 1994 and 1993 was 2.84% and 2.96%, respectively.
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 proceeds from the sale of the senior notes
in conjunction with the bank credit were used principally to extinguish $110,000
9 1/2% senior notes, interest thereon and related prepayment penalties (see
Note 4, Extraordinary Loss and Note 8, Lines of Credit).
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 $5,700 of principal on December
1, 1994 consisting of $3,900 in Series A notes and $1,800 in Series B notes.
Principal repayments required on the senior notes during each of the five years
subsequent to December 31, 1994, are as follows:
<TABLE>
<CAPTION>
Series A Series B
-------- --------
<S> <C> <C>
December 1, 1995 $3,280 $1,515
December 1, 1996 4,375 2,019
December 1, 1997 4,375 2,019
December 1, 1998 5,468 2,524
December 1, 1999 6,562 3,028
</TABLE>
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 Company 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 and Note 18, Subsequent Event), 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
and a related make-whole amount.
The senior note agreement contains covenants restricting distributions from the
Operating Partnership to the Company 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 Company to
consummate acquisitions in 1993 and 1994. For 1994 and future years, the senior
noteholders have agreed to ease certain coverage ratios and other financial
requirements. The Operating Partnership will be permitted 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 senior note agreement.
36
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt, continued:
As of December 31, 1994, the fair value estimate of the Company's senior notes
is approximately $84,000 as determined in accordance with SFAS No. 107. The
Company discounted the future cash flows of its senior notes based on borrowing
rates for debt with similar terms and remaining maturities. The fair value
estimate is made at a specific point in time and is subjective in nature and
involves uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimate.
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,
1994:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1995 $ 678 $10,251
1996 584 8,713
1997 581 6,907
1998 546 5,378
1999 542 2,670
Later years 4,164 6,859
------- -------
Total minimum lease payments 7,095 $40,778
=======
Less amounts representing interest (2,257)
-------
Present value of net minimum
lease payments (including
$387 currently payable) $ 4,838
=======
</TABLE>
Total rental expenses for all operating leases amounted to $15,153 in 1994,
$13,830 in 1993, and $13,593 in 1992.
11. Deferred Compensation Plans:
Certain officers and employees earn performance-based compensation, payment of
which is deferred until future periods.
The Company 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 amount charged to income under this plan was $850 in
1994 and is included in the deferred compensation liability as of December 31,
1994.
37
<PAGE>
SUN DISTRIBUTORS 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
interest 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 $2,295, $700, and
$1,250 in 1994, 1993 and 1992, respectively. During the three years ended
December 31, 1994, distributions from the plan amounted to $240 in 1994 and $332
in 1993. The deferred compensation liability attributable to the plan amounted
to $6,563 at December 31, 1994 of which $1,698 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 all vested and non-vested
amounts including accrued interest. Amounts charged to income and distributions
related to the former plan for the three years ended December 31, 1994 were
immaterial. The portion of the Operating Partnership's deferred compensation
liability attributable to this plan is $683 at December 31, 1994.
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
or a change, other than due to death or retirement, in a majority of the
directors of Lehman/SDI, Inc., during any one-year period.
12. Retirement Benefits:
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 (income credited) to operations under retirement benefit plans are
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ -------
<S> <C> <C> <C>
Defined contribution plans $3,498 $2,574 $2,279
Multi-employer pension plans 362 422 565
Defined benefit plans 266 144 (88)
------ ------ ------
Total $4,126 $3,140 $2,756
====== ====== ======
</TABLE>
Management does not anticipate its share of unfunded vested liabilities under
multi-employer pension plans to be material.
For the years ended December 31, 1994, 1993 and 1992, the costs of post-
retirement benefits charged to income were $115, $347 and $146, respectively.
The 1994 and 1993 charge was 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 Company's unrecognized accumulated post-retirement
benefit liability as of December 31, 1994, 1993 and 1992 was $744, $840 and
$893, respectively.
38
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
13. Income Taxes:
Deferred tax assets are comprised of the following at December 31, 1994 and
1993:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Gross deferred tax assets:
Deferred compensation $2,123 $1,389
Prepayment penalties related to
early extinguishment of debt 346 346
------ ------
2,469 2,124
Valuation allowance for deferred
tax assets (325) (325)
------ ------
Net deferred tax asset $2,144 $1,410
====== ======
</TABLE>
Management has determined, based on the Company's history of prior operating
earnings and its expectations for the future, that operating income of the
Company will more likely than not be sufficient to recognize fully these net
deferred tax assets. The Company has no deferred tax liability at December 31,
1994 or December 31, 1993.
As of December 31, 1994, the Company's tax basis of its assets and liabilities
was greater than its financial statement basis by approximately $67,000.
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------ ----- ------
<S> <C> <C> <C>
Current income taxes
Federal $ -- $ -- $ (12)
State and local 276 260 398
Foreign 558 401 565
----- ----- -----
834 661 951
----- ----- -----
Deferred income taxes
Federal (657) 186 (408)
State and local (77) 22 (50)
----- ----- -----
(734) 208 (458)
----- ----- -----
Total income taxes $ 100 $ 869 $ 493
===== ===== =====
</TABLE>
The extraordinary loss shown in the accompanying 1992 consolidated statement of
income includes a deferred tax benefit of $338 or approximately $.02 per Class B
limited partnership interest determined in accordance with SFAS No. 109.
39
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
14. Commitments and Contingencies:
Performance and bid bonds are issued on the Company's behalf during the
ordinary course of business through surety bonding companies as required by
certain contractors. As of December 31, 1994, the Company had outstanding
performance and bid bonds aggregating $681. As required by sureties, the
Company has standby letters of credit outstanding in the amount of $1,450 as of
December 31, 1994.
Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 1994, the
Company had outstanding letters of credit in the aggregate amount of $4,163
related to these activities.
Under the Company's insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of normal
claims. Beginning in 1991, the Company has retained risk on certain expected
losses from both asserted and unasserted claims related to 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, 1994, the Company has provided
insurers letters of credit aggregating $3,551 related to certain insurance
programs.
Certain legal proceedings are pending which are either in the ordinary course
of business or incidental to the Company's business. Those legal proceedings
incidental to the business of the Company are generally not covered by insurance
or other indemnity. In the opinion of counsel and management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial position, operations or cashflows of the Company.
15. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $10,097 $9,412 $15,110
------- ------ -------
Income taxes $ 792 $ 955 $ 499
------- ------ -------
</TABLE>
Interest paid in 1992 includes $3,687 due to early extinguishment of the
Company's 9 1/2% senior notes (see Note 4, Extraordinary Loss and Note 9, Long-
Term Debt).
40
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
16. Quarterly Data (unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1994
----
Net sales $175,109 $189,360 $192,547 $178,845
Gross profit 67,457 72,019 73,486 71,114
Net income 4,165 8,026 7,656 9,697
Net income per limited
partnership interest
- Class A $ .27 $ .28 $ .27 $ .28
- Class B $ .05 $ .23 $ .21 $ .30
1993
----
Net sales $149,986 $169,355 $171,955 $164,411
Gross profit 58,910 65,358 65,823 63,175
Net income 1,922 6,351 5,957 4,276
Net income per limited
partnership interest
- Class A $ .17 $ .38 $ .27 $ .28
- Class B -- $ .10 $ .13 $ .05
</TABLE>
17. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high credit
quality financial institutions. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base, and their dispersion across many different
industries and geographies.
18. Subsequent Event:
On January 3, 1995, the Operating Partnership sold certain assets of its Dorman
Products division for a cash consideration, net of expenses, of approximately
$35,500 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership estimates the gain on the sale
to be approximately $16,500. The aggregate assets sold, net of liabilities, in
connection with the sale of Dorman Products was approximately $19,000.
41
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(dollars in thousands)
<TABLE>
<CAPTION>
Balance Sheets as of December 31 1994 1993 1992
-------------------------------- -------- -------- --------
<S> <C> <C> <C>
Assets
Investment in SDI Operating Partners, L.P. $79,219 $72,882 $72,575
======= ======= =======
Partners' Capital
General partner's capital $ 791 $ 729 $ 726
Limited partners' capital-Class A Interests 67,642 67,642 67,642
Limited partners' capital-Class B Interests 12,300 6,025 5,721
Class B interests held in treasury (1,514) (1,514) (1,514)
------- ------- -------
Total partners' capital $79,219 $72,882 $72,575
======= ======= =======
<CAPTION>
Statements of Income for the Years Ended December 31
----------------------------------------------------
<S> <C> <C> <C>
Equity in net income of SDI Operating
Partners, L.P. $29,544 $18,506 $15,079
======= ======= =======
Net income allocated to general partner 295 $ 185 $ 151
------- ------- -------
Net income allocated to limited partners
- Class A interests $12,210 $12,210 $12,210
------- ------- -------
- Class B interests $17,039 $ 6,111 $ 2,718
------- ------- -------
<CAPTION>
Statement of Cash Flows
for the Years Ended December 31
-------------------------------
<S> <C> <C> <C>
Cash provided by operations -- -- --
Cash provided from investment
in SDI Operating Partners, L. P. $ 20,153 $ 14,791 $ 15,230
Cash distributions to general
partner and limited
partners $(20,153) $(14,791) $(15,230)
-------- -------- --------
Increase (decrease) in cash -- -- --
======== ======== ========
</TABLE>
This financial information should be read in conjunction with the consolidated
financial statements of the Company.
42
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
Schedule II - VALUATION ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
Deducted From Assets in Balance Sheet
-----------------------------------------------------------------------------
Valuation
Allowance for Allowance for Accumulated Accumulated Allowance for
Doubtful Obsolete Amortization Amortization Deferred
Accounts Inventories of Goodwill of Intangibles Income Taxes
------------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991 $2,527 $2,575 $ 7,168 $20,971 $ --
Additions charged to cost
and expenses 1,570 1,312 1,665 1,415 225
Deductions 1,741(A) 1,185(A) -- 9,798(B) --
------ ----- ------- ------- -------
Balance, December 31, 1992 2,356 2,702 8,833 12,588 225
Additions charged to cost
and expenses 1,714 1,859 1,772 1,233 100
Deductions 1,688(A) 1,393(A) -- -- --
------ ----- ------- ------- -------
Balance, December 31, 1993 2,382 3,168 10,605 13,821 325
Additions charged to cost
and expenses 1,453 2,236 1,629 1,168 --
Deductions 1,363(A) 1,622(A) -- -- --
Sale of divisions -- 291 975 593 --
------ ----- ------- ------- -------
Balance, December 31, 1994 $2,472 $3,491 $11,259 $14,396 $ 325
====== ====== ======= ======= =======
</TABLE>
Notes:
(A) Includes write-off of accounts receivable (net of bad debt recoveries) and
inventories.
(B) Expiration of organization costs in the amount of $4,521 and the write-off
of deferred financing fees related to prepayment of the Company's 9 1/2%
Senior Notes in the amount of $5,277.
43
<PAGE>
Item 9 - Disagreements on Accounting and Financial Disclosure.
-------------------------------------------------------------
Not applicable.
44
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant.
------------------------------------------------------------
The business of the Company and the Operating Partnership is managed by the
General Partner, whose general partner is Lehman/SDI, Inc., formerly known as
Shearson/SDI, Inc. The directors of Lehman/SDI, Inc., each of whom has served
as such since February 1987, except for Mr. Eliot M. Fried, who has served since
December 1994, are set forth below:
<TABLE>
<CAPTION>
Principal Occupation; Five-Year
Employment History; Other
Name and Age Directorships
------------ -------------------------------
<S> <C>
O. Gordon Brewer, Jr., 58 Vice President-Finance, Alco Standard
Corporation (distributor of office and
paper products); Executive Officer,
Alco Standard Corporation, 1970 to
present; Director, Corporate Insurance
and Reinsurance Limited.
Norman V. Edmonson, 54 Executive Vice President of the Company
since December 1994; Group Vice President
of the Company prior to December 1994.
Eliot M. Fried, 62 Managing Director, Lehman Brothers, Inc.
Director, American Marketing Industries;
Bridgeport Machines, Inc.; Energy Ventures, Inc.;
Lear Seating Corporation; and Vernitron
Corporation.
Arnold S. Hoffman, 59 Managing Director, Legg Mason Wood
Walker, Incorporated, Jan. 1992 to present;
Chairman, The Middle Market Group,
L.P. (investment banking, mergers,
acquisitions and divestitures), 1990 to
Jan. 1992; Managing Director, The Stamford
Company, 1989 to 1990; Director, Intelligent
Electronics, Incorporated.
Donald T. Marshall, 61 Chairman and Chief Executive Officer of
the Company.
Ernest L. Ransome, III, 68 Chairman, Giles & Ransome, Inc.
(distributor of construction equipment),
1988 to present; Director, Mannington
Mills, Inc., Midlantic Corp., and
Midlantic National Bank.
Donald A. Scott, 65 Senior Partner, Morgan, Lewis & Bockius;
Director, Provident Mutual Life Insurance
Company.
Henri I. Talerman, 40 Managing Director, Lehman Brothers, Inc.
</TABLE>
Although Mr. Fried owns no securities of the Company, he was nevertheless
required to file a Form 3 pursuant to Section 16 of the Securities Exchange Act
of 1934 within ten days after his election as a director, which he failed to do.
He has subsequently filed the required Form 3.
All directors hold office until the next annual meeting of the sole stockholder
of Lehman/SDI, Inc., and until their successors are duly elected and qualified.
45
<PAGE>
The officers of the Company and the Operating Partnership (constituting 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>
Positions with the Company;
Name and Age Five-year Employment History
------------ ----------------------------
<S> <C>
Louis J. Cissone, 60 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary since May
1993; Vice President Finance, Chief
Financial Officer, Treasurer
and Secretary prior to May 1993.
Harold J. Cornelius, 46 Group Vice President.
Joseph M. Corvino, 40 Vice President and Controller since May
1993; Controller prior to May 1993
Norman V. Edmonson, 54 Executive Vice President since December
1994; Group Vice President prior to
December 1994.
Max W. Hillman, Jr., 48 Group Vice President, since March 1991;
President, Hillman Fastener Division, 1982
to February, 1991.
Donald T. Marshall, 61 Chairman and Chief Executive Officer.
John P. McDonnell, 59 President and Chief Operating Officer
since December 1994; Group Vice President
prior to December 1994.
</TABLE>
All executive officers hold office at the pleasure of the board of directors.
46
<PAGE>
Item 11 - Executive 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, 1994, by each of the Chief Executive Officer and the four other
most highly compensated executive officers of the Company and the Operating
Partnership whose remuneration exceeded $100,000.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
Name and --------------------- All Other
Principal Position Year Salary Bonus (1) Compensation
---------------------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Donald T. Marshall 1994 $454,043 $221,144 8,185 (2)
Chairman and Chief 1993 403,392 62,897 6,367 (2)
Executive Officer 1992 418,672 36,012 5,345 (2)
Norman V. Edmonson 1994 300,477 94,400 1,418 (2)
Group Vice President 1993 285,144 89,000 1,250 (2)
1992 282,800 67,600 1,058 (2)
John P. McDonnell 1994 295,354 96,915 2,135 (2)
Group Vice President 1993 273,947 44,278 1,843 (2)
1992 273,753 45,795 1,553 (2)
Harold J. Cornelius 1994 275,375 102,729 90,128 (3)
Group Vice President 1993 261,147 37,621 58,818 (3)
1992 259,136 -- 63,931 (3)
Max W. Hillman, Jr. 1994 294,793 104,898 107,632 (3)
Group Vice President 1993 234,707 16,578 13,661 (3)
1992 231,905 54,060 34,771 (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 in 1994 by the
executive officers in accordance with the Company'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 as of December
31, 1994 for each executive officer are as follows: Donald T. Marshall $586,037;
Norman V. Edmonson, $385,110; John P. McDonnell, $184,182; Harold J. Cornelius,
$184,182 and Max W. Hillman, $184,182.
Directors of Lehman/SDI, Inc., who are not employees of the Company 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.
47
<PAGE>
EMPLOYMENT AGREEMENTS
---------------------
The Operating Partnership has entered into three-year employment agreements with
the Management Employees. The employment agreements which expire December 31,
1995 provide for salary levels at least commensurate with those previously in
effect. The agreements prohibit the employee from engaging or having an
interest in a competing business during the term of employment and for a period
of 18 months after termination.
CHANGE IN CONTROL ARRANGEMENTS
------------------------------
The executive officers named in Item 11 were participants in the Company'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, Inc., during any one-year period. See Note 11 of
Notes to Consolidated Financial Statements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
-----------------------------------------------------------
The Compensation Committee of the Board of Directors of Lehman/SDI, Inc.,
consisted of Arnold S. Hoffman, Director. Mr. Hoffman is an officer of Legg
Mason Wood Walker, Incorporated, which performed investment banking services for
the Company during 1994.
48
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and
-------------------------------------------------------------
Management.
----------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
Since the Company is managed by its General Partner and has no Board of
Directors, there are no "voting securities" of the Company 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 under Item 1 of this
Annual Report on Form 10-K, the general partner of the General Partner
is Lehman/SDI, Inc., an indirect, wholly owned subsidiary of Lehman
Brothers Holdings, Inc., American Express Tower, World Financial Center,
New York, NY 10285-1800.
(b) Security Ownership of Management
--------------------------------
The following table shows for each director, for each executive officer
named in the Summary Compensation Table and for all officers and
directors as a group, the beneficial ownership of Class A and Class B
Interests of the Company as of January 31, 1995. None of the amounts
equals more than 1% of the outstanding Class A Interests.
<TABLE>
<CAPTION>
Class B
Name of Class A Class B Percent
Beneficial Owner Amount(l) Amount(l) of Class
---------------- --------- --------- --------
<S> <C> <C> <C>
O. Gordon Brewer, Jr. 3,000 1,000 -- (5)
Harold J. Cornelius 200 200 -- (5)
Norman V. Edmonson 14,715 1,300,916 6.0%
Eliot M. Fried -- (2) -- (2) -- (2)
Max W. Hillman, Jr. 4,000 6,500 -- (5)
Arnold S. Hoffman 13,000 (2)(3) 13,000 (2)(3) -- (5)
Donald T. Marshall 30,311 2,025,232 9.3%
John P. McDonnell 7,711 623,071 2.9%
Ernest L. Ransome, III 5,000 (4) 5,000 (4) -- (5)
Donald A. Scott 9,000 9,000 -- (5)
Henri I. Talerman -- (2) -- (2) -- (2)
All directors and executive
officers as a group 102,815 4,370,328 20.2%
</TABLE>
49
<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 Company and the Operating Partnership.
The table does not include the GP Interests owned by the Management
Employees.
(2) Does not include (i) 108,554 Class B Interests owned by Lehman LTD I, Inc.,
or (ii) 5,788,124 Class 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, Inc., which is
the general partner of the GP and holds the remaining interest in the GP not
owned by the Management Employees.
(3) 3,000 of these Class 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 Class A and B Interests with respect to which he
disclaims beneficial ownership.
(4) 2,500 of these Class A and B Interests are held in a trust, of which Mr.
Ransome is a trustee.
(5) Represents less than 1% of the outstanding Class B Interests.
-----------------------
(c) Changes In Control
------------------
Not Applicable
50
<PAGE>
Item 13 - Certain Relationships and Related Transactions.
--------------------------------------------------------
MANAGEMENT FEE
--------------
The Operating Partnership pays a 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 payable
on March 31, 1995, is $3,329,872. The amount of management fee paid in 1994
with respect to 1993 was $3,329,872. See footnotes (1) and (2) to "Security
Ownership of Management" under Item 12 for ownership of the General Partner.
The interests of Lehman/SDI, Inc., and the Management Employees, in the fee for
1994 were as follows: Lehman/SDI, Inc. $1,791,471; Louis J. Cissone, $76,920;
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 RELATIONSHIPS
------------------------------
Mr. Scott is a partner in Morgan, Lewis & Bockius, a law firm that has performed
services for the Company during the last fiscal year.
Messrs. Fried and Talerman are officers of Lehman Brothers Inc., which performed
investment banking services for the Company during 1994.
Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which
performed investment banking services for the Company during 1994.
The Company proposes to have these firms perform similar services as needed
during the current fiscal year.
51
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports
--------------------------------------------------------------
on Form 8-K.
-----------
(a) Documents Filed as a Part of the Report:
---------------------------------------
1. Financial Statements.
--------------------
The information concerning financial statements called for
by Item 14 of Form 10-K is set forth in Part II, Item 8 of this annual report on
Form 10-K.
2. Financial Statement Schedules.
-----------------------------
The information concerning financial statement schedules
called for by Item 14 of Form 10-K is set forth in Part II, Item 8 of this
annual report on Form 10-K.
3. Exhibits, Including Those Incorporated by
-----------------------------------------
Reference.
---------
The following is a list of exhibits filed as part of this
annual report on Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated in
parentheses.
Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
2.1 Asset Purchase Agreement for the Acquisition of
the Assets of the Electrical Products Group
Divisions of SDI Operating Partners, L.P. by
Consolidated Electrical Distributors, Inc., dated
as of October 4, 1994, as amended. (1) (Exhibit 2.1).
2.2 Asset Purchase Agreement for the Acquisition
of the Assets of the Dorman Products Division
of SDI Operating Partners, L.P. by R&B, Inc.,
dated as of October 5, 1994, as amended.
(2) (Exhibit 2.1).
Articles of Incorporation and By-Laws
3.1 Amended and Restated Agreement of Limited
Partnership of Sun Distributors L.P. (3) (Exhibit
3.2; included as Exhibit A to the Prospectus).
52
<PAGE>
Instruments Defining the Rights of Security Holders, Including
Indentures
4.1 Deposit Agreement (with forms of Class A and Class B
Depositary Receipts attached), dated as of February 1,
1987 (4) (Exhibit 4.1).
4.2 Amendment and Succession Agreement To Deposit
Agreement, dated as of February 1, 1987
(5) (Exhibit 4.2)
4.3 Note Purchase Agreement dated as of December 15, 1992,
between SDI Operating Partners, L.P., and Teachers
Insurance and Annuity Association of America, New York
Life Insurance Company, New York Life Insurance and Annuity
Corporation and Massachusetts Mutual Life Insurance Company.
(6) (Exhibit 4.1)
4.4 Partner Guarantee dated as of December 15, 1992, by Sun
Distributors L.P. (6) (Exhibit 4.2)
Material Contracts
10.1 Forms of Employment Agreements for Management
Employees.
*(a) Louis J. Cissone, Joseph M. Corvino, Norman
V. Edmonson, Donald T. Marshall and
John P. McDonnell. (7) (Exhibit 10.1(a))
*(b) Harold J. Cornelius. (7) (Exhibit 10.1(b))
*(c) Max W. Hillman, Jr. (8) (Exhibit 10.1(c))
10.2 *Form of Amendment of Employment Agreements for
Management Employees. (8) (Exhibit 10.2)
10.3 (a) Credit Agreement dated December 22, 1992, among CoreStates
Bank, N.A., for itself and as agent, The Bank of Nova
Scotia, for itself and as co-agent, The Fuji Bank,
Limited, SDI Operating Partners, L.P., SDI Partners I,
L.P., and Sun Distributors L.P. (6) (Exhibit 10.1)
(b) Amendment No. 1 to Credit Agreement (9) Exhibit 10.3(b)
(c) Amendment No. 2 to Credit Agreement (9) Exhibit 10.3(c)
(d) Amendment No. 3 to Credit Agreement (9) Exhibit 10.3(d)
10.4 *Sun Distributors Incentive Compensation Plan.
(8) (Exhibit 10.5)
10.5 *Sun Distributors, Inc. Long-Term Performance Award Plan.
(As Amended June 1985) (8) (Exhibit 10.6)
10.6 *SDI Operating Partners, L.P. Deferred Compensation Plan
for Division Presidents (As amended September 13, 1993).
(9) (Exhibit 10.7)
53
<PAGE>
10.7 *SDI Operating Partners, L.P. Long-Term Performance
Share Plan dated January 1, 1994. (9) (Exhibit 10.8)
Subsidiaries of the Registrant
**21.1 Subsidiaries
Financial Data Schedules
**27.1 Summary financial information as of and for the year
ended December 31, 1994.
------------------------
(1) Filed on December 20, 1994, as an exhibit to Form 8-K
for events reportable as of December 5, 1994.
(2) Filed on January 18, 1995, as an exhibit to Form 8-K
for events reportable as of January 3, 1995.
(3) Filed on February 5, 1987, as an exhibit to Amendment
No. 2 to Registration Statement No. 33-10613 on Form
S-1 and incorporated herein by reference.
(4) Filed on March 31, 1988, as an exhibit to Annual Report
on Form 10-K for the year ended December 31, 1987.
(5) Filed on March 30, 1992, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1991.
(6) Filed on January 4, 1993, as an exhibit to Form 8-K
for events reportable as of December 22, 1992.
(7) Filed on April 2, 1990, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1989.
(8) Filed on March 31, 1993, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1992.
(9) Filed on March 31, 1994, as an exhibit to Annual Report on
Form 10K for the year ended December 31, 1993.
* Management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(c)
of this report.
** Filed herewith
54
<PAGE>
(b) Reports on Form 8-K.
-------------------
The Company filed Form 8-K on October 11, 1994 to report
Item 5--other events as of October 5, 1994. The event was
the issuance of a press release by the registrant announcing
(1) that agreement had been reached for the sale of its
Dorman Products and Electrical Group divisions for an aggregate
consideration of approximately $73 million and (2) that the
registrant had determined not to pursue other strategic
alternatives at this time.
The Company filed Form 8-K on December 20, 1994 to report
Item 2--Acquisition or Disposition of Assets and Item 7--
Financial Statements and Exhibits. See Exhibit 2.1 shown
above. The financial statements filed with Form 8-K were
as follows:
Pro Forma Consolidated Balance Sheet,
September 30, 1994 (Unaudited)
Pro Forma Consolidated Statement of Income
for the Nine Months ended September 30,
1994 (Unaudited)
Pro Forma Consolidated Statement of Income
for the Year ended December 31, 1993
(Unaudited)
Notes to Pro Forma Financial Information
(Unaudited)
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUN DISTRIBUTORS L.P.
By: SDI Partners I, L.P.,
General Partner
By: Lehman/SDI, Inc.,
General Partner
Date: March 28, 1995 By: /s/ Donald T. Marshall
--------------------------------
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of l934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Donald T.
Marshall and Louis J. Cissone, and each of them, his true and lawful attorney-
in-fact, in his name, place and stead to execute and cause to be filed with the
Securities and Exchange Commission any or all amendments to this report.
Signature Capacity Date
--------- -------- ----
/s/ O. Gordon Brewer, Jr. Director, Lehman/SDI, March 28, 1995
------------------------------ Inc.
O. Gordon Brewer, Jr.
/s/ Norman V. Edmonson Director, Lehman/SDI, March 28, 1995
------------------------------ Inc.
Norman V. Edmonson
56
<PAGE>
/s/ Eliot M. Fried Director, Lehman/SDI, March 28, 1995
------------------------------ Inc.
Eliot M. Fried
/s/ Arnold S. Hoffman Director, Lehman/SDI, March 28, 1995
------------------------------ Inc.
Arnold S. Hoffman
/s/ Donald T. Marshall Director, Lehman/SDI, March 28, 1995
------------------------------ Inc.
Donald T. Marshall
/s/ Ernest L. Ransome, III Director, Lehman/SDI, March 28, 1995
------------------------------ Inc.
Ernest L. Ransome, III
/s/ Donald A. Scott Director, Lehman/SDI, March 28, 1995
------------------------------ Inc.
Donald A. Scott
/s/ Henri I. Talerman Director, Lehman/SDI, March 28, 1995
------------------------------ Inc.
Henri I. Talerman
/s/ Louis J. Cissone Principal Financial March 28, 1995
------------------------------ Officer
Louis J. Cissone
/s/ Joseph M. Corvino Principal Accounting March 28, 1995
------------------------------ Officer
Joseph M. Corvino
57
<PAGE>
EXHIBIT INDEX
Exhibit Number
(Referenced to
Item 601 of Page
Regulation S-K) Description Number
--------------- ----------- ------
2.1 Asset Purchase Agreement for the Acquisition
of the Assets of the Electrical Products Group
Divisions of SDI Operating Partners, L.P. by
Consolidated Electrical Distributors, Inc.,
dated as of October 4, 1994, as amended.
(1) (Exhibit 2.1).
2.2 Asset Purchase Agreement for the Acquisition
of the Assets of the Dorman Products Division
of SDI Operating Partners, L.P. by R&B, Inc.,
dated as of October 5, 1994, as amended.
(2) (Exhibit 2.1).
3.1 Amended and Restated Agreement of Limited Partnership of
Sun Distributors L.P. (3) (Exhibit 3.2; included as
Exhibit A to the Prospectus).
4.1 Deposit Agreement (with forms of Class A and Class B
Depositary Receipts attached), dated as of February 1,
1987 (4) (Exhibit 4.1).
4.2 Amendment and Succession Agreement To Deposit
Agreement, dated as of February 1, 1987
(5) (Exhibit 4.2)
4.3 Note Purchase Agreement dated as of December 15, 1992,
between SDI Operating Partners, L.P., and Teachers
Insurance and Annuity Association of America, New York
Life Insurance Company, New York Life Insurance and
Annuity Corporation and Massachusetts Mutual Life
Insurance Company. (6) (Exhibit 4.1)
4.4 Partner Guarantee dated as of December 15, 1992, by Sun
Distributors L.P. (6) (Exhibit 4.2)
10.1 Forms of Employment Agreements for Management
Employees.
*(a) Louis J. Cissone, Joseph M. Corvino, Norman
V. Edmonson, Donald T. Marshall and
John P. McDonnell.(7) (Exhibit 10.1(a))
*(b) Harold J. Cornelius.(7) (Exhibit 10.1(b))
*(c) Max W. Hillman, Jr. (8) (Exhibit 10.1(c))
<PAGE>
EXHIBIT INDEX, continued
Exhibit Number
(Referenced to
Item 601 of Page
Regulation S-K) Description Number
--------------- ----------- ------
10.2 *Form of Amendment of Employment Agreements for
Management Employees. (8) (Exhibit 10.2)
10.3 (a) Credit Agreement dated December 22, 1992, among
CoreStates Bank, N.A., for itself and as agent,
The Bank of Nova Scotia, for itself and as
co-agent, The Fuji Bank, Limited, SDI Operating
Partners, L.P., SDI Partners I, L.P., and Sun
Distributors L.P. (6) (Exhibit 10.1)
(b) Amendment No. 1 to Credit Agreement (9)
Exhibit 10.3(b)
(c) Amendment No. 2 to Credit Agreement (9)
Exhibit 10.3(c)
(d) Amendment No. 3 to Credit Agreement (9)
Exhibit 10.3(d)
10.4 *Sun Distributors Incentive Compensation Plan.
(8) (Exhibit 10.5)
10.5 *Sun Distributors, Inc. Long-Term Performance Award Plan.
(As Amended June 1985) (8) (Exhibit 10.6)
10.6 *SDI Operating Partners, L.P. Deferred Compensation Plan
for Division Presidents (As amended September 13, 1993).
(9) (Exhibit 10.7)
10.7 *SDI Operating Partners, L.P. Long-Term Performance
Share Plan dated January 1, 1994. (9) (Exhibit 10.8)
**21.1 Subsidiaries
**27.1 Summary financial information as of and for the year
ended December 31, 1994.
------------------------
(1) Filed on December 20, 1994, as an exhibit to Form 8-K
for events reportable as of December 5, 1994.
(2) Filed on January 18, 1995, as an exhibit to Form 8-K
for events reportable as of January 3, 1995.
(3) Filed on February 5, 1987, as an exhibit to Amendment
No. 2 to Registration Statement No. 33-10613 on Form
S-1 and incorporated herein by reference.
(4) Filed on March 31, 1988, as an exhibit to Annual Report
on Form 10-K for the year ended December 31, 1987.
(5) Filed on March 30, 1992, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1991.
<PAGE>
EXHIBIT INDEX, continued
Exhibit Number
(Referenced to
Item 601 of Page
Regulation S-K) Description Number
--------------- ----------- ------
(6) Filed on January 4, 1993, as an exhibit to Form 8-K
for events reportable as of December 22, 1992.
(7) Filed on April 2, 1990, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1989.
(8) Filed on March 31, 1993, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1992.
(9) Filed on March 31, 1994, as an exhibit to Annual Report on
Form 10K for the year ended December 31, 1993.
* Management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(c)
of this report.
** Filed herewith
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
* SDI Operating Partners, L.P.;
Organized in the State of Delaware
* J. N. Fauver (Canada) Limited;
Incorporated in the Province of Ontario
* A & H Holding Company, Inc.;
Incorporated in the State of Michigan
* A & H Bolt & Nut Company Limited;
Incorporated in the Province of Nova Scotia
* The Fastener Centre, Inc.;
Incorporated in the State of Michigan
* Hydra Power de Mexico;
Incorporated in Bravos Judicial District,
Juarez, Chihuahua, Mexico
* Simco de Mexico;
Incorporated in Ciudad de Mexico, Mexico
* STM Systems de Mexico;
Incorporated in Chihuahua, Mexico
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (See Balance
Sheet at 12/31/94 and related Income Statement for the year ended 12/31/94) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 4,903
<SECURITIES> 0
<RECEIVABLES> 79,993
<ALLOWANCES> 2,472
<INVENTORY> 92,653
<CURRENT-ASSETS> 181,780
<PP&E> 60,564
<DEPRECIATION> 33,050
<TOTAL-ASSETS> 266,186
<CURRENT-LIABILITIES> 105,720
<BONDS> 74,781 <F2>
<COMMON> 0
0
0
<OTHER-SE> 79,219
<TOTAL-LIABILITY-AND-EQUITY> 266,186
<SALES> 735,861
<TOTAL-REVENUES> 735,861
<CGS> 451,785
<TOTAL-COSTS> 246,404
<OTHER-EXPENSES> 1,430
<LOSS-PROVISION> 1,453
<INTEREST-EXPENSE> 10,191
<INCOME-PRETAX> 29,644
<INCOME-TAX> 100
<INCOME-CONTINUING> 29,544
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,544
<EPS-PRIMARY> .79 <F1>
<EPS-DILUTED> .79
<FN>
<F1> EPS represents Class B Limited Partnership interests only.
<F2> Bonds represents all Long-Term Debt including Capitalized Lease Obligations
and Senior Notes.
</FN>
</TABLE>
