<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Schedule 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
SUNSOURCE L.P.
(Name of Issuer)
SUNSOURCE L.P.
(Name of Person(s) Filing Statement)
CLASS A LIMITED PARTNERSHIP INTERESTS AND DEPOSITARY RECEIPTS THEREFOR
(Title of Class of Securities)
867942-10-4
(CUSIP Number of Class of Securities)
CLASS B LIMITED PARTNERSHIP INTERESTS AND DEPOSITARY RECEIPTS THEREFOR
(Title of Class of Securities)
867942-20-3
(CUSIP Number of Class of Securities)
Joseph M. Corvino copy to:
SunSource L.P. Donald A. Scott, Esquire
2600 One Logan Square Morgan, Lewis & Bockius LLP
Philadelphia, PA 19103 2000 One Logan Square
(215) 665-3650 Philadelphia, PA 19103
(215) 963-5206
(Name, Addresses and Telephone Numbers of Persons Authorized to Receive Notices
and Communications on Behalf of Person Filing Statement)
This statement is filed in connection with (check the appropriate box):
a. |X| The filing of solicitation materials or an information statement subject
to Regulation 14A [17 CFR 240.14a-1 to 240.14b-1], Regulation 14C [17 CFR
240.14c-1 to 240.14c-101] or Rule 13e-3(c) [ss. 240.13e-3(c)] under the
Securities Exchange Act of 1934.
b. |_| The filing of a registration statement under the Securities Act of 1933.
c. |_| A tender offer.
d. |_| None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: |X|
Calculation of Filing Fee
------------------------------ ----------------------------
Transaction valuation* Amount of filing fee
$ 119,896,784 $ 23,979
------------------------------ ----------------------------
* Pursuant to Rule 0-11(a)(4), based on the sum of cash, book value of the
Trust Preferred Securities and, because the Corporation will have a capital
deficit, one-third of the par value of the Common Stock.
|_| Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the0 Form
or Schedule and the date of its filing.
Amount Previously Paid: _____________________
Form or Registration No. _____________________
Filing Party:
Date Filed: ______________________
<PAGE>
INTRODUCTORY NOTE
This Rule 13e-3 Transaction Statement on Schedule 13E-3 (the "Schedule
13E-3") relates to a proposed merger pursuant to which SunSource L.P. will be
converted to corporate form and holders of limited partnership interests will
receive cash and shares of Trust Preferred Securities or shares of Common Stock
(the "Transaction"). The Transaction is described in the Preliminary Proxy
Statement, a copy of which is attached as Exhibit 17(d) (the "Preliminary Proxy
Statement").
The information contained in the Preliminary Proxy Statement is
incorporated by reference in answer to the items of this Schedule 13E-3 and the
Cross Reference Sheet set forth belows shows the location in the Preliminary
Proxy Statement of the information required to be included in response to the
items of this Schedule 13E-3. The information contained in the Preliminary Proxy
Statement, including the exhibits thereto, is hereby expressly incorporated by
reference and the responses to each item herein are qualified in their entirety
by the provisions of the Preliminary Proxy Statement and the exhibits thereto.
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CROSS REFERENCE SHEET
(Pursuant to General Instruction F
to Schedule 13E-3)
<TABLE>
<CAPTION>
Item in Location in
Schedule 13E-3 Preliminary Proxy Statement
<S> <C>
Item 1 (a) SUMMARY - The Partnership, the Corporation and the Trust.
(b) - (d) MARKET PRICES AND DISTRIBUTIONS.
(e) - (f) Not applicable.
Item 2 (a) - (d) AVAILABLE INFORMATION; MANAGEMENT; SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(e) - (f) With respect to the persons listed in MANAGEMENT, none.
(g) MANAGEMENT.
Item 3 (a) - (b) Not applicable.
Item 4 (a) - (b) SUMMARY - Overview of the Conversion; - Structure of the
Conversion; SPECIAL FACTORS RELATING TO THE
CONVERSION - Terms of the Conversion.
Item 5 (a) - (c) Not applicable.
(d) MARKET PRICES AND DISTRIBUTIONS.
(f) - (g) Not applicable.
Item 6 (a) SPECIAL FACTORS RELATING TO THE CONVERSION -
Source and Amount of Funds.
(b) SPECIAL FACTORS RELATING TO THE CONVERSION -
Fees and Expenses.
(c) SPECIAL FACTORS RELATING TO THE CONVERSION -
Source and Amount of Funds.
</TABLE>
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<TABLE>
<S> <C>
(d) Not applicable.
Item 7 (a) - (c) SUMMARY - Reasons to Convert to Corporate Form; -
Alternatives to the Conversion; SPECIAL FACTORS RELATING
TO THE CONVERSION - Background of the Conversion; -
Alternatives to the Conversion; - Reasons to Convert to Corporate
Form.
(d) SUMMARY - Structure of the Conversion; -
Summary of Certain Federal Income Tax
Consequences; SPECIAL FACTORS RELATING TO
THE CONVERSION - Terms of the Conversion;
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
Item 8 (a) - (b) SUMMARY - Special Committee; - Recommendation of General
Partner and Fairness Determination; SPECIAL FACTORS
RELATING TO THE CONVERSION - Background of the
Conversion; - Reasons to Convert to Corporate Form; - Allocation
of Securities Between Limited Partner Interests and General
Partner Interests; Recommendation of Special Committee; -
Opinion of Smith Barney; - Recommendation of the General
Partner and Fairness Determination.
(c) SUMMARY - Voting at the Special Meeting;
VOTING AND PROXY INFORMATION - Vote
Required; Quorum.
(d) SUMMARY - Risk Factors, Adverse Effects and
Other Important Considerations; RISK
FACTORS, ADVERSE EFFECTS AND OTHER IMPORTANT
CONSIDERATIONS - Risks related to the
Conversion - No Independent Representation.
(e) SPECIAL FACTORS RELATING TO THE CONVERSION -
Background of the Conversion.
(f) Not applicable.
Item 9 (a) - (c) SUMMARY - Special Committee; - Recommendation of General
Partner and Fairness Determination; SPECIAL FACTORS
RELATING TO THE CONVERSION - Background of the
Conversion; - Allocation of Securities Between Limited Partner
Interests and General Partner Interests; Recommendation of
Special Committee; - Opinion of Smith Barney; -
Recommendation of the General Partner and Fairness
Determination; EXHIBIT C - Smith Barney Fairness Opinion.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Item 10 (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
(b) None.
Item 11 None.
Item 12 (a) SUMMARY - Voting at the Special
Meeting; VOTING AND PROXY INFORMATION - Vote
Required; Quorum.
(b) SUMMARY - Recommendation of General Partner
and Fairness Determination; SPECIAL FACTORS
RELATING TO THE CONVERSION - Recommendation
of the General Partner and Fairness
Determination.
Item 13 (a) SUMMARY - No Appraisal Rights; VOTING
AND PROXY INFORMATION - No Appraisal Rights.
(b) - (c) Not applicable.
Item 14 (a) - (b) INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE; SUMMARY FINANCIAL INFORMATION OF
THE PARTNERSHIP AND SUMMARY UNAUDITED PRO
FORMA FINANCIAL INFORMATION OF THE
CORPORATION; SELECTED FINANCIAL INFORMATION;
FINANCIAL STATEMENTS.
Item 15 (a) - (b) VOTING AND PROXY INFORMATION - Solicitation of
Proxies.
Item 16 Preliminary Proxy Statement.
Item 17 (a) Loan agreement to be filed by amendment.
(b) Smith Barney Fairness Opinion (Exhibit C to Preliminary Proxy
Statement.)
(c) Not applicable.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(d) Preliminary Proxy Statement.
(e) Not applicable.
(f) Not applicable.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Item 1. Issuer and Class of Security Subject to the Transaction
(a) SUMMARY - The Partnership, the Corporation and the Trust.
(b) - (d) MARKET PRICES AND DISTRIBUTIONS.
(e) - (f) Not applicable.
Item 2. Identity and Background
(a) - (d) AVAILABLE INFORMATION; MANAGEMENT; SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(e) - (f) With respect to the persons listed in MANAGEMENT, none.
(g) MANAGEMENT.
Item 3. Past Contacts, Transactions or Negotiations
(a) - (b) Not applicable.
(a) - (b) SUMMARY - Overview of the Conversion; - Structure of the
Conversion; SPECIAL FACTORS RELATING TO THE
CONVERSION - Terms of the Conversion.
Item 4. Terms of the Transaction
(a) - (b) SUMMARY - Overview of hte Conversion; - Structure of the
Conversion; SPECIAL FACTORS RELATING TO THE
CONVERSION - Terms of the Conversion.
Item 5. Plans or Proposals of the Issuer or Affiliate
(a) - (c) Not applicable.
(d) MARKET PRICES AND DISTRIBUTIONS.
(f) - (g) Not applicable.
Item 6. Source and Amounts of Funds or Other Consideration
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
(a) SPECIAL FACTORS RELATING TO THE CONVERSION -
Source and Amount of Funds.
(b) SPECIAL FACTORS RELATING TO THE CONVERSION -
Fees and Expenses.
(c) SPECIAL FACTORS RELATING TO THE CONVERSION -
Source and Amount of Funds.
(d) Not applicable.
Item 7. Purpose(s), Alternatives, Reasons and Effects
(a) - (c) SUMMARY - Reasons to Convert to Corporate Form; -
Alternatives to the Conversion; SPECIAL FACTORS RELATING
TO THE CONVERSION - Background of the Conversion; -
Alternatives to the Conversion; - Reasons to Convert to Corporate
Form.
(d) SUMMARY - Structure of the Conversion; -
Summary of Certain Federal Income Tax
Consequences; SPECIAL FACTORS RELATING TO
THE CONVERSION - Terms of the Conversion;
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
Item 8. Fairness of the Transaction
(a) - (b) SUMMARY - Special Committee; - Recommendation of General
Partner and Fairness Determination; SPECIAL FACTORS
RELATING TO THE CONVERSION - Background of the
Conversion; - Reasons to Convert to Corporate Form; - Allocation
of Securities Between Limited Partner Interests and General
Partner Interests; Recommendation of Special Committee; -
Opinion of Smith Barney; - Recommendation of the General
Partner and Fairness Determination.
(c) SUMMARY - Voting at the Special Meeting;
VOTING AND PROXY INFORMATION - Vote
Required; Quorum.
(d) SUMMARY - Risk Factors, Adverse Effects and
Other Important Considerations; RISK
FACTORS, ADVERSE EFFECTS AND OTHER IMPORTANT
CONSIDERATIONS - Risks related to the
Conversion - No Independent Representation.
</TABLE>
-8-
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<TABLE>
<S> <C> <C>
(e) SPECIAL FACTORS RELATING TO THE CONVERSION -
Background of the Conversion.
(f) Not applicable.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations
(a) - (c) SUMMARY - Special Committee; - Recommendation of General
Partner and Fairness Determination; SPECIAL FACTORS
RELATING TO THE CONVERSION - Background of the
Conversion; - Allocation of Securities Between Limited Partner
Interests and General Partner Interests; Recommendation of
Special Committee; - Opinion of Smith Barney; -
Recommendation of the General Partner and Fairness
Determination; EXHIBIT C - Smith Barney Fairness Opinion.
Item 10. Interest in Securities of the Issuer
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
(b) None.
Item 11. Contracts, Arrangements or Understandings with Respect to the Issuer's
Securities
None.
Item 12. Present Intention and Recommendation of Certain Persons with Regard to the
Transaction
(a) SUMMARY - Voting at the Special Meeting;
VOTING AND PROXY INFORMATION - Vote
Required; Quorum.
(b) SUMMARY - Recommendation of General Partner
and Fairness Determination; SPECIAL FACTORS
RELATING TO THE CONVERSION - Recommendation
of the General Partner and Fairness
Determination.
Item 13. Other Provisions of the Transaction
(a) SUMMARY - No Appraisal Rights; VOTING AND
PROXY INFORMATION - No Appraisal Rights.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
(b) - (c) Not applicable.
Item 14. Financial Information
(a) - (b) INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE; SUMMARY FINANCIAL INFORMATION OF
THE PARTNERSHIP AND SUMMARY UNAUDITED PRO
FORMA FINANCIAL INFORMATION OF THE
CORPORATION; SELECTED FINANCIAL INFORMATION;
FINANCIAL STATEMENTS.
Item 15. Persons and Assets Employed, Retained or Utilized
(a) - (b) VOTING AND PROXY INFORMATION - Solicitation of
Proxies.
Item 16. Additional Information
Preliminary Proxy Statement.
Item 17. Material to be Filed as Exhibits
(a) Loan agreement to be filed by amendment.
(b) Smith Barney Fairness Opinion (Exhibit C to Preliminary Proxy
Statement.)
(c) Not applicable.
(d) Preliminary Proxy Statement.
(e) Not applicable.
(f) Not applicable.
</TABLE>
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<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
December 27, 1996
SUNSOURCE L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By /s/ Joseph M. Corvino
------------------------
Joseph M. Corvino
Vice President - Finance
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
<S> <C> <C>
17(a) Not applicable.
17(b) Smith Barney Fairness Opinion (Exhibit C to
Preliminary Proxy Statement)
17(c) Not applicable.
17(d) Preliminary Proxy Statement
17(e) Not applicable.
17(f) Not applicable.
</TABLE>
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Philadelphia, Pennsylvania
January __, 1997
NOTICE OF SPECIAL MEETING OF
LIMITED PARTNERS To Be Held
On March __, 1997
To the Limited Partners of SunSource L.P.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the limited partners
of SunSource L.P., a Delaware limited partnership (the "Partnership"), will be
held at _______________________, Philadelphia, Pennsylvania on March __, 1997 at
10:00 a.m., local time.
At the Special Meeting, the limited partners will vote upon a proposal
(the "Conversion Proposal") to convert the Partnership to corporate form (the
"Conversion"). The Conversion will be accomplished through a merger (the
"Merger") of the Partnership and subsidiaries of SunSource Inc., a newly formed
Delaware corporation (the "Corporation") with and into SDI Operating Partners,
L.P. (the "Operating Partnership"). Upon consummation of the Merger: (i) Each
Class A limited partnership interest ("A Interest") will be exchanged for 0.38
share of 11.6% Trust Preferred Securities of SunSource Capital Trust, a business
trust holding Junior Subordinated Debentures of the Corporation, and $1.30 in
cash. The Trust Preferred Securities will have a liquidation preference of $25,
will be entitled to cumulative distributions of $2.90 per year payable monthly
and will mature in 30 years, subject to optional redemption after five years or
earlier upon the occurrence of a Tax Event. (ii) Each Class B limited
partnership interest ("B Interest") will be exchanged for 0.25 share of Common
Stock of the Corporation. (iii) The general partnership interests of SDI
Partners I, L.P. (the "General Partner") in the Partnership and the Operating
Partnership will be exchanged for 1,000,000 shares of Common Stock of the
Corporation, of which 75,000 shares will be held in escrow to be distributed
after two years if all distributions on the Preferred Securities have then been
paid. As a result of the Conversion, (i) the Partnership will cease to exist,
the Corporation will become the sole limited partner of the Operating
Partnership and a subsidiary of the Corporation will become the general partner;
(ii) unaffiliated holders of A Interests will hold 4,187,543 (less the number of
fractional shares for which holders will receive cash in the Conversion) Trust
Preferred Securities; (iii) unaffiliated holders of B Interests will hold
2,908,400 (less the number of fractional shares for which holders will receive
cash in the Conversion) shares of Common Stock (45.3%); and (iv) the General
Partner and affiliates of the General Partner who presently hold B Interests
will hold 3,510,536 shares of Common Stock (54.7%).
The Conversion Proposal and related matters are more fully described in
the attached Proxy Statement/Prospectus, which (together with the exhibits
thereto and the documents incorporated by reference therein) forms a part of
this Notice and is incorporated herein by reference. Frequently used capitalized
terms are defined in Exhibit A thereto and a chart illustrating the relative
relationships of the entities before and after the Conversion is set forth
before the Summary to the Proxy Statement/Prospectus.
The Conversion will require (i) the approval of limited partners
holding a majority of the outstanding A Interests and B Interests, each voting
separately as a class, and (ii) the approval of unaffiliated limited partners
(limited partners other than affiliates of the General Partner) holding a
majority of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class. Only limited partners of the
Partnership of record at the close of business on January __, 1996 are entitled
to notice of and to vote at the Special Meeting.
You are cordially invited to attend the Special Meeting. If you cannot
attend, please sign and date the accompanying form of proxy and return it
promptly in the enclosed envelope. If you attend the meeting, you may vote in
person regardless of whether you have given your proxy. Any proxy may be revoked
at any time before it is exercised, as indicated herein.
By Order of the General Partner
Joseph M. Corvino,
Secretary SDI Partners I,
L.P.
Your vote is important. Accordingly, you are asked to complete, sign and return
the accompanying proxy card in the envelope provided, which requires no postage
if mailed in the United States.
<PAGE>
Proxy Statement/Prospectus
SUNSOURCE INC.
6,418,936 Shares of Common Stock
SUNSOURCE CAPITAL TRUST
4,217,837 Shares of 11.6% Trust Preferred Securities
This Proxy Statement (which is also a Prospectus) relates to the
issuance of (i) Common Stock (par value $0.01 per share) of SunSource Inc., a
Delaware corporation which has been newly formed by SunSource L.P., a Delaware
limited partnership, and (ii) 11.6% Trust Preferred Securities (the "Preferred
Securities") of SunSource Capital Trust, a Delaware statutory business trust
(the "Trust"). In this Proxy Statement, SunSource Inc. is referred to as the
"Corporation" and SunSource L.P. as the "Partnership." Other frequently used
capitalized terms are defined in Exhibit A hereto (located inside the back
cover).
This Proxy Statement is being sent by the Partnership to the holders of
its Class A limited partnership interests ("A Interests") and Class B limited
partnership interests ("B Interests," and together with A Interests,
"Interests") in connection with the solicitation by SDI Partners I, L.P., a
Delaware limited partnership which is the general partner of the Partnership
(the "General Partner"), of proxies to be voted at a Special Meeting of the
Partnership's limited partners in Philadelphia on March __, 1997. At the Special
Meeting, the limited partners will vote on a proposal (the "Conversion
Proposal") that, if approved, will result in the conversion of the Partnership
to corporate form (the "Conversion").
The Conversion will be accomplished through a merger (the "Merger") of
the Partnership and subsidiaries of the Corporation with and into SDI Operating
Partners, L.P. (the "Operating Partnership"). Upon consummation of the Merger,
each A Interest will be exchanged for 0.38 share of Preferred Securities of the
Trust and $1.30 in cash. The Preferred Securities will have a liquidation
preference of $25, will be entitled to cumulative distributions of $2.90 per
year payable monthly and will mature in 30 years, subject to optional redemption
after five years. Each B Interest will be exchanged for 0.25 share of Common
Stock of the Corporation. The General Partner's general partnership interests in
the Partnership and the Operating Partnership will be exchanged for 1,000,000
shares of Common Stock of the Corporation, of which 75,000 shares will be held
in escrow to be distributed after two years if all distributions on the
Preferred Securities have then been paid. As a result of the Conversion, (i) the
Partnership will cease to exist, the Corporation will become the sole limited
partner of the Operating Partnership and a subsidiary of the Corporation will
become the general partner; (ii) the unaffiliated holders of A Interests will
hold 4,187,543 (less the number of fractional shares for which holders will
receive cash in the Conversion) Preferred Securities; (iii) unaffiliated holders
of B Interests will hold 2,908,400 (less the number of fractional shares for
which holders will receive cash in the Conversion) shares of Common Stock
(45.3%); and (iv) the General Partner and affiliates of the General Partner who
presently hold B Interests will hold 3,510,536 shares of Common Stock (54.7%).
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION
OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is
January __, 1997.
<PAGE>
The General Partner believes that the Conversion is in the best
interests of the Partnership and its limited partners and recommends that the
limited partners approve the Conversion.
The Conversion involves certain factors that should be considered by
all limited partners. The effects of the Conversion may differ for each limited
partner and may be disadvantageous to some depending upon their individual
circumstances and investment objectives. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS" and "SPECIAL FACTORS." In
particular, limited partners should consider that:
o There is a potential conflict of interest between the General Partner and
the limited partners and between the A Interests and the B Interests with
respect to the determination of the consideration to be received in the
Conversion. Also, a benefit to the General Partner which is not shared by
all limited partners generally is the elimination of liability of the
General Partner for liabilities of the Partnership which occur after the
Conversion. Limited partners were not separately represented in
establishing the terms of the Conversion. Such representation might have
caused the terms of the Conversion to be different in some respects from
those described herein.
o Because of the Conversion, the Partnership and the limited partners will
forego the potential future tax benefits associated with operating in
partnership form (e.g., no tax paid at the Partnership level on its taxable
income) immediately, rather than beginning after December 31, 1997.
o Certain provisions of Delaware law and the Corporation's organizational
documents may reduce the likelihood of a takeover of the Corporation that,
if successful, would permit stockholders to receive a premium over the
market price of the Common Stock.
o After the Conversion, holders of A Interests will no longer have their
contractual right under the Partnership Agreement to the priority return,
although they will be entitled to receive distributions on the Preferred
Securities before dividends are paid on the Common Stock. Holders of B
Interests will no longer have the right to tax distributions, although they
will no longer be taxed with respect to income of the Corporation. If the
Conversion is approved, the Board of Directors will have discretion to
defer payments on the Junior Subordinated Debentures. If such payments are
deferred, the Trust will be unable to make distributions on the Preferred
Securities, and the Corporation will be prohibited from paying dividends on
the Common Stock. The Board of Directors will also have discretion to
declare and pay dividends on the Common Stock, and there can be no
assurance that the Corporation will make dividend distributions. Management
presently intends not to recommend the payment of dividends on the Common
Stock in order to retain cash to fund the Corporation's acquisition program
and corporate requirements.
o The receipt of Preferred Securities and cash by the holders of A Interests
will be a taxable event.
o The receipt of Preferred Securities, Common Stock and cash by the holders
who hold both A Interests and B Interests will likely be a taxable event.
o Unlike the A Interests, which are not subject to mandatory or optional
redemption by the Partnership, the Junior Subordinated Debentures held by
the Trust may be redeemed by the Corporation at 100% of the liquidation
amount plus accrued and unpaid distributions at any time after March 31,
2002 or earlier at 101% of the liquidation amount plus accrued and unpaid
distributions upon the occurrence of a Tax Event. See "DESCRIPTION OF
JUNIOR SUBORDINATED DEBENTURES -- Optional Redemption."
o Issuances of additional shares of Common Stock or Preferred Stock by the
Corporation could adversely affect existing stockholders' equity interest
in the Corporation and the market price of the Common Stock.
-ii-
<PAGE>
o The fiduciary duties owed by the directors of the Corporation after the
Conversion may be less than those owed by the General Partner of the
Partnership before the Conversion, which may result in decreased potential
liability of the directors of the Corporation. See "COMPARISON OF INTERESTS
AND SECURITIES TO BE ISSUED -- Fiduciary Duties."
o Limited partners have no dissenters' or appraisal rights in the Conversion.
Therefore, limited partners will not be entitled to receive a cash payment
from the Partnership for the fair value of their interests if they dissent
and the Conversion is approved and consummated.
o The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman Brothers and, subject to certain
limitations, by management, after the Conversion. Lehman Brothers and
management have agreed to cooperate to execute an underwritten secondary
offering of all or some portion of their shares of Common Stock as soon as
practicable after the effective date of the Conversion, subject to market
conditions.The Corporation has agreed not to sell any additional shares of
Common Stock prior to the earlier of such initial secondary offering and
the nine-month anniversary of the Conversion.
o Prior to the Conversion, there has been no public market for the Preferred
Securities or the Common Stock. The Preferred Securities received by the
holders of A Interests may trade at prices below the market price of the A
Interests and the Common Stock received by the holders of B Interests may
trade at prices below the market price of the B Interests. If a large
number of holders of Preferred Securities or Common Stock were to offer
their securities for sale immediately after consummation of the Conversion,
the market prices of the securities could decline substantially absent a
corresponding demand for the securities from other investors.
o Transaction costs of approximately $______________ will be paid by the
Partnership, whether or not the Conversion is completed.
In addition to the factors noted above, an investment in SunSource
(whether in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and equity market conditions.
The General Partner believes that the Conversion will provide SunSource
and the limited partners the following benefits:
o Expand the base of potential investors in SunSource to include persons and
institutional entities who do not typically invest in limited partnership
securities. In addition, the General Partner anticipates that the Common
Stock (as compared to Interests) will receive additional investor interest
through increased review and evaluation by research analysts.
o Conserve cash by the elimination of the annual management fee of
$3,330,000.
o Although the Corporation will have to pay tax on its income, SunSource will
conserve additional cash because (i) the interest payable on the Junior
Subordinated Debentures, which will approximately equal the distributions
currently paid on the A Interests, is deductible for federal income tax
purposes and (ii) of the difference in rates between the B tax
distribution, which will be eliminated, and the tax that will become
payable by the Corporation.
o Permit greater flexibility to consummate acquisitions due to conservation
of cash resources and the ability to use capital stock as acquisition
currency.
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<PAGE>
o Provide greater access to public and private debt and equity capital
markets at a potentially lower cost of capital.
o Simplify and reduce costs of tax reporting for investors in SunSource.
The Conversion will require (i) the approval of limited partners
holding a majority of the outstanding A Interests and B Interests, each voting
separately as a class, and (ii) the approval of unaffiliated limited partners
(limited partners other than affiliates of the General Partner) holding a
majority of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class. Such majority approvals will bind
all limited partners regardless of whether they vote against the Conversion. The
affiliates of the General Partner, who own approximately 46% of the B Interests,
have advised the Partnership that they will vote in favor of the Conversion
Proposal. Failure to forward a proxy or to vote in person at the Special Meeting
will have the same effect as if a limited partner had voted against the
Conversion Proposal.
This Proxy Statement and the related form of proxy are first being sent
to limited partners on or about January __, 1997.
Application has been made to list the Preferred Securities and Common
Stock on the New York Stock Exchange.
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<PAGE>
No person is authorized to give any information or to make any representation
not contained in this Proxy Statement/Prospectus, and any information or
representation not contained herein must not be relied upon as having been
authorized by the Partnership, the General Partner, the Corporation or the
Trust. This Proxy Statement/Prospectus does not constitute an offer of any
securities other than the registered securities to which it relates or an offer
to any person in any jurisdiction where such offer would be unlawful. Neither
the delivery of this Proxy Statement/Prospectus nor any sales made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Partnership or the Corporation since the date
hereof.
Until 25 days after the date of this Proxy Statement/Prospectus, all dealers
effecting transactions in the Preferred Securities and the Common Stock, whether
or not participating in this distribution, may be required to deliver a Proxy
Statement/Prospectus.
AVAILABLE INFORMATION
The Partnership is (and following the Conversion, the Corporation will
be) subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files (and
will file) reports and other information with the Securities and Exchange
Commission (the "SEC"). Such reports and other information may be inspected and
copied at the public reference facilities maintained by the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven
World Trade Center, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this
material should also be available on-line through EDGAR and may be obtained at
the prescribed rates from the Public Reference Section of the SEC at its
principal office in Washington, D.C. The SEC also maintains a Web site
(http://www.sec.gov) that contains reports and other information regarding the
Corporation. Such reports and other information concerning the Partnership can
also be inspected at the office of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005, the exchange on which the limited partnership
interests are listed (and on which application has been made to list the
Preferred Securities and Common Stock).
The Partnership has filed with the SEC a Schedule 13E-3 under the
Exchange Act. The Corporation and the Trust have filed with the SEC a
Registration Statement on Form S-4 under the Securities Act of 1933, as amended
(the "Securities Act") with respect to the securities offered hereby. This Proxy
Statement/Prospectus, which constitutes part of the Registration Statement,
omits certain of the information contained in the Schedule 13E-3 and in the
Registration Statement and the exhibits and schedules thereto on file with the
SEC pursuant to the Exchange Act and the Securities Act and the rules and
regulations of the SEC thereunder. Statements contained in this Proxy
Statement/Prospectus as to the contents of any contract or other document are
necessarily summaries of such documents, are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or Schedule 13E-3, each such
statement being qualified in all respects by such reference.
No separate financial statements of the Trust have been included or
incorporated by reference herein. The Corporation and the Trust do not consider
that such financial statements would be material to holders of Preferred
Securities because (i) all of the voting securities of the Trust will be owned,
directly or indirectly, by the Corporation, a reporting company under the
Exchange Act, (ii) the Trust has no independent operations but exists for the
sole purpose of issuing securities representing undivided beneficial interests
in its assets and investing the proceeds thereof in Junior Subordinated
Debentures issued by the Corporation, and (iii) the obligations of the Trust
under the Preferred Securities are guaranteed by the Corporation to the extent
described herein. See "RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement/Prospectus incorporates documents by reference
which are not presented herewith. These documents (without exhibits, unless such
exhibits are specifically incorporated by reference herein) are available
without charge to each person to whom a copy of this Proxy Statement/Prospectus
is delivered, upon written or oral request addressed to SunSource L.P., 2600 One
Logan Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino,
Secretary, telephone number (215) 665-3650. In order to ensure timely delivery
of the documents, any request should be made by February __, 1997.
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The following documents of the Partnership have been filed with the SEC
and are incorporated herein by reference:
(a) Annual Report on Form 10-K for the fiscal year ended December
31, 1995.
(b) Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 1996, June 30, 1996 and September 30, 1996.
(c) Current Report on Form 8-K filed on December 19, 1996.
All documents filed by the Partnership pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference into this Proxy Statement/Prospectus and
to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
which also is incorporated herein) modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed to constitute a
part hereof except as so modified or superseded.
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TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION..............................................................................................................v
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................................................................v
ORGANIZATION CHART.................................................................................................................1
SUMMARY ..........................................................................................................................2
The Partnership, the Corporation and the Trust............................................................................2
Overview of the Conversion................................................................................................2
Existing Economic Interests of the Partners...............................................................................3
Risk Factors, Conflicts of Interest and Other Important Considerations....................................................3
Reasons to Convert to Corporate Form......................................................................................5
Alternatives to the Conversion............................................................................................5
Structure of the Conversion...............................................................................................6
Control of SunSource......................................................................................................6
Special Committee.........................................................................................................6
Recommendation of General Partner and Fairness Determination..............................................................7
Summary Description of Preferred Securities...............................................................................7
Comparative Rights of the Interests and the Securities to be Issued.......................................................9
Summary of Certain Federal Income Tax Consequences........................................................................9
Conditions to the Conversion..............................................................................................9
No Appraisal Rights......................................................................................................10
Consequences if Conversion Is Not Approved...............................................................................10
Voting at the Special Meeting............................................................................................10
List of Partners.........................................................................................................10
Delivery of Depositary Receipts..........................................................................................10
Reverse Stock Split......................................................................................................11
SUMMARY FINANCIAL INFORMATION OF THE PARTNERSHIP OF THE PARTNERSHIP
AND SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE CORPORATION..........................................................12
RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS............................................................14
Risks Related to the Conversion..........................................................................................14
Potential Conflicts of Interest.................................................................................14
No Independent Representation...................................................................................14
Adverse Tax Implications........................................................................................14
Addition of Provisions that May Discourage Changes of Control...................................................14
Loss of Contractual Right to Distributions......................................................................15
Future Dilution of Common Stock.................................................................................15
Possible Reduction in Fiduciary Standards.......................................................................15
Elimination of General Partner Liability for Corporation Obligations............................................15
No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited Partners..................................15
Uncertainty Regarding Market Price for Preferred Securities and Common Stock....................................16
Sale of Common Stock by Lehman Brothers and Management..........................................................16
Transaction Costs...............................................................................................16
Change in Ownership Rights......................................................................................16
Risks Related to the Preferred Securities................................................................................16
Ranking of Subordinated Obligations under Preferred Securities Guarantee
and Junior Subordinated Debentures; Dependence on the Corporation...............................................16
Enforcement of Certain Rights by Holders of Preferred Securities................................................17
Option to Extend Interest Payment Period; Tax Impact of Extension...............................................17
Special Event Redemption or Distribution........................................................................18
Limited Voting Rights...........................................................................................19
Other Considerations.....................................................................................................19
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VOTING AND PROXY INFORMATION......................................................................................................19
Voting Procedures........................................................................................................19
Revocation of Proxies....................................................................................................19
Vote Required; Quorum....................................................................................................20
Solicitation of Proxies..................................................................................................20
Independent Auditors.....................................................................................................20
No Appraisal Rights......................................................................................................20
Other Matters............................................................................................................20
SPECIAL FACTORS...................................................................................................................20
Background of the Conversion.............................................................................................20
Existing Partnership Structure...........................................................................................22
Existing Economic Interests of the Partners..............................................................................22
Alternatives to the Conversion...........................................................................................22
Reasons to Convert to Corporate Form.....................................................................................23
Terms of the Conversion..................................................................................................24
Consequences if Conversion is Not Approved...............................................................................25
Determinations of the Special Committee..................................................................................26
Opinion of Smith Barney..................................................................................................35
Recommendation of the General Partner and Fairness Determination.........................................................39
Source and Amount of Funds...............................................................................................40
Accounting Treatment.....................................................................................................40
Fees and Expenses........................................................................................................40
Exchange of Depositary Receipts..........................................................................................41
Treatment of Fractional Shares...........................................................................................41
COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED...............................................................................42
Fiduciary Duties.........................................................................................................49
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...........................................................................................50
Partnership Status and Taxation of the Partnership.......................................................................50
General Tax Treatment of the Conversion..................................................................................50
Certain Tax Consequences of the Conversion to Holders of B Interests.....................................................51
Certain Tax Consequences of the Conversion to Holders of A Interests.....................................................52
Other Tax Issues Affecting Limited Partners..............................................................................54
Tax Consequences to the Corporation and the Partnership..................................................................55
Unrelated Business Taxable Income........................................................................................55
Other Tax Aspects........................................................................................................56
MARKET PRICES AND DISTRIBUTIONS...................................................................................................56
CAPITALIZATION....................................................................................................................58
SELECTED HISTORICAL FINANCIAL INFORMATION ........................................................................................59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................................................61
BUSINESS .........................................................................................................................72
General ................................................................................................................72
Acquisition Strategy.....................................................................................................73
Products and Services....................................................................................................74
Marketing................................................................................................................74
Competition..............................................................................................................75
Insurance Arrangements...................................................................................................75
Employees................................................................................................................75
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Backlog ................................................................................................................75
Federal Income Tax Considerations........................................................................................76
Legal Proceedings........................................................................................................76
MANAGEMENT........................................................................................................................77
Executive Officers and Directors.........................................................................................77
Compensation.............................................................................................................80
Deferred Compensation Plans..............................................................................................81
Change in Control Arrangements...........................................................................................81
Management Fee...........................................................................................................81
Certain Business Relations...............................................................................................81
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................................82
Security Ownership of Certain Beneficial Owners..........................................................................82
Security Ownership of Certain Beneficial Owners and Management...........................................................82
SUNSOURCE CAPITAL TRUST...........................................................................................................83
DESCRIPTION OF PREFERRED SECURITIES...............................................................................................86
General ................................................................................................................86
Distributions............................................................................................................86
Mandatory Redemption.....................................................................................................87
Special Event Redemption or Distribution.................................................................................88
Redemption Procedures....................................................................................................89
Subordination of Common Securities.......................................................................................90
Liquidation Distribution Upon Dissolution................................................................................90
No Merger, Consolidation or Amalgamation of the Trust....................................................................90
Declaration Events of Default............................................................................................90
Voting Rights............................................................................................................91
Modification and Amendment of the Declaration............................................................................93
Book-Entry; Delivery and Form............................................................................................93
Expenses and Taxes.......................................................................................................95
Registrar, Transfer Agent and Paying Agent...............................................................................95
Information Concerning the Property Trustee..............................................................................95
Governing Law............................................................................................................95
Miscellaneous............................................................................................................95
DESCRIPTION OF PREFERRED SECURITIES GUARANTEE.....................................................................................96
General ................................................................................................................96
Certain Covenants of the Corporation.....................................................................................96
Amendments and Assignment................................................................................................97
Termination of the Preferred Securities Guarantee........................................................................97
Status of the Preferred Securities Guarantee.............................................................................97
Governing Law............................................................................................................97
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES.....................................................................................98
General ................................................................................................................98
Optional Redemption......................................................................................................98
Interest ................................................................................................................99
Option to Extend Interest Payment Period.................................................................................99
Compounded Interest.....................................................................................................100
Certain Covenants of the Corporation Applicable to the Junior Subordinated Debentures...................................100
Subordination...........................................................................................................100
Indenture Events of Default.............................................................................................101
Modification of the Indenture...........................................................................................102
Book-Entry and Settlement...............................................................................................102
Consolidation, Merger and Sale..........................................................................................102
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Defeasance and Discharge................................................................................................102
Governing Law...........................................................................................................103
Information Concerning the Indenture Trustee............................................................................103
Miscellaneous...........................................................................................................103
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE.......................................................................103
DESCRIPTION OF CAPITAL STOCK.....................................................................................................106
Preferred Stock.........................................................................................................106
Common Stock............................................................................................................106
Stockholders Agreement..................................................................................................106
Anti-takeover Provisions................................................................................................106
Limitation of Liability.................................................................................................108
Transfer Agent and Registrar............................................................................................108
RESALE OF SECURITIES.............................................................................................................108
Securities Act Restrictions.............................................................................................108
Resales by Lehman Brothers and Management...............................................................................109
LEGAL MATTERS....................................................................................................................109
EXPERTS ........................................................................................................................109
INDEX TO FINANCIAL STATEMENTS..................................................................................................F - 1
EXHIBIT A - GLOSSARY OF DEFINED TERMS......................................................................................... A - 1
EXHIBIT B - CONVERSION AGREEMENT...............................................................................................B - 1
EXHIBIT C - SMITH BARNEY FAIRNESS OPINION.....................................................................................C - 1
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ORGANIZATION CHART
BEFORE CONVERSION
Lehman Brothers
Holdings, Inc.
(Lehman)
100%
Lehman/SDI, Management
Inc.
53.8% 46.2% A Holders Public B Lehman Management
GP LP Holders Affiliates
100% 53.7% 27.2% 19.1%
SDI Partners I, L.P. A B B B
(The General Partner) 1% Interests Interests Interests Interests
GP
SunSource L.P.
(The Partnership)
99%
LP
GP SDI Operating
1% and Fee Partners, L.P.
(The Operating Partnership)
AFTER CONVERSION
Former Public Former Lehman and Management
A Holders B Holders Affiliates
100% 45.3% 31.4% 23.3%
Preferred Common Common Common
Securities Stock Stock Stock
Junior
Subordinated
SunSource Capital Trust Debentures SunSource Inc.
(The Trust) (The Corporation)
Common
Securities
99% 100%
LP SunSubC, Inc.
1%
SDI Operating Partners, L.P. GP
(The Operating Partnership)
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SUMMARY
The following is not intended to be complete and is qualified in all
respects by the more detailed information set forth elsewhere in this Proxy
Statement/Prospectus and the documents incorporated by reference herein. Unless
otherwise indicated, all information in this Prospectus assumes a 1-for-4
reverse stock split that will be effected by the exchange ratio of .25 share of
Common Stock for each B Interest in the Conversion. A glossary of frequently
used capitalized and other specialized terms is attached as Exhibit A and a
chart describing the SunSource structure before and after the Conversion is set
forth immediately preceding this Summary. Limited partners are urged to review
carefully the entire Proxy Statement/Prospectus and to request such documents
incorporated by reference herein as they desire. This Proxy Statement/Prospectus
contains forward-looking statements that address, among other things, source and
amount of funds, amount of sales, projected capital expenditures and acquisition
strategy. These statements may be found under "SPECIAL FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and
"BUSINESS," as well as in the Proxy Statement/Prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation, those
discussed in "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS" and matters set forth in the Proxy Statement/Prospectus
generally.
The Partnership, the Corporation and the Trust
SunSource L.P.(the "Partnership") was organized as a Delaware limited
partnership in 1986 under the name Sun Distributors L.P. to conduct the business
formerly conducted by Sun Distributors, Inc. when it was a subsidiary of Sun
Company, Inc. The Partnership assumed its present name in April 1996. The
general partner of the Partnership is SDI Partners I, L.P. (the "General
Partner"), a Delaware limited partnership, whose general partner is Lehman/SDI,
Inc. ("Lehman/SDI"), a Delaware corporation, and whose limited partners are
current or former members of management of the Partnership and the Operating
Partnership. Lehman/SDI is an indirect wholly owned subsidiary of Lehman
Brothers Holdings, Inc.
The business of the Partnership is conducted through SDI Operating
Partners, L.P. (the "Operating Partnership"), a Delaware limited partnership.
The General Partner is the general partner of the Operating Partnership and the
limited partner of the Operating Partnership is the Partnership. The Operating
Partnership is one of the largest wholesale distributors of industrial products
and services in the United States, organized in three segments: industrial
services, hardware merchandising and glass merchandising. See "BUSINESS." The
principal executive offices of the Partnership and the Operating Partnership are
located at 2600 One Logan Square, Philadelphia, PA 19103 and their telephone
number is (215) 665-3650.
SunSource Inc. (the "Corporation") is a Delaware corporation which has
been newly formed to accomplish the conversion of the Partnership to corporate
form (the "Conversion"). The outstanding shares of the Corporation are presently
owned by the Partnership. Its address and telephone number are the same as the
Partnership.
In this Proxy Statement/Prospectus, the term SunSource means the
Partnership prior to the Conversion and/or the Corporation after the Conversion,
in each case including subsidiaries.
SunSource Capital Trust (the "Trust") is a newly formed Delaware
statutory business trust which has been organized to issue the Trust Preferred
Securities (the "Preferred Securities") which will be exchanged for A Interests
in the Merger. The Trust's Common Securities are owned by the Corporation. Its
address and telephone number are the same as the Partnership.
Overview of the Conversion
In the Conversion:
o The Partnership and subsidiaries of the Corporation will merge with and
into the Operating Partnership (the "Merger").
o In the Merger each A Interest will be exchanged for 0.38 share (with a
liquidation value of $9.50) of Preferred Securities and $1.30 in cash. Each
B Interest will be exchanged for 0.25 share of Common Stock. The General
Partner's interests in the Partnership and the Operating Partnership will
be exchanged for 1,000,000 shares of Common Stock, of which 75,000 shares
will be held in escrow to be distributed after two years if all
distributions on the Preferred Securities have then been paid.
o As a result of the Conversion, the Corporation will become the sole limited
partner of the Operating Partnership and a subsidiary
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of the Corporation will become the general partner.
o Prior to the Conversion, the existing bank credit agreement will be
canceled and the Partnership's long-term debt will be repaid and replaced
with new credit facilities at interest rates expected to be lower than
financing rates currently incurred by the Partnership. Prepayment of the
Partnership's long-term debt will result in the payment of a make-whole
penalty of approximately $5 million.
The chart on page 1 describes the ownership structure of SunSource
before and after the Conversion.
As a result of the Conversion, the Partnership will cease to exist, the
holders of A Interests will own 100% of the outstanding Preferred Securities,
the holders of B Interests who are not affiliated with the General Partner will
own 45.3% of the Common Stock and affiliates of the General Partner will own
54.7% of the Common Stock. The directors and certain officers of Lehman/SDI will
become directors and officers of the Corporation. The Corporation will own,
directly or through its wholly-owned subsidiary, 100% of the equity in the
business and operations owned by the Operating Partnership which will remain in
partnership form after the Conversion. The employees of the Operating
Partnership will continue as employees after the Conversion.
The General Partner may decide not to pursue the Conversion at any time
before it becomes effective, whether before or after approval by the
Partnership's limited partners.
Existing Economic Interests of the Partners
All cash receipts of the Partnership, less cash used to pay or
establish a reserve for expenses ("Cash Available for Distribution"), are
distributed 99% to the holders of A Interests and 1% to the General Partner
until holders of A Interests have received annually a $1.10 simple, cumulative
return (the Priority Return"), which has historically been paid on a monthly
basis to holders of record on the first day of the month.
After distribution of the Priority Return, Cash Available for
Distribution is distributed 1% to the General Partner and 99% to the holders of
B Interests until such holders have received an annual distribution (the "B Tax
Distribution") equal to the product of (i) 125% of the then applicable maximum
Federal income tax rate for individuals and (ii) the taxable income allocable to
the B Interests. The B Tax Distribution has historically been partially
distributed on a monthly basis to holders of record on the first day of the
month with the balance distributed by March 31 of the succeeding year. See Note
3 of Notes to Consolidated Financial Statements.
Upon liquidation of the Partnership, after provision for all
liabilities, the holders of A Interests will receive a preferential distribution
equal to $10 per A Interest plus any unpaid Priority Return and the balance will
be distributed to the General Partner and the holders of B Interests in
accordance with their respective capital accounts.
The Operating Partnership distributes its available cash 99% to the
Partnership and 1% to the General Partner until the amount distributed to the
Partnership is sufficient to pay the Priority Return and the B Tax Distribution.
The General Partner also receives a management fee from the Operating
Partnership of $3,330,000 annually. To the extent that the Priority Return and
the B Tax Distribution have not been paid on a cumulative basis, the management
fee will not be paid, but will be deferred and be paid, together with any
management fees then owed with respect to any other year, after the Priority
Return and B Tax Distribution have been paid. In addition, the management fee
can be paid only if the Operating Partnership complies with the covenants
required by the Operating Partnership's credit agreements. See Notes 8 and 9 of
Notes to Consolidated Financial Statements.
Risk Factors, Conflicts of Interest and Other Important Considerations
In evaluating the Conversion, limited partners should take into account
the following risk factors and other special considerations, which are discussed
at greater length in "RISK FACTORS, ADVERSE EFFECTS AND OTHER IMPORTANT
CONSIDERATIONS" and "SPECIAL FACTORS."
o There is a potential conflict of interest between the General Partner and
the limited partners and between the A Interests and the B Interests with
respect to the determination of the consideration to be received in the
Conversion. The General Partner's economic and other interests and risks in
the Partnership differ from those of the limited partners. In addition,
certain members of management may receive accelerated payments under
certain deferred compensation plans of the Operating Partnership. A benefit
to the General Partner of the Conversion which is not shared by all limited
partners generally is the elimination of liability of the
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General Partner for obligations and liabilities of SunSource which occur
after the Conversion. Limited partners were not separately represented in
establishing the terms of the Conversion. Such representation might have
caused the terms of the Conversion to be different in some respects from
those described herein. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risks Related to the Conversion -- Potential
Conflicts of Interest."
o Because of the Conversion, the Partnership and the limited partners will
forego the potential future tax benefits associated with operating in
partnership form immediately, rather than after December 31, 1997 and these
benefits will not therefore be available to the Partnership and the limited
partners. A corporation pays taxes on its taxable income and its
stockholders generally pay taxes on any dividends from the corporation,
whereas a partnership pays no tax and its partners pay tax on their share
of partnership net income whether or not distributions are made. Efforts
have been made over the last several years to have the December 31, 1997
deadline extended or eliminated. To date such efforts have been
unsuccessful. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Related to the Conversion -- Adverse Tax
Implications."
o Certain provisions of Delaware law and the Corporation's organizational
documents, as well as provisions of a stockholders agreement among certain
stockholders of the Corporation (the "Stockholder Agreement") and the
stockholder rights plan, contain provisions that may reduce the likelihood
of a takeover of the Corporation that, if successful, might permit
stockholders to receive a premium over the market price for the Common
Stock. See "DESCRIPTION OF CAPITAL STOCK."
o After the Conversion, holders of A Interests will no longer have their
contractual right under the Partnership Agreement to the priority return,
although they will be entitled to distributions on the Preferred Securities
before dividends are paid on the Common Stock. Holders of B Interests will
no longer have the right to tax distributions, although they will no longer
be taxed with respect to income of the Corporation. If the Conversion is
approved, the Board of Directors of the Corporation will have discretion to
defer payments on the Junior Subordinated Debentures. If such payments are
deferred, the Trust will be unable to make distributions on the Preferred
Securities, and the Corporation will be prohibited from paying dividends on
the Common Stock. The Board of Directors will also have discretion to
declare and pay dividends on the Common Stock, and there can be no
assurance that the Corporation will make dividend distributions. Management
presently intends not to recommend the payment of dividends on the Common
Stock in order to retain cash to fund the Corporation's acquisition program
and corporate requirements.
o The receipt of Preferred Securities and cash by the holders of A Interests
will be a taxable event.
o The receipt of Preferred Securities, Common Stock and cash by holders who
hold both A Interests and B Interests will likely be a taxable event.
o Issuances of additional shares of Common Stock or Preferred Stock by the
Corporation could adversely affect existing stockholders' equity interest
in the Corporation and the market price of the Common Stock. Although it
has no present plans to do so, after the Conversion, the Corporation may
consider issuing additional shares of Common Stock or Preferred Stock to
raise capital or for acquisitions. Issuances of additional shares may be
more likely after the Conversion because the General Partner believes that
one of the advantages of the Conversion is that the corporate form will
expand the potential investor base, provide greater access to equity
markets and permit the use of capital stock as acquisition currency.
o The fiduciary duties owed by the directors of the Corporation after the
Conversion may be less than those owed by the General Partner of the
Partnership before the Conversion, which may result in decreased potential
liability of the directors of the Corporation. See "COMPARISON OF INTERESTS
AND SECURITIES TO BE ISSUED -- Fiduciary Duties."
o Limited partners have no dissenters' or appraisal rights in the Conversion.
Therefore, limited partners will not be entitled to receive cash payments
from SunSource for the fair value of their Interests if they dissent and
the Conversion is approved and consummated.
o The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman Brothers and, subject to certain
limitations, by management, after the Conversion. Lehman Brothers and
management have agreed to cooperate to execute an underwritten secondary
offering of all or some portion of their shares of Common Stock as soon as
practicable after the effective date of the Conversion, subject to market
conditions. The Corporation has agreed not to sell any additional shares of
Common Stock prior to the earlier of such initial secondary offering and
the nine-month anniversary of the Conversion.
o Prior to the Conversion, there has been no public market for the Preferred
Securities or Common Stock. It is possible that, when first issued, the
Preferred Securities received by the holders of A Interests may trade at
prices below the historical trading level
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of the A Interests and the Common Stock received by the holders of the B
Interests may trade at prices below the historical trading levels of the B
Interests. If a large number of holders of Preferred Securities or Common
Stock were to offer their securities for sale immediately after
consummation of the Conversion, the market price of the particular security
could decline. Various anti-takeover provisions which would apply to the
Corporation after the Conversion could also have a negative effect on the
market price of the Common Stock.
o Transaction costs of approximately $________________ will be paid by the
Partnership, whether or not the Conversion is completed.
In addition to the factors noted above, an investment in SunSource
(whether in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and equity market conditions.
Reasons to Convert to Corporate Form
The Conversion will convert SunSource to corporate form, replacing
partnership interests presently held by limited partners with securities of the
Corporation and the Trust. The General Partner believes that there are six
principal reasons for converting to corporate form at this time, which are
discussed at greater length in "SPECIAL FACTORS -- Reasons to Convert to
Corporate Form":
o Expansion of Potential Investor Base. The General Partner anticipates that
the Conversion will expand SunSource's potential investor base to include
institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons.
In addition, the General Partner anticipates that the Common Stock (as
compared to Interests) will receive additional investor interest through
increased review and evaluation by research analysts.
o Conservation of Cash. The Corporation will conserve cash by the elimination
of the annual management fee of $3,330,000.
o Deductibility of Interest. Although the Corporation will have to pay tax on
its income, SunSource will conserve additional cash because (i) the
interest payable on the Junior Subordinated Debentures, which will
approximately equal the distributions currently paid on the A Interests, is
deductible for federal income tax purposes and (ii) of the difference in
rates between the B tax distribution, which will be eliminated, and the tax
that will become payable by the Corporation.
o Acquisition Currency. The General Partner believes that current industry
conditions may provide opportunities for SunSource to grow through the
acquisition of businesses and assets which are complementary to its
existing businesses. In certain cases, SunSource may want to be able to
issue equity interests as payment of the purchase price for such
acquisitions. The General Partner believes that an equity interest in a
corporation will be a more attractive acquisition currency to sellers than
an interest in a partnership. SunSource is not presently party to any
agreement or understanding regarding a material acquisition and currently
has no plans to make a material acquisition.
o Greater Access to Equity Markets. The General Partner expects that the
Corporation will have greater access to the public and private equity
capital markets than the Partnership, potentially enabling it to raise
capital on more favorable terms than are now available to the Partnership.
This greater access may be of particular benefit if SunSource proposes to
issue equity securities to reduce existing debt or to seek additional funds
for capital expenditures or otherwise expand its business.
o Tax Consequences and Tax Reporting. The benefit of being taxed as a
partnership will end under current law after December 31, 1997. In
addition, the General Partner believes that the complexities of tax
reporting associated with partnership investments are regarded as unduly
burdensome for most limited partners under current conditions. The
ownership of stock rather than Interests will greatly simplify tax
reporting with respect to an investment in SunSource on each limited
partner's individual federal and state income tax returns for future years.
Alternatives to the Conversion
The alternatives to the Conversion which were considered by the General
Partner were continuing the existence of the Partnership as a limited
partnership and the liquidation of the Partnership. The Board of Directors of
Lehman/SDI does not believe that either of these alternatives will be more
beneficial to the limited partners than the Conversion. The General Partner
believes that other long-term strategies available to SunSource, such as
diversification, disposition of assets and acquisition of assets, are not
materially adversely affected by the decision to convert.
-5-
<PAGE>
o The benefit of continuing the existence of the Partnership as a limited
partnership by reason of the possible reduction of aggregate federal income
taxes payable by the Partnership and its partners compared to the aggregate
federal income taxes payable by the Corporation and its stockholders with
respect to the income of SunSource, ends under current law on December 31,
1997. See "SPECIAL FACTORS -- Alternatives to the Conversion" and "--
Reasons to Convert to Corporate Form."
o The benefit of liquidating the Partnership at this time rather than
effecting the Conversion would be the possibility that the currently
realizable value of the Partnership assets may exceed the value of
SunSource as a continuing business. The General Partner believes that a
liquidation of the Partnership's assets at this time would not result in a
price which would produce an acceptable return to the limited partners,
after the repayment of debt and after paying all costs and expenses of
liquidating and winding up the Partnership, including taxes on the sale of
the assets. Furthermore, the holders of B Interests would not be able to
have a continuing equity interest in the business of the Partnership. See
"SPECIAL FACTORS -- Alternatives to the Conversion" and "--Recommendation
of the General Partner and Fairness Determination."
Structure of the Conversion
If approved by the limited partners, the Conversion will be effected as
follows:
o The Corporation will form three new wholly owned Delaware subsidiaries,
SunSub A, SunSub B and SunSub C and a new Delaware statutory business
trust, the Trust. At the Effective Time, the Partnership, and SunSub A and
SunSub B will be merged into the Operating Partnership as the survivor.
Pursuant to the Merger, (i) the A Interests will be converted into shares
of Preferred Securities of the Trust and cash and the Corporation will
issue the Junior Subordinated Debentures to the Trust; (ii) the B Interests
will be converted into shares of Common Stock of the Corporation; (iii) the
General Partner interests in the Partnership and the Operating Partnership
will be converted into shares of Common Stock of the Corporation; (iv) the
shares of SunSub A will be converted into a 1% general partnership interest
in the Operating Partnership; and (v) the shares of SunSub B will be
converted into a 99% limited partnership interest in the Operating
Partnership. Immediately following the Merger, the Corporation will
contribute the general partnership interest in the Operating Partnership to
SunSub C. Also, following the Merger, the General Partner will dissolve and
distribute the Common Stock of the Corporation received in the Merger to
its general and limited partners.
o As a result of the Merger, the former holders of the A Interests will be
holders of shares of Preferred Securities of the Trust and the former
holders of the B Interests and the partners of the General Partner will be
holders of shares of Common Stock of the Corporation.
o The Corporation will then be the holder of the 99% limited partnership
interest in the Operating Partnership and its wholly owned subsidiary,
SunSub C, will hold the 1% general partnership interest. See page 1 above
for a diagram of the corporate structure after the conversion.
Control of SunSource
The directors and certain officers of Lehman/SDI will become the
directors and officers of the Corporation at the time of the Conversion.
Special Committee
Because of its concern regarding the potential conflict of interest
between the General Partner and the limited partners with respect to the
determination of the exchange ratios for the exchange of partnership interests
for shares of the Corporation, in June 1996, the Board of Directors of
Lehman/SDI appointed a special committee consisting of two members of the Board
of Directors, O. Gordon Brewer, Jr. and Ernest L. Ransome, III (the "Special
Committee"), to consider and advise the Board with respect to the terms of the
Conversion as to the fairness of the terms of the Conversion to the limited
partners, and to make a recommendation to the Board of Directors with respect to
the Conversion. The members of the Special Committee were not otherwise
affiliated with the Partnership. Smith Barney Inc. ("Smith Barney") was retained
to advise the Special Committee as to the fairness from a financial point of
view to the limited partners of the exchange ratios. The Special Committee
retained Dechert Price & Rhoads as its counsel. The limited partners were not
independently represented in the evaluation or negotiation of the Conversion.
For a more detailed description of the deliberations of the Special
Committee and its determinations regarding certain matters
-6-
<PAGE>
related to the Conversion, see "SPECIAL FACTORS -- Determinations of the Special
Committee," "-- Opinion of Smith Barney," and Exhibit C to this Proxy
Statement/Prospectus.
For its services, Smith Barney has been paid a fee of $1,250,000. The
fee was not contingent upon the consummation of the Conversion or any other
occurrence. Smith Barney will also be indemnified against certain liabilities,
including liabilities under the Securities Act and the Exchange Act.
SunSource and its affiliates have had no relationship with Smith Barney
other than that described above.
Recommendation of General Partner and Fairness Determination
The Board of Directors of Lehman/SDI has determined that the Conversion
is fair in all respects to the limited partners. This belief is principally
based on the fairness opinion of Smith Barney and the deliberations concerning
the exchange ratios of the Special Committee consisting of disinterested
directors, and took into account the benefits of the Conversion to SunSource,
the alternatives of continuing in existence as a partnership and liquidation,
and other considerations, including the fact that the General Partner will no
longer have a fiduciary duty to the Partnership and its partners, and the fact
that it will no longer have any liability for the liabilities of SunSource after
the Conversion. See "SPECIAL FACTORS -- Determinations of the Special
Committee."
The General Partner believes that the Conversion is in the best
interests of the Partnership and the limited partners and recommends that the
limited partners approve the Conversion. See "SPECIAL FACTORS -- Determinations
of the Special Committee," "-- Opinion of Smith Barney," and "-- Recommendation
of the General Partner and Fairness Determination."
Summary Description of Preferred Securities
The Trust is a statutory business trust that was formed under the
Delaware Business Trust Act (the "Business Trust Act") on ______________. The
Trust's declaration of trust (the "Declaration") has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. The Trust
exists for the purpose of (a) issuing (i) its Preferred Securities to the
Corporation in consideration for the deposit by the Corporation of Junior
Subordinated Debentures in the Trust as trust assets, and (ii) its Common
Securities to the Corporation in exchange for cash and investing the proceeds
thereof in an equivalent amount of Junior Subordinated Debentures and (b)
engaging in such other activities as are necessary and incidental thereto. The
rights of the holders of the Trust Securities, including economic rights, rights
to information and voting rights, are as set forth in the Declaration, the
Business Trust Act and the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). See "SUNSOURCE CAPITAL TRUST" and "DESCRIPTION OF PREFERRED
SECURITIES." In the Declaration, the Corporation has agreed to pay for all debts
and obligations (other than with respect to the Trust Securities) and all costs
and expenses of the Trust, including the fees and expenses of the Trustees and
any income taxes, duties and other governmental charges, and all costs and
expenses with respect thereto, to which the Trust may become subject, except for
United States withholding taxes. See "RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS -- Risks Related to the Preferred Securities,"
"SUNSOURCE CAPITAL TRUST" and "DESCRIPTION OF PREFERRED SECURITIES."
The Preferred Securities evidence preferred undivided beneficial
interests in the assets of the Trust and will rank pari passu with, and have
terms equivalent to, the Common Securities; provided that (i) if an Event of
Default under the Declaration occurs and is continuing, the holders of Preferred
Securities will have a priority over holders of the Common Securities with
respect to payments in respect of distributions and payments upon liquidation,
redemption or otherwise and (ii) holders of Common Securities have the exclusive
right (subject to the terms of the Declaration) to appoint, remove and replace
Trustees and to increase or decrease the number of Trustees, subject to the
right of holders of Preferred Securities to appoint a Special Regular Trustee
upon the occurrence of an Appointment Event (as hereinafter defined). The
Declaration does not permit the issuance by the Trust of any securities or
beneficial interests in the assets of the Trust other than the Preferred
Securities and the Common Securities, the incurrence of any indebtedness for
borrowed money by the Trust or the making of any investments other than in the
Junior Subordinated Debentures. The Declaration defines an event of default with
respect to the Trust Securities (an "Event of Default") as the occurrence and
continuance of an "event of default" under the Indenture with respect to the
Junior Subordinated Debentures (an "Indenture Event of Default").
Periodic cash distributions on each Preferred Security will be fixed at
a rate per annum of $2.90 (11.6% of the stated liquidation amount of $25 per
Preferred Security). Distributions in arrears will compound monthly at the rate
per annum of 11.6% of the amount in arrears. Distributions on the Preferred
Securities will be cumulative, will accrue from the Accrual Date (as hereinafter
defined) and, except as otherwise described herein, will be made monthly in
arrears, on the last day of each calendar month of each year,
-7-
<PAGE>
commencing on April 30, 1997, but only if and to the extent that interest
payments are made in respect of the Junior Subordinated Debentures.
The distribution rate and the distribution and other payment dates for
the Preferred Securities will correspond to the interest rate and the interest
and other payment dates on the Junior Subordinated Debentures deposited in the
Trust as trust assets. As a result, if principal or interest is not paid on the
Junior Subordinated Debentures, including as a result of the Corporation's
election to extend the interest payment period on the Junior Subordinated
Debentures as described below, the Trust will not make payments on the Trust
Securities. The Junior Subordinated Debentures provide that, so long as the
Corporation shall not be in default in the payment of interest on the Junior
Subordinated Debentures, the Corporation has the right under the Indenture to
defer payments of interest on the Junior Subordinated Debentures by extending
the interest payment period from time to time on the Junior Subordinated
Debentures for a period not exceeding 60 consecutive months (each, an "Extension
Period") and, as a consequence, monthly distributions on the Preferred
Securities would not be made (but would continue to accrue with interest thereon
at the rate of 11.6% per annum, compounded monthly by the Trust during any such
Extension Period). During an Extension Period, the Corporation may not declare
or pay dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its Common Stock or Preferred Stock
or make any guarantee payments with respect thereto during such Extension
Period. Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period; provided that such Extension Period
together with all such previous and further extensions thereof may not exceed 60
consecutive months. Upon the termination of any Extension Period and the payment
of all amounts then due, the Corporation may commence a new Extension Period,
subject to the above requirements. The Corporation may also prepay at any time
all or any portion of the interest accrued during an Extension Period.
Consequently, there could be multiple Extension Periods of varying lengths
throughout the term of the Junior Subordinated Debentures. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks Related to the
Preferred Securities"; "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES --
Interest" and "-- Option to Extend Interest Payment Period."
The payment of distributions on the Preferred Securities and payments
on liquidation of the Trust and the redemption of Preferred Securities, as set
forth below, are guaranteed by the Corporation on a subordinated basis as and to
the extent set forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The
Preferred Securities Guarantee is a full and unconditional guarantee from the
time of issuance of the Preferred Securities, but the Preferred Securities
Guarantee covers contributions and other payments of the Preferred Securities
only if and to the extent that the Corporation has made a payment to the
Property Trustee of interest or principal on the Junior Subordinated Debentures
deposited in the Trust as trust assets.
The Preferred Securities and Common Securities are redeemable on a Pro
Rata Basis (as defined below) from time to time, in whole or in part, to the
same extent as the Junior Subordinated Debentures are redeemable by the
Corporation, on or after March 31, 2002, upon not less than 30 nor more than 60
days' notice, at $25 per Preferred Security plus accrued and unpaid
distributions thereon to the date of redemption, including distributions accrued
as a result of the Corporation's election to defer payments of interest on the
Junior Subordinated Debentures (the "Redemption Price"), payable in cash. The
Preferred Securities will be redeemed upon the maturity or earlier redemption of
the Junior Subordinated Debentures. See "DESCRIPTION OF PREFERRED SECURITIES --
Mandatory Redemption." As used in this Proxy Statement/Prospectus, the term "Pro
Rata Basis" shall mean pro rata to each holder of Trust Securities according to
the aggregate liquidation amount of the Trust Securities held by the relevant
holder in relation to the aggregate liquidation amount of all Trust Securities
outstanding unless, in relation to a payment, an Event of Default under the
Declaration has occurred and is continuing, in which case any funds available to
make such payment shall be paid first to each holder of the Preferred Securities
pro rata according to the aggregate liquidation amount of the Preferred
Securities held by the relevant holder in relation to the aggregate liquidation
amount of all Preferred Securities outstanding, and only after satisfaction of
all amounts owed to the holders of the Preferred Securities, to each holder of
Common Securities pro rata according to the aggregate liquidation amount of the
Common Securities held by the relevant holder in relation to the aggregate
liquidation amount of all the Common Securities outstanding.
In addition, upon the occurrence and during the continuation of a Tax
Event or an Investment Company Event (each as hereinafter defined) arising from
a change in law or a change in legal interpretation or other specified
circumstances, the Trust shall, unless the Junior Subordinated Debentures are
redeemed in the limited circumstances described below, be dissolved with the
result that the Junior Subordinated Debentures will be distributed to the
holders of the Preferred Securities and the Common Securities on a Pro Rata
Basis, in lieu of any cash distribution. In the case of a Tax Event, the
Corporation will have the right in certain circumstances to redeem the Junior
Subordinated Debentures at any time with the result that the Trust will redeem
the Trust Securities on a Pro Rata Basis to the same extent as the Junior
Subordinated Debentures are redeemed. Any redemption for a Tax Event within five
years after the Effective Time of the Conversion will be at $25.25 per Preferred
Security and thereafter at $25 plus, in each case, accrued and unpaid
distributions to the date of redemption. If the Junior Subordinated Debentures
are distributed to the holders of the Preferred Securities, the Corporation will
use its best efforts to have the Junior Subordinated Debentures listed on the
New York Stock Exchange
-8-
<PAGE>
or on such other exchange as Preferred Securities are then listed. See
"DESCRIPTION OF PREFERRED SECURITIES -- Special Event Redemption or
Distribution."
The Junior Subordinated Debentures will be issued pursuant to an
indenture, dated as of _______ (the "Indenture") between the Corporation and
CoreStates Bank N.A., as trustee (the "Indenture Trustee"). See "DESCRIPTION OF
JUNIOR SUBORDINATED DEBENTURES." The Junior Subordinated Debentures will mature
on March 31, 2027 and will bear interest at an annual rate of 11.6% from the
Accrual Date. Interest will be payable monthly in arrears on the last day of
each calendar month of each year, commencing on April 30, 1997; provided that,
as described above, so long as the Corporation shall not be in default in the
payment of interest on the Junior Subordinated Debentures, the Corporation shall
have the right to extend the interest payment period from time to time for a
period not exceeding 60 consecutive months. The Corporation has no current
intention of exercising its right to extend an interest payment period. However,
should the Corporation determine to exercise such right in the future, the
market price of the Preferred Securities is likely to be affected. See "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks
Related to the Preferred Securities" and "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Option to Extend Interest Payment Period."
The Corporation shall have the right to redeem the Junior Subordinated
Debentures, in whole or in part, from time to time, on or after March 31, 2002,
upon not less than 30 nor more than 60 days' notice, at a redemption price equal
to 100% of the principal amount to be redeemed, plus any accrued and unpaid
interest to the redemption date, including interest accrued as a result of the
Corporation's election to defer payments of interest on the Junior Subordinated
Debentures, payable in cash. In addition, upon the occurrence of a Tax Event,
the Corporation will also have the right if certain conditions are met to redeem
the Junior Subordinated Debentures in whole (but not in part), upon not less
than 30 nor more than 60 days' notice, at a redemption price equal to 101% of
the principal amount to be redeemed, plus any accrued and unpaid interest, to
the redemption date, at any time.
Comparative Rights of the Interests and the Securities to be Issued
If the Conversion is approved, the rights and limitations to which
holders of Preferred Securities and Common Stock will be subject will be similar
in some respects and will differ in other respects from those to which they are
subject as holders of Interests. These rights and limitations are discussed
below under "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED."
Summary of Certain Federal Income Tax Consequences
Subject to the assumptions and other matters discussed in this Proxy
Statement/Prospectus under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," neither
the Partnership nor the Corporation will recognize any gain or loss in
connection with the Conversion. The Conversion will be a taxable transaction to
holders of A Interests who will recognize gain or loss equal to the difference
between the sum of the amount of cash and the fair market value of the Preferred
Securities received in the Conversion and their tax basis in their A Interests.
Persons that hold only B Interests will not recognize gain or loss in connection
with the Conversion, except to the extent of any cash received in lieu of
fractional shares. Persons that hold both A Interests and B Interests will
likely be taxable on an aggregate basis and thus, depending on their basis for
the A and B Interests, may recognize gain in connection to the Conversion, but
should not be able to claim a deductible loss on the Conversion, as explained in
more detail below. The limited partners have been allocated and taxed on a share
of the Partnership's income and deductions while receiving cash distributions
from the Partnership which have been generally nontaxable to the limited
partners. In addition, no tax has been paid at the Partnership level. After
consummation of the Conversion, the holders of B Interests will become
stockholders of the Corporation. They will no longer be allocated income or
deductions, and distributions from the Corporation generally will be taxable as
dividends if made from current or accumulated earnings and profits. In addition,
the Corporation will be subject to tax on its taxable income.
Conditions to the Conversion
The principal conditions to the Conversion are (i) approval of the
Conversion by the votes of holders of A Interests and B Interests; (ii) approval
of the Preferred Securities and Common Stock for listing on the NYSE; (iii) no
withdrawal of the Special Committee's determination that the Conversion is fair
to the holders of A Interests and B Interests or of the fairness opinion of
Smith Barney; (iv) receipt of a satisfactory tax opinion; (v) the availability
of financing to refinance existing senior debt on terms acceptable to the
Corporation; and (vi) no material change in applicable law, including with
respect to the taxation of the Conversion, the Corporation or the Preferred
Securities.
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<PAGE>
No Appraisal Rights
Limited partners who object to the Conversion will have no appraisal,
dissenters' or similar rights. Therefore, limited partners will not be entitled
to receive cash payments from SunSource for the fair value of their Interests if
they dissent and the Conversion is approved and consummated. See "VOTING AND
PROXY INFORMATION -- No Appraisal Rights."
Consequences if Conversion Is Not Approved
If the Conversion is not approved by the limited partners, or if the
Conversion is not consummated for any other reason, the Partnership presently
intends to continue to operate as an ongoing business in its current form,
although the General Partner anticipates that, after December 31, 1997, the
Partnership would be taxed as a corporation for federal income tax purposes and
there would be no tax distributions with respect to the B Interests. No other
transaction is currently being considered by the Partnership as an alternative
to the Conversion, although the Partnership may from time to time explore other
alternatives. See "SPECIAL FACTORS --Consequences if Conversion is Not
Approved."
Voting at the Special Meeting
<TABLE>
<S> <C>
The Special Meeting......................... The Special Meeting will be held at
___________________________________, Philadelphia, Pennsylvania on March
__, 1997 at 10:00 a.m., local time.
Voting...................................... Each Interest entitles the holder thereof on the record date to one vote. Only
limited partners of the Partnership on the record date are entitled to vote at
the Special Meeting. January __, 1997 is the record date for the
determination of limited partners entitled to vote at the Special Meeting.
Interests Outstanding....................... On the record date, 11,099,573 A Interests and 21,675,746 B Interests
were outstanding.
Vote Required............................... Approval of the Conversion will require (i) the favorable vote of limited
partners holding a majority of the outstanding A Interests and B Interests,
each voting separately as a class and (ii) the favorable vote of unaffiliated
limited partners (limited partners other than affiliates of the General
Partner) holding a majority of the A Interests and B Interests held by
unaffiliated limited partners, each voting separately as a class. Directors,
executive officers and other affiliates of the General Partner own less than
1% of the outstanding A Interests and 46.3% of the outstanding B Interests
and have advised the Partnership that they each intend to vote their Interests
in favor of the Conversion in the first votes described above.
</TABLE>
List of Partners
Each limited partner has the right for a proper purpose reasonably
related to the limited partner's interest in the Partnership, upon reasonable
demand and at the limited partner's own expense, to have furnished to the
limited partner, upon notification to the General Partner at 2600 One Logan
Square, Philadelphia, PA 19103, Attention: Joseph M. Corvino, Secretary and Vice
President -- Finance, a current list of the name and last known business,
residence or mailing address of each partner.
Delivery of Depositary Receipts
Promptly after the Effective Time, the Corporation will cause to be
mailed to all limited partners of record a letter of transmittal containing
instructions with respect to the surrender of Depositary Receipts for A and B
Interests in exchange for certificates representing shares of Preferred
Securities and Common Stock and cash in the case of A Interests. Upon surrender
to the Corporation of one or more Depositary Receipts, together with a properly
completed letter of transmittal, there will be issued and mailed to former
limited partners a certificate or certificates representing the number of shares
of Preferred Securities and Common Stock (and related
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<PAGE>
Rights) to which such holder is entitled and a check for cash in the case of A
Interests. From and after the Effective Time, each such Depositary Receipt will
evidence only the right to receive shares of Preferred Securities or Common
Stock. No fractional shares will be issued. Instead, (i) each holder of A
Interests will be entitled to receive cash in an amount equal to the fraction of
a share of Preferred Securities to which the holder is otherwise entitled
multiplied by the average closing price of the Preferred Securities for the five
trading days following the Effective Time; and (ii) each holder of B Interests
shall be entitled to receive cash in an amount equal to the fraction of a share
of Common Stock to which the holder is otherwise entitled multiplied by the
average closing price of the Common Stock for the five trading days following
the Effective Time. Limited partners should not send any Depositary Receipts
with the enclosed proxy. They should retain such Depositary Receipts until their
receipt of the letter of transmittal after the Effective Time.
Reverse Stock Split
As a result of the one-for-four reverse stock split, each holder of B Interests
will receive one post-split share of Common Stock for every four B Interests
held by such holder prior to the Conversion. The General Partner believes that
current trading prices for the B Interests reduce the attractiveness of the
Corporation's equity securities to the financial community and the investing
public. The reverse stock split will not affect a holder's percentage ownership
in the Corporation or of the outstanding Common Stock (except for minor
differences resulting from the aggregation and sale of fractional shares as
described herein). It is impossible to predict the market's reaction to any
reverse stock split or, in this case, to separate that reaction from the
market's reaction to the Conversion as a whole. However, the Corporation would
expect that immediately after the reverse stock split each share of Common Stock
would be valued at a price approximately four times greater than without the
split.
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<PAGE>
SUMMARY FINANCIAL INFORMATION OF THE PARTNERSHIP
AND SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE CORPORATION
(dollars in thousands, except for per unit data)
The following tables set forth summary consolidated historical and unaudited pro
forma financial and operating data of the Partnership and the Corporation as of
the dates and for the periods indicated. The summary historical financial
information of the Partnership for the years ended December 31, 1995, 1994,
1993, 1992 and 1991, has been derived from financial statements which have been
audited by Coopers & Lybrand L.L.P., independent accountants. The financial
data for the nine-month periods ending September 30, 1996 and 1995 are derived
from unaudited financial statements. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which the Partnership
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1996. The summary unaudited
pro forma financial information gives effect to the Conversion as if it occurred
at the beginning of the period for the pro forma income statement data presented
and as of the date presented with respect to the balance sheet data. The summary
financial information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Partnership and the unaudited Pro
Forma Financial Statements and Notes thereto of the Corporation included
elsewhere herein. See "INDEX TO FINANCIAL STATEMENTS." See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for
acquisitions and divestitures that affect comparability, and for a discussion of
the Corporation's recently announced restructuring plans.
<TABLE>
<CAPTION>
P A R T N E R S H I P - H I S T O R I C A L
--------------------------------------------------------------------------------------------
UNAUDITED
Nine Months Ended Years Ended
September 30, December 31,
------------------------- -----------------------------------------------------------------
INCOME STATEMENT DATA: 1996 1995 1995 1994 1993 1992 1991
--------- ---------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $489,517 $455,501 $599,865 $558,754 $493,437 $452,140 $420,619
Income from operations 24,914 25,623 31,302 37,759 28,975 29,712 27,255
Gain on Sale of Divisions -- 16,500 20,644 3,523 -- -- --
Provision (benefit) for income
taxes (372) 362 537 100 869 493 630
Income before extraordinary loss
and cumulative effect of change in
accounting principle 20,609 36,067 44,745 29,544 18,506 17,691 15,073
Extraordinary loss -- (629) (629) -- -- (3,434) --
Cumulative effect on prior years of
change in accounting principle -- -- -- -- -- 822 --
Net income $20,609 $35,438 $44,116 $29,544 $18,506 $15,079 $15,073
Net income per limited partnership
interest:
- Class A $ 0.82 $ 0.82 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class B $ 0.52 $ 1.20 $ 1.45 $ 0.79 $ 0.28 $ 0.13 $ 0.13
Cash distributions declared per
limited
partnership interest: $ 0.82 $ 0.82 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class A $ 0.23 $ 0.55 $ 0.67 $ 0.49 $ 0.27 $ 0.13 $ 0.13
- Class B
Weighted average number of
outstanding
limited partnership interests 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573
- Class A interests 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746
- Class B interests
</TABLE>
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<TABLE>
<CAPTION>
UNAUDITED
Nine Months Ended Years Ended
September 30, December 31,
------------------------- -----------------------------------------------------------------
INCOME STATEMENT DATA: 1996 1995 1995 1994 1993 1992 1991
--------- ---------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided by operating
activities $20,623 $ 7,683 $17,050 $17,704 $23,571 $27,056 $30,038
Total assets 263,303 257,567 254,591 266,186 273,493 261,588 264,544
Long-term debt and capitalized
lease obligations 63,934 70,465 63,934 74,781 104,185 115,505 120,108
</TABLE>
C O R P O R A T I O N - P R O F O R M A
---------------------------------------
U N A U D I T E D
-----------------
Nine Months Ended Year Ended
September 30, December 31,
-------------------- ------------
INCOME STATEMENT DATA 1996 1995 1995
---- ---- ----
Net sales $489,517 $455,501 $599,865
Income from operations 27,405 27,718 34,362
Distribution on guaranteed
preferred beneficial interest in the
Corporation's junior subordinated
debentures (9,174) (9,174) (12,232)
Income before income taxes 12,987 13,350 15,908
Provision for income taxes 5,920 6,511 7,882
Net income 7,067 6,839 8,026
Net income per common share $1.10 $1.07 $1.25
Weighted average number of
outstanding common shares 6,418,936 6,418,936 6,418,936
BALANCE SHEET DATA: September 30,
1996
----
Total assets $269,039
Long-term debt 100,674
Guaranteed preferred beneficial
interests in Corporation's Junior
Subordinated Debentures 105,446
Stockholders deficit $ (22,373)
Negative book value per common
share $ (3.49)
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RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS
Before completing the enclosed form of proxy, each limited partner
should carefully read this entire Proxy Statement/Prospectus, including the
Exhibits and the Partnership's Form 10-K for the year ended December 31, 1995
and the other documents incorporated herein by reference, and should give
particular attention to the following considerations.
Risks Related to the Conversion
Potential Conflicts of Interest
The General Partner is proposing the Conversion because it
believes that it is in the best interests of the limited partners. The General
Partner may, however, be viewed as having a potential conflict of interest with
the limited partners with respect to the determination of the consideration to
be received. Furthermore, the General Partner will receive a benefit from the
Conversion which is not shared by all limited partners generally in the
elimination of its liability for obligations and liabilities of SunSource which
may occur after the Conversion. If these potential conflicts of interest did not
exist, it is possible that the terms of the Conversion might be different than
the terms approved by the Board of Directors of the General Partner. For
additional information concerning the potential conflicts of interest between
the General Partner and the limited partners in the Conversion and the
procedures adopted by the General Partner to prevent these conflicts from having
an impact on the terms of the Conversion, see "SPECIAL FACTORS --Background of
the Conversion," "-- Determinations of the Special Committee," "-- Opinion of
Smith Barney," and "--Recommendation of the General Partner and Fairness
Determination."
No Independent Representation
The Conversion was proposed by the General Partner and
negotiated by the Special Committee with the General Partner without independent
representation of the limited partners. Independent representation on behalf of
the limited partners might have caused the terms of the Conversion to be
different in material respects from those described herein. In addition, Smith
Barney, the independent investment banking firm retained by the Special
Committee on behalf of the Partnership to render its opinion as to the fairness,
from a financial point of view, of the exchange ratios, was not separately
selected by the limited partners.
Adverse Tax Implications
A primary disadvantage of converting to corporate form is tax
related. The principal tax disadvantage is that a corporation pays taxes on its
taxable income, and its stockholders generally pay taxes on any dividends from
the corporation out of current or accumulated earnings and profits; whereas a
partnership pays no tax and its partners pay tax on their distributive share
(whether or not actually distributed) of the Partnership's taxable income, gain,
loss, deductions and credits. Under current law, the Partnership will be taxed
as a corporation after December 31, 1997; however, efforts have been made to
extend this date and there can be no assurance that further efforts in this
regard will not be successful. As a result of a conversion of the Partnership to
corporate form, limited partners will forego the potential future tax benefits
associated with operating in partnership form, including primarily the right,
through December 31, 1997, to have the Partnership income subject to only one
level of federal income taxation.
In addition, the Conversion will be a taxable transaction to
holders of A Interests, who will recognize gain or loss equal to the difference
between the cash and the fair market value of the Preferred Securities received
in the Conversion and their tax basis in their A Interests, and to holders of
both A and B Interests. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Addition of Provisions that May Discourage Changes of Control
The Partnership Agreement of the Partnership contains many
provisions which are designed to vest in the General Partner the right to manage
the business of the Partnership and to restrict the right of the limited
partners to change management and to approve transactions of a type which are
generally subject to stockholder approval in the case of a corporation. The
Partnership does not hold annual meetings of limited partners and does not
permit limited partners to vote on many of the matters upon which stockholders
of the Corporation will be permitted to vote. Upon effectiveness of the
Conversion, the Partnership will terminate and the stockholders will have the
rights described under the captions "DESCRIPTION OF PREFERRED SECURITIES,"
"DESCRIPTION OF CAPITAL STOCK" and "COMPARISON OF INTERESTS AND SECURITIES TO BE
ISSUED."
The Corporation's Certificate of Incorporation and By-laws,
the Stockholders Agreement and the stockholder rights plan contain certain
provisions that may have the effect of encouraging persons considering an
acquisition or takeover of the Corporation to negotiate with the Board of
Directors rather than to pursue non-negotiated acquisitions or takeover attempts
that a stockholder might consider to be in the stockholders' best interests,
including offers that might result in a premium over market price for the Common
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Stock. These provisions include authorization for the Board of Directors to
issue classes or series of Preferred Stock, a prohibition on stockholder action
by written consent and a requirement that stockholders notify the Corporation in
advance of any director nominees or items of business to be proposed at any
meeting of stockholders. See "DESCRIPTION OF CAPITAL STOCK -- Anti-takeover
Provisions." In addition, the deferred compensation plans of the Operating
Partnership will continue to provide that, upon the occurrence of a change in
control as defined in the plans, the vesting provisions of awards under the
plans will be accelerated. See "MANAGEMENT -- Deferred Compensation Plans."
These provisions may reduce interest in the Corporation as a potential
acquisition target or reduce the likelihood of a change in the management or
voting control of the Corporation without the consent of the then incumbent
Board of Directors.
Loss of Contractual Right to Distributions
The Partnership Agreement requires the Partnership to
distribute Available Cash to the A Interests to the extent of the Priority
Return and to the B Interests to the extent of the Tax Distribution. However,
Available Cash is determined after deducting such reserves as the General
Partner, in its sole discretion, determines to be necessary for capital
expenditures and other business purposes. After converting into corporate form,
limited partners will lose this contractual right. Payment of distributions on
the Preferred Securities by the Trust will depend on payments by the Corporation
on the Junior Subordinated Debentures which can be deferred for as long as five
years. The Board of Directors of the Corporation will have complete discretion
as to the distribution of dividends on the Common Stock. It is the intention of
the Board of Directors not to declare dividends on the Common Stock for the
foreseeable future; future dividends will depend on, among other things, the
future after-tax earnings, operations, capital requirements, borrowing capacity
and financial condition of the Corporation and general business conditions.
Future Dilution of Common Stock
The Corporation will be permitted to issue additional equity
or debt securities, including shares of Preferred Stock. Issuances of additional
shares of Common Stock or shares of Preferred Stock could adversely affect
stockholders' equity interest in the Corporation and the market price of the
Common Stock, and the interests in the assets, liabilities, cash flow and
results of operations of the Corporation represented by the shares of Common
Stock issued pursuant to the Conversion may be diluted. Issuances of additional
shares may be more likely after the Conversion because the General Partner
believes that one of the advantages of the Conversion is that the corporate form
will expand the potential investor base, provide greater access to equity
markets and permit the use of capital stock as acquisition currency. Holders of
Common Stock will not be entitled to preemptive rights.
Possible Reduction in Fiduciary Standards
At least one Delaware court has stated that the fiduciary
duties of a general partner to limited partners are comparable to those of a
director to stockholders. Other courts, however, have indicated that the
fiduciary duties of a general partner are greater than those of a director to
stockholders. Therefore, although it is unclear whether or to what extent there
are any differences in such fiduciary duties, it is possible that the fiduciary
duties of directors of the Corporation to its stockholders could be less than
those of the General Partner to the limited partners, which may result in
decreased potential liability of the directors of the Corporation. The
Certificate of Incorporation of the Corporation expressly limits the potential
liabilities of the directors for certain breaches of their fiduciary duties.
See "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED -- Fiduciary Duties."
Elimination of General Partner Liability for Corporation Obligations
The General Partner will receive a benefit from the Conversion
which is not shared by all limited partners generally in the elimination of its
liability for obligations and liabilities of SunSource which may occur after the
Conversion. Under Delaware law, as a general partner of the Partnership, the
General Partner is liable to the extent of its assets for the debts and
obligations of the Partnership. If the Conversion is consummated, the General
Partner would be a stockholder of the Corporation and would not have liability
for the debts and obligations of the Corporation.
No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited
Partners
If the limited partners approve the Conversion, all holders of
Interests will be bound by such approval even though they, individually, may
have voted against the Conversion. Under applicable state law and the terms of
the Partnership Agreement, limited partners will have no dissenters', appraisal
or similar rights in connection with the Conversion, nor will such rights be
voluntarily accorded to limited partners by the Partnership or the Corporation.
Therefore, limited partners will not be entitled to receive cash payment from
SunSource for the fair value of their Interests if they dissent and the
Conversion is approved and consummated. See "VOTING AND PROXY INFORMATION -- No
Appraisal Rights."
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Uncertainty Regarding Market Price for Preferred Securities and Common
Stock
At present there is no trading market for the Preferred
Securities and Common Stock. Application has been made to list these securities
on the NYSE under the trading symbols SDP for the Preferred Securities and SDPB
for the Common Stock. There can be no assurance that holders will be able to
sell their securities at favorable prices or that the trading prices for the
securities will be comparable to the trading prices for the Interests prior to
consummation of the Conversion. A large number of securities may be traded by
former limited partners immediately following completion of the Conversion for
various reasons, including the perceived increased liquidity that the securities
may afford to limited partners. This might tend to depress the market price of
the securities. The Corporation has agreed to file registration statements for
the sale of shares of Common Stock by Lehman Brothers and subject to certain
limitations, by management after the Conversion.
The closing prices on the New York Stock Exchange on January
__, 1996 for A Interests and B Interests were $____ and $____, respectively.
Various anti-takeover provisions which would apply to the
Corporation after the Conversion could also have a negative effect on the market
price of the Common Stock.
Sale of Common Stock by Lehman Brothers and Management
The Corporation has agreed to file registration statements for
the sale of shares of Common Stock by Lehman Brothers and, subject to certain
limitations, by management after the Conversion. Lehman Brothers and management
have agreed to cooperate to execute an underwritten secondary offering of all or
some portion of their shares of Common Stock as soon as practicable after the
effective date of the Conversion, subject to market conditions.
The Corporation has agreed not to sell any additional shares
of Common Stock prior to the earlier of such initial secondary offering and the
nine-month anniversary of the Conversion.
Transaction Costs
Transaction costs of approximately $__________ will be paid by
the Partnership, whether or not the Conversion is completed.
Change in Ownership Rights
As a result of the Conversion, limited partners will lose
certain rights associated with their ownership of Interests and will acquire
certain rights associated with their ownership of Preferred Securities and
shares of Common Stock. A comparison of these factors, which may relate to
investment objectives of limited partners, is set forth in "COMPARISON OF
INTERESTS AND SECURITIES TO BE ISSUED."
Risks Related to the Preferred Securities
Ranking of Subordinated Obligations under Preferred Securities
Guarantee and Junior Subordinated Debentures; Dependence on the
Corporation
The obligations of the Corporation under the Junior
Subordinated Debentures are unsecured obligations of the Corporation and will be
subordinate and junior in right of payment to Senior Indebtedness of the
Corporation but senior to its capital stock. The Corporation's obligations under
the Preferred Securities Guarantee are unsecured and will rank (i) subordinate
and junior in right of payment to all other liabilities of the Corporation,
including the Junior Subordinated Debentures, except those made pari passu or
subordinate by their terms, and (ii) senior to all capital stock now or
hereafter issued by the Corporation and to any guarantee now or hereafter
entered into by the Corporation in respect of its capital stock. Because the
Corporation is a holding company, the Junior Subordinated Debentures (and the
Corporation's obligations under the Preferred Securities Guarantee) are also
effectively subordinated to all existing and future liabilities, including trade
payables, of the Operating Partnership and other subsidiaries of the
Corporation, except to the extent that the Corporation is a creditor of the
subsidiaries recognized as such. There are no terms in the Preferred Securities,
the Junior Subordinated Debentures or the Preferred Securities Guarantee that
limit the Corporation's ability to incur additional indebtedness, including
indebtedness that ranks senior to or pari passu with the Junior Subordinated
Debentures and the Preferred Securities Guarantee, or the ability of its
subsidiaries to incur additional indebtedness. See "DESCRIPTION OF PREFERRED
SECURITIES GUARANTEE -- Status of the Preferred Securities Guarantee" and
"DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Subordination."
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The Indenture provides that the Corporation shall pay all
debts and obligations (other than with respect to the Trust Securities) and all
costs and expenses of the Trust, including any taxes and all costs and expenses
with respect thereto, to which the Trust may become subject, except for United
States withholding taxes. No assurance can be given that the Corporation will
have sufficient resources to enable it to pay such debts, obligations, costs and
expenses on behalf of the Trust.
Enforcement of Certain Rights by Holders of Preferred Securities
If an Event of Default (as defined herein) under the
Declaration occurs and is continuing, then the holders of Preferred Securities
would rely on the enforcement by the Property Trustee (as defined herein) of its
rights as a holder of the Junior Subordinated Debentures against the
Corporation. The holders of a majority in liquidation amount of the Preferred
Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Property Trustee or to
direct the exercise of any trust or power conferred upon the Property Trustee
under the Declaration, including the right to direct the Property Trustee to
exercise the remedies available to it as a holder of the Junior Subordinated
Debentures. If the Property Trustee fails to enforce its rights with respect to
the Junior Subordinated Debentures held by the Trust, any record holder of
Preferred Securities may institute legal proceedings directly against the
Corporation to enforce the Property Trustee's rights under such Junior
Subordinated Debentures without first instituting any legal proceedings against
such Property Trustee or any other person or entity.
The Trust's ability to make distributions and other payments
on the Preferred Securities is solely dependent upon the Corporation making
interest and other payments on the Junior Subordinated Debentures deposited as
trust assets as and when required. If the Corporation were not to make
distributions or other payments on the Junior Subordinated Debentures for any
reason, including as a result of the Corporation's election to defer the payment
of interest on the Junior Subordinated Debentures by extending the interest
period on the Junior Subordinated Debentures, the Trust will not make payments
on the Trust Securities. In such an event, holders of the Preferred Securities
would not be able to rely on the Preferred Securities Guarantee since
distributions and other payments on the Preferred Securities are subject to such
Guarantee only if and to the extent that the Corporation has made a payment to
the Property Trustee of interest or principal on the Junior Subordinated
Debentures deposited in the Trust as trust assets. Instead, holders of Preferred
Securities would rely on the enforcement by the Property Trustee of its rights
as registered holder of the Junior Subordinated Debentures against the
Corporation pursuant to the terms of the Indenture and may vote to appoint a
Special Regular Trustee. In the event the Corporation failed to pay interest on
or principal of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
directly institute a proceeding against the Corporation under the Indenture for
enforcement of payment to such holder of the interest on or principal of such
Junior Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of the Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Corporation will be
subrogated to the rights of such holder of Preferred Securities under the
Declaration to the extent of any payment made by the Corporation to such holder
of Preferred Securities in such Direct Action. Except as set forth herein,
holders of Preferred Securities will not be able to exercise directly any other
remedy available to the holders of Junior Subordinated Debentures or assert
directly any other rights in respect of the Junior Subordinated Debentures. See
"DESCRIPTION OF PREFERRED SECURITIES GUARANTEE," and "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Indenture Events of Default." If the Trust's failure
to make distributions on the Preferred Securities is a consequence of the
Corporation's exercise of its right to extend the interest payment period for
the Junior Subordinated Debentures, the Property Trustee will have no right to
enforce the payment of distributions on the Preferred Securities until an Event
of Default under the Declaration shall have occurred.
Option to Extend Interest Payment Period; Tax Impact of Extension
So long as the Corporation shall not be in default in the
payment of interest on the Junior Subordinated Debentures, the Corporation has
the right under the Indenture to defer payments of interest on the Junior
Subordinated Debentures by extending the interest payment period from time to
time for an Extension Period not exceeding 60 consecutive months, during which
no interest shall be due and payable. In such an event, monthly distributions on
the Preferred Securities would not be made (but would continue to compound
monthly at the rate of 11.6% per annum) by the Trust during any such Extension
Period. If the Corporation exercises the right to extend an interest payment
period, the Corporation may not during such Extension Period declare or pay
dividends on, or redeem, purchase, acquire or make a distribution or liquidation
payment with respect to, any of its Common Stock or Preferred Stock.
<PAGE>
Prior to the termination of any Extension Period, the
Corporation may further extend such Extension Period; provided that such
Extension Period together with all such previous and further extensions thereof
may not exceed 60 consecutive months. Upon the termination of any Extension
Period and the payment of all amounts then due, the Corporation may commence a
new Extension Period, subject to the above requirements. The Corporation may
also prepay at any time all or any portion of the interest accrued during an
Extension Period. Consequently, there could be multiple Extension Periods of
varying lengths throughout the term of the Junior Subordinated Debentures. See
"DESCRIPTION OF PREFERRED SECURITIES -- Distributions" and "DESCRIPTION OF THE
JUNIOR SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period."
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Because the Corporation has the right to extend the interest
payment period up to 60 consecutive months on various occasions, the Junior
Subordinated Debentures will be treated as issued with "original issue discount"
for United States federal income tax purposes. As a result, holders of Preferred
Securities will be required to include their pro rata share of original issue
discount in gross income as it accrues for United States federal income tax
purposes in advance of the receipt of cash. Generally, all of a securityholder's
taxable interest income with respect to the Junior Subordinated Debentures will
be accounted for as "original issue discount" and actual distributions of stated
interest will not be separately reported as taxable income. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders
of A Interests -- Accrual of Original Issue Discount and Premium" and "--
Potential Extension of Payment Period on the Junior Subordinated Debentures."
As described above, the Corporation has the right to extend an
interest payment period on the Junior Subordinated Debentures from time to time
for a period not exceeding 60 consecutive monthly interest periods. If the
Corporation determines to extend an interest payment period, or if the
Corporation thereafter extends an Extension Period or prepays interest accrued
during an Extension Period as described above, the market price of the Preferred
Securities is likely to be affected. In addition, as a result of such rights,
the market price of the Preferred Securities (which represent an undivided
interest in Junior Subordinated Debentures) may be more volatile than other
securities on which original issue discount accrues that do not have such
rights. A holder that disposes of Preferred Securities during an Extension
Period, therefore, may not receive the same return on investment as a holder
that continues to hold its Preferred Securities. See "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period."
Unlike the A Interests, which are not subject to mandatory or
optional redemption by the Partnership, the Junior Subordinated Debentures held
by the Trust may be redeemed by the Corporation at 100% of the liquidation
amount plus accrued and unpaid distributions at any time after March 31, 2002.
Special Event Redemption or Distribution
Upon the occurrence and during the continuation of a Tax Event
or Investment Company Event (each as defined herein), which may occur at any
time, the Trust shall, unless the Junior Subordinated Debentures are redeemed in
the circumstances described below, be dissolved with the result that, in the
manner described in "DESCRIPTION OF PREFERRED SECURITIES --Liquidation
Distribution Upon Dissolution," Junior Subordinated Debentures having an
aggregate principal amount equal to the aggregate stated liquidation amount of,
and bearing accrued and unpaid interest equal to accrued and unpaid
distributions on, the Preferred Securities and Common Securities would be
distributed on a Pro Rata Basis to the holders of the Preferred Securities and
Common Securities in liquidation of the Trust. In the case of a Tax Event, in
certain circumstances, the Corporation shall have the right to redeem at any
time the Junior Subordinated Debentures, in whole or in part, in which event the
Trust will redeem Preferred Securities and Common Securities on a Pro Rata Basis
to the same extent as the Junior Subordinated Debentures are redeemed. The price
paid on such redemption will be $25.25 in respect of each Preferred Security if
the redemption in the case of a Tax Event occurs within five years of the
Conversion and $25 thereafter. There can be no assurance as to the market prices
for Preferred Securities or the Junior Subordinated Debentures which may be
distributed in exchange for Preferred Securities if a dissolution and
liquidation of the Trust were to occur. Accordingly, the Preferred Securities or
the Junior Subordinated Debentures which the investor may receive on dissolution
and liquidation of the Trust, may trade at a discount. See "DESCRIPTION OF
PREFERRED SECURITIES -- Special Event Redemption or Distribution" and
"DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- General."
Under current United States federal income tax law and
interpretation thereof and assuming, as expected, the Trust is treated as a
grantor trust for United States federal income tax purposes, a distribution by
the Trust of the Junior Subordinated Debentures pursuant to a liquidation of the
Trust will not be a taxable event to the Trust or to holders of the Preferred
Securities and will not result in a holder of the Preferred Securities receiving
directly such holder's pro rata share of the Junior Subordinated Indentures
(previously held indirectly through the Trust). If, however, the liquidation of
the Trust were to occur because the Trust is subject to United States federal
income tax with respect to income accrued or received on the Junior Subordinated
Debentures as a result of the occurrence of a Tax Event or otherwise, the
distribution of Junior Subordinated Debentures to holders of the Preferred
Securities by the Trust would be a taxable event to the Trust and each holder,
and holders of the Preferred Securities would recognize gain or loss as if they
had exchanged their Preferred Securities for the Junior Subordinated Debentures
they received upon the liquidation of the Trust. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders of A
Interests -- Distribution of Junior Subordinated Debentures to Holders of
Preferred Securities."
On March 19, 1996, the Revenue Reconciliation Bill of 1996
(the "Bill") was introduced in the 104th Congress which would have, among other
things, generally denied interest deductions on a debt instrument that had a
maximum weighted average maturity of more than 40 years. The Bill also would
generally deny interest deductions for interest on an instrument, issued by a
corporation, that has a maximum term of more than 30 years and that is not shown
as indebtedness on the separate balance sheet of the
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issuer or, where the instrument is issued to a related party (other than a
corporation), where the holder or some other related party issues a related
instrument that is not shown as indebtedness on the issuer's consolidated
balance sheet. For purposes of determining the weighted average maturity or the
term of an instrument, any right to extend would be treated as exercised. The
above-described provisions of the Bill were proposed to be effective generally
for instruments issued on or after December 7, 1995. If either provision were to
apply to the Junior Subordinated Debentures, the Company would not be able to
deduct interest on the Junior Subordinated Debentures. However, on March 29,
1996, the Chairmen of the Senate Finance and House Ways and Means Committees
issued a joint statement (the "Joint Statement") to the effect that it was their
intention that the effective date of the Bill, if enacted, would be no earlier
that the date of appropriate Congressional action. In addition, subsequent to
the publication of the Joint Statement, Senator Daniel Patrick Moynihan and
Representatives Sam M. Gibbons and Charles B. Rangel wrote letters to Treasury
Department officials concurring with the view expressed in the Joint Statement
(the "Democrat Letters"). The 104th Congress adjourned without enacting the
Bill. Moreover, if the principles contained in the Joint Statement and the
Democrat Letters were followed, any similar legislation that is subsequently
proposed or enacted would not apply to the Junior Subordinated Debentures. There
can be no assurance however, that current or future legislative or
administrative proposals or final legislation will not adversely affect the
ability of the Company to deduct interest on the Junior Subordinated Debentures
or otherwise affect the tax treatment described herein. Such a change,
therefore, could give rise to a Tax Event, which would permit the Company to
cause a redemption of the Preferred Securities or to dissolve the Trust and
distribute the Junior Subordinated Debentures to the holders of Trust Securities
in liquidation of the Trust upon receiving an opinion of counsel as described
more fully under "DESCRIPTION OF CAPITAL STOCK -- Redemption -- Special Event
Redemption or Distribution of Junior Subordinated Debentures."
Limited Voting Rights
Holders of Preferred Securities will have limited voting
rights and, subject to the rights of holders of Preferred Securities to appoint
a Special Regular Trustee upon the occurrence of an Appointment Event, will not
be able to appoint, remove or replace, or to increase or decrease the number of,
Trustees, which rights are vested exclusively in the holders of Common
Securities.
Other Considerations
In addition to the factors noted above, an investment in SunSource
(whether in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and equity market conditions. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent
Developments."
VOTING AND PROXY INFORMATION
Voting Procedures
Under the Partnership Agreement, a holder of an Interest may vote only
if the holder has been admitted as a limited partner of the Partnership on or
before the record date for the Special Meeting. Each Interest entitles the
holder thereof to one vote with respect to matters to be voted on at the Special
Meeting. The General Partner has set the close of business on January __, 1997
as the record date (the "Record Date") for the determination of limited partners
entitled to vote at the Special Meeting.
The Partnership will accept proxies at any time before the Conversion
is voted on at the Special Meeting. The enclosed form of proxy, when properly
completed and returned, will constitute a limited partner's vote for or against,
or abstention on, the Conversion. If a limited partner returns a form of proxy
duly signed without voting, the limited partner will be deemed to have voted for
the Conversion.
Revocation of Proxies
A limited partner may revoke a proxy any time during the solicitation
period before its exercise by (i) delivering written notice of revocation to the
Partnership, (ii) executing and delivering to the Partnership a later dated form
of proxy or (iii) voting in person at the Special Meeting. Any such written
notice or later dated proxy should be sent to SunSource L.P., 2600 One Logan
Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino,
Secretary.
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Vote Required; Quorum
Approval of the Conversion will require (i) the affirmative vote of
limited partners holding an aggregate of more than 50% of the outstanding A
Interests and B Interests, each voting separately as a class, and (ii) the
affirmative vote of unaffiliated limited partners (limited partners other than
affiliates of the General Partner) holding an aggregate of more than 50% of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class. As of the Record Date, there were 11,099,573 A Interests
outstanding, of which 11,019,850 were held by unaffiliated holders, and
21,675,746 B Interests outstanding, of which 11,663,603 were held by
unaffiliated holders. The presence, in person or by proxy, of limited partners
holding an aggregate of more than 50% of each class will constitute a quorum at
the Special Meeting. Abstentions and broker non-votes will be treated as present
for the purpose of determining a quorum but will have the effect of votes
against the Conversion Proposal.
The executive officers, directors and other affiliates of the General
Partner own less than 1% of the outstanding A Interests and 46.3% of the
outstanding B interests. They have advised the Partnership that they each intend
to vote their Interests in favor of the Conversion, although they will not
participate in the votes by the unaffiliated holders of A Interests and B
Interests. For further information concerning the ownership of Interests by the
General Partner's affiliates, executive officers and directors, see "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Solicitation of Proxies
This solicitation is being made by the General Partner on behalf of the
Partnership. The Partnership will pay the cost of soliciting proxies. The
Partnership will reimburse brokerage houses and other nominees for their
reasonable expenses of forwarding proxy materials to beneficial owners of
Interests. The Partnership has retained ________________________ to aid in the
solicitation of proxies and to verify certain records related to the
solicitation of proxies for a fee of $_______ plus expenses. In addition,
representatives of SunSource may meet with brokers, research analysts and other
members of the investment community to discuss the Conversion. Representatives
of SunSource may also contact limited partners in person or by telephone, or
arrange meetings with limited partners to discuss the Conversion.
Independent Auditors
Representatives of Coopers & Lybrand L.L.P., the Partnership's
independent accountants, are expected to be present at the Special Meeting.
No Appraisal Rights
Limited partners who object to the Conversion will have no appraisal,
dissenters' or similar rights (i.e., the right, instead of receiving securities
of the Corporation, to seek a judicial determination of the "fair value" of
their Interests and to compel SunSource to purchase their Interests for cash in
that amount) under state law or the Partnership Agreement, nor will such rights
be voluntarily accorded to limited partners by SunSource. Thus, approval of the
Conversion by the requisite vote of limited partners will bind all limited
partners, and objecting limited partners will have no alternative to receipt of
securities of the Corporation other than selling their Interests (or securities
of the Corporation) in the open market.
Other Matters
The enclosed form of proxy grants discretionary authority to the
persons named to vote on any other matters that may properly come before the
Special Meeting. The Partnership is not aware of any other proposals planned to
be made at the Special Meeting and has no current intention of making any
additional proposals.
SPECIAL FACTORS
Background of the Conversion
In October 1986, Shearson Lehman Brothers Holdings, Inc. ("Shearson
Lehman"), the predecessor to Lehman Brothers, acquired all of the capital stock
of Sun Distributors, Inc. ("SDI") from Sun Company, Inc. In December 1986, the
Partnership and the Operating Partnership were organized as Delaware limited
partnerships, and in January 1987 the assets and liabilities of SDI were
transferred to the Operating Partnership in exchange for a note and a 99%
limited partnership interest in the Operating Partnership. Shearson Lehman then
contributed the limited partnership interest to the Partnership in exchange for
11,099,573 A Interests and 22,199,146 B Interests. In February 1987, Shearson
Lehman sold 10,653,990 units (each consisting of one A Interest and one B
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<PAGE>
Interest) in an underwritten public offering.
At the time of organization, the limited partnership form offered
important tax advantages since there was no federal income tax at the
partnership level. However, in December 1987 Congress passed the Revenue Act of
1987, one of the provisions of which decreed that publicly held limited
partnerships ("MLP's"), with certain exceptions not applicable to the
Partnership, would be taxed for federal income tax purposes as corporations.
MLP's existing on December 17, 1987 were "grandfathered" for ten years until
December 31, 1997.
In addition to the limited time period for the tax benefits, management
found that the structure of the Partnership impeded the strategic direction of
its business. Prior to 1987, the business had grown principally through
acquisitions made either with cash or Sun Company stock. With a limited
partnership, acquisitions with Interests became impracticable. Available cash
was limited by the required payment of the B Tax Distribution which had to be
made at 125% of the maximum individual federal income tax rate. This meant that,
at the outset, 38.75% (125% x 31%) of federal taxable income allocable to the B
Interests had to be distributed. In 1993, the maximum tax rate was increased to
39.6% meaning that the B Tax Distribution increased to 49.5% of federal taxable
income allocable to the B Interests.
During the early 1990's the question whether to convert to a
corporation was examined from time to time. One of the advantages of conversion
was that, if the A Interests could be replaced with debt, the interest on the
debt would be deductible which would offset to some degree the tax disadvantages
of being taxed as a corporation. However, the amount of this much debt on the
balance sheet would have impaired SunSource's ability to borrow money. It
therefore became impracticable to convert without the sale of some assets to
provide additional net worth.
In the spring and summer of 1992, Lehman Brothers and Legg Mason Wood
Walker, Incorporated ("Legg Mason") were engaged to seek out buyers for the
entire Partnership. Lehman Brothers and Legg Mason prepared descriptive
memoranda for the operations of the divisions, solicited confidentiality
agreements from prospective buyers, assisted in the due diligence efforts of the
prospective buyers and received various offers. Approximately 60 companies were
contacted but the effort produced no proposals attractive to pursue, due in part
to the financial and economic climate at that time and its effect on the
Partnership's business.
On September 13, 1993 the Partnership publicly announced that the Board
had begun to explore the possible sale of assets or becoming a publicly traded
corporation and had authorized the engagement of financial advisors to assist in
the process. Lehman Brothers and Legg Mason (the "Advisors") were again engaged
and conducted an extensive search for buyers of the entire Partnership or of
divisions of the Partnership. Again, the Advisors prepared memoranda for the
operations of the divisions, solicited confidentiality agreements from and
assisted in the due diligence efforts of, the prospective buyers and received
various offers. The Advisors contacted 77 strategic and 44 financial buyers.
They received no interest in the Partnership as a whole from acquirors at an
acceptable level. They received a number of bids for divisions, some of which
were attractive. However, the Board determined that the realizable sale value of
all of the Partnership's assets was not adequate, and also decided that
conversion to a corporation at that time would be unattractive. Finally the
Board determined that the bids for the Electrical Group and for the Dorman
Products division should be pursued further and instructed the Advisors to
obtain final bids for these businesses.
The Operating Partnership sold its Electrical Group on December 5, 1994
and the Dorman Products division on January 3, 1995. In addition, although not
the result of the study of strategic alternatives in 1993-1994, the Downey Glass
division was sold on October 27, 1995. The Operating Partnership received an
aggregate cash consideration, net of expenses, of approximately $70 million, of
which $14.2 million was used for a mandatory prepayment on its senior debt. With
the regularly scheduled principal payment on the senior debt in December 1995,
the Partnership's total debt as a percentage of its consolidated capitalization
was reduced to 43.5% at December 31, 1995 compared with 55% at December 31,
1994. The sales not only strengthened the financial position of the Partnership
but enabled it to remove the restriction on acquisitions which had been imposed
by the lenders for 1993 and 1994.
The strengthened balance sheet therefore removed one of the negative
considerations for conversion to a corporation and, with the deadline of
December 31, 1997 approaching, management and Lehman Brothers began to develop a
concept for conversion to a corporation. This concept was presented to the Board
of Lehman/SDI at its June 12, 1996 meeting. The Board authorized further work on
the conversion and appointed the Special Committee to review the terms of the
conversion proposal to be prepared by the General Partner. See "--
Determinations of the Special Committee" below.
At the same meeting, the Board reviewed a presentation prepared by
management which outlined a range of values which might be realized if the
Partnership were to be liquidated. Because the valuations presented did not
suggest an attractive potential sale value for the Partnership and because of
the logistical problems raised by a liquidation, the Board decided that pursuit
of the conversion alternative offered a higher expected value for Interest
holders than the liquidation plan. For more information on the liquidation
alternative, see "-- Alternatives to the Conversion."
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<PAGE>
Existing Partnership Structure
The Partnership is a Delaware limited partnership. Unless earlier
terminated pursuant to the Conversion or the Partnership Agreement, the
Partnership will continue in existence until December 31, 2086. The General
Partner holds a 1% general partner interest. The limited partner interests in
the Partnership, representing a 99% limited partner interest, are represented by
11,099,573 A Interests and 21,675,746 B Interests, both of which are traded on
the NYSE. The Partnership holds a 99% limited partner interest in the Operating
Partnership and the General Partner holds a 1% general partner interest. The
Partnership conducts all of its business activities through the Operating
Partnership. Lehman/SDI is the general partner of the General Partner and makes
all the decisions relating to the management of the Partnership and the
Operating Partnership and manages and controls their activities. Lehman Brothers
Holdings, Inc., as the sole stockholder of Lehman/SDI, elects the members of the
Board of Directors of Lehman/SDI. See the chart on page 1 of this Proxy
Statement/Prospectus.
The General Partner receives, as part of its general partner interest
in the Operating Partnership, a management fee of $3,330,000 per year from the
Operating Partnership as well as distributions attributable to its general
partnership interests. The Partnership will continue to pay the management fee
until the Effective Time of the Conversion. See "-- Existing Economic Interests
of the Partners." All expenses incurred by the General Partner are paid or
reimbursed by the Operating Partnership, except for the compensation of the
non-management directors of Lehman/SDI.
Existing Economic Interests of the Partners
Cash Available for Distribution of the Partnership (i.e., all cash
receipts of the Partnership, less cash used to pay or establish a reserve for
expenses) is distributed 99% to the holders of A Interests and 1% to the General
Partner until holders of A Interests have received annually a $1.10 simple,
cumulative return (the "Priority Return"). The Priority Return has been paid on
a monthly basis to holders of record on the first day of the month.
After distribution of the Priority Return, Cash Available for
Distribution is distributed 1% to the General Partner and 99% to the holders of
B Interests until such holders have received an annual distribution (the "B Tax
Distribution") equal to the product of (i) 125% of the then applicable maximum
Federal income tax rate for individuals and (ii) the taxable income allocable to
the B Interests. The B Tax Distribution has been partially distributed on a
monthly basis to holders of record on the first day of the month with the
balance distributed by March 31 of the succeeding year. See Note 3 of Notes to
Consolidated Financial Statements.
Upon liquidation of the Partnership, after provision for all
liabilities, the holders of A Interests will receive a preferential distribution
equal to $10 per A Interest plus any unpaid Priority Return and the balance will
be distributed to the General Partner and the holders of B Interests in
accordance with their respective capital accounts.
The Operating Partnership distributes its available cash 99% to the
Partnership and 1% to the General Partner until the amount distributed to the
Partnership is sufficient to pay the Priority Return and the B Tax Distribution.
The General Partner also receives a management fee from the Operating
Partnership of $3,330,000 annually. To the extent that the Priority Return and
the B Tax Distribution have not been paid on a cumulative basis, the management
fee will not be paid, but will be deferred and be paid, together with any
management fees then owed with respect to any other year, after the Priority
Return and B Tax Distribution have been paid. In addition, the management fee
can be paid only if the Operating Partnership complies with the covenants
required by the Operating Partnership's credit agreements. See Notes 8 and 9 of
Notes to Consolidated Financial Statements.
Alternatives to the Conversion
The alternatives to the Conversion which were considered by the General
Partner were continuing the existence of the Partnership as a limited
partnership and the liquidation of the Partnership, either immediately or over
an extended period of time.
The benefit of continuing the existence of the Partnership as a limited
partnership is the possible reduction of aggregate federal income taxes payable
by the Partnership and its partners compared to the aggregate federal income
taxes payable by the Corporation and its stockholders with respect to the income
of SunSource. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES." This federal income
tax benefit will end under current law on December 31, 1997 and the Partnership
will thereafter be taxed as a corporation. The Partnership will then be subject
to tax at the Partnership level and the partners will also be subject to tax on
any distributions received. In addition, payments of the Priority Return would
not be deductible for tax purposes. In view of this double taxation, the General
Partner does not believe it would be in the best interests of the Partnership
and the limited partners to remain in partnership form.
Another alternative to the Conversion considered by the General Partner
was liquidation. One benefit of liquidating the
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<PAGE>
Partnership at this time rather than effecting the Conversion would be the
possibility that the currently realizable value of the Partnership assets may
exceed the value of SunSource as a continuing business. Another benefit of
liquidating in partnership form is that a liquidation of the Partnership would
likely result in less federal income taxes payable on any gains recognized by
the Partnership than if the Partnership were converted to a corporation and
subsequently liquidated because the partners of the Partnership would only pay
federal income tax at the partner level on liquidation gains, while a
corporation would pay federal income tax on gains derived from liquidating its
assets and the corporation's stockholders would also pay federal income tax on
the amount by which the liquidation proceeds received by the stockholders
exceeded their basis in the shares.
Management made a presentation to the Board on June 12, 1996 during
which it outlined a range of values which might be realized if the Partnership
were to be liquidated. These values were based upon (i) current and projected
earnings before interest, taxes and amortization (EBITA) for all of the
Partnership's units, with estimated multiples of EBITA and (ii) management's
estimates of the costs of liquidation, including transaction costs, severance
pay, make-whole penalties on long-term debt, and the closing of the headquarters
operations. The estimated EBITA multiples used by management in its presentation
were derived from information developed by the Partnership's investment bankers
from their work in 1992, 1993 and 1994. Management believed such multiples had
not changed materially based on several unsolicited indications of interest the
Partnership had received with respect to certain of its divisions since such
time and the performance of the Partnership's various divisions during 1995 and
1996.
Although it seemed likely that a number of business units could be sold
on attractive terms, there was substantial doubt that acceptable prices could be
found for all of the business units within an acceptable time frame. The failure
to sell all but a few units would prevent the Partnership from liquidating. At
the same time, the requirement to pay the A Interest priority return would place
an onerous cash burden upon the remaining operating units. The Board determined
that the administrative burdens that would result from an attempt to sell
business units separately made liquidation an unattractive alternative.
An additional risk in the liquidation proposal was the amount of time
it could take to dispose of multiple businesses on satisfactory terms.
Management was concerned that morale could become a problem at those units not
sold quickly, and diminished performance and increased employee defections could
rapidly impair the value of the affected units. Finally, potential buyers of the
last few business units would have superior negotiating power when it became
clear that the Partnership had to sell the remaining assets in a short time
frame in order to complete the liquidation prior to December 31, 1997.
The Board also considered that liquidation would create an immediate
large taxable gain for the Partnership's investors while the Conversion would
result in a substantially smaller taxable gain.
Based on the considerations described below, the Board believes that a
liquidation of the Partnership's assets (either through individual or bulk asset
sales or the sale of the Partnership in its entirety) at this time would not
result in the limited partners receiving acceptable value. The Board did not
obtain an appraisal or other valuation of the assets.
The Board also rejected the liquidation alternative because liquidation
would not provide the limited partners and the General Partner with any
continuing equity interest in the Partnership and would be unlikely to be
accomplished on a tax-advantaged basis. The General Partner believes that in the
long term the value of the Partnership, whether or not the Conversion is
effected, to the General Partner and the limited partners would exceed the value
of the proceeds of a liquidation.
The General Partner believes that other long-term strategies available
to SunSource such as diversification, disposition of assets and acquisition of
assets are not materially adversely affected by the decision to convert. From
time to time in the past, the General Partner has considered, and in some cases
effected, the possibility of disposing of surplus assets, acquiring assets,
diversifying its operations geographically and engaging in new lines of
business. For example in 1994 and 1995, the Partnership sold its Electrical
Group, Dorman Products division, and Downey Glass division. Similarly, the
Partnership has acquired a number of companies which complement its operations.
See "BUSINESS -- General." The General Partner believes that SunSource will
continue to consider, and in some cases effect, similar transactions in the
future, regardless of whether SunSource is organized in partnership or corporate
form. However, the General Partner currently is not considering any significant
transaction involving the Partnership or SunSource's business which is outside
the ordinary course of business of the Partnership.
<PAGE>
Reasons to Convert to Corporate Form
The General Partner believes that there are six principal reasons to
convert to corporate form at this time: (i) the potential for the Corporation's
and the Trust's equity securities to attain greater acceptance within the
investment community; (ii) the conservation of cash by elimination of the
management fee and reduction in tax payments; (iii) the ability to deduct
interest payments on the Junior Subordinated Debentures for federal income tax
purposes; (iv) the potential for the Corporation to issue equity in payment of
the purchase price for complementary acquisitions; (v) the potential for the
Corporation to have greater access to equity capital markets;
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<PAGE>
and (vi) the simplification and reduction in cost of tax reporting for investors
in SunSource.
o Expansion of Potential Investor Base. The General Partner
anticipates that the Conversion will expand SunSource's
potential investor base to include institutional and other
investors who do not typically invest in limited partnership
securities because of various tax and administrative reasons.
In addition, the General Partner anticipates that the Common
Stock (as compared to Interests) will receive additional
investor interest through increased review and evaluation by
research analysts.
o Conservation of Cash. The Corporation will conserve cash by
the elimination of the annual management fee of $3,330,000.
o Deductibility of Interest. Although the Corporation will have
to pay tax on its income, SunSource will conserve additional
cash balance because (i) the interest payable on the Junior
Subordinated Debentures, which will equal the distributions
currently paid on the A Interests, is deductible for federal
income tax purposes and (ii) the difference in rates between
the B tax distribution which will be eliminated and the tax
that will become payable by the Corporation.
o Acquisition Currency. The General Partner believes that
current industry conditions may provide opportunities for
SunSource to grow through the acquisition of businesses and
assets which are complementary to its existing businesses. In
certain cases, SunSource may want to be able to issue equity
interests as payment of the purchase price for such
acquisitions. The General Partner believes that an equity
interest in a corporation will be a more attractive
acquisition currency to sellers than an interest in a
partnership. SunSource is not presently party to any agreement
or understanding regarding a material acquisition and
currently has no plans to make a material acquisition.
o Greater Access to Equity Markets. The General Partner expects
that the Corporation will have greater access to the public
and private equity capital markets than the Partnership,
potentially enabling it to raise capital on more favorable
terms than are now available to the Partnership. This greater
access may be of particular benefit if SunSource proposes to
issue equity securities to reduce existing debt, or to raise
additional funds for capital expenditures or otherwise to
expand its business.
o Tax Consequences and Tax Reporting. The benefit of being taxed
as a partnership will end under current law after December 31,
1997. In addition, the General Partner believes that the
complexities of tax reporting associated with partnership
investments are regarded as unduly burdensome for most limited
partners under current conditions. The ownership of stock
rather than Interests will greatly simplify tax reporting with
respect to an investment in SunSource on each limited
partner's individual federal and state income tax returns for
future years.
<PAGE>
Terms of the Conversion
Structure of the Conversion. If approved by the limited partners, the
Conversion will be effected as follows:
o The Corporation will form three new wholly owned Delaware
subsidiaries, SunSub A, SunSub B and SunSub C, and a new
Delaware statutory business trust, the Trust. At the Effective
Time, the Partnership, SunSub A and SunSub B will be merged
into the Operating Partnership which will be the survivor.
Pursuant to the Merger, (i) the A Interests will be converted
into Preferred Securities of the Trust and cash and the
Corporation will issue the Junior Subordinated Debentures to
the Trust; (ii) the B Interests will be converted into shares
of Common Stock of the Corporation; (iii) the General Partner
interests in the Partnership and the Operating Partnership
will be converted into shares of Common Stock of the
Corporation; (iv) the shares of SunSub A will be converted
into a 1% general partnership interest in the Operating
Partnership; and (v) the shares of SunSub B will be converted
into a 99% limited partnership interest in the Operating
Partnership. Immediately following the Merger, the Corporation
will contribute the general partnership interest in the
Operating Partnership to SunSub C. Also, following the Merger,
the General Partner will dissolve and distribute the Common
Stock of the Corporation received in the Merger to its general
and limited partners.
o As a result of the Merger, the former holders of the A
Interests will be holders of Preferred Securities of the Trust
and the former holders of the B Interests and the partners of
the General Partner will be holders of shares of Common Stock
of the Corporation.
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<PAGE>
o The Corporation will then be the holder of the 99% limited
partnership interest in the Operating Partnership and its
wholly owned subsidiary, SunSub C, will hold the 1% general
partnership interest. See page 1 above for a chart of the
corporate structure after the Conversion.
The Operating Partnership will be managed by SunSub C, as sole general
partner of the Operating Partnership, under the direction of its parent, the
Corporation. By reason of the Merger, the Corporation will be responsible for
all liabilities and obligations of the Partnership.
The Conversion is proposed to be effected pursuant to an Agreement and
Plan of Conversion, attached as Exhibit B and incorporated by reference herein,
among the Corporation, the Partnership, the Operating Partnership, the General
Partner, SunSub A and SunSub B (the "Conversion Agreement").
Diagrams illustrating the structure of SunSource and its subsidiaries,
both before and after the Conversion, are set forth immediately preceding the
Summary.
Effective Time. If approved at the Special Meeting, the Conversion is
expected to become effective on March 31, 1997 (the "Effective Time").
Conditions to the Conversion. The principal conditions to the
Conversion are (i) approval of the Conversion by the votes of holders of A
Interests and B Interests, including holders of unaffiliated A Interests and B
Interests; (ii) approval of the Preferred Securities and Common Stock for
listing on the NYSE; (iii) no withdrawal of the Special Committee's
determination that the Conversion is fair to the holders of A Interests and B
Interests or of the fairness opinion of Smith Barney; (iv) receipt of a
satisfactory tax opinion; (v) the availability of financing to refinance
existing senior debt on terms acceptable to the Corporation; and (vi) no
material change in applicable law, including with respect to the taxation of the
Conversion, the Corporation or the Preferred Securities.
Termination; Amendment. The General Partner may terminate the
Conversion Agreement and abandon the Conversion at any time before it becomes
effective, whether before or after approval by the limited partners. Any
provision of the Conversion Agreement may be waived at any time by the party
that is entitled to the benefits thereof, and the Conversion Agreement may be
amended at any time before or after approval thereof by the limited partners by
agreement of the Board of Directors of Lehman/SDI and the other parties to the
Conversion Agreement. After any such approval, however, no amendment or waiver
may be made that decreases the amount or changes the type of the consideration
or that in any way materially and adversely affects the rights of the holders of
Interests without the approval of a majority of such holders.
Consequences if Conversion is Not Approved
If the Conversion is not approved by the limited partners, or if the
Conversion is not consummated for any other reason, the Partnership presently
intends to continue to operate as an ongoing business in its current form. No
other transaction is currently being considered by the Partnership as an
alternative to the Conversion, although the Partnership may from time to time
explore other alternatives.
Failure to convert into corporate form could result in a substantial
reduction in income available to B Interests and would also result in a
reduction of the Partnership's fixed charge coverage ratio. The following table
shows that the pro forma results for the nine months ended September 30, 1996
would produce net income of $0.275 per existing B Interest if the Partnership
were to have converted to corporate form, but only $0.061 per existing B
Interest if the Conversion were not approved and the Partnership were to be
taxed as a corporation (as it will be after December 31, 1997 under current tax
law).
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<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
------------------
(dollars in thousands)
Pro Forma Partnership
Pro Forma Corporation Taxable as a Corporation
--------------------- -------------------------
<S> <C> <C>
Income from Operations $ 27,405 $ 27,405
Management Fee N/A 2,491
Interest Expense, Net 5,922 5,922
Other Income, Net 678 678
Distribution on Preferred Securities (9,174) --
------------ ------------
Income Before Taxes $ 12,987 $ 19,760
Income Tax Provision 5,920 8,970
------------ ------------
Net Income $ 7,067 $ 10,700
------------ ------------
General Partner Income Allocations -- 214
Class A Priority Return Payments -- 9,158
------------ ------------
Net income to B Holders $ 7,067 $ 1,328
------------ ------------
Number of B Units Outstanding 25,675,746 21,675,746
Earnings Per Class B Unit
(Before Reverse Split) $ 0.275 $ 0.061
------------ ------------
</TABLE>
Tax cash distributions to B Interest holders would be discontinued
after December 31, 1997 even if the Conversion is not approved, because income
taxes will be paid by the Partnership after that date.
Failure to convert will result in reduced cash flow, which would
inhibit the Partnership's ability to finance adequately future growth by
internal expansion or acquisition. The above table shows pro forma net income of
$7.0 million to holders of corporate B Interests for the nine months ended
September 30, 1996 versus $1.3 million to holders of B Interests if the
Partnership were taxed as a corporation. If the Conversion is not approved, the
General Partner might reconsider other alternatives, including liquidation of
the Partnership. In the event of a liquidation, the A Interests would be
entitled to a liquidation preference of $10 per Interest.
Determinations of the Special Committee
Appointment of the Special Committee and its Independent Advisors. On
June 12, 1996, the Board of Directors of Lehman/SDI appointed the Special
Committee to review, evaluate and reach a determination with respect to the
fairness of the terms of the Conversion to the limited partners, and to make a
recommendation to the Board of Directors with respect to the Conversion. In
connection with these instructions, the Special Committee was authorized to take
such action it deemed necessary or appropriate, including retaining, at the
expense of Lehman/SDI (which expenses are payable by the Partnership and
Operating Partnership pursuant to the terms of the Partnership Agreement and the
Operating Partnership Agreement), legal counsel and a financial advisor. The
Special Committee was also authorized to negotiate and document any agreement
with respect to the Conversion or any revisions thereto. The resolution
establishing the Special Committee provided that the Special Committee is only
advisory in nature and is not authorized or empowered to take any action on
behalf of, or binding upon, Lehman/SDI or its Board of Directors regarding the
Conversion or otherwise.
O. Gordon Brewer, Jr. and Ernest L. Ransome, III were appointed to
serve on the Special Committee and Mr. Brewer was elected to be the Special
Committee's Chairman. Except for their directorship in Lehman/SDI and the
Corporation and membership
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<PAGE>
on the Special Committee, the members of the Special Committee are not otherwise
affiliated with the Partnership, Operating Partnership, General Partner,
Corporation or Lehman/SDI. As of December 10, 1996, Mr. Brewer beneficially
owned 3,000 A Interests and 1,000 B Interests and Mr. Ransome beneficially owned
5,000 A Interests and 5,000 B Interests. As compensation for serving on the
Special Committee, Lehman/SDI agreed to pay to each member of the Special
Committee a retainer of $10,000 in recognition of the substantial effort and
time commitment invested in the Conversion process by the Special Committee,
plus a meeting fee of $1,000 per meeting. Lehman/SDI also provided the Special
Committee with a letter acknowledging that the members of the Special Committee
would be indemnified, and have expenses advanced, under Lehman/SDI's bylaws to
the fullest extent permitted under law for any losses or claims arising out of
the performance of the Special Committee.
On June 24, 1996, the Special Committee selected Dechert Price & Rhoads
as its independent legal counsel to advise the Special Committee regarding its
fiduciary duties and the legal aspects of the Conversion and any other matters
related to fulfilling the purpose of the Special Committee. On July 16, 1996,
the Special Committee formally engaged Smith Barney as to act as independent
financial advisor to the Special Committee and in that capacity, among other
things, (i) assist the Special Committee in its review of the business and
operations of the Partnership and the Operating Partnership and their historical
and projected financial condition, (ii) assist the Special Committee in its
review, evaluation and negotiation of the financial terms and structure of the
Conversion and (iii) render an opinion to the Special Committee and to the Board
of Directors as to whether (x) the consideration to be received in the
Conversion by the holders of A Interests is fair from a financial point of view
to such holders, (y) the consideration to be received in the Conversion by the
holders of B Interests is fair from a financial point of view to such holders,
and (z) the consideration (the "General Partner Consideration") to be received
by the General Partner in exchange for the General Partnership Interests (as
defined below) is fair from a financial point of view to the holders of A
Interests and to the holders of the B Interests, respectively.
Due Diligence, Evaluation and Preliminary Analysis of Initial Conversion
Proposal. Beginning in July 1996, at the instruction of the Special Committee,
Smith Barney and Dechert Price & Rhoads reviewed certain financial and legal
information relating to the Partnership and its operations to assist the Special
Committee. In addition, representatives of Smith Barney met with the senior
management team to discuss the Partnership's business, operations and prospects.
On August 8, 1996, the Special Committee received the General Partner's
proposal (the "Initial Conversion Proposal"), to convert the Partnership into a
corporation. The Initial Conversion Proposal provided for (i) each A Interest to
be exchanged for a package of preferred stock and subordinated debt of the
Corporation with an aggregate liquidation preference and face value of $10.00
per A Interest and aggregate annual cash distributions of $1.10 per year, (ii)
each B Interest to be exchanged for one share of Common Stock1, and (iii) the
General Partner's general partnership interests in and rights under the
Partnership and the Operating Partnership (the "General Partnership Interests"),
to be exchanged for 2,285,750 shares of Common Stock. The General Partner
informed the Special Committee that the number of shares of Common Stock
proposed to be exchanged for the General Partnership Interests represented the
General Partner's determination of the value of the General Partnership
Interests, including a "control premium." The Initial Conversion Proposal was
supplemented on August 16 with a description of the terms of the preferred stock
and subordinated debt to be exchanged for the A Interests.
On August 26, 1996, the Special Committee met with its financial and legal
advisors to preliminarily discuss the Initial Conversion Proposal. Smith Barney
discussed with the Special Committee its preliminary views of the financial
aspects of the Initial Conversion Proposal. In addition, the advisors reported
to the Special Committee on the status of their review of the Partnership and
its operations. After extensive discussion of the terms of the Initial
Conversion Proposal, the Special Committee identified a number of areas of
concern and instructed its advisors to arrange for a meeting with
representatives of the General Partner and its advisors to express those
concerns to the General Partner, including the Special Committee's concern
regarding the likely effect on market liquidity for holders of A Interests
resulting from the proposed issuance of multiple classes of securities in
exchange for the A Interests.
On September 4, 1996, the General Partner modified the Initial Conversion
Proposal and provided the Special Committee and its advisors with draft terms
for trust preferred securities which were proposed to be exchanged for the A
Interests. Each A Interest would be exchanged for 0.40 trust preferred
securities, with a liquidation preference of $25.00 (or $10.00 for each A
Interest) and cumulative cash distributions of 11% per annum ($1.10 per year for
each A Interest).
Negotiations with the General Partner. On September 9, 1996, representatives of
Smith Barney and Dechert Price & Rhoads met with representatives of the General
Partner (including Lehman Brothers and the Partnership's management) and legal
counsel to Lehman Brothers. The Special Committee's advisors informed the
General Partner that in evaluating the fairness of any exchange of securities
- --------
1 All references to shares of Common Stock reflect the one-for-four reverse
stock split implied by the exchange ratio for B Interests in the Conversion.
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<PAGE>
for A Interests in the Conversion, the Special Committee would attribute
significant weight to the current market price of the A Interests as opposed to
their liquidation value, and that the terms of the Conversion should reflect the
taxable nature of the exchange of A Interests and any elimination of existing
economic and other rights currently available to the A Interests. With respect
to the proposed consideration for the General Partnership Interests, the General
Partner was informed that the Special Committee believed the number of shares of
Common Stock proposed to be exchanged for General Partnership Interests
substantially overstated the value of the General Partnership Interests. The
Special Committee had taken note of certain limitations on the value of the
Management Fee, including the limited partners' right under the Partnership
Agreement to remove the General Partner by a vote of 80% of the outstanding
unaffiliated Interests and the termination of the General Partner's right to
receive the Management Fee upon the liquidation of the Partnership. The General
Partner was also advised that the Special Committee did not believe that the
General Partner was entitled to a "control premium" for the General Partnership
Interests, especially in view of the significant Common Stock ownership which
Lehman Brothers, its affiliates and management would have in the Corporation
after the Conversion and their representation on the Corporation's Board of
Directors. Moreover, the Special Committee's legal counsel conveyed the Special
Committee's concern with a number of issues relating to the governance of the
Corporation after the Conversion, including (i) the potential shift in voting
power from the current unaffiliated holders of A Interests and B Interests to
Lehman Brothers, its affiliates and management as a result of both the issuance
of a significant number of shares of Common Stock in exchange for the General
Partnership Interests and the loss of voting rights previously belonging to the
A Interests, (ii) the potential for sale of a control block of Common Stock at a
premium not available to all holders of Common Stock generally or otherwise in a
manner not in the best interests of all holders, and (iii) the need for a
meaningful independent check on any decision by Lehman Brothers or management
with respect to any major transaction by the Corporation with change of control
implications occurring shortly after the Conversion, particularly in light of
the substantial equity to be received by the General Partner in exchange for the
General Partner Interests, and Lehman Brothers' expression of interest in
possibly liquidating some or all of its Common Stock holdings after the
Conversion.
From September 10-17, 1996, representatives of Lehman Brothers and Smith
Barney had a number of discussions regarding the value and terms of the proposed
trust preferred securities. Lehman Brothers indicated that, in response to the
Special Committee's concerns, the General Partner was prepared to increase the
annual yield on the proposed securities to 11.8%, resulting in the holders of A
Interests receiving cash distributions of $1.18 per annum with respect to the
trust preferred securities received in exchange for each A Interest. During the
same period, the Special Committee's counsel discussed with counsel to Lehman
Brothers the issues raised by the Special Committee regarding corporate
governance after the Conversion.
<PAGE>
On September 17 and 18, 1996, the Special Committee met telephonically and
in person with its legal counsel and financial advisors to consider the
revisions to the Conversion proposal. The Special Committee received a report
from its advisors regarding the September 9 meeting and reviewed with them the
revised Conversion proposal. The Special Committee identified as its major areas
of concern (i) the value of the trust preferred securities, (ii) the taxable
nature of the Conversion to holders of the A Interests, (iii) the differences
between the trust preferred securities and the A Interests, including the
Corporation's right to call the trust preferred securities at par after five
years or at any time upon the occurrence of a Tax Event, and the Corporation's
ability to defer payments on the trust preferred securities at any time or from
time to time for up to 60 consecutive months, (iv) the number of shares of
Common Stock proposed to be issued with respect to the General Partnership
Interests, and (v) the need for certain corporate governance provisions for the
benefit of unaffiliated holders of Common Stock in light of the Special
Committee's concerns in this area noted above.
On October 22, 1996, the General Partner presented the Special Committee
with a new set of proposed terms for the Conversion (the "Second Conversion
Proposal"). The Second Conversion Proposal provided for (i) each A Interest to
be exchanged for (a) 0.38 share of 11.6% Preferred Securities with a liquidation
amount of $25.00, callable at par in five years, and (b) $1.00 in cash, (ii)
each B Interest to be exchanged for one share of Common Stock, and (iii) the
General Partnership Interests to be exchanged for an aggregate of 1,375,000
shares of Common Stock, 1,000,000 shares of which would be received by the
General Partner upon consummation of the Conversion, and the remaining 375,000
shares of which would be received by the General Partner in 125,000 share
installments on each of the first three anniversaries of the Conversion,
provided that if there were accrued and unpaid distributions on the Preferred
Securities on such dates, such shares would not be received by the General
Partner until such distributions had been paid. The Second Conversion Proposal
also contained a restriction on the ability of Lehman Brothers and management to
vote or transfer the shares of Common Stock which they received in exchange for
the General Partnership Interests, although such restrictions did not apply to
Common Stock received by them with respect to their B Interests. In response to
the Special Committee's concerns regarding the dominant influence of certain
stockholders after the Conversion, the Second Conversion Proposal also provided
for the Corporation's Board of Directors to consist of nine directors, up to two
designated by Lehman Brothers and its affiliates, three from management and four
independent directors (the "Independent Directors").
On October 23 and 24, 1996, the Special Committee met telephonically and in
person with its financial and legal advisors to discuss the Second Conversion
Proposal. At these meetings, the Special Committee concluded, after discussions
with its advisors, that the Second Conversion Proposal did not adequately
compensate holders of the A Interests and that the 1,375,000 shares of Common
Stock proposed to be exchanged for the General Partnership Interests was
excessive. The Special Committee discussed with its advisors
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<PAGE>
various alternative structures regarding the timing of the issuance of Common
Stock for the General Partnership Interests, including the possibility of
issuing a smaller number of shares without any vesting requirements. The Special
Committee also discussed various means of vesting contingent shares, including
the possibility of linking a portion of the contingent shares to the financial
performance of the Corporation after the Conversion. As to the corporate
governance aspects of the Second Conversion Proposal, the Special Committee
determined to continue negotiating for additional provisions protecting
minority, unaffiliated stockholders, including as to voting and resale
restrictions on Lehman Brothers' and management's Common Stock, and a provision
requiring approval of a majority of the Independent Directors for some period of
time following the Conversion with respect to certain types of transactions.
Later on October 24, the Special Committee and its advisors met with Lehman
Brothers, management, and counsel to Lehman Brothers and the Partnership to
further negotiate the terms of the Second Conversion Proposal. At the meeting,
the parties were unable to reach an agreement with respect to the number of
shares comprising the General Partner Consideration, although they did reach
agreement on the $1.30 cash payment to be included as part of the consideration
for the A Interests.
During the next three weeks, the Special Committee's advisors continued to
discuss the General Partner Consideration, the terms of any vesting of
contingent shares and further refinements to the corporate governance provisions
with the General Partner and its counsel. On November 15, 1996, the Special
Committee met with Mr. Donald T. Marshall, the Partnership's Chairman and Chief
Executive Officer. Mr. Marshall proposed various vesting alternatives and
performance targets which resulted in a maximum of 1,125,000 shares being paid
out for the General Partnership Interests if all such performance targets were
met. The parties were unable to reach agreement on the number of shares or
performance targets.
During telephonic meetings on November 7, 14, 15, 18 and 25, the Special
Committee continued to examine with its advisors the terms of the Conversion.
The Special Committee concluded that it was unlikely that the Special Committee
and the General Partner would be able to reach agreement on the appropriate
performance vesting targets and determined to drop its request for vesting based
on performance targets in exchange for a reduction in the aggregate number of
shares to be paid for the General Partnership Interests.
During November and the first week of December 1996, the Special Committee
and its advisors had a series of discussions with Lehman Brothers, management,
counsel to Lehman Brothers and counsel to the Partnership regarding the
resolution of the remaining issues on the proposal. On or about December 4,
1996, during a telephone conference among the members of the Special Committee,
Lehman Brothers, Mr. Marshall and Mr. Edmonson, the parties agreed upon a
premium of 101% of liquidation value upon a Tax Event redemption of the
Preferred Securities and a two year vesting requirement for 75,000 shares of the
Common Stock to be issued to the General Partner. At the Special Committee's
request, the General Partner clarified that the three most senior members of
management (Messrs. Marshall, Edmonson and McDonnell) would agree to waive any
right to receive accelerated payments under the change in control provisions of
the Partnership's deferred compensation plans. See "MANAGEMENT -- Change in
Control Arrangements." On December 9, 1996, the Special Committee received the
final draft of the summary terms of the Conversion proposal (the "Term Sheet")
from the General Partner reflecting the terms agreed upon.
<PAGE>
Initial Determination to Recommend the Conversion, Fairness Opinion. On
December 2, 1996, and again on December 10, 1996, the Special Committee met with
Smith Barney and Dechert Price & Rhoads for a comprehensive review of the terms
of the Conversion proposal. At both meetings, Smith Barney made a presentation
to the Special Committee regarding the fairness of the consideration to be
received in the Conversion from a financial point of view to the holders of the
A Interests and the B Interests, respectively, and the fairness from a financial
point of view of the General Partner Consideration to the holders of the A
Interests and the B Interests, respectively. At the December 10 meeting, Smith
Barney, upon the Special Committee's request, rendered its written fairness
opinion, dated December 10, 1996, to the effect that, as of such date based upon
and subject to certain matters as stated therein, (i) the consideration to be
received in the Conversion by the holders of A Interests is fair, from a
financial point of view to such holders, (ii) the consideration to be received
in the Conversion by the holders of B Interests is fair, from a financial point
of view to such holders, and (iii) the General Partner Consideration to be
received in the Conversion is fair from a financial point of view to the holders
of the A Interests and to the holders of B Interests, respectively. See "--
Opinion of Smith Barney."
Upon receipt of Smith Barney's written fairness opinion, the Special
Committee unanimously determined to recommend to the Board of Directors that, as
of such date, (i) the terms of the Conversion set forth on the Term Sheet were
(x) fair to the holders of the A Interests and (y) fair to the holders of the B
Interests, and (ii) the consideration to be received in the Conversion by the
General Partner (the "General Partner Consideration") in exchange for its
general partnership interests in the Partnership and the Operating Partnership
is fair to the holders of the A Interests and the holders of the B Interests,
respectively. The Special Committee's recommendation was subject to its review
of, and satisfaction with, the definitive documentation effecting the Conversion
and to its receipt of an updated written fairness opinion of Smith Barney, in
form and substance satisfactory to the Special Committee, after such definitive
documentation had been completed. The Special Committee also noted that it had
not considered the relative merits of the Conversion as compared to any
alternative business strategies that might exist for the Partnership or the
effect of any alternative transaction in which the Partnership might engage,
including the acquisition by a third party of all or any part of the Partnership
or its securities.
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<PAGE>
On December 11, 1996, the Special Committee and its financial and legal
advisors met with the Board of Directors and advised the Board of Directors that
the Special Committee had reviewed the proposed terms of the Conversion set
forth on the Term Sheet submitted to it by the General Partner and that at the
Special Committee meeting held the previous afternoon, the Special Committee had
received a written fairness opinion dated December 10, 1996 from Smith Barney
and the Special Committee delivered to the Board of Directors a letter of
recommendation as described above with respect to the proposed terms of the
Conversion. The Special Committee and Smith Barney advised the Board of
Directors that their analyses did not include any effects of the restructuring
charge related to the Partnership's Technology Services divisions and Glass
Merchandising business, which was finalized and announced later that day. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS --Recent Developments." The Special Committee informed the Board of
Directors that, when it convened to review the final documentation of the
Conversion prior to the mailing of the Proxy Statement/Prospectus, it and Smith
Barney would include the effects, if any, of such restructuring charge in any
updated recommendations by the Special Committee or fairness opinions rendered
by Smith Barney.
On December 11, 1996, the Partnership issued press releases
announcing the Conversion and the restructuring.
Factors Considered by Special Committee
In reaching its recommendations, the Special Committee considered a number
of factors. The Special Committee's recommendations were made after considering
all of the factors as a whole with respect to each such recommendation, and were
not based on any single factor. In making its recommendations, the members of
the Special Committee exercised their independent business judgment assisted by
their independent financial and legal advisors. The factors considered by the
Special Committee included, but were not limited to, the following:
o Fairness Opinion and Related Presentations. The Special Committee
reviewed, considered and analyzed information provided by the
Partnership and its advisors during various meetings and telephone
conferences, including the information as to the historical and
forecasted financial performance of the Partnership and the Corporation
and the pro forma effects of the Conversion, the information and
analyses relating to the Partnership, the Corporation, the A Interests,
the B Interests, the General Partnership Interests (including the
Management Fee), the Preferred Securities and the Common Stock, and the
terms and conditions of the Preferred Securities and the corporate
governance arrangements. In reaching its determination as to the
fairness of the Conversion to each of the A Interests and the B
Interests, the Special Committee placed particular weight on the
fairness opinion rendered by Smith Barney. See "-- Opinion of Smith
Barney."
<PAGE>
o Trading Volumes and Market Prices. The Special Committee considered (i)
the relatively low trading volumes of the A Interests and the B
Interests, (ii) the relatively narrow trading ranges of A Interests and
B Interests in recent years, including the market prices of the A
Interests and the B Interests immediately prior to the Special
Committee's recommendation on December 10, 1996, (iii) the absence of a
trading market for the Preferred Securities and Common Stock at the
time of its recommendation, and (iv) the reverse stock split implied by
the exchange ratio of B Interests for Common Stock.
As to the matters noted in (i) and (ii) above, the Special Committee
recognized that the Conversion will benefit the holders of Preferred
Securities and Common Stock to the extent the Conversion expands the
potential investor base for the Corporation's securities. See "--
Reasons to Convert to Corporate Form." As to the matter noted in (ii)
above, the Special Committee considered the presentations and analyses
of Smith Barney and its fairness opinion. See "-- Opinion of Smith
Barney." In assessing the fairness of the consideration to be received
by the holders of the A Interests in the Conversion, the Special
Committee attributed significant weight to the current market price of
the A Interests (see "MARKET PRICES AND DISTRIBUTIONS") as opposed to
their liquidation value of $10.00 per Interest. As to the matter noted
in (iii) above, the Special Committee recognized, and discussed with
its financial advisor, the possibility of short-term selling pressure
on the Preferred Securities and Common Stock as a result of the change
in the form of investment for holders of the A Interests and B
Interests. The Special Committee was also aware that there could be
downward pressure on the market price of the Common Stock after the
Conversion to the extent Lehman Brothers or management take steps to
sell any of their Common Stock holdings. See "RESALE OF SECURITIES --
Resales by Lehman Brothers and Management." As to the matters noted in
(iii) and (iv) above, the Special Committee consulted with Smith Barney
with respect to the level of market acceptance of the Preferred
Securities and Common Stock . However, Smith Barney's
fairness opinion did not express any opinion as to what the value of
the Preferred Securities or the Common Stock actually will be when
issued to holders of A Interests and B Interests, respectively, or the
prices at which the Preferred Securities or Common Stock will trade
subsequent to the Conversion. See "-- Opinion of Smith Barney." The
Special Committee noted that each of the Preferred Securities and
Common Stock will be a new security. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Uncertainty Regarding
Market Price for Preferred Securities and Common Stock." In addition,
Smith Barney advised the Special Committee that the valuation of the
Preferred Securities was further complicated by the limited number of
trust preferred securities of issuers of
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<PAGE>
generally comparable credit quality. As to the matter noted in (iv)
above, the Special Committee noted that the General Partner had
structured the reverse stock split implied by the exchange ratio in the
Conversion with respect to the B Interests because it believes the
current trading prices for the B Interests reduce the attractiveness of
the Corporation's equity securities to the financial community and the
investing public. After consultation with Smith Barney, the Special
Committee determined these stated reasons were reasonable and credible.
See "THE SUMMARY -- Reverse Stock Split."
o General Partner's Reasons to Convert to Corporate Form. The Special
Committee considered the reasons expressed by the General Partner in
support of the Conversion. See "-- Reasons to Convert to Corporate
Form." In addition, the Special Committee consulted with its financial
and legal advisors to assess the validity of these reasons and
determined that the General Partner's stated reasons for pursuing the
Conversion were reasonable and credible.
o Maintain Current Annual Distributions to Holders of A Interests. The
Special Committee recognized that holders of the Preferred Securities
would receive distributions of $2.90 per annum for each Preferred
Security, which distribution equates to the Priority Return paid of
$1.10 per annum on each A Interest after giving effect to the exchange
ratio of Preferred Securities for A Interests. The Special Committee
believed that maintaining the aggregate annual amount of distributions
payable was a benefit to the holders of the A Interests.
o Differences Between A Interests and Preferred Securities. In evaluating
the Preferred Securities, the Special Committee, with the assistance of
its financial and legal advisors, considered the various differences
between the A Interests and the Preferred Securities. These differences
included, among others, the following: (i) the Corporation's ability to
defer interest payments on the Junior Subordinated Debentures with
respect to the Preferred Securities at any time or from time to time
for a period up to 60 consecutive months, in which case no
distributions will be paid on the Preferred Securities although holders
of Preferred Securities will still be required to accrue original issue
discount income with respect to the unpaid distributions on the
Preferred Securities (see "RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER CONSIDERATIONS -- Risks Related to the Preferred Securities --
Option to Extend Interest Payment Period; Tax Impact of Extension," and
"-- Risks Related to the Preferred Securities -- Potential Market
Volatility During Extension Period"); (ii) the elimination of the
Management Fee as a payment subordinated to the Priority Return on A
Interests; (iii) the Corporation's ability to redeem at par the Junior
Subordinated Debentures on or after March 31, 2002, or at 101% of the
liquidation preference of the Preferred Securities at any time upon the
occurrence of a Tax Event if certain conditions are met (see "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Risks
Related to the Preferred Securities -- Special Event Redemption or
Distribution"; (iv) holders of A Interests are entitled under the terms
of the Partnership Agreement to receive in liquidation, after the
payment of all liabilities of the Partnership, an amount equal to their
capital account ($10.00), whereas holders of Preferred Securities will
receive in liquidation the equivalent of $9.50 for each A Interest
previously held; and (v) the loss of certain rights associated with the
ownership of A Interests, such as voting rights, rights to remove the
General Partner, rights to compel dissolution and duration of the
holder's investment, (see "COMPARISON OF INTERESTS AND SECURITIES TO BE
ISSUED").
<PAGE>
As to the matters noted in (i) and (ii) above, the Special Committee
discussed with its advisors the credit quality of the Junior
Subordinated Debentures and Preferred Securities and the prospective
terms of the refinancing, including the circumstances under which the
lenders could block payment of the Junior Subordinated Debentures (see
"-- Source and Amount of Funds"). The Special Committee also noted that
although the Corporation could elect for any reason to defer interest
payments on Junior Subordinated Debentures, this unfettered deferral
right was counterbalanced by (a) the adverse consequences such a
deferral would have on the Corporation and the market value of its
Common Stock, (b) the fact that interest would accrue on such unpaid
distributions at a rate of 11.6% per annum compounded monthly, and (c)
the two-year escrow for some of the shares of Common Stock to be issued
to senior management of the Corporation in exchange for the General
Partnership Interests. See "SUMMARY --Overview of the Conversion." As
to the matters noted in (iii) above, the Special Committee discussed
with Smith Barney its view of the effect of the optional redemption
feature of the Junior Subordinated Securities and discussed with its
advisors the possibility of changes in federal tax law which might give
rise to a Tax Event redemption. The Special Committee believed that any
risk of a Tax Event redemption was mitigated by the redemption price of
$25.25 per Preferred Security (101% of liquidation value) negotiated by
the Special Committee as well as the other benefits of the Conversion
to the holders of the A Interests. The Special Committee considered and
discussed with its advisors the possibility of a change in federal tax
law affecting securities similar to the Junior Subordinated Securities
or the Preferred Securities. See "RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER IMPORTANT CONSIDERATIONS -- Risks Related to the Preferred
Securities -- Special Event Redemption or Distribution." It is a
condition to the effectiveness of the Conversion that no tax
legislation be pending or in effect which would adversely affect the
tax consequences of the Preferred Securities, although there can be no
assurance that a Tax Event will not occur. As to the matters noted in
(iv) above, the Special Committee believed that the difference in
liquidation value between the A Interests and the Preferred Securities
is adequately compensated for by the higher distribution rate of the
Preferred Securities and the $1.30 cash distribution with respect to
each A Interest in the Conversion. As to the matters noted in (v)
above, the Special Committee viewed the A Interests and Preferred
Securities as principally yield-oriented securities and, after
consultation with its financial and legal
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<PAGE>
advisors, the Special Committee concluded that, on balance, the loss of
such voting and other rights was outweighed by the benefits of the
Conversion to the holders of the A Interests.
o Certain Federal Income Tax Consequences of the Conversion. The Special
Committee considered the applicable federal income tax consequences of
the Conversion to the Partnership and to the Corporation and the
holders of A Interests and B Interests, including the tax consequences
noted below:
o Tax Advantages to Corporation of Preferred Securities. The
Special Committee considered the tax benefits to the
Corporation of issuing the Preferred Securities. See "--
Reasons to Convert to Corporate Form -- Deductibility of
Interest."
o Corporate Level Tax. The Special Committee considered as a
negative factor the loss of the potential future tax benefits
associated with operating in partnership form, including
primarily the right to have Partnership income subject to only
one level of federal income taxation. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS --
Risks Related to the Conversion -- Adverse Tax Implications."
In addition, the Special Committee considered the loss of the
Partnership's favorable tax status for the period from the
date of consummation of the Conversion until December 31,
1997.
o Exchange of A Interest for Preferred Securities and Cash is
Taxable. The Special Committee considered the potential tax
consequences of the Conversion to holders of A Interests. The
Special Committee negotiated the cash portion of the
consideration to be exchanged for the A Interests in the
Conversion in part to provide that the holders of the A
Interests would be compensated for, and have the liquidity to
pay, income tax which may be incurred by them as a result of
the Conversion. In connection with its consideration of the
tax position of holders of A Interests, the Special Committee
discussed with its advisors and the General Partner the
historical trading prices and volumes of the A Interests, as
well as certain tax basis estimates prepared by management,
although the Special Committee realized that it could not
determine precisely the financial impact of those federal
income tax consequences of the Conversion because the tax
basis of each holder of A Interests in his or her A Interests
may be different and tax rates vary depending on the
circumstances and tax status of each holder. Furthermore, in
assessing the tax consequences the Special Committee
recognized that the taxes imposed on any gain recognized as a
result of the Conversion essentially represent an acceleration
of the tax gain which a holder of an A Interest would incur
when such holder sold his or her A Interests in the future.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax
Consequences of the Conversion to Holders of A Interests." The
Special Committee also considered the likely income tax
consequences of the Conversion to holders of A Interests
together with B Interests. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- General Tax Treatment of the Conversion."
<PAGE>
o Termination of Tax Distributions on B Interests. The Special
Committee considered the termination of the B Tax Distribution
as a consequence of the Conversion, and the Corporation's
intention of not paying cash dividends on the Common Stock.
The Special Committee noted that the purpose of the B Tax
Distribution was to provide holders of the B Interests with
the cash required to pay income taxes on the Partnership's
taxable income which is allocable and taxable to holders of
the B Interests. The Special Committee believes that
termination of the B Tax Distribution is mitigated by the fact
that holders of Common Stock generally will be taxed only on
distributions of money or other property received from the
Corporation and not on their allocable share of the
Corporation's taxable income. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Certain Tax Consequences of the Conversion to
Holders of the B Interests." The Special Committee also
compared the B Tax Distribution, which is made at the rate of
49.5% of the taxable income allocated to the B Interests, with
the Corporation's estimate of federal, state and local income
taxes payable on its taxable income at the effective rate of
approximately 40%. The Special Committee was aware that
applicable tax rates vary depending upon the individual
circumstances and tax status of each holder. While the Special
Committee viewed as a negative factor the possibility that the
B Tax Distribution was a cash resource to B Interest holders
to the extent of its monthly payout feature, as well as the
loss to certain holders of B Interests of that portion of the
B Tax Distribution which exceeded the holders' federal, state
and local income taxes on their allocable portion of the
taxable income of the Partnership, the Special Committee
considered that this factor was mitigated by the increased
cash flow to the Corporation from this aspect of the
Conversion, which in the Special Committee's view benefits
both the A Interests and the B Interests, and that, on
balance, the loss of the B Tax Distribution was outweighed by
the benefits of the Conversion to the holders of the B
Interests.
o Possible Reduction in Fiduciary Duties. The Special Committee
considered the elimination of the fiduciary duties owed to the
limited partners by the General Partner, the nature of the
fiduciary duties owed to the holders of Common Stock and
Preferred Securities, and the absence generally of fiduciary
duties of the directors of the Corporation to the Trust
holding the Junior Subordinated Debentures or the holders of
the Preferred Securities. See "RISK FACTORS,
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<PAGE>
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS --
Risks Related to the Conversion -- Possible Reduction in
Fiduciary Standards." The Special Committee believed the
change in the scope of the fiduciary duties owed to the former
limited partners, especially with respect to the A Interests
exchanged for Preferred Securities, to be a negative factor,
mitigated to some extent because the Special Committee viewed
the A Interests as principally yield-oriented securities.
o Certain Effects of the Conversion. The Special Committee also
considered the pro forma effects of the Conversion (including the
transaction costs associated with the Conversion and the Corporation's
pro forma negative stockholders' equity). See "RISK FACTORS, CONFLICTS
OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks Related to the
Conversion -- Transaction Costs." For a discussion of the pro forma
effects of the Conversion, see the pro forma financial statements
included in "INDEX TO FINANCIAL STATEMENTS." The Special Committee was
aware that, as a result of the Conversion, holders of the A Interests
and the B Interests would no longer have a contractual right to receive
the Priority Return and the B Tax Distribution. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks
Related to the Conversion -- Loss of Contractual Right to
Distributions." The Special Committee was also aware that the shares of
Common Stock issued in the Conversion may be diluted by additional
issuances, which may be more likely as a result of the Conversion. See
"RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS
-- Risks Related to the Conversion -- Future Dilution of Common Stock."
o Benefits to General Partner of Conversion. In evaluating the
fairness to the A Interests and the B Interests of the
allocation of the number of shares of Common Stock to be
issued with respect to the General Partnership Interests and
the effects of the Conversion, the Special Committee
considered and discussed with its financial and legal advisors
a number of factors benefiting the General Partner, including:
(i) the elimination of the General Partner's liability for
obligations of the Partnership and Operating Partnership (see
"RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS - Risks Related to the Conversion --
Elimination of General Partner Liability for Corporation
Obligations"); (ii) the ability of the General Partner to
convert its illiquid General Partnership Interests into a
liquid security, thereby facilitating the possible sale by the
former general and limited partners of some or all of their
Common Stock in the Corporation; (iii) the value to the
General Partner of receiving most of its shares of Common
Stock immediately upon consummation of the Conversion; (iv)
the value to Lehman Brothers of the registration rights it
will receive pursuant to the Registration Rights Agreement;
(v) the potential for the General Partner to treat as capital
gain income some or all of the income realized by its partners
as a result of the exchange of the General Partnership
Interests for shares of Common Stock; and (vi) the
acceleration of benefits under the Operating Partnership's
deferred compensation plans due to certain limited partners of
the General Partner (although the Special Committee viewed as
a mitigating factor the waiver of such acceleration by the
three most senior members of the Partnership's management.)
See "MANAGEMENT -- Change in Control Arrangements."
<PAGE>
o Valuation of General Partnership Interest. In evaluating the
fairness to the A Interests and the B Interests of the number
of shares of Common Stock to be issued with respect to the
General Partnership Interests, the Special Committee
considered and discussed with its financial and legal advisors
a number of factors, including: (i) the value of the General
Partner's 1% percentage interest in the capital and income of
the Partnership; (ii) the value of the General Partner's 1%
percentage interest in the capital and income of the Operating
Partnership; (iii) the present value of the General Partner's
right to receive the Management Fee pursuant to the terms of
the Operating Partnership Agreement; (iv) the value to the
Partnership of the services provided by the General Partner
with respect to the Management Fee; (v) the subordination of
the Management Fee to the liabilities and obligations of the
Operating Partnership and Partnership and to the Priority
Return on the A Interests and the B Tax Distribution on the B
Interests; (vi) the potential termination of the Management
Fee upon the liquidation of the Partnership; (vii) the
potential removal of the General Partner by a vote of 80% of
the Interests owned by Unaffiliated Limited Partners, voting
as a single class, which would result in the payment to the
General Partner of 1.01% of the aggregate fair market value of
the A Interests and the B Interests (with no additional
payment with respect to the Management Fee); (viii) the
potential for all or a portion of the Management Fee to be
deductible to the Corporation for income tax purposes after
the Conversion if the Corporation and the General Partner
entered into a management agreement providing for the
continuation of the Management Fee on the same terms and
conditions presently applicable; and (ix) the value of the
shares of Common Stock after the Conversion. In addition, the
Special Committee considered certain benefits to the General
Partner arising out of the Conversion discussed under "--
Benefits to General Partner of Conversion" above.
As to the matters noted above generally, the Special Committee
considered the presentations and analyses of Smith Barney and
its fairness opinion. See "-- Opinion of Smith Barney." As to
the matters noted in (vi) and (vii) above, the Special
Committee observed that, although the Partnership Agreement
and the Operating Partnership Agreement essentially provided
for no payment to the General Partner attributable to the
General Partner's right to receive the Management Fee
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upon liquidation or removal of the General Partner, the
Conversion was neither a liquidation nor a removal of the
General Partner. The Special Committee recognized that the
Board of Directors of Lehman/SDI had considered and rejected
the alternative of liquidation at this time, and liquidation
would likely be an unattractive option in corporate form
because of the two levels of income taxation applicable to
corporate liquidations. See "-- Alternatives to the
Conversion" and "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risks Related to the Conversion --
Adverse Tax Implications." In addition, the Special Committee
recognized that the right of the Unaffiliated Limited Partners
to remove the General Partner required a supermajority vote of
the outstanding Interests of the Unaffiliated Limited
Partners, which made it difficult for the Unaffiliated Limited
Partners to successfully remove the General Partner. The
Special Committee also recognized that the General Partner's
cooperation was required to engage in the Conversion, and that
such cooperation was unlikely to be forthcoming if the General
Partner did not receive some value for all of the economic
components of its General Partnership Interests, including the
Management Fee. As to the matter noted in (viii) above, the
Special Committee considered this tax aspect of the Management
Fee and during negotiations raised the possibility of
continuation of the Management Fee after the Conversion. The
Special Committee ultimately concluded that continuation of
the Management Fee in corporate form would be unduly
burdensome to the Corporation and that elimination of the
Management Fee and the substitution of Common Stock for its
value, as provided for in the Conversion, more closely aligns
the interests of the beneficial owners of the General Partner
with the interests of holders of Common Stock. The Special
Committee also believed that the resulting incremental cash
flow to the Corporation was a benefit to the holders of the A
Interests and the B Interests.
o No Appraisal Rights; Separate Class Vote. The Special
Committee noted the absence of appraisal or dissenters' rights
for the benefit of holders of Interests. The Special Committee
believed this factor was mitigated by the requirement that the
Conversion be approved by the affirmative vote of Unaffiliated
Limited Partners holding an aggregate of more than 50% of the
A Interests and B Interests, respectively, each voting
separately as a class. See "VOTING AND PROXY INFORMATION --
Vote Required; Quorum" and "-- No Appraisal Rights."
o Certain Corporate Governance Matters. The Special Committee
recognized that the Conversion altered, or could potentially
alter, a number of the existing corporate governance
relationships among the General Partner, Lehman Brothers,
management, and the unaffiliated holders of A Interests and B
Interests. These included in particular (i) the increased
voting power that could accrue to Lehman Brothers or senior
management, (ii) potential sales of control blocks of stock,
and (iii) the potential effect of Conversion on major
strategic decisions, in each case as discussed in
"--Negotiations with the General Partner" above.
<PAGE>
As to the matters noted in (i) above, the Special Committee
was aware that as a result of the loss of voting rights of the
A Interests and the issuance of Common Stock for the General
Partnership Interests, Lehman Brothers' and management's pro
forma voting power would have increased from 18.0% and 12.7%,
respectively, to 31.3% and 22.5%, respectively. Accordingly,
the Special Committee negotiated a provision in the
Stockholders Agreement with Lehman Brothers and certain
members of senior management that restricts the respective
voting power of such persons to the voting power held by each
of them with respect to a vote of the limited partners prior
to the Conversion. See "DESCRIPTION OF CAPITAL STOCK --
Stockholders Agreement." Under the terms of such restriction,
such persons will agree to vote, in the same proportion as the
shares not owned by them (the "Unaffiliated Shares") that are
voted on any such matter, that percentage of Excess Voting
Shares held by them at such time that equals the percentage of
outstanding Unaffiliated Shares that are voted on such matter.
The Special Committee was aware of the significant ownership
of Interests by Lehman Brothers and management in partnership
form and the absence of any voting restrictions on such
Interests in the Partnership Agreement. The Special Committee
believed the voting restrictions obtained in the Stockholders
Agreement (which effectively provides that, as to matters
requiring a majority vote of stockholders of the Corporation,
the holders of approximately 73% of the Common Stock held by
persons other than Lehman Brothers and its affiliates and
certain members of senior management have the ability to
control the outcome of any such vote) were of benefit to the
other holders of Common Stock, particularly in view of the
fact that the provision in the Partnership Agreement providing
for the removal of the General Partner upon the affirmative
vote of 80% of the Interests of the Unaffiliated Limited
Partners would not be carried forward in the Corporation's
Certificate of Incorporation or Bylaws. See "COMPARISON OF
INTERESTS AND SECURITIES TO BE ISSUED."
As to the matter noted in (ii) above, the Special Committee
viewed the Conversion as significantly enhancing the
possibility of change of control transactions involving major
stockholders of the Corporation given its more simplified
corporate structure and the likelihood of broader market
liquidity for its Common Stock. After extensive negotiations
with the General Partner, the Special Committee concluded that
the general prohibition on sales to third persons which would
beneficially own more than 10% (or in certain cases involving
institutional stockholders, 15%) of the Common Stock
substantially diminished the likelihood of Lehman Brothers or
management selling shares of Common Stock for a
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premium not available to all stockholders, or effecting a
change of control transaction without the consent of the
Independent Directors. The Special Committee was not aware of
any plans or proposals on the part of the General Partner,
Lehman Brothers, management or their respective affiliates to
engage in any block sales of Common Stock, whether or not
prohibited by the terms of the Stockholders Agreement. See
"DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement."
As to the matter noted in (iii) above, the Special Committee
believed it important that there be some meaningful
independent check on any decision by Lehman Brothers or
management with respect to any major transaction by the
Corporation with change of control implications occurring
shortly after the Conversion, particularly in light of the
substantial equity to be received by the General Partner in
exchange for the General Partnership Interests and Lehman
Brothers' expression of interest in possibly liquidating some
or all of its Common Stock holdings after the Conversion.
Accordingly, the Special Committee negotiated provisions in
the Stockholders Agreement requiring that at least four of the
nine members of the Corporation's Board of Directors be
Independent Directors, and that, for three years after the
Conversion, certain specified transactions, including mergers,
asset sales, liquidations and tender and exchange offers for
the Corporation, be approved by a majority of the Independent
Directors on the Corporation's Board of Directors. Also, the
Stockholders Agreement provides for the approval by the
Independent Directors of certain transactions between
management and Lehman Brothers, on the one hand, and the
Corporation, on the other. See "DESCRIPTION OF CAPITAL STOCK
-- Stockholders Agreement."
As to the matters noted in (i), (ii) and (iii) above, the
Special Committee was also aware that certain provisions in
the Corporation's Certificate of Incorporation and Bylaws and
the Corporation's stockholder rights plan could have certain
anti-takeover effects. See "DESCRIPTION OF CAPITAL STOCK --
Anti-takeover Provisions." However, the Special Committee
believed such provisions and the stockholder rights plan could
also facilitate the Special Committee's objectives in
preventing sale of control transactions that were not in the
best interests of all holders of Common Stock as discussed
above.
o Limitation of Scope of Special Committee's Review. The Special
Committee did not specifically consider the relative merits of
the Conversion as compared to any alternative strategies or
transactions, including liquidation of the Partnership. See
"-- Determinations of the Special Committee." For a discussion
of the review of certain alternatives to the Conversion
considered by the Board of Directors of Lehman/SDI. See "--
Alternatives to the Conversion."
The foregoing is a summary of the information and factors considered by
the Special Committee and is not intended to be exhaustive. In reaching its
recommendation that the Conversion is fair to the holders of the A Interests and
fair to the holders of the B Interests, and that the General Partner
Consideration is fair to the holders of the A Interests and the holders of the B
Interests, respectively, the Special Committee did not assign specific or
relative weights to the foregoing factors, except that each member placed
significant weight on the fairness opinion of Smith Barney.
<PAGE>
For additional information regarding certain risks relating to the
Conversion, limited partners should read carefully "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS" herein.
Opinion of Smith Barney
The Special Committee, Lehman/SDI, the Partnership, the Operating
Partnership and the General Partner have retained Smith Barney to act as
financial advisor to the Special Committee in connection with the Conversion. In
connection with its engagement, Smith Barney has delivered to the Special
Committee its written opinion, dated December 10, 1996, to the effect that, as
of such date based upon and subject to certain matters as stated therein, (i)
the consideration to be received in the Conversion by the holders of A Interests
is fair, from a financial point of view to such holders, (ii) the consideration
to be received in the Conversion by the holders of B Interests is fair, from a
financial point of view to such holders, and (iii) the General Partner
Consideration to be received in the Conversion is fair from a financial point of
view to the holders of the A Interests and to the holders of the B Interests,
respectively.
In rendering its opinion, Smith Barney, among other things, reviewed
the Term Sheet and the partnership agreements of the Partnership, the Operating
Partnership and the General Partner and held discussions with certain of the
senior operating management of the Partnership and the Operating Partnership
("Management") and representatives and advisors of the Partnership, the
Operating Partnership and the General Partner to discuss the business,
operations and prospects of the Partnership. Smith Barney also examined certain
publicly available business and financial information relating to the
Partnership as well as internal financial statements, forecasts and other
financial and operating data concerning the Partnership prepared by Management.
Smith Barney reviewed the financial terms of the Conversion as set forth in the
Term Sheet in relation to, among other things, current and historical market
prices and trading volumes of the A Interests and B Interests, historical and
projected earnings and operating data of the Partnership and projected earnings
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<PAGE>
and operating data of the Corporation, and the capitalization and financial
condition of the Partnership. Smith Barney considered, to the extent publicly
available, the financial terms of certain other similar transactions which Smith
Barney considered comparable to the Conversion, and analyzed certain financial,
capital market and other publicly available information relating to the
businesses of other companies whose operations Smith Barney considered
comparable to those of the Partnership. In addition to the foregoing, Smith
Barney conducted such other analyses and examinations and considered such other
financial, economic and market criteria as it deemed necessary to arrive at its
opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts and other
information furnished to or otherwise reviewed by or discussed with Smith
Barney, Smith Barney was informed by Management that such forecasts and other
information were reasonably prepared on bases reflecting the best currently
available estimates and judgments of Management as to the expected future
financial performance of the Partnership or the Corporation, as the case may be.
Smith Barney further relied on the assurances of Management that it was unaware
of any facts that would make the information or forecasts provided to Smith
Barney incomplete or misleading. Smith Barney did not express any opinion as to
what the value of the Common Stock or the Preferred Securities actually will be
when issued to holders of A Interests and B Interests, respectively, or the
prices at which the Common Stock or the Preferred Securities will trade
subsequent to the Conversion. In addition, Smith Barney did not make and was not
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Partnership. Smith Barney was not
asked to and did not express an opinion as to the relative merits of the
Conversion as compared to any alternative business strategies that might exist
for the Partnership or the effect of any other transaction in which the
Partnership might engage. Smith Barney was not asked to solicit third-party
indications of interest in acquiring all or any part of the Partnership. Smith
Barney's opinion is necessarily based upon financial, capital market and other
conditions and circumstances existing and disclosed to Smith Barney as of the
date of its opinion. No limitation was imposed by the Special Committee on the
scope of the investigation by Smith Barney in connection with its fairness
opinion.
The full text of the written opinion of Smith Barney, which sets forth
the assumptions made, matters considered and limitation on the review
undertaken, is attached as Exhibit C to this Proxy Statement/Prospectus and is
incorporated herein by reference. Holders of A Interests and B Interests are
urged to read this opinion carefully in its entirety. Smith Barney's opinion is
directed only to the fairness of the consideration to be received by holders of
A Interests and B Interests and of the General Partner Consideration from a
financial point of view to holders of A Interests and B Interests, respectively,
and has been provided for the use of the Special Committee and the Board of
Directors of Lehman/SDI, Inc. in their evaluation of the Conversion, does not
address any other aspect of the Conversion or any related transaction and does
not constitute a recommendation to any holder of A Interests or B Interests as
to how such holder should vote at the Special Meeting. The summary of the
opinion of Smith Barney set forth in this Proxy Statement/Prospectus is
qualified in its entirety by reference to the full text of such opinion.
<PAGE>
In preparing its opinion to the Special Committee, Smith Barney
performed a variety of financial and comparative analyses, including those
described below. The summary of such analyses does not purport to be a complete
description of the analyses underlying Smith Barney's opinion. The preparation
of a fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not necessarily susceptible to summary
description. In arriving at its opinion, Smith Barney did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of such analyses and
factors. Accordingly, Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
Smith Barney made numerous assumptions with respect to the Partnership, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the Partnership. The
estimates contained in such analyses are not necessarily indicative of actual
values or predictive of actual future results or values, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of the businesses or securities do not
purport to be appraisals or to reflect the prices at which the business or
securities may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
A Interests
Valuation of A Interests. In order to value the A Interests, Smith
Barney performed discounted cash flow analyses of the distributions payable to
the holders of A Interests under four scenarios assuming (i) the Partnership is
liquidated immediately, (ii) the Partnership is liquidated on 12/31/97, (iii)
the Partnership is liquidated on 12/31/2001 and (iv) the Partnership is
liquidated on 12/31/2036. In these analyses, discount rates of 9.4%, 10.6% and
12.5% were used. These discount rates were based on, among other things, the
historical range of trading yields on the A Interests. The implied valuation
range for the A Interests resulting from these analyses was $98.0 million ($8.83
per A Interest) to $129.3 million ($11.65 per A Interest). The mid-point of the
implied
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<PAGE>
valuation range was then calculated to be $113.6 million ($10.24 per A
Interest).
Valuation of the A Consideration. Upon consummation of the Merger, each
A Interest will be exchanged for 0.38 shares of Preferred Securities and $1.30
in cash (collectively, the "A Consideration"). Smith Barney analyzed the value
of the Preferred Securities in relation to the trading value of the A Interests.
Unlike the A Interests which are not redeemable (other than in a liquidation of
the Partnership), the Preferred Securities are callable by the Corporation at
liquidation value five years after the date of issuance. Based on the treasury
yield curve on December 6, 1996, assumed interest rate volatility of 9% and a 40
year maturity, Smith Barney estimated that an additional yield of 93 basis
points would be required to compensate holders of A Interests for this change in
call protection.
In addition to the changes in the distribution rate and call protection
in the Preferred Securities, in analyzing the differences between the A
Interests and the Preferred Securities, Smith Barney also considered, among
other things, (i) the market risk associated with the Preferred Securities, (ii)
the potential for the deferment for up to 60 months of the monthly distributions
on the Preferred Securities, and (iii) the lack of voting rights granted to
holders of the Preferred Securities. In comparing the value of the A
Consideration with the value of the A Interests, Smith Barney also considered
the potential payment of taxes by holders of A Interests in the Conversion and
the fact that the amount of monthly distributions to be received by holders of A
Interests after the Conversion would be the same as the monthly distributions
payable on the A Interests prior to the Conversion.
Smith Barney analyzed the value of the A Consideration assuming a range
of trading yields on the Preferred Securities of 9.4% to 12.2% on a yield to
first call basis. The range of implied values for the A Consideration based on
such yields on the Preferred Securities was calculated to be $10.59 to $11.63.
The range of implied values of the A Consideration was compared to
$10.50, the average of the closing market prices of an A Interest on the five
trading days preceding December 12, 1996, the day the Partnership announced the
terms of the Conversion (the "Announcement Date"). The range of premiums of such
implied values over such average market price for an A Interest was .9% to
10.8%. The range of implied values of the A Consideration was also compared to
the mid-point of the DCF valuation range of the A Interests and the range of
premiums over such valuation was 3.4% to 13.6%.
B Interests
Valuation of B Interests. In order to value the B Interests, Smith
Barney performed discounted cash flow analyses of the projected free cash flows
of the Partnership assuming the Partnership begins paying corporate income taxes
in 1998. Smith Barney also assumed, among other things, discount rates of 11.5%,
12.5% and 13.5% and terminal multiples of earnings before interest, taxes,
depreciation and amortization ("EBITDA") of 5.5x to 7.0x. The discount rates
used were based on, among other things, the cost of capital of the Partnership,
adjusted to take into account that beginning in 1998, distributions on the A
Interests would not be tax deductible. The terminal multiples used were based
on, among other things, the trading multiples of the Comparable Companies (as
defined below).
Smith Barney performed the discounted cash flow analyses on the
operating projections prepared by Management. These analyses resulted in an
implied valuation range for the B Interests of $93.3 million ($4.30 per B
Interest) to $165.8 million ($7.65 per B Interest). The mid-point of the implied
valuation range was then calculated to be $129.5 million ($5.97 per B Interest).
Valuation of the B Consideration. Upon consummation of the Merger, each
B Interest will be exchanged for 0.25 shares of Common Stock (the "B
Consideration"). Smith Barney analyzed the value of the Common Stock by
examining trading multiples of comparable companies and performing discounted
cash flow analyses of the Corporation's projected free cash flows.
Comparable Company Analysis. Using publicly available information,
Smith Barney analyzed, among other things, the market values and trading
multiples of a group of eight selected comparable wholesale distributors of
industrial products and services comprised of Barnes Group, Inc., BMC West
Corp., Bearings, Inc., Cameron Ashley Building Products, Inc., Hughes Supply,
Inc., Lawson Products, Inc., NCH Corporation and Rexel Inc. (collectively the
"Comparable Companies").
Smith Barney compared market values as multiples of, among other
things, projected 1996 and 1997 net income. The multiples of projected 1996 and
1997 net income of the Comparable Companies were between the following ranges:
(i) projected 1996 net income: 11.0x to 18.2x (with a mean of 12.8x and a median
of 12.0x); and (ii) projected 1997 net income: 9.5x to 14.1x (with a mean of
11.6x and a median of 11.7x). Smith Barney also compared market values as
multiples of historical EBITDA and projected 1996 and 1997 EBITDA. The multiples
of latest twelve months ended September 30, 1996 ("LTM") EBITDA and projected
1996 and 1997 EBITDA of the Comparable Companies were between the following
ranges: (i) LTM EBITDA: 5.8x to 12.1x (with a mean of 7.2x and a median of
6.5x); (ii) projected 1996 EBITDA: 5.6x to 10.6x (with a mean of 6.6x and a
median of 6.1x); and (iii) projected 1997
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EBITDA: 5.2x to 8.7x (with a mean of 6.2x and a median of 5.9x).
Smith Barney also compared the debt to capitalization ratios, interest
coverage ratios, historical profit margins, historical EBITDA and net income
growth, returns of average assets, equity and invested capital (total debt plus
book value of common equity plus book value of preferred equity plus book value
of minority interests plus deferred income tax liabilities), dividend yield and
projected earnings per share ("EPS") growth of the Comparable Companies. All
projected EPS figures for the Comparable Companies were based on the consensus
net income estimates of selected investment banking firms and all projections
for the Corporation were based on operating projections prepared by Management.
All multiples were based on closing stock prices as of December 6, 1996.
Smith Barney applied a range of trading multiples representative of the
Comparable Companies to pro forma historical and projected operating data of the
Corporation (derived by adjusting the operating data of the Partnership to
reflect consummation of the Conversion and application of a 40% corporate tax
rate) to arrive at a range of implied equity values for the shares of Common
Stock. Smith Barney applied the Comparable Companies' mean and median multiples
of 12.8x and 12.0x to projected 1996 net income, and 11.6x and 11.7x to
projected 1997 net income. Based on these multiples, Smith Barney arrived at an
implied valuation range of $18.96 to $22.92 per share of Common Stock or $4.74
to $5.73 for the B Consideration. Smith Barney also applied the Comparable
Companies' mean and median multiples of 7.2x and 6.5x to LTM EBITDA, 6.6x and
6.1x to projected 1996 EBITDA, and 6.2x and 5.9x to projected 1997 EBITDA. Based
on these multiples of EBITDA, Smith Barney arrived at an implied valuation range
of $9.56 to $15.00 per share of Common Stock or $2.39 to $3.75 for the B
Consideration. In valuing the Common Stock, Smith Barney relied more heavily on
the implied valuation range derived from the multiples of net income rather than
the multiples of EBITDA since they believe that net income multiples would be a
better indicator of the trading value of the Common Stock.
None of the Comparable Companies is identical to the Corporation.
Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the public trading value of the Comparable Companies
or the company to which they are being compared.
Discounted Cash Flow Analyses. Smith Barney also performed discounted
cash flow analyses of the projected free cash flows of the Corporation for the
five fiscal years ended December 31, 2001. Smith Barney assumed, among other
things, discount rates of 9.0%, 10.0% and 11.0% and terminal multiples of EBITDA
of 6.0x to 7.5x. The discount rates used were based on, among other things, the
cost of capital of the Partnership, adjusted to take into account the capital
structure of the Corporation and the fact that dividends on the Preferred
Securities will be tax deductible. The terminal multiples used were based on,
among other things, the trading multiples of the Comparable Companies. The
discounted cash flow analyses were performed on the operating projections
prepared by Management and resulted in an implied equity valuation range per
share of Common Stock of $17.64 to $31.56 or $4.41 to $7.89 for the B
Consideration.
Smith Barney then derived an implied equity valuation range per share
of $18.28 to $27.24 for the Common Stock by averaging the composite values
derived through the comparable company analysis based on net income multiples
and the discounted cash flow analyses described above. The implied equity
valuation range was adjusted to $4.57 to $6.81 to show an implied valuation
range for the B Consideration. This range was compared to $4.35, the average
closing market price of a B Interest on the five trading days preceding the
Announcement Date. The range of premiums of the implied valuation range over
such average market price for a B Interest was 4.3% to 55.5%. The range of
implied values of the B Consideration was also compared to the mid-point of the
implied valuation range of a B Interest and the range of premiums over such
valuation was -23.5% to 14.1%.
General Partnership Interests
Valuation of the General Partner Interests. Smith Barney analyzed the
value of the General Partnership Interests consisting of (i) the Management Fee
and (ii) an effective percentage equity interest of 1.99% in the Operating
Partnership (the "1.99% Interest"). In order to determine the potential value
attributable to the General Partnership Interests, Smith Barney performed a net
present value calculation of the Management Fee in perpetuity assuming discount
rates of 9.4%, 10.5% and 12.5%. Based on these net present value calculations,
Smith Barney estimated the range of the total potential value of the Management
Fee to be $26.6 million to $35.6 million. Smith Barney also capitalized the
Management Fee based on the Comparable Companies' mean and median LTM EBITDA
multiples (6.5x and 7.2x) and capitalized the after-tax equivalent of the
Management Fee based on the Comparable Companies' mean and median LTM net income
multiples (13.0x and 13.4x). The capitalization of the Management Fee resulted
in a range of total potential value of $21.6 million to $26.8 million. The two
valuation methodologies produced a composite total potential valuation range for
the Management Fee of $21.6 million to $35.6 million.
In addition to looking at the valuation methodologies described in the
preceding paragraph, Smith Barney took into consideration the following factors
which detract from the value of the Management Fee, among others, in analyzing
the value of the Management Fee: (i) the accelerated timing of the receipt by
the General Partner of value for the Management Fee in the Conversion; (ii) the
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<PAGE>
illiquidity of the right to receive the Management Fee; (iii) the potential for
the Management Fee to be terminated in the event of (a) liquidation or sale of
the Partnership, or (b) removal of the General Partner upon the vote of 80% of
the unaffiliated limited partners; (iv) the subordination of the Management Fee
to the payment of distributions on the A Interests; and (v) the termination of
the services provided by the General Partner following the consummation of the
Conversion.
Smith Barney estimated the value for the 1.99% Interest by taking 1.99%
of the enterprise value for the Partnership less net debt. Enterprise value for
the Partnership was calculated using discounted cash flow analyses of the
projected free cash flows of the Partnership assuming the Partnership begins
paying corporate income taxes in 1998. Smith Barney also assumed, among other
things, discount rates of 11.5%, 12.5% and 13.5% and terminal multiples of
EBITDA of 5.5x to 7.0x. Smith Barney performed these analyses on the operating
projections prepared by Management. These analyses resulted in an implied
valuation range for the 1.99% Interest of $4.1 million to $5.6 million. Smith
Barney then added the range of total potential values derived from the analysis
of the Management Fee and the range of implied values of the 1.99% Interest and
derived a total potential value range for the General Partnership Interests of
$25.7 million to $41.2 million, with a resulting mid-point of $33.4 million.
Valuation of the General Partner Consideration. Upon consummation of
the Merger, the General Partnership Interests will be exchanged for 1,000,000
shares of Common Stock (the "General Partner Consideration"). Smith Barney
analyzed the value of the Common Stock using the equity values implied by the
comparable company trading multiples and discounted cash flow analyses described
above. See "-- B Interests -- Valuation of the B Consideration." Smith Barney
derived an implied equity valuation range per share of Common Stock of $18.28 to
$27.24 by averaging the composite values derived through the comparable company
analysis based on net income multiples and the discounted cash flow analysis.
The valuation range for the General Partner Consideration was then calculated to
be $18.3 million to $27.2 million. The range of implied values of the General
Partner Consideration was compared to the mid-point of the total potential value
of the General Partnership Interests and the range of discounts from such
valuation was - 45.2% to -18.4%.
Other Factors and Comparative Analyses
In rendering its opinion, Smith Barney considered certain other factors
and conducted certain other comparative analyses, including among other things,
a review of (i) the projected financial results of the Partnership, (ii) the
history of trading prices for the A and B Interests, (iii) the treatment of
general partner interests in selected partnership conversions, (iv) certain pro
forma effects on the Partnership resulting from the Conversion and (v) the pro
forma ownership of the Corporation.
The Special Committee, Lehman/SDI, the Partnership, the Operating
Partnership and the General Partner entered into an engagement letter with Smith
Barney on July 16, 1996 pursuant to which the Partnership agreed to pay Smith
Barney fees of $1.25 million, comprised of a retainer fee of $250,000, which was
paid upon execution of the engagement letter and an opinion fee of $1.0 million,
which was paid shortly after delivery of Smith Barney's opinion, dated December
10, 1996. The Partnership has agreed to reimburse Smith Barney for its
out-of-pocket expenses, including reasonable fees and disbursements of counsel
provided that such fees and expenses of counsel shall not be in excess of
$25,000 in the aggregate without the prior written consent of the Special
Committee, which consent shall not be unreasonably withheld. Lehman/SDI, the
General Partner, the Partnership and the Operating Partnership have also agreed,
in a separate letter agreement, to indemnify Smith Barney and its affiliates,
their respective directors, officers, agents and employees and each person, if
any, controlling Smith Barney or any of its affiliates against certain
liabilities, including liabilities under the federal securities laws and
expenses related to Smith Barney's engagement.
In light of Smith Barney's familiarity with, and understanding of, the
operations of the Partnership as well as their experience in advising on matters
relating to the conversion of partnerships to corporate form generally, the
Special Committee believed that it was advisable to engage Smith Barney in
connection with the proposed Conversion. Smith Barney is a nationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Other than acting as financial advisor in connection with the
Conversion (and delivery of its fairness opinion), Smith Barney has not
previously rendered investment banking services to the Partnership, Lehman/SDI,
the Operating Partnership or the General Partner in the past two years. In the
ordinary course of its business, Smith Barney may, from time to time, buy and
sell securities of the Partnership.
Recommendation of the General Partner and Fairness Determination
The General Partner believes the Conversion is fair to and in the best
interests of the Partnership and the limited partners. The General Partner
recommends that the limited partners approve the Conversion.
As described under "-- Alternatives to the Conversion," the General
Partner does not believe that liquidation is a viable alternative
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<PAGE>
for the Partnership because, among other things, there was substantial doubt
that acceptable prices could be found for all of the business units within an
acceptable time period. The General Partner's determination to recommend that
SunSource convert to corporate form is based on its belief that the Conversion
will result in the benefits to the limited partners and to the Corporation
described above under "-- Reasons to Convert to Corporate Form." On the other
hand, the General Partner considered the potential disadvantages of the
Conversion, see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Related to the Conversion," and, given the alternatives
to the Conversion, believes that the advantages of the Conversion outweigh any
potential disadvantages.
In reaching a recommendation with respect to the Conversion, the General
Partner also considered (i) the fact that the consideration to be received and
the other terms of the Conversion resulted from arms-length negotiation with the
Special Committee and were determined by the Special Committee to be fair to the
limited partners and (ii) the fact that Smith Barney has delivered its opinion
(and the basis for such opinion) to the Special Committee to the effect that,
(a) the consideration to be received in the Conversion by the holders of A
Interests is fair, from a financial point of view to such holders, (b) the
consideration to be received in the Conversion by the holders of B Interests is
fair, from a financial point of view to such holders, and (c) the General
Partner Consideration to be received in the Conversion is fair from a financial
point of view to the holders of the A Interests and to the holders of the B
Interests, respectively. The General Partner also considered the consequences to
the Partnership and its partners if the Conversion is not consummated, as
discussed under "-- Consequences if Conversion is Not Approved" and other
information about the Conversion and the Corporation included in this Proxy
Statement/Prospectus, and concluded that the Conversion was in the best
interests of the Partnership and the limited partners. No particular weight was
assigned to any one factor in arriving at its decision.
The General Partner sought to provide procedural fairness to the limited
partners in connection with the consideration of the Conversion by (i) creating
a Special Committee composed of disinterested directors to advise the Board of
Directors with respect to the terms of the Conversion as to its fairness to the
limited partners, and to make a recommendation to the Board of Directors with
respect to the Conversion, (ii) authorizing the Special Committee to select a
financial advisor and legal counsel to assist it in its deliberations, and (iii)
implementing the Conversion only if approved by the affirmative vote of a
majority of the unaffiliated A Interests and B Interests, each voting separately
as a class. Through these arrangements the General Partner sought to provide
procedural fairness to the limited partners and to minimize the extent to which
the consideration of the Conversion was subject to conflicts of interest of the
management and affiliates of the General Partner.
Source and Amount of Funds
It is estimated that the funds required to make the $1.30 cash payment to
the A Interests and to pay for fractional shares and for the fees and expenses
described below will be less than $________. Payments to be made prior to the
Conversion will be made from funds borrowed under the Partnership's existing
bank credit agreement which is described in Note 8 of Notes to Consolidated
Financial Statements. Upon consummation of the Conversion, the existing bank
credit agreement and the Partnership's long-term debt will be repaid and
replaced with new credit facilities at interest rates expected to be lower than
financing rates currently incurred by the Partnership. Prepayment of the
Partnership's long-term debt will result in the payment of a make-whole penalty
of approximately $5 million.
Accounting Treatment
For financial accounting purposes, the Conversion will be treated as a
recapitalization. Therefore, the assets and liabilities of the Partnership will
be recorded by the Corporation at their historical cost basis, except that the
Corporation will also record incremental deferred tax assets in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), relating to
the temporary differences for certain assets and liabilities of the Partnership
at the date of conversion to corporate form. The existing values of the tax
basis in assets and liabilities of the Partnership at the date of conversion
will carry over to the Corporation which will also record a provision for U.S.
federal and state income taxes on its taxable earnings.
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Corporation and, accordingly, the accounts of the Trust will be included
in the consolidated financial statements of the Corporation. The Preferred
Securities will be presented in the consolidated balance sheet of the
Corporation as a separate line item directly above stockholders' equity under
the caption "GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION'S
JUNIOR SUBORDINATED DEBENTURES" and appropriate disclosures about the Preferred
Securities, the Guarantee and the Junior Subordinated Debentures will be
included in the Notes to the Consolidated Financial Statements. For financial
reporting purposes, the Corporation will record distributions payable on the
Preferred Securities as an expense in its consolidated statements of income.
Fees and Expenses
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<PAGE>
All legal and other costs and expenses incurred by the Corporation or the
Partnership in connection with the Conversion will be paid by the Partnership,
whether or not the Conversion is consummated. The following is a statement of
certain estimated fees and expenses incurred by the Corporation in connection
with the Conversion:
SEC Registration Fee...........................................$
New York Stock Exchange Listing Fee.............................
Legal Fees and Expenses.........................................
Financial Advisory Fees and Expenses............................
Accounting Fees and Expenses....................................
Solicitation Fees and Expenses..................................
Printing and Engraving Expenses.................................
Miscellaneous ................................................. ______
Total ...............................................$
Exchange of Depositary Receipts
Limited partners should not send any depositary receipts with the enclosed
proxy. They should retain the depositary receipts until they receive further
instructions if the Conversion is consummated.
Promptly after the Effective Time, the Corporation will mail to all limited
partners of record a letter of transmittal containing instructions with respect
to the surrender of depositary receipts for Interests in exchange for
certificates representing shares of Preferred Securities and Common Stock and
cash in the case of A Interests. Upon surrender to the Corporation of one or
more depositary receipts, together with a properly completed letter of
transmittal, there will be issued and mailed to former limited partners of
record at the Effective Time a certificate or certificates representing the
number of shares of Preferred Securities or Common Stock to which such holder is
entitled and a check for cash in the case of A Interests. From and after the
Effective Time, each depositary receipt will evidence only the right to receive
shares of Preferred Securities and Common Stock and cash in the case of A
interests.
No distributions or dividends with respect to the Preferred Securities or
Common Stock payable to the holders of record thereof after the Effective Time
will be paid to the holder of any unsurrendered depositary receipts until such
depositary receipts are surrendered for exchange, at which time accumulated
interest or dividends will be paid, without interest, subject to any applicable
escheat laws.
If any certificate representing Preferred Securities or Common Stock is to
be issued in a name other than that in which the depositary receipt surrendered
in exchange therefor is registered on the books of the Partnership as of the
Effective Time, it will be a condition of such issuance that (i) the depositary
receipt so surrendered be properly endorsed and otherwise in proper form for
transfer, and (ii) the person requesting such exchange pay to the Corporation
any transfer or other taxes required by reason of the issuance of a certificate
representing Preferred Securities or Common Stock in any name other than that of
the registered owner of the depositary receipt surrendered, or the person
requesting such exchange establish to the satisfaction of the Corporation that
such tax has been paid or is not applicable.
After the Effective Time, there will be no further registration of
transfers of Interests that were issued and outstanding immediately before such
time. If, after the Effective Time, depositary receipts representing Interests
are presented for transfer, they will be canceled and exchanged for one or more
certificates representing shares of Preferred Securities or Common Stock and
cash in the case of A Interests.
Treatment of Fractional Shares
No fractional shares will be issued. Instead, (i) each holder of A
Interests will be entitled to receive cash in an amount equal to the fraction of
a share of Preferred Securities to which the holder is otherwise entitled
multiplied by the average closing price of the Preferred Securities for the five
trading days following the Effective Time; and (ii) each holder of B Interests
shall be entitled to receive cash in an amount equal to the fraction of a share
of Common Stock to which the holder is otherwise entitled multiplied by the
average closing price of the Common Stock for the five trading days following
the Effective Time.
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<PAGE>
COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED
The following summary compares a number of differences between ownership of
Interests and ownership of shares of Preferred Securities and Common Stock and
the effects relating thereto.
<TABLE>
<CAPTION>
Interests Common Stock Preferred Securities
--------- ------------ --------------------
Issuer
<S> <C> <C>
The Partnership The Corporation The Trust. Payment of distributions
and on liquidation or redemption is
guaranteed on a subordinated basis
as and to the extent described
herein by the Corporation.
Taxation
Under current law, the Partnership is not a The Corporation is a taxable entity with Each holder of Preferred Securities
taxpaying entity. Rather, each holder of respect to its income after allowable will be considered to own a pro rata
Interests includes the holder's share of the deductions and credits. Stockholders will portion of the Junior Subordinated
income and gain and, subject to certain have taxable income from the Debentures held by the trust and
limitations, the losses, deductions and Corporation's operations only to the extent will be required to include in gross
credits of the Partnership in computing that taxable dividends and other income the pro rata share of income
taxable income without regard to the cash distributions are declared and paid on the accrued on the Junior Subordinated
distributed to the limited partner. Common Stock. See "CERTAIN FEDERAL INCOME Debentures and any original issue
Generally, cash distributions to holders of TAX CONSEQUENCES." discount attributable to the Junior
Interests are not taxable, unless Subordinated Debentures. See
distributions exceed the limited partner's "CERTAIN FEDERAL INCOME TAX
basis in the Interests. See "CERTAIN CONSEQUENCES."
FEDERAL INCOME TAX CONSEQUENCES."
A tax-exempt limited partner's share of the No portion of the earnings of, or any No portion of the income accrued
Partnership's taxable income constitutes dividends received from, the Corporation or distributions received on the
unrelated business taxable income to the will constitute unrelated business taxable Preferred Securities will constitute
tax-exempt unitholder. See "CERTAIN income to tax-exempt stockholders, except unrelated business taxable income
FEDERAL INCOME TAX CONSEQUENCES." to the extent their investment in stock of to tax-exempt stockholders, except
the Corporation is considered to the extent their investment in the
debt-financed. See "CERTAIN FEDERAL Preferred Securities is considered
INCOME TAX CONSEQUENCES." debt-financed. See CERTAIN
FEDERAL INCOME TAX CONSEQUENCES."
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Preferred Securities
--------- ------------ --------------------
<S> <C> <C>
Distributions and Dividends
The Partnership is required under the The Board of Directors of the Corporation The holders of Preferred Securities
Partnership Agreement to make has the discretion to determine whether or will be entitled to monthly
distributions of the Partnership's Available not and when to declare and pay dividends distributions at the rate of $2.90 per
Cash, less certain permitted retentions to and the amount of any dividend. Holders of annum (11.6% of the $25
the A Interests for the Priority Return of Common Stock will have no contractual liquidation amount) to the extent
$1.10 per annum and to the B Interests for right to receive dividends. interest is paid by the Corporation
the Tax Distribution. Available Cash on the Junior Subordinated
generally means the Partnership's cash Debentures. The Corporation has
receipts less (i) cash operating expenses the right to defer payment of
and other expenditures, and (ii) reserves, interest on the Junior Subordinated
established by the General Partner in its Debentures for a period up to 60
sole discretion for working capital, capital consecutive months in which case
expenditures, debt service and other no distributions will be paid on the
purposes and contingencies. Preferred Securities. Any unpaid
dividends will cumulate and must
be paid prior to any dividends on
the Common Stock.
Management
The business and affairs of the Partnership The business and affairs of the Corporation The Trust is managed by five
are managed by the General Partner. are managed by or under the direction of trustees appointed by the
the Board of Directors of the Corporation. Corporation.
The members of the Board of Directors of
Lehman/SDI will become the members of
the Board of Directors of the Corporation
after the Conversion. Therefore, the
personnel in control of the Corporation
will be identical to that of the Partnership.
The General Partner may be removed only The holders of Common Stock of the The holders of Preferred Securities
by vote of 80% of the Interests held by Corporation will have the ability to elect will have no rights to elect or
unaffiliated limited partners. See members of the Board of Directors with a remove management of the
"DESCRIPTION OF CAPITAL STOCK -- plurality of the votes cast for such election Corporation. The holders will be
Stockholders Agreement." and to remove management with a majority entitled to elect a Special Regular
vote of the Common Stock outstanding and Trustee if the Trust fails to make
entitled to vote. distributions for 18 consecutive
months or there is an Event of
Default.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Preferred Securities
--------- ------------ --------------------
<S> <C> <C>
Voting Rights
Under Delaware law and the Partnership Holders of Common Stock will have the The holders of Preferred Securities
Agreement, limited partners have voting right to vote on matters specified by will have no voting rights except to
rights with respect to (i) the removal and Delaware law affecting the corporate elect a Special Regular Trustee as
replacement of the General Partner, (ii) the structure of the Corporation, including described above and with respect to
merger of the Partnership, (iii) the sale of election of the Board of Directors. certain modifications and
all or substantially all of the assets owned, Stockholders of the Corporation will have amendments.
directly or indirectly, by the Partnership, the right to vote on all matters on which
(iv) the dissolution of the Partnership or stockholders must be permitted to vote
the Operating Partnership, and (v) material including, as a general matter, election of
amendments to the Partnership Agreement directors, fundamental changes in the
and the Operating Partnership Agreement, Corporation, sale of all or substantially all
subject, in certain cases, to approval of the of the assets of the Corporation and certain
Board of Directors. amendments to the Certificate of
Incorporation.
Each Interest entitles each holder thereof Each share of Common Stock entitles its Each of the Preferred Securities
who is admitted as a limited partner to the holder to cast one vote on each matter entitles its holder to cast one vote
Partnership to cast one vote on all matters presented to stockholders. on each matter presented to
presented to limited partners. stockholders.
Approval of any matter submitted to Approval of any matter submitted to Approval on any matter on which
limited partners generally requires the stockholders generally requires the holders of Preferred Securities are
affirmative vote of limited partners holding affirmative vote of holders of more than entitled to vote requires the
more than 50% of the Interests then 50% of the Common Stock outstanding affirmative vote of a majority of the
outstanding. The removal of the General and entitled to vote. outstanding Preferred Securities
Partner requires the affirmative vote of except that modifications and
80% of the unaffiliated limited partners. amendments of the Declaration
require a 66 2/3% vote.
Holders of 25% of the Interests held by Amendment of the certificate of The holders of the Preferred
limited partners may propose amendments incorporation or bylaws requires approval Securities have no right to amend
to the partnership agreement. of a majority of the members of the Board the Declaration of Trust.
of Directors and, in certain
cases, approval by the
stockholders. The Stockholders
Agreement has certain requirements
with regard to approval of
amendments by the Independent
Directors. In addition, the
Stockholders Agreement contains
provisions under which Lehman
Brothers and certain members of
management will agree to vote, in
the same proportion as the
"Unaffiliated Shares" that are
voted on any such matter, that
percentage of Excess Voting Shares
(as defined herein) held by them
at such time that equals the
percentage of outstanding
Unaffiliated Shares that are voted
on such matter. See "DESCRIPTION
OF CAPITAL STOCK --Stockholders
Agreement."
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Preferred Securities
--------- ------------ --------------------
<S> <C> <C>
Any action that may be taken at a meeting Stockholders may act by written consent in Not applicable.
of limited partners may be taken by written lieu of a meeting with a number of votes
consent in lieu of a meeting executed by sufficient for such action.
limited partners sufficient to authorize such
action at a meeting of limited partners.
Special Meetings
Special meetings of Limited Partners may Stockholders are permitted to call a special Holders of Preferred Securities may
be called by the General Partner or by meeting or require that the board of only call a special meeting of the
Limited Partners holding at least 25% of directors call a special meeting of Trust when entitled to elect a
the outstanding Interests. stockholders if such meeting is called by Special Regular Trustee.
holders of at least 25% of outstanding
Common Stock.
Conversion Rights
The Interests are not convertible into any The Common Stock is not convertible into The Preferred Securities are not
other securities. any other securities. convertible into any other
securities.
Redemption
Interests are not subject to mandatory or The Common Stock is not subject to The Preferred Securities will be
optional redemption. mandatory or optional redemption. redeemed upon maturity or earlier
redemption of the Junior Subordinated
Debentures at 100% of the liquidation
amount plus accrued and unpaid
distributions, provided that any
redemption by reason of a Tax Event
within the first five years will be
at 101%. The Junior Subordinated
Debentures may be redeemed by the
Corporation at any time after March
31, 2002.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Preferred Securities
--------- ------------ --------------------
<S> <C> <C>
Liquidation Rights
In the event of the liquidation of the In the event of a liquidation of the In the event of a liquidation of the
Partnership the assets of the Partnership Corporation, the holders of Common Stock Trust, the holders of Preferred
remaining after the payment of all debts would be entitled to share ratably in any Securities would be entitled to
and liabilities of the Partnership, the assets remaining after satisfaction of receive a preferential distribution of
payment of expenses of the liquidation of obligations to creditors and any liquidation $25 per Preferred Security plus
the Partnership and the establishment of a preferences on any series of preferred accrued and unpaid distributions
reasonable reserve in connection stock of the Corporation that may then be except that, upon the occurrence of
therewith, are distributed to holders of A outstanding. a Special Event, the Trust will be
Interests in an amount equal to their capital liquidated and the holders will
account ($10) plus any unpaid Priority receive Junior Subordinated
Return and the remainder is distributed to Debentures.
the General Partner and the B Interests in
accordance with their capital accounts.
Right to Compel Dissolution
Limited partners may compel dissolution Under Delaware law, holders of Common Holders of Preferred Securities
of the Partnership by the affirmative vote Stock may compel dissolution of the may not compel dissolution of the
of the holders of a majority of outstanding Corporation, absent prior action by the Trust.
Interests. board of directors, only if all holders
consent in writing. A plan of
dissolution adopted by the board
of directors must be approved by a
majority of the Common Stock
outstanding and entitled to vote.
Limited Liability
In general, holders of Interests are limited Shares of Common Stock will be fully paid Holders of Preferred Securities will
partners in a Delaware limited partnership, and nonassessable. Stockholders generally not have personal liability for
and do not have personal liability for will not have personal liability for obligations of the Trust or the
obligations of the Partnership. obligations of the Corporation. Corporation.
Liquidity and Marketability
The Interests are freely transferable and are The Common Stock will be freely The Preferred Securities will be
currently listed and traded on the New transferable and application has been made freely transferable and application
York Stock Exchange. After the Effective for listing the Common Stock on the New has been made for listing the
Time, the Interests will cease to be traded. York Stock Exchange. Preferred Securities on the New
York Stock Exchange.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Preferred Securities
--------- ------------ --------------------
<S> <C> <C>
Continuity of Existence
The Partnership Agreement provides for The Corporation's Certificate of The Trust will terminate on March
the Partnership to continue in existence Incorporation provides for perpetual 31, 2027 or upon the earlier
until December 31, 2086, unless earlier existence, subject to Delaware law. redemption of the Preferred
terminated in accordance with the Securities or the distribution to the
Partnership Agreement. holders of the Junior Subordinated
Debentures.
Financial Reporting
The Partnership is subject to the reporting The Corporation will be subject to the
requirements of the Exchange Act and files reporting requirements of the Exchange
annual and quarterly reports thereunder. Act and will file annual and quarterly
The Partnership also provides annual and reports thereunder. The Corporation also
quarterly reports to its limited partners. will provide annual and quarterly reports
to its stockholders.
Certain Legal Rights
Delaware law allows a limited partner to Delaware law affords stockholders of a Delaware law allows a beneficial
institute legal action on behalf of the corporation similar rights to bring owner of the Trust to institute legal
Partnership (a partnership derivative stockholder derivative actions when the action on behalf of the Trust (a trust
action) to recover damages from a third board of directors has failed to institute an derivative action) to recover
party or a general partner where the action against third parties or directors of damages from a third party or a
general partner has failed to institute the the corporation, and class actions to trustee where the trustees with
action. In addition, a limited partner may recover damages from directors for authority to do so have failed to
have rights to institute legal action on violations of their fiduciary duties. institute the action. In addition, a
behalf of the limited partner or all other Stockholders may also have rights to bring beneficial owner of the Trust may
similarly situated limited partners (a class actions in federal courts to enforce federal have rights to institute legal action
action) to recover damages from a general rights. These rights are comparable to the on behalf of himself or all other
partner for violations of fiduciary duties to rights of the limited partners in the similarly situated beneficial owners
the limited partners. Limited partners may Partnership. (a class action) to recover damages
also have rights to bring actions in federal from a trustee for violations of
courts to enforce federal rights. fiduciary duties to the beneficial
owners. Beneficial owners of the
Trust may also have rights to bring
actions in federal courts to enforce
federal rights.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Preferred Securities
--------- ------------ --------------------
<S> <C> <C>
Right to List of Holders; Inspection of Books and Records
Upon reasonable demand, at the limited Under Delaware law, upon written request, Holders of Preferred Securities are
partner's own expense and for a purpose at reasonable times and for a proper entitled to inspect the books and
reasonably related to his interest in the purpose reasonably related to a records of the Trust for any purpose
Partnership, a limited partner may have stockholder's interest as a stockholder, any reasonably related to a holder's
access, at reasonable times, to certain stockholder of record shall have the right interest during normal business
information regarding the status of the to examine and copy the Corporation's hours.
business and financial condition of the stock ledger, a list of its stockholders and
Partnership, tax returns, governing its other books and records. In certain
instruments of the Partnership and a circumstances under Delaware law,
current list of the partners of the stockholders may not have the same right
Partnership, provided that the General to information regarding the Corporation
Partner may keep confidential any trade that they currently have under the
secrets or any other information the Partnership Agreement with respect to
disclosure of which could damage the information regarding the Partnership.
Partnership or violate any agreement or
applicable law.
Subordination
Subordinated to claims of creditors of the Subordinated to claims of creditors of the Subordinated to creditors of the
Partnership and Operating Partnership. Corporation and the Operating Partnership Trust, if any. The Preferred
Securities Guarantee and the Junior
Subordinated Debentures of the
Corporation will be subordinate to
all liabilities of the Corporation
and the Operating Partnership except
those made pari passu or subordinate
by their terms.
</TABLE>
Fiduciary Duties
As a general partner of a limited partnership, the General Partner owes the
limited partners, under Delaware law, the fiduciary duties of good faith and
loyalty in handling the affairs of the Partnership, including, in certain
instances, a duty to disclose material information concerning the Partnership's
affairs. The General Partner believes it has satisfied its fiduciary duties in
connection with the Conversion. Following consummation of the Conversion, the
directors of Lehman/SDI will become directors of the Corporation. Under Delaware
law, a director's fiduciary duties to the stockholders of the Corporation in
such capacity will be substantially similar to those currently owed by the
General Partner to limited partners under Delaware law.
The Partnership Agreement further provides that neither the General Partner
nor any of its affiliates will be liable to the Partnership or the limited
partners for any act or omission if (i) taken in good faith and in a manner
reasonably believed to be in, or not opposed to, the interests of the
Partnership, and (ii) the conduct did not constitute gross negligence or willful
or wanton misconduct. Thus, the General Partner and its affiliates may have a
more limited liability to the limited partners than would otherwise be the case
absent such provisions. Similarly, the Corporation's Certificate of
Incorporation provides that a director of the Corporation shall not be liable
for any act or omission in the director's capacity as director except to the
extent the director is found liable for (i) a breach of the duty of loyalty,
(ii) an act or omission not in good faith, (iii) a transaction in which the
director received an improper benefit or (iv) an act or omission for which the
liability of a director is expressly provided for by statute. Under the
Partnership Agreement, the Partnership is required to indemnify the General
Partner and the officers, directors, employees and agents of the General Partner
against liabilities and expenses incurred by the General Partner or such persons
if (i) the General Partner or such persons acted in good faith, and in a manner
reasonably believed to be in, or not opposed to, the interests of the
Partnership and, with respect to any criminal proceeding, had no
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reason to believe the conduct was unlawful and (ii) the General Partner's or
such persons' conduct did not constitute actual fraud, gross negligence or
willful misconduct. The Corporation's By-laws provide indemnification to all its
directors, officers, employees and agents.
After the Conversion, the General Partner will dissolve and will not owe
any fiduciary duties to the Corporation or persons holding Preferred Securities
or Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes certain federal income tax
considerations relating to the Conversion. These summaries are included herein
for general information only. They do not discuss all aspects of federal income
taxation that may be relevant to a particular taxpayer in light of the
taxpayer's personal tax circumstances or to certain types of taxpayers subject
to special treatment under the federal income tax laws. No legal opinion
regarding such tax considerations is being rendered hereby. Except as otherwise
indicated, statements of legal conclusion regarding tax treatments, tax effects
or tax consequences reflect the conclusions of Morgan, Lewis & Bockius LLP,
counsel for the Corporation and the Partnership, which has rendered its opinion
regarding the accuracy of the discussion herein to the Partnership. A copy of
Morgan, Lewis & Bockius LLP's opinion has been filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus forms a part,
and a copy of the opinion may be obtained by written request addressed to
SunSource L.P., 2600 One Logan Square, Philadelphia, Pennsylvania 19103,
Attention: Joseph M. Corvino, Secretary, telephone number (215) 665-3650. The
Partnership has not requested, and does not intend to request, a ruling from the
Internal Revenue Service ("IRS"). An opinion of counsel is not binding on the
IRS or the courts, and no assurance can be given that the IRS will not challenge
the tax treatment of certain matters discussed herein, or if it does, that it
will be unsuccessful. Accordingly, each limited partner should consult the
limited partner's own tax advisor as to the specific tax consequences to the
limited partner including the application and effect of state or local income
and other tax laws.
The following discussion is based on existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
and existing administrative interpretations and court decisions. Future
legislation, regulations, administrative interpretations or court decisions
could significantly change such authorities either prospectively or
retroactively.
Partnership Status and Taxation of the Partnership
The Partnership is properly classified for federal income tax purposes as a
partnership rather than an association taxable as a corporation. Currently, the
Partnership is not itself subject to federal income tax. Rather, each limited
partner is subject to income tax based on the limited partner's allocable share
of Partnership taxable income, gain, loss, deduction, and credits, whether or
not any cash is actually distributed to such limited partner.
The Revenue Act of 1987 amended the Code to treat certain publicly-traded
partnerships as corporations rather than partnerships for federal income tax
purposes. Under a transition rule, however, an existing publicly-traded
partnership, such as the Partnership, will not be classified as a corporation
until the earlier of (i) the partnership's first taxable year beginning after
December 31, 1997, or (ii) the time at which the partnership adds a new line of
business that is substantial. Under the above-described transition rule, the
Partnership will be taxed as a corporation no later than its taxable year
beginning on January 1, 1998. At that time the Partnership will be treated as if
it had transferred all of its assets (subject to its liabilities) to a newly
formed corporation in exchange for the stock of the corporation, and then
distributed such stock to its partners in liquidation of their interests in the
Partnership. Upon classification as a corporation for tax purposes, the
Partnership would be subject to federal income tax on its earnings at corporate
tax rates.
General Tax Treatment of the Conversion
The Partnership has been a Delaware limited partnership since it began
operations in 1987. In the Conversion, the Partnership and the subsidiaries of
the Corporation will be merged with and into the Operating Partnership with each
A Interest being exchanged for Preferred Securities and cash and each B Interest
being exchanged for Common Stock.
There is no specific authority dealing with a substantially similar
transaction. Accordingly, counsel cannot predict with certainty how the
Conversion will be treated for federal income tax purposes.
The exchange of A Interests for Preferred Securities and cash pursuant to
the Merger will be a taxable transaction. In the case of a holder who exchanges
A Interests, gain or loss will be recognized in an amount equal to the
difference between the sum of the amount of cash and the fair market value of
Preferred Securities received in the exchange and the exchanging holder's tax
basis in the A Interests exchanged. Such gain or loss will be long-term capital
gain or loss if the A Interests have been held for more than one year as of such
date and if such Interests have been held as capital assets. The Corporation
does not expect that any portion of the gain will be treated
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as ordinary income pursuant to the rules of section 751 of the Code. A holder of
A Interests will have a tax basis in the Preferred Securities received in the
Merger equal to the fair market value of such Preferred Securities received. A
holder's aggregate tax basis in his pro rata share of the underlying Junior
Subordinated Debentures will be equal to his pro rata share of their "issue
price" on the Expiration Date as defined below.
As to holders of B Interests, counsel is of the opinion that the limited
partners will be treated as exchanging their B Interests for shares of Common
Stock in an exchange described in Section 351 of the Code, pursuant to which
such holders should not recognize gain or loss, except to the extent of any cash
received in lieu of fractional shares. Any such cash should result in capital
gain to the recipient, assuming that the B Interests are held as capital assets.
Counsel's opinion that holders of B Interests will be treated as exchanging
their Partnership interests for stock of the Corporation is based on the federal
income tax treatment of analogous transactions. It is well settled, and the
Service has issued published rulings to the effect that, if a parent corporation
forms a transitory subsidiary corporation and merges it into another corporation
to enable the parent to acquire the stock of such other corporation, the merger
of the transitory subsidiary corporation into such other corporation will be
ignored, and the stockholders of the target corporation will be treated as
receiving directly from the parent corporation stock or other property of the
parent in exchange for their shares of the target. In addition, the Service has
issued private letter rulings addressing the treatment of transactions in which
a corporation forms a transitory partnership and merges it into an existing
partnership as a means of transforming the partners of the existing partnership
into stockholders of the corporation. The conclusions expressed in the private
letter rulings are consistent with the treatment of the Conversion expressed
above. Holders of B Interests should be aware that, unlike published rulings,
private letter rulings cannot be cited as authority, and may be relied upon only
by the taxpayer requesting the ruling, although the conclusions expressed
therein are indicative of the Service's thinking on a particular matter.
As to persons that hold both A Interests and B Interests at the time of the
Conversion, while not free from doubt, a likely result is that these investors
will recognize gain on an aggregate basis - i.e. the difference between their
aggregate tax basis in the Class A Interests and the Class B Interests and the
aggregate fair market value of the cash, Preferred Securities and Common Stock
received in the Conversion will constitute the gain realized, which realized
gain will be recognized to the extent of the boot received in the Conversion -
i.e. the sum of the cash and the fair market value of the Preferred Securities
received. Such gain should be treated as long-term capital gain, provided that
the Interests have been held for more than one year, and provided that such
Interests have been held as capital assets. As noted earlier, the Corporation
does not expect that any portion of the gain will be treated as ordinary income
pursuant to section 751 of the Code. Such a holder's basis in the Common Stock
received in the Conversion will be equal to sum of such holder's basis in the A
Interests and B Interests exchanged therefor, plus the amount of gain
recognized, less the amount of cash and the value of the Preferred Securities
received. If the aggregate tax basis of the Class A and Class B Interests
exceeds the aggregate fair market values of the cash, Preferred Securities, and
Common Stock received in the Conversion, it is likely that no loss will be
recognized. A person that holders both A Interests and B Interests could take
the position that a treatment of the Conversion other than the aggregate basis
approach described above should apply, and such persons could consult their own
tax advisors regarding the tax consequences of the aggregate basis approach.
The Partnership and the Corporation intend to treat the Conversion in
accordance with the positions reflected in the foregoing description and to
prepare reports and tax information accordingly. Except as otherwise noted, the
following discussion assumes the correctness of such treatment.
Certain Tax Consequences of the Conversion to Holders of B Interests
Nonrecognition of Gain or Loss. Section 351 (a) of the Code provides, in
general, that no gain or loss is recognized upon the transfer by one or more
persons of property (such as partnership interests) to a corporation solely in
exchange for stock in such corporation if, immediately after the exchange, such
person or persons are in control of the corporation to which the property was
transferred. Section 368(c) of the Code defines control as the ownership of
stock possessing at least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of the total number of
shares of all other classes of stock. Section 351 (b) of the Code provides that
if money or other property ("boot") is received in addition to stock in an
otherwise qualifying transaction, taxable income must be recognized in an amount
equal to the lesser of (i) any gain realized on the exchange or (ii) the amount
of boot received. For this purpose, gain realized is generally equal to the
excess, if any, of (x) the amount of cash and the fair market value of stock and
other property received from the corporation over (y) the adjusted basis of
property transferred to the corporation. In determining realized gain, a limited
partner's share of partnership liabilities is treated as cash received upon the
transfer. Section 357(c) of the Code generally provides that if the sum of the
liabilities assumed in the Section 351 exchange exceeds the aggregate tax basis
of the assets transferred in the exchange, such excess is treated as gain from
the sale or exchange of the assets transferred. Section 752 of the Code
generally provides that a partner's tax basis for its partnership interest
includes its share of the liabilities of the partnership, as determined under
Treasury regulations. A published ruling issued by the Service holds that upon
the transfer of a partnership interest to a corporation in a Section 351
transaction, the transferor's share of partnership liabilities is treated
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as assumed by the corporation for purposes of Section 357(c) of the Code.
Assuming the Conversion is treated for federal income tax purposes in the
manner described above under "General Tax Treatment of the Conversion," it is
counsel's opinion that the exchange by holders of B Interests of their Interests
for Common Stock will be treated as part of a transaction described in Code
Section 351(a). Accordingly, holders of B Interests should incur no federal
income tax liability as a result of the exchange, except to the extent of any
cash received in lieu of fractional shares. Any such cash should result in
capital gain to the recipient, assuming that such B Interests are held capital
assets. This conclusion is based on the assumption that (i) such holders do not
own any A Interests (see the discussion above), (ii) holders of B Interests and
the parties exchanging their interests in the General Partner (together, the
"Transferors") as steps in the Conversion will own, immediately after such
transfers, more than 80 percent of each class of stock of the Corporation and
(iii) not more than 20 percent of the shares of stock transferred to the
Transferors pursuant to the Conversion will be subsequently disposed of pursuant
to contracts or other formal or informal agreements entered into prior to the
Conversion (the "Control Assumption"). If the Control Assumption were not
correct, each holder of B Interests could recognize gain or loss on the
Conversion as if such holder had sold the B Interests in a taxable transaction
for an amount equal to the value of stock received in the Conversion. Counsel is
not aware of any contracts or other formal or informal agreements entered into
by persons receiving shares of stock to dispose of such shares.
Notwithstanding the above, any holders of B Interests who are treated as
receiving shares of stock in exchange for services will be taxed on the receipt
of the stock to the extent of the value thereof.
Any portion of the liabilities of the Partnership allocated to a holder of
B Interests would increase such holder's tax basis in such B Interest by an
amount equal to such allocated liability. As such allocated liability cannot
exceed such holder's tax basis in the B Interest, no gain recognition under
Section 357(c) of the Code will result from the Conversion for a holder of B
Interests.
Basis and Holding Period of Common Stock. The aggregate tax basis of the
Common Stock that a holder of B Interests receives in the exchange will be equal
to the tax basis of their B Interests immediately prior to the Conversion.
The holding period for Common Stock received in the Conversion will include
the exchanging holder's holding period for the B Interests, provided such holder
held such Interests as capital assets at the time of the Conversion.
Sale of Stock. In general, any gain or loss from the sale or exchange of
the Common Stock received in the Conversion will be characterized as capital
gain or loss provided such item was held as a capital asset. Gain or loss will
be measured by the difference between the amount realized and the holder's
adjusted tax basis in the Common Stock.
Ownership of Stock. After the Conversion, a holder of Common Stock
generally will be taxed only on distributions of money or other property
received from the Corporation, if any, out of current or accumulated earnings
and profits. Such income will be characterized as a dividend and as investment
or portfolio income for purposes of certain tax rules, e.g., those regarding
deductibility of interest expense, under section 163 of the Code. To the extent
that the Corporation has no current or accumulated earnings and profits at the
time of a distribution, the amount of the distribution will first reduce a
stockholder's adjusted basis in the Common Stock and, thereafter, will be taxed
as an amount received from the sale or exchange of the Common Stock. The
Corporation will have no accumulated earnings and profits as it begins
operations following consummation of the Conversion. Distributions in connection
with a complete liquidation of the Corporation will be treated as amounts
received from the sale or exchange of the Common Stock. Distributions received
in connection with a redemption will be treated as dividends or as amounts
received from the sale or exchange of the stock depending upon the redeeming
stockholder's actual or constructive ownership of other stock of the
Corporation.
Certain Tax Consequences of the Conversion to Holders of A Interests
Classification of the Trust. In connection with the issuance of the
Preferred Securities, Morgan, Lewis & Bockius LLP, counsel to the Corporation
and the Trust, will render its opinion generally to the effect that, under then
current law and assuming full compliance with the terms of the Declaration, the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
each holder of Preferred Securities (a "Securityholder") will be considered the
owner of a pro rata portion of the Junior Subordinated Debentures held by the
Trust. Accordingly, each Securityholder will be required to include in gross
income the Securityholder's pro rata share of the income accrued on the Junior
Subordinated Debentures.
Recognition of Gain or Loss. The exchange of A Interests for Preferred
Securities and cash pursuant to the Merger will be a taxable transaction. Gain
or loss will be recognized in an amount equal to the difference between the sum
of the cash and the fair market value of Preferred Securities received in the
exchange and the exchanging holder's tax basis in the A Interest exchanged. Such
gain will be long-term capital gain or loss if the A Interests has been held for
more than one year as of such date and if such Interests have been held as
capital assets.
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Basis and Holding Period of Common Stock. A Securityholder's initial tax
basis for the Securityholder's pro rata share of the Junior Subordinated
Debentures will be equal to the Securityholder's pro rata share of their "issue
price," (as defined below), and will be increased by original issue discount (as
discussed below) accrued with respect thereto, and reduced by the amount of cash
distributions (including the amount of any Pre-Issuance Accrued Interest) paid
to such Securityholder.
Accrual of Original Issue Discount and Premium. The Junior Subordinated
Debentures will be considered to have been issued with "original issue discount"
and each Securityholder, including a taxpayer who otherwise uses the cash method
of accounting, will be required to include the Securityholder's pro rata share
of original issue discount on the Junior Subordinated Debentures in income as it
accrues, in accordance with a constant yield method based on a compounding of
interest, before the receipt of cash distributions on the Preferred Securities.
Generally, all of a Securityholder's taxable interest income with respect to the
Junior Subordinated Debentures will be accounted for as "original issue
discount" and actual distributions of stated interest will not be separately
reported as taxable income. So long as the interest payment period is not
extended, cash distributions received by an initial holder for any monthly
interest period (assuming no disposition prior to the record date for such
distribution) will equal or exceed the sum of the daily accruals of income for
such monthly interest period, unless the issue price of the Junior Subordinated
Debentures (as defined below) is less than $25.
The total amount of "original issue discount" on the Junior Subordinated
Debentures will equal the difference between the "issue price" of the Junior
Subordinated Debentures and their "stated redemption price at maturity." Because
the Corporation has the right to extend the interest payment period of the
Junior Subordinated Debentures, all of the stated interest payments on the
Junior Subordinated Debentures will be includible in determining their "stated
redemption price at maturity." The "issue price" of each $25 principal amount of
the Junior Subordinated Debentures will be equal to the fair market value of a
Preferred Security on the Expiration Date (reduced by Pre-Issuance Accrued
Interest), which may be more or less than $25, with the result that the total
amount of original issue discount on the Junior Subordinated Debentures may be
more or less than the amount of stated interest payable with respect thereto.
No portion of the amounts received on the Preferred Securities will be
eligible for the dividends received deduction applicable to holders that are
U.S. corporations, unless the Preferred Securities constitute "high yield
discount obligations" ("HYDOs") under the Internal Revenue Code. If the
Preferred Securities do constitute HYDOs, the original issue discount on the
Preferred Securities will not be deductible by the Corporation until actually
paid by the Corporation, and depending upon the instrument's yield as computed
under the original issue discount rules, a portion of such original issue
discount (the "Disqualified Portion") may not be deductible by the Corporation
at any time. Such Disqualified Portion, if any, will be eligible for the
dividends received deduction for corporate holders of A Interests, however, if
the Corporation has sufficient earnings and profits. The question whether the
Preferred Securities will constitute HYDOs cannot be determined at the time of
this writing, because the issue depends, in part, on factors that will not be
determined until the date of issuance of the Preferred Securities (including
their "issue price" and the prevailing "applicable federal rate" under the
Code).
Potential Extension of Payment Period on the Junior Subordinated
Debentures. Securityholders will continue to accrue original issue discount with
respect to their pro rata share of the Junior Subordinated Debentures during an
extended interest payment period, and any holders who dispose of Preferred
Securities prior to the record date for the payment of interest following such
extended interest payment period, will not receive from the Trust any cash
related thereto.
Distribution of Junior Subordinated Debentures to Holders of Preferred
Securities. Under current law, except in the unlikely event that the Trust were
determined to be taxable as a corporation for tax purposes, a distribution by
the Trust of the Junior Subordinated Debentures as described in the Prospectus
detailing the terms of the Preferred Securities under the caption "Description
of the Preferred Securities -- Special Event Redemption or Distribution," will
be non-taxable and will result in the Securityholder receiving directly his pro
rata share of the Junior Subordinated Debentures previously held indirectly
through the Trust, with a holding period and tax basis equal to the holding
period and adjusted tax basis such Securityholder was considered to have had in
his pro rata share of the underlying Junior Subordinated Debentures prior to
such distribution.
Treatment of the Payment of Pre-issuance Accrued Interest. "Pre-issuance
Accrued Interest" payable on the first interest payment date should be treated
as a return of capital with respect to a Securityholder's pro rata interest in
the Junior Subordinated Debentures, reducing the Securityholder's tax basis in
his pro rata share of the Junior Subordinated Debentures.
Market Discount and Bond Premium. Securityholders other than initial
holders may be considered to have acquired their pro rata interest in the Junior
Subordinated Debentures with market discount, acquisition premium or amortizable
bond premium. Such holders are advised to consult their tax advisors as to the
income tax consequences of the acquisition, ownership and disposition of the
Preferred Securities.
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Disposition of the Preferred Securities. Upon on a sale, exchange or other
disposition of the Preferred Securities (including a distribution of cash in
redemption of a Securityholder's Preferred Securities upon redemption or
repayment of the underlying Junior Subordinated Debentures, but excluding the
distribution of Junior Subordinated Debentures), a Securityholder will be
considered to have disposed of all or part of the Securityholder's pro rata
share of the Junior Subordinated Debentures, and will recognize gain or loss
equal to the difference between the amount realized and the Securityholder's
adjusted tax basis in the Securityholder's pro rata share of the underlying
Junior Subordinated Debentures deemed disposed of. Gain or loss will be capital
gain or loss (except to the extent of any accrued market discount with respect
to such Securityholder's pro rata share of the Junior Subordinated Debentures
not previously included in income). See "Market Discount and Bond Premium"
above. Such gain or loss will be long-term capital gain or loss if the Preferred
Securities have been held for more than one year.
The Preferred Securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A Securityholder who disposes of his Preferred
Securities between record dates for payments of distributions thereon will
nevertheless be required to include in income accrued but unpaid interest on the
Junior Subordinated Debentures through the date of disposition, and to add such
amount to the Securityholder's adjusted tax basis in the Securityholder's pro
rata share of the underlying Junior Subordinated Debentures deemed disposed of.
Accordingly, such a Securityholder will recognize a capital loss to the extent
the selling price (which may not fully reflect the value of accrued but unpaid
interest) is less than the Securityholder's adjusted tax basis (which will
include accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
United States Alien Holders. For purposes of this discussion, a "United
States Alien Holder" is any corporation, individual, partnership, estate or
trust that is, as to the United States, a foreign corporation, a non-resident
alien individual, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust.
Under present United States federal income tax law:
(i) payments by the Trust or any of its paying agents to any
holder of a Preferred Security who or which is a United States Alien Holder
will not be subject to United States federal withholding tax, provided that
(a) the beneficial owner of the Preferred Security does not actually or
constructively own 10 percent or more of the total combined voting power of
all classes of stock of the Corporation entitled to vote, (b) the
beneficial owner of the Preferred Security is not a controlled foreign
corporation that is related to the Corporation through stock ownership, and
(c) either (A) the beneficial owner of the Preferred Security certifies to
the Trust or its agent, under penalties of perjury, that it is not a United
States holder and provides its name and address or (B) a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"Financial Institution") and holds the Preferred Security certifies to the
Trust or its agent under penalties of perjury that such statement has been
received from the beneficial owner by it or by a Financial Institution
between it and the beneficial owner and furnishes the Trust or its agent
with a copy thereof;
(ii) a United States Alien Holder of a Preferred Security will not
be subject to United States federal withholding tax on any gain realized
upon the sale or other disposition of a Preferred Security; and
(iii) any gain realized by a United States Alien Holder upon the
exchange of A Interests for Preferred Securities will not be subject to
United States federal withholding tax.
Information Reporting to Holders. The Trust will report the original issue
discount that accrued during the year with respect to the Junior Subordinated
Debentures, and any gross proceeds received by the Trust from the retirement or
redemption of the Junior Subordinated Debentures, annually to the holders of
record of the Preferred Securities and the Internal Revenue Service. The Trust
currently intends to deliver such reports to holders of record prior to January
31 following each calendar year. It is anticipated that persons who hold
Preferred Securities as nominees for beneficial holders will report the required
tax information to beneficial holders on Form 1099.
Backup Withholding. Payments made on, and proceeds from the sale of
Preferred Securities may be subject to a "backup" withholding tax of 31 percent
unless the holder complies with certain identification requirements. Any
withheld amounts will generally be allowed as a credit against the holder's
federal income tax, provided the required information is timely filed with the
Internal Revenue Service.
Other Tax Issues Affecting Limited Partners
Pre-Conversion Operations of the Partnership. The income and deductions of
the Partnership incurred during 1997 prior to the Conversion will be allocated
among the partners, and each partner's basis in its general or limited partner
interest will be adjusted by
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such allocations, in essentially the same manner they would have been allocated
and adjusted apart from the Conversion. Each partner will receive a Schedule K-1
for 1996 and 1997 reflecting the income and deductions allocated to the partner
during the period in 1996 and 1997 in which the partner owned such Interests,
even if the partner sells the Interests prior to the Conversion.
Pre-Conversion Sale of Interests. The tax consequences to a limited partner
who sells a Partnership Interest prior to the Conversion are not affected by the
Conversion.
(i) The limited partner may recognize both ordinary income and
capital gain or loss. The ordinary income amount will be approximately the
amount of ordinary income, including depreciation recapture and other
unrealized receivables as defined in Section 751 of the Code, that would
have been allocated to the limited partner if the Partnership had sold all
its assets. Such amount will vary depending on the amount paid for the
Partnership Interests, the date acquired and other factors. The capital
gain or loss amount will normally be the difference between the limited
partner's adjusted tax basis and the amount realized from the sale of the
Interest (reduced by the portion treated as ordinary income).
(ii) The deductibility of a noncorporate taxpayer's investment
interest expense is generally limited to the amount of such taxpayer's net
investment income. Investment interest expense includes (1) interest on
indebtedness incurred or continued to purchase or carry property held for
investment (such as the Common Stock); (2) a partnership's interest expense
attributed to the portfolio income of the Partnership under the passive
activity loss rules; and (3) that portion of interest expense incurred or
continued to purchase or carry an interest in a passive activity (such as a
limited partner's Interest in the Partnership) to the extent attributed to
portfolio income (within the meaning of the passive activity loss rules).
Investment interest deductions which are disallowed may be carried forward
and deducted in subsequent years to the extent of net investment income in
such years.
Reporting Requirements. Each limited partner who receives Common Stock in
the Conversion will be required to file with the limited partners' federal
income tax return a statement that provides details relating to the property
transferred and the stock received in the Conversion. The Corporation will
provide former limited partners with information to assist them in preparing
such statement.
Tax Consequences to the Corporation and the Partnership
The following discussion assumes that the Conversion will be treated for
federal income tax purposes in the manner described above under "--Tax Treatment
of the Conversion." In counsel's opinion, the acquisition by the Corporation of
the various partnership interests and other interests as a result of the
Conversion and issuance of cash, the Preferred Securities and Common Stock will
not give rise to the recognition of gain or loss by the Corporation or the
Partnership, and the basis of the Partnership interests received by the
Corporation in exchange for cash, the Preferred Securities and Common Stock will
generally be determined by reference to the tax basis of the B Interests in the
hands of the exchanging partners immediately prior to the Conversion increased
by the fair market value of the cash and Preferred Securities received by the
holders of A Interests.
The acquisition of Partnership interests by the Corporation will result in
a constructive termination of the Partnership for federal income tax purposes
under Section 708 of the Code. This section provides that a "sale or exchange"
(which includes a transfer in connection with a Section 351 transaction) of 50
percent or more of the total interest in a partnership's capital and profits
within a 12- month period terminates a partnership for tax purposes. Upon such
termination, there is a hypothetical liquidation and distribution of the
partnership's assets to the transferees of the partnership interests and the
remaining partners, and a hypothetical contribution of the assets to the
partnership, which for tax purposes is considered a new partnership. The
constructive termination of the Partnership under Section 708 of the Code
results in a constructive termination of the Operating Partnership. The
Corporation does not expect that this termination will result in any material
adverse tax consequences to the Corporation or the Partnership.
As part of the Conversion, the Partnership will be merged with the
Operating Partnership. The merger of the Partnership and the transfer of its
assets to the Operating Partnership will not result in the recognition of gain
or loss to the Partnership or the Operating Partnership.
Unrelated Business Taxable Income
Certain persons otherwise generally exempt from federal income taxes (such
as pension plans and other exempt organizations) are taxed under Section 511 of
the Code on unrelated business taxable income. Currently, substantially all
taxable income generated by the Partnership is considered unrelated business
taxable income for tax-exempt organizations. Dividends distributed by the
Corporation will not be taxed under Section 511 of the Code, except to the
extent that the Common Stock is debt-financed property as that term is defined
in Section 514 of the Code.
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Other Tax Aspects
Apart from federal income taxes, no attempt has been made to determine any
tax that may be imposed on limited partners by the country, state or
jurisdiction in which such partner resides or is a citizen. In addition to
federal income taxes, limited partners may be subject to other taxes, such as
state or local income taxes that may be imposed by various jurisdictions, and
may be required to file tax returns through the date of consummation of the
Conversion in those states in which properties owned by the Partnership (through
the Operating Partnership) are located. Limited partners may also be subject to
income, intangible property, estate, and inheritance taxes in their state of
domicile. Limited partners should consult their own tax advisors with regard to
state income, inheritance, and estate taxes.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED TO PROVIDE
ONLY A GENERAL SUMMARY AND DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY
WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION
DOES NOT ADDRESS ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF DISPOSITION OF
INTERESTS IN THE PARTNERSHIP PURSUANT TO THE CONVERSION. ACCORDINGLY, EACH
LIMITED PARTNER IS STRONGLY URGED TO CONSULT HIS OWN TAX ADVISOR TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES TO SUCH LIMITED PARTNER OF THE CONVERSION,
INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX
LAWS.
MARKET PRICES AND DISTRIBUTIONS
Effective May 1, 1990, the Partnership separated its publicly
traded limited partnership unit into one Class A Limited Partnership Interest
and one Class B Limited Partnership Interest. The A Interests and B Interests
trade separately on the New York Stock Exchange under the symbols SDP and SDPB,
respectively.
The following table shows the quarterly range of high and low
closing sales prices for the A Interests and B Interests separately for the
periods indicated.
A Interests B Interests
--------------- -------------
High Low High Low
---- --- ---- ---
1995
First Quarter 10 3/4 10 1/4 4 3/4 4
Second Quarter 11 10 3/8 4 3/8 4
Third Quarter 11 3/8 10 3/4 4 7/8 4
Fourth Quarter 11 3/8 10 7/8 5 1/8 4 1/2
1996
First Quarter 11 3/4 11 1/4 5 1/8 4
Second Quarter 11 1/2 10 7/8 4 1/2 4
Third Quarter 11 1/8 10 3/8 4 1/2 4 1/4
Fourth Quarter
1997
First Quarter
(through January )
The closing sales prices on January __, 1997, the last trading day
prior to the mailing of this Proxy Statement/Prospectus, were ____ per A
Interest and ____ per B Interest. The closing sales prices on December 11, 1996,
the last trading day before the Partnership publicly announced the planned
Conversion, were 10-1/2 per A Interest and 4-1/4 per B Interest.
As of November 30, 1996, the Partnership had 11,099,573 A
Interests and 21,675,746 B Interests outstanding. The total number of record
holders of A Interests and B Interests as of November 30, 1996 was 1,754 and
1,034, respectively.
-55-
<PAGE>
The holders of the A Interests are entitled to receive annually
$1.10 per A Interest (the "Priority Return") to the extent that cash is
available for distribution. Priority Return distributions are paid monthly on
the last day of the month to holders of record on the first day of that month.
When federal taxable income is allocated to the holders of B
Interests, such holders are entitled to annual tax distributions (the "B Tax
Distribution") equal to the product of (i) 125% of the then applicable maximum
federal income tax rate for individuals and (ii) the federal taxable income
allocated to the holders of B Interests with respect to the preceding year.
The Priority Return and B Tax Distribution will be paid to the
extent cash is available for distribution and accumulate until paid. To the
extent that the Priority Return and B Tax Distribution have not been paid on a
cumulative basis, management fees due the General Partner will be deferred, and
will be paid, together with any management fees then owed with respect to any
other year, after the Priority Return and B Tax Distribution have been paid. If
cash available for distribution exceeds the amount necessary to pay the Priority
Return and B Tax Distribution, the General Partner may make additional
discretionary distributions to the holders of B Interests, provided that no
distribution, except the B Tax Distribution, may be made to holders of the B
Interests if, after such distribution, such holders' capital accounts with
respect to their B Interests would be below $.50 on a per Interest basis.
The Partnership paid Priority Return distributions of $1.10 per
Class A Interest in 1994 and 1995. For 1994, the B Tax Distribution amounted to
$10,895,000 or $.492619 per Class B Interest which was partially paid in the
amount of $.009352 per B Interest per month for the period January through March
1994 and $.02 per B Interest per month during the period April through December
1994. The monthly tax distributions were paid to holders of record on the first
day of each month during 1994 and aggregated $.208056 per B Interest for the
full year 1994. On March 31, 1995, the Partnership distributed the balance of
the tax distribution due of $.284563 per B Interest, as follows: approximately
$.01981 per month to holders of record of B Interests on the first day of the
month during January through March 1994; $.00916 per month for April through
November 1994; and $.15185 for December 1994 which included $.14269 related to
the capital gain on the sale of the Electrical Group divisions on December 5,
1994.
For 1995, the B Tax Distribution amounted to $14,807,000 or
$.669517 per B Interest which was partially paid in the amount of $.02 per B
interest per month for the period January through December, 1995, along with a
partial distribution of $.15 on April 10, 1995 to holders of record on December
30, 1994, related to the taxable gain on the sale of Dorman Products. The
monthly tax distributions were paid to holders of record on the first day of
each month during 1995 and aggregated $.24 per B interest for the full year
1995. On March 29, 1996, the Partnership distributed the balance of the tax
distribution due of $.279517 per B Interest, as follows: $.174544 to holders of
record on December 30, 1994 for the balance due on the taxable gain on the sale
of Dorman Products; $.001968 per month to holders of record of B Interests on
the first day of the month during January through December 1995 for the balance
due on ordinary taxable income; and $.081356 to holders of record on September
29, 1995 related to the taxable gain on the sale of Downey Glass on October 27,
1995.
<PAGE>
The Partnership expects to pay Priority Return distributions of
$1.10 per Class A Interest in 1996 (including a distribution declared November
18, 1996, payable December 31, 1996, to holders of record November 29, 1996).
For the period January 1, 1997 through the Effective Time, the Partnership
expects to pay Priority Return distributions of approximately $.091666 per month
per Class A Interest.
For 1996, the Partnership expects the B Tax Distribution to amount
to approximately $8.0 million or $.36 per B Interest, which was partially paid
in the amount of $.02 per B Interest per month for the period January through
April 1996 and in the amount of $.03 per B Interest per month for the period May
through December 1996 (including a distribution declared November 18, 1996,
payable December 31, 1996, to holders of record November 29, 1996). On March 31,
1997, the Partnership anticipates distributing the balance of the tax
distribution due of approximately $.04 per Class B Interest, as follows: $.01
per month to holders of record of B Interest on the first day of the month
during January through April 1996 only.
The Partnership will suspend the payment of monthly advance B Tax
Distributions effective January 1, 1997, pending the conversion to corporate
form. At this time, the Partnership does not expect to make a Class B Tax
Distribution for the 1997 period since all taxable income is expected to be
allocated to the Class A Interests only for the shortened tax year up through
the Effective Time.
After the Effective Time, the former holders of A Interests will
be entitled to monthly distributions on the Preferred Securities subject to the
right of the Corporation to defer payments on the Junior Subordinated Debentures
for up to five years in which case the distributions will accumulate,
compounding monthly. Dividends on the Common Stock will be payable when and as
declared by the Board of Directors of the Corporation. Management presently
intends not to recommend the payment of dividends on the Common Stock in order
to retain cash to fund the Corporation's acquisition program and corporate
requirements. The payment of dividends by the Corporation will be at the
discretion of the Board of Directors, will be subject to legal and contractual
limitations, and will depend upon the future earnings, operations, financial
conditions and capital and other requirements of the Corporation.
-56-
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of
the Partnership at September 30, 1996, and the pro forma capitalization of the
Corporation as if the conversion had occurred on September 30, 1996. The table
should be read in conjunction with the historical and pro forma financial
statements of the Partnership and related Notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
(dollars in thousands)
September 30, 1996
------------------
Pro Forma
Partnership Corporation
----------- -----------
<S> <C> <C>
Current portion of senior notes $ 6,395 $ --
========= =========
Long-term portion of senior notes $ 63,934 $ --
--------- ---------
Bank revolving credit -- --
--------- ---------
Replacement credit facility (ies) -- 100,674
--------- ---------
Guaranteed preferred beneficial interests
in the Corporation's Junior Subordinated Debentures -- 105,446
--------- ---------
General Partner's minority interest in the
operating partnership 1,035 --
--------- ---------
Partners' capital:
General partner 1,024 --
Limited partners:
Class A interests 67,642 --
Class B interests 35,296 --
Class B interest held in treasury (1,514) --
Cumulative foreign currency
translation adjustment (1,288) --
--------- ---------
Total partners' capital 101,160 --
--------- ---------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000 shares
authorized, none issued -- --
Common Stock, $0.01 par; 20,000,000 shares
authorized; 6,418,936 shares issued and
outstanding -- 64
Accumulated deficit -- (21,149)
Cumulative foreign currency
translation adjustment -- (1,288)
--------- ---------
Total stockholders' deficit -- (22,373)
--------- ---------
Total capitalization $ 166,129 $ 183,747
========= =========
</TABLE>
-57-
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
(dollars in thousands, except for partnership interest data)
The following table sets forth selected consolidated historical
financial data of the Partnership as of the dates and for the periods indicated.
The selected historical financial information of the Partnership for the years
ended December 31, 1995, 1994, 1993, 1992 and 1991, has been derived from
financial statements which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The financial data for the nine-month periods ending
September 30, 1996 and 1995 are derived from unaudited financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Partnership considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. The selected financial information should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
appearing elsewhere herein. See "INDEX TO FINANCIAL STATEMENTS." See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" for acquisitions and divestitures that affect comparability.
<TABLE>
<CAPTION>
UNAUDITED
Nine Months Ended Years Ended December 31,
September 30, ------------------------
-------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $489,517 $455,501 $599,865 $558,754 $493,437 $452,140 $420,619
Income from operations 24,914 25,623 31,302 37,759 28,975 29,712 27,225
Gain on Sale of Divisions -- 16,500 20,644s 3,523 -- -- --
Provision (benefit) for income taxes (372) 362 537 100 869 493 630
Income before extraordinary loss and
cumulative effect of change in accounting
principle 20,609 36,067 44,745 29,544 18,506 17,691 15,073
Extraordinary loss -- (629) (629) -- -- (3,434) --
Cumulative effect on prior years of change in
accounting principle -- -- -- -- -- 822 --
Net income $20,609 $35,438 $44,116 $29,544 $18,506 $15,079 $15,073
Earnings per limited partnership interest:
Income before extraordinary loss
and cumulative effect of change in
accounting principle
- Class A
- Class B $0.82 $0.82 $1.10 $1.10 $1.10 $1.10 $1.10
$0.52 $1.23 $1.48 $0.79 $0.28 $0.25 $0.13
Extraordinary loss
- Class A -- -- -- -- -- -- --
- Class B -- $(0.03) $(0.03) -- -- $(0.16) --
Cumulative effect on prior years
of change in accounting principal
- Class A -- -- -- -- -- -- --
- Class B -- -- -- -- -- $0.04 --
Net income per limited partnership interest
- Class A $0.82 $0.82 $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $0.52 $1.20 $1.45 $0.79 $0.28 $0.13 $0.13
Cash distributions declared per limited
partnership interest
- Class A $0.82 $0.82 $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $0.23 $0.55 $0.67 $0.49 $0.27 $0.13 $0.13
</TABLE>
-58-
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED
Nine Months Ended Years Ended December 31,
September 30, ------------------------
-------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average number of shares
outstanding 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573
- Class A 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746
- Class B
Cash provided by operating activities $20,623 $7,683 $17,050 $17,704 $23,571 $27,056 $30,038
Total assets 263,303 257,567 254,591 266,186 273,493 261,588 264,544
Long-term debt and capitalized lease
obligations 63,934 70,465 63,934 74,781 104,185 115,503 120,108
</TABLE>
-59-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Partnership's operations and
financial condition. The discussion pertains to the consolidated statements of
income of the Partnership and subsidiary for the years ended December 31, 1993,
1994 and 1995 (audited) and the nine-month periods ended September 30, 1995 and
1996 (unaudited), and the consolidated balance sheets dated December 31, 1994
and 1995 (audited) and September 30, 1995 and 1996 (unaudited), and should be
read in conjunction with these consolidated financial statements and notes
thereto appearing elsewhere herein. In connection with the proposed conversion
of the Partnership to a C corporation, references are also made, where
appropriate, to the unaudited pro forma financial statements contained elsewhere
herein.
General
The Partnership is currently a publicly traded master limited partnership
operating in the wholesale distribution industry through a subsidiary
partnership, SDI Operating Partners, L.P. (the "Operating Partnership"). The
Partnership consists of a headquarters operation and three business segments
which are Industrial Services, Hardware Merchandising and Glass Merchandising.
The Partnership's Industrial Services segment is comprised of the Sun
Inventory Management ("SIMCO") divisions and the Sun Technology Services
divisions. The SIMCO divisions are Kar Products, A&H Bolt and
SIMCO/Special-T-Metals. The SIMCO divisions provide maintenance products and
inventory management services to both original equipment manufacturers and
maintenance and repair facilities, including in-plant systems. Sun Technology
Services, formerly the Fluid Power group, is comprised of Activation, Air-Dreco,
J.N. Fauver Co., Hydra-Power Mexico, Walter Norris and Warren Fluid Power. The
Technology Services divisions provide fluid power products, engineering design,
and equipment repair services to a wide variety of industrial customers.
The Partnership's Hardware Merchandising segment consists of the Hillman
division. Hillman distributes hardware items and related products and also
provides merchandising systems service and support to both large and small
hardware retailers.
The Partnership's Glass Merchandising segment consists of the Harding Glass
division. Harding provides glass products and point-of-sale related services
such as the installation and repair of automobile and flat glass.
Recent Developments
On December 11, 1996, the Board of Directors of Lehman/SDI, Inc., approved
management's plan to restructure its Technology Services divisions and its Glass
Merchandising business. During the fourth quarter of 1996, the Partnership
expects to record a $6.0 million restructuring charge related to the integration
and consolidation of its five domestic Technology Services divisions and the
write-off of certain non-performing assets in the Glass Merchandising segment.
The restructuring plan is expected to result in the elimination of 175 employees
in the Technology Services divisions by December 31, 1998, and is expected to
produce net annualized cost savings of approximately $5.0 million per year
thereafter.
Pending the conversion to corporate form, the Partnership will suspend the
payment of monthly advance B Tax Distributions effective January 1, 1997.
Conversion to Corporate Form
In connection with the proposed conversion of the limited partnership to a
C corporation, limited partnership interests in the Partnership will be
exchanged for securities and cash. Holders of Class A limited partnership
interests will receive $119.9 million in the aggregate, consisting of $105.5
million of Trust Preferred Securities of SunSource Capital Trust, a business
trust holding junior subordinated debentures of SunSource, Inc. (the
"Corporation") and $14.4 million of cash. Per Class A interest, each holder will
receive 0.38 share of Trust Preferred Securities, with a liquidation preference
of $25 and $1.30 in cash. The Trust Preferred Securities will be payable monthly
at an interest rate of 11.6% which will result in $1.102 per annum payable to
each current holder of a Class A interest, substantially equivalent to the
pre-conversion priority return paid to each Class A interest. Holders of Class B
limited partnership interests will receive .25 share of common stock of the
Corporation for each outstanding Class B interest or one share of common stock
for each four Class B limited partnership interests. The General Partner will
receive 1,000,000 shares of common stock immediately upon consummation of the
conversion in exchange for the General Partner's economic interest in the
Partnership and the Operating Partnership.
-60-
<PAGE>
The holders of only Class A interests will be subject to federal income tax
on the gain recognized as the difference between the tax basis in their Class A
interests and the total consideration received as preferred securities and cash.
The holders of only Class B interests will not be subject to federal income tax
on the receipt of common stock. Investors holding both Class A interests and
Class B interests will be subject to federal income tax on the gain recognized
as the difference between the aggregate tax basis in their Class A and Class B
interests and the aggregate fair market value of the consideration received
(preferred securities, cash and common stock) to the extent of boot received
(the preferred securities and cash only).
Sale of Certain Divisions
The Operating Partnership sold its Downey Glass division on October 27,
1995, its Dorman Products division on January 3, 1995 and its three Electrical
Group divisions on December 5, 1994, for an aggregate cash consideration, net of
expenses, of approximately $70.6 million (subject to certain post-closing
adjustments) and the assumption of certain liabilities. The proceeds from these
divestitures were used to reduce debt and for general Partnership purposes,
including acquisitions for integration with its remaining businesses.
Sales from the divested divisions aggregated $ 29.1 million for the year
ended December 31, 1995, $177.1 million for the year ended December 31, 1994,
and $162.3 million for the year ended December 31, 1993. Income contributions
from these divisions aggregated $.3 million or $.01 per Class B interest in
1995, $8.6 million or $.39 per Class B interest in 1994, and $6.6 million or
$.30 per Class B interest in 1993.
Acquisitions
On April 11, 1996, the Partnership's Industrial Services segment, through
its Warren Fluid Power Division, purchased certain assets of Hydraulic Depot,
Inc. of Reno, Nevada for an aggregate purchase price of $.7 million. Annual
sales of Hydraulic Depot, Inc. are approximately $2.5 million. This acquisition
expands Warren's previous geographic markets.
On November 13, 1995, the Partnership's Hardware Merchandising segment,
through its Hillman Division, purchased certain assets of the Retail Division of
Curtis Industries of Eastlake, Ohio for an aggregate purchase price of $7.5
million and the assumption of certain liabilities. The Curtis Retail operation
was integrated with the Operating Partnership's Hillman division. Curtis' sales
were $1.6 million from the acquisition date through December 31, 1995 and $8.0
million through the first nine months of 1996. Annual sales of Curtis' Retail
Division are expected to be approximately $10.5 million.
Results of Operations
Market Developments
Through the first nine months of 1996, the Industrial Services and Hardware
Merchandising segments continued to expand as a result of economic strength in
most product markets and the addition of new product lines and value-added
services. However, the Glass business has experienced a decline in sales volume
primarily attributable to the discontinuation of certain product lines and
markets and competitive pressures from major glass manufacturers in the
wholesale distribution business. This decline has been partially offset by real
growth in Harding's retail glass shops, its primary strategic focus. Growth in
the retail glass business is expected to continue, complemented by internal
expansion and acquisition growth opportunities.
Operating expense control and liquidity in working capital investment
allows the operating divisions to respond quickly to market conditions affected
by economic recession or growth. Management has and will continue to respond to
changing market conditions.
Nine Months Ended September 30, 1996 and September 30, 1995
Net income for the first nine months of 1996 was $20.6 million compared
with $35.4 million in 1995. The results for the first nine months of 1995
included a $16.5 million gain from the sale of Dorman Products, a $.6 million
charge related to the early retirement of debt, and $.4 million of operating
income from Downey Glass which was divested on October 27, 1995. Excluding these
1995 events, net income increased $1.4 million or 7.5% over the first nine
months of 1995.
Net sales increased $34.0 million or 7.5% over the first nine months of
1995, excluding Downey, due to strengthening in most product markets and the
addition of new product lines and value-added services. Sales recorded in the
first nine months of 1996 were $489.5 million compared with sales of $455.5
million in the first nine months of 1995, excluding divisions sold.
-61-
<PAGE>
Sales increases (decreases) by business segment are as follows:
Sales Increase (Decrease)
Amount %
------ -
Industrial Services
Technology Services divisions 7.1 million 3.3 %
SIMCO divisions 12.2 million 11.7 %
-----
Total Industrial Services 19.3 million 6.0 %
Hardware Merchandising 15.6 million 24.4 %
Glass Merchandising (.9) million (1.3)%
-----
Total Partnership $34.0 million 7.5 %
=====
The sales increase in the Hardware Merchandising segment includes
approximately $8.0 million of revenue contributed from the acquisition of
Curtis. The increase in sales in the SIMCO divisions is comprised of sales
growth in inventory management services of $6.8 million or 36.7% and in
maintenance products of $5.4 million or 6.3%.
The decline in sales volume in the Glass Merchandising segment is
attributable to the discontinuation of certain product lines and markets served
accounting for $.7 million of the sales decline and a decrease in wholesale
glass, contract, brokerage and other product line sales of $1.4 million, offset
by an increase in retail glass sales of $1.2 million or almost 4%.
Cost of sales increased $22.3 million or 8.3% from the first nine months of
1995, due primarily to increased sales levels in the comparison period.
Gross margins were 40.4% in the first nine months of 1996 compared with
40.8% in the same period of 1995, comprised by business segment as follows:
Nine Months Ended September 30,
1996 1995
---- ----
Industrial Services
Technology Services divisions 26.7% 27.2%
SIMCO divisions 61.4% 64.8%
Total Industrial 38.6% 39.4%
Hardware Merchandising 49.9% 52.3%
Glass Merchandising 38.0% 36.6%
The erosion in gross margin in the SIMCO divisions is due mainly to
competitive pricing pressures and changes in sales mix. Gross margins in the
Hardware Merchandising segment decreased due to reduced packaging productivity
levels and costs associated with the Curtis acquisition and other business
expansion programs.
Selling, general and administrative expenses ("SG&A") expenses increased by
$11.9 million or 7.7% over the first nine months of 1995, comprised as follows:
increased selling expenses of $6.1 million or 8.3%, increased warehouse and
delivery expenses of $4.6 million or 16.7% and increased general and
administrative expenses of $1.2 million or 2.3%. The increase in S,G&A expenses
supported increased 1996 sales levels, the integration of the Curtis retail
division, the addition of six large in-plant accounts in the SIMCO divisions and
expansion programs by several other operating units.
-62-
<PAGE>
Including the changes discussed above, S,G&A expenses as a percentage of
sales in the comparison period, were as follows:
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
Selling Expenses 16.3% 16.1%
Warehouse and Delivery Expenses 6.5% 6.0%
General and Administrative Expenses
Total S,G&A Expenses 11.1% 11.7%
----- -----
33.9% 33.8%
*Restated for comparison purposes
As calculated in accordance with the partnership agreement, the management
fee due the General Partner annually amounts to $3.3 million which is based on
3% of the aggregate initial capital investment ($111 million) of the limited
partners. The management fee is accrued each quarter in the amount of
approximately $.8 million.
The $.4 million of net results of operations from divisions sold represents
operating income from the divested Downey Glass division for the first nine
months of 1995.
Interest income decreased $.3 million in the comparison period due
primarily to reduced investment of excess cash that was generated during the
fourth quarter of 1994 and the first quarter of 1995 from divisions sold.
Interest expense decreased $.4 million in the comparison period due
primarily to reduced financing costs from the prepayment of senior notes on
March 14, 1995.
Other income increased by $.9 million in the comparison period due
primarily to legal settlements and post-closing adjustments from divisions sold.
Currently, the Partnership incurs state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
operations. Also, the Partnership provides for deferred income taxes as
determined in accordance with Statement of Financial Accounting Standard No.
109. As currently calculated, deferred income taxes represent state and federal
income tax benefits expected to be realized after December 31, 1997, when the
Partnership will be taxed as a corporation. The Partnership's provision for
income taxes in the first nine months of 1996 decreased $.7 million from the
first nine months of 1995 due to the recording of the following: a $.3 million
deferred income tax benefit relating to book/tax differences in the
Partnership's casualty loss insurance program, a $.2 million favorable
adjustment to prior year's state income tax provisions and to a $.2 million
reduction in the foreign income tax provision.
The allocation of net income to the General Partner is based on the General
Partner's 1% ownership interest in the profits of the Partnership. The
allocation of net income to the limited partners for financial statement
purposes represents a 99% interest in the profits of the Partnership. The net
income allocation resulted in $.82 of income per Class A limited partnership
interest for the nine months ended September 30, 1996 and September 30, 1995;
and $.52 of income per Class B limited partnership interest in the first nine
months of 1996 compared with $1.20 of income per Class B interest for the first
nine months of 1995. Income per Class B interest in 1995 included a gain of $.75
from the sale of Dorman Products, results of operations from divisions sold of
$.02 and an extraordinary loss of $.03 from the early extinguishment of debt.
Excluding these 1995 events, income per Class B limited partnership interest
amounted to $.52 in the first nine months of 1996 compared with $.46 in the
first nine months of 1995.
Years Ended December 31, 1995 and 1994
Net income for the year ended December 31, 1995 was $44.1 million including
a combined gain of $20.6 million from the sale of the Downey Glass and Dorman
Products divisions, compared with $29.5 million earned in 1994 which included a
gain of $3.5 million from the sale of the Electrical Group divisions. Results
for 1995 also included $.3 million of income from Downey Glass, a $.6 million
charge related to the early retirement of debt and a reduction in net financing
costs of almost $3.2 million from the prior year. 1994 net
-63-
<PAGE>
income included income from the Electrical Group of $4.1 million, from Dorman
Products of $2.8 million, and from Downey Glass of $1.7 million. Excluding
income contributions and gains from divisions sold, as well as the extraordinary
loss on the early extinguishment of debt, net income for 1995 amounted to $23.8
million or 36.7% above the comparable 1994 earnings of $17.4 million.
Net sales increased $41.1 million or 7.4% over 1994 due to strengthening in
most product markets and significant growth from sales programs and services
initiated since 1992. Excluding divisions sold, sales recorded in 1995 were
$599.9 million compared with 1994 sales of $558.8 million. Sales increases
(decreases) by business segment were as follows:
Sales Increase (Decrease)
Amount %
------ ----
Industrial Services
Technology Services divisions 25.0 million 9.6 %
SIMCO divisions 10.1 million 7.9 %
-----
Total Industrial Services 35. million 9.1 %
Hardware Merchandising 11.9 million 16.3 %
Glass Merchandising (5.9) million (6.1)%
------
Total Partnership $41.1 million 7.4 %
=====
The decline in sales volume in the Glass Merchandising segment was
primarily attributable to the discontinuation of certain product lines and
markets served, resulting in a sales reduction of $5.0 million from 1994. On a
comparable basis, sales decreased $.9 million, or .9%, in the Glass
Merchandising segment.
Cost of sales increased $23.4 million or 7.1% from the twelve months ended
December 31, 1994, due primarily to increased sales levels in the comparison
period.
Excluding divisions sold, gross margins were 40.8% in 1995 compared with
40.7% in 1994, comprised by business segment as follows:
Year Ended December 31,
1995 1994
---- ----
Industrial Services
Technology Services divisions 27.4% 27.7%
SIMCO divisions 64.5% 65.9%
Total Industrial Services 39.5% 40.3%
Hardware Merchandising 52.4% 51.0%
Glass Merchandising 35.9% 34.4%
Sales mix was the principal contributor to the changes in gross margins.
S,G&A expenses, excluding divisions sold, increased by $15.9 million or
8.4% over 1994, comprised as follows: increased selling expenses of $8.9 million
or 9.9%, increased warehouse and delivery expenses of $3.2 million or 10.0% and
increased general and administrative expenses of $3.9 million or 5.7%. The
increase in S,G&A expenses supported increased 1995 sales levels and expansion
programs by certain operating units.
-64-
<PAGE>
Excluding divisions sold, S,G&A expenses as a percentage of sales, were as
follows:
Year Ended December 31,
-----------------------
1995 1994
---- ----
Selling Expenses 16.5% 16.1%
Warehouse and Delivery Expenses 5.8% 5.7%
General and Administrative Expenses 11.9% 12.1%
----- -----
Total S,G&A Expenses 34.2% 33.9%
===== =====
The increase in S,G&A as a percentage of sales is due mainly to increased
support payments, incentive programs and marketing efforts for the sales force.
The management fee due the General Partner is accrued in the amount of $3.3
million annually, as previously discussed.
Depreciation expense increased $.1 million in the comparison period due
primarily to an increase in the depreciable fixed asset base at the remaining
divisions of the Partnership.
Amortization expense decreased $.2 million in 1995 compared with 1994 due
primarily to the expiration of non-compete agreements in the Glass Merchandising
segment.
Net results of operations from divisions sold in the 1995 period includes
only the $0.3 million from the Downey Glass division compared with results of
operations from all divisions sold in the 1994 period, as follows: the
Electrical Group divisions ($4.1 million), the Dorman Products division ($2.8
million) and the Downey Glass division ($1.7 million).
Interest income increased $.3 million in the comparison period due
primarily to the investment of excess cash generated from divisions sold.
Interest expense decreased $2.6 million in the comparison period due
primarily to reduced financing costs of approximately $1.5 million from the
prepayment of senior notes on March 14, 1995, and $1.1 million from reduced
borrowing levels under the Partnership's revolving credit facility.
Other income was $.3 million for the twelve months ended December 31, 1995,
compared to $1.7 million of other expense recorded in the 1994 comparison
period. This change was primarily due to the favorable settlement of certain
non-recurring insurance and legal matters in the 1995 period.
As previously stated, the Partnership incurs state, local and foreign
income taxes, and provides for deferred income taxes as determined in accordance
SFAS No. 109. The Partnership's provision for income taxes in 1995 increased $.4
million from 1994 due primarily to an increase in state taxes as a result of
gains on divisions sold.
The allocation of net income, which was discussed previously, resulted in
$1.10 of income per Class A limited partnership interest for the years ended
December 31, 1995 and December 31, 1994; and $1.45 of income per Class B limited
partnership interest in 1995 compared with $.79 of income per Class B interest
for the year ended December 31, 1994. Income per Class B interest in 1995
included a combined gain of $.94 from the sale of the Dorman Products and Downey
Glass divisions and an extraordinary loss of $.03 from the early extinguishment
of debt. Income per Class B interest for the twelve months ended December 31,
1994 included a gain of $.16 on the sale of the Electrical Group divisions.
Income per Class B interest for the twelve months ended December 31, 1995 and
1994 included $.01 and $.39, respectively, of income from divisions sold.
Years Ended December 31, 1994 and 1993
Net income for the year ended December 31, 1994 was $29.5 million including
a gain of $3.5 million from the sale of the Electrical Group divisions, compared
with $18.5 million earned in 1993. This increase was a result of continued
economic expansion across all product markets and internal growth strategies
implemented primarily in these periods.
-65-
<PAGE>
Results for 1994 and 1993 included income from divisions sold as follows:
Downey Glass division of $ 1.7 and $ .1 million; Dorman Products division of
$2.8 and $3.3 million; and Electrical Group divisions of $4.1 and $3.2 million,
respectively. Excluding income contributions and gains from divisions sold, net
income for 1994 amounted to $17.4 million or 46.9% above the comparable 1993
earnings of $11.9 million.
Excluding divisions sold, net sales increased $65.4 million or 13.2 % over
1993 due to strengthening in most product markets and significant growth from
sales programs and services initiated since 1992. Sales recorded in 1994 were
$558.8 million compared with 1993 sales of $493.4 million. Sales increases by
business segment were as follows:
<TABLE>
<CAPTION>
Sales Increase
--------------
Amount %
------ ----
Industrial Services
<S> <C> <C>
Technology Services divisions $35.9 million 16.0%
SIMCO divisions 10.4 million 8.8%
-----
Total Industrial Services 46.3 million 13.5%
Hardware Merchandising 16.2 million 28.6%
Glass Merchandising 2.9 million 3.0%
-----
Total Partnership $65.4 million 13.2%
=====
</TABLE>
Cost of sales increased $38.7 million or 13.2%, due primarily to increased
sales levels in the existing businesses in the comparison period.
Excluding divisions sold, gross margins were 40.7% in 1994 compared with
40.6% in 1993, comprised by business segment as follows:
Year Ended December 31,
-----------------------
1995 1994
---- ----
Industrial Services
Technology Services divisions 27.7% 27.2%
SIMCO divisions 65.9% 66.4%
Total Industrial Services 40.3% 40.7%
Hardware Merchandising 51.0% 50.7%
Glass Merchandising 34.4% 34.4%
The erosion in gross margin in the SIMCO divisions is due mainly to
increased sales allowances related to business expansion programs and
competitive pricing pressures. Sales mix contributed principally to the change
in gross margins in the remaining divisions/segments.
Excluding divisions sold, total S,G&A expenses increased by $20.4 million
or 12.1% compared with 1993, comprised as follows: increased selling expenses of
$12.1 million or 15.5%, increased warehouse and delivery expenses of $3.3
million or 11.7% and increased general and administrative expenses of $5.0
million or 8.0%.
Selling and warehouse and delivery expense increased during 1994 to support
the substantial increase in 1994 sales levels and expansion programs. General
and administrative expenses in 1994 increased primarily by inflationary growth
in fixed costs and increased incentive-based compensation for management as a
result of 1994 net income performance.
Excluding divisions sold, S,G&A expenses, as a percentage of sales were as
follows in 1994 and 1993:
-66-
<PAGE>
Year Ended December 31,
-----------------------
1995 1994
---- ----
Selling Expenses 16.1% 15.8%
Warehouse and Delivery Expenses 5.7% 5.8%
General and Administrative Expenses 12.1% 12.7%
----- -----
Total S,G&A Expenses 33.9% 34.2%
===== =====
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.
The management fee due the General Partner is accrued in the amount of $3.3
million annually, as previously discussed.
Depreciation expense decreased $.3 million due primarily to a reduction in
the depreciable fixed asset base as a result of fully depreciated assets.
Amortization expense decreased $.3 million due primarily to the expiration
of non-compete agreements in the Glass Merchandising segment.
Net results of operations from divisions sold in 1994 and 1995 increased
$2.0 million over 1993 due to economic strengthening in 1994.
Interest expense increased $.1 million in the comparison period due mainly
to higher interest rates in 1994 over the 1993 year.
Other expense of $1.7 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
$.2 million.
As previously stated, the Partnership incurs state, local and foreign
income taxes, and provides for deferred income taxes as determined in accordance
SFAS No. 109. The Partnership'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, which was discussed previously, 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. Income per Class B interest for
the twelve months ended December 31, 1994 and 1993 included $.39 and $.30,
respectively, of income from divisions sold.
Liquidity and Capital Resources
Net cash provided by operations in the first nine months of 1996 was $20.6
million, an increase of $12.9 million over the first nine months of 1995. The
increase was due primarily to decreased working capital investment in operations
in the comparison period of approximately $14.0 million. For the twelve months
ended December 31, 1995 and 1994, net cash provided by operations was $17.1
million and $17.7 million, respectively.
The Partnership's net interest coverage ratio (earnings before interest,
taxes and gain on sale of divisions over net interest expense) improved to 4.91X
in the first nine months of 1996 from 4.77X for the nine months ended September
30, 1995. For the full year 1995, the net interest coverage ratio was 4.56X.
The Partnership's cash position of $1.7 million as of September 30, 1996,
decreased $4.2 million from the balance at December 31, 1995. Cash was provided
during this period primarily from operations in the amount of $20.6 million.
Cash was used during this period predominantly for distributions to the general
and limited partners ($20.5 million), capital expenditures ($2.7 million),
repayment of credit facilities ($.7 million) and other items ($.9 million).
-67-
<PAGE>
For the twelve months ended December 31, 1995, cash was provided primarily
from operations of $17.1 million and proceeds from the sale of the Dorman
Products and Downey Glass divisions in the aggregate amount of $44.9 million.
Cash was used during 1995 predominantly for distributions to the general and
limited partners ($27.2 million), repayment of debt obligations ($19.0 million),
acquisitions ($7.4 million), capital expenditures ($4.3 million) and the
purchase of life insurance ($3.1 million) in conjunction with funding the
Partnership's deferred compensation plans.
The Partnership's working capital position of $101.5 million at September
30, 1996, represents an increase of $5.6 million from the December 31, 1995
level of $95.8 million. The increase is attributable to reinvestment in working
capital of $4.1 million, a decrease in distributions payable to partners of $5.9
million, a decrease in management fee payable to the General Partner of $.8
million and working capital from acquisitions of $.6 million, offset by an
increase in accrued interest on senior notes of $1.6 million and a decrease in
cash of $4.2 million. The Partnership's current ratio increased to 2.14 at
September 30, 1996 from the December 31, 1995 level of 2.11. As a corporation on
a pro forma basis, the current ratio is 2.55 as of September 30, 1996.
The Partnership's financial position strengthened during 1994 and 1995 as a
result of the sale of the Downey Glass, Dorman Products and Electrical Group
divisions. The Partnership reduced the principal balance on its original $95
million senior note obligation by $24.7 million during 1994 and 1995, and paid
an additional prepayment of $6.4 million on December 1, 1996. As of September
30, 1996, the total debt as a percentage of its consolidated capitalization is
40.8% compared with 42.3% as of December 31, 1995 and 43.1% as of September 30,
1995.
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 divisions. However, the banks waived this
permanent reduction and maintained the existing bank credit commitment of $50
million. The lenders agreed to revise certain covenant tests to exclude the
impact of cash distributions to holders of Class B interests related solely to
tax gains on divisions sold.
The taxable gains per Class B interest on the sale of divisions amounted to
$.232 and $.927 on Downey and Dorman, respectively, in 1995 and $.408 on the
Electrical Group in 1994. The Operating Partnership made tax distributions to
Class B holders of record as of September 29, 1995 on the Downey gain ($.081
paid on March 29, 1996) and to Class B holders of record as of December 30, 1994
related to the gains on the Electrical Group ($.143 paid on March 31, 1995) and
Dorman ($.15 paid on April 10, 1995 and $.175 paid on March 29, 1996).
The Partnership anticipates spending approximately $3.5 million for capital
expenditures for the full year 1996, primarily for machinery and equipment.
As of September 30, 1996, the Operating Partnership had $42.6 million
available under its Bank Credit Agreement which provides revolving credit for
working capital purposes and acquisitions through December 31, 1997. The $7.4
million outstanding under the Bank Credit Agreement consisted entirely of Letter
of Credit commitments. In addition, an indirect, wholly-owned Canadian
subsidiary of the Operating Partnership has a $2.5 million Canadian dollar line
of credit for working capital purposes of which $.8 million USD was outstanding
at September 30, 1996.
The Partnership was restricted from making acquisition investments in 1993
and 1994 under the Senior Note and Bank Credit Agreements. Acquisition spending
in 1995 amounted to $7.5 million and management continues to pursue acquisitions
to complement internal growth, with annual permitted spending of up to $15
million in the aggregate. Through the first nine months of 1996, the Partnership
spent $.7 million on acquisitions.
Effective May 1, 1996, the Partnership increased its monthly Class B
tax-related cash distribution from $.02 to $.03 per Class B interest and expects
this tax distribution rate to continue for the balance of 1996 to assist the
holders of Class B interests in meeting their 1996 estimated tax obligations. As
a result of the proposed conversion, the Corporation would not be required to
make tax-related cash distributions to the Class B holders. Accordingly, a
decision regarding dividends on common stock received in exchange for Class B
interests would solely be within the discretion of the Board of Directors of the
Corporation.
See Item 3 - Legal Proceedings of Form 10-K dated December 31, 1995, Part
II, Item 1 of Forms 10-Q dated March 31, 1996 and June 30, 1996, and Note 14 of
Notes to Consolidated Financial Statements included herein, for the description
of a lawsuit with respect to the sale of the Partnership's Dorman Products
Division. Certain other legal proceedings are pending which are either in the
ordinary course of business or incidental to the Partnership's business. Those
legal proceedings incidental to the business of the Partnership are generally
not covered by insurance or other indemnity. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial position, operations or cash flows of the Partnership.
-68-
<PAGE>
Pro Forma Liquidity and Capital Resources
In connection with the proposed conversion of the partnership to a
corporation, SunSource's cash flow will improve by about $4.0 million annually
due to the elimination of General Partner management fees in amount of $3.3
million per year and the balance due principally to a reduction in income tax
rates. As a corporation, the Corporation's effective tax rate for state and
federal income taxes is expected to be approximately 40% compared with the
Partnership's current tax distribution rate of 49.5% (applied to Class B taxable
ordinary income only) plus the elimination of certain partnership-only state and
local taxes. Also, SunSource anticipates financing cost savings through
refinancing of its current outstanding debt with a combination of new long-term
debt and/or bank revolver financing, of which approximately $101.9 million would
be outstanding on a pro forma basis as a corporation at September 30, 1996. As a
result of its refinancing, it is likely that SunSource will prepay its
outstanding senior notes in whole or in part upon consummation of the proposed
conversion. SunSource would incur a make-whole penalty of approximately $5.0
million as a result of prepayment of the senior notes in their entirety. The
refinancing is expected to provide SunSource with additional working capital for
reinvestment in its businesses and acquisition capital for future growth.
The proposed conversion to corporate form will result in SunSource
reporting a negative net worth due to the exchange of Trust Preferred Securities
and cash for the Class A limited partnership interests. The new Trust Preferred
Securities have certain equity characteristics but creditors' rights, thereby
being classified between liabilities and equity on the balance sheet. The
Partnership's consolidated capitalization as of September 30, 1996, was $166.1
million in its current partnership form compared to $183.7 million as a
corporation on a pro forma basis. Total debt as a percentage of the SunSource's
consolidated capitalization is expected to increase to 55.4% as a corporation on
a pro forma basis from its current 40.8% as of September 30, 1996. SunSource's
new 11.6% yielding Trust Preferred Securities are cumulative, callable after
five years at the SunSource's option and deductible for federal income tax
purposes. SunSource's fixed charge for its Class A holders will remain at $12.2
million annually through the exchange of Trust Preferred Securities for Class A
interests. The A holders will continue to receive approximately $.092 per month
for each current Class A interest owned, which will aggregate $1.102 annually.
Income Taxes
As a result of the Partnership's adoption of SFAS No. 109 in 1992, the
Partnership has deferred tax assets aggregating $3.7 million as of September 30,
1996 and $2.8 million as of December 31, 1995. Management believes that the
Partnership's deferred tax assets will be realized through the reversal of
existing temporary differences at the earlier of the date of conversion to a C
corporation should the proposed conversion be approved, or after December 31,
1997, when the Partnership will be treated as a corporation for federal income
tax purposes. The temporary differences expected to reverse at the date of
conversion or after December 31, 1997, between the financial statement and tax
bases, at September 30, 1996 are composed of prepayment penalties in the amount
of $.8 million, deferred compensation liabilities in the amount of $8.5 million,
and insurance casualty loss liabilities of $1.0 million, net of a valuation
allowance of $.4 million and at December 31, 1995 are composed of prepayment
penalties in the amount of $.8 million and deferred compensation liabilities in
the amount of $7.5 million, net of a valuation allowance of $.4 million. See
Note 13 of Notes to Consolidated Financial Statements.
Upon conversion to a corporation, additional deferred tax assets will be
recognized in the amount of $7.5 million on a pro forma basis as of September
30, 1996, as a result of temporary differences expected to reverse before
December 31, 1997, between the financial statement and tax bases. These
additional temporary differences result from inventory adjustments ($9.9
million), accrued self-insurance loss liabilities ($3.8 million), bad debts
($1.7 million), vacation pay liabilities ($1.5 million) and other liabilities
($1.9 million). Additionally, the Corporation may receive a step-up in the tax
basis of the assets and liabilities acquired from the Partnership and, as a
result, would record additional deferred tax assets at the conversion date. The
actual amount of incremental deferred tax assets will be calculated based on the
temporary differences existing at the date of conversion to a corporation. As a
corporation on a pro forma basis, the deferred tax assets aggregate $11.3
million as of September 30, 1996, reflecting all temporary differences between
the financial statement and tax bases.
The minimum level of future taxable income necessary to realize SunSource's
deferred tax assets on a pro forma basis at September 30, 1996, is approximately
$28.8 million. For the three years ended December 31, 1995, the SunSource's
consolidated net income per the financial statements reconciled to federal
taxable income in thousands of dollars is shown below:
-69-
<PAGE>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
Consolidated Net Income per the
Financial Statements ("Book") $ 44,116 $ 29,544 $ 18,506
Tax Adjustments to Book Income:
Goodwill & Other Intangible Asset
Amortization 1,252 1,634 1,807
Depreciation 467 506 796
Deferred Compensation, net 942 2,917 384
Self-Insurance Accrued Expenses, net (776) 844 3,331
Tax gain in excess of book gain from
sale of Divisions 1,977 1,216 --
Other Increase (Decrease) to Book Income, net 1,893 451 (288)
-------- -------- --------
Federal Taxable Income $ 49,871 $ 37,112 $ 24,536
======== ======== ========
Partnership Tax Status
As previously stated, the Partnership will be taxed as a corporation for
federal income tax purposes either upon conversion to a corporation should the
proposed conversion be approved, or after December 31, 1997, whichever is
earlier. If the proposed conversion is approved and the Partnership converts to
a corporation, the Corporation will record a provision for U.S. federal, state
and foreign income taxes on its taxable earnings. The payments made to the
holders of the preferred securities will be deductible by the Corporation for
U.S. federal income tax purposes.
If the Partnership remains a limited partnership, the effect of the change
in taxation after December 31, 1997 will result in the Partnership paying a
corporate income tax at the Partnership level. Therefore, in accordance with the
Partnership Agreement, the Partnership's income would not be allocated for tax
purposes to the partners as is currently being done, and limited partners would
pay taxes only on distributions from the Partnership, if any. Additionally, in
accordance with the Partnership Agreement, the Partnership would no longer make
tax distributions with respect to Class B limited partnership interests.
Accordingly, a decision on whether any other distribution would be made with
respect to the Class B interests would solely be within the discretion of the
General Partner. Based on current operations, it is likely that cash would be
retained in the Partnership to fund its acquisition program and other
partnership requirements. If the Partnership remains a limited partnership,
there will be no change with respect to the priority return distribution paid to
the Class A interests in the amount of approximately $.092 per month to each
Class A interest to aggregate $1.10 annually.
Inflation
Inflation in recent years has had a modest impact on the operations of the
Partnership. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Partnership's operating divisions to raise prices is dependent upon competitive
market conditions.
-70-
<PAGE>
BUSINESS
General
The Partnership through the Operating Partnership is one of the largest
wholesale distributors of industrial products and services in the United States.
Since January 1987, the business of the Partnership and the Operating
Partnership has been managed by SDI Partners I, L.P. (the "General Partner"), a
limited partnership whose general partner is Lehman/SDI, Inc., formerly known as
Shearson/SDI, a Delaware corporation and an indirect, wholly owned subsidiary of
Lehman Brothers Holdings, Inc. ("Lehman Holdings"). The General Partner owns 1%
of the Partnership and 1% of the Operating Partnership. All of the limited
partnership interests in the General Partner are beneficially owned by members
of management of the Partnership and the Operating Partnership (the "Management
Employees").
While the Partnership has historically viewed its operations as one
business segment, changes in the marketplace, risks and the economy demand that
the Partnership now measure and value its businesses with a customer-based focus
on value added services such as engineering design, inventory management, and
integrated supply. These services are expected to provide greater revenue growth
in future years than general product distribution. In December 1995, the
Partnership reorganized its operating businesses, operating management, and
current strategic plan to support markets for industrial services and
merchandising services for hardware and glass. The current organization consists
of its headquarters operation and three business segments comprised of eleven
operating divisions, as follows:
<TABLE>
<CAPTION>
Principal Year Acquired/
Location Organized
------------------------------ --------------
<S> <C> <C>
Sun Distributors Headquarters Philadelphia, Pennsylvania 1975
Industrial Services Segment
Sun Inventory Management Company ("SIMCO") Divisions
- Kar Products Chicago, Illinois 1977
- A&H Bolt & Nut Company Windsor, Ontario 1989
- SIMCO/Special-T-Metals Lenexa, Kansas 1992/1981
Sun Technology Services Divisions
- Walter Norris Rosemont, Illinois 1976
- J.N. Fauver Company Madison Heights, Michigan 1978
- Warren Fluid Power Denver, Colorado 1987
- Air-Dreco Houston, Texas 1988
- Activation Birmingham, Alabama 1991
- Hydra Power Tlalnepantla, C.P., Mexico 1992
Hardware Merchandising Segment
- Hillman Fastener Cincinnati, Ohio 1982
Glass Merchandising Segment
- Harding Glass Industries Kansas City, Missouri 1980
</TABLE>
Beginning in 1996, the Partnership has reported its financial results on
the basis of the aforementioned segments.
In November 1995, the Operating Partnership's Hillman Fastener division
acquired the retail hardware business of Curtis Industries. Annual sales of
Curtis' Retail division are approximately $10.5 million. The acquisition of
Curtis will significantly expand Hillman's position as a supplier of goods and
services to the hardware home center market where Curtis has concentrated much
of its attention. In addition, the Curtis product line can now be offered to
Hillman's present customer base. This acquisition continues
-71-
<PAGE>
Hillman's long-term growth strategy to become a major provider of products and
services to all segments of the hardware merchandising business.
The Operating Partnership sold the Electrical Products Group divisions on
December 5, 1994, the Dorman Products division on January 3, 1995, and the
Downey Glass division on October 27, 1995, (the "divested operations or
divisions sold") as listed below:
Divisions Sold Principal Location
- -------------- -------------------
Electrical Products Group Divisions
- - American Electric Company St. Joseph, Missouri
- - Philips & Company Columbia, Missouri
- - Keathley-Patterson Electric Co. N. Little Rock, Arkansas
Dorman Products Division Warsaw, Kentucky
Downey Glass Division Los Angeles, California
For the year ended December 31, 1995, the Partnership had net sales of
approximately $600 million, excluding sales from the divested Downey Glass
division of $29 million, with the largest operating division contributing
approximately $154 million.
The Partnership's business strategy has been to identify and develop
specific industrial distribution markets. However, the Partnership's current
strategic plan seeks to increase its emphasis on sales of high gross-margin
products by providing its customers with value added services, such as
engineering design services through its Sun Technology Services divisions and
inventory management and integrated supply services primarily through its SIMCO
divisions. In addition, the Partnership has opened new service centers for
repair of fluid power equipment and seeks to expand this service outside its
core geography and across Canada. The Partnership also continues to enhance its
retail service offerings in the glass segment and broaden its retail
merchandising of hardware related products.
Presidents of the Partnership's operating divisions exercise broad
discretion in the conduct of their businesses, including responsibility for the
management of their suppliers, customers and employees. Strong formal and
informal planning and monitoring functions are performed by the General Partner,
and the individual presidents of operating units are evaluated against the
financial and non-financial goals established jointly each year with the General
Partner. A substantial portion of each president's compensation is tied to the
performance of his division against its annual plan. Also, certain presidents
can earn substantial deferred compensation for maintaining the results of their
operations in the upper quartile within the industrial distribution industry.
Management believes that much of the Partnership's prior success has been the
result of fostering and perpetuating the entrepreneurial drive of operating
management.
The Partnership evaluates on an ongoing basis the performance and prospects
of each of its operating divisions in light of the Partnership's overall
business strategy.
Acquisition Strategy
Since the organization of its predecessor in 1975, the business of the
Partnership has grown primarily through acquisitions of existing distribution
companies. The acquisition strategy has expanded the Partnership's operations,
both geographically and in the number and type of products offered. The
Partnership evaluates companies that have developed attractive product/market
niches and have demonstrated their ability to achieve high returns on invested
capital. The Partnership looks for companies with strong management capabilities
and stable growth patterns. Prior to making certain acquisitions, an extensive
operational review is performed by an external consulting firm. Subsequent to
most acquisitions, certain agreed upon procedures are performed by internal and
external auditors.
In December 1992, the Partnership 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 Partnership was not permitted to
make acquisitions in 1993 and 1994. In 1995, this restriction was removed and
acquisition spending amounted to $7.5 million with authorized spending of up to
$15.0 million in accordance with the terms of the Partnership's credit
agreements. See Notes 5, 8 and 9 of Notes to Consolidated Financial Statements.
-72-
<PAGE>
As the result of an analysis of strategic alternatives by the Partnership,
the Partnership sold the non-strategic businesses described above. Through the
sale, the Partnership has strengthened its balance sheet and is now in a
position to resume its acquisition program by focusing on businesses which fit
its current strategic plan.
Products and Services
Excluding the divested operations discussed previously, the Partnership
provides distribution and value-added services related to over 1,300 product
lines. These services are provided in three main business segments: (1)
industrial services which consist of inventory management, engineering and
integrated supply services to industrial businesses through sales of products
such as fasteners (nuts, bolts, screws, etc.), hydraulic, pneumatic and
electronic systems and parts; (2) retail merchandising services through sales of
fasteners and related products to hardware and home center retail stores; and
(3) retail glass services consisting of installation and repair through sales of
glass products such as large sheet glass, auto glass, insulated glass, mirrors
and specialty glass. The average single sale during the year ended December 31,
1995, was approximately $297.
Inasmuch as the Partnership is principally providing distribution and
related services, most of the products sold are manufactured by others. However,
several divisions sell a majority of their products under their own labels. In
some cases, most notably through its Technology Services divisions, the
Partnership assembles products or designs systems to the specifications of the
end-users and performs related product repairs. Through its Glass Merchandising
segment, the Partnership produces insulated glass units according to customer
specifications. In addition, several of the products which the Partnership
distributes are purchased by the Partnership in bulk and subsequently repackaged
in small quantities.
The Partnership regularly uses a large number of suppliers and has
long-term relationships with many of them. Most items which the Partnership
distributes are purchased from several sources, and the Partnership believes
that the loss of any single supplier would not significantly affect the
operations of the Partnership viewed as a whole. No single supplier accounted
for more than 5% of the Partnership's purchases for the year ended December 31,
1995.
The following table shows the percentages of consolidated net sales
reported for the years ended December 31, 1995, 1994, and 1993 derived from the
Partnership's current business segments, excluding divisions sold:
<TABLE>
<CAPTION>
Percentage of Consolidated Net Sales for
Year Ended December 31,
Nine Months Ended -----------------------------------------
Business Segment September 30, 1996 1995 1994 1993
- ---------------- ------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Industrial Services
Technology Services divisions 45.8% 47.6% 46.6% 45.5%
SIMCO divisions 23.9% 23.0% 22.9% 23.9%
----- ----- ----- -----
Total Industrial Services 69.7% 70.6% 69.5% 69.4%
Hardware Merchandising 16.2% 14.1% 13.1% 11.4%
Glass Merchandising 14.1% 15.3% 17.4% 19.2%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
</TABLE>
Marketing
While the Partnership sells across three main business segments (industrial
services, hardware merchandising and glass merchandising), a substantial portion
of its sales are industrially based, and sales performance is tied closely to
the overall performance of the non-defense-goods producing sector of Gross
Domestic Product in the United States. However, risks and economic changes in
the marketplace demand a customer-based focus on value-added services which vary
by business segment. The principal markets for the Partnership's products and
services by business segment, as determined by management are as follows:
Maintenance and Repair Markets and Original Equipment Manufacturers
Customers in this market are served by the divisions in the Industrial
Services segment. These customers include diverse industrial
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<PAGE>
plants and commercial establishments as well as producers of automotive
equipment, farm equipment, machine tools and a broad range of other
equipment.
Hardware Merchandising
This market is primarily comprised of retail hardware stores, home service
centers, and lumberyards seeking merchandising services for hardware
related products.
Glass Merchandising
This market is primarily comprised of individuals seeking automotive and
residential glass replacement as well as contractors seeking glazing
materials and services.
The Partnership has over 179,000 customers, the largest of which accounted
for less than 4% of net sales for the year ended December 31, 1995. 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 775 sales people.
The Partnership's products and services are sold in all 50 states. While
its Glass Merchandising segment sells in regional markets, the remaining two
segments sell on a national scale. In general, fluid power products and
technology services are sold primarily in the upper Midwest, Southeast,
Southwest, Canada and Mexico; maintenance products and inventory management
services are sold nationwide in the U.S., Canada, and Mexico; retail
merchandising products and services are sold nationally in the U.S. and Mexico;
and retail glass products and services are sold primarily in the West, the
Midwest, the Mid-Atlantic and the Southeast.
Competition
The distribution business is highly competitive, with the principal methods
of competition being quality of service, quality of products, product
availability, credit terms, price and the provision of value-added services such
as engineering design, integrated supply and inventory management. The
Partnership encounters competition from a large number of regional and local
distributors and from several national distributors, some of which have greater
financial resources than the Partnership. The wholesale distribution business is
highly fragmented, with a majority of the wholesale distributors in the United
States being operated as family-owned businesses. The Partnership's competitors
have annual sales of approximately $5 million on the average with approximately
one-half under $2 million. The Partnership believes that its business differs
from that of other large national distributors in that the Partnership carries a
diverse range of product lines and provides significant value-added services,
while most large distributors concentrate on only one or two product groups.
Insurance Arrangements
Under the Partnership's current insurance programs, commercial umbrella
coverage is obtained for catastrophic exposure and aggregate losses in excess of
expected claims. Since October 1991, the Partnership has retained the exposure
on certain expected losses related to workman's compensation, general liability
and automobile. The Partnership also retains the exposure on expected losses
related to health benefits of certain employees. The Partnership believes that
its present insurance is adequate for its businesses. See Note 14 of Notes to
Consolidated Financial Statements.
Employees
Currently, the Partnership, through the Operating Partnership, employs
3,843 employees, of which 1,670 are sales personnel, 1,142 are employed as
warehouse and delivery personnel, and 1,031 hold administrative positions. The
Operating Partnership has collective bargaining agreements with five unions
representing a total of 65 employees. In the opinion of management, employee
relations are good.
Backlog
The Partnership's sales backlog excluding divested operations was
$54,935,000 as of December 31, 1995, and $56,335,000 as of December 31, 1994.
Normally, in the distribution business, orders are shipped within a week of
receipt. On average, the Partnership's backlog is less than one month's sales.
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<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 Partnership, and the passive activity losses
and credits attributable thereto. Section 7704 of the Code provides that
publicly traded partnerships generally will be treated as corporations for tax
purposes commencing in tax years beginning after 1987. The effective date of
this amendment was delayed, however, for certain "existing partnerships," such
as the Partnership, until the taxable year beginning after December 31, 1997,
provided that such partnerships do not add any substantial new line of business
before the delayed effective date. The Partnership does not intend to add any
substantial new line of business during the period when it otherwise qualifies
for delayed effectiveness under Section 7704.
Section 469 of the Code provides that, in the case of publicly traded
partnerships that are not treated as corporations under Section 7704, net losses
and credits attributable to an interest in each such partnership shall not be
applied against the partner's other income. Such net losses and credits are
suspended and carried forward to be applied against net income from the
Partnership in succeeding years. Since the commencement of operations, the
Partnership has not incurred a net loss for federal income tax purposes.
However, if the Partnership should incur a net loss for federal income tax
purposes in any subsequent year until taxable years beginning after December 31,
1997, such net losses will be suspended at the limited partner level, carried
forward and netted in a later year or years against the limited partner's share
of the net income of the Partnership, or will be used when the entire investment
is disposed of in a taxable transaction. Similarly, a limited partner's share of
any credits of the Partnership in excess of the tax liability attributable to
his or her interest in the Partnership will be suspended, carried forward and
applied against the tax liability attributable to the Partnership in a
subsequent year or years, or may be used to increase the basis of such
partnership interest when the entire investment is disposed of in a taxable
transaction. Generally, these credits may not be applied against tax liability
attributable to other activities.
Assuming the continued effectiveness of Section 7704 of the Code in its
current form, if the Partnership remains a publicly traded partnership, the
Partnership would be treated as a corporation for tax purposes beginning in
fiscal year 1998. Section 469 would then be inapplicable to the limited
partners' treatment of income or credits attributable to the Partnership. The
income of the Partnership would be taxed to it as a separate entity, and any
losses of the Partnership would not be deductible by limited partners. This tax
at the corporate level would reduce the amount distributable to partners and
cash distributions to limited partners would be taxed at the individual level as
dividends to the extent of earnings and profits. See Part II, Item 5, Market for
Registrant's Partnership Interests and Related Matters - Partnership Tax Status.
The Revenue Reconciliation Act of 1993 (the "1993 Act") amended the Code
with respect to the tax treatment of unrelated business taxable income ("UBTI")
in an effort to allow pension funds and other tax-exempt organizations (such as
individual retirement accounts and charitable organizations) to invest in
publicly traded partnerships. Such entities are subject to federal income tax on
net UBTI in excess of $1,000.
The 1993 Act repeals the rule that automatically treats income from
publicly traded partnerships as gross income that is derived from an unrelated
trade or business. As a result, investments in publicly traded partnerships will
be treated the same as investments in other partnerships for purposes of the
UBTI rules for partnership years beginning on or after January 1, 1994.
Section 708 of the Code, in general, provides for termination of a
partnership if 50 percent or more of the total interest in partnership capital
and profits is sold or exchanged within a twelve-month period. However, the
legislative history to the Technical and Miscellaneous Revenue Act of 1988
indicates that termination of a partnership within the meaning of Section 708
will not cause a partnership to cease to qualify as an "existing partnership"
for purposes of Section 7704. Accordingly, sales or exchanges of Interests in
the Partnership pursuant to trading of the Partnership's Interests on the New
York Stock Exchange will not impair the status of the Partnership as an
"existing partnership" that qualifies for a delayed effective date under Section
7704.
Legal Proceedings
A civil complaint was filed by Dorman Products of America, Ltd. ("Dorman"),
a subsidiary of R&B, Inc. ("R&B"), against the Operating Partnership, in the
United States District Court for the Eastern District of Pennsylvania on
February 27, 1996, alleging misrepresentation of certain facts by the Operating
Partnership upon which R&B allegedly based their offer to purchase the assets of
the Dorman Products division of the Operating Partnership. The complaint sought
damages of approximately $21 million. The Operating Partnership moved to dismiss
for lack of jurisdiction and the complaint was withdrawn. On April 25, 1996, the
Operating Partnership filed an action against Dorman and R&B in the Court of
Common Pleas of Montgomery County, Pennsylvania alleging breach of contract,
intentional interference with contractual relations and negligence and
requesting a declaratory judgment that the Operating Partnership did not make
any misrepresentations in connection with the sale of the division. Dorman and
R&B have counterclaimed
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<PAGE>
making the same allegations which were made in the original complaint. In the
opinion of management, the ultimate resolution of this matter will not have a
material effect on the consolidated financial position, operations or cash flows
of the Partnership.
MANAGEMENT
Executive Officers and Directors
The business of the Partnership and the Operating Partnership is managed by
the General Partner, whose general partner is Lehman/SDI. The directors of
Lehman/SDI, each of whom has served as such since February 1987, except for Mr.
Eliot M. Fried, who has served since December 1994, Mr. Henri I. Talerman, who
has served since March 1995, and Mr. John P. McDonnell, who has served since May
1995, are set forth below:
<TABLE>
<CAPTION>
Principal Occupation; Five-Year
Name, Age and Address Employment History; Other Directorships
--------------------- ---------------------------------------
<S> <C>
O. Gordon Brewer, Jr.,60 Vice President-Finance, Alco Standard Corporation (distributor of
Alco Standard Corp. office and paper products); Executive Officer, Alco Standard
P. O. Box 834 Corporation, 1970 to present; Director, Corporate Insurance and
Valley Forge, PA 19482 Reinsurance Limited.
Norman V. Edmonson, 56 Executive Vice President of the Partnership since December
2600 One Logan Square 1994; Group Vice President of the Partnership prior to December
Philadelphia, PA 19103 1994.
Eliot M. Fried, 63 Managing Director, Lehman Brothers Inc.; Director, Axsys
Lehman Brothers Technologies, Inc.; Bridgeport Machines, Inc.; Energy Ventures,
American Express Tower - 17th Floor Inc.
World Financial Center
New York, NY 10285
Arnold S. Hoffman, 61 Senior Managing Director, Legg Mason Wood Walker,
Legg Mason Wood Walker Incorporated Incorporated, Jan. 1992 to present; Chairman, The Middle Market
Mellon Bank Center, Suite 1100 Group, L.P. (investment banking, mergers, acquisitions and
1735 Market Street divestitures), 1990 to January 1992; Director, Intelligent
Philadelphia, PA 19103 Electronics Incorporated.
Donald T. Marshall, 63 Chairman and Chief Executive Officer of the Partnership.
2600 One Logan Square
Philadelphia, PA 19103
John P. McDonnell, 60 President of the Partnership since December 1994; Group Vice
2600 One Logan Square President of the Partnership prior to December 1994.
Philadelphia, PA 19103
Ernest L. Ransome, III, 70 Chairman, Giles & Ransome, Inc. (distributor of construction
Giles & Ransome equipment), 1988 to present.
2975 Galloway Road
Bensalem, PA 19020
Donald A. Scott, 67 Senior Partner, Morgan, Lewis & Bockius LLP; Director,
2000 One Logan Square Provident Mutual Life Insurance Company.
Philadelphia, PA 19103
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Henri I. Talerman, 39 Managing Director, Lehman Brothers Inc.; Director, McBride plc;
Lehman Brothers Financier Gerflor SA; Advisory Director, Europe Capital
American Express Tower - 18th Floor Partners.
World Financial Center
New York, NY 10285
</TABLE>
All directors hold office until the next annual meeting of the sole
stockholder of Lehman/SDI and until their successors are duly elected and
qualified.
The executive officers of the Partnership and the Operating Partnership
(constituting, except for Mr. Brus, the "Management Employees" referred to
herein), each of whom has served as such for the past five years, except as
noted, are set forth below:
<TABLE>
<CAPTION>
Principal Occupation; Five-Year
Name, Age and Address Employment History; Other
--------------------- -------------------------
Directorships
-------------
<S> <C>
Richard J. Brus, 58 President, Sun Technology Services since 1995; President,
153 W. Valley Avenue Activation Division 1992 to 1995; and Vice President-Sales
& Birmingham, AL 35259 Marketing, Activation Division, prior to 1992.
Harold J. Cornelius, 47 Group Vice President.
Harding Glass Industries
7201 W. 110th Street
Overland Park, KS 66210
Joseph M. Corvino, 42 Vice President-Finance, Chief Financial Officer, Treasurer and
2600 One Logan Square Secretary since December 1995; Vice President and Controller
Philadelphia, PA 19103 prior to December 1995.
Norman V. Edmonson, 56 Executive Vice President since December 1994; Group Vice
2600 One Logan Square President prior to December 1994.
Philadelphia, PA 19103
Max W. Hillman, Jr., 49 Group Vice President, since March 1991; President, Hillman
Hillman Fastener Fastener Division, 1982 to February, 1991.
10590 Hamilton Avenue
Cincinnati, OH 45231
Donald T. Marshall, 63 Chairman and Chief Executive Officer.
2600 One Logan Square
Philadelphia, PA 19103
John P. McDonnell, 60 President and Chief Operating Officer since December 1994;
2600 One Logan Square Group Vice President prior to December 1994.
Philadelphia, PA 19103
</TABLE>
All executive officers hold office at the pleasure of the board of
directors.
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<PAGE>
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, 1995, by each of the Chief Executive Officer and the four other
most highly compensated executive officers of the Partnership and the Operating
Partnership whose remuneration exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal Position Annual Compensation
--------------------------------------------------- All Other
Year Salary Bonus Compensation
---- ------ ----- ------------
<S> <C> <C> <C> <C>
Donald T. Marshall 1995 $488,688 $ 4,347 $10,234 (2)
Chairman and Chief Executive Officer 1994 454,043 221,144 8,185 (2)
1993 403,392 62,897 6,367 (2)
John P. McDonald 1995 374,451 32,812 2,500 (2)
President and Chief Operating Officer 1994 295,354 96,915 2,135 (2)
1993 273,947 44,278 1,843 (2)
Norman V. Edmonson 1995 333,849 82,200 1,638 (2)
Executive Vice President 1994 300,477 94,400 1,418 (2)
1993 285,144 89,000 1,250 (2)
Harold J. Cornelius 1995 291,609 27,400 --
Group Vice President 1994 275,375 102,729 90,128 (2)
1993 261,147 37,621 58,818 (2)
Max W. Hillman, Jr. 1995 268,920 36,250 50,186 (3)
Group Vice President 1994 294,793 104,898 107,632 (3)
1993 234,707 16,578 13,661 (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 1995 and 1994 by
the executive officers in accordance with the Partnership's Long-Term
Performance Share Plan since the awards earned are subject to reduction or
forfeiture through 1998 if performance goals are not achieved. The value of the
awards credited for December 31, 1995 and December 31, 1994, respectively, for
each executive officer are as follows: Donald T. Marshall $553,934 and $586,037;
Norman V. Edmonson, $364,012 and $385,110; John P. McDonnell, $174,092 and
$184,182; Harold J. Cornelius, $174,092 and $184,182, and Max W. Hillman,
$174,092 and $184,182.
Directors of Lehman/SDI who are not employees of the Partnership or Lehman
Brothers Inc. are paid an annual fee of $14,000 and a fee of $1,000 for each
board or committee meeting attended. Such fees are paid by the General Partner.
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<PAGE>
Deferred Compensation Plans
The Partnership's deferred compensation plans are described in Note 11 to
Consolidated Financial Statements. Completion of the Conversion will result in
100% vesting for all participant balances as of the date of the Conversion. The
present intention is to continue operation of the plans following the
Conversion.
The Partnership's Long-Term Performance Share Plan (the "Share Plan") is
based upon annual and cumulative performance for a five year term ending
December 31, 1998. If the Conversion is approved, the participants will be
entitled to 100% vesting of the awards earned through December 31, 1996 in
accordance with the change of control provision of the Share Plan. See "--
Change in Control Arrangements." If the conversion is approved, the Share Plan
will continue to run from January 1, 1997 to December 31, 1998, to complete the
Share Plan's original five-year performance cycle.
Change in Control Arrangements
The executive officers named above were participants in the Operating
Partnership's Deferred Compensation Plans (the "Plans") in certain years. Upon a
change in control, the Plans provide for payment of all vested and non-vested
amounts including accrued interest. The change in control provision is triggered
upon a sale of all of the Operating Partnership's business, a change in the
General Partner, or a change, other than due to death or retirement, in a
majority of the directors of Lehman/SDI during any one-year period. See Note 11
of Notes to Consolidated Financial Statements. As a result of the proposed
conversion, the change of control provisions of the Plans will be triggered.
Participants will be offered an opportunity to defer receipt of amounts
available for payment under a new deferred compensation plan, the "Deferred
Compensation Plan for Key Employees of SDI Operating Partners, L.P.," effective
December 1, 1996. The Partnership estimates that approximately $10.2 million of
deferred compensation balances will become payable as a result of the change of
control provision and eligible for elective deferral. Management expects
approximately $7.5 million of these balances eligible for payment to be
deferred. Messrs. Marshall, McDonnell and Edmonson have waiver their rights to
accelerate payments.
Management Fee
The Operating Partnership pays a management fee (the "Management Fee") to
the General Partner. The Management Fee, payable annually on March 31 (with
respect to the preceding year), is equal to 3% of the aggregate initial capital
investment of $110,995,730 by the limited partners. The amount of the Management
Fee paid on March 31, 1996, was $3,329,872. The amount of management fee paid in
1995 with respect to 1994 was $3,329,872. See footnotes (1) and (2) to the table
under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" for
ownership of the General Partner. The interests of Lehman/SDI and the Management
Employees, in the fee for 1995 were as follows: Lehman/SDI, $1,791,471; Harold
J. Cornelius, $92,304; Joseph M. Corvino, $30,768; Norman V. Edmonson, $384,600;
Max W. Hillman, Jr., $92,304; Donald T. Marshall, $599,977; and John P.
McDonnell, $184,608.
Certain Business Relations
Mr. Scott is a partner in Morgan, Lewis & Bockius LLP, a law firm that has
performed services for the Partnership during the last fiscal year.
Messrs. Fried and Talerman are officers of Lehman Brothers Inc., which
performed investment banking services for the Partnership during 1995 and 1996.
Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which
performed investment banking services for the Partnership during 1995.
The Partnership proposes to have these firms perform similar services as
needed during the current fiscal year.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
Since the Partnership is managed by its General Partner and has no Board of
Directors, there are no "voting securities" of the Partnership outstanding
within the meaning of Item 403(a) of Regulation S-K and Rule 12b-2 under the
Securities Exchange Act of 1934. As set forth above, the general partner of the
General Partner is Lehman/SDI, an indirect, wholly owned subsidiary of Lehman
Brothers Holdings, Inc., American Express Tower, World Financial Center, New
York, NY 10285-1800.
Security Ownership of Certain Beneficial Owners and Management
The following table shows for (i) each director, (ii) executive officer
named in the Summary Compensation Table, (iii) certain persons known to the
Company to own beneficially more than 5% of the outstanding interests and (iv)
for all officers and directors as a group, the beneficial ownership of Class A
and Class B Interests of the Partnership as of December 1, 1996. None of the
amounts equals more than 1% of the outstanding Class A Interests.
<TABLE>
<CAPTION>
Ownership Before Conversion Ownership After Conversion
Class B Percent of
Name of Beneficial Class A Class B Percent of Shares of Common Stock
Owner Amount(1) Amount(1) Class Common Stock Held
------------------ ------- ------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Lehman LTD I, Inc. -- 108,554 --(5) 27,138 --(5)
Lehman Brothers
Capital Partners I -- 5,788,124 26.7% 1,447,031 22.5%
Lehman/SDI, Inc. -- -- -- 538,000 8.4%
O. Gordon Brewer, Jr. 3,000 1,000 -- (5) 250 --(5)
Harold J. Cornelius 200 200 --(5) 27,770 --(5)
Joseph M. Corvino 1,415 105,546 --(5) 35,626 --(5)
Richard J. Brus 1,186 2,500 --(5) 625 --(5)
Norman V. Edmonson 4,900 1,300,916 6.0% 440,729 --(5)
Eliot M. Fried -- (2) -- (2) --(2) -- --(6)
Max W. Hillman, Jr. 4,000 10,000 --(5) 30,220 --(5)
Arnold S. Hoffman 13,000(2)(3) 13,000(2)(3) --(5) 3,250 --(6)
Donald T. Marshall 30,311 2,075,232 9.6% 698,988 10.9%
John P. McDonnell 7,711 623,071 2.9%(5) 211,208 3.3%
Ernest L. Ransome, III 5,000(4) 5,000 -- 1,250 --(5)
Donald A. Scott 9,000 9,000 -- 2,250 --(5)
Henri I. Talerman --(2) -- -- -- --(5)
All directors and 79,723 4,145,465 19.1% 1,452,166 22.6%
executive officers as a
group (13 persons)
</TABLE>
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<PAGE>
- ----------------------
(1) In addition to the Interests listed, the Management Employees beneficially
own limited partnership interests in the General Partner (the "GP Interests").
The GP Interests held by the Management Employees collectively represent 46.2%
of the limited partnership interests in the General Partner. The General Partner
owns 1% of the Partnership and the Operating Partnership. The table does not
include the GP Interests owned by the Management Employees.
(2) Does not include (i) 108,554 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, which is the general partner of the General
Partner and holds the remaining interest in the General Partner not owned by the
Management Employees.
(3) 3,000 of these 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.
(6) Does not include 1,447,031 shares of Common Stock expected to be owned by
Lehman Brothers Capital Partners I ("Capital Partners") after the Conversion.
Messrs. Hoffman and Fried, as limited partners of Capital Partners, derive
economic benefit of approximately 1% from interests held by Capital Partners.
- -----------------------
SUNSOURCE CAPITAL TRUST
The Trust is a statutory business trust that was formed under the Business
Trust Act on _________ pursuant to a declaration of trust dated ____________
among the Trustees and the Corporation and the filing of a certificate of trust
with the Secretary of State of Delaware. The Declaration is qualified under the
Trust Indenture Act. Upon issuance of the Preferred Securities, the holders
thereof will own all of the issued and outstanding Preferred Securities. The
Corporation has agreed to acquire Common Securities in an amount equal to at
least 3% of the total capital of the Trust and will own, directly or indirectly,
all of the issued and outstanding Common Securities. The Preferred Securities
and the Common Securities will rank pari passu with each other and will have
equivalent terms; provided that (i) if an Event of Default under the Declaration
occurs and is continuing, the holders of Preferred Securities will have a
priority over holders of the Common Securities with respect to payments in
respect of distributions and payments upon liquidation, redemption or otherwise
and (ii) holders of Common Securities have the exclusive right (subject to the
terms of the Declaration) to appoint, remove or replace Trustees and to increase
or decrease the number of Trustees, subject to the right of holders of Preferred
Securities to appoint a Special Regular Trustee upon the occurrence of an
Appointment Event.
The number of Trustees of the Trust shall initially be five. Three of the
Trustees will be the Regular Trustees. The fourth trustee is CoreStates Bank
N.A. which is unaffiliated with the Corporation and which will serve as the
Property Trustee and act as the indenture trustee for purposes of the Trust
Indenture Act. The fifth trustee is an affiliate of CoreStates Bank N.A. and
will serve as the Delaware Trustee. Pursuant to the Declaration, legal title to
the Junior Subordinated Debentures will be held by the Property Trustee for the
benefit of the holders of the Trust Securities and the Property Trustee will
have the power to exercise all rights, powers and privileges under the Indenture
with respect to the Junior Subordinated Debentures. In addition, the Property
Trustee will maintain exclusive control of the Property Account to hold all
payments in respect of the Junior Subordinated Debentures for the benefit of the
holders of Trust Securities. The Property Trustee will promptly make
distributions to the holders of the Trust Securities out of funds from the
Property Account. The Preferred Securities Guarantee is separately qualified
under the Trust Indenture Act and will be held by CoreStates Bank N.A. acting in
its capacity as indenture trustee with respect thereto, for the benefits of the
holders of the Preferred Securities. Subject to the right of holders of
Preferred Securities to appoint a Special Regular Trustee upon the occurrence of
an Appointment Event, the Corporation, as the direct or indirect owner of all of
the Common Securities, has the exclusive right
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<PAGE>
(subject to the terms of the Declaration) to appoint, remove or replace Trustees
and to increase or decrease the number of Trustees, provided that the number of
Trustees shall at least be three, a majority of which shall Regular Trustees.
The Trust exists for the purpose of (a) issuing (i) its Preferred
Securities to the Corporation in consideration of the deposit by The Corporation
of Junior Subordinated Debentures in the Trust as trust assets, and (ii) its
Common Securities to the Corporation in exchange for cash and investing the
proceeds thereof in an equivalent amount of Junior Subordinated Debentures and
(b) engaging in such other activities as are necessary or incidental thereto.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the
Declaration, the Business Trust Act and the Trust Indenture Act.
Under the Declaration, the Trust shall not, and the Trustees shall cause
the Trust not to, engage in any activity other than in connection with the
purposes of the Trust or other than as required or authorized by the
Declaration. In particular, the Trust shall not and the Trustees shall not (a)
invest any proceeds received by the Trust from holding the Junior Subordinated
Debentures but shall promptly distribute from the Property Account all such
proceeds to holders of Trust Securities pursuant to the terms of the Declaration
and of the Trust Securities; (b) acquire any assets other than as expressly
provided in the Declaration; (c) possess Trust property for other than a Trust
purpose; (d) make any loans, other than loans represented by the Junior
Subordinated Debentures; (e) possess any power or otherwise act in such a way as
to vary the Trust assets or the terms of the Trust Securities in any way
whatsoever; (f) issue any securities or other evidences of beneficial ownership
of, or beneficial interests in, the Trust other than the Trust Securities; (g)
incur any indebtedness for borrowed money or (h)(i) direct the time, method and
place of exercising any trust or power conferred upon the Indenture Trustee with
respect to the Junior Subordinated Debentures or the Property Trustee with
respect to the Preferred Securities, (ii) waive any past default that is
waivable under the Indenture of the Declaration, (iii) exercise any right to
rescind or annul any declaration that the principal of all of the Junior
Subordinated Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures or the Declaration, in each case where such consent
shall be required, unless in the case of this clause (h) the Property Trustee
shall have received an unqualified opinion of nationally recognized independent
tax counsel recognized as expert in such matters to the effect that such action
will not cause the Trust to be classified for the United States federal income
tax purposes as an association taxable as a corporation or a partnership and
that the Trust will continue to be classified as a grantor trust for United
States federal income tax purposes.
The books and records of the Trust will be maintained at the principal
office of the Trust and will be open for inspection by a holder of Preferred
Securities or the holder's representative for any purpose reasonably related to
the holder's interest in the Trust during normal business hours. Each holder of
Preferred Securities will be furnished annually with unaudited financial
statements of the Trust as soon as available after the end of the Trust's fiscal
year.
Except as provided below or under the Business Trust Act and the Trust
Indenture Act, holders of Preferred Securities have no voting rights. If (i)
distributions on the Preferred Securities are in arrears for 18 consecutive
months or (ii) an Event of Default under the Declaration occurs and is
continuing, holders of Preferred Securities shall have the right to vote, as a
single class, for the appointment of a Special Regular Trustee who need not be
an employee or officer of or otherwise affiliated with the Corporation. The
Special Regular Trustee shall have the same rights, powers and privileges under
the Declaration as the Regular Trustees. See "DESCRIPTION OF PREFERRED
SECURITIES -- Voting Rights."
The Property Trustee, for the benefit of the holders of the Trust
Securities, is authorized under the Declaration to exercise all rights under the
Indenture with respect to the Junior Subordinated Debentures to enforce the
Corporation's obligations under the Junior Subordinated Debentures upon the
occurrence of an Indenture Event of Default. The Property Trustee shall also be
authorized to enforce the rights of holders of Preferred Securities under the
Preferred Securities Guarantee. If the Trust's failure to make distributions on
the Preferred Securities is a consequence of the Corporation's exercise of its
right to extend the interest payment period for the Junior Subordinated
Debentures, the Property Trustee will have no right to enforce the payment of
distributions on the Preferred Securities until an Event of Default shall have
occurred. Holders of at least a majority in liquidation amount of the Preferred
Securities will have the right to direct the Property Trustee with respect to
certain matters under the Declaration and the Preferred Securities Guarantee. If
the Property Trustee fails to enforce its rights under the Indenture or fails to
enforce the Preferred Securities Guarantee, any holder of Preferred Securities
may, after a period of 30 days has elapsed from such holder's written request to
the Property Trustee to enforce such rights or the Preferred Securities
Guarantee, institute a legal proceeding against the Corporation to enforce such
rights or the Preferred Securities Guarantee, as the case may be, See
"DESCRIPTION OF PREFERRED SECURITIES -- Voting Rights."
If an Indenture Event of Default occurs and is continuing with respect to
Junior Subordinated Debentures, an Event of Default under the Declaration will
occur and be continuing with respect to the Trust Securities. In such event, the
Declaration provides that the holder of Common Securities will be deemed to have
waived any such Event of Default with respect to the Common Securities
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until all Events of Default with respect to the Preferred Securities have been
so cured or waived, the Property Trustee will be deemed to be acting solely on
behalf of the holders of the Preferred Securities and only the holders of the
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and consequently under the
Indenture. In the event that any Event of Default with respect to the Preferred
Securities is waived by the holders of the Preferred Securities as provided in
the Declaration, the holders of Common Securities pursuant to the Declaration
have agreed that such waiver also constitutes a waiver of such Event of Default
with respect to the Common Securities for all purposes under the Declaration
without any further act, vote or consent of the holders of the Common
Securities. See "DESCRIPTION OF PREFERRED SECURITIES."
The Declaration provides that the Trustees may treat the person in whose
name a Preferred Security is registered on the books and records of the Trust as
the sole holder thereof and of the Preferred Securities represented thereby for
purposes of receiving distributions and for all other purposes and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such certificate or in the Preferred Securities represented thereby on the part
of any person, whether or not the Trust shall have actual or other notice
thereof. Preferred Securities will be issued in fully registered form. Investors
may elect to hold their Preferred Securities directly or, subject to the rules
and procedures of The Depository Trust Company ("DTC," described under
"DESCRIPTION OF PREFERRED SECURITIES -- Book-Entry; Delivery and Form," hold
interests in a global certificate registered on the books and records of the
Trust in the name of DTC or its nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal
with DTC (or any successor depositary) for all purposes,
including the payment of distributions and receiving approvals,
votes or consents under the Declaration, and except as set forth
in the Declaration with respect to the Property Trustee, shall
have no obligation to persons owning Preferred Securities
("Beneficial Owners") registered in the name of and held by DTC
or its nominee; and
(ii) the rights of Beneficial Owners shall be exercised
only through DTC (or any successor depositary) and shall be
limited to those established by law and agreements between such
Owners and DTC and/or its participants. See "DESCRIPTION OF
PREFERRED SECURITIES -- Book-Entry; Delivery and Form." With
respect to Preferred Securities registered in the name of and
held by DTC or its nominee, all notices and other communications
required under the Declaration shall be given to, and all
distributions on such Preferred Securities shall be given or made
to, DTC (or its successor).
In the Declaration, the Corporation has agreed to pay for all
debts and obligations (other than with respect to the Trust Securities) and all
costs and expenses of the Trust, including the fees and expenses of the Trustees
and any taxes and all costs and expenses with respect thereto, to which the
Trust may become subject, except for United States withholding taxes. The
foregoing obligations of the Corporation under the Declaration are for the
benefit of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice hereof. Any such Creditor may enforce such
obligations of the Corporation directly against the Corporation and the
Corporation has irrevocably waived any right or remedy to require that any such
Creditor take any action against the Trust or any other person before proceeding
against the Corporation. The Corporation has agreed in the Declaration to
execute such additional agreements as may be necessary or desirable in order to
give full effect to the foregoing.
THE FOREGOING SUMMARY OF CERTAIN PROVISIONS OF THE DECLARATION
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE DECLARATION WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT
OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART.
The business address of the Trust is 2600 One Logan Square,
Philadelphia, PA 19103, telephone number (215) 665- 3650.
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DESCRIPTION OF PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of
the Declaration which is qualified under the Trust Indenture Act. The Property
Trustee, CoreStates Bank N.A., but not the other Trustees of the Trust, will act
as the indenture trustee for purposes of the Trust Indenture Act. The terms of
the Preferred Securities and the Declaration include those stated in the
Declaration and those made part of the Declaration by the Trust Indenture Act.
The summary of certain material terms and provisions of the Preferred Securities
and the Declaration set forth below does not purport to be complete and is
subject to and qualified in its entirety by reference to the Declaration, which
has been filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part, the Business Trust Act and the Trust
Indenture Act.
General
The Declaration authorizes the Trust to issue the Preferred
Securities, which represent preferred undivided beneficial interests in the
assets of the Trust, and the Common Securities, which represent common undivided
beneficial interests in the assets of the Trust. All of the Common Securities
will be owned, directly or indirectly, by the Corporation. The Common Securities
and the Preferred Securities will have equivalent terms except that (i) if an
Event of Default under the Declaration occurs and is continuing, the rights of
the holders of the Common Securities to payment in respect of periodic
distributions and payments upon liquidation, redemption or otherwise are
subordinated to the rights of the holders of the Preferred Securities and (ii)
holders of Common Securities have the exclusive right (subject to the terms of
the Declaration) to appoint, remove or replace Trustees and to increase or
decrease the number of Trustees, subject to the right of holders of Preferred
Securities to appoint a Special Regular Trustee upon the occurrence of an
Appointment Event. The Declaration does not permit the issuance by the Trust of
any securities or other evidences of beneficial ownership of, or beneficial
interests in, the Trust other than the Preferred Securities and the Common
Securities, the incurrence of any indebtedness for borrowed money by the Trust
or the making of any investment other than in the Junior Subordinated
Debentures. Pursuant to the Declaration, the Property Trustee will own and hold
the Junior Subordinated Debentures as trust assets for the benefit of the
holders of the Preferred Securities and the Common Securities. The payment of
distributions out of moneys held by the Property Trustee and payments on
redemption of the Preferred Securities or liquidation of the Trust are
guaranteed by the Corporation on a subordinated basis as and to the extent
described under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Property
Trustee will hold the Preferred Securities Guarantee for the benefit of holders
of the Preferred Securities. The Preferred Securities Guarantee is a full and
unconditional guarantee from the time of issuance of the Preferred Securities,
but the Preferred Securities Guarantee covers distributions and other payments
on the Preferred Securities only if and to the extent that the Corporation has
made a payment to the Property Trustee of interest or principal on the Junior
Subordinated Debentures deposited in the Trust as trust assets. See "-Voting
Rights."
Distributions
Distributions on the Preferred Securities will be fixed at a rate
per annum of $2.90 (11.6% of the stated liquidation amount of $25) per Preferred
Security. Distributions in arrears for more than one month will compound monthly
thereon at the rate per annum of 11.6% thereof. The term "distributions" as used
herein includes any such interest payable unless otherwise stated. The amount of
distributions payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months and for any period shorter than a full monthly
period for which distributions are computed, the amount of the distribution
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month.
Distributions on the Preferred Securities will be cumulative,
will accrue from the first day following the Effective Time (the "Accrual Date")
and, except as otherwise described below, will be payable monthly in arrears, on
the last day of each calendar month of each year, commencing on April 30, 1997,
but only if, and to the extent that, interest payments are made in respect of
Junior Subordinated Debentures held by the Property Trustee.
So long as the Corporation shall not be in default in the payment
of interest on the Junior Subordinated Debentures, the Corporation has the right
under the Indenture to defer payments of interest on the Junior Subordinated
Debentures by extending the interest payment period from time to time on the
Junior Subordinated Debentures for a period not exceeding 60 consecutive months
and, as a consequence, distributions on the Preferred Securities would not be
made (but would continue to accrue with interest thereon at the rate of 11.6%
per annum, compounded monthly) by the Trust during any such Extension Period. If
the Corporation exercises the right to extend an interest payment period, the
Corporation may not declare or pay dividends on, or redeem, purchase, acquire or
make a distribution or liquidation payment with respect to, any of its Common
Stock or Preferred Stock during such Extension Period. Prior to the termination
of any such Extension Period, the Corporation may further extend such Extension
Period; provided that such Extension Period together with all such previous and
further extensions thereof may not exceed
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60 consecutive months. Upon the termination of any Extension Period and the
payment of all amounts then due, the Corporation may commence a new Extension
Period, subject to the above requirements. The Corporation may also prepay at
any time all or any portion of the interest accrued during an Extension Period.
Consequently, there could be multiple Extension Periods of varying lengths (up
to five Extension Periods of 60 consecutive monthly interest periods each or
more numerous shorter Extension Periods) throughout the term of the Junior
Subordinated Debentures. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
CONSIDERATIONS -- Risks Related to the Preferred Securities," "DESCRIPTION OF
JUNIOR SUBORDINATED DEBENTURES -- Interest" and "-- Option to Extend Interest
Payment Period." Payments of accrued distributions will be payable to holders of
Preferred Securities as they appear on the books and records of the Trust on the
first record date after the end of an Extension Period.
Distributions on the Preferred Securities must be paid on the
dates payable to the extent that the Property Trustee has cash on hand in the
Property Account to permit such payment. The funds available for distribution to
the holders of the Preferred Securities will be limited to payments received by
the Property Trustee in respect of the Junior Subordinated Debentures that are
deposited in the Trust as trust assets. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES." If the Corporation does not make interest payments on the Junior
Subordinated Debentures, the Property Trustee will not make distributions on the
Preferred Securities. Under the Declaration, if and to the extent the
Corporation does make interest payments on the Junior Subordinated Debentures
deposited in the Trust as trust assets, the Property Trustee is obligated to
make distributions on the Trust Securities on a Pro Rata Basis. The payment of
distributions on the Preferred Securities is guaranteed by the Corporation on a
subordinated basis as and to the extent set forth under "DESCRIPTION OF
PREFERRED SECURITIES GUARANTEE." The Preferred Securities Guarantee is a full
and unconditional guarantee from the time of issuance of the Preferred
Securities but the Preferred Securities Guarantee covers distributions and other
payments on the Preferred Securities only if and to the extent that the
Corporation has made a payment to the Property Trustee of interest or principal
on the Junior Subordinated Debentures deposited in the Trust as trust assets. As
used in this Proxy Statement/Prospectus the term "Pro Rata Basis" shall mean pro
rata to each holder of Trust Securities according to the aggregate liquidation
amount of the Trust Securities held by the relevant holder in relation to the
aggregate liquidation amount of all Trust Securities outstanding unless, in
relation to a payment, an Event of Default under the Declaration has occurred
and is continuing, in which case any funds available to make such payment shall
be paid first to each holder of the Preferred Securities pro rata according to
the aggregate liquidation amount of the Preferred Securities held by the
relevant holder in relation to the aggregate liquidation amount of all the
Preferred Securities outstanding, and only after satisfaction of all amounts
owed to the holders of the Preferred Securities, to each holder of Common
Securities pro rata according to the aggregate liquidation amount of the Common
Securities held by the relevant holder in relation to the aggregate liquidation
amount of all the Common Securities outstanding.
Distributions on the Preferred Securities will be made to the
holders thereof as they appear on the books and records of the Trust on the
relevant record dates, which will be the first business day of the month of the
relevant distribution payment date. The Declaration provides that the payment
dates or record dates for the Preferred Securities shall be the same as the
payment dates and record dates for the Junior Subordinated Debentures.
Distributions payable on any Preferred Securities that are not punctually paid
on any distribution date as a result of the Corporation having failed to make
the corresponding interest payment on the Junior Subordinated Debentures will
forthwith cease to be payable to the person in whose name such Preferred
Security is registered on the relevant record date, and such defaulted
distribution will instead be payable to the person in whose name such Preferred
Security is registered on the special record date established by the Regular
Trustees, which record date shall correspond to the special record date or other
specified date determined in accordance with the Indenture; provided, however,
that distributions shall not be considered payable on any distribution payment
date falling within an Extension Period unless the Corporation has elected to
make a full or partial payment of interest accrued on the Junior Subordinated
Debentures on such distribution payment date. Distributions on the Preferred
Securities will be paid through the Property Trustee who will hold amounts
received in respect of the Junior Subordinated Debentures in the Property
Account for the benefit of the holders of the Preferred and Common Securities.
All distributions paid with respect to the Trust Securities shall be paid on a
Pro Rata Basis to the holders thereof entitled thereto. If any date on which
distributions are to be made on the Preferred Securities is not a Business Day,
then payment of the distribution to be made on such date will be made on the
next succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date.
Mandatory Redemption
Upon the repayment of the Junior Subordinated Debentures, whether
at maturity, upon redemption or otherwise, the proceeds from such repayment or
payment will be promptly applied to redeem Preferred Securities and Common
Securities having an aggregate liquidation amount equal to the Junior
Subordinated Debentures so repaid, upon not less than 30 nor more than 60
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days' notice, at the Redemption Price. The Common Securities will be entitled to
be redeemed on a Pro Rata Basis with the Preferred Securities, except that if an
Event of Default under the Declaration has occurred and is continuing, the
Preferred Securities will have a priority over the Common Securities with
respect to payment of the Redemption Price. Subject to the foregoing, if fewer
than all outstanding Preferred Securities and Common Securities are to be
redeemed, the Preferred Securities and Common Securities will be redeemed on a
Pro Rata Basis.
Special Event Redemption or Distribution
If, at any time, a Tax Event or an Investment Company Event (each
as hereinafter defined, and each a "Special Event") shall occur and be
continuing, the Trust shall, unless the Junior Subordinated Debentures are
redeemed in the circumstances described below, be dissolved with the result
that, after satisfaction of creditors of the Trust, Junior Subordinated
Debentures with an aggregate principal amount equal to the aggregate stated
liquidation amount of the Preferred Securities and the Common Securities would
be distributed on a Pro Rata Basis to the holders of the Preferred Securities
and the Common Securities in liquidation of such holders' interests in the
Trust, within 90 days following the occurrence of such Special Event; provided,
however, that in the case of the occurrence of a Tax Event, as a condition of
such dissolution and distribution, the Regular Trustees shall have received an
opinion of nationally recognized independent tax counsel experienced in such
matters (a "No Recognition opinion"), which opinion may rely on any then
applicable published revenue rulings of the Internal Revenue Service, to the
effect that the holders of the Preferred Securities will not recognize any gain
or loss for United States federal income tax purposes as a result of such
dissolution and distribution of Junior Subordinated Debentures; and, provided,
further, that, if at the time there is available to the Trust the opportunity to
eliminate, within such 90-day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure, which has no adverse effect on the Trust
or the Corporation or the holders of the Preferred Securities, the Trust will
pursue such measure in lieu of dissolution. Furthermore, if in the case of the
occurrence of a Tax Event, (i) the Regular Trustees have received an opinion (a
"Redemption Tax Opinion") of nationally recognized independent tax counsel
experienced in such matters that, as a result of a Tax Event, there is more than
an insubstantial risk that the Corporation would be precluded from deducting the
interest on the Junior Subordinated Debentures for United States federal income
tax purposes even if the Junior Subordinated Debentures were distributed to the
holders of Preferred Securities and Common Securities in liquidation of such
holders' interests in the Trust as described above or (ii) the Regular Trustees
shall have been informed by such tax counsel that a No Recognition opinion
cannot be delivered to the Trust, the Corporation shall have the right, upon not
less than 30 nor more than 60 days notice, to redeem the Junior Subordinated
Debentures in whole or in part for cash within 90 days following the occurrence
of such Tax Event, and promptly following such redemption Preferred Securities
and Common Securities with an aggregate liquidation amount equal to the
aggregate principal amount of the Junior Subordinated Debentures so redeemed
will be redeemed by the Trust at the Redemption Price on a Pro Rata Basis at
$25.25 if the redemption price occurs within five years after the Effective Time
of the Conversion and at the Redemption Price thereafter; provided, however,
that if at the time there is available to the Corporation or the Regular
Trustees the opportunity to eliminate, within such 90-day period, the Tax Event
by taking some ministerial action, such as filing a form or making an election,
or pursuing some other similar reasonable measure, which has no adverse effect
on the Trust, the Corporation or the holders of the Preferred Securities, the
Corporation will pursue such measure in lieu of redemption and provided further
that The Corporation shall have no right to redeem the Junior Subordinated
Debentures while the Regular Trustees on behalf of the Trust are pursuing any
such ministerial action. The Common Securities will be redeemed on a Pro Rata
Basis with the Preferred Securities, except that if an Event of Default under
the Declaration has occurred and is continuing, the Preferred Securities will
have a priority over the Common Securities with respect to payment of the
Redemption Price.
"Tax Event" means that the Regular Trustees shall have obtained
an opinion of nationally recognized independent tax counsel experienced in such
matters (a "Dissolution Tax opinion") to the effect that on or after the
Effective Time as a result of (a) any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein, (b) any amendment to, or change in, an interpretation or application of
any such laws or regulations by any legislative body, court, governmental agency
or regulatory authority (including the enactment of any legislation and the
publication of any judicial decision or regulatory determination), (c) any
interpretation or pronouncement that provides for a position with respect to
such laws or regulations that differs from the theretofore generally accepted
position or (d) any action taken by any governmental agency or regulatory
authority, which amendment or change is enacted, promulgated, issued or
effective or which interpretation or pronouncement is issued or announced or
which action is taken, in each case on or after the Effective Time, there is
more than an insubstantial risk that (i) the Trust is, or will be within 90 days
of the date thereof, subject to United States federal income tax with respect to
income accrued or received on the Junior Subordinated Debentures, (ii) the Trust
is, or will be within 90 days of the date thereof, subject to more than a de
minimis amount of other taxes, duties or other governmental charges or (iii)
interest payable by the Corporation to the Trust on the Junior Subordinated
Debentures is not, or within 90 days of the date thereof will not be, deductible
by the Corporation for United
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States federal income tax purposes.
It should be noted that certain legislation proposed as recently
as 1996 would have applied to securities similar to the Junior Subordinated
Debentures, with the result that the Corporation would not have been entitled to
an interest deduction with respect to the payments on the Junior Subordinated
Debentures. See the discussion above under "RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER IMPORTANT CONSIDERATIONS." No prediction can be made as to the
likelihood of similar legislation being proposed in the future or as to whether
such legislation would be effective retroactively to deny interest deductions
with respect to securities issued prior to the date of enactment of such
legislation. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Related to the Preferred Securities -- Special Event
Redemption or Distribution."
"Investment Company Event" means that the Regular Trustees shall
have received an opinion of nationally recognized independent counsel
experienced in practice under the Investment Company Act of 1940, as amended
(the "1940 Act"), that as a result of the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation by
any legislative body, court, governmental agency or regulatory authority (a
"Change in 1940 Act Law"), there is more than an insubstantial risk that the
Trust is or will be considered an "investment company" which is required to be
registered under the 1940 Act, which Change in 1940 Act Law becomes effective on
or after the Effective Time.
On the date fixed for any distribution of Junior Subordinated
Debentures, upon dissolution of the Trust, (i) the Preferred Securities and the
Common Securities will no longer be deemed to be outstanding and (ii)
certificates representing Preferred Securities will be deemed to represent
Junior Subordinated Debentures having an aggregate principal amount equal to the
stated liquidation amount of, and bearing accrued and unpaid interest equal to
accrued and unpaid distributions on, such Preferred Securities until such
certificates are presented to the Corporation or its agent for transfer or
reissuance.
There can be no assurance as to the market price for the Junior
Subordinated Debentures which may be distributed in exchange for Preferred
Securities if a dissolution and liquidation of the Trust were to occur.
Accordingly, the Junior Subordinated Debentures which the investor may
subsequently receive on dissolution and liquidation of the Trust may trade at a
discount to the price of the Preferred Securities exchanged. If the Junior
Subordinated Debentures are distributed to the holders of Preferred Securities
upon the dissolution of the Trust, the Corporation will use its best efforts to
list the Junior Subordinated Debentures on the NYSE or on such other exchange on
which the Preferred Securities are then listed.
Redemption Procedures
The Trust may not redeem fewer than all the outstanding Preferred
Securities unless all accrued and unpaid distributions have been paid on all
Preferred Securities for all monthly distribution periods terminating on or
prior to the date of redemption.
If the Trust gives a notice of redemption in respect of Preferred
Securities (which notice will be irrevocable) then immediately prior to the
close of business on the redemption date, provided that the Corporation has paid
to the Property Trustee a sufficient amount of cash in connection with the
related redemption or maturity of the Junior Subordinated Debentures,
distributions will cease to accrue on the Preferred Securities called for
redemption, such Preferred Securities shall no longer be deemed to be
outstanding and all rights of holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
Securities to receive the Redemption Price, but without interest on such
Redemption Price. Neither the Trustees nor the Trust shall be required to
register or cause to be registered the transfer of any Preferred Securities
which have been so called for redemption. If any date fixed for redemption of
Preferred Securities is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay)
except that, if such Business Day falls in the next calendar year, such payment
will be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on such date fixed for redemption. If the
Corporation fails to repay Junior Subordinated Debentures on maturity or on the
date fixed for this redemption or if payment of the Redemption Price in respect
of Preferred Securities is improperly withheld or refused and not paid by the
Property Trustee or by the Corporation pursuant to the Preferred Securities
Guarantee described under "Description of the Preferred Securities Guarantee,"
distributions on such Preferred Securities will continue to accrue, from the
original redemption date of the Preferred Securities to the date of payment, in
which case the actual payment date will be considered the date fixed for
redemption for purposes of calculating the Redemption Price.
If a partial redemption of the Preferred Securities would result
in the delisting of the Preferred Securities by any
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national securities exchange or other organization on which the Preferred
Securities are then listed, the Corporation pursuant to the Indenture will only
redeem Debentures in whole and, as a result, the Trust may only redeem the
Preferred Securities in whole.
Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Corporation or any of
its subsidiaries may at any time and from time to time purchase outstanding
Preferred Securities by tender, in the open market or by private agreement.
Subordination of Common Securities
Payment of distributions on, and the redemption price of, the Preferred
Securities and the Common Securities, as applicable, shall be made pro rata
based on the liquidation amount of such Preferred Securities and Common
Securities; provided, however, that if on any distribution date or redemption
date an Indenture Event of Default shall have occurred and be continuing, no
payment of any distribution on, or redemption price of, any of the Common
Securities, and no other payment on account of the redemption, liquidation or
other acquisition of such Common Securities, shall be made unless payment in
full in cash of all accumulated and unpaid distributions on all of the
outstanding Preferred Securities for all distribution periods terminating on or
prior thereto, or in the case of payment of the redemption price, the full
amount of such redemption price on all of the outstanding Preferred Securities
then called for redemption, shall have been made or provided for, and all funds
available to the Property Trustee shall first be applied to the payment in full
in cash of all distributions on, or redemption price of, the Preferred
Securities then due and payable.
Liquidation Distribution Upon Dissolution
In the event of any voluntary or involuntary dissolution, liquidation,
winding-up or termination of the Trust, the holders of the Preferred Securities
and Common Securities at the date of dissolution, winding-up or termination of
the Trust will be entitled to receive on a Pro Rata Basis solely out of the
assets of the Trust, after satisfaction of liabilities of creditors (to the
extent not satisfied by the Corporation as provided in the Declaration), an
amount equal to the aggregate of the stated liquidation amount of $25 per Trust
Security plus accrued and unpaid distributions thereon to the date of payment
(such amount being the "Liquidation Distribution"), unless, in connection with
such dissolution, liquidation, winding-up or termination, Junior Subordinated
Debentures in an aggregate principal amount equal to the aggregate stated
liquidation amount of such Trust Securities and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid distributions on such
Trust Securities, shall be distributed on a Pro Rata Basis to the holders of the
Preferred Securities and Common Securities in exchange therefor.
If, upon any such dissolution, the Liquidation Distribution can be paid
only in part because the Trust has insufficient assets available to pay in full
the aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Preferred Securities and the Common Securities shall be paid on a
Pro Rata Basis. The holders of the Common Securities will be entitled to receive
distributions upon any such dissolution on a Pro Rata Basis with the holders of
the Preferred Securities, except that if an Event of Default under the
Declaration has occurred and is continuing, the Preferred Securities shall have
a priority over the Common Securities with respect to payment of the Liquidation
Distribution.
Pursuant to the Declaration, the Trust shall terminate: (i) on March 31,
2027, (ii) when all of the Trust Securities shall have been called for
redemption and the amounts necessary for redemption thereof shall have been paid
to the holders of Trust Securities in accordance with the terms of the Trust
Securities, or (iii) when all of the Junior Subordinated Debentures shall have
been distributed to the holders of Trust Securities in exchange for all of the
Trust Securities in accordance with the terms of the Trust Securities.
No Merger, Consolidation or Amalgamation of the Trust
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets to, any
corporation or other entity.
Declaration Events of Default
An Indenture Event of Default will constitute an event of default under
the Declaration with respect to the Trust Securities (an "Event of Default");
provided that pursuant to the Declaration, the holder of the Common Securities
will be deemed to have waived any such Event of Default with respect to the
Common Securities until all Events of Default with respect to the Preferred
Securities have been cured or waived. Until all such Events of Default with
respect to the Preferred Securities have been so cured or waived, the Property
Trustee will be deemed to be acting solely on behalf of the holders of the
Preferred Securities, and only the holders of
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the Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and consequently under the
Indenture. In the event that any Event of Default with respect to the Preferred
Securities is waived by the holders of the Preferred Securities as provided in
the Declaration, the holders of Common Securities pursuant to the Declaration
have agreed that such waiver also constitutes a waiver of such Event of Default
with respect to the Common Securities for all purposes under the Declaration
without any further act, vote or consent of the holders of the Common
Securities. See "-- Voting Rights."
Upon the occurrence of an Event of Default, the Property Trustee as the
holder of all of the Junior Subordinated Debentures will have the right under
the Indenture to declare the principal of and interest on the Junior
Subordinated Debentures to be immediately due and payable. In addition, the
Property Trustee will have the power to exercise all rights, powers and
privileges under the Indenture. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES."
If the Property Trustee fails to enforce its rights with respect to the
Junior Subordinated Debentures held by the Trust, any record holder of Preferred
Securities may institute legal proceedings directly against the Corporation to
enforce the Property Trustee's rights under such Junior Subordinated Debentures
without first instituting any legal proceedings against such Property Trustee or
any other person or entity. In addition, if an Event of Default under the
Declaration has occurred and is continuing and such event is attributable to the
failure of the Corporation to pay interest, principal or other required payments
on the Junior Subordinated Debentures issued to the Trust on the date such
interest, principal or other payment is otherwise payable, then a record holder
of Preferred Securities may, on or after the respective due dates specified in
the Junior Subordinated Debentures, institute a proceeding directly or
indirectly against the Corporation under the Indenture for enforcement of
payment on Junior Subordinated Debentures having a principal amount equal to the
aggregate liquidation amount of the Preferred Securities held by such holder. In
connection with such Direct Action, the Corporation will be subrogated to the
rights of such record holder of Preferred Securities to the extent of any
payment made by the Corporation to such record holder of Preferred Securities.
Voting Rights
Except as provided below, under "Modification and Amendment OF THE
DECLARATION" and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE -- Amendments
and Assignment" and as otherwise required by the Business Trust Act, the Trust
Indenture Act and the Declaration, the holders of the Preferred Securities will
have no voting rights.
If (i) the Trust fails to make distributions in full on the Preferred
Securities for 18 consecutive months or (ii) an Event of Default under the
Declaration occurs and is continuing (each, an "Appointment Event"), then the
holders of the Preferred Securities, acting as a single class, will be entitled,
by the vote of holders of Preferred Securities representing a majority in
aggregate liquidation amount of the outstanding Preferred Securities, to appoint
a Special Regular Trustee (who need not be an officer or an employee of or
otherwise affiliated with the Corporation) who shall have the same rights,
powers and privileges under the Declaration as the Regular Trustees. Any holder
of Preferred Securities (other than the Corporation or any of its affiliates)
shall have the right to nominate any person to be appointed as Special Regular
Trustee. For purposes of determining whether the Trust has failed to pay
distributions in full for 18 consecutive months, distributions shall be deemed
to remain in arrears, notwithstanding any payments in respect thereof, until
full cumulative distributions have been or contemporaneously are paid with
respect to all monthly distribution periods terminating on or prior to the date
of payment of such cumulative distributions. Not later than 30 days after such
right to appoint a Special Regular Trustee arises, the Regular Trustees will
convene a meeting for the purpose of appointing a Special Regular Trustee. If
the Regular Trustees fail to convene such meeting within such 30-day period, the
holders of Preferred Securities representing 10% in liquidation amount of the
outstanding Preferred Securities will be entitled to convene such meeting. The
provisions of the Declaration relating to the convening and conduct of the
meetings of the holders will apply with respect to any such meeting. If, at any
such meeting, holders of less than a majority in aggregate liquidation amount of
Preferred Securities entitled to vote for the appointment of a Special Regular
Trustee vote for such appointment, no Special Regular Trustee shall be
appointed. Any Special Regular Trustee may be removed without cause at any time
by holders of Preferred Securities representing a majority in liquidation amount
of the Preferred Securities and holders of Preferred Securities representing 10%
in liquidation amount of the Preferred Securities shall be entitled to convene a
meeting for such purpose. Any Special Regular Trustee appointed shall cease to
be a Special Regular Trustee if the Appointment Event pursuant to which the
Special Regular Trustee was appointed and all other Appointment Events have been
cured and cease to be continuing. Notwithstanding the appointment of any such
Special Regular Trustee, the Corporation shall retain all rights under the
Indenture, including the right to extend the interest payment period as provided
under "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Option to Extend
Interest Payment Period." If such an extension occurs, there will be no
Indenture Event of Default for failure to make any scheduled interest payment
during the Extension Period on the date originally scheduled.
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Subject to the requirements of the second to last sentence of this
paragraph, the holders of a majority in aggregate liquidation amount of the
Preferred Securities have the right (i) on behalf of all holders of Trust
Securities, to waive any past default that is waivable under the Declaration and
(ii) to direct the time, method and place of conducting any proceeding for any
remedy available to the Property Trustee, or exercising any trust or power
conferred upon the Property Trustee under the Declaration, including the right
to direct the Property Trustee, as the holder of the Junior Subordinated
Debentures, to (a) direct the time, method and place of conducting any
proceeding for any remedy available to the Indenture Trustee, or exercising any
trust or power conferred on the Indenture Trustee with respect to the Junior
Subordinated Debentures, (b) waive any past default that is waivable under
Section 6.06 of the Indenture, or (c) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable; provided that where a consent under the Indenture would
require the consent of (1) holders of Junior Subordinated Debentures
representing a specified percentage greater than a majority in principal amount
of the Junior Subordinated Debentures or (2) each holder of Junior Subordinated
Debentures affected thereby, no such consent shall be given by the Property
Trustee without the prior consent of, in the case of clause (1) above, holders
of Preferred Securities representing such specified percentage of the aggregate
liquidation amount of the Preferred Securities or, in the case of clause (2)
above, each holder of all Preferred Securities affected thereby. The Property
Trustee shall not revoke any action previously authorized or approved by a vote
of the holders of Preferred Securities. The Property Trustee shall notify all
holders of record of Preferred Securities of any notice of default received from
the Indenture Trustee with respect to the Junior Subordinated Debentures. Other
than with respect to directing the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee or the Indenture
Trustee as set forth above, the Property Trustee shall be under no obligation to
take any of the foregoing actions at the direction of the holders of the
Preferred Securities unless the Property Trustee shall have obtained an opinion
of nationally recognized independent tax counsel recognized as expert in such
matters to the effect that the Trust will not be classified for United States
federal income tax purposes as an association taxable as a corporation or a
partnership on account of such action and will be treated as a grantor trust for
United States federal income tax purposes following such action.
A waiver of an Indenture Event of Default by the Property Trustee at the
direction of holders of the Preferred Securities will constitute a waiver of the
corresponding Event of Default under the Declaration in respect of the Trust
Securities.
In the event the consent of the Property Trustee as the holder of the
Junior Subordinated Debentures is required under the Indenture with respect to
any amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures, the Property Trustee shall request the direction of the
holders of the Trust Securities with respect to such amendment, modification or
termination and shall vote with respect to such amendment, modification or
termination as directed by a majority in liquidation amount of the Trust
Securities voting together as a single class; provided, however, that where any
such amendment, modification or termination under the Indenture would require
the consent of holders of Junior Subordinated Debentures representing a
specified percentage greater than a majority in principal amount of the Junior
Subordinated Debentures, the Property Trustee may only give such consent at the
direction of the holders of Trust Securities representing such specified
percentage of the aggregate liquidation amount of the Trust Securities; and,
provided, further, that the Property Trustee shall be under no obligation to
take any such action in accordance with the directions of the holders of the
Trust Securities unless the Property Trustee has obtained an opinion of
nationally recognized independent tax counsel recognized as expert in such
matters to the effect that the Trust will not be classified for United States
federal income tax purposes as an association taxable as a corporation or a
partnership on account of such action and will be treated as a grantor trust for
United States federal income tax purposes following such action.
Any required approval or direction of holders of Preferred Securities may
be given at a separate meeting of holders of Preferred Securities convened for
such purpose, at a meeting of all of the holders of Trust Securities or pursuant
to written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Preferred Securities. Each such notice will
include a statement setting forth (i) the date of such meeting or the date by
which such action is to be taken, (ii) a description of any resolution proposed
for adoption at such meeting on which such holders are entitled to vote or of
such matter upon which written consent is sought and (iii) instructions for the
delivery of proxies or consents.
No vote or consent of the holders of Preferred Securities will be required
for the Trust to redeem and cancel Preferred Securities or distribute Junior
Subordinated Debentures in accordance with the Declaration.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities at such time that are owned by the Corporation or by any entity
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Corporation shall not be entitled to vote or consent and
shall, for purposes of such vote or consent, be treated as if they were not
outstanding.
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The procedures by which persons owning Preferred Securities registered in
the name of and held by DTC or its nominee may exercise their voting rights are
described under "Book-Entry; Delivery and Form" below.
Subject to the right of holders of Preferred Securities to appoint a
Special Regular Trustee upon the occurrence of an Appointment Event, holders of
the Preferred Securities will have no rights to increase or decrease the number
of Trustees or to appoint, remove or replace a Trustee, which rights are vested
exclusively in the holders of the Common Securities.
Modification and Amendment of the Declaration
The Declaration may be modified and amended on approval of a majority of
the Regular Trustees, provided that, if any proposed modification or amendment
provides for, or the Regular Trustees otherwise propose to effect, (i) any
action that would adversely affect the powers, preferences or special rights of
the Trust Securities, whether by way of amendment to the Declaration or
otherwise, or (ii) the dissolution, winding-up or termination of the Trust other
than pursuant to the terms of the Declaration, then the holders of the
outstanding Trust Securities as a class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of at least 66 2/3% in liquidation amount of the Trust
Securities, provided that if any amendment or proposal referred to in clause (i)
above would adversely affect only the Preferred Securities or the Common
Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of 66 2/3% in liquidation amount of such class of
securities.
Notwithstanding the foregoing, (i) no amendment or modification may be
made to the Declaration unless the Regular Trustees shall have obtained (A)
either a ruling from the Internal Revenue Service or a written unqualified
opinion of nationally recognized independent tax counsel experienced in such
matters to the effect that such amendment will not cause the Trust to be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership and to the effect that the Trust will
continue to be treated as a grantor trust for purposes of United States federal
income taxation and (B) a written unqualified opinion of nationally recognized
independent counsel experienced in such matters to the effect that such
amendment will not cause the Trust to be an "investment company" which is
required to be registered under the 1940 Act; (ii) certain specified provisions
of the Declaration may not be amended without the consent of all of the holders
of the Trust Securities; (iii) no amendment which adversely affects the rights,
powers and privileges of the Property Trustee shall be made without the consent
of the Property Trustee; (iv) Article IV of the Declaration relating to the
obligation of The Corporation to purchase the Common Securities and to pay
certain obligations and expenses of the Trust as described under "SUNSOURCE
CAPITAL TRUST" may not be amended without the consent of The Corporation; (v)
the rights of holders of Common Securities under Article V of the Declaration to
increase or decrease the number of, and to appoint, replace or remove, Trustees
(other than a Special Regular Trustee) shall not be amended without the consent
of each holder of Common Securities; and (vi) the rights of holders of Preferred
Securities under the Declaration to appoint or remove a Special Regular Trustee
shall not be amended without the consent of each holder of Preferred Securities.
The Declaration further provides that it may be amended without the
consent of the holders of the Trust Securities to (i) cure any ambiguity, (ii)
correct or supplement any provision in the Declaration that may be defective or
inconsistent with any other provision of the Declaration, (iii) to add to the
covenants, restrictions or obligations of the Corporation, and (iv) to conform
to changes in, or a change in interpretation or application of certain 1940 Act
requirements by the SEC, which amendment does not adversely affect the rights,
preferences or privileges of the holders.
Book-Entry; Delivery and Form
Preferred Securities will be issued in fully registered form. Investors
may elect to hold their Preferred Securities directly or, subject to the rules
and procedures of DTC described below, hold interests in a global certificate
(the "Preferred Securities Global Certificate") registered in the name of DTC or
its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in a global Preferred
Security.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct
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Participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations ("Direct Participants").
DTC is owned by a number of its Direct Participants and by the NYSE, the
American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its
Participants are on file with the Securities and Exchange Commission.
Upon issuance of a Preferred Securities Global Certificate, DTC will
credit on its book-entry registration and transfer system the number of
Preferred Securities represented by such Preferred Securities Global Certificate
to the accounts of institutions that have accounts with DTC. Ownership of
beneficial interests in a Preferred Securities Global Certificate will be
limited to Participants or persons that may hold interests through Participants.
The ownership interest of each actual purchaser of each Preferred Security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Preferred Securities. Transfers of
ownership interests in the Preferred Securities are to be accomplished by
entries made on the books of Participants acting on behalf of Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of the Preferred
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Preferred Securities are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers. So long as DTC, or its
nominee, is the owner of a Preferred Securities Global Certificate, DTC or such
nominee, as the case may be, will be considered the sole owner and holder of
record of the Preferred Securities represented by such Preferred Securities
Global Certificate for all purposes.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Preferred Securities are being redeemed, DTC will reduce pro rata (subject to
adjustment to eliminate fractional Preferred Securities) the amount of interest
of each Direct Participant in the Preferred Securities to be redeemed.
Although voting with respect to the Preferred Securities is limited, in
those instances in which a vote is required, neither DTC nor Cede & Co. itself
will consent or vote with respect to Preferred Securities. Under its usual
procedures, DTC would mail an Omnibus Proxy to the Trust as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts the Preferred
Securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
Distribution payments on the Preferred Securities represented by a
Preferred Series Global Certificate will be made by the Property Trustee to DTC.
DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participants and not of DTC, the Trust or The Corporation, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of distributions to DTC is the responsibility of the Trust, disbursement
of such payments to Direct Participants is the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners is the responsibility of
Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Trust. Under such circumstances, if a successor securities depository is not
obtained, Preferred Security certificates will be required to be printed and
delivered. Additionally, the Trust may decide to discontinue use of the system
of book-entry transfers through DTC (or a successor depository). In that event,
certificates for the Preferred Securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Trust and the Corporation believe to be
reliable, but the Trust and the Corporation take no responsibility for the
accuracy thereof.
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Expenses and Taxes
In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Preferred Securities) and
all costs and expenses of the Trust (including costs and expenses relating to
the organization of the Trust, the fees and expenses of the Trustees and the
costs and expenses relating to the operation of the Trust) and to pay any and
all taxes and all costs and expenses with respect thereto (other than United
States withholding taxes) to which the Trust might become subject. The foregoing
obligations of the Company under the Indenture are for the benefit of, and shall
be enforceable by, any person to whom any such debts, obligations, costs,
expenses and taxes are owed (a "Creditor") whether or not such Creditor has
received notice thereof. Any such Creditor may enforce such obligations of the
Corporation directly against the Corporation, and the Corporation has
irrevocable waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Company. The Corporation has also agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give effect to the
foregoing.
Registrar, Transfer Agent and Paying Agent
Payment of distributions and payments on redemption of the
Preferred Securities will be payable, the transfer of the Preferred Securities
will be registrable, and Preferred Securities will be exchangeable for Preferred
Securities of other denominations of a like aggregate liquidation amount, at the
principal corporate trust office of the Property Trustee in The City of New
York; provided that payment of distributions may be made at the option of the
Regular Trustees on behalf of the Trust by check mailed to the address of the
persons entitled thereto and that the payment on redemption of any Preferred
Security will be made only upon surrender of such Preferred Security to the
Property Trustee.
Registrar and Transfer Company or one of its affiliates will act
as registrar and transfer agent for the Preferred Securities. Registrar and
Transfer Company will also act as paying agent and, with the consent of the
Regular Trustees, may designate additional paying agents.
Registration of transfers of Preferred Securities will be
effected without charge by or on behalf of the Trust, but upon payment (with the
giving of such indemnity as the Trust or The Corporation may require) in respect
of any tax or other governmental charges that may be imposed in relation to it.
The Trust will not be required to register or cause to be
registered the transfer of Preferred Securities after such Preferred Securities
have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, prior to a default with respect to the
Trust Securities, undertakes to perform only such duties as are specifically set
forth in the Declaration and, after default, shall exercise the same degree of
care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provision, the Property Trustee is under no obligation
to exercise any of the powers vested in it by the Declaration at the request of
any holder of Preferred Securities, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities which might be incurred
thereby. The Property Trustee is not required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties if
the Property Trustee reasonably believes that repayment or adequate indemnity is
not reasonably assured to it.
The Corporation and certain of its affiliates maintain a deposit
account and banking relationship with the Property Trustee.
Governing Law
The Declaration and the Preferred Securities will be governed by,
and construed in accordance with, the internal laws of the State of Delaware.
Miscellaneous
The Preferred Securities have been approved for listing on the
NYSE, subject to notice of issuance.
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The Regular Trustees are authorized and directed to take such
action as they deem reasonable in order that the Trust will not be deemed to be
an "investment company" required to be registered under the 1940 Act or that the
Trust will not be classified for United States federal income tax purposes as an
association taxable as a corporation or a partnership and will be treated as a
grantor trust for United States federal income tax purposes. In this connection,
the Regular Trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust or the Declaration, that the Regular
Trustees determine in their discretion to be reasonable and necessary or
desirable for such purposes, as long as such action does not adversely affect
the interests of holders of the Trust Securities.
The Corporation and the Regular Trustees on behalf of the Trust
will be required to provide to the Property Trustee annually a certificate as to
whether or not The Corporation and the Trust, respectively, is in compliance
with all the conditions and covenants under the Declaration.
DESCRIPTION OF PREFERRED SECURITIES GUARANTEE
Set forth below is a summary of information concerning the
Preferred Securities Guarantee that will be executed and delivered by the
Corporation for the benefit of the holders from time to time of Preferred
Securities. The Preferred Securities Guarantee is separately qualified under the
Trust Indenture Act and will be held by CoreStates Bank N.A. acting in its
capacity as indenture trustee with respect thereto, for the benefit of the
holders of the Preferred Securities. The terms of the Preferred Securities
Guarantee include those stated in such Guarantee and those made part of the
Preferred Securities Guarantee by the Trust Indenture Act. The summary set forth
below does not purport to be complete and is subject in all respects to the
provisions of, and is qualified in its entirety by reference to, the Preferred
Securities Guarantee, which is filed as an exhibit to the Registration Statement
of which this Offering Circular/Prospectus forms a part, and the Trust Indenture
Act.
General
Pursuant to the Preferred Securities Guarantee, the Corporation
will irrevocably and unconditionally agree, to the extent set forth therein, to
pay in full, to the holders of the Preferred Securities, the Guarantee Payments
(as defined below) (without duplication of amounts theretofore paid by the
Trust), to the extent not paid by the Trust, regardless of any defense, right of
set-off or counterclaim that the Trust may have or assert. The following
payments or distributions with respect to the Preferred Securities to the extent
not paid or made by the Trust (the "Guarantee Payments") will be subject to the
Guarantee (without duplication): (i) any accrued and unpaid distributions on the
Preferred Securities and the redemption price, including all accrued and unpaid
distributions to the date of the redemption, with respect to the Preferred
Securities called for redemption by the Trust but if and only to the extent that
in each case the Corporation has made a payment to the Property Trustee of
interest or principal on the Junior Subordinated Debentures and (ii) upon a
voluntary or involuntary dissolution, winding-up or termination of the Trust
(other than in connection with the distribution of Junior Subordinated
Debentures to holders of Preferred Securities or the redemption of all of the
Preferred Securities upon the maturity or redemption of the Junior Subordinated
Debentures), the lesser of (a) the aggregate of the liquidation amount and all
accrued and unpaid distributions on the Preferred Securities to the date of
payment, to the extent the Trust has funds available therefor, and (b) the
amount of assets of the Trust remaining available for distribution to holders of
Preferred Securities in liquidation of the Trust. The Corporation's obligation
to make a Guarantee Payment may be satisfied by direct payment of the required
amounts by the Corporation to the holders of Preferred Securities or by causing
the Trust to pay such amounts to such holders.
Certain Covenants of the Corporation
In the Preferred Securities Guarantee, the Corporation will
covenant that, so long as the Preferred Securities remain outstanding, the
Corporation will not declare or pay any dividends on, or redeem, purchase,
acquire or make a distribution or liquidation payment with respect to, any of
its common stock or preferred stock or make any guarantee payment with respect
thereto if at such time (i) the Corporation shall be in default with respect to
its Guarantee Payments or other payment obligations under the Preferred
Securities Guarantee, (ii) there shall have occurred any Event of Default under
the Declaration or (iii) the Corporation shall have given notice of its
selection of an Extension Period as provided in the Indenture and such period,
or any extension thereof, is continuing. In addition, so long as the Preferred
Securities remain outstanding, the Corporation has agreed (i) to remain the sole
direct or indirect owner of all of the outstanding Common Securities and shall
not cause or permit the Common Securities to be transferred except to the extent
permitted by the Declaration; provided that any permitted successor of the
Corporation under the
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Indenture may succeed to the Corporation's ownership of the Common Securities
and (ii) to use reasonable efforts to cause the Trust to continue to be treated
as a grantor trust for United States federal income tax purposes except in
connection with a distribution of Junior Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes that do not adversely affect
the rights of holders of Preferred Securities (in which case no consent will be
required), the Preferred Securities Guarantee may be amended only with the prior
approval of the holders of not less than 66 2/3% in liquidation amount of the
outstanding Preferred Securities. The manner of obtaining any such approval of
holders of the Preferred Securities will be as set forth under "DESCRIPTION OF
PREFERRED SECURITIES -- Voting Rights." All guarantees and agreements contained
in the Preferred Securities Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Corporation and shall inure to
the benefit of the holders of the Preferred Securities then outstanding. Except
in connection with a consolidation, merger or sale involving the Corporation
that is permitted under the Indenture, the Corporation may not assign its
obligations under the Preferred Securities Guarantee.
Termination of the Preferred Securities Guarantee
The Preferred Securities Guarantee will terminate and be of no
further force and effect as to the Preferred Securities upon full payment of the
Redemption Price of all Preferred Securities, or upon distribution of the Junior
Subordinated Debentures to the holders of Preferred Securities in exchange for
all of the Preferred Securities, or upon full payment of the amounts payable
upon liquidation of the Trust. Notwithstanding the foregoing, the Preferred
Securities Guarantee will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of Preferred Securities must restore
payment of any sums paid with respect to the Preferred Securities or the
Preferred Securities Guarantee.
Status of the Preferred Securities Guarantee
The Corporation's obligations under the Preferred Securities
Guarantee to make the Guarantee Payments will constitute an unsecured obligation
of the Corporation and will rank (i) subordinate and junior in right of payment
to all other liabilities of the Corporation, including the Junior Subordinated
Debentures, except those made pari passu or subordinate by their terms, and (ii)
senior to all capital stock now or hereafter issued by the Corporation and to
any guarantee now or hereafter entered into by the Corporation in respect of any
of its capital stock. Because the Corporation is a holding company, the
Corporation's obligations under the Preferred Securities Guarantee are also
effectively subordinated to all existing and future liabilities, including trade
payables, of the Corporation's subsidiaries, except to the extent that the
Corporation is a creditor of the subsidiaries recognized as such. The
Declaration provides that each holder of Preferred Securities by acceptance
thereof agrees to the subordination provisions and other terms of the Preferred
Securities Guarantee.
The Preferred Securities Guarantee will constitute a guarantee of
payment and not of collection (that is, the guaranteed party may institute a
legal proceeding directly against the guarantor to enforce its rights under the
guarantee without first instituting a legal proceeding against any other person
or entity). The Preferred Securities Guarantee will be deposited with CoreStates
Bank N.A. as indenture trustee, to be held for the benefit of the holders of the
Preferred Securities. CoreStates Bank N.A. shall enforce the Preferred
Securities Guarantee on behalf of the holders of the Preferred Securities. The
holders of not less than a majority in aggregate liquidation amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available in respect of the Preferred
Securities Guarantee, including the giving of directions to CoreStates Bank N.A.
If CoreStates Bank N.A. fails to enforce the Preferred Securities Guarantee as
above provided, any holder of Preferred Securities may, after a period of 30
days has elapsed from such holder's written request to CoreStates Bank N.A. to
enforce the Preferred Securities Guarantee, institute a legal proceeding
directly against the Corporation to enforce its rights under the Preferred
Securities Guarantee, without first instituting a legal proceeding against the
Trust or any other person or entity.
Governing Law
The Preferred Securities Guarantee will be governed by and
construed in accordance with the laws of the State of New York.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
Set forth below is a description of the Junior Subordinated Debentures
which will be deposited in the Trust as trust assets. The terms of the Junior
Subordinated Debentures include those stated in the Indenture dated
_____________ (the "Indenture"), between the Corporation and CoreStates Bank
N.A., as trustee (the "Indenture Trustee"), the form of which has been filed as
an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part, and those made part of the Indenture by the
Trust Indenture Act. The following description does not purport to be complete
and is qualified in its entirety by reference to the Indenture and the Trust
Indenture Act. Whenever particular provisions or defined terms in the Indenture
are referred to herein, such provisions or defined terms are incorporated by
reference herein. Section and Article references used herein are references to
provisions of the Indenture.
The Indenture does not limit the aggregate principal amount of
indebtedness which may be issued thereunder and provides that junior
subordinated debentures may be issued thereunder from time to time in one or
more series (collectively, together with the Junior Subordinated Debentures, the
"Subordinated Debentures"). The Junior Subordinated Debentures constitute a
separate series under the Indenture.
Under certain circumstances involving the dissolution of the Trust
following the occurrence of a Special Event, Junior Subordinated Debentures may
be distributed to the holders of the Trust Securities in liquidation of the
Trust. See "DESCRIPTION OF PREFERRED SECURITIES -- Special Event Redemption or
Distribution."
General
The Junior Subordinated Debentures are unsecured, subordinated obligations
of the Corporation, limited in aggregate principal amount to an amount equal to
the sum of (i) the stated liquidation amount of the Preferred Securities issued
by the Trust in the Offer and (ii) the proceeds received by the Trust upon
issuance of the Common Securities to the Corporation (which proceeds will be
used to purchase an equal principal amount of Junior Subordinated Debentures).
The entire principal amount of the Junior Subordinated Debentures will
become due and payable, together with any accrued and unpaid interest thereon,
on March 31, 2027. The Junior Subordinated Debentures are not subject to any
sinking fund.
If Junior Subordinated Debentures are distributed to holders of Preferred
Securities in dissolution of the Trust, such Junior Subordinated Debentures will
be so issued in certificated form in denominations of $25 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Payments of principal and interest on Junior Subordinated Debentures will
be payable, the transfer of the Junior Subordinated Debentures will be
registrable, and Junior Subordinated Debentures will be exchangeable for Junior
Subordinated Debentures of other denominations of a like aggregate principal
amount, at the corporate trust office of the Indenture Trustee in The City of
New York; provided that payment of interest may be made at the option of the
Corporation by check mailed to the address of the persons entitled thereto and
that the payment of principal with respect to any Junior Subordinated Debenture
will be made only upon surrender of such Junior Subordinated Debenture to the
Indenture Trustee.
If the Junior Subordinated Debentures are distributed to the holders of
Preferred Securities upon the dissolution of the Trust, the Corporation will use
its best efforts to list the Junior Subordinated Debentures on the NYSE or on
such other exchange on which the Preferred Securities are then listed.
Optional Redemption
Except as provided below, the Junior Subordinated Debentures may not be
redeemed prior to March 31, 2002. The Corporation shall have the right to redeem
the Junior Subordinated Debentures, in whole or in part, from time to time, on
or after March 31, 2002, upon not less than 30 nor more than 60 days' notice, at
a redemption price equal to 100% of the principal amount to be redeemed, plus
any accrued and unpaid interest, to the redemption date, including interest
accrued during an Extension Period. The Corporation will also have the right to
redeem the Junior Subordinated Debentures at any time upon the occurrence of a
Tax Event if certain conditions are met as described under "DESCRIPTION OF THE
PREFERRED SECURITIES -- Special Event Redemption or Distribution." The
redemption price for such redemption within five years of the Conversion will be
101% of the principal amount of the Debentures plus accrued and unpaid interest.
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If the Corporation gives a notice of redemption in respect of Junior
Subordinated Debentures (which notice will be irrevocable) then, by 12:00 noon,
New York City time, on the redemption date, the Corporation will deposit
irrevocably with the Indenture Trustee funds sufficient to pay the applicable
redemption price and will give irrevocable instructions and authority to pay
such redemption price to the holders of the Junior Subordinated Debentures. If
notice of redemption shall have been given and funds deposited as required, then
upon the date of such deposit, interest will cease to accrue on the Junior
Subordinated Debentures called for redemption, such Junior Subordinated
Debentures will no longer be deemed to be outstanding and all rights of holders
of such Junior Subordinated Debentures so called for redemption will cease,
except the right of the holders of such Junior Subordinated Debentures to
receive the applicable redemption price, but without interest on such redemption
price. If any date fixed for redemption of Junior Subordinated Debentures is not
a Business Day, then payment of the redemption price payable on such date will
be made on the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay) except that, if such
Business Day falls in the next calendar year, such payment will be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date fixed for redemption. If payment of the redemption price
in respect of Junior Subordinated Debentures is improperly withheld or refused
and not paid by the Corporation, interest on such Junior Subordinated Debentures
will continue to accrue, from the original redemption date to the date of
payment, in which case the actual payment date will be considered the date fixed
for redemption for purposes of calculating the applicable redemption price. If
fewer than all of the Junior Subordinated Debentures are to be redeemed, the
Junior Subordinated Debentures to be redeemed shall be selected by lot or pro
rata or in some other equitable manner determined by the Indenture Trustee.
In the event of any redemption in part, the Corporation shall not be
required to (i) issue, register the transfer of or exchange any Junior
Subordinated Debentures during a period beginning at the opening of business 15
days before any selection for redemption of Junior Subordinated Debentures and
ending at the close of business on the earliest date on which the relevant
notice of redemption is deemed to have been given to all holders of Junior
Subordinated Debentures to be redeemed and (ii) register the transfer of or
exchange any Junior Subordinated Debentures so selected for redemption, in whole
or in part, except the unredeemed portion of any Junior Subordinated Debentures
being redeemed in part.
Interest
The Junior Subordinated Debentures will bear interest at an annual rate of
11.6% from the Accrual Date. Interest will be payable monthly in arrears on the
last day of each calendar month of each year (each, an "Interest Payment Date"),
commencing on April 30, 1997, to the person in whose name such Junior
Subordinated Debenture is registered, subject to certain exceptions, at the
close of business on the first day of the month of such Interest Payment Date.
Interest payable on any Junior Subordinated Debenture that is not punctually
paid or duly provided for on any interest payment date will forthwith cease to
be payable to the person in whose name such Junior Subordinated Debenture is
registered on the relevant record date, and such defaulted interest will instead
be payable to the person in whose name such Junior Subordinated Debenture is
registered on the special record date or other specified date determined in
accordance with the Indenture; provided, however, that interest shall not be
considered payable by the Corporation on any interest payment date falling
within an Extension Period unless the Corporation has elected to make a full or
partial payment of interest accrued on the Junior Subordinated Debentures on
such interest payment date.
The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months and for any period shorter than
a full monthly period for which interest is computed, the amount of interest
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month. If any date on which interest is payable on the Junior
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day is in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date.
Option to Extend Interest Payment Period
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation shall have the
right to extend the interest payment period from time to time for a period not
exceeding 60 consecutive months. The Corporation has no current intention of
exercising its right to extend an interest payment period. No interest shall be
due and payable during an Extension Period, except at the end thereof. During
any Extension Period, the Corporation shall not declare or pay any dividends on,
or redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its common stock or preferred stock or make any guarantee
payments with respect thereto. Prior to the termination of any such Extension
Period, the Corporation may further extend the interest payment period; provided
that such Extension Period together with all such previous and further
extensions thereof may not exceed 60 consecutive months. On the interest payment
date occurring
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at the end of each Extension Period, the Corporation shall pay to the holders of
Junior Subordinated Debentures of record on the record date for such interest
payment date (regardless of who the holders of record may have been on other
dates during the Extension Period) all accrued and unpaid interest on the Junior
Subordinated Debentures, together with interest thereon at the rate specified
for the Junior Subordinated Debentures to the extent permitted by applicable
law, compounded monthly, ("Compounded Interest"). Upon the termination of any
Extension Period and the payment of all amounts then due, the Corporation may
commence a new Extension Period, subject to the above requirements. The
Corporation may also prepay at any time all or any portion of the interest
accrued during an Extension Period. Consequently, there could be multiple
Extension Periods of varying lengths (up to five Extension Periods of 60
consecutive months each or more numerous shorter Extension Periods) throughout
the term of the Junior Subordinated Debentures. The failure by the Corporation
to make interest payments during an Extension Period would not constitute a
default or an event of default under the Indenture or the Corporation's
currently outstanding indebtedness.
If the Property Trustee shall be the sole holder of the Junior
Subordinated Debentures, the Corporation shall give the Property Trustee notice
of its selection of such Extension Period one Business Day prior to the earlier
of (i) the date the distributions on the Preferred Securities are payable or
(ii) the date the Trust is required to give notice to the NYSE or other
applicable self-regulatory organization or to holders of the Preferred
Securities of the record date or the date such distribution is payable, but in
any event not less than one Business Day prior to such record date. The Trust
shall give notice of the Corporation's selection of such Extension Period to the
holders of the Preferred Securities.
If Junior Subordinated Debentures have been distributed to holders of
Trust Securities, the Corporation shall give the holders of the Junior
Subordinated Debentures notice of its selection of such Extension Period ten
Business Days prior to the earlier of (i) the next succeeding interest payment
date or (ii) the date The Corporation is required to give notice to the NYSE (if
the Junior Subordinated Debentures are then listed thereon) or other applicable
self-regulatory organization or to holders of the Junior Subordinated Debentures
of the record or payment date of such related interest payment.
Compounded Interest
Payments of Compounded Interest on the Junior Subordinated Debentures held
by the Trust will make funds available to pay any interest on distributions in
arrears in respect of the Preferred Securities pursuant to the terms thereof.
Certain Covenants of the Corporation Applicable to the Junior Subordinated
Debentures
In the Indenture, the Corporation will covenant that, so long as the
Preferred Securities remain outstanding, the Corporation will not declare or pay
any dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its common stock or preferred stock
or make any guarantee payment with respect thereto if at such time (i) the
Corporation shall be in default with respect to its Guarantee Payments or other
payment obligations under the Preferred Securities Guarantee, (ii) there shall
have occurred any Indenture Event of Default with respect to the Junior
Subordinated Debentures or (iii) the Corporation shall have given notice of its
selection of an Extension Period as provided in the Indenture and such period,
or any extension thereof, is continuing.
Subordination
The Indenture provides that the Junior Subordinated Debentures are
subordinate and junior in right of payment to all Senior Indebtedness of the
Corporation. In the event (a) of any insolvency or bankruptcy proceedings, or
any receivership, liquidation, reorganization or other similar proceedings in
respect of the Corporation or its property or any proceeding for voluntary
liquidation, dissolution or other winding up of the Corporation, or (b) Junior
Subordinated Debentures are declared due and payable before their expressed
maturity because of the occurrence of an Indenture Event of Default (under
circumstances other than as set forth in clause (a) above), then the holders of
all Senior Indebtedness shall first be entitled to receive payment of the full
amount due thereon in money, before the holders of any of the Junior
Subordinated Debentures are entitled to receive a payment on account of the
principal of, premium, if any, or interest on the indebtedness evidenced by such
Junior Subordinated Debentures. In the event and during the continuation of any
default in payment of any Senior Indebtedness or if any event of default shall
exist under any Senior Indebtedness resulting in the acceleration of the
maturity thereof, as "event of default" is defined therein or in the agreement
under which the same is outstanding, no payment of the principal of, premium, if
any, or interest on the Subordinated Debentures shall be made. (Section 14.02).
The term "Senior Indebtedness" shall mean the principal of and premium, if
any, and interest on (a) all indebtedness of the Corporation, whether
outstanding on the date of the Indenture or thereafter created, (i) for money
borrowed by the Corporation,(ii)
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for money borrowed by, or obligations of, others and either assumed or
guaranteed, directly or indirectly, by the Corporation, (iii) in respect of
letters of credit and acceptances issued or made by banks, or (iv) constituting
purchase money indebtedness, or indebtedness secured by property included in the
property, plant and equipment accounts of the Corporation at the time of the
acquisition of such property by the Corporation, for the payment of which the
Corporation is directly liable, and (b) all deferrals, renewals, extensions and
refundings of, and amendments, modifications and supplements to, any such
indebtedness. As used in the preceding sentence the term "purchase money
indebtedness" means indebtedness evidenced by a note, debenture, bond or other
instrument (whether or not secured by any lien or other security interest)
issued or assumed as all or a part of the consideration for the acquisition of
property, whether by purchase, merger, consolidation or otherwise, unless by its
terms such indebtedness is subordinate to other indebtedness of the Corporation.
Notwithstanding anything to the contrary in the Indenture or the Junior
Subordinated Debentures, Senior Indebtedness shall not include (i) any
indebtedness of the Corporation which, by its terms or the terms of the
instrument creating or evidencing it, is subordinate in right of payment to or
pari passu with the Junior Subordinated Debentures, as the case may be, and, in
particular, the Junior Subordinated Debentures shall rank pari passu with
respect to all other debt securities and guarantees in respect thereof issued to
any other trusts, partnerships or other entity affiliated with the Corporation
which is a financing vehicle of the Corporation in connection with the issuance
of preferred securities by such financing vehicle, or (ii) any indebtedness of
the Corporation to a subsidiary of the Corporation.
The Indenture does not limit the aggregate amount of indebtedness,
including Senior Indebtedness, that may be issued. Because the Corporation will
be a holding company after the Merger, the Junior Subordinated Debentures will
be effectively subordinated to all existing and future liabilities, including
trade payables, of the Corporation's subsidiaries, except to the extent that the
Corporation is a creditor of the subsidiaries recognized as such. At September
30, 1996, the Operating Partnership had outstanding indebtedness of $81,186,000,
all of which had been guaranteed by the Partnership. For a discussion of
indebtedness to be outstanding after the Merger, see "CAPITALIZATION." There are
no terms in the Preferred Securities, the Junior Subordinated Debentures or the
Preferred Securities Guarantee that limit the Corporation's ability to incur
additional indebtedness, including indebtedness that ranks senior to or pari
passu with the Junior Subordinated Debentures and the Preferred Securities
Guarantee, or the ability of its subsidiaries to incur additional indebtedness.
See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE -- Status of the Preferred
Securities Guarantee."
Indenture Events of Default
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Indenture Event of
Default" with respect to a series of Subordinated Debentures:
(a) failure for 30 days to pay interest on the Subordinated
Debentures of such series when due; provided that a valid extension of the
interest payment period by the Corporation shall not constitute a default in the
payment of interest for this purpose; or
(b) failure to pay principal of or premium, if any, on the
Subordinated Debentures of such series when due whether at maturity, upon
redemption, by declaration or otherwise; or
(c) failure to observe or perform any other covenant contained in
the Indenture with respect to such series for 90 days after written notice to
the Corporation from the Indenture Trustee or the holders of at least 25% in
principal amount of the outstanding Subordinated Debentures of such series; or
(d) certain events in bankruptcy, insolvency or reorganization of
the Corporation.
In each and every such case, unless the principal of all the Subordinated
Debentures of that series shall have already become due and payable, either the
Indenture Trustee or the holders of not less than 25% in aggregate principal
amount of the Subordinated Debentures of that series then outstanding, by notice
in writing to the Corporation (and to the Indenture Trustee if given by such
holders), may declare the principal of all the Subordinated Debentures of that
series to be due and payable immediately, and upon any such declaration the same
shall become and shall be immediately due and payable.
The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures of that series have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Subordinated Debentures of that series may
declare the principal due and payable immediately upon an Event of Default with
respect to such series, but the holders of a majority in aggregate outstanding
principal amount of Subordinated Debentures of such series may annul such
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declaration and waive the default if the default has been cured and a sum
sufficient to pay all matured installments of interest and principal otherwise
than by acceleration and any premium has been deposited with the Indenture
Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures of that series may, on behalf of the holders of all the
Subordinated Debentures of that series, waive any past default, except a default
in the payment of principal, premium, if any, or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal otherwise than by acceleration and any premium has been deposited
with the Indenture Trustee) or a call for redemption of Junior Subordinated
Debentures. The Corporation is required to file annually with the Indenture
Trustee a certificate as to whether or not the Corporation is in compliance with
all the conditions and covenants under the Indenture.
An Indenture Event of Default also constitutes an Event of Default under
the Declaration. See "DESCRIPTION OF PREFERRED SECURITIES -Declaration Events of
Default."
Modification of the Indenture
The Indenture contains provisions permitting the Corporation and the
Indenture Trustee, with the consent of the holders of not less than a majority
in principal amount of the outstanding Subordinated Debentures of each series
affected, to modify the Indenture or any supplemental indenture affecting the
rights of the holders of such Subordinated Debentures; provided that no such
modification may, without the consent of the holder of each outstanding
Subordinated Debenture affected thereby, (i) extend the fixed maturity of any
Subordinated Debentures of any series, or reduce the principal amount thereof,
or reduce the rate or extend the time of payment of interest thereon, or reduce
any premium payable upon the redemption thereof, without the consent of the
holder of each Subordinated Debenture so affected or (ii) reduce the percentage
of Subordinated Debentures, the holders of which are required to consent to any
such modification, without the consent of the holders of each Subordinated
Debenture then outstanding and affected thereby.
Book-Entry and Settlement
If any Junior Subordinated Debentures are distributed to holders of
Preferred Securities (see "DESCRIPTION OF PREFERRED SECURITIES"), such Junior
Subordinated Debentures will be issued in fully registered form. In such event,
investors may elect to hold their Junior Subordinated Debentures directly or,
subject to the rules and procedures of DTC, hold interests in a global
certificate registered in the name of DTC or its nominee.
For a description of DTC and DTC's book-entry system, see "DESCRIPTION OF
PREFERRED SECURITIES -- Book-Entry; Delivery and Form." As of the date of this
Offering Circular/Prospectus, the description herein of DTC's book-entry system
and DTC's practices as they relate to purchases, transfers, notices and payments
with respect to the Preferred Securities apply in all material respects to any
Junior Subordinated Debentures registered in the name of and held by DTC or its
nominee.
Consolidation, Merger and Sale
The Indenture provides that the Corporation may not consolidate with or
merge into any other person or transfer or lease its properties and assets
substantially as an entirety to any person and may not permit any person to
merge into or consolidate with the Corporation unless (i) either the Corporation
will be the resulting or surviving entity or any successor or purchaser is a
corporation organized under the laws of the United States of America, any State
or the District of Columbia, and any such successor or purchaser expressly
assumes the Corporation's obligations under the Indenture and (ii) immediately
after giving effect to the transaction no Event of Default shall have occurred
and be continuing.
Defeasance and Discharge
Under the terms of the Indenture, the Corporation will be discharged from
any and all obligations in respect of the Junior Subordinated Debentures (except
in each case for certain obligations to register the transfer or exchange of
Junior Subordinated Debentures, replace stolen, lost or mutilated Junior
Subordinated Debentures, maintain paying agencies and hold moneys for payment in
trust) if (i) the Corporation irrevocably deposits with the Indenture Trustee
cash or U.S. Government Obligations, as trust funds in an amount certified to be
sufficient to pay at maturity (or upon redemption) the principal of, premium, if
any, and interest on all outstanding Junior Subordinated Debentures; (ii) the
Corporation delivers to the Indenture Trustee an opinion of counsel to the
effect that the holders of the Junior Subordinated Debentures will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance and that defeasance will not otherwise alter such holders'
United States
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federal income tax treatment of principal, premium and interest payments on such
Junior Subordinated Debentures (such opinion must be based on a ruling of the
Internal Revenue Service or a change in United States federal income tax law
occurring after the date of such Indenture, since such a result would not occur
under current tax law); and (iii) no event or condition shall exist that,
pursuant to certain provisions described under "- Subordination" above, would
prevent the Corporation from making payments of principal of, premium, if any,
and interest on the Junior Subordinated Debentures at the date of the
irrevocable deposit referred to above.
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed by,
and construed in accordance with, the laws of the State of New York.
Information Concerning the Indenture Trustee
The Indenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Junior Subordinated Debentures, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities that might be incurred thereby. The Indenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it. The
Indenture Trustee is one of a number of banks with which the Corporation and its
subsidiaries maintain ordinary banking and trust relationships.
Miscellaneous
The Corporation will have the right at all times to assign any of its
rights or obligations under the Indenture to a direct or indirect wholly-owned
subsidiary of the Corporation; provided that, in the event of any such
assignment, the Corporation will remain jointly and severally liable for all
such obligations. Subject to the foregoing, the Indenture will be binding upon
and inure to the benefit of the parties thereto and their respective successors
and assigns. The Indenture provides that it may not otherwise be assigned by the
parties thereto other than by the Corporation to a successor or purchaser
pursuant to a consolidation, merger or sale permitted by the Indenture.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE
As long as payments of interest and other payments are made when
due on the Junior Subordinated Debentures, such payments will be sufficient to
cover distributions and other payments due on the Preferred Securities primarily
because (i) the aggregate principal amount of Junior Subordinated Debentures
held as trust assets will be equal to the sum of the aggregate stated
liquidation amount of the Preferred Securities and the proceeds received by the
Trust upon issuance of the Common Securities to the Corporation; (ii) the
interest rate and interest and other payment dates on the Junior Subordinated
Debentures will match the distribution rate and distribution and other payment
dates for the Preferred Securities; (iii) the Indenture provides that the
Corporation shall pay for all debts and obligations (other than with respect to
the Trust Securities) and all costs and expenses of the Trust, including any
taxes and all costs and expenses with respect thereto, to which the Trust may
become subject, except for United States withholding taxes; and (iv) the
Declaration further provides that the Trustees shall not cause or permit the
Trust, among other things, to engage in any activity that is not consistent with
the limited purposes of the Trust. With respect to clause (iii) above, however,
no assurance can be given that the Corporation will have sufficient resources to
enable it to pay such debts, obligations, costs and expenses on behalf of the
Trust.
Payments of distributions and other payments due on the Preferred
Securities are guaranteed by the Corporation on a subordinated basis as and to
the extent set forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." If
the Corporation does not make interest or other payments on the Junior
Subordinated Debentures, the Trust will not make distributions or other payments
on the Preferred Securities. Under the Declaration, if and to the extent the
Corporation does make interest or other payments on the Junior Subordinated
Debentures, the Property Trustee is obligated to make distributions or other
payments on the Preferred Securities. The Preferred Securities Guarantee is a
full and unconditional guarantee from the time of issuance of the
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Preferred Securities, but the Preferred Securities Guarantee covers
distributions and other payments on the Preferred Securities only if and to the
extent that the Corporation has made a payment to the Property Trustee of
interest or principal on the Junior Subordinated Debentures deposited in the
Trust as trust assets. In such event, a holder of Preferred Securities may
institute a legal proceeding directly against the Corporation under the
Indenture to enforce payment of such distributions to such holder after the
respective due dates. Taken together, the Corporation's obligations under the
Junior Subordinated Debentures, the Indenture and the Preferred Securities
Guarantee provide, in the aggregate, a full and unconditional guarantee of
payments of distributions and other amounts due on the Preferred Securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full and
unconditional guarantee of the Trust's obligations under the Preferred
Securities.
If an Appointment Event occurs, the Declaration provides that the
holders of the Preferred Securities may appoint a Special Regular Trustee who
will have the same rights, powers and privileges under the Declaration as the
Regular Trustees. The Property Trustee will have the power to exercise all
rights, powers and privileges under the Indenture with respect to the Junior
Subordinated Debentures, including its rights as the holder of the Junior
Subordinated Debentures to enforce the Corporation's obligations under the
Junior Subordinated Debentures upon the occurrence of an Indenture Event of
Default, and will also have the right to enforce the Preferred Securities
Guarantee on behalf of the holders of the Preferred Securities. In addition, the
holders of at least a majority in liquidation amount of the Preferred Securities
will have the right to direct the Property Trustee with respect to certain
matters under the Declaration and the Preferred Securities Guarantee. If the
Property Trustee fails to enforce its rights under the Indenture or fails to
enforce the Preferred Securities Guarantee, any holder of Preferred Securities
may, after a period of 30 days has elapsed from such holder's written request to
the Property Trustee to enforce such rights or the Preferred Securities
Guarantee, institute a legal proceeding against the Corporation to enforce such
rights or the Preferred Securities Guarantee, as the case may be. See
"DESCRIPTION OF PREFERRED SECURITIES" and "DESCRIPTION OF PREFERRED SECURITIES
GUARANTEE."
The Corporation and the Trust believe that the above mechanisms
and obligations, taken together, are equivalent to a full and unconditional
guarantee by the Corporation of payments due on the Preferred Securities.
If a Special Event shall occur and be continuing, the Trust shall
be dissolved unless the Junior Subordinated Debentures are redeemed in the
limited circumstances described below, with the result that Junior Subordinated
Debentures held by the Trust having an aggregate principal amount equal to the
aggregate stated liquidation amount of the Preferred Securities and Common
Securities will be distributed on a Pro Rata Basis in exchange for the
outstanding Preferred Securities and Common Securities, subject in the case of a
Tax Event to the Corporation's right in certain circumstances to redeem Junior
Subordinated Debentures as described under "DESCRIPTION OF PREFERRED SECURITIES
- -- Special Event Redemption or Distribution." The Preferred Securities represent
preferred undivided beneficial interests in the assets of the Trust, a statutory
business trust which exists for the purpose of (a) issuing (i) its Preferred
Securities to the Corporation in consideration for the deposit by the
Corporation of Junior Subordinated Debentures in the Trust as trust assets, and
(ii) its Common Securities to the Corporation in exchange for cash and investing
the proceeds thereof in an equivalent amount of Junior Subordinated Debentures
and (b) engaging in such other activities as are necessary or incidental
thereto.
Upon any voluntary or involuntary dissolution, winding-up or
termination of the Trust, the holders of Preferred Securities will be entitled
to receive the Liquidation Distribution in cash or Junior Subordinated
Debentures and will be entitled to the benefits of the Preferred Securities
Guarantee with respect to any such distribution. See "DESCRIPTION OF PREFERRED
SECURITIES -- Liquidation Distribution Upon Dissolution." Upon any voluntary or
involuntary liquidation or bankruptcy of the Corporation, the holders of Junior
Subordinated Debentures would be subordinated creditors of the Corporation,
subordinated in right of payment to all Senior Indebtedness, but entitled to
receive payment in full of principal, premium, if any, and interest, before any
stockholders of the Corporation receive payments or distributions.
A default or event of default under any Senior Indebtedness would
not constitute a default or event of default under the Junior Subordinated
Debentures. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness, the subordination provisions of the Junior Subordinated
Debentures provide that no payments may be made in respect of the Junior
Subordinated Debentures. Failure to make required payments on the Junior
Subordinated Debentures would constitute an event of default under the
Indenture.
-102-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Preferred Stock
The Certificate of Incorporation of the Corporation authorizes
the issuance of 1,000,000 shares of Preferred Stock, par value $.01 per share,
by the Board of Directors in one or more classes or series and with such voting
powers, designations, preferences and relative participating, optional or other
special rights and such qualifications, limitations, or restrictions thereof as
shall be set forth in the resolutions of the Board of Directors authorizing such
issuance. There will be no shares of Preferred Stock outstanding after the
Merger. There will be reserved for issuance 64,189 shares of Series A Junior
Participating Preferred Shares pursuant to the Corporation's Stockholder Rights
Plan. See "-- Stockholder Rights Plan."
Common Stock
The Certificate of Incorporation of the Incorporation authorizes
the issuance of 20,000,000 shares of Common Stock, par value of $.01 per share,
of which 1,000 shares are currently outstanding and owned by the Partnership.
After the Merger, there will be 6,418,936 shares of Common Stock outstanding.
Holders of shares of the Corporation's Common Stock are entitled
to one vote per share on all matters to be voted upon by the stockholders. There
are no cumulative voting rights with respect to the election of directors.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of shares of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Corporation, the holders of shares of Common
Stock are entitled to share ratably in all assets after payment of liabilities,
subject to prior distribution rights of Preferred Stock, if any, then
outstanding. Shares of Common Stock have no preemptive, conversion or other
subscription rights and there are no redemption or sinking fund provisions
applicable to the Common Stock.
Stockholders Agreement
Certain stockholders of the Corporation have entered into a
Stockholders Agreement dated as of _____________, that contains certain
restrictions with respect to voting and sale of shares of Common Stock. The
Stockholders Agreement requires the Corporation to include certain provisions in
its bylaws. See "-- Bylaw Provisions." In addition, the Stockholders Agreement
provides that Lehman Brothers and each of the following members of management,
Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J. Cornelius,
Max W. Hillman and Joseph M. Corvino (the "Senior Executives") will agree with
the Corporation not to sell any shares of Common Stock that they beneficially
own, in a single transaction or series of related transactions, to any third
person(s) which, to the knowledge of Lehman Brothers and its affiliates and the
Senior Executives, after reasonable inquiry, would beneficially own after such
transactions more than 10% of the outstanding Common Stock (or more than 15% of
the outstanding common stock if such third person(s) are eligible to report the
acquisition of such shares on Schedule 13G pursuant to clauses (i), (ii) and
(iii) of Rule 13d-1(b)(1) under the Exchange Act, as such rule is currently in
effect.) The Stockholders Agreement also contains provisions that restrict the
respective voting power of Lehman Brothers and the Senior Executives. Under the
terms of such restriction, such persons will agree to vote, in the same
proportion as the "Unaffiliated Shares" that are voted on any such matter, that
percentage of Excess Voting Shares held by them at such time that equals the
percentage of outstanding Unaffiliated Shares that are voted on such matter.
"Excess Voting Shares" means the shares of Common Stock beneficially owned by
Lehman Brothers and its affiliates and the Senior Executives, at any time, that
represents voting power in excess of the respective voting powers immediately
prior to the Conversion that they would have had in a vote of the holders of A
Interests and B Interests voting together as a single class. See also "-- Bylaw
Provisions" below.
Anti-takeover Provisions
Certain provisions of the Corporation's Certificate of
Incorporation and Bylaws, the Stockholder Rights Plan and the change in control
provisions in the Deferred Compensation Plans could have an anti-takeover
effect. See "MANAGEMENT --Change in Control Arrangements." These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Corporation's Board of Directors and management and in the
policies formulated by the Board of Directors and to discourage an unsolicited
takeover of the Corporation if the Board of Directors determines that the
takeover is not in the best interests of the Corporation and its stockholders.
However, these provisions could have the effect of discouraging certain attempts
to acquire the Corporation or remove incumbent management even if some or a
majority of stockholders deemed such an attempt
-103-
<PAGE>
to be in their best interests.
Certificate of Incorporation Provisions. The Certificate of
Incorporation provides that any action required or permitted to be taken by the
stockholders of the Corporation may be effected only at an annual or special
meeting of stockholders. Stockholders are permitted to call a special meeting or
to require that the Board of Directors call a special meeting of stockholders if
such meeting is called by holders of at least 25% of outstanding Common Stock.
Bylaw Provisions. The Bylaws establish an advance notice
procedure for the nomination of candidates for election as directors, other than
by or at the direction of the Board of Directors, as well as for other
stockholder proposals to be considered at annual meetings of stockholders. In
general, notice of intent to nominate a director or raise business at such
meetings must be received at least 60 days prior to any annual meeting and must
contain certain specified information concerning the persons to be nominated or
the matters to be brought before the meeting and concerning the stockholder
submitting the proposal. Under the terms of the Stockholders Agreement, prior to
the third anniversary of the date of the Conversion, the approval of at least a
majority of the Corporation's Independent Directors is required to approve and
authorize (i) amendments to the Corporation's Certificate of Incorporation or
Bylaws or any stockholder rights plan of the Corporation (including the
redemption of the rights thereunder or waiver of any provision thereof) or any
waiver of, or "opt-out" from, the benefit or effect of any anti-takeover statute
or other provision applicable to the Corporation (including Section 203 of the
Delaware General Corporation Law) or (ii) any agreement binding the Corporation
in respect of the sale, in a single transaction or a series of related
transactions, of all or a substantial part of the Corporation. In addition, the
approval of at least a majority of the Corporation's Independent Directors is
required to approve and authorize (i) any transaction or series of related
transactions between the Corporation or any of its subsidiaries, on the one
hand, and SDI Partners I, L.P., Capital Partners I, L.P., Lehman/SDI, Inc. or
Lehman Brothers Inc. or any affiliate of these entities on the other, so long as
any of such entities an its affiliates own, in the aggregate, at least 10% of
the outstanding Common Stock, (ii) any amendment to, or waiver of, any provision
of the Stockholders Agreement, or (iii) any amendment to the Certificate of
Incorporation or Bylaws that would amend these restrictive provisions.
Stockholder Rights Plan. The Corporation has adopted a
Stockholder Rights Plan pursuant to a Rights Agreement, dated as of the
Effective Time, between the Corporation and CoreStates Bank N.A. The Plan is
designed to insure that all stockholders of the Corporation receive fair value
for their shares of Common Stock in the event of any proposed takeover of the
Corporation and to guard against the use of partial tender offers or other
coercive tactics to gain control of the Corporation without offering fair value
to the Corporation's stockholders. Under the Rights Plan, each share of Common
Stock will have attached thereto a Right. Each Right entitles the registered
holder to purchase from the Corporation one one-hundredth of a share of Series A
Junior Participating Preferred Shares, par value $.01 per share, of the
Corporation (the "Preferred Shares"), or a combination of securities and assets
of equivalent value, at a Purchase Price of ________, subject to adjustment. The
Purchase Price may be paid, at the option of the holder, in cash or shares of
Common Stock having a value at the time of exercise equal to the Purchase Price.
Until the Distribution Date, ownership of the Rights will be
evidenced by and will be transferred with and only with the certificates
representing the shares of Common Stock, and no separate Rights Certificates
will be distributed. The Distribution Date will occur upon the earlier of (i) 10
days following a public announcement that a person or group has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of Common Stock, or (ii) the close of business on a date
fixed by the Board of Directors following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 20% or
more of the outstanding shares of Common Stock. The Rights are not exercisable
until the Distribution Date and will expire at the close of business on March
31, 2007, unless earlier redeemed by the corporation as described below.
Except in the circumstances described below, after the
Distribution Date each Right will be exercisable into one one-hundredth of a
Preferred Share (a "Preferred Share Fraction"). Each Preferred Share Fraction
carries voting and dividend rights that are intended to produce the equivalent
of one share of Common Stock. Each Preferred Share Fraction will entitle the
holder to receive dividends each calendar quarter in an amount equal to the
greater of $.02 or the aggregate per share amount in cash of all dividends or
other distributions (other than dividends payable in Common Stock) declared on
the Common Stock during the preceding quarter. Each Preferred Share Fraction
will entitle the holder to one vote on all matters submitted to a vote of the
stockholders of the Corporation. Each Preferred Share Fraction will have a
liquidation preference equal to the greater of $1.00 per share, plus accrued
dividends, or an amount per share equal to the aggregate amount to be
distributed per share to holders of Common Stock. The Preferred Share Fractions
are not redeemable.
It is unlikely that a holder of a Right will ever exercise the
Right to receive Preferred Shares. The Rights may be exercised if a "Flip-in" or
"Flip-over" event occurs.
-104-
<PAGE>
If a "Flip-in" event occurs and the Distribution Date has passed,
the holder of each Right, with the exception of the Acquiror, is entitled to
purchase $______ worth of Common Shares for $_____. The Rights will no longer be
exercisable into Preferred Shares at that time. A "Flip-in" event takes place if
one of the following happens:
o A person or group acquires 20% or more of the outstanding Common
Stock.
o A 20% stockholder merges with or acquires the Corporation and an
equity security of the Corporation remains outstanding.
o A 20% stockholder engages in "self-dealing" transactions with the
Corporation. Examples of this are the receipt of stock from the
Corporation or the sale of assets by the 20% stockholder to the
Corporation.
If a "Flip-over" event occurs, the holder of Rights is entitled
to purchase $_____ worth of the Acquiror's stock for $_____ for each Right held.
A "Flip-over" event occurs if the Corporation is acquired or merged and no
outstanding shares remain or if 50% of the Corporation's assets or earning power
is sold or transferred. The Rights Plan prohibits the Corporation from entering
into this sort of transaction unless the Acquiror agrees to comply with the
"Flip-over" provisions of the Plan.
The Rights can be redeemed by the Corporation for $.01 per right
until up to ten days after the public announcement that someone has acquired 20%
or more of the Corporation's Common Shares or the Board can extend the
redemption period for as long as it determines appropriate. If the Rights are
not redeemed or substituted by the Corporation, they will expire on September 1,
2006.
Limitation of Liability
As permitted by the DGCL, the Corporation's Certificate of
Incorporation provides that directors of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, relating to
prohibited dividends or distributions or the repurchase or redemption of stock,
or (iv) for any transaction from which the director derives an improper personal
benefit.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is
Registrar and Transfer Company.
RESALE OF SECURITIES
Securities Act Restrictions
Preferred Securities and shares of Common Stock received by
persons who may be deemed to be "affiliates" of the Partnership may be sold by
those persons only in accordance with the provisions of Rule 145 under the
Securities Act, pursuant to an effective registration under the Securities Act
or in transactions that are exempt from registration under the Securities Act.
Rule 145 provides, in general, that the securities may be sold by the affiliate
during the two years following the date the securities were acquired from the
Corporation if (i) there is available adequate current public information with
respect to the Corporation and (ii) the number of Preferred Securities or shares
of Common Stock sold within any three month period does not exceed the greater
of 1% of the total number of outstanding Preferred Securities or shares of
Common Stock, as the case may be, or the average weekly trading volume of the
particular security during the four calendar weeks immediately preceding the
date of receipt of the order to execute the transaction by a broker or the date
of execution of the transaction directly with a market maker and (iii) the
securities are sold in transactions directly with a "market maker" or in
"brokers' transactions" within the meaning of Rule 144 under the Securities Act.
Rule 145 further provides that during the third year following the date the
securities were acquired from the Corporation the affiliate may sell such
securities if the affiliate is not an affiliate of the Corporation and there is
available adequate public information with respect to the Corporation, and
thereafter the affiliate may sell the securities without restriction if the
affiliate is not, and has not been for at least three months, an affiliate of
the Corporation.
-105-
<PAGE>
Resales by Lehman Brothers and Management
Lehman Brothers and Messrs. Marshall, McDonnell and Edmonson have
agreed to cooperate to execute an underwritten secondary offering of their
shares of Common Stock, as soon as practicable after the effective date of the
Conversion pursuant to the registration rights described below, subject to
market conditions. Such parties have agreed not to sell their shares of Common
Stock prior to such secondary offering; provided that such restriction will
lapse with respect to sales pursuant to Rule 144 or Rule 145 under the
Securities Act if the secondary offering has not been consummated within nine
months after the effective date of the Conversion. Notwithstanding the
foregoing, such parties have agreed that Lehman Brothers Capital Partners I L.P.
may distribute shares of Common Stock that it holds to its partners at any time
and that the subsequent sale or transfer of such shares by such partners (other
than shares distributed to the general partner of Lehman Brothers Capital
Partners I L.P.) is not restricted.
In connection with the foregoing, the Corporation has entered
into a registration rights agreement with Lehman Brothers and Messrs. Marshall,
McDonnell and Edmonson affording registration rights with respect to all of the
shares of Common Stock to be acquired by Lehman Brothers pursuant to the
Conversion and 20% of the shares of Common Stock to be acquired by such
individuals pursuant to the Conversion. Lehman Bothers has the right to demand
registration of all or part of its registrable shares in the contemplated
initial secondary offering and registration of any remaining shares pursuant to
a shelf registration statement. Such individuals have the right to register
their registrable shares on a pro rata basis with Lehman Brothers in the initial
secondary offering. In addition, Lehman Brothers and such individuals have
piggy-back registration rights with respect to all subsequent primary and
secondary offerings of Common Stock.
The Corporation has agreed not to sell any additional shares of
Common Stock prior to the earlier of such initial secondary offering and the
nine-month anniversary of the Conversion.
LEGAL MATTERS
The validity of the securities offered hereby, and certain
federal income tax matters set forth under "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," will be passed upon for the Partnership by Morgan, Lewis &
Bockius LLP, Philadelphia, Pennsylvania. Morgan, Lewis & Bockius LLP will rely
as to matters of Delaware law on Richards, Layton & Finger, Wilmington,
Delaware. Donald A. Scott, a partner in Morgan, Lewis & Bockius LLP, is a
director of the Partnership and will become a director of the Corporation.
EXPERTS
The consolidated financial statements of the Partnership at
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report dated March 8, 1996, and are included
in reliance upon such report and the authority of such firm as experts in
accounting and auditing.
-106-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SunSource L.P. and Subsidiary
Unaudited Pro Forma Consolidated Financial Statements Page
Introduction to Unaudited Pro Forma Consolidated Financial Statements
Unaudited Pro Forma Consolidated Balance Sheets......................
Unaudited Pro Forma Consolidated Statements of Income:
for the nine months ended September 30, 1996........................
for the nine months ended September 30, 1995........................
for the twelve months ended December 31, 1995......................
Notes to Unaudited Pro Forma Consolidated Financial Statements.......
Unaudited Historical Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and 1995........
Consolidated Statements of Income for the Nine Months ended
September 30, 1996 and 1995.........................................
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1996 and 1995.........................................
Notes to Unaudited Consolidated Financial Statements
Audited Historical Consolidated Financial Statements
Report of Independent Accountants....................................
Consolidated Balance Sheets as of December 31, 1995 and 1994.........
Consolidated Statements of Income for the Years ended
December 31, 1995, 1994 and 1993....................................
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1994 and 1993....................................
Consolidated Statements of Changes in Partners' Capital
for the Years ended December 31, 1995, 1994 and 1993................
Notes to Consolidated Financial Statements...........................
F-1
<PAGE>
Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated financial statements of SunSource
Inc., give effect to the proposed conversion of SunSource L.P. ("the
Partnership") to corporate form. In connection with the conversion, the
Partnership intends to refinance its outstanding long-term debt. The
Conversion and refinancing ("the transaction") will be effected through the
formation of a new corporation, SunSource, Inc.
The unaudited pro forma consolidated statements of income assume the transaction
occurred: (i) on January 1, 1996 for the nine-month period ending September 30,
1996 and (ii) on January 1, 1995 for the nine-month period ending September 30,
1995 and the twelve-month period ending December 31, 1995. The pro forma balance
sheet assumes the transaction occurred on September 30, 1996.
The pro forma consolidated financial statements are not necessarily indicative
of operating results or financial position that would have been achieved had the
transaction occurred on the dates indicated and should not be construed as
representative of future operating results or financial position.
The pro forma consolidated financial statements and accompanying notes should be
read in conjunction with the historical financial statements and related notes
thereto included in this Proxy/Prospectus.
F-2
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 (UNAUDITED)
PRO FORMA
ADJUSTMENTS
ASSETS PARTNERSHIP AMOUNT NOTE* CORPORATION
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,729 $ (1,729) 2A $ --
Accounts and notes receivable, net 86,693 -- 86,693
Inventories 97,088 -- 97,088
Deferred income taxes -- 8,012 2B 8,012
Other current assets 4,630 (467) 2C 4,163
----------- ----------- -----------
Total current assets 190,140 5,816 195,956
Property and equipment, net 20,267 -- 20,267
Goodwill 44,589 -- 44,589
Deferred income taxes 3,747 (508) 2B 3,239
Other assets 4,560 428 2D 4,988
----------- ----------- -----------
Total assets $ 263,303 $ 5,736 $ 269,039
=========== =========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts and notes payable, trade $ 54,858 $ -- $ 54,858
Current portion of senior notes 6,395 (6,395) 2E --
Distributions / dividends payable 1,934 (915) 2F 1,019
Accrued expenses:
Interest on senior notes 2,081 (2,081) 2E --
Management fee due the general partner 2,491 (2,491) 2G --
Other accrued expenses 20,905 -- 20,905
----------- ----------- -----------
Total current liabilities 88,664 (11,882) 76,782
Senior notes 63,934 (63,934) 2E --
Replacement credit facilities n/a 100,674 2A,C-H 100,674
Other liabilities 9,545 (1,035) 2I 8,510
----------- ----------- -----------
Total liabilities 162,143 23,823 185,966
----------- ----------- -----------
Guaranteed preferred beneficial
interests in company's junior
subordinated debentures -- 105,446 2H 105,446
----------- ----------- -----------
Partners' Capital:
General partner 1,024 (1,024) 2I --
Limited partners:
Class A interests 67,642 (67,642) 2H --
Class B interests 35,296 (35,296) 2C,D,I --
Class B interests held in treasury (1,514) 1,514 2I --
Cumulative foreign currency
translation adjustment (1,288) 1,288 2I --
----------- ----------- -----------
Total partners' capital 101,160 (101,160) --
----------- ----------- -----------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000
shares authorized, none issued -- -- 2I --
Common stock $0.01 par, 20,000,000
shares authorized; 6,418,936 shares
issued and outstanding -- 64 2I 64
Accumulated deficit -- (21,149) 2B,H,I (21,149)
Cumulative foreign currency
translation adjustment -- (1,288) 2I (1,288)
----------- ----------- -----------
Total stockholders' deficit -- (22,373) (22,373)
----------- ----------- ------------
Total liabilities, partners' capital,
preferred beneficial interest and
stockholders' deficit $ 263,303 $ 5,736 $ 269,039
=========== =========== ===========
Pro forma negative net book value per common share: $ (3.49)
===========
</TABLE>
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
Page 1 of 3
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996 (Unaudited)
----------------------------------------------------------------
Pro Forma *
Partnership Adjustments Note Corporation
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 489,517 $ -- $ 489,517
Cost of sales 291,920 -- 291,920
------------ ----------- -----------
Gross profit 197,597 -- 197,597
------------ ----------- -----------
Operating expenses:
Selling, general and
administrative expenses 166,059 -- 166,059
Management fee to general partner 2,491 (2,491) 3A --
Depreciation 2,684 -- 2,684
Amortization 1,449 -- 1,449
------------ ----------- -----------
Total operating expenses 172,683 (2,491) 170,192
------------ ----------- -----------
Income from operations 24,914 2,491 27,405
Interest expense, net 5,147 775 3C 5,922
Other income, net 470 208 3D 678
Distribution on guaranteed preferred
beneficial interests in company's
junior subordinated debentures -- (9,174) 3E (9,174)
------------ ----------- ------------
Income before income taxes 20,237 (7,250) 12,987
Provision (benefit) for
income taxes (372) 6,292 3G 5,920
------------ ----------- -----------
Net income $ 20,609 $ (13,542) $ 7,067
============ =========== ===========
Net income allocated to partners:
General partner $ 206
-----------
Class A limited partners $ 9,157
-----------
Class B limited partners $ 11,246
-----------
Earnings per limited partnership interest:
- Class A interest $ 0.82
- Class B interest $ 0.52
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573
- Class B interests 21,675,746
Net income per common share $ 1.10
Weighted average number of outstanding common shares 6,418,936
</TABLE>
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
Page 2 of 3
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1995 (Unaudited)
----------------------------------------------------------------
Pro Forma *
Partnership Adjustments Note Corporation
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 455,501 $ -- $ 455,501
Cost of sales 269,623 -- 269,623
------------ ----------- -----------
Gross profit 185,878 -- 185,878
------------ ----------- -----------
Operating expenses:
Selling, general and
administrative expenses 154,148 -- 154,148
Management fee to general partner 2,491 (2,491) 3A --
Depreciation 2,531 -- 2,531
Amortization 1,481 -- 1,481
------------ ----------- -----------
Total operating expenses 160,651 (2,491) 158,160
------------ ----------- -----------
Net results of operations
from divisions sold 396 (396) 3B --
------------ ----------- -----------
Income from operations 25,623 2,095 27,718
Interest expense, net 5,281 (142) 3C 5,139
Other income (expense), net (413) 358 3D (55)
Distribution on guaranteed preferred
beneficial interests in company's
junior subordinated debentures -- (9,174) 3E (9,174)
Gain on sale of divisions 16,500 (16,500) 3F --
------------ ----------- -----------
Income before income taxes 36,429 (23,079) 13,350
Provision for income taxes 362 6,149 3G 6,511
------------ ----------- -----------
Income before extraordinary loss 36,067 (29,228) 6,839
Extraordinary loss from early
extinguishment of debt (629) 629 3H --
------------ ----------- -----------
Net income $ 35,438 $ (28,599) $ 6,839
============ =========== ===========
Net income allocated to partners:
General partner $ 354
-----------
Class A limited partners $ 9,157
-----------
Class B limited partners $ 25,927
-----------
Earnings per limited partnership interest:
Income before extraordinary loss
- Class A interest $ 0.82
- Class B interest $ 1.23
Extraordinary loss
- Class A interest $ --
- Class B interest $ (0.03)
Net income
- Class A interest $ 0.82
- Class B interest $ 1.20
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573
- Class B interests 21,675,746
Net income per common share $ 1.07
Weighted average number of outstanding common shares 6,418,936
Ratio of earnings to fixed charges 1.93
</TABLE>
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
Page 3 of 3
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1995 (Unaudited)
----------------------------------------------------------------
Pro Forma *
Partnership Adjustments Note Corporation
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 599,865 $ -- $ 599,865
Cost of sales 355,004 -- 355,004
------------ ----------- -----------
Gross profit 244,861 -- 244,861
------------ ----------- -----------
Operating expenses:
Selling, general and
administrative expenses 205,180 -- 205,180
Management fee to general partner 3,330 (3,330) 3A --
Depreciation 3,358 -- 3,358
Amortization 1,961 -- 1,961
------------ ----------- -----------
Total operating expenses 213,829 (3,330) 210,499
------------ ----------- -----------
Net results of operations
from divisions sold 270 (270) 3B --
------------ ----------- -----------
Income from operations 31,302 3,060 34,362
Interest expense, net 6,920 4 3C 6,924
Other income, net 256 446 3D 702
Distribution on guaranteed preferred
beneficial interests in company's
junior subordinated debentures -- (12,232) 3E (12,232)
Gain on sale of divisions 20,644 (20,644) 3F --
------------ ----------- -----------
Income before income taxes 45,282 (29,374) 15,908
Provision for income taxes 537 7,345 3G 7,882
------------ ----------- -----------
Income before extraordinary loss 44,745 (36,719) 8,026
Extraordinary loss from early
extinguishment of debt (629) 629 3H --
------------ ----------- -----------
Net income $ 44,116 $ (36,090) $ 8,026
============ =========== ===========
Net income allocated to partners:
General partner $ 441
-----------
Class A limited partners $ 12,210
-----------
Class B limited partners $ 31,465
-----------
Earnings per limited partnership interest:
Income before extraordinary loss
- Class A interest $ 1.10
- Class B interest $ 1.48
Extraordinary loss
- Class A interest $ --
- Class B interest $ (0.03)
Net income
- Class A interest $ 1.10
- Class B interest $ 1.45
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573
- Class B interests 21,675,746
Net income per common share $ 1.25
Weighted average number of outstanding common shares 6,418,936
Ratio of earnings to fixed charges 1.83
</TABLE>
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include pro forma consolidated accounts of
SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). On December 11, 1996, the
Partnership announced the terms of a plan to convert from its current limited
partnership structure to a taxable C corporation, which must be approved by a
majority of the holders of the Class A and Class B interests unaffiliated with
SDI Partners I, L.P., the General Partner ("GP"), each voting separately as a
class. In connection with the conversion of the partnership to corporate form,
the Partnership intends to refinance its outstanding long-term debt. The
conversion and refinancing ("the transaction") will be effected through the
formation of a new corporation, SunSource, Inc. ("the Corporation").
See the accompanying notes for a description of the adjustments made on the pro
forma financial statements to effect the transaction. The accompanying pro forma
consolidated financial statements and related notes have not been audited. In
management's opinion, all adjustments considered necessary for the fair
presentation of financial position and income for the unaudited pro forma
financial statements presented have been reflected. Results for periods for
which pro forma statements are provided are not necessarily indicative of those
to be expected in future periods, should the proposed transaction be approved.
Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted for the unaudited pro forma statements, although
management believes that disclosures are adequate to make the information
presented not misleading.
The transaction, as proposed, is a recapitalization and will not result in a
change in control of the affiliated entities. Therefore, the assets and
liabilities of the Partnership will be recorded by the Corporation at their
historical cost basis, except that the Corporation will also record incremental
deferred tax assets in accordance with Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), relating to the temporary differences for
certain assets and liabilities at the date of conversion to corporate form (see
note 2B below). The Corporation will also record a tax provision on its taxable
income for federal and state corporate income taxes. Transaction costs of the
conversion, estimated to be $6,900, will be recorded by the Partnership in the
consolidated statement of income prior to the conversion. The Corporation will
incur a make-whole penalty after the conversion, estimated at $5,100, related to
the repayment of its existing senior notes with borrowing under new credit
facilities.
The unaudited pro forma financial information has been prepared based on the
historical financial statements of the Partnership as if the proposed
transaction had occurred at the beginning of the periods presented for the
consolidated statements of income and as of the date presented for the balance
sheet. The incremental deferred tax benefits have not been included in the pro
forma income statement due to their non-recurring nature. In addition,
adjustments are included in the pro forma statements of income to exclude
non-recurring transactions related to the sale of divisions in 1995 in order to
show pro forma financial statements on a corporate basis which are more
representative of ongoing operations.
F-7
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated September 30, 1996:
A. Reclassify cash to replacement credit facilities; all excess cash is
assumed to reduce current borrowing.
B. Upon conversion, under SFAS No. 109, the Corporation will be entitled
to record additional deferred tax assets not previously available to
the Partnership due to its partnership status. These deferred tax
assets represent temporary differences between book and tax bases of
assets and liabilities which are expected to reverse before December
31, 1997. The net incremental deferred tax asset of $7,504 (current and
long-term portion) is recorded on a pro forma basis as a credit to
corporate accumulated deficit upon conversion. Additionally, the
Corporation may receive a step-up in the tax basis of assets and
liabilities acquired from the Partnership and, as a result, would
record additional deferred tax assets at the conversion date. Should
the transaction be approved, the actual amount of the aggregate
additional deferred tax assets will be calculated based on temporary
differences existing at the date of conversion to a C corporation. The
following is the composition of the pro forma adjustment to historical
deferred tax assets at September 30, 1996:
<TABLE>
<CAPTION>
Partnership Pro Forma
Current deferred tax assets: (Unaudited) Adjustment Corporation
----------- ---------- -----------
<S> <C> <C> <C>
Inventory $ -- $ 3,939 $ 3,939
Self-insurance liability -- 1,533 1,533
Accounts receivable -- 679 679
Vacation pay liability -- 594 594
Other current liabilities -- 1,289 1,289
Other current items, net -- (22) (22)
---------- ----------- ----------
Net current deferred tax assets $ -- $ 8,012 $ 8,012
========== =========== =========
Long-term gross deferred
tax assets:
Deferred compensation $ 3,622 $ (158) $ 3,464
Other items, net 475 (340) 135
----------- ----------- ---------
4,097 (498) 3,599
Valuation allowance for long-
term deferred tax assets (350) (10) (360)
----------- ----------- ----------
Net long-term deferred tax assets $ 3,747 $ (508) $ 3,239
=========== =========== =========
</TABLE>
C. Charge the Class B capital account for an estimated $6,900 of
transaction costs to be recorded by the Partnership in connection with
the conversion and $5,100 of prepayment penalties on existing senior
notes which will be incurred by the Corporation after the conversion.
Historical prepaid transaction costs of $467 are eliminated from other
current assets and offset against the incremental debt increase for the
transaction and make-whole amounts, resulting in a net increase in debt
of $11,533.
F-8
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated September 30, 1996,
continued:
D. Write-off historical balance of deferred financing fees of $197, which
relate to Series A and B Senior Notes, to the Class B capital account.
Capitalize estimated deferred financing fees of $625 related to
commitment fees on the proposed replacement credit facilities. Deferred
financing fees are included in other non-current assets.
E. Reclassify outstanding Series A and Series B Senior Note principal
balances totalling $70,329 (current and long-term portions) and accrued
interest of $2,081 to replacement credit facilities, assuming
outstanding senior note balance is repaid in full as part of the
transaction.
F. Record payment of $915 of the historical liability of $1,934 for
distributions payable as of September 30, 1996 and reclassify $1,019 of
this liability (the portion related to the monthly Class A
distribution) to dividends payable for the new trust preferred
securities.
G. Record payment of the management fee payable to GP at September 30,
1996.
H. Issue 4,217,837 shares of Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Debentures ("Preferred Interests") with a
liquidation value of $25.00, in exchange for all 11,099,573 Class A
limited partnership interests, which amounts to .38 preferred interests
for each Class A interest. The preferred interests of the Corporation
will be credited $105,446 for the newly issued shares. Holders of Class
A interests will also receive $1.30 of cash per A interest, or $14,429
in the aggregate. The Class A capital account will be charged for the
total value of the Class A exchange package aggregating $119,875, with
the difference between this amount and the stated value of the account
at September 30, 1996 of $67,642, or $52,233, charged against
accumulated deficit of the Corporation. The preferred interests have
certain equity characteristics but creditors' rights, thereby being
classified between liabilities and stockholder's equity on the balance
sheet.
I. Authorize 1,000,000 shares of preferred stock, with a par value of
$0.01, none being issued. Authorize 20,000,000 shares and issue
6,418,936 shares of common stock with a par value of $0.01. Holders of
Class B limited partnership interests will be issued 5,418,937 shares
of common stock upon conversion, in exchange for all 21,675,756
outstanding Class B interests, which amounts to .25 common shares for
each Class B interest. The GP will be issued 1,000,000 shares of common
stock (after the effect of the reverse split) in exchange for their
entire GP interests in the Partnership and the Operating Partnership.
Common stock of the new corporation will be credited $64 from the Class
B capital account for the newly issued shares. Class B treasury stock
of $1,514 will be closed to the Class B capital account and accumulated
deficit of the Corporation will be credited with the remainder of the
Class B limited partners' capital account of $21,521. Minority interest
of $1,035 and the GP's capital account of $1,024 will be credited to
corporate accumulated deficit. The cumulative foreign currency
translation adjustment of $1,288 will be charged to a separate item of
stockholder's equity of the Corporation.
F-9
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
3. Pro Forma Adjustments to Consolidated Statements of Income:
A. Reduce operating expenses for elimination of the management fee to the
GP.
B. Eliminate results of operations from divisions sold as a non-recurring
item.
C. Adjust interest expense, net, to reflect incremental debt incurred as a
result of the transaction, offset by an estimated reduction in interest
rates of approximately 150 basis points.
D. Eliminate minority interest expense due to the exchange of the GP's 1%
minority interest for common stock.
E. Record an expense for the monthly distribution on preferred interests
based on an annual yield of 11.6%, resulting in an approximate charge
of $1,109 per month.
F. Eliminate gain(s) on sale of divisions as a non-recurring item.
G. Adjust the provision or benefit for income taxes to reflect current and
deferred income tax expense or benefit that would be expected under
corporate form. Under partnership form, the Partnership books a current
provision for state partnership and foreign taxes only and a deferred
tax benefit relating only to those temporary differences between book
and tax assets that are expected to reverse after December 31, 1997,
when the Partnership would begin paying federal corporate income taxes.
For pro forma purposes, the assumed combined federal and state
corporate tax rate utilized is 39.875%, applied to taxable income.
<TABLE>
<CAPTION>
Pro forma adjustments Nine Months Ended
to provision (benefit) ------------------------------------ Year Ended
for income taxes 9/30/96 9/30/95 12/31/95
---------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Eliminate state
partnership taxes $ (239) $ (412) $ (608)
Record current tax
provision based
on taxable income 6,231 6,659 7,975
Adjustment to deferred
portion 300 (98) (22)
---------- ---------- -----------
Total pro forma adjustments $ 6,292 $ 6,149 $ 7,345
========== ========== ==========
</TABLE>
H. Eliminate extraordinary loss due to the early extinguishment of debt as
a non-recurring item.
F-10
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1996 December 31, 1995
ASSETS (Unaudited) 1995 (Unaudited)
------ ------------- ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,729 $ 5,900 $ 9,249
Accounts and notes receivable, net 86,693 75,824 83,255
Inventories 97,088 96,022 91,064
Other current assets 4,630 4,742 3,586
--------- --------- ---------
Total current assets 190,140 182,488 187,154
Property and equipment, net 20,267 20,181 21,605
Goodwill 44,589 44,250 43,912
Other intangibles 821 1,312 1,489
Deferred income taxes 3,747 2,844 2,709
Cash surrender value of
life insurance policies 3,163 3,009 --
Other assets 576 507 698
--------- --------- ---------
Total assets $ 263,303 $ 254,591 $ 257,567
========= ========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable, trade $ 52,837 $ 42,437 $ 45,955
Notes payable 2,021 2,753 2,145
Current portion of senior notes 6,395 6,395 4,795
Distributions payable to partners 1,934 7,819 1,638
Accrued expenses:
Salaries and wages 5,546 5,109 5,263
Interest on senior notes 2,081 520 2,223
Management fee due the general partner 2,491 3,330 2,491
Income and other taxes 2,864 3,398 3,182
Other accrued expenses 12,495 14,886 13,331
--------- --------- ---------
Total current liabilities 88,664 86,647 81,023
Senior notes 63,934 63,934 70,330
Deferred compensation 8,300 7,829 7,547
Other liabilities 1,245 1,238 485
--------- --------- ---------
Total liabilities 162,143 159,648 159,385
--------- --------- ---------
Commitments and contingencies
Partners' capital:
General partner 1,024 963 980
Limited partners:
Class A interests 67,642 67,642 67,642
Class B interests 35,296 29,252 31,074
Class B interests held in treasury (1,514) (1,514) (1,514)
Cumulative foreign currency
translation adjustment (1,288) (1,400) --
--------- --------- ---------
Total partners' capital 101,160 94,943 98,182
--------- --------- ---------
Total liabilities and
partners' capital $ 263,303 $ 254,591 $ 257,567
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-11
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995*
<S> <C> <C>
Net sales $ 489,517 $ 455,501
Cost of sales 291,920 269,623
----------- -----------
Gross profit 197,597 185,878
------------ -----------
Operating expenses:
Selling, general and administrative expenses 166,059 154,148
Management fee to general partner 2,491 2,491
Depreciation 2,684 2,531
Amortization 1,449 1,481
------------ -----------
Total operating expenses 172,683 160,651
------------ -----------
Net results of operations from
divisions sold (note 3) -- 396
------------ -----------
Income from operations 24,914 25,623
Interest income 60 342
Interest expense 5,207 5,623
Other income (expense), net 470 (413)
Gain on sale of divisions (note 3) -- 16,500
------------ -----------
Income before provision for income taxes 20,237 36,429
Provision (benefit) for income taxes (372) 362
------------ -----------
Income before extraordinary loss 20,609 36,067
Extraordinary loss from early extinguishment
of debt (note 4) -- (629)
------------ ------------
Net income $ 20,609 $ 35,438
============ ===========
Net income allocated to partners:
General partner $ 206 $ 354
----------- -----------
Class A limited partners $ 9,157 $ 9,157
----------- -----------
Class B limited partners $ 11,246 $ 25,927
----------- -----------
Earnings per Limited partnership interest:
Income before extraordinary loss
- Class A interest $ 0.82 $ 0.82
- Class B interest $ 0.52 $ 1.23
Extraordinary loss
- Class A interest -- --
- Class B interest -- $ (0.03)
Net income
- Class A interest $ 0.82 $ 0.82
- Class B interest $ 0.52 $ 1.20
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573 11,099,573
- Class B interests 21,675,746 21,675,746
</TABLE>
*Restated for comparative purposes.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-12
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995 *
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,609 $ 35,438
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization:
- Existing divisions 4,133 2,799
- Divested divisions -- 1,515
Gain on sale of division -- (16,500)
Extraordinary loss -- 629
Provision for deferred compensation 898 2,058
Deferred income tax benefit (903) (565)
Changes in current operating items:
Increase in accounts and notes receivable (10,580) (11,097)
Increase in inventories (2,132) (6,945)
Decrease in other current assets 112 2,192
Increase in accounts payable 10,342 4,160
Increase in accrued interest 1,561 1,562
Decrease in other accrued liabilities (3,675) (8,218)
Other items, net 258 655
------------ -----------
Net cash provided by operating activities 20,623 7,683
------------ -----------
Cash flows from investing activities:
Proceeds from sale of divisions -- 37,786
Proceeds from sale of property and equipment 39 762
Payment for purchase of assets (673) --
Investment in life insurance policies (100) --
Capital expenditures (2,713) (3,471)
Other, net (80) (219)
------------ ------------
Net cash (used for) provided by
investing activities (3,527) 34,858
------------ -----------
Cash flows from financing activities:
Early extinguishment of senior notes -- (14,175)
Prepayment penalties and related costs -- (629)
Cash distributions to partners (20,535) (22,777)
Repayments under other credit facilities, net (732) (564)
Principal payments under
capitalized lease obligations -- (50)
------------ ------------
Net cash used for financing activities (21,267) (38,195)
------------ ------------
Net (decrease) increase in cash
and cash equivalents (4,171) 4,346
Cash and cash equivalents at beginning of period 5,900 4,903
------------ -----------
Cash and cash equivalents at end of period $ 1,729 $ 9,249
============ ===========
</TABLE>
*Reclassified for comparative purposes.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-13
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource L.P. (the "Company"), formerly Sun Distributors L.P., and its
subsidiary partnership, SDI Operating Partners, L.P. (the "Operating
Partnership"). All significant intercompany balances and transactions have been
eliminated. The Company is one of the largest wholesale distributors of
industrial products and related services in the United States. The Company's
three business segments are Industrial Services, Retail Hardware Merchandising
and Retail Glass.
The accompanying consolidated financial statements and related notes are
unaudited, except for the balance sheet as of December 31, 1995; however, in
management's opinion all adjustments (consisting of normal recurring accruals)
considered necessary for the fair presentation of financial position, income and
cash flows for the periods shown have been reflected. Results for the interim
period are not necessarily indicative of those to be expected for the full year.
Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to Form 10-Q requirements although the
Company believes that disclosures are adequate to make the information presented
not misleading. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's report on Form 10-K for the year ended December 31,
1995.
2. Related Party Transaction:
In March 1996, the Operating Partnership paid the 1995 management fee of $3,330
due the General Partner, SDI Partners I, L.P. (the "GP").
3. Acquisitions/Divestitures:
On April 11, 1996, the Company's Industrial Services segment, through its Warren
Fluid Power division, purchased certain assets of Hydraulic Depot, Inc., of
Reno, Nevada, for an aggregate purchase price of $700. Annual sales of Hydraulic
Depot, Inc. are approximately $2,500.
On January 3, 1995, the Operating Partnership sold certain assets of its Dorman
Products division for a cash consideration, net of expenses, of approximately
$36,600 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $16,500 or $.75 per Class B interest included in the consolidated
statement of income for the nine months ended September 30, 1995. The aggregate
assets sold, net of liabilities, in connection with the sale of Dorman Products
was approximately $20,100.
F-14
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Acquisitions/Divestitures (continued):
For comparison purposes the Company has reclassified the results of operations
of its divested Downey Glass division (sold on October 27, 1995) for the three
and nine months ended September 30, 1995, to a separate component of income from
operations in the Consolidated Statement of Income for the three and nine months
ended September 30, 1995. Downey's sales, gross profit and operating income for
the three and nine months ended September 30, 1995, were $9,100 and $26,300,
$2,900 and $8,000 and $300 and $400, respectively. Total assets for Downey were
$9,996 at September, 1995, and are included in the Consolidated Balance Sheet as
of September 30, 1995.
4. Extraordinary Loss:
During the first quarter of 1995, the Company recorded an extraordinary loss of
$629 or approximately $.03 per Class B limited partnership interest due to early
extinguishment of a portion of the Company's Series A 9.08% and Series B 8.44%
senior notes. The extraordinary loss consists entirely of prepayment penalties.
(See Note 5, Lines of Credit and Long-Term Debt).
5. Lines of Credit and Long-Term Debt:
As of September 30, 1996, the Operating Partnership had $42,564 available under
its $50,000 Bank Credit Agreement which provides revolving credit for working
capital purposes and acquisitions. The $7,436 outstanding under the Bank Credit
Agreement consisted of letter of credit commitments only.
In addition, an indirect, wholly-owned Canadian subsidiary of the Operating
Partnership has a $2,500 Canadian dollar line of credit for working capital
purposes of which $829 USD was outstanding at September 30, 1996.
In connection with the sale of the Electrical Group divisions in December 1994
and the Dorman Products division in January 1995, the Operating Partnership was
required to offer the holders of its senior notes prepayment in the amount of
$14,175 which the noteholders accepted. Prepayment of the senior notes was made
on March 14, 1995, including accrued interest thereon of $360 and a prepayment
penalty of $629. (See Note 4 - Extraordinary Loss.)
F-15
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
6. Contingencies:
The Operating Partnership is a party to litigation in which the buyer of its
Dorman Products division claims that certain misrepresentations were made in
connection with the purchase. The buyer seeks damages of approximately $21,000.
In the opinion of management, the ultimate resolution of this matter will not
have a material effect on the consolidated financial position, operations or
cash flows of the Company.
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial position, operations or cashflows of the Company.
F-16
<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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, 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.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 8, 1996
F-17
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1995 1994
------------ ----------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,900 $ 4,903
Accounts and notes receivable, net of
allowance for doubtful accounts of
$1,827 and $2,472, respectively 75,824 77,521
Inventories 96,022 92,653
Other current assets 4,742 6,703
----------- -----------
Total current assets 182,488 181,780
Property and equipment, net 20,181 27,514
Goodwill (net of accumulated amortization
of $11,739 and $11,259, respectively) 44,250 48,458
Other intangibles (net of accumulated
amortization of $13,724 and $14,396, respectively 1,312 2,477
Deferred income taxes 2,844 2,144
Cash surrender value of life insurance policies 3,009 --
Other assets 507 3,813
----------- -----------
Total assets $ 254,591 $ 266,186
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 42,437 $ 44,435
Notes payable 2,753 2,709
Current portion of senior notes 6,395 18,970
Current portion of capitalized lease obligations -- 387
Distributions payable to partners 7,819 7,774
Accrued expenses:
Salaries and wages 5,109 7,131
Management fee due the general partner 3,330 3,330
Income and other taxes 3,398 3,338
Other accrued expenses 15,406 17,646
----------- -----------
Total current liabilities 86,647 105,720
Senior notes 63,934 70,330
Capitalized lease obligations -- 4,451
Deferred compensation 7,829 6,398
Other liabilities 1,238 68
----------- -----------
Total liabilities 159,648 186,967
----------- -----------
Commitments and contingencies
Partners' capital:
General partner 963 791
Limited partners:
Class A interests 67,642 67,642
Class B interests 29,252 12,300
Class B interests held in treasury (1,514) (1,514)
Cumulative foreign currency translation adjustment (1,400) --
------------ -----------
Total partners' capital 94,943 79,219
------------ -----------
Total liabilities and partners' capital $ 254,591 $ 266,186
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-18
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Net sales $ 599,865 $ 558,754 $ 493,437
Cost of sales 355,004 331,609 292,878
--------- --------- ---------
Gross profit 244,861 227,145 200,559
--------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 205,180 189,252 168,839
Management fee to general partner 3,330 3,330 3,330
Depreciation 3,358 3,249 3,556
Amortization 1,961 2,143 2,496
--------- --------- ---------
Total operating expenses 213,829 197,974 178,221
--------- --------- ---------
Net results of operations from
divisions sold (note 5) 270 8,588 6,637
--------- --------- ---------
Income from operations 31,302 37,759 28,975
Interest income 412 66 85
Interest expense 7,332 9,956 9,876
Other income (expense), net 256 (1,748) 191
Gain on sale of division (note 5) 20,644 3,523 --
--------- --------- ---------
Income before provision for income taxes 45,282 29,644 19,375
Provision for income taxes 537 100 869
--------- --------- ---------
Income before extraordinary loss 44,745 29,544 18,506
Extraordinary loss from early extinguishment
of debt (note 4) (629) -- --
---------- --------- ---------
Net income $ 44,116 $ 29,544 $ 18,506
========== ========= =========
Net income allocated to partners:
General partner $ 441 $ 295 $ 185
--------- --------- ---------
Class A limited partners $ 12,210 $ 12,210 $ 12,210
--------- --------- ---------
Class B limited partners $ 31,465 $ 17,039 $ 6,111
--------- --------- ---------
Earnings per Limited partnership interest:
Income before extraordinary loss
- Class A interest $ 1.10 $ 1.10 $ 1.10
- Class B interest $ 1.48 $ 0.79 $ 0.28
Extraordinary loss
- Class A interest -- -- --
- Class B interest $ (0.03) -- --
Net income
- Class A interest $ 1.10 $ 1.10 $ 1.10
- Class B interest $ 1.45 $ 0.79 $ 0.28
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573 11,099,573 11,099,573
- Class B interests 21,675,746 21,675,746 21,675,746
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-19
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 44,116 $ 29,544 $ 18,506
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization:
- Existing divisions 5,319 5,392 6,052
- Divested divisions 338 1,750 1,902
Decrease in cash value of life insurance 58 -- --
Gain on sale of divisions (20,644) (3,523) --
Extraordinary loss 629 -- --
Provision for deferred compensation 2,340 3,187 721
Deferred income tax expense (benefit) (700) (734) 208
Changes in current operating items:
Increase in accounts and notes receivable (3,666) (11,783) (4,855)
Increase in inventories (8,209) (9,436) (10,689)
Decrease (increase) in other current assets 857 347 (815)
Increase in accounts payable 2,531 1,865 10,542
Increase (decrease) in accrued interest (141) (42) 516
Increase (decrease) in other
accrued liabilities (6,062) 4,836 2,415
Other items, net 284 (3,699) (932)
---------- ---------- ----------
Net cash provided by operating activities 17,050 17,704 23,571
---------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of divisions 44,873 26,561 --
Proceeds from sale of property and equipment 757 724 384
Payment for purchase of assets (7,385) -- --
Investment in life insurance policies (3,067) -- --
Capital expenditures (4,299) (4,263) (3,734)
Other, net (93) 228 55
---------- ---------- ---------
Net cash provided by (used for)
investing activities 30,786 23,250 (3,295)
---------- ---------- ----------
Cash flows from financing activities:
Repayment of senior notes (18,971) (5,700) --
Repayments under the bank credit agreement, net -- (10,000) (5,000)
Prepayment penalties and related costs (629) -- --
Cash distributions to partners (27,218) (20,357) (14,940)
Borrowings (repayments) under other
credit facilities, net 44 (702) 817
Principal payments under capitalized
lease obligations (65) (619) (618)
Other, net -- -- 47
---------- ---------- ---------
Net cash used for financing activities (46,839) (37,378) (19,694)
---------- ---------- ----------
Net increase in cash and cash equivalents 997 3,576 582
Cash and cash equivalents at beginning of period 4,903 1,327 745
---------- ---------- ---------
Cash and cash equivalents at end of period $ 5,900 $ 4,903 $ 1,327
========== ========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-20
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
Cumulative
Foreign
Currency
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
Net income 441 12,210 31,465 -- -- 44,116
Cash distributions paid and/or
declared to partners (269) (12,210) (14,513) -- -- (26,992)
Cumulative foreign currency
translation adjustment -- -- -- -- (1,400) (1,400)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 $ 963 $ 67,642 $ 29,252 $ (1,514) $ (1,400) $ 94,943
========= ========= ========= ========= ========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-21
<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.
Nature of Operations:
The Company is one of the largest wholesale distributors of industrial products
and related services in the United States. The Company's three principal lines
of business are: (1) industrial products and services, primarily maintenance and
fluid power products and inventory management services sold to industrial
customers for machine and plant maintenance and for manufacturing of original
equipment; (2) retail merchandising products and services, primarily fasteners
and related products sold to retail hardware stores; and (3) retail glass
products and services sold to construction and retail markets. Based on net
sales of existing divisions for the year ended December 31, 1995, the Industrial
Services Segment provides approximately 71% of the Company's sales through its
Sun Technology Services divisions (48% of net sales) and the Sun Inventory
Management Company ("SIMCO") divisions (23% of net sales). The Retail
Merchandising and Retail Glass Services Segments provide approximately 14% and
15%, respectively, of the Company's net sales.
Although its sales are primarily industrially-based, 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, 1995. The Company's products and services are
sold throughout all 50 states as well as in Canada and Mexico. Foreign sales
account for less than 5% of total revenues. The average single sale during the
year ended December 31, 1995 was less than three hundred dollars. Sales
performance is tied closely to the overall performance of the non-defense-goods
producing sector of Gross Domestic Product in the United States.
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.
F-22
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Property and Equipment:
Property and equipment, including assets acquired under capital leases, is
carried at cost and includes expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold, or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations.
Depreciation:
For financial accounting purposes, depreciation, including that related to plant
and equipment acquired under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets, generally three to
twenty-five years, or, if shorter, over the terms of the related leases.
Goodwill and Other Intangible Assets:
Goodwill related to the excess of acquisition cost over the fair value of net
assets acquired is amortized on a straight-line basis over forty years. Other
intangible assets arising principally from acquisitions by the Operating
Partnership are amortized on a straight-line basis over periods ranging from
three to ten years.
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.
Statement of Financial Accounting Standards ("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 or benefit for state and federal
income taxes is reflected in the accompanying consolidated statements of income.
F-23
<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:
Certain employees are covered under profit-sharing retirement plans ("defined
contribution plans") for which contributions are determined on an annual basis
in accordance with the requirements of each plan.
Defined benefit plan contributions covering certain employees are funded, at a
minimum, in accordance with the requirements of the Employee Retirement Income
Security Act of 1974, as amended.
In accordance with collective bargaining agreements, annual contributions to
multi-employer pension plans are made. These contributions, which are based on
fixed contributions per month for each hour worked, are charged to income as
incurred.
Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan.
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.
Translation of Foreign Currencies:
The translation of applicable foreign-currency-based financial statements into
U.S. dollars is performed for balance sheet accounts using exchange rates in
effect at the balance sheet date and for revenue and expense accounts using an
average exchange rate during the period. The cumulative foreign currency
translation adjustment was included in non-current liabilities prior to 1995. In
1995 such amount has been classified as a separate component of partner's
capital.
Exchange adjustments resulting from foreign currency transactions are recognized
in net income and were immaterial for the three years ending December 31, 1995.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-24
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
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, 1995, are held as follows:
Class A Class B
Interests Interests
--------- ---------
Public Investors 11,010,035 ( 99.2%) 11,637,103 ( 53.7%)
Lehman Holdings and
Affiliates -- 5,896,678 ( 27.2%)
Executive Officers and
Directors (a) 89,538 ( 0.8%) 4,141,965 ( 19.1%)
------------------- -------------------
Total 11,099,573 (100.0%) 21,675,746 (100.0%)(b)
=================== ======================
(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, 1995.
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.
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 15, 1995, the Company declared a priority
return distribution for the month of January 1996 in the amount of $1,038 or
$.091666 per Class A interest payable January 31, 1996, to holders of record
December 29, 1995. The Class A capital account as of December 31, 1995 and 1994,
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 1995, 1994, and 1993, federal taxable income
per Class A interest amounted to $1.10 per year, all of which represented
ordinary income. Any remaining income after the Class A allocation is allocated
to the holders of Class B interests. The holders of Class B interests receive an
allocable share of loss until the Class B capital account (as defined in the
partnership agreement) of each holder is reduced to zero. Thereafter, any
unallocated loss is allocated to the holders of Class A interests.
F-25
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
For 1995, 1994 and 1993, federal taxable income amounted to $1.6923, $1.1146 and
$.5411 per Class B interest, respectively. Federal taxable income in 1995
consists of ordinary income of $.5326 per Class B interest and a combined
capital gain of $1.1597 per Class B interest related to the sale of the Dorman
Products and Downey Glass divisions (see Note 5, Acquisitions/Divestitures).
Federal taxable income in 1994 consisted of ordinary income of $.7069 per Class
B interest and a capital gain of $.4077 per Class B interest related to the sale
of the Electrical Products Group divisions. In 1993, federal taxable income
consisted of ordinary income only. The Class B capital account as of December
31, 1995 and 1994, was approximately $2.54 and $1.52 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 1995, the Class B Tax
Distribution amounted to $14,807 or $.6695 per Class B interest which was
partially paid in the amount of $.02 per Class B interest per month for the
period January through December 1995 and a partial distribution of $.15 paid on
April 10, 1995 to holders of record on December 30, 1994, related to the taxable
gain on the sale of the Dorman Products division on January 3, 1995. On March
29, 1996, the Partnership intends to distribute the balance of the tax
distribution due of $.2795 per Class B interest, as follows: approximately
$.1745 to holders of record on December 30, 1994 for the balance due on the
taxable gain on the sale of Dorman Products; $.00197 per month to holders of
record of Class B interests on the first day of the month during January through
December 1995 for the balance due on ordinary income; and $.0814 to holders of
record on September 29, 1995 related to the taxable gain on the sale of the
Downey Glass division (see Note 5, Acquisitions/Divestitures).
For 1994, the Class B Tax Distribution amounted to $10,895 or $.492619 per Class
B interest which was partially paid in the amount of $.009352 per Class B
interest per month for the period January through March 1994 and $.02 per Class
B interest per month during the period April through December 1994. The monthly
tax distributions were paid to holders of record on the first day of each month
during 1994 and aggregated $.208056 per Class B interest for the full year 1994.
On March 31, 1995, the Partnership paid the balance of the tax distribution due
of $.284563 per Class B interest, as follows: approximately $.01981 per month to
holders of record of Class B interests on the first day of the month during
January through March 1994, $.00916 per month for April through November 1994,
and $.15185 for December 1994 which includes $.14269 related to the capital gain
on the sale of the Electrical Products Group divisions. (See Note 5,
Acquisitions/ Divestitures.)
For 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.
On December 15, 1995, the Company declared a Class B Tax Distribution for the
month of January 1996 in the amount of $442 or $.02 per Class B interest payable
January 31, 1996, to holders of record on December 29, 1995.
F-26
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
4. Extraordinary Loss:
In 1995, the Company recorded an extraordinary loss of $629 or approximately
$.03 per Class B limited partnership interest, due to early extinguishment of a
portion of the Operating Partnership's Series A 9.08% and Series B 8.44% Senior
Notes (See Note 9, Long-Term Debt).
5. Acquisitions/Divestitures:
In November 1995, the Company's Hillman Fastener division purchased certain
assets of the Retail division of Curtis Industries of Eastlake, Ohio, for an
aggregate purchase price of $7,457 and the assumption of certain liabilities.
The aggregate purchase price includes goodwill of $2,051. This acquisition has
been accounted for as a purchase and, accordingly, the results of operations
have been included in the accompanying consolidated financial statements from
the date of acquisition.
No acquisitions were consummated during 1994 and 1993 as a result of
restrictions on acquisition expenditures imposed by the credit agreements of the
Operating Partnership (See Note 8, Lines of Credit and Note 9, Long-Term Debt).
On October 27, 1995, the Operating Partnership sold certain assets of its Downey
Glass division for a cash consideration, net of expenses, of approximately
$6,237 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $4,144 or $.19 per Class B interest included in the 1995
consolidated statement of income. The aggregate assets sold, net of liabilities,
in connection with the sale of the Downey Glass division was approximately
$2,093.
On January 3, 1995, the Operating Partnership sold certain assets of its Dorman
Products division for a cash consideration, net of expenses, of approximately
$36,600 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $16,500 or $.75 per Class B interest included in the 1995
consolidated statement of income. The aggregate assets sold, net of liabilities,
in connection with the sale of Dorman Products was approximately $20,100.
On December 5, 1994, the Operating Partnership sold certain assets of its
Electrical Products Group divisions for a cash consideration, net of expenses,
of approximately $27,800 (subject to certain post-closing adjustments) and the
assumption of certain liabilities. The Operating Partnership recorded a gain on
the sale in the amount of $3,523 or $.16 per Class B interest included in the
1994 consolidated statement of income. The aggregate assets sold, net of
liabilities, in connection with the sale of the Electrical Products Group
divisions was approximately $24,300.
For comparison purposes the Company has reported the results of operations for
the divisions sold during 1994 and 1995 as a separate component of income from
operations on the Consolidated Statement of Income, and has reclassified prior
periods accordingly. Sales from the divested divisions aggregated $29,077,
$177,107 and $162,270 for the years ended December 31, 1995, 1994 and 1993,
respectively, and have been excluded from net sales reported on the Consolidated
Statement of Income. Total assets for the divested divisions were $37,982 at
December 31, 1994 and are included in the Consolidated Balance Sheets.
F-27
<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 1995, 1994 and 1993 were
$3,330. In March 1995, the Operating Partnership paid $3,330 of the 1994
management fee. 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
1995 management fee due March 31, 1996.
Certain warehouse and office facilities are leased from employees under various
operating leases. Charges to income applicable to these leases totaled $260 in
1995, $405 in 1994, and $367 in 1993. Aggregate future minimum lease obligations
under these leases at December 31, 1995, were $156.
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1995 and 1994:
1995 1994
-------- ------
Land $ 3,319 $ 3,589
Buildings and leasehold improvements 18,048 24,133
Machinery and equipment 16,290 23,526
Furniture and fixtures 9,208 9,316
------- -------
46,865 60,564
Less accumulated depreciation 26,684 33,050
------- -------
$20,181 $27,514
======= =======
8. Lines of Credit:
On December 22, 1992, the Operating Partnership entered into a $50,000 bank
credit agreement with three lenders. This agreement provides borrowings on a
revolving credit basis at interest rates based on the London Interbank Offered
Rate ("LIBOR") plus 1 and 3/4% and prime. Letters of credit commitments are
issued at varying rates. The bank credit agreement's original termination date
of December 22, 1995 has been extended to December 31, 1997. The credit facility
requires a commitment fee of 1/2 of 1% per year on the average daily unused
portion of the commitment and an annual agent's fee. There is no compensating
balance requirement under this facility. The Company had no bank borrowings
outstanding at December 31, 1995, under the bank credit agreement. The $10,103
outstanding balance under the facility at December 31, 1995, represents letter
of credit commitments only.
F-28
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
8. Lines of Credit, continued:
The bank credit agreement contains covenants restricting distributions from the
Operating Partnership to the Company and the GP. Amounts available for
distribution in accordance with the bank credit agreement at December 31, 1995,
were $8,620. 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) the Operating Partnership was required to reduce permanently the
bank revolver commitment under the bank credit agreement by approximately
$13,000. However, the banks waived this permanent reduction and maintained the
existing bank credit commitment of $50,000. For 1995 and future years, the
lenders have agreed to revise certain covenant tests to exclude the impact of
cash distributions to holders of Class B interests related solely to tax gains
on divisions sold.
The Operating Partnership has another credit facility available in the amount of
$500 for letters of credit of which no amount was outstanding at December 31,
1995. The letters of credit commitments are issued at varying rates. This
facility, renewable annually, is not subject to compensating balance
requirements or unused commitment fees.
An indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a
$2,500 Canadian dollar line of credit with a local lender for working capital
purposes of which $463 USD was outstanding at December 31, 1995. 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, 1995 and 1994:
1995 1994
---- ----
Short-term bank borrowings drawn on
working capital lines of credit $ 463 $ 449
Trade notes payable in accordance with
glass inventory financing arrangements 1,474 1,474
Notes payable in accordance with insurance
financing arrangements 816 786
------ ------
$2,753 $2,709
====== ======
The weighted average interest rate on the outstanding notes payable borrowings
at December 31, 1995 and 1994 was 3.01% and 2.84%, respectively.
F-29
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt:
On December 22, 1992, the Operating Partnership issued $95,000 of senior notes
with a final maturity of December 1, 2002, through a private placement with
several institutional investors. The 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
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 $4,796 and $5,700 of principal on
December 1, 1995 and 1994, respectively. This consisted of $3,282 and $3,900 in
Series A notes, and $1,514 and $1,800 in Series B notes in 1995 and 1994,
respectively. Principal repayments required on the senior notes during each of
the five years subsequent to December 31, 1995, are as follows:
Series A Series B
-------- --------
December 1, 1996 $4,375 $2,020
December 1, 1997 4,375 2,020
December 1, 1998 5,468 2,522
December 1, 1999 6,562 3,030
December 1, 2000 8,201 3,786
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), the Operating Partnership was required to offer the
noteholders prepayment of senior notes in the amount of $14,175. The noteholders
accepted the prepayment offer which the Operating Partnership paid on March 14,
1995, including accrued interest thereon of $360 and a prepayment penalty of
$629 (see Note 4, Extraordinary Loss).
The senior note agreement contains covenants restricting distributions from the
Operating Partnership to the 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 is permitted acquisition spending in
1995 and future years of up to $15,000 in any calendar year, absent a default or
event of default as defined in the senior note agreement.
F-30
<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, 1995, the fair value estimate of the Company's senior notes
is approximately $73,000 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, 1995:
Operating
Leases
---------
1996 $ 9,362
1997 7,892
1998 6,086
1999 4,084
2000 3,228
Later years 5,933
-------
Total minimum lease payments $36,585
=======
Total rental expenses for all operating leases amounted to $14,232 in 1995,
$15,153 in 1994, and $13,830 in 1993.
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 amounts charged to income under this plan were $1,186
in 1995 and $850 in 1994. The portion of the Operating Partnership's deferred
compensation liability attributable to this plan is $2,036 as of December 31,
1995.
F-31
<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 $1,135, $2,295 and
$700 in 1995, 1994 and 1993, respectively. During the three years ended December
31, 1995, distributions from the plan amounted to $1,422 in 1995, $240 in 1994,
and $332 in 1993. The deferred compensation liability attributable to the plan
amounted to $6,229 at December 31, 1995 of which $1,160 is included in other
accrued expenses.
Under a former plan, effective through December 31, 1986, certain employees and
officers earned deferred compensation amounts which unconditionally vested at
the rate of 20% per year over the 5-year period following the year in which the
award was earned. Participants of the former plan have elected to defer all
outstanding awards until retirement. Upon a change in control of the Operating
Partnership, participants are entitled to payment of their total account balance
including accrued interest. Amounts charged to income and distributions related
to the former plan for the three years ended December 31, 1995 were immaterial.
The portion of the Operating Partnership's deferred compensation liability
attributable to this plan is $724 at December 31, 1995.
In December 1995, the Operating Partnership established a Rabbi trust to assist
in funding the liabilities of the Deferred Compensation plans described above.
This trust purchased insurance policies on the lives of certain participants in
the Deferred Compensation plans. The Operating Partnership is the sole
beneficiary of these insurance policies. The cash surrender value of these
insurance policies was $3,009 at December 31, 1995.
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 to operations under retirement benefit plans are as follows:
1995 1994 1993
---- ---- ----
Defined contribution plans $2,693 $3,498 $2,574
Multi-employer pension plans 374 362 422
Defined benefit plans 259 266 144
------ ------ ------
Total $3,326 $4,126 $3,140
====== ====== ======
Management estimates that its share of unfunded vested liabilities under
multi-employer pension plans is not material.
F-32
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits, continued:
For the years ended December 31, 1995, 1994 and 1993, the costs of
post-retirement benefits charged to income were $81, $115 and $347,
respectively. The 1995 and 1994 charges were determined in accordance with SFAS
No. 106 on an accrual basis with costs recognized in prior years upon payment of
the post-retirement obligations. The Company's unrecognized accumulated
post-retirement benefit liability as of December 31, 1995, 1994 and 1993 was
$705, $744 and $840, respectively.
13. Income Taxes:
Deferred tax assets are comprised of the following at December 31, 1995 and
1994:
1995 1994
---- ----
Gross deferred tax assets:
Deferred compensation $2,936 $2,123
Prepayment penalties related to
early extinguishment of debt 299 346
------ ------
3,235 2,469
Valuation allowance for deferred
tax assets (391) (325)
------- -------
Net deferred tax asset $2,844 $2,144
======= ======
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,
1995 or December 31, 1994.
As of December 31, 1995, the Company's tax basis of its assets and liabilities
was greater than its financial statement basis by approximately $72,000.
The provision (benefit) for income taxes consists of the following:
1995 1994 1993
-------- ------- ------
Current income taxes
State and local $ 608 $ 276 $ 260
Foreign 629 558 401
------- ------ -----
1,237 834 661
------- ------ -----
Deferred income taxes
Federal (627) (657) 186
State and local (73) (77) 22
-------- ------- -----
(700) (734) 208
-------- ------- -----
Total income taxes $ 537 $ 100 $ 869
======== ======= =====
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, 1995, the Company had outstanding performance
and bid bonds aggregating $911. As required by sureties, the Company has standby
letters of credit outstanding in the amount of $650 as of December 31, 1995.
F-33
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
14. Commitments and Contingencies, continued:
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, 1995, the
Company had outstanding letters of credit in the aggregate amount of $4,902
related to these activities.
As of December 31, 1995 the Company has guaranteed approximately $1,773 worth of
lease obligations, principally relating to businesses previously disposed. The
Company is not currently aware of any existing conditions which would cause a
financial loss related to these guarantees.
Under the Company's insurance programs, commercial umbrella coverage is obtained
for catastrophic exposure and aggregate losses in excess of normal claims.
Beginning in 1991, the Company has retained risk on certain expected losses from
both asserted and unasserted claims related to 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, 1995, the Company has provided insurers letters of credit
aggregating $4,551 related to certain insurance programs.
On February 27, 1996, a lawsuit was filed against the Operating Partnership by
the buyer of its Dorman Products division for alleged misrepresentation of
certain facts by the Company upon which the buyer based its offer to purchase
Dorman. The complaint seeks damages of approximately $21,000. In the opinion of
management, the ultimate resolution of this matter will not have a material
effect on the consolidated financial position, operations or cash flows of the
Company.
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial position, operations or cash flows of the Company.
15. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 7,304 $10,097 $ 9,412
------- ------- -------
Income taxes $ 1,190 $ 792 $ 955
------- ------- -------
Supplemental schedule of non-cash investing activities:
Assumed liabilities in connection with
the purchase of assets (See Note 5,
Acquisitions/Divestitures) $ 232 $ -- $ --
------- ------- -----
</TABLE>
F-34
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
16. Quarterly Data (unaudited):
In 1995 the Company reclassified results of operations for divisions sold to a
separate component of income from operations on the Consolidated Statement of
Income (see Note 5, Acquisitions/Divestitures). For comparability, quarterly
sales and gross profit information previously reported have been restated
herewith:
<TABLE>
<CAPTION>
1995 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales, as reported on Form 10-Q $154,792 $163,820 $163,214 $ N/A
Less net sales, divisions sold 8,385 8,843 9,097 N/A
-------- -------- -------- --------
Net sales 146,407 154,977 154,117 144,634
Gross profit, as reported on Form 10-Q 61,441 65,902 66,510 N/A
Less gross profit, divisions sold 2,264 2,802 2,909 N/A
-------- -------- -------- --------
Gross profit 59,177 63,100 63,601 $ 58,983
Income before extraordinary loss 19,862 8,377 7,828 8,678
Extraordinary loss (Note 4) (629) -- -- --
Net income 19,233 8,377 7,828 8,678
Earnings per limited partnership interest:
Income before extraordinary loss:
- Class A $.27 $.28 $.27 $.28
- Class B $.77 $.24 $.22 $.25
Extraordinary loss:
- Class A $ -- $ -- $ -- $ --
- Class B $(.03) $ -- $ -- $ --
Net Income:
- Class A $.27 $.28 $.27 $.28
- Class B $.74 $.24 $.22 $.25
1994
Net sales, as reported on Form 10-Q* $175,109 $189,360 $192,547 $178,845
Less net sales, divisions sold 42,455 45,991 48,023 40,638
-------- -------- -------- --------
Net sales 132,654 143,369 144,524 138,207
Gross profit, as reported on Form 10-Q* 67,457 72,019 73,486 71,114
Less gross profit, divisions sold 14,193 14,112 14,979 13,647
-------- -------- -------- --------
Gross profit 53,264 57,907 58,507 57,467
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
</TABLE>
*Fourth Quarter as reported on Form 10-K for the year ended December 31, 1994.
F-35
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
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
sales and trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different industries and geographies.
F-36
<PAGE>
EXHIBIT A
GLOSSARY OF DEFINED TERMS
A Interests Class A limited partnership interests in
the Partnership including depositary
receipts therefor.
Appointment Event When the Trust has failed to make full
distributions on the Preferred
Securities for 18 consecutive months or
an Event of Default under the
Declaration occurs.
B Interests Class B limited partnership interests in
the Partnerships including depositary
receipts therefor.
B Tax Distribution Distribution to B Interests from Cash
Available for Distribution equal to the
product of (i) 125% of the then
applicable maximum Federal income tax
rate for individuals and (ii) the
taxable income allocable to the B
Interests.
Business Trust Act Delaware Business Trust Act.
Cash Available for Distribution All cash receipts of the Partnership
less cash used to pay or establish a
reserve for expenses.
Code Internal Revenue Code of 1986, as
amended.
Common Stock Common Stock, par value $.01 per share,
of the Corporation. Common Securities
Common Securities of the Trust.
Conversion The conversion of the Partnership to
corporate form as generally described in
this Proxy Statement/Prospectus and
related transactions entered into
pursuant to the Conversion Agreement.
Conversion Agreement Agreement and Plan of Conversion, dated
________, 1996 among the Partnership,
the Operating Partnership, the General
Partner, SunSub A and SunSub B.
Conversion Proposal The proposal to convert the Partnership
to corporate form.
Corporation SunSource Inc., a Delaware corporation.
Creditor Person to whom the Trust owes any debts,
obligations, costs, expenses and taxes.
Declaration Declaration of trust of the Trust.
depositary receipts Depositary receipts for A Interests or B
Interests.
Delaware Trustee
DGCL Delaware General Corporation Law.
A - 1
<PAGE>
Direct Participants
Distributions Payments with respect to the Preferred
Securities.
DTC The Depository Trust Company.
Effective Time The date on which the Conversion will
become effective. The specific date will
be determined by the General Partner and
will be publicly announced no later than
the date of the Special Meeting.
Event of Default Event of Default with respect to the
Trust Securities.
Exchange Act Securities Exchange Act of 1934, as
amended.
Guarantee Payments Payments on distributions guaranteed by
the Corporation pursuant to the
Preferred Securities Guarantee.
General Partner SDI Partners I, L.P., a Delaware limited
partnership.
Indenture Indenture dated as of __________, 1996
between the Corporation and __________,
as Trustee governing the Junior
Subordinated Debentures.
Indenture Event of Default Event of default under the Indenture
with respect to the Junior Subordinated
Debentures.
Indenture Trustee
Indirect
Participants
Interests Limited partnership interests in the
Partnership.
Investment Company The Regular Trustees shall have received
Event a legal opinion that the Trust may be
considered an investment company under
the Investment Company Act of 1940, as
amended.
IRS Internal Revenue Service.
Junior Subordinated Debentures Junior Subordinated Debentures of the
Corporation.
Lehman/SDI Lehman/SDI, Inc., a Delaware
corporation, general partner of the
General Partner.
limited partners Holders of Interests, including holders
that are admitted to the Partnership as
limited partners and holders who are
merely assignees of the Interests.
Liquidation Distribution on dissolution or
Distribution liquidation of the Trust.
Management Fee Management fee payable by the Operating
Partnership to the General Partner of
$3,330,000 annually.
Merger Merger of the Partnership, SunSub A and
SunSub B with and into the Operating
Partnership pursuant to the Conversion
Agreement.
NYSE New York Stock Exchange.
A - 2
<PAGE>
Operating SDI Operating Partners, L.P., a Delaware
Partnership limited partnership.
Operating Amended and Restated Agreement of
Partnership Limited Partnership of the Operating
Agreement Partnership.
Pari passu Equal in priority.
Partners Both the holder of the general partner
interest in the Partnership and holders
of A Interests and B Interests.
Partnership SunSource L.P., a Delaware limited
partnership.
Partnership Amended and Restated Agreement of
Agreement Limited Partnership of the Partnership.
Preferred 11.6% Trust Preferred Securities of the
Securities Trust.
Preferred Securities Guarantee Guarantee by the Corporation on a
subordinated basis of the payment of
distributions on the Preferred
Securities and payments on liquidation
of the Trust and redemption of Preferred
Securities.
Preferred Securities Global
Certificate
Preferred Share Fraction One one-hundredth of a Preferred Share,
carrying voting and dividend rights that
are intended to produce the equivalent
of one share of Common Stock.
Preferred Series A Junior Participating
Shares Preferred Shares, par value $0.01 per
share, of the Corporation.
Priority Return Distribution to A Interests from Cash
Available for Distribution annually of
$1.10 simple cumulative return.
Pro Rata Basis Pro rata to each holder of Trust
Securities according to the aggregate
liquidation amount of the Trust
Securities held by the relevant holder
in relation to the aggregate liquidation
amount of all Trust Securities
outstanding.
Property Trustee CoreStates Bank N.A.
Record Close of business on January , 1997, for
Date the determination of limited partners
entitled to vote at the Special Meeting.
Redemption Price $25 plus accrued and unpaid
distributions on the Preferred
Securities to the date of redemption.
Regular Trustees Three individual trustees of the Trust.
Rights Rights to purchase shares of Preferred
Stock of the Corporation and, in certain
cases, Common Stock of the Corporation,
as described in the Rights Agreement.
SEC Securities and Exchange Commission.
A - 3
<PAGE>
Securities Act Securities Act of 1933, as amended.
Smith Barney Smith Barney, Inc., financial adviser to
the Special Committee.
Special Committee Elected by the Board of Directors of
Lehman/SDI to consider and advise the
entire Board concerning the fairness to
the limited partners of the terms of the
Conversion related to the exchange of
general and limited partner interests in
the Partnership. The members of the
Special Committee are O. Gordon Brewer,
Jr. and Ernest L. Ransome, III.
Special Event A Tax Event or Investment Company Event.
Special Meeting The Special Meeting of the limited
partners of SunSource L.P., to be held
at ___________, Philadelphia,
Pennsylvania on February __, 1997 at
10:00 a.m., local time. At the Special
Meeting, the limited partners will vote
upon the proposed Conversion.
Special Regular Trustee to be elected by holders of
Trustee Preferred Securities if distributions
are in arrears for 18 consecutive months
or there is an Event of Default.
SunSource The Partnership, prior to the
Conversion, and the Corporation, after
the Conversion, including in each case
their respective subsidiaries.
SunSub A
SunSub B
SunSub C
Tax Event The Regular Trustees shall have received
a tax opinion to the effect that the
payment of interest to the Trust may be
taxable to the Trust or interest payable
by the Corporation on the Junior
Subordinated Debentures may not be
deductible by the Corporation for
federal income tax.
Trust SunSource Capital Trust, a Delaware
statutory business trust.
Trust Indenture Act Trust Indenture Act of 1939, as amended.
Trust Securities Preferred Securities and Common
Securities of the Trust.
A - 4
<PAGE>
CONVERSION AGREEMENT
EXHIBIT B
AGREEMENT AND PLAN OF CONVERSION
AGREEMENT AND PLAN OF CONVERSION, dated as of December __, 1996, by and
among SunSource Inc., a Delaware corporation (the "Corporation"); SunSource
L.P., a Delaware limited partnership (the "Partnership"); SDI Operating
Partners, L.P., a Delaware limited partnership (the "Operating Partnership");
SDI Partners I, L.P., a Delaware limited partnership (the "General Partner");
SunSub A, a Delaware corporation ("SunSub A"); and SunSub B, a Delaware
corporation ("SunSub B").
B A C K G R O U N D
The Partnership is a master limited partnership whose general partner
is the General Partner and whose Class A and Class B limited partnership
interests ("A Interests" and "B Interests") are publicly held. The parties
desire to convert the Partnership to corporate form (the "Conversion") and to
that end have newly formed the Corporation and its two wholly-owned
subsidiaries, SunSub A and SunSub B. The Partnership owns the limited
partnership interest in the Operating Partnership with the general partnership
interest being also owned by General Partner.
The parties have also newly formed SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"). The Corporation will contribute Junior
Subordinated Debentures to the Trust in exchange for 11.6% Trust Preferred
Securities (the "Preferred Securities") and Trust Common Securities (the "Common
Securities").
The parties desire to accomplish the Conversion through the merger
provided for herein (the "Merger") by which the Partnership and SunSub A and
SunSub B will be merged into the Operating Partnership and the A Interests will
receive Preferred Securities of the Trust and cash and the B Interests and the
General Partner will receive Common Stock of the Corporation.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Merger and the mode of carrying the
same into effect, the parties hereto, intending to be legally bound, hereby
agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as hereinafter defined), the Partnership and
SunSub A and SunSub B shall be merged with and into the Operating Partnership
(such parties to the Merger being sometimes hereinafter collectively referred to
as the "Constituent Entities") pursuant to the Agreement of Merger attached
hereto as Annex 1 (the "Merger Agreement") and the separate existence of the
Partnership and SunSub A and SunSub B shall cease. The Operating Partnership
shall be the surviving entity in the Merger (sometimes hereinafter referred to
as the "Surviving Entity") and shall continue to be governed by the laws of the
State of Delaware, and all rights, privileges, immunities and franchises of the
Constituent Entities shall vest in the Surviving Entity and continue unaffected
by the Merger.
SECTION 1.2 Terms and Conditions of The Merger. The manner of
converting the securities of the Constituent Entities shall be as set forth in
Section 5 of the Merger Agreement.
B-1
<PAGE>
SECTION 1.3 Timing.
(a) Limited Partner Approval. The Partnership shall submit the
proposal to convert to corporate form (the "Conversion Proposal") to its limited
partners for approval and adoption at a meeting to be held as soon as
practicable. In connection with such meeting, the Partnership shall take such
reasonable steps as shall be necessary for the prompt preparation and filing by
the Partnership of a proxy statement (the "Proxy Statement") under the
Securities Exchange Act of 1934 (the "Exchange Act") and by the Corporation of a
registration statement (the "Registration Statement") and prospectus (the
"Prospectus") under the Securities Act of 1933 (the "Securities Act"), with the
Securities and Exchange Commission ("SEC") and shall cause the Proxy
Statement/Prospectus to be mailed to the limited partners of the Partnership as
soon as practicable. Adoption of the Conversion Proposal requires (I) the
approval of limited partners holding a majority of the outstanding A Interests
and B Interests, each voting separately as a class, and (ii) the approval of
unaffiliated limited partners (limited partners other than affiliates of the
General Partner) holding a majority of the outstanding A Interests and B
Interests held by unaffiliated limited partners, each voting separately as a
class (the "Class Votes").
(b) Closing and Effective Time. Subject to the Conversion
Proposal receiving the requisite approval by the limited partners and subject to
the provisions of this Agreement, the parties shall hold a closing (the
"Closing") on (i) the later of (A) the business day following the meeting of the
limited partners of the Partnership to consider and vote upon the Conversion
Proposal or (B) the business day on which the last of the conditions set forth
in Article IV is fulfilled or waived or (ii) at such other date as the parties
hereto may agree (the "Closing Date"), at 10:00 A.M., (local time) at the
offices of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, or at such
other place or time as the parties hereto may agree. The Merger shall become
effective as set forth in Section 3 of the Merger Agreement (the "Effective
Time").
(c) Certificate of Incorporation and Bylaws. From and after
the Effective Time, and pursuant to the Merger, the Certificate of Incorporation
and Bylaws of the Corporation as attached as Annexes 2 and 3, respectively,
shall continue to be the Certificate of Incorporation and Bylaws of the
Corporation as the surviving entity without change or amendment until further
amended in accordance with the provisions thereof and applicable law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Representations and Warranties by the Partnership. Each of
the Partnership and the Operating Partnership represents and warrants to the
other parties that:
(a) Organization and Good Standing of the Partnership and the
Operating Partnership. Each of the Partnership and the Operating Partnership is
a limited partnership duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) Capitalization. The sole general partner of the
Partnership is the General Partner and there are issued and outstanding
11,099,573 A Interests and 21,675,746 B Interests of the Partnership. The sole
general partner of the Operating Partnership is the General Partner and the sole
limited partner of the Operating Partnership is the Partnership.
There is no outstanding option, warrant or other agreement or
commitment to which either the Partnership or the Operating Partnership is a
party or by which it is bound providing for the issuance of any additional
securities of the Partnership or the Operating Partnership.
B-2
<PAGE>
(c) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary
partnership action on the part of the Partnership and the Operating Partnership
other than the approval of the Conversion Proposal by the limited partners of
the Partnership. This Agreement has been duly executed and delivered by the
Partnership and the Operating Partnership and is enforceable against the
Partnership and the Operating Partnership, respectively, in accordance with its
terms.
(d) Proxy Statement; Other Information. Each of the
Partnership and the Operating Partnership represents that the Registration
Statement, the Proxy Statement, the Schedule 13E-3 and all other filings with
the SEC in connection with the Conversion comply in all material respects with
the Securities Act and the Exchange Act, as the case may be and that these
materials do not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the
circumstances under which they were made, not misleading.
(e) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Partnership and the Operating
Partnership nor the consummation of the transactions contemplated hereby will
(i) conflict with or result in any breach of any provision of the Partnership
Agreement; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and the DGCL, (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the Partnership or the Operating Partnership; (iii) result in a
default (or give rise to any right of termination, unilateral modification or
amendment, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, license, agreement or other instrument or obligation to
which the Partnership or the Operating Partnership is a party or by which the
Partnership or the Operating Partnership or any of their respective assets may
be bound, except for such defaults (or rights of termination, unilateral
modification or amendment, cancellation or acceleration) which in the aggregate
would not have a material adverse effect on the Partnership or the Operating
Partnership; or (iv) violate any order, writ, injunction, decree, judgment,
ordinance, statute, rule or regulation applicable to the Partnership or the
Operating Partnership or any of their respective properties or businesses,
except for violations (other than of orders, writs, injunctions or decrees)
which would not in the aggregate have a material adverse effect on the
Partnership or the Operating Partnership.
SECTION 2.2 Representations and Warranties by the Corporation.
The Corporation represents and warrants to the other parties that:
(a) Organization and Good Standing of the Corporation, SunSub
A, SunSub B and the Trust. Each of the Corporation and SunSub A and SunSub B is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Trust is a statutory business trust duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
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(b) Capitalization. The authorized capital stock of the
Corporation consists of 1,000,000 shares of Preferred Stock, par value $.01 per
share, of which none are outstanding, and 20,000,000 shares of Common Stock, par
value $.01 per share, of which 1,000 shares are outstanding and owned by the
Partnership. The authorized capital stock of each of SunSub A and SunSub B
consists of 1,000 shares of Common Stock, par value $.01 per share, all of which
are outstanding and owned by the Corporation. The authorized securities of the
Trust consist of 4,217,837 shares of Preferred Securities, of which none are
outstanding, and 130,449 shares of Common Securities, of which 1,000 shares are
outstanding and owned by the Corporation.
There is no outstanding option, warrant or other agreement or
commitment to which either the Corporation, SunSub A, SunSub B or the Trust is a
party or by which it is bound providing for the issuance of any additional
securities of the Corporation, SunSub A, SunSub B or the Trust except for the
issuance by the Trust to the Corporation of _________________ shares of
Preferred Securities in exchange for Junior Subordinated Debentures and
___________ shares of Common Securities for cash and except pursuant to this
Agreement.
(c) Authorization. The execution, delivery and performance of
this Agreement has been duly and validly authorized by all necessary corporate
action on the part of the Corporation, SunSub A and SunSub B. This Agreement has
been duly executed and delivered by the Corporation, SunSub A and SunSub B and
is enforceable against each of them in accordance with its terms.
(d) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Corporation nor the consummation
of the transactions contemplated hereby will (i) conflict with or result in any
breach of any provision of the Corporation's Certificate of Incorporation or
Bylaws; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and the DGCL, (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the Corporation; (iii) result in a default (or give rise to any right
of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which the Corporation is
a party or by which it or any of its assets may be bound, except for such
defaults (or rights of termination, unilateral modification or amendment,
cancellation or acceleration) which in the aggregate would not have a material
adverse effect on the Corporation; or (iv) violate any order, writ, injunction,
decree, judgment, ordinance, statute, rule or regulation applicable to the
Corporation or any of its properties or businesses, except for violations (other
than of orders, writs, injunctions or decrees) which would not in the aggregate
have a material adverse effect on the Corporation.
SECTION 2.3 Representations and Warranties by the General Partner.
(a) Organization and Good Standing. The General Partner is a
limited partnership duly organized, validly existing and in good standing under
the laws of the State of Delaware. The general partner of the General Partner is
Lehman/SDI, Inc., a Delaware corporation ("Lehman/SDI").
(b) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary
partnership action on the part of the General Partner. This Agreement has been
duly executed and delivered by the General Partner.
(c) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the General Partner nor the
consummation of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the General Partnership Agreement or
the Partnership Agreement; (ii) require any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or
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regulatory authority or body, except (A) pursuant to the Securities Act and the
Exchange Act or the rules and requirements of any national securities exchange
or the National Association of Securities Dealers, Inc., (B) the filing of a
certificate of merger pursuant to the Delaware RULPA and DGCL, (C) filings under
state securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the General Partner; (iii) result in a default (or give rise to any
right of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which the General
Partner is a party or by which it or any of its assets may be bound, except for
such defaults (or rights of termination, unilateral modification or amendment,
cancellation or acceleration) which in the aggregate would not have a material
adverse effect on the General Partner; or (iv) violate any order, writ,
injunction, decree, judgment, ordinance, statute, rule or regulation applicable
to the General Partner or any of its properties or businesses, except for
violations (other than of orders, writs, injunctions or decrees) which would not
in the aggregate have a material adverse effect on the General Partner.
(d) Certain Agreements. Except as disclosed in the
Registration Statement, (I) there are no agreements in effect between the
General Partner or any of its affiliates, on the one hand, and the Partnership
and the Operating Partnership, on the other; and (ii) there are no written
agreements in effect between Lehman Brothers or any of its affiliates, on the
one hand, and any member of management, on the other.
(e) Ownership of Partnership Interests; Title. The General
Partner is the owner of record and beneficially of the general partnership
interests in the Partnership and the Operating Partnership (the "GP Interests")
as disclosed in the Registration Statement. The General Partner has not received
any notice of any adverse claim to the ownership of any such GP Interests and
does not have any reason to know of any such adverse claim that may be
justified. On the Closing Date, the General Partner shall have good and
transferable title to the GP Interests, free and clear of all liens.
ARTICLE III
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 3.1 Legal Conditions to Merger. Each of the parties hereto will
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Merger.
SECTION 3.2 Affiliates. Prior to the Closing Date the General Partner
shall deliver to the Corporation a letter identifying all persons who are, at
the time the Conversion Proposal is submitted for approval to the limited
partners of the Partnership, "affiliates" of the Partnership for purposes of
Rule 145 under the Securities Act. The General Partner shall use its best
efforts to cause each such person to deliver to the Corporation on or prior to
the Closing Date executed affiliates' letters in customary form.
SECTION 3.3 Fees and Expenses. Whether or not the Merger is
consummated, all costs and expenses incurred by the Partnership in connection
with this Agreement and the transactions contemplated hereunder shall be paid by
the Partnership.
SECTION 3.4 Stock Exchange Listing. The Corporation shall use its best
efforts to cause the Preferred Securities and Common Stock to be issued in the
Merger to be approved for listing on the New York Stock Exchange (the "NYSE"),
subject to official notice of issuance, prior to the Closing Date. The A
Interests and the B Interests will be delisted at or immediately after the
Effective Time.
SECTION 3.5 Indemnification.
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(a) The Partnership shall, and from and after the Effective
Time, the Corporation shall, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director, partner, shareholder,
agent or fiduciary of the Partnership, the Operating Partnership, the General
Partner, Lehman/SDI or the Corporation (the "Companies") or an affiliate of such
person (the "Indemnified Parties") against all losses, claims, damages, costs,
expenses, liabilities or judgments, or amounts that are paid in settlement with
the approval of the indemnifying party (which approval shall not be unreasonably
withheld) of, or in connection with, any claim, action, suit, proceeding or
investigation ("Proceeding") based in whole or in part out of the fact that such
person is or was an officer, director, partner or shareholder of one or more of
the Companies or an affiliate of such person, whether pertaining to any matter
existing or occurring at or prior to the Effective Time and whether asserted or
claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities")
in each case to the full extent a partnership or a corporation is permitted
under Delaware law to indemnify such persons or entities; and the Partnership
(and after the Effective Time, the Corporation) will pay or reimburse expenses
in advance of the final disposition of any such Proceeding to each Indemnified
Party to the full extent permitted by law upon receipt of an undertaking to
repay such expenses if and when requested to do so under applicable law. Without
limiting the foregoing, in the event any such Proceeding is brought against any
Indemnified Party (whether arising before or after the Effective Time), (I) the
Indemnified Parties may retain counsel satisfactory to them, (ii) the
Partnership (and after the Effective Time, the Corporation) shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received, and (iii) the Partnership (and
after the Effective Time, the Corporation) will use all reasonable efforts to
assist in the vigorous defense of any such matter, provided that neither the
Partnership nor the Corporation shall be liable for any settlement of any claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim indemnification
under this Section 3.5, upon learning of any Proceeding, shall notify the
Partnership (and after the Effective Time, the Corporation) (but the failure so
to notify the Partnership or the Corporation, as the case may be, shall not
relieve the Partnership or the Corporation from any liability which it may have
under this Section 3.5 except to the extent such failure prejudices the
indemnifying party) and shall deliver to the Partnership (and after the
Effective Time, the Corporation) the undertaking referred to above. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to each such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties.
(b) The provisions of this Section 3.5 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and the
Indemnified Party's heirs, representatives, successors and assigns.
ARTICLE IV
CONDITIONS TO THE MERGER
SECTION 4.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of the parties to effect the Merger shall be subject
to the satisfaction, on or before the Closing Date, of each of the following
conditions:
(a) Representations and Warranties and Performance. The
representations and warranties of each of the other parties herein contained
shall be true and correct on the Closing Date with the same effect as though
made at such time. Each of the other parties shall have performed in all
material respects all obligations and complied in all material respects with all
agreements, undertakings, covenants and conditions required by this Agreement to
be performed or complied with by it at or prior to the Closing Date.
(b) Pending Litigation. There shall not be any litigation or
other proceeding pending or threatened to restrain or invalidate the
transactions contemplated by this Agreement.
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(c) Limited Partner Approval. The Conversion Proposal shall
have been approved and adopted by the requisite vote of the holders of the A
Interests and B Interests pursuant to the Class Votes.
(d) Regulatory Approval. All authorizations, consents and
permits required to perform this Agreement and the Merger Agreement shall have
been obtained and the required statutory waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, shall have
expired or been terminated.
(e) Registration Statement. The Registration Statement filed
pursuant to Section 1.3 (a) shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceeding seeking a stop
order.
(f) NYSE Listing. The Preferred Securities and the Common
Stock to be issued in the Merger shall have been approved for listing on the
NYSE upon official notice of issuance.
(g) Blue Sky Compliance. The Corporation shall have complied
with all requirements of state securities or "blue sky" laws with respect to the
issuance of the securities in the Merger.
(h) Special Committee Determination. The Special Committee
shall not have withdrawn its determination that the Conversion is fair to the
holders of A Interests and B Interests.
(I) Fairness Opinion. The fairness opinion delivered to the
Partnership by Smith Barney Inc. and included as an exhibit to the Proxy
Statement/Prospectus shall not have been rescinded prior to the Closing Date.
(j) Tax Opinion. The tax opinion of Morgan, Lewis & Bockius
LLP delivered to the Partnership and filed as an exhibit to the Registration
Statement shall not have been rescinded prior to the Closing Date.
(k) Securities Opinion. The securities law opinion of
Richards, Layton & Finger delivered to the Corporation and filed as an exhibit
to the Registration Statement shall not have been rescinded prior to the Closing
Date.
(l) Available Financing. The Corporation shall have available
financing to refinance existing senior debt on terms acceptable to the
Corporation and the General Partner or shall have received approval of the
Conversion by the existing senior lenders.
(m) Deferred Compensation Plan. The Corporation shall have
received from Donald T. Marshall, John P. McDonnell and Norman V. Edmonson
("Management") undertakings to defer into the Deferred Compensation Plan for Key
Employees of the Operating Partnership all payments due under the previous
Deferred Compensation Plans and Long Term Performance Share Plan of the
Operating Partnership.
(n) Changes in Applicable Law. There shall have been no
material change, in effect or pending, in applicable law , including with
respect to the taxation of the Conversion, the Corporation or the Preferred
Securities.
(o) Contribution Agreement. The Corporation shall have entered
into a Contribution Agreement with Lehman Brothers Inc. on terms satisfactory to
the parties hereto.
(p) Stockholders Agreement. The Corporation, Lehman Brothers
Inc. and Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J.
Cornelius, Max W. Hillman and Joseph M. Corvino shall have entered into a
Stockholders Agreement on terms satisfactory to the parties.
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(q) Registration Rights Agreement. The Corporation, Lehman
Brothers Inc. and Management shall have entered into a Registration Rights
Agreement on terms satisfactory to the parties.
(r) Escrow Agreement. The Corporation and the Escrow Agent
shall have entered into an Escrow Agreement on terms satisfactory to the
parties.
(s) Resale Agreement. The Corporation, Lehman and Management
shall have entered into an agreement regarding resale of the Corporation's
Common Stock.
(t) Other Documentation. The parties hereto shall have entered
into such other agreements as are contemplated by the Conversion, including,
without limitation, the Indenture and Declaration of Trust in respect of the
Junior Subordinated Debentures and Preferred Securities, on terms satisfactory
to the parties.
ARTICLE V
TERMINATION AND ABANDONMENT
SECTION 5.1 Termination and Abandonment. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after approval by the limited partners of the
Partnership, by action of the Board of Directors of Lehman/SDI.
SECTION 5.2 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that after approval of the Conversion Proposal by the limited partners
of the Partnership, no amendment may be made which decreases the amount or
changes the type of consideration to which the limited partners of the
Partnership are entitled under this Agreement or otherwise materially adversely
affects the rights of the limited partners of the Partnership without the
further approval of the limited partners.
SECTION 5.3 Waiver. Any time prior to the Effective Time, whether
before or after the meeting referred to in Section 1.3(a), any party hereto may
waive compliance with any of the agreements of any other party or with any
conditions to the obligations of such party; provided, however, that after
approval of the Conversion Proposal by the limited partners of the Partnership,
no waiver may be given which materially adversely affects the rights of the
limited partners of the Partnership without the further approval of the limited
partners . Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party by a duly authorized officer.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Notices. Any notices or other communications required or
permitted hereunder shall be sufficiently given if sent by telecopy or facsimile
transmission (with hard
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copy to follow), registered or certified mail, postage prepaid, or Federal
Express or similar overnight delivery services addressed, in the case of all
parties at
2600 One Logan Square
Philadelphia, PA 19103
Attn: Norman V. Edmonson
with required copies to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Attn: Donald A. Scott, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attn: Andrew R. Keller, Esq.
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attn: William G. Lawlor, Esq.
or such other address as shall be furnished in writing by any party to the
others prior to the giving of the applicable notice or communication.
SECTION 6.2 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.3 Headings. The headings herein are for convenience of
reference only, do not constitute a part of this Agreement, and shall not be
deemed to limit or affect any of the provisions hereof.
SECTION 6.4 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties, with respect to the subject matter hereof.
SECTION 6.5 Cooperation. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its reasonable efforts to take,
or cause to be taken, such action, to execute and deliver, or cause to be
executed and delivered, such governmental notifications and additional documents
and instruments and to do, or cause to be done, all things necessary, proper or
advisable under the provisions of this Agreement and under applicable law to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 6.6 No Rights, Etc.. Nothing in this Agreement express or
implied is intended to confer upon any other person any rights or remedies under
or by reason of this Agreement.
SECTION 6.7 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Delaware applicable to contracts made and to be performed in that
State.
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SECTION 6.8 Special Committee. Any determination by the Corporation or
the General Partner that any of the conditions in Article IV hereof have been
satisfied or waived, or any amendment of this Agreement, shall require the
affirmative vote of the Special Committee (as defined in the Registration
Statement).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Conversion to be duly executed as of the date first above written.
SUNSOURCE L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By________________________________
Chairman
SDI OPERATING PARTNERS, L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By________________________________
Chairman
SDI PARTNERS I, L.P.
By Lehman/SDI, Inc.
Its General Partner
By________________________________
Chairman
SUNSUB A
By________________________________
President
SUNSUB B
By________________________________
President
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ANNEX 1
AGREEMENT OF MERGER
OF
SUNSOURCE L.P.
(a Delaware limited partnership)
SUNSUB A
(a Delaware corporation)
AND
SUNSUB B
(a Delaware corporation)
WITH AND INTO
SDI OPERATING PARTNERS, L.P.
(a Delaware limited partnership)
AGREEMENT OF MERGER, dated as of ___________, 1997, by and
among SunSource L.P., a Delaware limited partnership (the "Partnership"), SunSub
A, a Delaware corporation ("SunSub A"), SunSub B, a Delaware corporation
("SunSub B"; and together with the Partnership and SunSub A, the "Disappearing
Entities"), and SDI Operating Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), with reference to the following RECITALS:
A. The Partnership is a Delaware limited partnership whose
general partner is SDI Partners I, L.P., a Delaware limited partnership (the
"General Partner"). Its limited partnership interests are publicly held,
consisting of 11,099,573 Class A limited partnership interests ("A Interests")
and 21,675,746 Class B limited partnership interests ("B Interests).
B. SunSub A is a Delaware corporation having all of its issued
and outstanding capital stock, consisting of 1,000 shares of common stock, par
value $.01 per share, owned of record and beneficially by SunSource Inc., a
Delaware corporation (the "Corporation").
C. SunSub B is a Delaware corporation having all of its issued
and outstanding capital stock, consisting of 1,000 shares of common stock, par
value $.01 per share, owned of record and beneficially by the Corporation.
D. The Operating Partnership is a Delaware limited partnership
whose general partner is the General Partner and whose limited partner is the
Partnership.
E. The Corporation has organized SunSource Capital Trust, a
Delaware statutory business trust (the "Trust"), which has authorized and issued
[4,217,837] 11.6% Trust Preferred Securities (the "Preferred Securities") and [
] Trust Common Securities, all of which are owned by the Corporation.
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F. The partners of the Partnership and the Operating
Partnership and the Boards of Directors and shareholder of SunSub A and SunSub B
have approved and adopted resolutions approving and adopting this Agreement of
Merger in accordance with the General Corporation Law of the State of Delaware
(the "DGCL").
NOW, THEREFORE, the parties hereto, in consideration of the
mutual covenants herein contained and intending to be legally bound, agree as
follows:
1. Parties to Merger. The Disappearing Entities and the
Operating Partnership (such parties to the merger being hereinafter sometimes
collectively referred to as the "Constituent Entities") shall effect a merger
(the "Merger") in accordance with and subject to the terms and conditions of
this Agreement of Merger (the "Agreement").
2. Merger. At the Effective Time (as defined in Section 3
hereof), each of the Disappearing Entities shall be merged with and into the
Operating Partnership (which latter entity shall be, and is hereinafter
sometimes referred to as, the "Surviving Entity").
3. Filing and Effective Time. A certificate of merger and such
other documents and instruments as are required by, and complying in all
respects with, the DGCL shall be filed in the Office of the Secretary of State
of Delaware. The Merger shall become effective, following the filing of all such
documents and instruments, at 11:59 p.m. on __________, 1997 (the "Effective
Time").
4. Effect of Merger. At the Effective Time, the separate
existence of each of the Disappearing Entities shall cease, the Surviving Entity
shall continue to be a limited partnership organized and governed by the laws of
the State of Delaware and the Merger shall have the effects provided therefor by
the DGCL.
5. Partnership Interests and Capital Stock. At the Effective
Time:
(a) Each A Interest of the Partnership issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holders thereof, be converted
into 0.38 share of Preferred Securities and $1.30 in cash;
(b) Each B Interest of the Partnership issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holders thereof, be converted
into 0.25 share of common stock, par value $.01, of the Corporation (the "Common
Stock");
(c) The general partner interests in the Partnership
and the Operating Partnership issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into 1,000,000 shares of Common Stock,
provided that 75,000 of such shares shall be held in escrow until the second
anniversary of the Effective Time and shall only be distributed thereafter to
the limited partners of the General Partner when the Corporation is current on
distributions on the Preferred Securities;
(d) The shares of common stock of SunSub A issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into a 1% general partnership interest in the Operating Partnership;
(e) The shares of common stock of SunSub B issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into a 99% limited partnership interest in the Operating Partnership;
(f) The limited partnership interest in the Operating
Partnership issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be canceled; and
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(g) No fractional shares shall be issued in the
Merger but in lieu thereof each holder of A Interests shall be entitled to
receive cash in an amount equal to the fraction of a share of Preferred
Securities to which the holder is otherwise entitled multiplied by the average
closing price of the Preferred Securities for the five trading days following
the Effective Time and each holder of B Interests shall be entitled to receive
cash in an amount equal to the fraction of a share of Common Stock to which the
holder is otherwise entitled multiplied by the average closing price of the
Common Stock for the five trading days following the Effective Time.
6. Exchange of Certificates. Promptly after the Effective
Time, the Corporation will mail to all limited partners of record a letter of
transmittal containing instructions with respect to the surrender of depositary
receipts for A Interests in exchange for certificates representing shares of
Preferred Securities and cash and the surrender of depositary receipts for B
Interests in exchange for certificates representing shares of Common Stock. Upon
surrender to the Corporation of one or more depositary receipts, together with a
properly completed letter of transmittal, there will be issued and mailed to
former limited partners of record at the Effective Time a certificate or
certificates representing the number of shares of Preferred Securities and cash
or a certificate or certificates for shares of Common Stock to which such holder
is entitled. From and after the Effective Time, each depositary receipt will
evidence only the right to receive shares of Preferred Securities and cash or
shares of Common Stock. No distributions or dividends with respect to the
Preferred Securities or Common Stock payable to the holders of record thereof
after the Effective Time will be paid to the holder of any unsurrendered
depositary receipts until such depositary receipts are surrendered for exchange,
at which time accumulated distributions or dividends will be paid, without
interest, subject to any applicable escheat laws.
7. Further Assurances. Each of the Disappearing Entities shall
at any time, or from time to time, as and when requested by the Surviving
Entity, or by its successors and assigns, execute and deliver, or cause to be
executed and delivered in its name by its last acting officers, or by the
corresponding officers of the Surviving Entity, all such conveyances,
assignments, transfers, deeds, or other instruments, and shall take, or cause to
be taken, such further or other action as the Surviving Entity, or its
successors and assigns, may deem required or convenient in order to evidence the
transfer, vesting or devolution of any property, right, privilege, immunity,
power or purpose, or to vest or perfect in or confirm to the Surviving Entity,
or its successors and assigns, title to and possession of all the properties,
rights, privileges, immunities, powers and purposes of the Disappearing Entities
and otherwise to carry out the intent and purposes hereof.
11. Termination. Notwithstanding approval by the partners and
shareholders of the Constituent Entities of this Agreement, this Agreement may
be terminated at any time prior to the Effective Time by action of the General
Partner.
B-13
<PAGE>
IN WITNESS WHEREOF, the parties hereto, pursuant to the
approval and authority duly given by resolutions approved and adopted by their
respective partners and Boards of Directors and shareholders, have duly executed
this Agreement of Merger as of the day and year first written above.
SDI OPERATING PARTNERS, L.P. SUNSOURCE L.P.
By SDI Partners I, L.P. By SDI Partners I, L.P.
Its General Partner Its General Partner
By Lehman/SDI, Inc. By Lehman/SDI, Inc.
Its General Partner Its General Partner
By____________________ By____________________
Chairman Chairman
[SUNSUB A]
By____________________
President
[SUNSUB B]
By____________________
President
B-14
<PAGE>
EXHIBIT C
SMITH BARNEY FAIRNESS OPINION
C- 1
<PAGE>
December 10, 1996
The Special Committee of the Board of Directors of Lehman/SDI, Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attention: O. Gordon Brewer, Jr. and Ernest L. Ransome, III The Special
Committee of the Board of Directors of Lehman/SDI, Inc.
Gentlemen:
In connection with the proposed conversion of SunSource L.P.
("SunSource" or the "Partnership") to corporate form (the "Conversion"), you
have requested our opinion as to the fairness, from a financial point of view,
to holders of SunSource's Class A Limited Partnership Interests ("Class A
Interests") and Class B Limited Partnership Interests ("Class B Interests") of
the Partnership of (i) the consideration to be received by holders of Class A
Interests and holders of Class B Interests, respectively, and (ii) the General
Partner Consideration (as defined herein) in the Conversion. The terms of the
Conversion are summarized in the Summary Terms of the Conversion Proposal dated
December 9, 1996 (the "Term Sheet") prepared by SDI Partners I, L.P (the
"General Partner"). The Term Sheet provides that (i) holders of Class A
Interests will receive in exchange for each Class A Interest, 0.38 shares of
11.6% Trust Preferred Securities, par value $25.00 per share (the "Preferred
Securities") of SunSource Capital Trust and $1.30 in cash, (ii) holders of Class
B Interests will receive in exchange for each Class B Interest one share of
common stock, par value $.01 per share (the "Common Stock") of a newly formed
Delaware corporation (the "Company"), and (iii) the General Partner will receive
4,000,000 shares of Common Stock in exchange for its general partnership
interests in SunSource and the Operating Partnership (as defined below). The
Common Stock to be received by the General Partner is referred to herein as the
"General Partner Consideration."
In arriving at our opinion, we have reviewed the Term Sheet and the limited
partnership agreements of the Partnership, SDI Operating Partners L.P. (the
p"Operating Partnership"), and the General Partner, and held discussions with
certain senior operating management of the Operating Partnership ("Management")
and representatives and advisors of the Partnership, the Operating Partnership
and the General Partner to discuss the business, operations and prospects of the
Partnership. We have examined certain publicly available business and financial
information relating to the Partnership as well as internal financial
statements, forecasts and other financial and operating data concerning the
Partnership prepared by Management. We have reviewed the financial terms of the
Conversion as set forth in the Term Sheet in relation to, among other things:
current and historical market prices and trading volumes of the Class A
Interests and Class B Interests; historical and projected earnings and operating
data of the Partnership; the capitalization and financial condition of the
Partnership;
<PAGE>
and the pro forma effect of the Conversion. We also considered, to the extent
publicly available, the financial terms of certain other similar transactions
which we considered comparable to the Conversion and analyzed certain financial,
capital market and other publicly available information relating to the business
of other companies whose operations we considered comparable to those of the
Partnership. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
furnished to or otherwise reviewed by or discussed with us, we have been advised
by Management that such forecasts and other information were reasonably prepared
on bases reflecting the best currently available estimates and judgments of
Management as to the expected future financial performance of the Partnership or
the Company, as the case may be, and we further relied on the assurances of
management that it is unaware of any facts that would make the information or
forecasts provided to us incomplete or misleading.
We are not expressing any opinion as to what the value of the Preferred
Securities or the Common Stock actually will be when issued to holders of Class
A Interests and Class B Interests, respectively, or the prices at which the
Preferred Securities or Common Stock will trade subsequent to the Conversion. We
have not made or been provided with an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of the Partnership. We have
not been asked to express an opinion as to the relative merits of the Conversion
as compared to any alternative business strategies that might exist for the
Partnership or the effect of any alternative transaction in which the
Partnership might engage. We were not asked to solicit third-party indications
of interest in acquiring all or any part of the Partnership. Our opinion is
necessarily based upon financial, capital market and other conditions and
circumstances existing and disclosed to us as of the date hereof.
We have been engaged to render financial advisory services to the Special
Committee (the "Special Committee") of the Board of Directors of Lehman/SDI,
Inc. in connection with the Conversion and will receive a fee for our services,
including a fee for the delivery of this opinion. In the ordinary course of
business, we and our affiliates may actively trade or hold the Class A Interests
and Class B Interests for our own account or for the account of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
<PAGE>
It is understood that this opinion is for the information of the Special
Committee and the Board of Directors of Lehman/SDI, Inc. only and may not be
used for any other purpose without prior written consent, except that this
opinion may be included in any proxy statement, registration statement or
similar document prepared in connection with a Conversion. Provided however,
that the opinion shall be included in its entirety and any other reference to
Smith Barney shall be accurate and complete and shall not be included without
the consent of Smith Barney, which consent shall not be unreasonably withheld.
Based upon and subject to the foregoing, our experience as investment bankers
and other factors we deemed relevant, we are of the opinion that, as of the date
hereof, (i) the consideration to be received in the Conversion by the holders of
Class A Interests is fair from a financial point of view to such holders, (ii)
the consideration to be received in the Conversion by the holders of Class B
Interests is fair from a financial point of view to such holders, and (iii) the
General Partner Consideration to be received in the Conversion is fair from a
financial point of view to the holders of Class A Interests and to the holders
of the Class B Interests, respectively.
Very truly yours,
SMITH BARNEY INC.
