<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-9375
SunSource L.P.
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(Exact name of registrant as specified in its charter)
Delaware 23-2439550
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 One Logan Square
Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 665-3650
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Class A Limited Partnership New York
Interests and Depositary Stock Exchange
Receipts therefore.
Class B Limited Partnership New York
Interests and Depositary Stock Exchange
Receipts therefore.
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for, such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X . NO .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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PART I
Item 1 - Business.
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General
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SunSource L.P., a Delaware limited partnership (the "Partnership"), through its
subsidiary limited partnership, SDI Operating Partners, L.P. (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. ("Lehman/SDI"), formerly known as Shearson/SDI, Inc., a
Delaware corporation and an indirect, wholly owned subsidiary of Lehman Brothers
Holdings, Inc. ("Lehman Holdings"). The General Partner owns 1% of the
Partnership and 1% of the Operating Partnership. All of the limited partnership
interests in the General Partner are beneficially owned by members of management
of the Partnership and the Operating Partnership (current and former executive
officers, the "Management Employees").
The current organization consists of a headquarters and three business segments
comprised of twelve operating divisions, as follows:
<TABLE>
<CAPTION>
Principal Year Acquired/
Location Organized
------------- --------------
<S> <C> <C>
SunSource Headquarters Phila., Pa. 1975
Industrial Services Segment Chicago, Il. 1996
Sun Inventory Management Company ("SIMCO") Divisions
- Kar Products Chicago, Il. 1977
- A&H Bolt & Nut Company Windsor, Ontario 1989
- SIMCO/Special-T-Metals Lenexa, Ks. 1992/1981
Sun Technology Services Divisions
- Walter Norris Rosemont, Il. 1976
- J.N. Fauver Company Madison Heights, Mi. 1978
- Warren Fluid Power Denver, Co. 1987
- Air-Dreco Houston, Tx. 1988
- Activation Birmingham, Al. 1991
International
- Hydra Power de Mexico Tlalnepantla, C.P., Mexico 1992
- SIMCO de Mexico Mexico City, Mexico 1992
Hardware Merchandising Segment
- Hillman Cincinnati, Oh. 1982
Glass Merchandising Segment
- Harding Glass Kansas City, Mo. 1980
</TABLE>
2
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General, continued
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On December 11, 1996, the Board of Directors of Lehman/SDI, approved
management's plan to restructure its Technology Services divisions and its Glass
Merchandising business. During the fourth quarter of 1996, the Partnership
recorded a $6.0 million restructuring charge related to the integration and
consolidation of its five domestic Technology Services divisions and the
write-off of certain non-performing assets in the Glass Merchandising segment.
The restructuring plan is expected to result in the elimination of 175 employees
in the Technology Services divisions by December 31, 1998, through integration
of its finance, administration, purchasing, warehousing and service center
functions. Redeployment of the Partnership's assets in its Glass business will
focus management's attention on strategic growth in the retail sector. See Note
1 of Notes to Consolidated Financial Statements.
In November 1995, the Operating Partnership's Hillman division acquired the
retail hardware business of Curtis Industries for $8.0 million. Annual sales of
Curtis' Retail division are approximately $11 million. The acquisition of Curtis
significantly expanded Hillman's position as a supplier of goods and services to
the hardware home center market where Curtis has concentrated much of its
attention. In addition, the Curtis product line can now be offered to Hillman's
present customer base. This acquisition continues Hillman's long-term growth
strategy to become a major provider of products and services to all segments of
the Hardware merchandising business.
On April 11, 1996, the Partnership's Industrial Services Segment, through its
Warren Fluid Power Division, purchased certain assets of Hydraulic Depot, Inc.
of Reno, Nevada, for a 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.
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
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Electrical Products Group Divisions
- American Electric Company St. Joseph, Mo.
- Philips & Company Columbia, Mo.
- Keathley-Patterson Electric Co. N. Little Rock, Ar.
Dorman Products Division Warsaw, Ky.
Downey Glass Division Los Angeles, Ca.
For the year ended December 31, 1996, the Partnership had net sales of
approximately $649 million, with the largest operating division contributing
approximately $164 million.
3
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General, continued
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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 their segment of 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
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Since its inception 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 and services offered. The Partnership evaluates
companies that have developed attractive product/market niches and have
demonstrated their ability to achieve high returns on invested capital. The
Partnership looks for companies with strong management capabilities and stable
growth patterns. Prior to making certain acquisitions, an extensive operational
review is performed by an external consulting firm. Prior to most acquisitions,
certain agreed upon procedures are performed by internal and external auditors.
In accordance with the terms of its credit agreements, the Partnership was not
permitted to make acquisitions in 1994. Acquisition spending amounted to $8.0
million and $.7 million in 1995 and 1996, respectively. See Notes 5, 8 and 9 of
Notes to Consolidated Financial Statements.
As the result of an analysis of strategic alternatives by the Partnership, the
Partnership sold the non-strategic businesses described above in 1994 and 1995.
Through the sale, the Partnership strengthened its balance sheet and positioned
itself to resume its acquisition program by focusing on businesses which fit its
current strategic plan. The Partnership has authorized spending of up to $15.0
million per year for acquisitions in accordance with the terms of its credit
agreements.
4
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Products and Services
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Excluding the divested operations discussed previously, the Partnership provides
distribution and value-added services related to over 1,300 product lines. Such
value-added services are typically provided to the Partnership's customers on a
non-fee basis and are an integral component of the Partnership's marketing
strategy. These products and services are provided in three main business
segments: (1) industrial services which consist of inventory management,
engineering and integrated supply services to industrial businesses through
sales of products such as fasteners (nuts, bolts, screws, etc.), hydraulic,
pneumatic and electronic systems and parts; (2) hardware merchandising services
through sales of fasteners and related products to hardware and home center
retail stores; and (3) glass merchandising consisting of installation and repair
through sales of glass products such as large sheet glass, auto glass, insulated
glass, mirrors and specialty glass. The average single sale during the year
ended December 31, 1996, was approximately $297.
Inasmuch as the Partnership is principally providing distribution and related
services, most of the products sold are manufactured by others. However, several
divisions sell a majority of their products under their own labels. In some
cases, most notably through its Technology Services divisions, the Partnership
assembles products or designs systems to the specifications of the end-users and
performs related product repairs. Through its Glass Merchandising Segment, the
Partnership produces insulated glass units according to customer specifications.
In addition, many of the products which the Partnership distributes are
purchased by the Partnership in bulk and subsequently repackaged in small
quantities.
The Partnership regularly uses a large number of suppliers and has long-term
relationships with many of them. Most items which the Partnership distributes
are purchased from several sources, and the Partnership believes that the loss
of any single supplier would not significantly affect the operations of the
Partnership viewed as a whole. No single supplier accounted for more than 5% of
the Partnership's purchases for the year ended December 31, 1996.
The following table shows the percentages of consolidated net sales reported for
the years ended December 31, 1996, 1995, and 1994 derived from the Partnership's
current business segments, excluding divisions sold:
<TABLE>
<CAPTION>
Percentage of Consolidated Net Sales for
Year Ended December 31,
---------------------------------------------------
Business Segment 1996 1995 1994
- ------------------- ------ ------ -----
<S> <C> <C> <C>
Industrial Services
Technology Services 46.1% 47.6% 46.6%
Inventory Management 24.1% 23.0% 22.9%
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Total Industrial Services 70.2% 70.6% 69.5%
Hardware Merchandising 15.9% 14.1% 13.1%
Glass Merchandising 13.9% 15.3% 17.4%
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100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
5
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Marketing
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While the Partnership sells across three business segments (industrial services,
hardware merchandising and glass merchandising), a substantial portion of its
sales is industrially based, and sales performance is tied closely to the
overall performance of the non-defense-goods producing sector of Gross Domestic
Product in the United States. However, risks and economic changes in the
marketplace demand a customer-based focus on value-added services which vary by
business segment. The principal markets for the Partnership's products and
services by business segment, as determined by management are as follows:
Maintenance and Repair Markets and Original Equipment Manufacturers
-------------------------------------------------------------------
Customers in this market are served by the divisions in the Industrial
Services segment. These customers include diverse industrial plants and
commercial establishments such 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
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This market is primarily comprised of individuals seeking automotive
and residential glass replacement as well as commercial enterprises
seeking glazing contractor services.
The Partnership has over 180,000 customers, the largest of which accounted for
less than 5% of net sales for the year ended December 31, 1996. Each division
maintains its own sales force which is compensated for the most part on a
commission basis. The divisions' sales forces vary in size, the largest of which
has approximately 740 sales people.
The Partnership's products and services are sold in all 50 states. While its
Glass Merchandising segment sells in regional markets, the remaining two
segments sell on a national scale. In general, fluid power products and
technology services are sold primarily in the upper Midwest, Southeast,
Southwest, Canada and Mexico; maintenance products and inventory management
services are sold nationwide in the U.S., Canada, and Mexico; hardware
merchandising products and services are sold nationally in the U.S. and Mexico;
and glass merchandising products and services are sold primarily in the West,
the Midwest, the Mid-Atlantic and the Southeast.
6
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Competition
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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
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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
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As of December 31, 1996, the Partnership, through the Operating Partnership,
employed 3,984 employees, of which 1,675 were sales personnel, 1,308 were
employed as warehouse and delivery personnel, and 1,001 held administrative
positions. The Operating Partnership has collective bargaining agreements with 5
unions representing a total of 80 employees. In the opinion of management,
employee relations are good.
Backlog
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The Partnership's sales backlog excluding divested operations was $59,531,000 as
of December 31, 1996, and $54,935,000 as of December 31, 1995. Normally, in the
distribution business, orders are shipped within a week of receipt. On average,
the Partnership's backlog is less than one month's sales.
7
<PAGE>
Federal Income Tax Considerations
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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.
Under existing tax law, pursuant to Section 7704 of the Code, if the Partnership
remains a publicly traded partnership, it 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.
8
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Federal Income Tax Considerations, continued
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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.
Conversion to Corporate Form
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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 the General Partner, each voting separately as a
class (the "Conversion"). The Conversion will be effected through the formation
of a new corporation, SunSource Inc. (the "Corporation"), of which the Operating
Partnership would be a wholly-owned subsidiary partnership. On December 30,
1996, and amended thereafter, the Partnership filed a preliminary proxy
statement with the U.S. Securities and Exchange Commission (the "SEC") relating
to the proposed transaction. Review by the SEC and mailing of the proxy
statement are pending.
Item 2 - Properties.
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The Partnership currently has approximately 200 warehouse and stocking
facilities located throughout the United States, Canada and Mexico. Most of
these include sales offices. Approximately 16% of these facilities are owned and
the remainder are leased. The Partnership's principal properties are warehouse
facilities used by the Operating Partnership, as follows:
Division Location Description
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Hillman Cincinnati, Ohio 190,000 sq.ft. (leased)
Harding Glass Denver, Colorado 184,000 sq.ft. (owned)
Kar Products Itasca, Illinois 80,000 sq.ft. (owned)
In the opinion of management, the Partnership's existing facilities are in good
condition.
9
<PAGE>
Item 3 - Legal Proceedings.
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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
Partnership filed an action against Dorman and R&B in the Court of Common Pleas
of Montgomery County, Pennsylvania, alleging breach of contract, intentional
interference with contractual relations and negligence and requesting a
declaratory judgment that the Operating Partnership did not make any
misrepresentations in connection with the sale of the division. Dorman and R&B
have counterclaimed making the same allegations which were made in the original
complaint.
On January 16, 1997, a holder of B Interests filed a purported class action in
the Delaware Court of Chancery seeking to enjoin the Conversion on the terms
proposed as well as an order requiring the defendants to account to the
plaintiff and the class for damages and requiring the General Partner or its
affiliates to hold the consideration received in trust pending a determination
of the amounts properly attributable to the General Partner's interest.
Defendants named in the complaint are the Partnership, the Corporation, the
General Partner, Lehman/SDI, Lehman Holdings, and all of the directors of
Lehman/SDI. The complaint alleges that the terms of the Conversion unfairly
transfer substantial equity to the General Partner to the detriment of the B
Interests and constitute a breach of fiduciary duty. A second complaint
containing substantially identical allegations was filed by a limited partner in
the Delaware Court of Chancery on February 11, 1997. The defendants believe the
complaints are without merit and intend to vigorously defend themselves.
In the opinion of management, the ultimate resolution of these matters will not
have a material effect on the consolidated financial position, operations or
cash flows of the Partnership.
Item 4 - Submission of Matters to a Vote of Security Holders.
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Not applicable.
10
<PAGE>
PART II
Item 5 - Market for Registrant's Partnership Interests and Related Matters.
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Market Prices
-------------
The Class A Interests and Class B Interests trade separately on the New York
Stock Exchange under the symbols SDP and SDPB, respectively.
The following table shows the quarterly range of high and low closing sales
prices for the Class A and Class B Interests separately for the periods
indicated.
<TABLE>
<CAPTION>
CLOSING SALES PRICE
-------------------
1996 1995
---------------------- ----------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Class A Interests
First Quarter $11 3/4 $11 1/4 $10 3/4 $10 1/4
Second Quarter 11 1/2 10 7/8 11 10 3/8
Third Quarter 11 1/8 10 3/8 11 3/8 10 3/4
Fourth Quarter 11 1/4 10 1/4 11 3/8 10 7/8
Class B Interests
First Quarter $ 5 1/8 $ 4 $ 4 3/4 $ 4
Second Quarter 4 1/2 4 4 3/8 4
Third Quarter 4 1/2 4 1/4 4 7/8 4
Fourth Quarter 4 5/8 4 1/8 5 1/8 4 1/2
</TABLE>
The total number of Class A Interests outstanding as of December 31, 1996 and
1995, was 11,099,573. The total number of Class B Interests outstanding as of
December 31, 1996 and 1995 was 21,675,746. The total number of Class A and Class
B Interest holders as of December 31, 1996 and 1995 was approximately 13,560 and
14,082, respectively.
Cash Distributions
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The holders of the Class A Interests are entitled to receive annually $1.10 per
Class A Interest (the "Priority Return") to the extent that cash is available
for distribution. Priority Return distributions are paid monthly on the last day
of the month to holders of record on the first day of that month.
When federal taxable income is allocated to the holders of Class B Interests,
such holders are entitled to annual tax distributions (the "Class B Tax
Distribution") equal to the product of (i) 125% of the then applicable maximum
federal income tax rate for individuals and (ii) the federal taxable income
allocated to the holders of Class B Interests with respect to the preceding
year.
11
<PAGE>
Cash Distributions, continued
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The Priority Return and Class B Tax Distribution are required to be paid to the
extent cash is available for distribution and accumulate until paid. To the
extent that the Priority Return and Class B Tax Distribution have not been paid
on a cumulative basis, management fees due the General Partner will be deferred,
and will be paid, together with any management fees then owed with respect to
any other year, after the Priority Return and Class B Tax Distribution have been
paid. If cash available for distribution exceeds the amount necessary to pay the
Priority Return and Class B Tax Distribution, the General Partner may make
additional discretionary distributions to the holders of Class B Interests,
provided that no distribution, except the Class B Tax Distribution, may be made
to holders of the Class B Interests if, after such distribution, such holders'
capital accounts with respect to their Class B Interests would be below $.50 on
a per Interest basis.
The Partnership paid Priority Return distributions of $1.10 per Class A Interest
in 1996 and 1995. For 1996, the Class B Tax Distribution amounted to $7.7
million or $.35 per Class B Interest which was partially paid in the amount of
$.02 per Class B interest per month for the period January through April 1996
and in the amount of $.03 per month for the period May through December 1996. On
March 31, 1997, the Partnership will distribute the balance of the tax
distribution due of $.0265 per Class B Interest to holders of record for the
entire year.
The Partnership suspended the payment of monthly advance Class B Tax
Distributions effective January 1, 1997 through March 31, 1997, pending the
conversion to corporate form. Due to the delay in completion of the proposed
corporate conversion, the Partnership intends to resume payment of monthly
advance Class B tax distributions in April 1997 in the amount of $.03 per B
Interest. On March 20, 1997, the Partnership declared a B tax distribution in
the amount of $.03 per B Interest payable April 30, 1997, to holders of record
April 1, 1997. The Partnership intends to pay this monthly rate to Class B
holders until the effective date of the conversion since it expects to allocate
sufficient Class B taxable income in the shortened tax year from January 1,
1997, through the effective date to require the B tax distribution payment. The
balance of the required 1997 Class B tax distribution, if any will be paid on or
before March 31, 1998.
For 1995, the Class B Tax Distribution amounted to $14.8 million or $.67 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 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 Class B interest for the full
year 1995. On March 29, 1996, the Partnership distributed the balance of the tax
distribution due of $.2795 per Class B Interest, as follows: $.1745 to holders
of record on December 30, 1994 for the balance due on the taxable gain on the
sale of Dorman Products; $.0020 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 taxable income; and $.0814 to holders of record on
September 29, 1995 related to the taxable gain on the sale of Downey Glass on
October 27, 1995.
12
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Taxable Income Allocations
- --------------------------
Income taxes with respect to the Class A and Class B Interests are payable by
limited partners based upon the allocation of taxable income or loss pursuant to
the provisions of the Partnership Agreement. The allocation is made on a monthly
basis to the holders of record on the first day of each month. For 1996, federal
taxable income (ordinary income) was allocated to each Class A Interest in the
amount of $.0917 per month or an aggregate of $1.10 for the entire year. Federal
taxable income allocated to each Class B interest in 1996 amounted to ordinary
income of $.70. For 1995, federal taxable income (ordinary income) was allocated
to each Class A Interest in the amount of $.0917 per month or an aggregate of
$1.10 for the entire year. Federal taxable income allocated to each Class B
Interest in 1995 amounted to ordinary income of $.5326 and capital gains of
$1.1597 of which $.9273 was related to the sale of Dorman Products on January 3,
1995 and $.2324 was related to the sale of Downey Glass on October 27, 1995.
Capital Accounts
- ----------------
The Class A capital account (as defined in the Partnership Agreement) was $10.00
per Class A Interest as of December 31, 1996 and 1995. The Class B Capital
Account (as defined in the Partnership Agreement) at December 31, 1996 and 1995,
was approximately $2.89 and $2.54 per Class B Interest, respectively.
Partnership Tax Status
- ----------------------
As previously stated, after December 31, 1997, the Partnership will be taxed as
a corporation for federal income tax purposes. Management has proposed
conversion of the Partnership to corporate form. (See Item 1 - Conversion to
Corporate Form.) However, if the Partnership remains a limited partnership, the
effect of the change in taxation will result in the Partnership paying a
corporate income tax at the Partnership level. Therefore, in accordance with the
Partnership Agreement, the Partnership's income will not be allocated for tax
purposes to the partners as is currently being done, and limited partners will
pay taxes only on distributions from the Partnership, if any. Additionally, in
accordance with the Partnership Agreement, the Partnership would no longer make
tax distributions with respect to Class B limited partnership interests.
Accordingly, a decision on whether any other distribution will be made with
respect to the Class B interests is solely within the discretion of the General
Partner. Based on current operations, it is likely that cash will be retained in
the Partnership to fund its acquisition program and partnership requirements. If
the Partnership remains a limited partnership, payment of the Priority Return
distribution is expected to continue to the Class A interests in the amount of
$.0917 per month to each Class A interest to aggregate $1.10 annually.
13
<PAGE>
Item 6 - Selected Financial Data.
- ---------------------------------
The following table sets forth selected consolidated financial data of the
Partnership as of and for the five years ended December 31, 1996. Data for all
periods shown are derived from financial statements of the Partnership which
have been audited by Coopers & Lybrand L.L.P., independent accountants, as
indicated in their reports thereon. See accompanying Notes to Consolidated
Financial Statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for acquisitions and divestitures that
affect comparability.
<TABLE>
<CAPTION>
(dollars in thousands, except per partnership interest amounts)
Income Statement Data for Years 1996 1995 1994 1993 1992
Ended December 31: -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $649,254 $628,935 $735,861 $655,707 $612,052
Income from operations 24,452 31,302 37,759 28,975 29,712
Gain on Sale of Divisions -- 20,644 3,523 -- --
Provision (Benefit) for income taxes (1,140) 537 100 869 493
Income before extraordinary loss
and cumulative effect of change
in accounting principle 19,267 44,745 29,544 18,506 17,691
Extraordinary loss -- (629) -- -- (3,434)
Cumulative effect on prior years
of change in accounting
principle -- -- -- -- 822
Net income 19,267 44,116 29,544 18,506 15,079
Earnings per limited partnership interest:
Income before extraordinary loss
and cumulative effect of change
in accounting principle
- Class A $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $ .32 $1.48 $ .79 $ .28 $ .25
Extraordinary loss
- Class A $ -- $ -- $ -- $ -- $ --
- Class B $ -- $(.03) $ -- $ -- $(.16)
Cumulative effect on prior years
of change in accounting principle
- Class A $ -- $ -- $ -- $ -- $ --
- Class B $ -- $ -- $ -- $ -- $ .04
Net income
- Class A $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $ .32 $1.45 $ .79 $ .28 $ .13
Cash provided by operations $ 23,298 $ 17,050 $ 17,704 $ 23,571 $27,056
Cash distributions declared per
limited partnership interest
- Class A $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $ .33 $ .67 $ .49 $ .27 $ .13
Balance Sheet Data at December 31:
Total assets $262,555 $254,591 $266,186 $273,493 $261,588
Long-term debt and capitalized
lease obligations 69,043 63,934 74,781 104,185 115,503
</TABLE>
14
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Partnership's operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein.
General
The Partnership is a publicly held master limited partnership operating in the
wholesale industrial distribution industry through a subsidiary partnership, SDI
Operating Partners, L.P. (the "Operating Partnership"). The Partnership consists
of a headquarters operation and three business segments which are Industrial
Services, Hardware Merchandising and Glass Merchandising.
The Partnership's Industrial Services segment is comprised of the Sun Inventory
Management ("SIMCO") divisions and the SunSource Technology Services divisions.
The SIMCO divisions are Kar Products, A&H Bolt, SIMCO/Special-T-Metals and SIMCO
de Mexico. The SIMCO divisions provide maintenance products and inventory
management services to both original equipment manufacturers and maintenance and
repair facilities, including in-plant systems. SunSource Technology Services,
formerly the Fluid Power group, is comprised of Activation, Air-Dreco, J.N.
Fauver Co., Hydra-Power de Mexico, Walter Norris and Warren Fluid Power. The
Technology Services divisions provide fluid power products, engineering design,
and equipment repair services to a wide variety of industrial customers.
The Partnership's Hardware Merchandising segment consists of the Hillman
division. Hillman distributes hardware items and related products and also
provides merchandising systems service and support to both large and small
hardware retailers.
The Partnership's Glass Merchandising segment consists of the Harding Glass
division. Harding provides glass products and point-of-sale related services
such as the installation and repair of automobile and flat glass.
Conversion to Corporate Form
On December 11, 1996, the Partnership announced the terms of a plan to convert
from its current limited partnership structure to a taxable C corporation, which
must be approved by a majority of the holders of the Class A and Class B
interests unaffiliated with SDI Partners I, L.P., the General Partner, each
voting separately as a class. In connection with the conversion of the
partnership to corporate form, the Partnership intends to refinance its
outstanding long-term debt. The conversion and refinancing transaction will be
effected through the formation of a new corporation, SunSource Inc., of which
the Operating Partnership would be a wholly-owned subsidiary partnership. On
December 30, 1996, and amended thereafter, the Partnership filed a preliminary
proxy statement with the U.S. Securities and Exchange Commission (the "SEC")
relating to the proposed transaction. Review by the SEC and mailing of the proxy
statement are pending.
The Partnership has recorded $2.1 million of transaction costs related to the
proposed conversion as of December 31, 1996 and anticipates spending an
additional $1.5 million of transaction costs in 1997 to complete the conversion
process. See Note 1 of Notes to Consolidated Financial Statements for a
discussion of the accounting recognition of these costs.
15
<PAGE>
Sale of Certain Divisions
The Operating Partnership sold its Downey Glass division on October 27, 1995,
its Dorman Products division on January 3, 1995 and its three Electrical Group
divisions on December 5, 1994, for an aggregate cash consideration, net of
expenses, of approximately $70.6 million (subject to certain post-closing
adjustments) and the assumption of certain liabilities. The proceeds from these
divestitures were used to reduce debt and for general Partnership purposes,
including acquisitions for integration with its remaining businesses.
Sales from the divested divisions aggregated $ 29.1 million for the year ended
December 31, 1995, $177.1 million for the year ended December 31, 1994, and
$162.3 million for the year ended December 31, 1993. Income contributions from
these divisions aggregated $.3 million or $.01 per Class B interest in 1995,
$8.6 million or $.39 per Class B interest in 1994, and $6.6 million or $.30 per
Class B interest in 1993.
Acquisitions
On April 11, 1996, the Partnership's Industrial Services segment, through its
Warren Fluid Power division, purchased certain assets of Hydraulic Depot, Inc.
of Reno, Nevada for an aggregate purchase price of $.7 million. Annual sales of
Hydraulic Depot, Inc. are approximately $2.5 million. This acquisition expands
Warren's previous geographic markets.
On November 13, 1995, the Partnership's Hardware Merchandising segment, through
its Hillman division, purchased certain assets of the Retail Division of Curtis
Industries of Eastlake, Ohio for an aggregate purchase price of $8.0 million and
the assumption of certain liabilities. The Curtis Retail operation was
integrated with the Hillman division. Curtis' sales were $1.6 million from the
acquisition date through December 31, 1995 and approximately $11.0 million for
the twelve months ended December 31, 1996.
Results of Operations
Market Developments
--------------------
In 1996, the Industrial Services and Hardware Merchandising segments continued
to expand as a result of economic strength in most product markets and the
addition of new product lines and value-added services. However, the Glass
business has experienced a decline in sales volume primarily attributable to the
discontinuation of certain product lines and markets served and competitive
pressures from major glass manufacturers who have more aggressively pursued the
wholesale distribution business in recent years. This decline has been partially
offset by real growth in Harding's retail glass business, it's primary strategic
focus. Growth in the retail glass business is expected to continue, complemented
by internal expansion and acquisition growth opportunities.
Operating expense control and liquidity in working capital investment allows the
operating divisions to respond quickly to market conditions affected by economic
recession or growth. Management will continue to respond to changing market
conditions.
16
<PAGE>
Restructuring Charges
---------------------
On December 11, 1996, the Board of Directors of Lehman/SDI approved management's
plan to restructure its Technology Services divisions and its Glass
Merchandising business. During the fourth quarter of 1996, the Partnership
recorded a $6.0 million restructuring charge, of which only $.2 million was paid
in cash by December 31, 1996, related to the integration and consolidation of
its five domestic Technology Services divisions and the write-off of certain
non-performing assets in the Glass Merchandising segment. The restructuring plan
is expected to result in the elimination of 175 employees in the Technology
Services divisions by December 31, 1998, and is expected to produce net
annualized cost savings of approximately $5.0 million per year upon its
completion. See Note 1 of Notes to Consolidated Financial Statements for the
accounting recognition of the restructuring charges.
Operating Results Excluding Divisions Sold
------------------------------------------
As previously stated, the Operating Partnership sold certain divisions in 1994
and 1995. In order to provide an analysis of the results of ongoing operations,
the sales, gross profit and operating expenses of these divisions have been
excluded from the following discussion of results of operations. The table below
reflects the results from ongoing operations of the Partnership for each year:
<TABLE>
<CAPTION>
(dollars in thousands)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net sales $649,254 $599,865 $558,754
Cost of sales 386,251 355,004 331,609
-------- -------- --------
Gross profit 263,003 244,861 227,145
-------- -------- --------
Operating expenses:
Selling, general & admin. expenses 221,574 205,180 189,252
Management fee to general partner 3,330 3,330 3,330
Depreciation 3,623 3,358 3,249
Amortization 1,924 1,961 2,143
-------- -------- --------
Total operating expenses 230,451 213,829 197,974
-------- -------- --------
Restructuring charges 5,950 -- --
Transaction costs 2,150 -- --
-------- -------- --------
Income from operations $ 24,452 $ 31,032 $ 29,171
======== ======== ========
</TABLE>
Years Ended December 31, 1996 and 1995
--------------------------------------
Net income for the year ended December 31, 1996 was $19.3 million compared with
$44.1 million in 1995. As previously mentioned, 1996 results included a $4.9
million charge (net of $1.1 million in deferred tax benefits), related to the
restructuring of the Technology Services and Glass Merchandising divisions and a
$2.1 million charge for transaction costs associated with the conversion to a C
corporation. The 1995 results included a combined gain of $20.6 million from the
sale of the Downey Glass division in October 1995 and the Dorman Products
division in January 1995. Results for 1995 also included a $.6 million charge
related to the early retirement of debt and $.3 million of operating income from
Downey Glass. Excluding these non-recurring items, net income for 1996 amounted
to $26.3 million or 10.5% above the comparable 1995 earnings of $23.8 million.
17
<PAGE>
Net sales increased $49.4 million or 8.2% over 1995 resulting primarily from an
increase in the volume of products sold due to continued strengthening in
existing product markets as well as additional market penetration from new
product lines and value-added services. Sales recorded in 1996 were $649.3
million compared with 1995 sales of $599.9 million, excluding divisions sold.
Sales increases (decreases) by business segment are as follows:
<TABLE>
<CAPTION>
Sales Increase (Decrease)
-------------------------
Amount %
------ -
<S> <C> <C>
Industrial Services
Technology Services $ 13.6 million 4.8 %
Inventory Management 18.2 million 13.1 %
-------
Total Industrial Services 31.8 million 7.5 %
Hardware Merchandising 18.8 million 22.2 %
Glass Merchandising (1.2)million (1.3)%
-------
Total Partnership $ 49.4 million 8.2 %
========
</TABLE>
The sales increase in the Hardware Merchandising segment includes approximately
$11.0 million which is due to the Curtis acquisition and the balance of $7.8
million in growth from new accounts, expansion of existing product lines and
market penetration of new product lines. The increase in sales in the SIMCO
divisions is comprised of sales growth from new inventory management programs of
$10.5 million or 42.9% and in maintenance products of $7.7 million or 6.7%.
The decline in sales volume in the Glass Merchandising segment is attributable
to the discontinuation of certain product lines and markets served, accounting
for $.2 million of the sales decline and a decrease in wholesale glass,
brokerage and other product line sales of $2.8 million, offset by an increase in
retail glass sales of $1.8 million, or 4.2%.
Cost of sales increased $31.2 million or 8.8% from the twelve months ended
December 31, 1995, due primarily to increased sales levels in the comparison
period.
Gross margins were 40.5% in 1996 compared with 40.8% in 1995, excluding
divisions sold, comprised by business segment as follows:
Year Ended December 31
-----------------------
1996 1995
---- ----
Industrial Services
Technology Services 26.7% 27.4%
Inventory Management 61.1% 64.5%
Total Industrial Services 38.6% 39.5%
Hardware Merchandising 50.8% 52.4%
Glass Merchandising 38.8% 35.9%
The erosion in gross margin in the SIMCO divisions is due mainly to competitive
pricing pressures and changes in sales mix. Gross margins in the Hardware
Merchandising segment decreased due to reduced packaging productivity levels and
costs associated with integration costs for the Curtis acquisition and other
business expansion programs.
Gross margins in the Glass Merchandising segment increased due primarily to
improved purchasing management and better sales in retail glass which carries
higher margins than the other product lines in this segment.
18
<PAGE>
Selling, warehouse and delivery, and general and administrative ("S,G&A")
expenses increased by $16.4 million or 8.0% over 1995, excluding divisions sold,
comprised as follows: increased selling expenses of $7.4 million or 7.5%,
supporting increased 1996 sales levels; increased warehouse and delivery
expenses of $6.3 million or 17.2% due to the integration of the Curtis retail
division, expansion programs by certain operating units, and the addition of
seven large in-plant accounts in the SIMCO divisions; and increased general and
administrative expenses of $2.8 million or 3.9% due primarily to cost
containment efforts.
Excluding divisions sold, S,G&A expenses as a percentage of sales, were as
follows:
Year Ended December 31
1996 1995
---- ----
Selling Expenses 16.3% 16.4%
Warehouse and Delivery Expenses 6.6% 6.1%
General and Administrative Expenses 11.2% 11.7%
------ -----
Total S,G&A Expenses 34.1% 34.2%
====== =====
As calculated in accordance with the partnership agreement, the management fee
due the General Partner is accrued in the amount of $3.3 million annually which
is based on 3% of the aggregate initial capital investment ($111 million) of the
limited partners.
Depreciation expense increased $.3 million in the comparison period due
primarily to an increase in the depreciable fixed asset base.
Interest income decreased $.3 million in 1996 due primarily to the reduced
investment of excess cash that was generated during the fourth quarter of 1994
and the first quarter of 1995 from divisions sold.
Interest expense decreased $.4 million in 1996 due primarily to reduced
financing costs from the prepayment of senior notes on March 14, 1995, offset by
higher interest expense from increased borrowing levels under the Partnership's
revolving credit facility.
Other income increased $.3 million in the comparison period due primarily to
lowered minority interest expense.
Currently, the Partnership incurs state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican Operations.
Also, the Partnership provides for deferred income taxes as determined in
accordance with Statement of Financial Accounting Standard No. 109 ("SFAS
#109"). As currently calculated, deferred income taxes represent state and
federal income tax benefits expected to be realized after December 31, 1997,
when the Partnership will be taxed as a corporation.
The Partnership's provision for income taxes in 1996 decreased $1.7 million from
1995 due to the recording of the following: $.5 million deferred income tax
benefit relating to book/tax differences in the Partnership's casualty loss
insurance program, a $1.1 million deferred income tax benefit relating to
book/tax differences from restructuring costs and a $.1 million favorable
adjustment to prior year's state income tax provisions. See "Income Taxes" below
for a discussion of the effect of the proposed conversion to corporate form on
deferred income taxes.
19
<PAGE>
The allocation of net income to the General Partner is based on the General
Partner's 1% ownership interest in the profits of the Partnership. The
allocation of net income to the limited partners for financial statement
purposes represents a 99% interest in the profits of the Partnership. The net
income allocation resulted in $1.10 of income per Class A limited partnership
interest for the years ended December 31, 1996 and December 31, 1995; and $.32
of income per Class B limited partnership interest in 1996 compared with $1.45
of income per Class B interest for the year ended December 31, 1995. Income per
Class B interest in 1996 was reduced by the restructuring charge, net of
deferred tax benefits and transaction costs amounting to $.22 and $.10,
respectively. Income per Class B interest for the twelve months ended December
31, 1995 included a combined gain of $.94 from the sale of the Dorman Products
and Downey Glass divisions, an extraordinary loss of $.03 from the early
extinguishment of debt and $.01 of income from the divested Downey Glass
division. Excluding these non-recurring items, income per Class B interest was
$.64 compared with $.53 in 1995, an increase of approximately 21%.
Years Ended December 31, 1995 and 1994
--------------------------------------
Net income for the year ended December 31, 1995 was $44.1 million including a
combined gain of $20.6 million from the sale of the Dorman Products and Downey
Glass divisions, compared with $29.5 million earned in 1994, which included a
gain of $3.5 million from the sale of the Electrical Group divisions in December
1994. Results for 1995 also included a $.6 million charge related to the early
retirement of debt and a reduction in net financing costs of almost $3.2 million
from the prior year. 1994 net income included income from the Electrical Group
of $4.1 million, from Dorman Products of $2.8 million, and from Downey Glass of
$1.7 million. Excluding income contributions and gains from divisions sold, as
well as the extraordinary loss on early extinguishment of debt, net income for
1995 amounted to $23.8 million or 36.7% above the comparable 1994 earnings of
$17.4 million.
Net sales increased $41.1 million or 7.4% over 1994 resulting primarily from an
increase in the volume of products sold due to strengthening in most product
markets and significant growth from sales programs and services initiated since
1992. Substantially all of the Partnership's growth in revenues is related to
increases in the volume of products sold. Excluding divisions sold, sales
recorded in 1995 were $599.9 million compared with 1994 sales of $558.8 million.
Sales increases (decreases) by business segment were as follows:
Sales Increase
-------------------------------
Amount %
------ -
Industrial Services
Technology Services $ 25.0 million 9.6 %
Inventory Management 10.1 million 7.9 %
-------
Total Industrial Services 35.1 million 9.1 %
Hardware Merchandising 11.9 million 16.3 %
Glass Merchandising (5.9)million (6.1)%
-------
Total Partnership $ 41.1 million 7.4 %
=======
The decline in sales volume in the Glass Merchandising segment was primarily
attributable to the discontinuation of certain product lines and markets served,
resulting in a sales reduction of $5.0 million from 1994. On a comparable basis
sales decreased $.9 million, or .9%, in the Glass Merchandising segment.
Cost of sales increased $23.4 million or 7.1%, due primarily to increased sales
levels in the existing businesses in the comparison period.
20
<PAGE>
Excluding divisions sold, gross margins were 40.8% in 1995 compared with 40.7%
in 1994, comprised by business segment as follows:
Year Ended December 31
-----------------------------
1995 1994
---- ----
Industrial Services
Technology Services 27.4% 27.7%
Inventory Management 64.5% 65.9%
Total Industrial Services 39.5% 40.3%
Hardware Merchandising 52.4% 51.0%
Glass Merchandising 35.9% 34.4%
Sales mix was the principal contributor to the changes in gross margins.
S,G&A expenses, excluding divisions sold, increased by $15.9 million or 8.4%
over 1994, comprised as follows: increased selling expenses of $8.9 million or
9.9%, increased warehouse and delivery expenses of $3.2 million or 10.0% and
increased general and administrative expenses of $3.9 million or 5.7%. The
increase in S,G&A expenses supported increased 1995 sales levels and expansion
programs by certain operating units.
Excluding divisions sold, S,G&A expenses, as a percentage of sales were as
follows:
Year Ended December 31
-----------------------------
1995 1994
---- ----
Selling Expenses 16.4% 16.1%
Warehouse and Delivery Expenses 6.1% 5.7%
General and Administrative Expenses 11.7% 12.1%
----- -----
Total S,G&A Expenses 34.2% 33.9%
----- -----
The increase in S, G&A as a percentage of sales was due mainly to increased
support payments, incentive programs and marketing efforts for the sales force.
The management fee due the General Partner is accrued in the amount of $3.3
million annually, as previously discussed.
Depreciation expense increased $.1 million in the comparison period due
primarily to an increase in the depreciable fixed asset base at the remaining
divisions of the Partnership.
Amortization expense decreased $.2 million in the comparison period due
primarily to the expiration of non-compete agreements in the Glass Merchandising
segment.
Interest income increased $.3 million in the comparison period due primarily to
the investment of excess cash generated from divisions sold.
Interest expense decreased $2.6 million in the comparison period due to reduced
financing costs of approximately $1.5 million from the prepayment of senior
notes on March 14, 1995, and $1.1 million from reduced borrowing levels under
the Partnership's revolving credit facility.
Other income was $.3 million for the twelve months ended December 31, 1995,
compared to $1.7 million of other expense 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.
21
<PAGE>
As previously stated, the Partnership incurs state, local and foreign income
taxes and provides for deferred income taxes as determined in accordance with
SFAS #109. The Partnership's provision for income taxes in 1995 increased $.4
million from 1994 due primarily to an increase in state taxes as a result of
gains on divisions sold.
The allocation of net income, which was discussed previously, resulted in $1.10
of income per 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.
Liquidity and Capital Resources
Net cash provided by operations for the twelve months ended December 31, 1996
was $23.3 million, an increase of $6.2 million from the prior year level of
$17.1 million. The Partnership's net interest coverage ratio (earnings before
interest, taxes, gain on sale of divisions, and 1996 restructuring charges and
transaction costs over net interest expense) improved to 4.81X in 1996 from the
1995 level of 4.56X.
The Partnership's cash position of $1.7 million as of December 31, 1996,
decreased $4.2 million from the balance at December 31, 1995. Cash was provided
during 1996 primarily from operations of $23.3 and borrowings under the bank
credit agreement of $11.0 million. Cash was used during this period
predominantly for distributions to the general and limited partners ($25.6
million), repayment of debt obligations ($6.4 million), acquisitions ($.7
million), capital expenditures ($4.3 million), repayments under other credit
facilities($.1 million) and the purchase of life insurance ($1.4 million).
The Partnership's working capital position of $100.2 million at December 31,
1996, represents an increase of $4.4 million from the December 31, 1995 level of
$95.8 million. The increase is primarily attributable to reinvestment in working
capital of $2.7 million, a decrease in distributions payable of $5.4 million and
acquired working capital of $.5 million related to the Hydraulic Depot
acquisition, offset by a decrease in cash of $4.2 million. The Partnership's
current ratio increased to 2.15 at December 31, 1996 from the December 31, 1995
level of 2.11.
On December 1, 1996 and 1995, the Operating Partnership paid scheduled principal
repayments on its senior notes aggregating $6.4 million and $4.8 million,
respectively. On March 14, 1995, the Partnership prepaid a portion of its senior
notes in the amount of $14.2 million, including accrued interest thereon of $.4
million and a make-whole penalty of $.6 million. As of December 31, 1996, the
Partnership's total debt as a percentage of its consolidated capitalization is
43.9% compared with 42.3% as of December 31, 1995.
The Partnership anticipates spending approximately $4.5 million for capital
expenditures in 1997, primarily for machinery and equipment.
22
<PAGE>
As of December 31, 1996, the Operating Partnership had $33.2 million available
under its $50.0 million Bank Credit Agreement which provides revolving credit
for working capital purposes and acquisitions through December 31, 1997. The
Partnership had $11.0 million in bank borrowings outstanding at December 31,
1996 under the Bank Credit Agreement and $5.8 million outstanding representing
letter of credit commitments. In addition, an indirect, wholly-owned Canadian
subsidiary of the Operating Partnership has a $2.5 million Canadian dollar line
of credit for working capital purposes of which $.6 million USD was outstanding
at December 31, 1996.
The Partnership was restricted from making acquisition investments in 1994 under
the Senior Note and Bank Credit Agreements. The acquisition restriction in 1994
was a result of an amendment to the credit agreements executed in the first
quarter of 1994 that eased certain coverage ratios and other financial
requirements of the credit agreements. Acquisition spending amounted to $.7
million and $8.0 million in 1996 and 1995, respectively. Management intends to
continue its acquisition strategy in 1997, with authorized spending of up to
$15.0 million per year in the aggregate, to complement internal growth.
The Operating Partnership was required to reduce permanently the bank revolver
commitment under the bank credit agreement by approximately $13.0 million as a
result of the sale of certain operating divisions. However, the banks have
waived this permanent reduction and maintained the existing bank credit
commitment of $50.0 million. For 1995 and future years, the lenders have agreed
to revise certain covenant tests to exclude the impact of cash distributions to
holders of Class B interests related solely to tax gains on divisions sold.
The Partnership suspended the payment of monthly advance B tax distributions
effective January 1, 1997 through March 31, 1997, pending the conversion to
corporate form. Due to the delay in completion of the proposed corporate
conversion, the Partnership intends to resume payment of monthly advance Class B
tax distributions in April 1997 in the amount of $.03 per B Interest. On March
20, 1997, the Partnership declared a B tax distribution in the amount of $.03
per B Interest payable April 30, 1997, to holders of record April 1, 1997. The
Partnership intends to pay this monthly rate to Class B holders until the
effective date of the conversion since it expects to allocate sufficient Class B
taxable income in the shortened tax year from January 1, 1997, through the
effective date to require the B tax distribution payment. The balance of the
required 1997 Class B tax distribution, if any will be paid on or before March
31, 1998.
For 1996, the Class B tax distribution amounted to $7.7 million or $.35 per B
interest, which was partially paid in the amount of $.02 per B interest per
month for the period January through April 1996 and in the amount of $.03 per B
interest per month for the period May through December 1996. On March 31, 1997,
the Partnership will distribute the balance of the tax distribution due of
$.0265 per Class B interest to holders of record for the entire year.
The taxable gain from the sale of the Dorman Products and Downey Glass divisions
in 1995 amounted to $.927 and $.232 per Class B interest, respectively. The sale
of the Electrical Group divisions in December 1994 resulted in a taxable gain of
$.408 per Class B Interest. With respect to the sale of Dorman Products on
January 3, 1995, the Operating Partnership paid a partial tax distribution on
April 10, 1995 to Class B holders of record as of December 30, 1994, in the
amount of $.15 per Class B Interest. The remaining balance of the tax
distribution for the taxable gain on the sale of Dorman Products in the amount
of $.175 per Class B Interest was paid on March 29, 1996, along with a tax
distribution in the amount of $.081 per Class B interest to holders of record as
of September 29, 1995 related to the sale of the Downey Glass division on
October 27, 1995. Related to the sale of the Electrical Group divisions, the
Partnership made a tax distribution on March 31, 1995 to Class B holders of
record as of December 30, 1994, equal to approximately $.143 per Class B
Interest.
23
<PAGE>
In connection with the proposed conversion of the Partnership to corporate form,
the Partnership intends to refinance its current outstanding debt of $74.9
million as of December 31, 1996, with a combination of new long-term fixed rate
debt of $60 million and a bank revolver of $90 million. As a result of its
refinancing, SunSource will prepay its outstanding senior notes in whole upon
consummation of the proposed conversion. The Partnership would incur a
make-whole penalty of approximately $5 million related to prepayment. The
refinancing is expected to provide SunSource with additional working capital for
reinvestment in its businesses, capital to fund costs related to the proposed
corporate conversion and refinancing and acquisition capital for future growth.
See Item 3 - Legal Proceedings, for the description of a lawsuit with respect to
the sale of the Partnership's Dorman Products division and recent lawsuits
involving the Partnership's General Partner related to the proposed conversion
to corporate form. Certain other legal proceedings are pending which are either
in the ordinary course of business or incidental to the Partnership's business.
Those legal proceedings incidental to the business of the Partnership are
generally not covered by insurance or other indemnity. In the opinion of
management, the ultimate resolution of these matters will not have a material
effect on the consolidated financial position, operations or cash flows of the
Partnership.
Income Taxes
The Partnership has a deferred tax asset aggregating $5.0 million as of December
31, 1996. Management believes that the Partnership's deferred tax asset will be
realized through the reversal of existing temporary differences at the earlier
of the date of conversion to a C corporation should the proposed conversion be
approved, or after December 31, 1997, when the Partnership will be treated as a
corporation for federal income tax purposes. The temporary differences expected
to reverse at the date of conversion to a C corporation or after December 31,
1997, between the financial statement and tax bases, are composed of prepayment
penalties in the amount of $.8 million, insurance casualty loss liabilities in
the amount of $1.4 and deferred compensation liabilities in the amount of $8.3
million, net of a valuation allowance of $.2 million. See Note 13 of Notes to
Consolidated Financial Statements.
The minimum level of future taxable income necessary to realize the
Partnership's recorded deferred tax asset at December 31, 1996, is approximately
$12.5 million. For the three years ended December 31, 1996, the Partnership's
consolidated net income per the financial statements reconciled to federal
taxable income in thousands of dollars is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Consolidated Net Income per the
Financial Statements ("Book") $19,267 $44,116 $29,544
Tax Adjustments to Book Income:
- -------------------------------
Goodwill & Other Amortization 1,013 1,252 1,634
Depreciation 607 467 506
Deferred Compensation, net (96) 942 2,917
Self-Insurance Accrued Expenses, net (943) (776) 844
Tax gain in excess of book gain from
sale of Divisions -- 1,977 1,216
Restructuring Charges 5,783 -- --
Transaction Costs 2,150 -- --
Other Increase (Decrease) to
Book Income, net 853 1,893 451
-------- -------- -------
Federal Taxable Income $28,634 $49,871 $37,112
======== ======== =======
</TABLE>
24
<PAGE>
Partnership Tax Status
As previously stated, the Partnership will be taxed as a corporation for federal
income tax purposes either upon conversion to a corporation should the proposed
conversion be approved, or after December 31, 1997, whichever is earlier. If the
proposed conversion is approved and the Partnership converts to a corporation,
the Corporation will record a provision for U.S. federal, state and foreign
income taxes on its taxable earnings.
If the Partnership remains a limited partnership, the effect of the change in
taxation after December 31, 1997 will result in the Partnership paying a
corporate income tax at the Partnership level. Therefore, in accordance with the
Partnership Agreement, the Partnership's income will not be allocated for tax
purposes to the partners as is currently being done, and limited partners will
pay taxes only on distributions from the Partnership, if any. Additionally, in
accordance with the Partnership Agreement, the Partnership would no longer make
tax distributions with respect to Class B limited partnership interests.
Accordingly, a decision on whether any other distribution will be made with
respect to the Class B interests is solely within the discretion of the General
Partner. Based on current operations, it is likely that cash would be retained
in the Partnership to fund its acquisition program and other partnership
requirements. If the Partnership remains a limited partnership, payment of the
Priority Return distribution is expected to continue to the Class A interests in
the amount of $.0917 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 on competitive
market conditions.
25
<PAGE>
Item 8 - Financial Statements and Supplementary Data.
- -----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
Report of Independent Accountants 27
Financial Statements:
Consolidated Balance Sheets, December 31, 1996 and 1995 28
Consolidated Statements of Income, Years ended
December 31, 1996, 1995 and 1994 29
Consolidated Statements of Cash Flows, Years ended
December 31, 1996, 1995 and 1994 30
Consolidated Statements of Changes in Partners' Capital,
Years ended December 31, 1996, 1995 and 1994 31
Notes to Consolidated Financial Statements 32-52
Financial Statement Schedules:
I Condensed Financial Information of Registrant 53
II Valuation Accounts 54
26
<PAGE>
Report of Independent Accountants
The Board of Directors
Lehman/SDI, Inc.
We have audited the accompanying consolidated balance sheets of SunSource L.P.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in partners' capital and cash flows for each of
the three years in the period ended December 31, 1996. We have also audited the
financial statement schedules listed in Item 14 (a)(2) of this Form 10-K. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of SunSource L.P. and
subsidiary as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 29, 1997, except for
Note 9 as to which the date is
March 21, 1997 and Note 19 as to
which the date is March 4, 1997
27
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1996 1995
------------ ----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,666 $ 5,900
Accounts and notes receivable, net of
allowance for doubtful accounts of
$2,208 and $1,827, respectively 78,578 75,824
Inventories 102,396 96,022
Other current assets 4,672 4,742
--------- ---------
Total current assets 187,312 182,488
Property and equipment, net 21,409 20,181
Goodwill (net of accumulated amortization
of $12,879 and $11,739, respectively) 43,036 44,250
Other intangibles (net of accumulated
amortization of $14,372 and $13,724, respectively) 667 1,312
Deferred income taxes 5,007 2,844
Cash surrender value of life insurance policies 4,566 3,009
Other assets 558 507
--------- ---------
Total assets $ 262,555 $ 254,591
========= =========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current liabilities:
Accounts payable $ 48,557 $ 42,437
Notes payable 2,670 2,753
Current portion of senior notes 6,395 6,395
Current portion of capitalized lease obligations 107 --
Distributions payable to partners 1,857 7,819
Accrued expenses:
Salaries and wages 5,696 5,022
Management fee due the general partner 3,330 3,330
Income and other taxes 2,695 3,398
Other accrued expenses 15,224 15,493
--------- ---------
Total current liabilities 86,531 86,647
Senior notes 57,539 63,934
Bank revolving credit 11,000 --
Capitalized lease obligations 504 --
Deferred compensation 8,644 7,829
Other liabilities 3,718 1,238
--------- ---------
Total liabilities 167,936 159,648
--------- ---------
Commitments and contingencies
Partners' capital:
General partner 960 963
Limited partners:
Class A interests 67,642 67,642
Class B interests 29,040 29,252
Class B interests held in treasury (1,514) (1,514)
Cumulative foreign currency translation adjustment (1,509) (1,400)
--------- ---------
Total partners' capital 94,619 94,943
--------- ---------
Total liabilities and partners' capital $ 262,555 $ 254,591
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
<S> <C> <C> <C>
Net sales $ 649,254 $ 628,935 $ 735,861
Cost of sales 386,251 375,425 451,785
------------ ------------ ------------
Gross profit 263,003 253,510 284,076
------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 221,574 213,221 235,845
Management fee to general partner 3,330 3,330 3,330
Depreciation 3,623 3,661 4,502
Amortization 1,924 1,996 2,640
------------ ------------ ------------
Total operating expenses 230,451 222,208 246,317
------------ ------------ ------------
Restructuring charges 5,950 -- --
Transaction costs 2,150 -- --
------------ ------------ ------------
Income from operations 24,452 31,302 37,759
Interest income 69 412 66
Interest expense 6,944 7,332 9,956
Other income (expense), net 550 256 (1,748)
Gain on sale of division (note 5) -- 20,644 3,523
------------ ------------ ------------
Income before provision for income taxes 18,127 45,282 29,644
Provision (benefit) for income taxes (1,140) 537 100
------------ ------------ ------------
Income before extraordinary loss 19,267 44,745 29,544
Extraordinary loss from early extinguishment
of debt (note 4) -- (629) --
------------ ------------ ------------
Net income $ 19,267 $ 44,116 $ 29,544
============ ============ ============
Net income allocated to partners:
General partner $ 193 $ 441 $ 295
------------ ------------ ------------
Class A limited partners $ 12,210 $ 12,210 $ 12,210
------------ ------------ ------------
Class B limited partners $ 6,864 $ 31,465 $ 17,039
------------ ------------ ------------
Earnings per Limited partnership interest:
Income before extraordinary loss
- Class A interest $ 1.10 $ 1.10 $ 1.10
- Class B interest $ 0.32 $ 1.48 $ 0.79
Extraordinary loss
- Class A interest -- -- --
- Class B interest -- $ (0.03) --
Net income
- Class A interest $ 1.10 $ 1.10 $ 1.10
- Class B interest $ 0.32 $ 1.45 $ 0.79
Weighted average number of outstanding
limited partnership interests:
- Class A interests 11,099,573 11,099,573 11,099,573
- Class B interests 21,675,746 21,675,746 21,675,746
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 19,267 $ 44,116 $ 29,544
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization:
- Existing divisions 5,547 5,319 5,392
- Divested divisions -- 338 1,750
Decrease (increase) in cash value of life insurance (157) 58 --
Gain on sale of divisions -- (20,644) (3,523)
Extraordinary loss -- 629 --
Restructuring charges 5,950 -- --
Transaction costs 2,150 -- --
Provision for deferred compensation 1,071 2,340 3,187
Deferred income tax benefit (2,163) (700) (734)
Changes in current operating items:
Increase in accounts and notes receivable (2,465) (3,666) (11,783)
Increase in inventories (7,572) (8,209) (9,436)
Decrease in other current assets 70 857 347
Increase in accounts payable 6,062 2,531 1,865
Decrease in accrued interest (47) (141) (42)
Decrease in accrued restructuring charges
and transaction costs (1,899) -- --
Increase (decrease) in other accrued liabilities (2,769) (6,062) 4,836
Other items, net 253 284 (3,699)
-------- -------- --------
Net cash provided by operating activities 23,298 17,050 17,704
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of divisions -- 44,873 26,561
Proceeds from sale of property and equipment 62 757 724
Payment for purchase of assets (683) (7,385) --
Capital expenditures (4,341) (4,299) (4,263)
Investment in life insurance policies (1,400) (3,067) --
Other, net (39) (93) 228
-------- -------- --------
Net cash provided by (used for) investing activities (6,401) 30,786 23,250
-------- -------- --------
Cash flows from financing activities:
Cash distributions to partners (25,641) (27,218) (20,357)
Repayment of senior notes (6,395) (18,971) (5,700)
Borrowings (repayments) under the bank credit
agreement, net 11,000 -- (10,000)
Prepayment penalties and related costs -- (629) --
Borrowings (repayments) under other
credit facilities, net (83) 44 (702)
Principal payments under capitalized
lease obligations (12) (65) (619)
-------- -------- --------
Net cash used for financing activities (21,131) (46,839) (37,378)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (4,234) 997 3,576
Cash and cash equivalents at beginning of period 5,900 4,903 1,327
-------- -------- --------
Cash and cash equivalents at end of period $ 1,666 $ 5,900 $ 4,903
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
-----------------
Cumulative
Foreign
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment TOTAL
------- ------- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 729 $ 67,642 $ 6,025 $ (1,514) $ (694) $ 72,188
Net income 295 12,210 17,039 -- -- 29,544
Cash distributions paid and/or
declared to partners (233) (12,210) (10,764) -- -- (23,207)
Change in cumulative foreign
translation adjustment -- -- -- -- (644) (644)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1994 791 67,642 12,300 (1,514) (1,338) 77,881
Net income 441 12,210 31,465 -- -- 44,116
Cash distributions paid and/or
declared to partners (269) (12,210) (14,513) -- -- (26,992)
Change in cumulative foreign
translation adjustment -- -- -- -- (62) (62)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 $ 963 $ 67,642 $ 29,252 $ (1,514) $ (1,400) $ 94,943
Net income 193 12,210 6,864 -- -- 19,267
Cash distributions paid and/or
declared to partners (196) (12,210) (7,076) -- -- (19,482)
Change in cumulative foreign
translation adjustment -- -- -- -- (109) (109)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 $ 960 $ 67,642 $ 29,040 $ (1,514) $ (1,509) $ 94,619
========= ========= ========= ========= ========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). All significant intercompany
balances and transactions have been eliminated.
Nature of Operations:
---------------------
The Partnership is one of the largest wholesale distributors of industrial
products and related services in the United States. The Partnership's three
segments are: (1) industrial products and services, primarily maintenance and
fluid power products and inventory management services sold to industrial
customers for machine and plant maintenance and for manufacturing of original
equipment; (2) retail merchandising products and services, primarily fasteners
and related products sold to retail hardware stores; and (3) retail glass
products and services sold to construction and retail markets. Based on net
sales of existing divisions for the year ended December 31, 1996, the Industrial
Services Segment provides approximately 70% of the Partnership's sales through
its Sun Technology Services divisions (46% of net sales) and the Sun Inventory
Management Company ("SIMCO") divisions (24% of net sales). The Hardware
Merchandising and Glass Merchandising segments provide approximately 16% and
14%, respectively, of the Partnership's net sales.
Although its sales are primarily industrially-based, the Partnership has over
180,000 customers, the largest of which accounted for less than 5% of net sales
for the year ended December 31, 1996. The Partnership's products and services
are sold throughout all 50 states as well as in Canada and Mexico. Foreign sales
account for less than 5% of total revenues. The average single sale during the
year ended December 31, 1996 was less than three hundred dollars. Sales
performance is tied closely to the overall performance of the non-defense-goods
producing sector of Gross Domestic Product in the United States.
Restructuring Charges:
----------------------
On December 11, 1996 (the "commitment date"), the Board of Directors of
Lehman/SDI, Inc. ("Lehman/SDI"), the general partner of the Partnership's
General Partner, approved the Partnership's plan to restructure its Technology
Services divisions and its Glass Merchandising business. The Partnership
recorded a provision for these charges on the commitment date in the amount of
$5,950, of which $4,400 related to Technology Services and $1,550 to Glass
Merchandising. The following disclosures are made in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity."
32
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
1. Basis of Presentation, continued:
The following is a summary of the balance sheet classification of the accrued
restructuring charges in the accompanying balance sheet at December 31, 1996:
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ----------------------------- ----------- ---------- -----
Current - other accrued expenses $ 829 $ 896 $ 1,725
Long-term - other liabilities $ 2,014 $ 573 $ 2,587
Restructuring Charges - Technology Services Divisions
-----------------------------------------------------
The restructuring charges for the Technology Services Divisions include
termination benefits of $2,955 covering 175 employees, including sales (40),
warehouse (27), purchasing (16), branch operations (56) and accounting (36).
Other exit costs for Technology Services include legal and consulting costs of
$525 to develop severance agreements and to conduct employee meetings and lease
termination and related costs of $920 to close ten leased warehouse and office
facilities. The Board's approval on the commitment date provided the
Partnership's management with the authority to involuntarily terminate
employees. The Partnership has established the levels of benefits that the
terminated employees would receive and informed the employees of their
termination benefits prior to December 31, 1996.
The following table summarizes the restructuring costs charged, the balance
sheet classification, and payments or adjustments between the commitment date
and December 31, 1996:
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ---------------------------- -------- ---------- -----
Opening Balance at
December 11, 1996:
- ------------------
Current - other accrued expense $ 941 $ 872 $ 1,813
Long-term - other liabilities $ 2,014 $ 573 $ 2,587
Payments during period:
- -----------------------
Current - other accrued expense * $ (112) $ (55) $ (167)
Ending Balance at
December 31, 1996:
- ------------------
Current - other accrued expense $ 829 $ 817 $ 1,646
Long-term - other liabilities $ 2,014 $ 573 $ 2,587
* termination benefits paid to 9 employees; other exit costs for legal and
consulting charges paid.
33
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
1. Basis of Presentation, continued:
Restructuring Charges - Glass Merchandising Divisions
-----------------------------------------------------
The restructuring charges for the Glass Merchandising division represent
primarily costs to withdraw from certain geographic markets as part of the
Partnership's restructuring plan. The largest component of these charges is the
write-off of unamortized goodwill from purchase business combinations in the
amount of $1,321, which is not recoverable. The remaining charges represent the
excess of undepreciated fixed assets over their fair value, in the amount of
$150, with fair value determined using the estimated prices of similar assets.
The Partnership applied the provisions of SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in
connection with the determination of these charges. The decision to withdraw
from these markets was primarily strategic based on an overall review of the
operations of the Glass Merchandising segment; in the Partnership's view, any
recognition of asset impairment prior to the commitment date would not have been
appropriate under SFAS No. 121., since the specific locations to be closed were
decided upon only in the process of finalizing the restructuring plan. These
amounts are included as restructuring charges since they were recognized at the
commitment date as part of the overall plan of restructuring. Also included are
$79 of lease termination costs recognized in accordance with EITF No. 94-3 as
exit costs.
The following table summarizes other exit costs charged, the balance sheet
classification, and payments or adjustments between the commitment date and
December 31, 1996:
Balance Sheet Classification Total
- ---------------------------- -----
Opening Balance at December 11, 1996
- ------------------------------------
Unamortized Goodwill $ 1,321
Excess of undepreciated fixed assets $ 150
Current - other accrued expenses $ 79
Charges during period:
- ----------------------
Unamortized Goodwill $ (1,321)
Excess of undepreciated fixed assets $ (150)
Ending Balance at December 31, 1996:
- ------------------------------------
Current - other accrued expenses $ 79
Transaction Costs:
- ------------------
On December 11, 1996, the Partnership announced the terms of a plan to convert
from its current limited partnership structure to a taxable C corporation, which
must be approved by a majority of the holders of the Class A and Class B
interests unaffiliated with SDI Partners I, L.P., the General Partner, each
voting separately as a class.
In connection with the proposed conversion, the Partnership has incurred certain
costs related to the transaction which are included as a separate component of
income from operations, due to the infrequent nature of the conversion
transaction.
34
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies:
Cash Equivalents:
-----------------
Cash equivalents consist of commercial paper, U.S. Treasury obligations and
other liquid securities purchased with initial maturities less than 90 days and
are stated at cost which approximates market value.
Inventories:
------------
Inventories, which consist of products purchased for resale, are valued at the
lower of cost or market, cost being determined principally on the first-in,
first-out method.
Property and Equipment:
-----------------------
Property and equipment, including assets acquired under capital leases, is
carried at cost and includes expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold, or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations.
Depreciation:
-------------
For financial accounting purposes, depreciation, including that related to plant
and equipment acquired under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets, generally three to
twenty-five years, or, if shorter, over the terms of the related leases.
Goodwill and Other Intangible Assets:
-------------------------------------
Goodwill related to the excess of acquisition cost over the fair value of net
assets acquired is amortized on a straight-line basis over forty years. Other
intangible assets arising principally from acquisitions by the Operating
Partnership are amortized on a straight-line basis over periods ranging from
three to ten years.
35
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Income Taxes:
-------------
As a partnership, taxable income and losses are included on the federal tax
returns of the partners; accordingly, the Partnership incurs no liability for
U.S. federal income taxes. Accordingly, no current provision for federal income
taxes is reflected in the accompanying consolidated financial statements.
However, the Partnership does incur certain state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
operations. Therefore, a current provision for state, local and foreign income
taxes is reflected in the accompanying consolidated financial statements.
The Revenue Act of 1987 provides that certain "existing publicly traded
partnerships", such as the Partnership, generally will not be treated as
corporations for federal income tax purposes until after December 31, 1997,
provided that such partnerships do not add any substantial new line of business
before the effective date.
Statement of Financial Accounting Standards ("SFAS") No. 109 requires the
Partnership to recognize deferred tax assets and liabilities for expected future
tax consequences of events that have been recognized in the consolidated
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the temporary differences are expected to reverse.
The Partnership's deferred taxes are determined from temporary differences
expected to reverse after December 31, 1997, or the date of conversion, if
earlier, when the Partnership will be taxed as a corporation. Therefore, a
deferred provision or benefit for state and federal income taxes is reflected in
the accompanying consolidated statements of income.
Retirement Benefits:
--------------------
Certain employees are covered under profit-sharing retirement plans ("defined
contribution plans") for which contributions are determined on an annual basis
in accordance with the requirements of each plan.
Defined benefit plan contributions covering certain employees are funded, at a
minimum, in accordance with the requirements of the Employee Retirement Income
Security Act of 1974, as amended.
In accordance with collective bargaining agreements, annual contributions to
multi-employer pension plans are made. These contributions, which are based on
fixed contributions per month for each hour worked, are charged to income as
incurred.
Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan. The
Partnership has elected to amortize the accumulated post-retirement benefit
liability (transition obligation) resulting in delayed recognition. The impact
of the adoption on the Partnership's financial position and results of
operations is immaterial.
36
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Fair Value of Financial Instruments:
------------------------------------
Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value because of the short-term maturity or
revolving nature of these instruments. The fair values of the Partnership's debt
instruments are disclosed in Note 9.
Translation of Foreign Currencies:
----------------------------------
The translation of applicable foreign-currency-based financial statements into
U.S. dollars is performed for balance sheet accounts using exchange rates in
effect at the balance sheet date and for revenue and expense accounts using an
average exchange rate during the period. The changes in the cumulative foreign
translation adjustment for each period relate to translation adjustments in
their entirety.
Exchange adjustments resulting from foreign currency transactions are recognized
in net income and were immaterial for the three years ending December 31, 1996.
Use of Estimates in the Preparation of Financial Statements:
------------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
37
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure:
The General Partner of the Partnership and the Operating Partnership is SDI
Partners I, L.P. (the "GP"), a Delaware limited partnership whose sole general
partner is Lehman/SDI, formerly known as Shearson/SDI, Inc., an indirect,
wholly-owned subsidiary of Lehman Brothers Holdings, Inc. ("Lehman Holdings"),
formerly known as Shearson Lehman Brothers Holdings, Inc.
The Partnership's Class A and Class B limited partnership interests outstanding,
as of December 31, 1996, are held as follows:
Class A Class B
Interests Interests
Public Investors 11,019,850 (99.3%) 11,633,603 (53.7%)
Lehman Holdings
And Affiliates -- 5,896,678 (27.2%)
Executive Officers and
Directors (a) 79,723 (0.7%) 4,145,465 (19.1%)
------------------ -------------------
Total 11,099,573 (100.0%) 21,675,746 (100.0%)(b)
=================== ======================
(a) Executive officers of the Partnership and the Operating Partnership and
Directors of Lehman/SDI, including beneficial ownership.
(b) Net of 523,400 Class B interests held in the Partnership's treasury as of
December 31, 1996.
Except as expressly limited by the partnership agreement, the GP has complete
and exclusive discretion in the management and control of the affairs and
business of the Partnership and its subsidiary partnership. The holders of Class
A and Class B interests have certain limited voting rights under the partnership
agreement generally regarding the removal of the GP and the sale of all or
substantially all of the assets of the Partnership or the Operating Partnership
or dissolution of the Partnership.
Holders of Class A interests are entitled to receive, to the extent cash is
available, $1.10 annually (the "priority return") per Class A interest, which is
currently paid monthly. On December 19, 1996, the Partnership declared a
priority return distribution for the month of January 1997 in the amount of
$1,038 or $.091666 per Class A interest payable January 31, 1997, to holders of
record December 31, 1996. The Class A capital account as of December 31, 1996
and 1995, was $10.00 per Class A interest.
All items of income and loss and cash distributions of the Operating Partnership
are allocated 99% to the Partnership and l% to the GP. The GP is allocated l% of
the Partnership's share of income or loss and cash distributions, with the
remaining 99% allocated to the limited partners.
Income for federal income tax purposes is allocated to the holders of Class A
interests, until the Class A capital account of each holder is equal to the sum
of their initial capital investment ($10.00 per Class A interest), plus any
unpaid priority return. For years 1996, 1995, and 1994, federal taxable income
per Class A interest amounted to $1.10 per year, all of which represented
ordinary income. Any remaining income after the Class A allocation is allocated
to the holders of Class B interests. The holders of Class B interests receive an
allocable share of loss until the Class B capital account (as defined in the
partnership agreement) of each holder is reduced to zero. Thereafter, any
unallocated loss is allocated to the holders of Class A interests.
38
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
For 1996, 1995 and 1994, federal taxable income amounted to $.70, $1.6923 and
$1.1146 per Class B interest, respectively. In 1996, federal taxable income
consisted of ordinary income only. Federal taxable income in 1995 consisted of
ordinary income of $.5326 per Class B interest and a combined capital gain of
$1.1597 per Class B interest related to the sale of the Dorman Products and
Downey Glass divisions (see Note 5, Acquisitions/Divestitures). Federal taxable
income in 1994 consisted of ordinary income of $.7069 per Class B interest and a
capital gain of $.4077 per Class B interest related to the sale of the
Electrical Products Group divisions. The Class B capital account as of December
31, 1996 and 1995, was approximately $2.89 and $2.54 per Class B interest,
respectively.
Holders of Class B interests are entitled to receive annual cash distributions
sufficient to cover their tax liabilities on taxable income allocated to the
Class B interests (the "Class B Tax Distribution"). For 1996, the Class B Tax
Distribution amounted to $7,663 or $.3465 per Class B interest which was
partially paid in the amount of $.02 per Class B interest per month for the
period January through April 1996 and $.03 for the period May through December
1996. On March 31, 1997, the Partnership intends to distribute the balance of
the tax distribution due of $.0265 per Class B interest to holders of record for
the entire year.
For 1995, the Class B Tax Distribution amounted to $14,807 or $.6695 per Class B
interest which was partially paid in the amount of $.02 per Class B interest per
month for the period January through December 1995 and a partial distribution of
$.15 paid on April 10, 1995 to holders of record on December 30, 1994, related
to the taxable gain on the sale of the Dorman Products division on January 3,
1995. On March 29, 1996, the Partnership distributed the balance of the tax
distribution of $.2795 per Class B interest, as follows: approximately $.1745 to
holders of record on December 30, 1994 for the balance due on the taxable gain
on the sale of Dorman Products; $.00197 per month to holders of record of Class
B interests on the first day of the month during January through December 1995
for the balance due on ordinary income; and $.0814 to holders of record on
September 29, 1995 related to the taxable gain on the sale of the Downey Glass
division (see Note 5, Acquisitions/Divestitures).
For 1994, the Class B Tax Distribution amounted to $10,895 or $.492619 per Class
B interest which was partially paid in the amount of $.009352 per Class B
interest per month for the period January through March 1994 and $.02 per Class
B interest per month during the period April through December 1994. The monthly
tax distributions were paid to holders of record on the first day of each month
during 1994 and aggregated $.208056 per Class B interest for the full year 1994.
On March 31, 1995, the Partnership paid the balance of the tax distribution due
of $.284563 per Class B interest, as follows: approximately $.01981 per month to
holders of record of Class B interests on the first day of the month during
January through March 1994, $.00916 per month for April through November 1994,
and $.15185 for December 1994 which includes $.14269 related to the capital gain
on the sale of the Electrical Products Group divisions. (See Note 5,
Acquisitions/Divestitures.)
39
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
On December 19, 1996, the Partnership in anticipation of its conversion to
corporate form, suspended payment of the monthly tax-related distributions to
Class B interest holders effective January 1, 1997, through March 31, 1997. Due
to the delay in completion of the proposed corporate conversion, the Partnership
intends to resume payment of monthly advance Class B tax distributions in April
1997 in the amount of $.03 per B Interest. On March 20, 1997, the Partnership
declared a B tax distribution in the amount of $.03 per B Interest payable April
30, 1997, to holders of record April 1, 1997. The Partnership intends to pay
this monthly rate to Class B holders until the effective date of the conversion
since it expects to allocate sufficient Class B taxable income in the shortened
tax year from January 1, 1997, through the effective date to require the B tax
distribution payment. The balance of the required 1997 Class B tax distribution,
if any will be paid on or before March 31, 1998.
4. Extraordinary Loss:
In 1995, the Partnership recorded an extraordinary loss of $629 or approximately
$.03 per Class B limited partnership interest, due to early extinguishment of a
portion of the Operating Partnership's Series A 9.08% and Series B 8.44% Senior
Notes (See Note 9, Long-Term Debt).
5. Acquisitions/Divestitures:
On April 11, 1996, the Partnership's Industrial Services segment, through its
Warren Fluid Power division purchased certain assets of Hydraulic Depot, Inc.,
of Reno, Nevada, for an aggregate purchase price of $700. Annual sales of
Hydraulic Depot, Inc., are approximately $2,500.
In November 1995, the Partnership's Hillman Fastener division purchased certain
assets of the Retail division of Curtis Industries of Eastlake, Ohio, for an
aggregate purchase price of $8,011 and the assumption of certain liabilities.
The aggregate purchase price includes goodwill of $3,442. The purchase price and
goodwill amounts include post-closing adjustments recorded in 1996. This
acquisition has been accounted for as a purchase and, accordingly, the results
of operations have been included in the accompanying consolidated financial
statements from the date of acquisition.
On October 27, 1995, the Operating Partnership sold certain assets of its Downey
Glass division for a cash consideration, net of expenses, of approximately
$6,237 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $4,144 or $.19 per Class B interest included in the 1995
consolidated statement of income. The aggregate assets sold, net of liabilities,
in connection with the sale of the Downey Glass division was approximately
$2,093.
On January 3, 1995, the Operating Partnership sold certain assets of its Dorman
Products division for a cash consideration, net of expenses, of approximately
$36,600 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $16,500 or $.75 per Class B interest included in the 1995
consolidated statement of income. The aggregate assets sold, net of liabilities,
in connection with the sale of Dorman Products was approximately $20,100.
40
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
5. Acquisitions/Divestitures, continued:
On December 5, 1994, the Operating Partnership sold certain assets of its
Electrical Products Group divisions for a cash consideration, net of expenses,
of approximately $27,800 (subject to certain post-closing adjustments) and the
assumption of certain liabilities. The Operating Partnership recorded a gain on
the sale in the amount of $3,523 or $.16 per Class B interest included in the
1994 consolidated statement of income. The aggregate assets sold, net of
liabilities, in connection with the sale of the Electrical Products Group
divisions was approximately $24,300.
6. Related Party Transactions:
The GP earns a management fee annually from the Operating Partnership equal to
3% of the aggregate initial Capital Investment of the holders of Class A
interests ($110,996). The management fee will be paid only after cumulative
outstanding priority returns and additional required cash distributions are
paid. In addition, the management fee can be paid only if the Partnership
complies with covenants required by the credit agreements (see Note 8, Lines of
Credit, and Note 9, Long-Term Debt). Management fees earned but not paid
accumulate until paid. Management fees earned in each of years 1996, 1995 and
1994 were $3,330. The management fees for the years 1995 and 1994 were paid in
full in March 1996 and 1995, respectively. Management expects to pay in full the
1996 management fee due March 31, 1997.
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1996 and 1995:
1996 1995
-------- ------
Land $ 3,289 $ 3,319
Buildings and leasehold improvements 18,642 18,048
Machinery and equipment 18,680 16,290
Furniture and fixtures 10,368 9,208
------- -------
50,979 46,865
Less accumulated depreciation 29,570 26,684
------- -------
$21,409 $20,181
======= =======
8. Lines of Credit:
On December 22, 1992, the Operating Partnership entered into a $50,000 bank
credit agreement with three lenders. This agreement provides borrowings on a
revolving credit basis at interest rates based on the London Interbank Offered
Rate ("LIBOR") plus 1 and 3/4% and prime. Letters of credit commitments are
issued at varying rates. The bank credit agreement's original termination date
of December 22, 1995 has been extended to December 31, 1997. The credit facility
requires a commitment fee of 1/2 of 1% per year on the average daily unused
portion of the commitment and an annual agent's fee. There is no compensating
balance requirement under this facility. As of December 31, 1996, the Operating
Partnership had $33,152 available under this Credit Agreement. The $16,848
outstanding consists of bank borrowings amounting to $11,000 as reflected on the
Partnership's consolidated balance sheet at December 31, 1996, and letter of
credit commitments aggregating $5,848.
41
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
8. Lines of Credit, continued:
The bank credit agreement contains covenants restricting distributions from the
Operating Partnership to the Partnership and the GP. Amounts available for
distribution in accordance with the bank credit agreement at December 31, 1996,
were $4,164. The agreement also requires the maintenance of specific coverage
ratios and levels of financial position and restricts incurrence of additional
debt and the sale of assets. The bank credit agreement did not permit the
Partnership to consummate acquisitions in 1994. Amendments to the agreement were
negotiated in March and December of 1994 to ease certain coverage ratios and
other financial requirements in 1994 and future years. The December 1994
amendment allows for acquisition spending in 1995 and future years up to $15,000
in any calendar year, absent a default or event of default as defined in the
bank credit agreement.
In connection with the sale of operating divisions (see note 5, Acquisitions/
Divestitures), the Operating Partnership was required to reduce permanently the
bank revolver commitment under the bank credit agreement by approximately
$13,000. However, the banks waived this permanent reduction and maintained the
existing bank credit commitment of $50,000. For 1995 and future years, the
lenders have agreed to revise certain covenant tests to exclude the impact of
cash distributions to holders of Class B interests related solely to tax gains
on divisions sold.
The Operating Partnership has another credit facility available in the amount of
$500 for letters of credit of which no amount was outstanding at December 31,
1996. The letters of credit commitments are issued at varying rates. This
facility, renewable annually, is not subject to compensating balance
requirements or unused commitment fees.
An indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a
$2,500 Canadian dollar line of credit with a local lender for working capital
purposes of which $557 USD was outstanding at December 31, 1996. This facility,
which is renewable annually, provides bank borrowings at an interest rate of
prime plus 1/4 of 1%. There are no compensating balance requirements or
commitment fees associated with this facility.
Notes payable consisted of the following at December 31, 1996 and 1995:
1996 1995
---- ----
Short-term bank borrowings drawn on
working capital lines of credit $ 557 $ 463
Trade notes payable in accordance with
glass inventory financing arrangements 1,193 1,474
Notes payable in accordance with insurance
financing arrangements 920 816
------ ------
$2,670 $2,753
====== ======
The weighted average interest rate on the outstanding notes payable borrowings
at December 31, 1996 and 1995 was 3.05% and 3.01%, respectively.
42
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt:
On December 22, 1992, the Operating Partnership issued $95,000 of senior notes
with a final maturity of December 1, 2002, through a private placement with
several institutional investors.
The new senior notes were issued in two series, as follows: $65,000 Series A
notes at 9.08% and $30,000 Series B notes at 8.44%. Interest is required to be
paid semiannually on June 1 and December 1 on the outstanding principal of the
senior notes. The Operating Partnership repaid $4,375, $3,282 and $3,900 in
Series A notes, and $2,020, $1,514 and $1,800 in Series B notes in 1996, 1995
and 1994, respectively. Principal repayments required on the senior notes during
each of the five years subsequent to December 31, 1996, are as follows:
Series A Series B
-------- --------
December 1, 1997 $4,375 $2,020
December 1, 1998 5,468 2,522
December 1, 1999 6,562 3,030
December 1, 2000 8,201 3,786
December 1, 2001 9,297 4,290
Optional prepayments, in multiples of $100, may be made at anytime, as a whole
or in part, with accrued interest thereon plus a penalty ("make-whole amount"),
if any, as defined in the note agreement.
If the Partnership sells a significant amount of assets as defined in the note
agreement, it must make an offer of prepayment of note principal to the senior
noteholders determined on an applicable share basis with the bank credit
agreement. The prepayment offer also must include accrued interest thereon plus
a make-whole amount, if any, as defined in the note agreement. Related to the
sale of operating divisions in December 1994 and January 1995 (see Note 5,
Acquisition/Divestitures), the Operating Partnership was required to offer the
noteholders prepayment of senior notes in the amount of $14,175. The noteholders
accepted the prepayment offer which the Operating Partnership paid on March 14,
1995, including accrued interest thereon of $360 and a prepayment penalty of
$629 (see Note 4, Extraordinary Loss).
The senior note agreement contains covenants restricting distributions from the
Operating Partnership to the Partnership and the GP. Additionally, the note
agreement restricts the incurrence of additional debt and the sale of assets and
requires the maintenance of specific coverage ratios and levels of financial
position. Also, the senior note agreement did not permit the Partnership to
consummate acquisitions in 1994. For 1994 and future years, the senior
noteholders have agreed to ease certain coverage ratios and other financial
requirements.
Provisions made during the year for restructuring charges and transaction costs
(Note 7) rendered the Operating Partnership unable to comply with certain
financial covenants of the bank credit agreement and the senior note agreement.
On March 21, 1997, the Partnership received the final consent in which the banks
and senior note holders agreed to a modification of these covenants effective
for the fiscal quarters ending December 31, 1996 through: (i) June 30, 1997 for
the bank credit agreement; and (ii) September 30, 1997 for the senior note
agreement. The Partnership is in compliance with the modified covenants.
43
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt, continued:
As of December 31, 1996, the fair value estimate of the Partnership's senior
notes is approximately $65,000 as determined in accordance with SFAS No. 107.
The Partnership discounted the future cash flows of its senior notes based on
borrowing rates for debt with similar terms and remaining maturities. The fair
value estimate is made at a specific point in time and is subjective in nature
and involves uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly
affect the estimate.
10. Leases:
Certain warehouse and office space and equipment are leased under capital and
operating leases with terms in excess of one year. Future minimum lease payments
under noncancellable leases consisted of the following at December 31, 1996:
Capital Operating
Leases Leases
1997 $151 $ 9,210
1998 151 7,696
1999 151 5,475
2000 151 4,204
2001 134 2,875
Later years -- 10,692
---- -------
Total minimum lease payments $738 $40,152
=======
Less amounts representing interest (127)
-----
Present value of Net Minimum Lease
payments (including $107 currently
payable) $611
====
Total rental expenses for all operating leases amounted to $15,239 in 1996,
$14,232 in 1995, and $15,153 in 1994.
11. Deferred Compensation Plans:
Certain officers and employees earn performance-based compensation, payment of
which is deferred until future periods.
The Partnership adopted a new deferred compensation plan for its officers
effective January 1, 1994. Under this plan, awards are earned based on operating
performance over a five-year period which vest and are paid in cash only at the
end of the fifth year. At the end of any year within the five-year program, the
cumulative award is subject to reduction or forfeiture if performance goals are
not achieved. Upon a change in control of the Operating Partnership,
participants are entitled to payment of awards earned through completion of the
most recent plan year. The amounts charged to income under this plan were $378
in 1996, $1,186 in 1995 and $850 in 1994. The portion of the Operating
Partnership's deferred compensation liability attributable to this plan is
$2,414 as of December 31, 1996.
44
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
11. Deferred Compensation Plans, continued:
For a plan adopted in 1987 and amended thereafter, certain employees earned
awards which vest at the rate of 20% per year over the 5-year period following
the year in which the award was earned. The awards will be paid at age 60, if
elected by the employee, or upon death, disability or retirement and accrue
investment earnings until paid. Upon a change in control of the Operating
Partnership, participants are entitled to payment of all vested and non-vested
amounts including accrued interest. The full award is charged to operations in
the year earned. The amounts charged to income under the plan were $677, $1,135
and $2,295 in 1996, 1995 and 1994, respectively. During the three years ended
December 31, 1996, distributions from the plan amounted to $1,160 in 1996,
$1,422 in 1995, and $240 in 1994. The deferred compensation liability
attributable to the plan amounted to $5,998 at December 31, 1996 of which $564
is included in other accrued expenses.
Under a former plan, effective through December 31, 1986, certain employees and
officers earned deferred compensation amounts which unconditionally vested at
the rate of 20% per year over the 5-year period following the year in which the
award was earned. Participants of the former plan have elected to defer all
outstanding awards until retirement. Upon a change in control of the Operating
Partnership, participants are entitled to payment of their total account balance
including accrued interest. Amounts charged to income and distributions related
to the former plan for the three years ended December 31, 1996 were immaterial.
The portion of the Operating Partnership's deferred compensation liability
attributable to this plan is $796 at December 31, 1996.
In December 1995, the Operating Partnership established a Rabbi trust to assist
in funding the liabilities of the Deferred Compensation plans described above.
This trust purchased insurance policies on the lives of certain participants in
the Deferred Compensation plans. The Operating Partnership is the sole
beneficiary of these insurance policies. The cash surrender value of these
insurance policies was $4,566 at December 31, 1996.
The change of control provision in the deferred compensation plans is triggered
upon a sale of all of the Operating Partnership's business, a change in the GP
including its reorganization or a change, other than due to death or retirement,
in a majority of the directors of Lehman/SDI during any one-year period.
The Partnership adopted a new deferred compensation plan effective December 1,
1996, to offer key employees an opportunity to defer a portion of their
compensation including bonuses and any amounts credited to the accounts of such
employees which otherwise may become payable to such employees under other
incentive compensation programs maintained by the Partnership. This new plan
would allow participants eligible for accelerated payments under the change in
control provision of the Partnership's deferred compensation plans an election
to continue to defer their balances.
45
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits, continued:
Net periodic pension cost (income) in 1996, 1995, and 1994 for non-contributory
defined benefit plans consists of:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Service cost during the period $ 879 $ 675 $ 1,102
Interest cost on projected benefit obligations 1,656 1,578 1,534
Actual return on assets (3,432) (3,503) (2,100)
Net amortization and deferral 917 1,509 (270)
-------- -------- --------
Net periodic pension cost $ 20 $ 259 $ 266
======== ======== =======
</TABLE>
Significant assumptions used in determining pension cost (income) include:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.25% 8.25% 7.00%
Rates of increase in compensation levels 6.50% 6.50% 6.50%
Expected long-term rate of return
on plan assets 9.75% 8.50% 9.50%
</TABLE>
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Partnership's balance sheets at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------------- -------------------------
Assets Accumulated Assets Accumulated
Exceed Benefit Exceed Benefit
Accumulated Obligations Accumulated Obligations
Actuarial present value of Benefit Exceed Benefit Exceed
beneficial obligations: Obligations Assets Obligations Assets
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Vested benefit obligation $ 19,019 $ -0- $ 17,304 $ 1,016
======== ======== ======== ========
Accumulated benefit obligation $ 19,290 $ -0- $ 17,450 $ 1,016
======== ======== ======== ========
Projected benefit obligation $ 23,716 $ -0- $ 21,467 $ 1,016
Plan assets at fair value 26,519 -0- 24,220 897
-------- -------- -------- --------
Projected benefit obligation
less than(in excess of)
plan assets 2,803 -0- 2,753 (119)
Unrecognized net loss (1,247) -0- (668) 161
Prior service cost not yet
recognized in net periodic
pension cost (328) - (352) -
Unamortized balance of
unrecognized net transition
asset established at
January 1, 1987 (1,648) -0- (1,693) (189)
--------- --------- --------- ---------
Prepaid pension cost (pension
liability) recognized
in the balance sheet $ (420) $ -0- $ 40 $ (469)
========= ========= ========= =========
</TABLE>
46
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits, continued:
The discount rate assumptions used in determining actuarial present value of
benefit obligations at December 31, 1996 and 1995 was 7.25%.
Certain employees of the Partnership's Kar Products, J.N. Fauver Co., and its
divested Dorman Products and American Electric Co. divisions are covered by
these defined benefit retirement plans. Assets of the defined benefit plans
consist of insurance contracts and assets managed under a commingled trust
agreement. The trust assets are invested primarily in equity and fixed income
holdings.
Costs charged to operations under all retirement benefit plans are as follows:
1996 1995 1994
---- ---- ----
Defined contribution plans $1,327 $2,693 $3,498
Multi-employer pension plans 189 374 362
Defined benefit plans 20 259 266
------ ------ ------
Total $1,536 $3,326 $4,126
====== ====== ======
Management estimates that its share of unfunded vested liabilities under
multi-employer pension plans is not material.
For the years ended December 31, 1996, 1995 and 1994, the costs of
post-retirement benefits charged to income were $87, $81 and $115, respectively.
The 1996 and 1995 charges were determined in accordance with SFAS No. 106 on an
accrual basis with costs recognized in prior years upon payment of the
post-retirement obligations. The Partnership's unrecognized accumulated
post-retirement benefit liability as of December 31, 1996, 1995 and 1994 was
$477, $516 and $744, respectively.
13. Income Taxes:
Deferred tax assets are comprised of the following at December 31, 1996 and
1995:
1996 1995
---- ----
Gross deferred tax assets:
Deferred compensation $3,292 $2,936
Deferred restructuring changes 1,034 --
Casualty Loss Insurance Program 548 --
Prepayment penalties related to
early extinguishment of debt 304 299
------ ------
5,178 3,235
Valuation allowance for deferred
tax assets (171) (391)
------- -------
Net deferred tax asset $5,007 $2,844
======= ======
Management has determined, based on the Partnership's history of prior operating
earnings and its expectations for the future, that operating income of the
Partnership will more likely than not be sufficient to recognize fully these net
deferred tax assets. The Partnership has no deferred tax liability at December
31, 1996 or December 31, 1995.
As of December 31, 1996, the Partnership's tax basis of its assets and
liabilities was greater than its financial statement basis by approximately
$77,000.
47
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
13. Income Taxes, continued:
The provision (benefit) for income taxes consists of the following:
1996 1995 1994
-------- ------- ------
Current income taxes
State and local $ 605 $ 608 $ 276
Foreign 418 629 558
------- ------- -------
1,023 1,237 834
------- ------- -------
Deferred income taxes
Federal (1,897) (627) (657)
State and local (266) (73) (77)
------- ------- -------
(2,163) (700) (734)
------- ------- -------
Total income taxes $(1,140) $ 537 $ 100
======= ======= =======
14. Commitments and Contingencies:
Performance and bid bonds are issued on the Partnership's behalf during the
ordinary course of business through surety bonding companies as required by
certain contractors. As of December 31, 1996, the Partnership had outstanding
performance and bid bonds aggregating $234. As required by sureties, the
Partnership has standby letters of credit outstanding in the amount of $650 as
of December 31, 1996.
Letters of credit are issued by the Partnership during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 1996, the
Partnership had outstanding letters of credit in the aggregate amount of $1,872
related to these activities.
As of December 31, 1996 the Partnership has guaranteed approximately $1,181
worth of lease obligations, principally relating to businesses previously
divested. The Partnership is not currently aware of any existing conditions
which would cause a financial loss related to these guarantees.
Under the Partnership's insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of normal
claims. Beginning in 1991, the Partnership has retained risk on certain expected
losses from both asserted and unasserted claims related to workman's
compensation, general liability and automobile as well as the health benefits of
certain employees. Provisions for losses expected under these programs are
recorded based on an analysis of historical insurance claim data and certain
actuarial assumptions. As of December 31, 1996, the Partnership has provided
insurers letters of credit aggregating $3,326 related to certain insurance
programs.
On February 27, 1996, a lawsuit was filed against the Operating Partnership by
the buyer of its Dorman Products division for alleged misrepresentation of
certain facts by the Partnership upon which the buyer allegedly based its offer
to purchase Dorman. The complaint seeks damages of approximately $21,000.
On January 16, 1997, a holder of B Interests filed a purported class action
alleging that the terms of the Conversion unfairly transfer substantial equity
to the General Partner to the detriment of the B Interests and constitute a
breach of fiduciary duty. A second complaint containing substantially identical
allegations was filed by a limited partner on February 11, 1997.
In the opinion of management, the ultimate resolution of these matters will not
have a material effect on the consolidated financial position, operations or
cash flows of the Partnership.
48
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
14. Commitments and Contingencies, continued:
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Partnership's business. Those legal
proceedings incidental to the business of the Partnership are generally not
covered by insurance or other indemnity. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial position, operations or cash flows of the Partnership.
15. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
1996 1995 1994
-------- -------- -------
Cash paid during the period for:
Interest $ 6,769 $ 7,304 $10,097
------- ------- -------
Income taxes $ 1,189 $ 1,190 $ 792
------- ------- -------
Supplemental schedule of non-cash
investing activities:
Assumed liabilities in connection with
the purchase of assets (See Note 5,
Acquisitions/Divestitures) $ -- $ 232 $ --
------- ------- -------
49
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
16. Quarterly Data (unaudited):
<TABLE>
<CAPTION>
1996 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $154,892 $167,500 $167,125 $159,737
Gross profit 62,464 67,104 68,029 65,406
Net income 4,010 8,313 8,286 (1,342)*
Net income (loss) per limited
partnership interest
- Class A $.27 $.28 $.27 $.28
- Class B $.04 $.24 $.24 ($.20)
</TABLE>
* Includes non-recurring restructuring charges and transaction costs of of
$5,950 and $2,150, respectively.
<TABLE>
<CAPTION>
1995 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $154,792 $163,820 $163,214 $147,109
Gross profit 61,441 65,902 66,510 59,657
Income before extraordinary loss 19,862** 8,377 7,828 8,678***
Extraordinary loss (Note 4) (629) -- -- --
Net income 19,233 8,377 7,828 8,678
Net income per limited partnership interest:
Income before extraordinary loss:
- Class A $.27 $.28 $.27 $.28
- Class B $.77 $.24 $.22 $.25
Extraordinary loss:
- Class A $ -- $ -- $ -- $ --
- Class B $(.03) $ -- $ -- $ --
Net Income:
- Class A $.27 $.28 $.27 $.28
- Class B $.74 $.24 $.22 $.25
</TABLE>
** Includes gain on sale of Dorman Products division of $16,500.
*** Includes gain on sale of Downey Glass division of $4,144.
17. Concentration of Credit Risk:
Financial instruments which potentially subject the Partnership to concentration
of credit risk consist principally of cash and cash equivalents and trade
receivables. The Partnership places its cash and cash equivalents with high
credit quality financial institutions. Concentrations of credit risk with
respect to sales and trade receivables are limited due to the large number of
customers comprising the Partnership's customer base, and their dispersion
across many different industries and geographies. The Partnership performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.
50
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
18. Segment Information:
The following are the segment disclosures required under SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," with respect to the
Partnership's reportable segments as identified in Note 1, "Basis of
Presentation" under "Nature of Operations":
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
Industry Segment Data:
1996 1995 1994
=================================================================================
<S> <C> <C> <C>
Net Sales
Industrial Services $ 456,798 $ 424,978 $ 532,719
Hardware Merchandising 103,503 84,720 72,841
Glass Merchandising 90,369 120,650 132,063
Adjustments and eliminations (1,416) (1,413) (1,762)
--------- --------- ---------
Consolidated Net Sales $ 649,254 $ 628,935 $ 735,861
- ---------------------------------------------------------------------------------
Income from Operations
Industrial Services $ 33,437 $ 31,834 $ 39,773
Hardware Merchandising 9,074 9,592 7,096
Glass Merchandising 3,037 3,387 5,756
Corporate Expenses (21,096)* (13,511) (14,866)
--------- --------- ---------
Consolidated Income from Operations $ 24,452 $ 31,302 $ 37,759
- ---------------------------------------------------------------------------------
Identifiable Assets
Industrial Services $ 166,849 $ 162,681 $ 181,545
Hardware Merchandising 46,331 36,340 24,357
Glass Merchandising 37,734 42,041 53,058
Corporate Assets 13,140 13,635 7,352
Adjustments and Eliminations (1,499) (106) (126)
--------- --------- ---------
Consolidated Assets $ 262,555 $ 254,591 $ 266,186
- ---------------------------------------------------------------------------------
Capital Expenditures
Industrial Services $ 2,180 $ 2,315 $ 2,736
Hardware Merchandising 1,985 539 339
Glass Merchandising 640 1,254 1,094
Corporate 159 191 94
--------- --------- ---------
Consolidated Capital Expenditures $ 4,964 $ 4,299 $ 4,263
- ---------------------------------------------------------------------------------
Depreciation and Amortization
Industrial Services $ 3,448 $ 3,339 $ 4,458
Hardware Merchandising 639 401 364
Glass Merchandising 1,355 1,839 2,271
Corporate 105 78 49
--------- --------- ---------
Consolidated Total $ 5,547 $ 5,657 $ 7,142
=================================================================================
</TABLE>
* Includes non-recurring restructuring charges and transaction costs of $5,950
and $2,150, respectively.
51
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
19. Subsequent Event:
On March 4, 1997, the Operating Partnership received the last of two financing
commitments which together aggregate $150,000 from lenders. These commitments
are available to the Partnership until May 30, 1997. The Partnership intends to
utilize the debt capacity to fund transaction costs and other payments related
to its conversion to corporate form, refinance its current outstanding senior
notes of $63,934 as of December 31, 1996, including interest thereon and related
make-whole amount of approximately $5,000, and outstanding bank revolver
borrowings of $11,000 as of December 31, 1996. Also, the new credit facilities
will provide working capital for reinvestment in its businesses and acquisition
capital for future growth. The new financing commitments consist of a $60,000
five-year fixed rate note at 7.66% and a $90,000 five-year bank revolver with
terms and conditions more favorable than the Partnership's existing senior notes
and bank credit lines including less restrictive covenants and an effective
interest rate reduction of approximately 1.00%.
Consummation of the refinancing with the new credit facilities is contingent
upon approval of the Partnership's conversion into corporate form and certain
other terms and conditions of closing being satisfied in a manner acceptable to
the lenders.
52
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(dollars in thousands)
<TABLE>
<CAPTION>
Balance Sheets as of December 31 1996 1995 1994
- -------------------------------- ---- ---- ----
<S> <C> <C> <C>
Assets
Investment in SDI Operating Partners, L.P. $ 94,619 $ 94,943 $ 79,219
======== ======== ========
Partners' Capital
General partner's capital $ 960 $ 963 $ 791
Limited partners' capital-Class A Interests 67,642 67,642 67,642
Limited partners' capital-Class B Interests 29,040 29,252 12,300
Class B interests held in treasury (1,514) (1,514) (1,514)
Cumulative foreign currency translation adjustment (1,509) (1,400) --
-------- -------- --------
Total partners' capital $ 94,619 $ 94,943 $ 79,219
======== ======== ========
Statements of Income for the Years Ended December 31
- ----------------------------------------------------
Equity in net income of SDI Operating
Partners, L.P. $ 19,267 $ 44,116 $ 29,544
======== ======== ========
Net income allocated to general partner $ 193 $ 441 $ 295
-------- -------- --------
Net income allocated to limited partners
- Class A interests $ 12,210 $ 12,210 $ 12,210
-------- -------- --------
- Class B interests $ 6,864 $ 31,465 $ 17,039
-------- -------- --------
Statement of Cash Flows
for the Years Ended December 31
- -------------------------------
Cash provided by operations -- -- --
Cash provided from investment in SDI Operating
Partners, L.P. $ 25,385 $ 26,946 $ 20,153
Cash distributions to general partner and limited
partners $(25,385) $(26,946) $(20,153)
-------- -------- --------
Increase (decrease) in cash -- -- --
======== ======== ========
</TABLE>
This financial information should be read in conjunction with the consolidated
financial statements of the Company.
53
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
SCHEDULE II - VALUATION ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
Deducted From Assets in Balance Sheet
-------------------------------------
Valuation
Allowance for Allowance for Accumulated Accumulated Allowance for
Doubtful Obsolete Amortization Amortization Deferred
Accounts Inventories of Goodwill of Intangibles Income Taxes
-------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 2,382 $ 3,168 $10,605 $13,821 $ 325
Additions charged to cost
and expenses 1,453 2,236 1,629 1,168 --
Deductions 1,363(A) 1,622(A) -- -- --
Sale of divisions -- 291 975 593 --
------- ------- ------- ------- -------
Balance, December 31, 1994 2,472 3,491 11,259 14,396 325
Additions charged to cost
and expenses 1,070 1,704 1,364 845 66
Deductions 1,552(A) 1,306(A) -- -- --
Sale of divisions 163 479 884 1,517 --
------- ------- ------- ------- -------
Balance, December 31, 1995 1,827 3,410 11,739 13,724 $ 391
Additions charged to cost
and expenses 1,280 1,440 1,409 648 --
Deductions 899(A) 1,010(A) 269(B) -- 220
------- ------- ------- ------- -------
Balance, December 31, 1996 $ 2,208 $ 3,840 $12,879 $14,372 $ 171
======= ======= ======= ======= =======
</TABLE>
Notes:
(A) Includes write-off of accounts receivable (net of bad debt recoveries) and
inventories.
(B) Includes write-off of Goodwill in accordance with FAS 121, Impairment of
Long-Lived Assets.
54
<PAGE>
Item 9 - Disagreements on Accounting and Financial Disclosure.
- --------------------------------------------------------------
Not applicable.
55
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
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. The description of the principal occupation is for
the entire five-year period unless otherwise indicated.
<TABLE>
<CAPTION>
Principal Occupation; Five-Year
Employment History; Other
Name and Age Directorships
------------ ---------------------------------
<S> <C>
O. Gordon Brewer, Jr., 60 Vice President-Finance, Ikon Office Solutions,
formerly Alco Standard Corporation (distributor of
office and paper products); Executive Officer,
Alco Standard Corporation, Director, Corporate
Insurance and Reinsurance Limited.
Norman V. Edmonson, 56 Executive Vice President of the Partnership
since December 1994; Group Vice President
of the Partnership January 1991 to December 1994.
Eliot M. Fried, 64 Managing Director, Lehman Brothers Inc.; Director,
Axsys Technologies, Inc., Jan. 1993 to present;
Bridgeport Machines, Inc.; Energy Ventures, Inc.;
Walter Industries, Jan. 1994 to present
Arnold S. Hoffman, 61 Senior Managing Director, Legg Mason Wood
Walker, Incorporated; Director, Intelligent
Electronics Incorporated.
Donald T. Marshall, 63 Chairman and Chief Executive Officer of
the Partnership.
John P. McDonnell, 61 President of the Partnership since December
1994; Group Vice President of the Partnership
from 1987 to December 1994.
Ernest L. Ransome, III, 70 Chairman, Giles & Ransome, Inc.
(distributor of construction equipment).
Donald A. Scott, 67 Senior Partner, Morgan, Lewis & Bockius LLP;
Director, Provident Mutual Life Insurance Company.
Henri I. Talerman, 39 Managing Director, Lehman Brothers Inc. June 1992
to present; Senior V.P., Lehman Brothers prior to
June 1992; Director, McBride plc, May 1993 to
present; Financier Gerflor SA 1992 to present;
Advisory Director, Europe Capital Partners.
</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.
56
<PAGE>
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>
Positions with the Partnership;
Name and Age Five-year Employment History
------------ --------------------------------
<S> <C>
Richard J. Brus, 59 President, Sun Technology Services since
1995; President, Activation Division 1992 to
1995; and Vice President-Sales & Marketing,
Activation Division, prior to 1992.
Harold J. Cornelius, 48 Group Vice President.
Joseph M. Corvino, 42 Vice President-Finance, Chief Financial
Officer, Treasurer and Secretary since
December 1995; Vice President and Controller
prior to December 1995.
Norman V. Edmonson, 56 Executive Vice President since December
1994; Group Vice President prior to
December 1994.
Max W. Hillman, Jr., 50 Group Vice President
Donald T. Marshall, 63 Chairman and Chief Executive Officer.
John P. McDonnell, 61 President and Chief Operating Officer
since December 1994; Group Vice President
prior to December 1994.
</TABLE>
All executive officers hold office at the pleasure of the board of directors.
57
<PAGE>
Item 11 - Executive Compensation.
- ---------------------------------
The following table sets forth all cash compensation paid and accrued by the
Operating Partnership for services rendered during the three years ended
December 31, 1996, by each of the Chief Executive Officer and the four other
most highly compensated executive officers of the Partnership and the Operating
Partnership whose remuneration exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Name and Annual Compensation All Other
Principal Position Year Salary Bonus (1) Compensation
- ------------------ ------ ------ --------- ------------
<S> <C> <C> <C> <C>
Donald T. Marshall 1996 452,509 45,230 11,749
Chairman and Chief 1995 488,688 4,347 10,234
Executive Officer 1994 454,043 221,144 8,185
John P. McDonnell 1996 358,105 22,692 3,273
President and Chief 1995 374,451 32,812 2,500
Operating Officer 1994 295,354 96,915 2,135
Norman V. Edmonson 1996 308,125 105,600 1,923
Executive Vice President 1995 333,849 82,200 1,638
1994 300,477 94,400 1,418
Harold J. Cornelius 1996 280,107 7,101 19,000
Group Vice President 1995 291,609 27,400 --
1994 275,375 102,729 90,128
Max W. Hillman, Jr 1996 269,816 -- 29,000
Group Vice President 1995 268,920 36,250 50,186
1994 294,793 104,898 107,632
</TABLE>
(1) Represents Earned Bonus for services rendered in each year. Does not include
the management fee payable to the General Partner. See "Management Fee"
under Item 13.
(2) Represents primarily term life insurance premiums paid by the Operating
Partnership for the benefit of the named executive officer.
(3) Represents deferred compensation earned and awarded for services rendered in
the year which unconditionally vests at the rate of 20% per year over the
five-year period from the date earned.
The above table excludes deferred compensation awards earned through 1996 by the
executive officers in accordance with the Partnership's Long-Term Performance
Share Plan since the awards earned are subject to reduction or forfeiture
through 1998 if performance goals are not achieved. The value of the awards
credited as of December 31, 1996, for each executive officer are as follows:
Donald T. Marshall $1,126,486; Norman V. Edmonson, $740,261; John P. McDonnell,
$354,036; Harold J. Cornelius, $354,036; and Max W. Hillman, $354,036.
Directors of Lehman/SDI, who are not employees of the Partnership or Lehman
Brothers Inc. are paid an annual fee of $14,000 and a fee of $1,000 for each
board or committee meeting attended. Such fees are paid by the General Partner.
58
<PAGE>
DEFERRED COMPENSATION PLANS
- ---------------------------
The Partnership's deferred compensation plans are described in Note 11 of Notes
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, including its reorganization or a change, other than due to
death or retirement, in a majority of the directors of Lehman/SDI during any
one-year period. See Note 11 of Notes to Consolidated Financial Statements. As a
result of the proposed conversion, the change of control provisions of the Plans
will be triggered. Participants were offered an opportunity to defer receipt of
amounts available for payment under a new deferred compensation plan, the
"Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P.,"
effective December 1, 1996. The Partnership estimates that approximately $9.2
million of deferred compensation balances will become payable as a result of the
change of control provisions and eligible for elective deferral. Management
expects approximately $6.5 million of these balances eligible for payment to be
deferred and $2.7 million to be paid. Payments to current and former executive
officers are expected to aggregate about $.1 million. Messrs. Marshall,
McDonnell and Edmonson have waived their rights to accelerate payments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
- -----------------------------------------------------------
The Compensation Committee of the Board of Directors of Lehman/SDI, consisted
of Arnold S. Hoffman, Director. Mr. Hoffman is an officer of Legg Mason Wood
Walker, Incorporated, which performed investment banking services for the
Partnership during 1996.
59
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
(a) 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 under Item
1 of this Annual Report on Form 10-K, 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.
(b) Security Ownership of Management
--------------------------------
The following table shows for (i) each director, (ii) each executive
officer, and (iii) all officers and directors as a group, the beneficial
ownership of Class A and Class B Interests of the Partnership as of
January 31, 1997. None of the amounts equals more than 1% of the
outstanding Class A Interests.
Name of Class A Class B Class B
Beneficial Owner Amount(l) Amount(l) Percent of Class
- ---------------- --------- --------- ----------------
O. Gordon Brewer, Jr 3,000 1,000 --(5)
Richard J. Brus 1,186 2,500 --(5)
Joseph M. Corvino 1,415 105,546 --(5)
Harold J. Cornelius 200 200 --(5)
Norman V. Edmonson 4,900 1,300,916 6.0%
Eliot M. Fried -- --(2) --(2)
Max W. Hillman, Jr 4,000 10,000 --(5)
Arnold S. Hoffman 13,000(3) 13,000(2)(3) --(5)
Donald T. Marshall 30,311 2,075,232 9.6%
John P. McDonnell 7,711 623,071 2.9%
Ernest L. Ransome, III 5,000(4) 5,000(4) --(5)
Donald A. Scott 9,000 9,000 --(5)
Henri I. Talerman -- --(2) --(2)
All directors and executive
officers as a group 79,723 4,145,465 19.1%
- -----------------------
60
<PAGE>
(1) In addition to the Interests listed, the Management Employees beneficially
own limited partnership interests in the General Partner (the "GP
Interests"). The GP Interests held by the Management Employees collectively
represent 46.2% of the limited partnership interests in the General Partner.
The General Partner owns 1% of the Partnership and the Operating
Partnership. The table does not include the GP Interests owned by the
Management Employees.
(2) Does not include (i) 108,554 B Interests owned by Lehman LTD I, Inc., or
(ii) 5,788,124 B Interests owned by Lehman Brothers Capital Partners I
("Capital Partners"), affiliates of Lehman Brothers Inc. Messrs. Hoffman and
Fried, as limited partners of Capital Partners, derive economic benefit of
approximately 1% from interests held by Capital Partners. An affiliate of
Lehman Brothers Inc., of which Messrs. Fried and Talerman are officers, also
owns all of the capital stock of Lehman/SDI which is the general partner of
the GP and holds the remaining interest in the GP not owned by the
Management Employees.
(3) 3,000 of these A and B Interests are owned by Hoffman Investment Co., of
which Mr. Hoffman is Managing Partner. In addition, Mr. Hoffman's children
own 3,000 A and B Interests with respect to which he disclaims beneficial
ownership.
(4) 2,500 of these A and B Interests are held in a trust, of which Mr. Ransome
is a trustee.
(5) Represents less than 1% of the outstanding B Interests.
- -----------------------
(c) Changes In Control
------------------
Not applicable.
61
<PAGE>
Item 13 - Certain Relationships and Related Transactions.
- ---------------------------------------------------------
MANAGEMENT FEE
- --------------
The Operating Partnership pays a Management Fee to the General Partner. The
Management Fee, payable annually on March 31 (with respect to the preceding
year), is equal to 3% of the aggregate initial capital investment of
$110,995,730 by the limited partners. The amount of the Management Fee payable
on March 31, 1997, is $3,329,872. The amount of management fee paid in 1996 with
respect to 1995 was $3,329,872. See footnotes (1) and (2) to "Security Ownership
of Management" under Item 12 for ownership of the General Partner. The interests
of Lehman/SDI, and the Management Employees, in the fee for 1996 were as
follows: Lehman/SDI, $1,791,471; Harold J. Cornelius, $92,304; Joseph M.
Corvino, $30,768; Norman V. Edmonson, $384,600; Max W. Hillman, Jr., $92,304;
Donald T. Marshall, $599,977; and John P. McDonnell, $184,608.
CERTAIN BUSINESS RELATIONSHIPS
- ------------------------------
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 1996.
Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which
performed investment banking services for the Partnership during 1996.
The Partnership proposes to have these firms perform similar services as needed
during the current fiscal year.
62
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 10-K.
- ----------------------------------------------------------------------------
(a) Documents Filed as a Part of the Report:
----------------------------------------
1. Financial Statements.
---------------------
The information concerning financial statements called for by
Item 14 of Form 10-K is set forth in Part II, Item 8 of this annual report on
Form 10-K.
2. Financial Statement Schedules.
------------------------------
The information concerning financial statement schedules called
for by Item 14 of Form 10-K is set forth in Part II, Item 8 of this annual
report on Form 10-K.
3. Exhibits, Including Those Incorporated by Reference.
----------------------------------------------------
The following is a list of exhibits filed as part of this annual
report on Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated in
parentheses.
Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
2.1 Asset Purchase Agreement for the Acquisition
of the Assets of the Electrical Products Group
Divisions of SDI Operating Partners, L.P. by
Consolidated Electrical Distributors, Inc.,
dated as of October 4, 1994, as amended.
(1) (Exhibit 2.1).
2.2 Asset Purchase Agreement for the Acquisition
of the Assets of the Dorman Products Division
of SDI Operating Partners, L.P. by R&B, Inc.,
dated as of October 5, 1994, as amended.
(2) (Exhibit 2.1).
63
<PAGE>
Articles of Incorporation and By-Laws
3.1 Amended and Restated Agreement of Limited
Partnership of Sun Distributors L.P. (3)
(Exhibit 3.2; included as Exhibit A to the
Prospectus).
Instruments Defining the Rights of Security Holders,
Including Indentures
4.1 Deposit Agreement (with forms of Class A and Class B
Depositary Receipts attached), dated as of February 1,
1987 (4) (Exhibit 4.1).
4.2 Amendment and Succession Agreement To Deposit Agreement,
dated as of February 1, 1987 (5) (Exhibit 4.2)
4.3 (a) Note Purchase Agreement dated as of December 15,
1992, between SDI Operating Partners, L.P., and
Teachers Insurance and Annuity Association of
America, New York Life Insurance Company, New York
Life Insurance and Annuity Corporation and
Massachusetts Mutual Life Insurance Company.
(6) (Exhibit 4.1)
(b) Amendment No. 1 to Note Purchase Agreement (7)
(Exhibit 4.1)
(c) Amendment No. 2 to Note Purchase Agreement (7)
(Exhibit 4.1)
**(d) Amendment No. 3 to Note Purchase Agreement
4.4 Partner Guarantee dated as of December 15, 1992, by Sun
Distributors L.P. (6) (Exhibit 4.2)
Material Contracts
10.1 (a) Credit Agreement dated December 22, 1992, among
CoreStates Bank, N.A., for itself and as agent, The
Bank of Nova Scotia, for itself and as
co-agent, The Fuji Bank,
Limited, SDI Operating Partners, L.P., SDI
Partners I, L.P., and Sun Distributors L.P. (6) (Exhibit 10.1)
(b) Amendment No. 1 to Credit Agreement (9)
(Exhibit 10.3(b))
(c) Amendment No. 2 to Credit Agreement (9)
(Exhibit 10.3(c))
(d) Amendment No. 3 to Credit Agreement (9)
(Exhibit 10.3(d))
(e) Amendment No. 4 to Credit Agreement (7)
(Exhibit 10.1(e))
(f) Amendment No. 5 to Credit Agreement (10)
(Exhibit 10.1(f))
**(g) Amendment No. 6 to Credit Agreement
10.2 *Sun Distributors Incentive Compensation Plan.
(8) (Exhibit 10.5)
10.3 *Sun Distributors, Inc. Long-Term Performance Award Plan.
(As Amended June 1985) (8) (Exhibit 10.6)
64
<PAGE>
10.4 *SDI Operating Partners, L.P. Deferred Compensation Plan
for Division Presidents (As amended September 13, 1993).
(9) (Exhibit 10.7)
10.5 *SDI Operating Partners, L.P. Long-Term Performance
Share Plan dated January 1, 1994. (9) (Exhibit 10.8)
Subsidiaries of the Registrant
**21.1 Subsidiaries
Financial Data Schedules
**27.1 Summary financial information as of and for the year
ended December 31, 1996.
------------------------
(1) Filed on December 20, 1994, as an exhibit to Form 8-K
for events reportable as of December 5, 1994.
(2) Filed on January 18, 1995, as an exhibit to Form 8-K
for events reportable as of January 3, 1995.
(3) Filed on February 5, 1987, as an exhibit to Amendment
No. 2 to Registration Statement No. 33-10613 on Form
S-1 and incorporated herein by reference.
(4) Filed on March 31, 1988, as an exhibit to Annual Report
on Form 10-K for the year ended December 31, 1987.
(5) Filed on March 30, 1992, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1991.
(6) Filed on January 4, 1993, as an exhibit to Form 8-K for
events reportable as of December 22, 1992.
(7) Filed on May 12, 1995, as an exhibit to Quarterly
Report on Form 10Q for the quarterly period ended March
31, 1995.
(8) Filed on March 31, 1993, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1992.
(9) Filed on March 31, 1994, as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1993.
(10) Filed on March 31, 1996 as an exhibit to Annual Report
on Form 10K for the year ended December 31, 1995.
* Management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item
14(c) of this report.
** Filed herewith
65
<PAGE>
(b) Reports on Form 8-K.
--------------------
The Partnership filed a report on Form 8-K as of December 11,
1996 to report the Registrant's announcement that the Board
of Directors of Lehman/SDI, Inc., had approved the terms upon
which it is proposed to convert the master limited
partnership to corporate form. In addition, the Partnership
announced plans to restructure its Technology Services
divisions (formerly Fluid Power divisions) and its Glass
Merchandising business.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUNSOURCE L.P.
By: SDI Partners I, L.P.,
General Partner
By: Lehman/SDI, Inc.,
General Partner
Date: March 20, 1997 By:/s/ Donald T. Marshall
----------------------
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of l934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Donald T.
Marshall and Joseph M. Corvino, and each of them, his true and lawful
attorney-in-fact, in his name, place and stead to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
report.
Signature Capacity Date
--------- -------- ----
/s/ O. Gordon Brewer, Jr. Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
O. Gordon Brewer, Jr.
/s/ Norman V. Edmonson Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
Norman V. Edmonson
67
<PAGE>
/s/ Eliot M. Fried Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
Eliot M. Fried
/s/ Arnold S. Hoffman Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
Arnold S. Hoffman
/s/ Donald T. Marshall Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
Donald T. Marshall
/s/ John P. McDonnell Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
John P. McDonnell
/s/ Ernest L. Ransome, III Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
Ernest L. Ransome, III
/s/ Donald A. Scott Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
Donald A. Scott
/s/ Henri I. Talerman Director, Lehman/SDI, Inc. March 20, 1997
- ------------------------------
Henri I. Talerman
/s/ Joseph M. Corvino Principal Financial Officer March 20, 1997
- ------------------------------
Joseph M. Corvino
/s/ John J. Dabrowski Principal Accounting Officer March 20, 1997
- ------------------------------
John J. Dabrowski
68
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE BALANCE
SHEET AS OF DECEMBER 31, 1996 AND THE RELATED STATEMENT OF INCOME FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,666
<SECURITIES> 0
<RECEIVABLES> 80,786
<ALLOWANCES> 2,208
<INVENTORY> 102,396
<CURRENT-ASSETS> 187,312
<PP&E> 50,979
<DEPRECIATION> 29,570
<TOTAL-ASSETS> 262,555
<CURRENT-LIABILITIES> 86,531
<BONDS> 57,539<F1>
0
0
<COMMON> 0
<OTHER-SE> 94,619
<TOTAL-LIABILITY-AND-EQUITY> 262,555
<SALES> 649,254
<TOTAL-REVENUES> 649,254
<CGS> 386,251
<TOTAL-COSTS> 230,451
<OTHER-EXPENSES> (550)
<LOSS-PROVISION> 1,280
<INTEREST-EXPENSE> 6,944
<INCOME-PRETAX> 18,127
<INCOME-TAX> (1,140)
<INCOME-CONTINUING> 19,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,267
<EPS-PRIMARY> .32<F2>
<EPS-DILUTED> .32<F2>
<FN>
1=Bonds represents all long-term debt for Senior Notes.
2=EPS represents Class B Limited Partnership Interest only.
</FN>
</TABLE>
