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As filed September 17, 1998
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No. 2)
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ X ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement [ ] Confidential, for Use of
the Commission Only (as
permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Synthetic Industries L.P.
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(Name of Registrant as Specified in Its Charter)
Charlene E. Sutherland
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction:
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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As filed September 17, 1998
CHARLENE E. SUTHERLAND
4512 BIRD OF PARADISE LANE
LA MESA, CA 91941
e-mail: [email protected]
September [ ], 1998
TO: LIMITED PARTNERS OF SYNTHETIC INDUSTRIES, L.P.
Re: REMOVAL OF GENERAL PARTNER AND DISSOLUTION OF SYNTHETIC INDUSTRIES, L.P.
Dear Limited Partners:
As a limited partner of Synthetic Industries, L.P. (the "Partnership"), I am
soliciting your proxy to authorize me to execute on behalf of limited
partners a written consent to the removal of the Partnership's general
partner, SI Management, L.P., the dissolution of the Partnership, and the
winding up of the Partnership under the stewardship of an independent
liquidating trustee. I believe such a course of action will maximize the
return to limited partners within the shortest practical time frame.
Like many of you, I have been a limited partner since the inception of the
Partnership. As a licensed securities principal, registered representative,
and certified financial planner, I believed that the Partnership represented
a sound investment. In 1993, control of the Partnership's general partner
was acquired by members of management of Synthetic Industries, Inc. (the
"Company"). At that time, the Partnership owned 100% of the Company.
Since management of the Company acquired control of the Partnership, I have
been concerned about what I believe is an inherent conflict between the
interests of the management of the Company and the interests of the
Partnership and its limited partners. Since 1994, the general partner has
sanctioned, and in some cases affirmatively approved on behalf of the
Partnership, actions by the Company and the Partnership that I believe have
not, on balance, been in the best interests of the Partnership and its
limited partners. These actions are described in the accompanying Proxy
Statement under the heading "Background and Purpose of the Proposed
Dissolution."
In September of 1997, the general partner proposed a plan of withdrawal and
dissolution (the "GP Plan"), described in a proxy statement dated September
19, 1997. The implementation of the GP Plan was enjoined by the Court of
Chancery of the State of Delaware and was restrained by the United States
District Court for the Northern District of California. On May 14, 1998, the
general partner announced that it had withdrawn the GP Plan and that the
Partnership would continue to own stock of the Company as it has in the past.
I believe that, if the Partnership's controlling block of stock in the
Company were diligently marketed, it is likely that one or more buyers will
be willing to pay a price more reflective of the going concern value of the
Company, and significantly greater, than the current market price of the
Company's publicly traded stock. I have been advised that at least two
potential acquirers - one an American company listed on the New York Stock
Exchange and the other a European company listed on a major European Stock
Exchange - have in recent months approached the Company with a view to its
acquisition. See "Questions and Answers About the Proposed Dissolution -
Q. Why does Sutherland believe a change of control transaction may be
possible?" and "Background and Purpose of the Proposed Dissolution -
Attractiveness of the Company as an Acquisition Candidate" in the
accompanying Proxy Statement. Under the plan of dissolution described in the
accompanying Proxy Statement, an independent liquidating trustee - former
federal judge Charles B. Renfrew
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- - would be required to attempt to identify and implement a change of control
transaction as a way of maximizing the value received by the Partnership for
its assets before distributing the Partnership's assets to limited partners.
For these and other reasons, which are more fully discussed in the
accompanying Proxy Statement, I am proposing that limited partners exercise
their contractual and statutory rights to remove the general partner, to
dissolve the Partnership, to elect Judge Renfrew as the liquidating trustee
(the "Trustee") and to adopt a plan of dissolution pursuant to which the
Trustee will seek to maximize the value of the Partnership's stock ownership
of the Company. I believe this plan (the "Proposed Dissolution") will
optimize limited partners' chances of maximizing in the shortest practical
time frame their return on their investment in the Partnership. Please note,
however, that should limited partners approve the Proposed Dissolution, the
resulting dissolution of the Partnership will be irrevocable. See "Risk
Factors" and "The Proposed Dissolution - Risks" in the accompanying Proxy
Statement. Further, if the Proposed Dissolution is adopted, there is no
assurance that the shares of the Company's stock owned by the Partnership
will be sold or disposed of at a price reflecting the going concern value of
the Company or a premium above market price. See "Risk Factors" and "The
Proposed Dissolution - No Assurance of Change of Control Transaction" in the
accompanying Proxy Statement.
Please review carefully the accompanying Proxy Statement, which describes in
detail the Proposed Dissolution. Please do not hesitate to call Georgeson &
Co., Inc., my proxy solicitation agent, at (212) 440-9800 for information
concerning the plan described in the Proxy Statement.
Very truly yours,
/s/ Charlene E. Sutherland
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Charlene E. Sutherland
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PROXY STATEMENT TO THE LIMITED PARTNERS OF
SYNTHETIC INDUSTRIES, L.P.
by
Charlene E. Sutherland
4512 Bird of Paradise Lane
La Mesa, CA 91941
e-mail: [email protected]
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You are being sent this Proxy Statement by Charlene E. Sutherland
("Sutherland"), a limited partner in Synthetic Industries, L.P., a Delaware
limited partnership (the "Partnership"), to describe a proposed plan of
dissolution of the Partnership and to solicit your proxy to authorize
Sutherland to execute a written consent in favor of the proposed plan of
dissolution.
The plan of dissolution proposed by Sutherland and described in this
Proxy Statement involves the following four principal actions: (1) the
removal of S.I. Management L.P. as the Partnership's sole general partner,
which under the terms of the partnership agreement would automatically
dissolve the Partnership after 90 days, (2) the determination by a majority
in interest of limited partners to dissolve the Partnership immediately, (3)
the election of Judge Charles B. Renfrew (retired) as a statutory liquidating
trustee (the "Trustee") pursuant to Section 17-803(a) of the Delaware Revised
Uniform Limited Partnership Act (the "Act") and (4) the approval of a plan of
dissolution to direct the Trustee in connection with settling the business
and affairs of the Partnership. In addition, limited partners must select a
special counsel to render an opinion required by the partnership agreement as
a condition to the right of limited partners to consent to or vote on the
proposed dissolution and must also approve the opinion rendered by such
counsel. In this Proxy Statement, the term "Proposed Dissolution" refers to
the plan of dissolution as a whole, including the approval of the dissolution
of the Partnership, the removal of the general partner, the appointment of
the Trustee, the adoption of the plan of dissolution, the selection of
special counsel, and the approval of the opinion rendered by special counsel.
For the Proposed Dissolution described in this Proxy Statement to be
adopted, the holders of a majority of the Partnership's outstanding limited
partnership interests must give their proxies to Sutherland. Sutherland
intends to execute a written consent to the Proposed Dissolution as soon as
practicable after receiving the necessary proxies from the holders of at
least a majority of the Partnership's outstanding limited partnership
interests. The Partnership has outstanding 800 units of limited partnership
interest held by approximately 1,900 limited partners. Under Delaware law
and the Partnership Agreement, there is no specified time by which proxies to
execute a written consent must be submitted. Sutherland intends at present to
solicit proxies until she receives proxies from the holders of at least a
majority in interest of the outstanding limited partnership interests.
However, Sutherland reserves the right to abandon the solicitation of proxies
in the event she determines (i) that she will be unable to obtain sufficient
proxies to enable her to execute a written consent in favor of the Proposed
Dissolution or (ii) that an alternative transaction has arisen that
Sutherland believes would be comparable to the Proposed Dissolution in
benefit to limited partners.
If you grant a proxy to Sutherland, you may revoke your proxy at any
time prior to the execution and delivery to the Partnership of a written
consent in favor of the Proposed Dissolution on behalf of holders of a
majority of the outstanding limited partnership interests. To revoke your
proxy, you must send to the
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Solicitation Agent (at the address set forth herein) a letter or other
written notice stating your name and that you wish to revoke a previously
executed proxy. Any such letter or other written notice must be executed and
bear a later date than your previously filed proxy.
Sutherland has retained Georgeson & Co., Inc. (the "Solicitation
Agent") to assist in the solicitation of proxies. To request additional
copies of this Proxy Statement, please contact the Solicitation Agent at the
following address:
Georgeson & Co., Inc.
Wall Street Plaza
New York, NY 10005
(212) 440-9800
This Proxy Statement is dated [September ], 1998. It is first being
sent to limited partners of the Partnership on or about [September ], 1998.
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YOU ARE URGED TO GRANT YOUR PROXY TO SUTHERLAND TO CONSENT TO THE PROPOSED
DISSOLUTION BY COMPLETING, SIGNING, DATING AND MAILING THE ENCLOSED PROXY IN THE
ENVELOPE THAT HAS BEEN INCLUDED FOR YOUR CONVENIENCE.
PLEASE RESPOND. YOUR PROXY IS IMPORTANT.
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QUESTIONS AND ANSWERS ABOUT THE PROPOSED DISSOLUTION
Q. WHO IS SUTHERLAND?
Like you, Charlene E. Sutherland is a limited partner of the Partnership.
She beneficially owns two quarter-units of limited partnership interest.
She acquired one of her quarter-units in the Partnership's original sale of
limited partnership interests and her other quarter-unit on the secondary
market. She is a licensed securities principal, a registered
representative, a certified financial planner, and a licensed tax
practitioner in the State of California. Her father-in-law, Judge Kenneth
E. Sutherland (retired), owns one-quarter of a unit, and certain of her
clients own in the aggregate four and three-quarters units.
Q. WHAT IS THE PROPOSED TRANSACTION?
The transaction proposed is to dissolve and liquidate the Partnership in a
manner intended to maximize the return to limited partners. Under
Sutherland's Proposed Dissolution, a majority in interest of limited
partners will exercise their right under the partnership agreement to
remove the general partner and to dissolve the Partnership. Although
removal of the general partner would cause the automatic dissolution of
the Partnership after the expiration of 90 days, by also dissolving the
Partnership by consent of the limited partners, the effective date of
dissolution will be the same as the date on which the general partner is
removed. At the same time, limited partners will elect Judge Charles B.
Renfrew (retired) as a liquidating trustee ("the Trustee") to liquidate the
Partnership's assets in accordance with a plan of dissolution approved by
the limited partners.
Q. WHO IS JUDGE RENFREW?
Judge Charles B. Renfrew (retired) -- the candidate for the position of
Trustee -- is a former United States District Court Judge. Judge Renfrew
also has served as Deputy Attorney General of the United States, the top
corporate legal officer of Chevron Corporation, and as a director and
trustee of numerous boards. Judge Renfrew currently has his own law
practice, specializing in alternative dispute resolution and internal
corporate investigations. Judge Renfrew has no prior relationship with the
Partnership, the general partner, the Company, Sutherland, Sutherland's
attorneys or, to the knowledge of Sutherland and her attorneys, any
affiliates or associates of any of the foregoing. See "About the Trustee."
Q. WHAT WILL THE TRUSTEE DO?
The Partnership owns a controlling interest in Synthetic Industries, Inc.
(the "Company") and thus has the ability to transfer control of the Company
to another person. In transactions involving a change of control of a
company, the price paid for the stock of the company more closely reflects
the going concern value of the company, and is typically higher, than the
prevailing market price for the company's stock. This difference between
the market price and the higher price paid in a change of control
transaction that realizes the going concern value is commonly referred to
as a "control premium." The Trustee will seek to obtain a price for the
Partnership's stock in the Company in a change of control transaction that
reflects the going concern value of the Company. There is no assurance that
going concern value can be obtained in connection with the Proposed
Dissolution. The reasons why Sutherland believes that the Partnership
should be able to obtain the going concern value of the Company are
discussed in the response to the question below of "Why does Sutherland
believe a change of control transaction may be possible?" as well as under
the headings "Summary - Background and Purpose of the Proposed Dissolution
- Attractiveness of the Company as an Acquisition Candidate" and "The
Proposed
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Dissolution - Background and Purpose of the Proposed Dissolution -
Attractiveness of the Company as an Acquisition Candidate" that appear
later in this Proxy Statement. Limited partners should read the foregoing
sections of the Proxy Statement carefully. Donaldson, Lufkin & Jenrette
("DLJ"), an investment banking firm contacted by attorneys for Sutherland,
has provided to Sutherland's attorneys at their request a comparable
company analysis. Except for this analysis, no specific financial
analyses, such as discounted cash flow analyses or comparable company
transaction analyses, have been performed by or on behalf of Sutherland.
See the response to the question below of "Why does Sutherland believe a
change of control transaction may be possible?" as well as the discussions
under the headings "Summary - Background and Purpose of the Proposed
Dissolution - Attractiveness of the Company as an Acquisition Candidate"
and "The Proposed Dissolution - Background and Purpose of the Proposed
Dissolution - Attractiveness of the Company as an Acquisition Candidate"
that appear later in this Proxy Statement.
Q. WHY IS SUTHERLAND PROPOSING THE DISSOLUTION?
The existing general partner is closely affiliated with management
of the Company. Sutherland believes that the executive officers of
the Company who control the general partner have caused the general
partner to place their own interests ahead of the interests of the
Partnership and its limited partners. In particular, since January
of 1994, the general partner has failed to make substantial efforts
to seek out a change of control transaction. In addition,
Sutherland believes that the existing general partner (i) diluted
the Partnership's interest in the Company from 100% to
approximately 67% by permitting a public offering of stock by the
Company in 1996, (ii) permitted the Company to implement various
measures that may impede a change of control, one effect of which
may be to entrench existing management, (iii) tried to dispose of
the Partnership's controlling stock interest in a public offering
(by their nature, public offerings do not involve any control
premium because one person does not acquire a controlling interest
as a result of a public offering) and (iv) tried in 1997 to
implement a plan of dissolution that Sutherland believes was not in
the best interests of the Partnership or its limited partners.
These actions by the general partner, and their principal
advantages and disadvantages to the Partnership and limited
partners, are discussed under the headings "Summary - Background
and Purpose of the Proposed Dissolution" and "The Proposed
Dissolution - Background and Purpose of the Proposed Dissolution."
For example, as a result of the 1996 public offering by the
Company, the Company received cash proceeds from the offering that
were used to reduce debt, and the net tangible book value of a
share of stock of the Company increased. Also, a public market was
established for the Company's stock. The Partnership benefitted
from these events, although the Partnership derives only limited
value from the existence of a public market for the Company's stock
because of restrictions on the Partnership's ability to sell its
shares of stock in the public market. Moreover, net tangible book
value per share is not generally recognized as an indicator of the
actual value of stock. In addition, the reduction of the
Partnership's ownership interest from 100% to approximately 67% may
have the effect of lessening the amount the Partnership might
obtain in a change of control transaction. The public offering by
the Company also created public minority stockholders. As a
result, the board of directors no longer owes fiduciary duties only
to the Partnership as the sole stockholder. To the extent that the
interests of the Partnership conflict with those of the public
minority stockholders, the board of directors of the Company face a
conflict of interest that did not exist prior to the public
offering.
Q. WHY DOES SUTHERLAND BELIEVE A CHANGE OF CONTROL TRANSACTION MAY BE
POSSIBLE?
Sutherland has been told that two
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potential acquirors, one an American company headquartered in the
Sourtheastern United States and listed on the New York Stock
Exchange (the "American company") and the other a European company
listed on a major European Stock Exchange (the "European company"),
have both approached the Company with a view to acquiring the
Company. A representative of the American company advised
attorneys for Sutherland that in May of 1998 attorneys for the
American company and the Company had a preliminary meeting in
anticipation of a meeting between the executives of both companies,
that on or about June 15, 1998, executives of both companies met,
and that the American company intended to draft a letter of intent.
On July 14, 1998, after being contacted by representatives for the
European company, counsel for Sutherland met with representatives
of the European company. During the course of that meeting,
Sutherland's attorneys were told that for some months the European
company had been expressing to the Company an interest in engaging
in substantive discussions concerning a possible acquisition of the
Company or a controlling interest in the Company. Sutherland's
attorneys were further told that the Company had been refusing to
disclose sufficient nonpublic information to the European company,
or to engage in substantive commercial discussions, to enable the
European company to make a decision with respect to making an offer
to acquire the Company or a controlling interest therein and, if
appropriate, to formulate the terms of a proposal therefor.
In addition to being told that the American company and the
European company have both expressed interest in acquiring the
Company, counsel for Sutherland has contacted four investment
banking firms, NationsBank Montgomery Securities ("NationsBank"),
Greif & Co., Sutro & Co. and Donaldson, Lufkin & Jenrette ("DLJ"),
each of which is experienced in valuations and acquisitions. Each
has informally expressed to Sutherland's counsel the view that the
Company's stock trades at a price well below comparable public
company valuations and that the Partnership's control block of
stock could likely be sold at a substantial premium over current
market price in a change of control transaction. Such views are
based on internal analyses, if any, done by such firms. Except for
a comparable company analysis prepared by DLJ, no such analyses, if
performed, have been disclosed to Sutherland or her counsel.
Except for the comparable company analysis by DLJ, neither
Sutherland, her attorneys nor any advisers retained by her or her
attorneys has undertaken any qualitative or quantitative analysis,
such as a discounted cash flow analysis or comparable company
transactions analysis.
Q. WHAT EFFECT WILL THE PROPOSED DISSOLUTION HAVE ON ME?
If approved, the Proposed Dissolution will result in the
termination of the Partnership. This will mean that the
Partnership's property will be disposed of as soon as practicable
pursuant to the Proposed Dissolution and the proceeds will be
distributed to limited partners. The Partnership and the Company
are parties to a registration rights agreement pursuant to which
the Company must at the request of the Partnership register at the
Company's expense the Company stock owned by the Partnership.
Accordingly, if the Trustee cannot dispose of the Company's stock
owned by the Partnership in a change of control transaction, the
Trustee will either sell the stock in a registered offering and
distribute cash to limited partners or will distribute the stock
pro rata to limited partners. If stock is distributed to limited
partners, you will be able to decide whether to retain the stock
distributed to you or sell such stock in the open market. The
Company is a reporting company
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under the Securities Exchange Act of 1934 and its common stock is listed
on the NASDAQ National Market. Shares of the Company's common stock
distributed to limited partners in a liquidating distribution should be
freely transferrable. Should the stock not be registered pursuant to the
registration rights agreement, Sutherland nevertheless expects that the
stock will be unrestricted stock or, if restricted stock, will be freely
tradable under SEC Rule 144(k) by limited partners who are not
affiliates of the Company.
Q. HOW MUCH WILL I RECEIVE?
There is no way to predict how much you will receive on dissolution
of the Partnership. The type and amount of distribution will
depend on the type of change of control transaction, if any, that
the Trustee is able to structure. If such a transaction occurs,
limited partners may receive cash or stock or other securities of a
company that acquires the Partnership's stock in the Company. If a
change of control transaction does not occur, then limited partners
will receive either (a) a pro rata distribution of the Company's
stock owned by the Partnership or (b) a pro rata distribution of
the cash proceeds of a registered offering of the Company's stock.
In addition, the expenses incurred in connection with the
solicitation of proxies for the Proposed Dissolution will be paid
by the Partnership. Such expenses cannot be determined at present,
but are expected to be in the range of approximately $75,000. In
addition, the Partnership will incur the expense of the Trustee's
fees, which would not be less than $75,000 and could be
substantially higher. The Trustee may retain an investment banking
firm or similar professional to assist in identifying and
structuring a change of control transaction. The fees and expenses
of such a professional are typically contingent on the consummation
of the transaction and often range from one to one and a quarter
percent of the value of the corporation being acquired in the
transaction. Such expenses will reduce the amount distributed to
limited partners. The amount available for distribution to limited
partners from a change of control transaction will also be reduced
by (i) the amount payable to the general partner under the
Partnership Agreerment and (ii) any attorneys' fees awarded to
Sutherland's attorneys in connection with certain pending
litigation. See "The Proposed Dissolution - Expenses of the Plan of
Dissolution;" "Risk Factors - Risk of Amount Due to General
Partner;" "Interest of Certain Persons in the Solicitation - The
Mills Law Firm;" "Interest of Certain Persons in the Solicitation -
Smith, Katzenstein & Furlow LLP;" "Summary of Certain Pending
Litigation." Thus, the actual amount to be received in connection
with the Proposed Dissolution cannot be determined at this time.
Q. WHAT VOTE OF LIMITED PARTNERS IS REQUIRED TO APPROVE THE PROPOSED
DISSOLUTION?
The holders of at least a majority of the outstanding limited
partnership interests must approve the Proposed Dissolution.
Q. WHAT WILL HAPPEN TO THE GENERAL PARTNER'S INTEREST?
Under the partnership agreement, upon the removal of the general
partner, the general partner ceases to function as a general
partner of the Partnership. The general partner's interest is
automatically converted into that of a special limited partner
entitled only to certain distributions, and having no voting
rights. In addition, the Partnership has the option to purchase
the general partner's interest, subject to the general partner's
right to retain a 7.5% interest in the Partnership after the
limited partners receive their Priority Return (as defined in the
partnership agreement). See "Summary of Certain Provisions of the
Partnership Agreement -- Allocations of Profits, Losses and
Distributions, Priority Return." Under the Proposed Dissolution,
the Trustee will cause the Partnership to exercise its option to
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purchase the general partner's interest, unless the Trustee
determines in his sole discretion that it would not be in the best
interests of the Partnership to do so.
Q. AM I ENTITLED TO APPRAISAL RIGHTS?
Neither Delaware law nor the Partnership Agreement provides limited
partners with appraisal rights in connection with dissolution of
the Partnership or the sale or other disposition of its assets. In
the event that a transaction implemented by the Trustee would
involve a limited partnership roll-up under federal law, appraisal
rights may be made available in connection with such a transaction.
Q. WILL I HAVE A VOTE ON ANY DISPOSITION OF PARTNERSHIP ASSETS?
Probably not. Approval of the Proposed Dissolution will authorize
the Trustee to dispose of the Partnership's assets in whatever
transaction the Trustee determines in his discretion will provide
the greatest value to the Partnership and its partners. It is
possible, however, that the Trustee could enter into certain
transactions, such as a merger of the Partnership into another
entity, that may be subject to federal law regulating limited
partnership roll-ups, and such transaction may require approval by
a vote of the limited partners.
Q. WHAT DO I NEED TO DO NOW?
If you are in favor of the Proposed Dissolution described in this
Proxy Statement, you must execute and return to Sutherland the form
of proxy accompanying this Proxy Statement. If you abstain from
granting a proxy, you will in effect be voting against the Proposed
Dissolution.
Q. WHEN DO YOU EXPECT THE PROPOSED DISSOLUTION TO BE COMPLETED?
Sutherland cannot predict whether or when sufficient proxies will
be received to effect the Proposed Dissolution. However, if it is
effected, the Trustee will endeavor to identify, enter into and
consummate a change of control transaction as soon as practicable.
It is not possible to predict how long it may take the Trustee to
do so or to determine that such a transaction is not reasonably
likely to occur. It is also possible that even if such a
transaction is entered into soon after the Proposed Dissolution is
effected, other circumstances, such as the need for regulatory
approvals, any litigation instituted challenging the Proposed
Dissolution, a material adverse change in the business prospects of
the Company or a material adverse change in the economy generally,
may delay implementation of any change of control transaction.
Q. WHAT HAPPENS IF THE TRUSTEE CANNOT STRUCTURE A CHANGE OF CONTROL
TRANSACTION?
If after having attempted to identify and structure a change of
control transaction the Trustee determines that it is not
reasonably likely that any such transaction can be effected, the
Trustee will as soon thereafter as practical dispose of shares of
the Company's common stock in order to discharge the Partnership's
obligations. The Partnership and the Company are parties to a
registration rights agreement pursuant to which the Company must at
the request of the Partnership register at the Company's expense
the Company stock owned by the Partnership. Accordingly, if the
Trustee cannot dispose of the Company's stock owned by the
Partnership in a change of control transaction, the Trustee will
either sell the stock in a registered offering and distribute cash
to limited partners or will distribute the stock pro rata to
limited partners. If stock is distributed to limited partners, you
will be able to decide whether to retain the stock distributed to
you or sell such stock in the open market. The Company is a
reporting company under the Securities Exchange Act of 1934 and its
common stock is listed on the NASDAQ National Market. Shares of
the Company's common stock
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distributed to limited partners in a liquidating distribution
should be freely transferrable. Should the stock not be
registered pursuant to the registration rights agreement,
Sutherland nevertheless expects that the stock will be unrestricted
stock or, if restricted stock, will be freely tradable under SEC
Rule 144(k) by limited partners who are not affiliates of the
Company. In deciding whether to sell the Company's stock in a
registered offering or to distribute the stock to the limited
partners, the Trustee will select the option that, in the good
faith business judgment of the Trustee, produces the highest return
for the limited partners, and in doing so may consider all such
factors as the Trustee in his sole discretion deems appropriate,
which may include some or all of the following: (a) whether the
return that could be received for the Company's stock in a public
offering would likely be higher than, lower than, or equal to the
market price of the Company's stock; (b) the impact that
distribution of the Company's stock to the limited partners would
likely have on the market price of the stock; (c) whether there
would be any restrictions on the limited partners' ability to
freely trade stock that is distributed to them; (d) the condition
of the stock market; (e) potential tax consequences to the
Partnership and its partners; (f) the expenses likely to be
associated with each of the two options; and (g) the views
expressed, if any, by limited partners.
Q. ARE THERE ANY MATERIAL RISKS ASSOCIATED WITH THE PROPOSED DISSOLUTION?
Yes. These are described under the headings "Risk Factors" and "The
Proposed Dissolution - Risks." The principal risks involved include: no
change of control transaction may occur or the going concern value of the
Company may not be realized in such a transaction; the Company and the
general partner may oppose the Proposed Dissolution; the Company, the
general partner or other limited partners may institute litigation
challenging the Proposed Dissolution; limited partners may fail to approve
the Proposed Dissolution; the determination of the amount due the general
partner may adversely affect limited partners; there may be a decline in
the price of the Company's stock that may adversely affect the value of any
control premium; there are tax consequences to the Proposed Dissolution
that may be adverse to limited partners, depending on their individual tax
circumstances; an additional vote of limited partners may be needed in
connection with a change of control transaction sought to be implemented by
the Trustee; there may be delays in implementing the Proposed Dissolution
caused by litigation, by changes in the economy or the stock market, by
efforts to identify and negotiate a change of control transaction, or other
similar factors; once the dissolution of the Partnership is approved by the
limited partners, it cannot be undone; limited partners are not entitled to
appraisal rights in connection with the dissolution of the Partnership and
are not likely to have appraisal rights in connection with a change of
control transaction implemented by the Trustee; there are material costs
and expenses that the Partnership will incur if the Proposed Dissolution is
adopted, including the fees and expenses of the Trustee (see "About the
Trustee"), transaction expenses in connection with any change of control
transaction (which will likely include fees to a business broker or
investment banking firm), and reimbursement of the out-of-pocket expenses
incurred by or on
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behalf of Sutherland in connection with the preparation of the
Proposed Dissolution and the solicitation of proxies (see "The
Proposed Dissolution - Expenses of the Plan of Dissolution").
Limited partners are encouraged to read the sections of this Proxy
Statement that discuss such risks and to consider them carefully
before deciding whether to grant their proxies to Sutherland.
Q. WHERE CAN I FIND MORE INFORMATION ABOUT THE PARTNERSHIP AND SYNTHETIC
INDUSTRIES, INC.?
You may obtain more information from various sources described under "Where
You Can Find More Information" on page 62 of this Proxy Statement.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Questions and Answers About the Proposed Dissolution . . . . . . . . . . . . 3
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Charlene E. Sutherland . . . . . . . . . . . . . . . . . . . . . . . . 14
The Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Synthetic Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . 15
Background and Purpose of the Proposed Dissolution . . . . . . . . . . 15
Lack of Distributions . . . . . . . . . . . . . . . . . . . . . . 15
Failure of General Partner to Protect Interests of Limited
Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Failure of General Partner to Seek Out a Control Premium . . . . . 19
Attractiveness of the Company as an Acquisition Candidate . . . . 19
General Partner Controlled by Management of the Company. . . . . . 20
Need for Independent Trustee . . . . . . . . . . . . . . . . . . . 20
Proposed Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consent to the Proposed Dissolution . . . . . . . . . . . . . . . . . . 23
Selection and Approval of Opinion of Special Counsel . . . . . . . . . 23
Conditions to the Proposed Dissolution . . . . . . . . . . . . . . . . 23
Summary of Certain United States Income Tax Considerations . . . . . . 24
Summary of Expenses of the Proposed Dissolution . . . . . . . . . . . . 24
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Possible Lack of Change of Control Transaction . . . . . . . . . . . . 25
Possible Opposition by the Company . . . . . . . . . . . . . . . . . . 25
Possible Failure to Approve Proposed Dissolution . . . . . . . . . . . 26
Election to Dissolve Irrevocable . . . . . . . . . . . . . . . . . . . 26
Possible Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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<S> <C>
Risk of Amount Due General Partner . . . . . . . . . . . . . . . . . . 27
Possible Decline of Market Price for the Company's Stock . . . . . . . 28
Certain Tax Risks and Possible Tax Gain . . . . . . . . . . . . . . . . 28
Possible Need for Additional Limited Partner Vote . . . . . . . . . . . 29
Possible Delay in Liquidation . . . . . . . . . . . . . . . . . . . . . 29
The Proposed Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Removal of General Partner . . . . . . . . . . . . . . . . . . . . . . 29
Dissolution of the Partnership . . . . . . . . . . . . . . . . . . . . 30
Appointment of Independent Liquidating Trustee . . . . . . . . . . . . 30
Approval of Plan of Dissolution . . . . . . . . . . . . . . . . . . . . 30
No Assurance of Change of Control Transaction . . . . . . . . . . . . . 32
Principal Intended Benefits . . . . . . . . . . . . . . . . . . . . . . 32
Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Background and Purpose of the Proposed Dissolution . . . . . . . . . . 33
Lack of Distributions . . . . . . . . . . . . . . . . . . . . . . 33
Failure of General Partner to Protect Interests of Limited
Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Failure of General Partner to Seek out a Control Premium . . . . . 36
Attractiveness of the Company as an Acquisition Candidate . . . . 37
General Partner Controlled by Management of the Company. . . . . . 38
Need for Independent Trustee . . . . . . . . . . . . . . . . . . . 38
Conditions to the Plan of Dissolution . . . . . . . . . . . . . . . . . 38
Expenses of the Plan of Dissolution . . . . . . . . . . . . . . . . . . 39
Solicitation of Proxies from Limited Partners . . . . . . . . . . . . . 40
Market Price for Units . . . . . . . . . . . . . . . . . . . . . . . . 41
Proxy Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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<S> <C>
Consent Required . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Probable Lack of Appraisal Rights . . . . . . . . . . . . . . . . . . . 43
Partnership Units and Principal Holders Thereof . . . . . . . . . . . . 43
The Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Selected Financial Data Concerning the Partnership . . . . . . . . . . . . . 44
Certain Federal Income Tax Considerations . . . . . . . . . . . . . . . . . 46
Classification as a Partnership . . . . . . . . . . . . . . . . . . . . 46
Principles of Partnership Taxation Applicable to the Proposed
Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Treatment of a Distribution . . . . . . . . . . . . . . . . . . . . . . 48
Treatment of Repayment of Partnership Liabilities and Plan Costs . . . 48
Other Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
State and Other Tax Matters . . . . . . . . . . . . . . . . . . . . . . 49
Summary of Certain Provisions of the Partnership Agreement . . . . . . . . . 49
Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Allocation of Profits, Losses and Distributions, Priority Return. . . . 50
Voting Rights of Limited Partners . . . . . . . . . . . . . . . . . . . 51
Removal, Withdrawal, Bankruptcy, Insolvency, Dissolution,
Retirement or Resignation of the General Partner . . . . . . . . . 51
Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
About the Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Compensation; Indemnification . . . . . . . . . . . . . . . . . . . . . 53
About the Special Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . 53
Interest of Certain Persons in the Solicitation. . . . . . . . . . . . . . . 54
Charlene E. Sutherland. . . . . . . . . . . . . . . . . . . . . . . . . 54
The Mills Law Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . 55
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<S> <C>
Smith, Katzenstein & Furlow LLP . . . . . . . . . . . . . . . . . . . . 56
Summary of Certain Pending Litigation. . . . . . . . . . . . . . . . . . . . 57
Delaware Court of Chancery . . . . . . . . . . . . . . . . . . . . . . 57
United States District Court for the Northern District of California. . 59
Financial Information about the Partnership. . . . . . . . . . . . . . . . . 61
Where You can Find More Information. . . . . . . . . . . . . . . . . . . . . 62
</TABLE>
<TABLE>
<S> <C>
Exhibits
Exhibit A Plan of Dissolution
Exhibit B Opinion of Special Counsel
Exhibit C Form 10-K for Synthetic Industries, L.P. for the fiscal year
ending September 30, 1997
Exhibit D Form 10-Q for Synthetic Industries, L.P. for the quarter
ending June 30, 1998
</TABLE>
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT
AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. TO
UNDERSTAND THE PROPOSED DISSOLUTION FULLY AND FOR A MORE COMPLETE DESCRIPTION
OF THE PARTNERSHIP, SYNTHETIC INDUSTRIES, INC., AND THE METHOD OF
IMPLEMENTING THE PROPOSED DISSOLUTION, YOU SHOULD READ CAREFULLY THIS ENTIRE
PROXY STATEMENT AND THE DOCUMENTS TO WHICH YOU ARE REFERRED.
CHARLENE E. SUTHERLAND
Charlene E. Sutherland is a limited partner of the Partnership. She
owns two quarter-units of limited partnership interest. She acquired one of
her quarter-units in the Partnership's original offering of units, and she
acquired her other quarter-unit in the secondary market. She is a certified
financial planner and licensed tax practitioner in the State of California.
Since January of 1990 she has been a registered representative and a
principal of a major registered broker-dealer on an independent contractor
basis. From 1986 to 1990, Sutherland was a registered representative with
Integrated Resources Equity Corp., on an independent contractor basis. From
1979 to 1985, she was employed by Equitec Securities Corp., as a senior
account executive.
From 1990 to 1991, Sutherland served on the board of directors of the
American Association of Limited Partners, a lobbying group that engaged in
lobbying efforts in support of the Limited Partnership Rollup Reform Act of
1993. Between 1987 and 1990, Sutherland served as the producer and moderator
of a local public-access-cable, non-commercial television show called Wealth
Management, an informational show for investors.
Sutherland's father-in-law, Judge Kenneth E. Sutherland (retired), owns
one-quarter unit in the Partnership, and a number of her clients own in the
aggregate another four and three-quarter units. As a limited partner,
Sutherland had serious concerns about various actions taken by the general
partner. She moved to intervene in litigation involving the Partnership and
the general partner in the United States District Court for the Northern
District of California, but that motion was denied. Subsequently, the lead
plaintiff in that litigation, with Sutherland's agreement, moved to have
Sutherland added to his complaint as a named plaintiff and a putative class
representative, which motion has not yet been decided. For additional
information concerning Sutherland, see "Interest of Certain Persons in the
Solicitation -- Charlene E. Sutherland" and "Summary of Certain Pending
Litigation -- United States District Court for the Northern District of
California."
Although it is Sutherland who is soliciting proxies pursuant to this
Proxy Statement, Sutherland's attorneys, The Mills Law Firm and Smith,
Katzenstein & Furlow LLP, are advancing all expenses associated with the
solicitation of proxies for the Plan of Dissolution, subject to being
reimbursed by the Partnership if the Proposed Dissolution is approved.
Because Sutherland's attorneys are advancing the expenses of the proxy
solicitation, they are deemed to be participants in the proxy solicitation.
Neither The Mills Law Firm, Smith, Katzenstein & Furlow LLP nor any partner
or attorney associated with either firm owns any units in the Partnership.
The Mills Law Firm and Smith, Katzenstein & Furlow LLP have financial
incentives to try to cause the limited partners to receive the highest
possible return for their investment in the Partnership and to try to cause
them to adopt the Proposed Dissolution. In connection with the liquidation
of the Partnership, The Mills Law Firm and Smith, Katzenstein & Furlow LLP
may receive substantial attorney's fees and costs as compensation for efforts
made by them in litigation and otherwise on behalf of limited partners. The
attorney's fees and costs that The Mills Law Firm and Smith, Katzenstein &
Furlow LLP receive may increase if the two firms cause the return received by
the limited partners in the liquidation of the Partnership to increase. See
"Interest of Certain Persons in the Solicitation - The Mills Law Firm" and
"Interest of Certain Persons in the
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Solicitation - Smith, Katzenstein & Furlow LLP."
THE PARTNERSHIP
The Partnership is a Delaware limited partnership organized in 1986 for
the purpose of acquiring Synthetic Industries, Inc. (the "Company"). An
aggregate of 800 Units were issued for aggregate capital contributions of
approximately $78.4 million, which were used to fund a portion of the
purchase price for 100% of the stock of the Company. In November of 1996, the
existing general partner permitted the Company to make a public offering of
common stock that diluted the Partnership's ownership from 100% to
approximately 67% of the Company's common stock. In May of 1998, the general
partner transferred 82,056 shares of Company stock owned by the Partnership
to the Company in payment of approximately $1,759,000 owed to the Company
for expenses incurrred by the Company on behalf of the Partnership. This
transaction caused the Partnership's percentage ownership of the Company to
fall from approximately 66.7% to approximately 66.4%. The Partnership owns
no assets other than its approximately 66.4% of the outstanding common stock
of the Company. Based on the annual and quarterly reports publicly filed by
the Partnership, Sutherland believes that the Partnership's only liability
consists of approximately $434,000 still owed to the Company for expenses
incurred by the Company on the Partnership's behalf.
THE GENERAL PARTNER
The existing general partner of the Partnership is SI Management L.P., a
Delaware limited partnership whose sole general partner is Synthetic
Management G.P., a Georgia general partnership having five partners
controlled, respectively, by Leonard Chill, Ralph Kenner, William Gardner
Wright, Jr., and W. Wayne Freed, who are each current executive officers of
the Company, and Jon P. Beckman, a former executive officer of and currently
a paid consultant to the Company. The principal place of business of the
general partner is located at 309 LaFayette Road, Chickamauga, Georgia 30707.
The general partner's telephone number is (706) 375-3121.
SYNTHETIC INDUSTRIES, INC.
The Company is a Delaware corporation founded in 1969 to produce
polypropylene-based primary carpet backing. Since that time the Company's
business has expanded into the manufacturing and sale of a full line of
polypropylene-based industrial fabrics, specialty yarns and geotextiles. As a
result of a public offering of common stock in November 1996, the Company had
8,656,250 shares of common stock outstanding, of which approximately 67% was
owned by the Partnership. In May of 1998, the general partner transferred
82,056 shares of Company stock owned by the Partnership to the Company in
payment of approximately $1,759,000 owed to the Company for expenses incurred
by the Company on behalf of the Partnership. This transfer caused the
Partnership's percentage ownership of the Company to fall from approximately
66.7% to approximately 66.4%. The Common Stock trades under the symbol
"SIND" on the Nasdaq National Market.
The principal executive office of the Company is located at 309
LaFayette Road, Chickamauga, Georgia 30707. The Company's telephone number
is (706) 375-3121.
BACKGROUND AND PURPOSE OF THE PROPOSED DISSOLUTION
LACK OF DISTRIBUTIONS. Since the inception of the Partnership, limited
partners have received no distributions on their investment. By comparison,
the persons controlling the general partner have received benefits that
include not only substantial salaries and bonuses from the Company but also a
substantial number of options to acquire the Company's common stock at
favorable exercise prices. According to the Company's financial reports,
Messrs. Chill, Kenner, Wright, Freed, and Beckman collectively own 360,766
options to acquire Company stock at $10.72 per share. Sutherland estimates
that, as of September __, 1998, the collective value of these options was
over $_____ million (based on the September __, 1998 stock price of $_______
per
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share).
FAILURE OF GENERAL PARTNER TO PROTECT INTERESTS OF LIMITED PARTNERS.
Based on various actions by the general partner described below, Sutherland
believes that the general partner has subordinated the interests of limited
partners to those of the Company's management, some of whom control the
general partner, and to the interests of the Company's public stockholders.
1. In 1994 the general partner caused the Partnership as the sole
stockholder of the Company to approve stock option plans pursuant to which
some 486,027 options were granted to directors and officers, some of whom
control the general partner, thereby diluting the Partnership's 100%
ownership of the Company. The existence of the options gave the directors
and officers an incentive to create and increase a public float for the
Company's stock and to liquidate the Partnership in a manner that will
maximize the value of the options. Although the Partnership might have
benefitted indirectly from an award of options because of the incentives they
provided to management, other performance-based incentives could have been
used to reward management for their performance without diluting the
Partnership's 100% ownership of the Company. Further, those members of
management who control the general partner already had a financial incentive
to improve the Company's performance by virtue of provisions in the
partnership agreement that allocate 30% of distributions to the general
partner after limited partners receive the Priority Return. See "Risk
Factors - Risk of Amount Due General Partner."
2. The general partner sought to cause the Partnership to sell its
stock in the Company in a public offering in August of 1996. While such a
sale would have liquidated the Partnership's assets and limited partners
would have received a distribution of net assets, such a sale would have
precluded the Partnership from realizing the going concern value of the
Company in a change of control transaction. Public offerings by their nature
do not involve the transfer of control to one person who will pay the going
concern value in return for obtaining control.
3. The general partner refused to call a meeting of limited partners
to vote on the proposed public offering after more than 10% in interest of
the limited partners requested such a meeting. Instead, in September of
1996, the general partner abandoned the proposed offering of all of the
Partnership's stock in the Company and allowed the Company to conduct a
public offering of approximately 2.8 million new shares of common stock.
That offering was completed in November of 1996.
4. The general partner permitted the 1996 public offering of stock by
the Company to be priced on November 1, 1996 at approximately $13.00 per
share rather than delaying the pricing until the Company had announced a
significant improvement in the Company's earnings. Within less than two
months following the public announcement on November 25, 1996 that the
Company's fourth quarter net sales were up 13.5%, fourth quarter operating
income was up 181%, and operating income for the fiscal year ended September
30, 1996 was up 34.1%, the price of the Company's stock had increased to
nearly $20. Sutherland believes that the interests of the Partnership and
its limited partners would have been better served if the general partner had
required the Company to delay pricing the 1996 public offering until after
the announcement of the significant improvement in the Company's earnings.
5. A principal effect of the 1996 offering of stock by the Company was
to dilute the Partnership's stock ownership from 100% to approximately 67%.
By creating a 33% public stockholder minority, the Company (with the general
partner's cooperation) made it more difficult for the Partnership to dispose
of the Company as a whole. The 1996 public offering did result in the
creation of a public market for the Company's stock. However, the
Partnership generally cannot take advantage of that public market. The
Partnership's ability to sell its stock is limited because the Partnership
owns a controlling interest in the Company and its sales of stock are subject
to restrictions under federal law. The creation of a public market benefitted
holders of options to purchase stock of the Company, such as the persons who
control the general partner, as the public market gave value to the options
and a ready market into which to sell shares acquired
16
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on exercise of options..
6. As a result of the 1996 public offering by the Company, the Company
received cash proceeds from the offering that were used to reduce debt, a
public market was created for the Company's stock and the net tangible book
value of a share of stock of the Company increased. The Partnership
benefitted from these events, although the Partnership derives only limited
value from the existence of a public market for the Company's stock because
of restrictions on the Partnership's ability to sell its shares of stock in
the public market. Moreover, net tangible book value per share is not
generally recognized as an indicator of the actual value of stock. In
addition, the reduction of the Partnership's ownership interest from 100% to
approximately two thirds may have the effect of lessening the amount the
Partnership might otherwise obtain in a change of control transaction. The
public offering by the Company also created public minority stockholders. As
a result, the board of directors no longer owes fiduciary duties only to the
Partnership as the sole stockholder. To the extent that the interests of the
Partnership conflict with those of the public minority stockholders, the
board of directors of the Company face a conflict of interest that did not
exist prior to the public offering.
7. Prior to the 1996 public offering by the Company, it was not
subject to Section 203 of the Delaware General Corporation Law. As a result
of the public offering in 1996 by the Company, the Company became subject to
Section 203, a statute that makes it more difficult to effect a change of
control transaction. The general partner could have taken steps to cause the
Company not to become subject to Section 203, but did not.
8. On or about September 6, 1996, the general partner permitted the
Company to enter into employment agreements with executives of the Company,
some of whom also control the general partner, that provide for the payment
of substantial sums to them in the event of a change of control, thereby
impeding change of control transactions. On or about October 24, 1996, the
general partner also caused the Partnership to approve an amendment to the
certificate of incorporation of the Company that eliminated the right of
stockholders to act by written consent in lieu of a meeting. This weakened
the Partnership's control of the Company . Because the Company's
stockholders have no right to call special meetings of stockholders and now
must act at an annual meeting if they wish to replace the board, the
Partnership can no longer act at any time to replace the board of directors.
The amendment thus may deter or make more difficult a change of control
because an acquiror of more than 50% of the stock cannot act immediately to
replace the board. Because the Partnership owned 100% of the stock, and
would continue to own an absolute majority after the November 1996 public
offering by the Company, and management of the Company controlled the general
partner, the Partnership had no need for and received no benefit from the
adoption of any measures that would impede a change of control. Because the
Partnership can no longer act at any time to replace the board and because
the Company is now subject to Section 203, the Partnership's ability to sell
freely its controlling interest in the Company has been impeded.
9. In September of 1997, the general partner proposed a plan of
dissolution (the "GP Plan") that would have dissipated entirely any premium
that might be obtained for the Partnership's two-thirds controlling interest
in the Company in a change of control transaction. Under the GP Plan, the
Partnership Agreement was to be amended to permit limited partners to
withdraw their capital, those limited partners desiring to do so could have
exchanged their limited partnership units for their pro rata share of stock
of the Company, all shares so withdrawn had to be sold immediately in an
underwritten public offering, and all shares not withdrawn would have
remained in the Partnership for distribution to limited partners 360 to 720
days after commencement of implementation of the GP Plan. The general
partner's plan did not afford any opportunity for the Partnership (and
indirectly the limited partners) to capture the going concern value of the
Company through a change of control transaction. The compulsory public
offering would have forced those limited partners who chose to withdraw their
capital in the form of shares to sell the shares immediately at a discount to
market and to pay material underwriters' and brokers' fees and other
expenses. Those limited partners who elected not to withdraw their capital
would have been forced to wait from one to two years (and possibly longer)
after implementation commenced to receive a distribution of capital. A
principal effect of the GP Plan
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would have been that the Partnership's two-thirds ownership interest would
have been dispersed into the hands of a large number of public holders of
stock, which would have eliminated the concentration of ownership that
resides in the Partnership. Such a result would have precluded the
Partnership from having any opportunity of realizing the going concern value
of the Company through a change of control transaction and would likely have
aided incumbent management in retaining control of the Company and fending
off any change of control transaction.
10. In May of 1998, the general partner transferred 82,056 shares of
common stock of the Company owned by the Partnership to the Company in
payment of $1,759,000 of expenses incurred by the Company on behalf of the
Partnership. The shares were valued at $21.44, approximately the then market
price of Company's publicly traded minority stock, a price that Sutherland
believes to be less than the amount per share that the Partnership could
realize in a change of control transaction. Thus, in Sutherland's view, the
Partnership did not receive for the stock transferred to the Company an
amount per share that approximated the going concern value of the Company.
In addition, as a result of this transaction, the Partnership's ownership of
stock in the Company was reduced from approximately 66.7% to approximately
66.4%, thereby falling below two-thirds of the outstanding stock. This
resulted in the Partnership losing its former ability as a two-thirds
stockholder to cause the Company's certificate of incorporation to be amended
to delete certain provisions that require a two-thirds vote for their
amendment, including the provision that prohibits stockholders from acting by
written consent.
11. The general partner has announced no alternative plan for the
dissolution and liquidation of the Partnership, even though the general
partner has stated that the Partnership serves no business purpose and
provides no benefit to limited partners.
Sutherland was also aware that certain limited partners had instituted
two lawsuits, one in the Court of Chancery of the State of Delaware (the
"Chancery Court") and one in the United States District Court for the
Northern District of California (the "District Court"), challenging the
conduct of the general partner and the persons controlling the general
partner. See "Summary of Pending Litigation." The complaints in those
lawsuits were later amended to seek an injunction against the GP Plan. On
October 23, 1997, the Chancery Court preliminarily enjoined the GP Plan,
finding that it was likely that the plan's terms violated the partnership
agreement. On March 19, 1998, the Delaware Supreme Court affirmed the
Chancery Court's grant of a preliminary injunction. Neither the preliminary
injunction nor its affirmance was a final determination on the merits that
the GP Plan violated the partnership agreement. On November 6, 1997, the
District Court issued a temporary restraining order against implementation of
the GP Plan, finding that the plaintiff had raised serious questions as to
whether the plan violated federal law relating to limited partnership
roll-ups and as to whether the general partner failed to disclose properly
what actions limited partners needed to take to require the GP Plan to be
approved by two-thirds in interest of the limited partners. However, the
District Court never made a final determination on the merits regarding these
issues. Sutherland moved to intervene in the litigation in the District
Court, but that motion was denied. Subsequently, the lead plaintiff in the
District Court litigation, with Sutherland's agreement, moved to have
Sutherland added to his complaint as a named plaintiff and a putative class
representative, which motion has not yet been decided. See "Summary of
Certain Pending Litigation." On May 14, 1998, the general partner announced
that it had withdrawn the GP Plan and that the Partnership would continue to
hold the Company's stock as it has in the past.
On December 29, 1997, limited partners commenced a second lawsuit in the
Chancery Court to challenge certain stock options granted by the Company to
certain of its current and former directors and executive officers, some of
whom control the general partner. On or about June 3, 1998, the plaintiffs
in the two actions in the Chancery Court moved to consolidate the two actions
and for leave to file a consolidated third amended and supplemental class and
derivative complaint (the "Third Amended Complaint"). Thereafter, the
defendants advised counsel for the plaintiffs that defendants did not oppose
the motion, and on June 23, 1998, the Chancery Court entered an order
consolidating the two actions and granting leave to file the Third Amended
Complaint. On July 20, 1998, the defendants filed a motion to dismiss the
Third Amended
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Complaint. See "Summary of Certain Pending Litigation."
In its proxy statement soliciting votes in favor of its now withdrawn
plan, the general partner indicated that the Partnership had outlived its
purpose, stating: "THERE IS NO BUSINESS PURPOSE OR BENEFIT TO INVESTORS
HOLDING INTERESTS IN A PARTNERSHIP, THE SOLE PURPOSE AND ACTIVITY OF WHICH IS
TO HOLD PUBLICLY TRADED SHARES OF A SINGLE CORPORATION." Sutherland agrees,
but believes that the Partnership should now take appropriate steps to ensure
not only liquidity for limited partners, but also that limited partners
receive the maximum return reasonably attainable on their investment.
Sutherland believes that the best return to limited partners is most likely
to result from a sale of the Partnership's 66% ownership interest in the
Company in a change of control transaction in which the Partnership (and
possibly minority stockholders of the Company) receives the going concern
value of the Company, which typically is a higher price per share than the
market price for the Company's common stock prior to the change of control
transaction.
FAILURE OF GENERAL PARTNER TO SEEK OUT A CONTROL PREMIUM. Sutherland
has been advised that, in the pending Chancery Court litigation, the general
partner has consistently argued that there was no significant interest on the
part of any person in acquiring the Company. However, Sutherland has learned
that, in discovery in the Chancery Court litigation, the plaintiffs confirmed
that, prior to proposing the GP Plan, the general partner had made only one
limited effort since January of 1994, at the latest, to explore a sale of the
Company or other change of control transaction. However, since 1994 the
Company's results of operations had significantly improved, making it a more
attractive acquisition candidate, and the stock market had also improved
significantly. Based on the proxy statement for the GP Plan and discovery in
the Chancery Court litigation, it appears that the only effort relating to
exploring a change of control transaction made by or on behalf of the general
partner after January 1994 but before the GP Plan was proposed was that Bear
Stearns & Co., one of the general partner's prime advisers, made a limited
inquiry in August 1996 concerning a sale of the Company. That inquiry, which
apparently consisted only of mailing a prospectus about the Company to seven
industrial companies and three financial institutions, was made prior to the
Company's public offering and prior to an announcement of significant
increases in the Company's earnings for the fourth quarter and fiscal year
ended September 30, 1996. No such inquiry was made contemporaneously with
the GP Plan proposed in 1997.
Recently, Sutherland was told that at least two potential acquirers have
approached the Company within the past year with a view to its acquisition
and that the Company has not cooperated with one of those potential
acquirers. See "Attractiveness of the Company as an Acquisition Candidate."
ATTRACTIVENESS OF THE COMPANY AS AN ACQUISITION CANDIDATE. The Company
would appear to be an attractive candidate for acquisition. On or about July
9, 1998, attorneys for Sutherland were contacted by representatives of a
European company listed on a major European Stock Exchange (the "European
company") that is engaged in businesses similar to those of the Company.
On July 14, 1998, attorneys for Sutherland met in Wilmington, Delaware
with representatives of the European company. During the course of that
meeting, Sutherland's attorneys were told that for some months the European
company had been expressing to the Company an interest in engaging in
substantive discussions concerning a possible acquisition of the Company or a
controlling interest in the Company. Sutherland's attorneys were further
told, however, that the Company had been refusing to disclose sufficient
nonpublic information to the European company, or to engage in substantive
commercial discussions, to enable the European company to make a decision
with respect to making an offer to acquire the Company or a controlling
interest therein and, if appropriate, to formulate the terms of a proposal
therefor. In a subsequent telephone conversation with representatives of the
European company, Sutherland's attorneys were told that the Company had first
approached the European company with a view to acquiring certain assets of
the European company, that the European company had indicated that it was
not interested in disposing of any of its assets to the Company, and that
since that initial contact from the Company, the European company had been
continuously expressing an interest to the Company in discussing a possible
acquisition of the Company
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or a controlling interest therein. The European company's representatives
indicated that they were disclosing the European company's interest in
acquiring the Company to Sutherland's attorneys in the belief that limited
partners could encourage the Company to engage in substantive discussions
with the European company and also because the European company wanted to
advise Sutherland's attorneys that it viewed the ongoing Chancery Court
and District Court litigations (see "Summary of Certain Pending Litigation")
as an impediment to the consideration of an acquisition of the Company or a
controlling interest therein.
On or about July 16, 1998, Sutherland's attorneys advised an attorney
for the general partner of the substance of the meeting with representatives
of the European company. The attorney for the general partner acknowledged
that the Company had had contacts with the European company and had expressed
interest in acquiring assets of the European company, but he denied that the
European company had expressed interest in acquiring the Company or any of
its assets. The statements to Sutherland's attorneys by counsel for the
general partner appear to be in direct conflict with the representations made
by the representatives of the European company.
In addition to the interest of the European company in acquiring the
Company, attorneys for Sutherland have been told that an American company
headquartered in the Southeastern United States and listed on the New York
Stock Exchange (the "American company") has expressed interest in acquiring
the Company. A representative of the American company advised attorneys for
Sutherland that in May of 1998 attorneys for the American company and the
Company had a preliminary meeting in anticipation of a meeting between the
executives of the American company and the Company, that on June 15, 1998,
executives of both companies met, and that the American company intended to
draft a letter of intent. Sutherland's attorneys do not know whether there
have been any subsequent material developments with respect to contacts
between the American company and the Company, or the nature of any such
material developments. The American company is a public company serving
customers in the industrial, commercial, institutional, health care and
construction industries, as well as consumers.
As part of Sutherland's effort to determine the attractiveness of the
Company as an acquisition candidate, counsel for Sutherland contacted four
investment banking firms, NationsBank Montgomery Securities ("NationsBank"),
Greif & Co., Sutro & Co. and Donaldson, Lufkin & Jenrette ("DLJ"), each of
which is experienced in valuations and acquisitions. Each has informally
expressed to Sutherland's counsel the view that the Company's stock trades at
a price well below comparable public company valuations and that the
Partnership's control block of stock could likely be sold at a substantial
premium over current market price in a change of control transaction. Such
views are based on internal analyses, if any, done by such firms. Except for
an analysis prepared by DLJ, no such analyses, if performed, have been
disclosed to Sutherland or her counsel.
DLJ prepared a comparable company analysis at the request of
Sutherland's attorneys. That analysis indicates to Sutherland that the per
share going concern value of the Company is higher than the current price of
the Company's publicly traded minority stock.
Except for the comparable company analysis by DLJ, neither Sutherland,
her attorneys nor any advisers retained by her or her attorneys has
undertaken any qualitative or quantitative analysis, such as a discounted
cash flow analysis or comparable company transactions analysis.
GENERAL PARTNER CONTROLLED BY MANAGEMENT OF THE COMPANY. The general
partner is dominated and controlled by individuals who are also executive
officers of the Company. Sutherland believes that this causes the general
partner to have interests that materially conflict with those of the
Partnership and its limited partners, because, in Sutherland's view, the
interests of the Company's management and public stockholders are not the
same as the interests of the Partnership and the limited partners.
NEED FOR INDEPENDENT TRUSTEE. Sutherland believes that the Partnership
has outlived its utility, that
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the general partner will not diligently seek out change of control
transactions that might yield a premium for the Partnership's 66% stock
ownership of the Company, and that the general partner has interests that
materially conflict with those of the limited partners. Thus, Sutherland
believes that the affairs of the Partnership would best be wound up by an
independent liquidating trustee who will not be hampered by any conflict of
interest and who will actively seek out change of control transactions in an
effort to maximize the return to the limited partners.
PROPOSED DISSOLUTION
The Proposed Dissolution has four principal components, each of which is
contingent on limited partner approval of each of the other three components.
1. REMOVAL OF THE GENERAL PARTNER. The first component is the removal of
the general partner. Section 7(g) of the Partnership Agreement authorizes a
majority in interest of the limited partners to remove the general partner if
they determine in their discretion that the general partner is not performing
in the best interest of the Partnership or if they determine that it is
otherwise in the best interest of the Partnership to remove the general
partner. For the reasons discussed under "Background and Purpose of the
Proposed Dissolution," Sutherland believes that it is in the best interests
of the Partnership and the limited partners to remove the general partner.
Under Section 11(a)(iv) of the Partnership Agreement, removal of the general
partner will result in the dissolution of the Partnership unless within 90
days of the removal all limited partners vote to elect a successor general
partner. Because Sutherland will not vote in favor of the election of a
successor general partner, upon removal of the general partner the
Partnership would after 90 days be dissolved by virtue of Section 11(a)(iv)
of the partnership agreement. In addition, by removing the general partner,
the Partnership will have the option of acquiring a substantial portion of
the general partner's interest in the Partnership. Sutherland believes that
such an acquisition of the general partner's interest is likely (but not
guaranteed) to decrease the distributions which the general partner will be
entitled to receive upon the dissolution and liquidation of the Partnership
and result in a corresponding increase in the distributions to the limited
partners. See "Proposed Dissolution - 4. Approval of Plan of Dissolution"
and "Summary of Certain Provisions of the Partnership Agreement - Resignation,
Withdrawal, Bankruptcy, Insolvency, Dissolution, Retirement or Reorganization
of the General Partner."
2. DISSOLUTION OF THE PARTNERSHIP. The second component of the Proposed
Dissolution is the determination by a majority in interest of limited
partners to dissolve the Partnership, contingent on removal of the general
partner, pursuant to their right to do so under Section 11(a)(iii) of the
partnership agreement. Although, as explained above, the removal of the
general partner would ultimately result in the dissolution of the
Partnership, the determination by a majority of limited partners to dissolve
the Partnership will cause the Partnership to be dissolved 90 days earlier
than if limited partners only removed the general partner. By causing
dissolution to occur immediately upon the removal of the general partner,
limited partners are entitled under Section 17-803(a) of the Act to appoint
immediately an independent liquidating trustee to wind up the Partnership's
business and affairs.
3. APPOINTMENT OF INDEPENDENT LIQUIDATING TRUSTEE. The third component of
the Proposed Dissolution is the appointment pursuant to Section 17-803(a) of
the Act of Judge Charles B. Renfrew (retired) as the independent liquidating
trustee (the "Trustee") to carry out the winding up of the Partnership's
business and affairs. See "About the Trustee." Judge Renfrew has no prior
relationship with the Partnership, the general partner, the Company,
Sutherland, The Mills Law Firm, Smith, Katzenstein & Furlow LLP or, to the
knowledge of Sutherland and her attorneys, any affiliates or associates of
any of the foregoing.
4. APPROVAL OF PLAN OF DISSOLUTION. The fourth component of the Proposed
Dissolution is the approval of a plan of dissolution that the Trustee will
follow in connection with winding up the Partnership's business and affairs.
See Exhibit A. Under that plan, the Trustee will hire a nationally
recognized investment banking or similar financial firm, or a qualified
business broker, to seek out and structure a change of control
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transaction in an effort to maximize the price received by the Partnership
for its 66% of the Company's common stock. The Trustee will seek to identify,
enter into and consummate a change of control transaction as soon as
practical following approval of the plan. Factors such as litigation, the
need for regulatory approvals, or other circumstances may delay
implementation of a change of control transaction.
If no change of control or similar transaction is identified, or if
identified is not entered into or consummated, and the Trustee determines
that it is not reasonably likely that a change of control transaction can be
consummated within a reasonable period of time, the Trustee will as soon
thereafter as practical either (a) distribute pro rata to partners the common
stock of the Company owned by the Partnership, net of expenses of the plan of
dissolution, or alternatively (b) sell the Company's stock in a registered
offering and distribute net cash proceeds to limited partners. (The
Partnership and the Company are parties to a registration rights agreement
pursuant to which the Company has agreed to register at its expense the
Company's common stock owned by the Partnership.) In deciding whether to
sell the Company's stock in a registered offering or to distribute the stock
to the limited partners, the Trustee will select the option that, in the good
faith business judgment of the Trustee, produces the highest return for the
limited partners, and in doing so may consider all such factors as the
Trustee in his sole discretion deems appropriate, which may include some or
all of the following: (a) whether the return that could be received for the
Company's stock in a public offering would likely be higher than, lower than,
or equal to the market price of the Company's stock; (b) the impact that
distribution of the Company's stock to the limited partners would likely have
on the market price of the stock; (c) whether there would be any restrictions
on the limited partners' ability to freely trade stock that is distributed to
them; (d) the condition of the stock market; (e) potential tax consequences
to the Partnership and its partners; (f) the expenses likely to be associated
with each of the two options; and (g) the views expressed, if any, by limited
partners.
If stock is distributed to limited partners, they will be able to decide
whether to retain the stock distributed to them or sell such stock in the
open market. The Company is a reporting company under the Securities
Exchange Act of 1934 and its common stock is listed on the NASDAQ National
Market. Shares of the Company's common stock distributed to limited partners
in a liquidating distribution should be freely transferrable. Should the
stock not be registered pursuant to the registration rights agreement,
Sutherland nevertheless expects that the stock will be unrestricted stock or,
if restricted stock, will be freely tradable under SEC Rule 144(k) by limited
partners who are not affiliates of the Company.
Sutherland cannot predict whether a change of control transaction will
be identified by the Trustee or whether any such transaction will in fact be
consummated. However, if such a transaction is consummated, it may take the
form of a sale or exchange for cash or other property (including securities
of another entity) of the common stock of the Company owned by the
Partnership, a merger of the Partnership into another entity, or some other
form of transaction. To ensure liquidity for limited partners, the proposed
plan of dissolution requires the Trustee to dispose of the Partnership's
assets only for cash, cash equivalents, or securities that when distributed
to limited partners will be fully marketable without restriction.
In addition to the attempt to obtain a price for the common stock of the
Company owned by the Partnership reflective of the going concern value of the
Company, the plan of dissolution provides that the Trustee will exercise the
Partnership's option to acquire a substantial portion of the general
partner's interest in the Partnership following the removal of the general
partner, unless the Trustee determines in his sole discretion that it would
not be in the best interests of the Partnership to do so. The partnership
agreement provides in substance that after the limited partners receive the
Priority Return, any gain resulting from the sale of all or substantially all
of the Partnership's assets is to be allocated 30% to the general partner and
70% to the limited partners. However, the partnership agreement also provides
that in the event that the general partner is removed, the Partnership has
the option of purchasing the general partner's interest at its appraised
value, subject to the right of the general partner to retain a 7.5% interest
in distributions after the Priority Return is reached. Sutherland believes
that the cost of acquiring the general partner's interest in the Partnership
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will be substantially less than the amount of distributions that the general
partner would be entitled to receive if the general partner retained its full
interest. Thus, Sutherland believes that distributions to limited partners
would likely be increased if the Partnership exercised its right to acquire a
substantial portion of the general partner's interest. Whether such an
increase would occur will depend on a number of factors not presently
ascertainable, including the method used to appraise the value of the general
partner's interest. Whether the Partnership exercises the option to acquire
the general partner's interest will be determined by the Trustee, in his sole
discretion, based on the circumstances at the time. For example, if the
Trustee determines that the Priority Return will likely not be achieved as a
result of a change of control transaction, or that no change of control
transaction is likely and that the common stock of the Company will thus
likely be distributed to limited partners or sold in a registered offering,
the Trustee may also determine that it would not be in the best interests of
the Partnership and the limited partners to exercise the Partnership's option
to acquire the general partner's interest.
In making any determination related to the implementation of the
Proposed Dissolution, including but not limited to any determination as to
whether it is reasonably likely that a change of control transaction will
occur, whether it is reasonably likely that the Trustee will be able to enter
into one or more agreements relating to a change of control transaction,
whether there is a reasonable likelihood that a change of control transaction
can be consummated, and whether it would be in the best interests of the
Partnership to exercise its option to acquire a part of the general partner's
interest, the Trustee may rely in good faith on the opinion of any person,
including any investment banking firm or similar financial institution or
business broker that the Trustee may retain, any counsel that the Trustee may
retain, or any other person selected by the Trustee as to matters the Trustee
reasonably believes are within such person's professional or expert
competence and who has been selected with reasonable care by or on behalf of
the Trustee.
CONSENT TO THE PROPOSED DISSOLUTION
By this Proxy Statement, each limited partner is being asked to grant to
Sutherland a proxy authorizing Sutherland to execute a written consent on
behalf of such limited partner to the Proposed Dissolution, which includes
the removal of the general partner, the dissolution of the Partnership, the
appointment of Judge Charles B. Renfrew (retired) as a liquidating trustee,
and the adoption of the plan of dissolution attached as Exhibit A hereto.
For the Proposed Dissolution to be adopted, it must be approved by the
holders of more than 50% of the Partnership's outstanding limited partnership
interests. The Partnership has outstanding 800 units of limited partnership
interests held by approximately 1,900 limited partners. Holders of more than
400 units must grant proxies to Sutherland for Sutherland to be able to
execute a written consent approving the Proposed Dissolution.
SELECTION AND APPROVAL OF OPINION OF SPECIAL COUNSEL
In addition to the consent necessary to adopt the Proposed Dissolution,
the Partnership Agreement requires that at least 10% in interest of limited
partners select counsel to render an opinion concerning certain legal matters
and that a majority in interest of limited partners approve the opinion of
counsel as a condition to the right of limited partners to exercise their
right to vote or consent to certain actions, including removal of the general
partner. Sutherland has obtained such an opinion from Roberts, Isaf & Summers
("Special Counsel"), a law firm located in Atlanta, Georgia. See "About the
Special Counsel." A copy of the opinion of Special Counsel is attached as
Exhibit B to this Proxy Statement. The proxy solicited by Sutherland includes
a proxy to execute a written consent selecting Roberts, Isaf & Summers as
Special Counsel and approving the opinion rendered by them.
CONDITIONS TO THE PROPOSED DISSOLUTION
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As a condition to the Proposed Dissolution, a majority in interest of
limited partners must grant to Sutherland proxies to express their written
consent selecting Roberts, Isaf & Summers as Special Counsel, approving the
opinion rendered by Special Counsel, and adopting the Proposed Dissolution.
In addition, the Proposed Dissolution will not be consummated unless: (i) all
necessary regulatory approvals, if any, are obtained, (ii) no provision of
applicable law or regulations and no order or decree prohibits implementation
or consummation of the Proposed Dissolution and (iii) all actions by or
filings with any governmental body, agency or official authority required to
permit the consummation of the Proposed Dissolution have occurred.
SUMMARY OF CERTAIN UNITED STATES INCOME TAX CONSIDERATIONS
The tax consequences of the Proposed Dissolution cannot be predicted at
the present time. They will depend on the terms and conditions of the
transaction that is ultimately consummated by the Trustee.
Generally, if no change of control transaction were consummated, and
shares of common stock of the Company were to be distributed to limited
partners, no taxable gain or loss would be recognized on the shares
distributed. A limited partner's tax basis in the shares distributed to the
limited partner should equal the tax basis of the limited partner's units
immediately prior to the distribution.
In the event of a change of control or other transaction that resulted
in a sale by the Partnership of the shares of common stock of the Company
owned by the Partnership for cash, followed by a distribution of the cash
consideration (net of expenses of the sale and certain other Partnership
expenses associated with the Proposed Dissolution), each limited partner
would recognize a long term capital gain equal to the difference between the
limited partner's basis in the units owned by the limited partner and the
amount of the gain allocated to the limited partner pursuant to the
partnership agreement.
In the event of a change of control transaction that resulted in an
exchange of the shares of common stock of the Company owned by the
Partnership for securities or other consideration, whether the transaction
would require limited partners to recognize any gain or loss in connection
with the transaction would depend on the nature of the transaction and the
consideration received. While it is possible that such a transaction might
be structured to avoid recognition of gain or loss for tax purposes, it is
more likely that the transaction would require limited partners to recognize
gain or loss for tax purposes.
In order to pay the liabilities of the Partnership and to fund expenses
of the Proposed Dissolution, including the fees of the Trustee, some of the
shares of stock of the Company owned by the Partnership will be sold. In
connection with such a sale of stock and the payment of expenses, a taxable
gain or loss will be recognized that will be allocated to limited partners in
accordance with the terms of the Partnership Agreement.
In addition to federal tax considerations, limited partners may be
affected by state tax laws in connection with Proposed Dissolution.
Accordingly, limited partners are advised to consult with their tax advisors
concerning both the federal and state tax law consequences to limited
partners in the event the Proposed Dissolution is effected.
SUMMARY OF EXPENSES OF THE PROPOSED DISSOLUTION
The expenses of the Proposed Dissolution will depend on the type of
transaction that the Trustee ultimately implements in connection with the
dissolution and winding up of the Partnership and cannot be determined at
present. Expenses in connection with the solicitation of proxies for the
Proposed Dissolution, which are being advanced by Sutherland's attorneys but
which will be reimbursed by the Partnership if the Proposed Dissolution is
approved, are expected to be in the range of approximately $75,000. In
addition, the Partnership will incur the expense of the Trustee's fees and
expenses, which would not be less than $75,000 and could be substantially
higher. The Trustee may retain an investment banking firm or similar
professional to assist in identifying and structuring a change of control
transaction. The fees and expenses of such a
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professional are typically contingent on the consummation of the transaction
and often range from one to one and a quarter percent of the value of the
corporation being acquired in the transaction. Should the Trustee determine
to make a public offering of the stock of the Company owned by the
Partnership, the Partnership would incur the expense of the underwriter's
commissions, which may be in the range of 5% of the total offering proceeds.
The Partnership would be required in connection with its dissolution to
discharge its debts and other obligations. Sutherland believes that the
Partnership's only material liability is its indebtedness to the Company in
the approximate amount of $434,000. See "The Proposed Dissolution - Expenses
of the Plan of Dissolution."
RISK FACTORS
Limited partners should consider carefully all of the information
contained in this Proxy Statement prior to executing and returning the
enclosed form of proxy. Summarized below are certain significant risk
factors relating to the Proposed Dissolution. These risk factors are not the
only risks related to the Proposed Dissolution, and the order in which they
are discussed is not indicative of their relative importance. The risk
factors summarized below should be considered in the context of all of the
information contained in this Proxy Statement. See also "The Proposed
Dissolution - Risks."
POSSIBLE LACK OF CHANGE OF CONTROL TRANSACTION
Sutherland is proposing the Proposed Dissolution in part because she
believes that there is a significant chance that the Company, or the
Partnership's 66% stock interest in the Company, can be sold at a price that
reflects a material premium over the current market price for the Company's
common stock. However, there is the risk that, if the Proposed Dissolution
were adopted, the Trustee will be unable to locate a purchaser and negotiate
and implement a change of control transaction that will result in a control
premium being paid for the Company or the Partnership's 66% stock interest in
the Company. In such a case, limited partners would receive either a pro
rata distribution of the Company's stock, net of the expenses associated with
the Proposed Dissolution, or a pro rata distribution of the cash proceeds of
a registered offering of the Company's stock, net of the expenses of the
Proposed Dissolution.
POSSIBLE OPPOSITION BY THE COMPANY
If the Trustee were to locate a prospective buyer, the board of
directors of the Company may oppose any change of control transaction. The
Company's certificate of incorporation and bylaws contain provisions that
prohibit stockholders, including the Partnership, from calling a special
meeting or taking action by written consent. These provisions could make it
more difficult for the Partnership to remove the incumbent directors in the
event they oppose a change of control transaction. Thus, such provisions may
discourage, delay, or make more difficult a change of control transaction.
Because the general partner in the past approved an amendment to the
certificate of incorporation of the Company that took away the right of
stockholders of the Company to act by written consent in lieu of a meeting,
the Partnership cannot use its stock ownership to remove directors of the
Company except at a meeting of stockholders. The stockholders have no right
to call a special meeting of stockholders. It is most likely, therefore,
that the Partnership could remove directors only at an annual meeting of
stockholders. The Company last held an annual meeting in February of 1998.
On July 2, 1998, the general partner's counsel informed Sutherland that the
Company has not yet set a date for its next annual meeting but that the
likely date will be some time in February of 1999.
The Company is also subject to Section 203 of the Delaware General
Corporation Law. Section 203 restricts certain business combinations with
any stockholder who acquires 15% or more of the Company's stock (called an
"Interested Stockholder") for a period of three years after a person becomes
an Interested Stockholder. Such restrictions do not apply if the board of
directors of the Company approve in advance either
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the person becoming an Interested Stockholder or the business combination, or
the business combination is approved by the holders of at least two-thirds of
the Company's stock (excluding shares owned by the Interested Stockholder).
In May of 1998, the Partnership transferred 82,056 shares of common stock of
the Company to the Company to pay certain debt owed to the Company. See "The
Partnership." One result of this use of stock was to reduce the
Partnership's stock ownership in the Company from approximately 66.7% to
approximately 66.4%, thus causing the Partnership's ownership to fall below
the two-thirds level sufficient to satisfy the vote requirement for exempting
a transaction from Section 203. Consequently, if the board of directors of
the Company opposes a change of control transaction, Section 203 and the
inability of the Partnership to elect a new board of directors except at an
annual meeting may deter, discourage, delay, or make more difficult a change
of control transaction proposed by the Trustee.
POSSIBLE FAILURE TO APPROVE PROPOSED DISSOLUTION
If the Proposed Dissolution is not approved, Sutherland believes that
the general partner will simply continue to conduct the business of the
Partnership as currently conducted. The general partner stated in its proxy
statement relating to the now-withdrawn GP Plan that if that plan were not
approved, the general partner would continue the business of the Partnership
as currently being conducted. The general partner also stated that it was
not then exploring any alternatives to its plan of withdrawal and
dissolution, but might from time to time explore alternatives. In a May 14,
1998 press release and in a May 14, 1998 letter to limited partners, the
general partner announced that the GP Plan had been withdrawn and that the
Partnership would continue to hold its stock in the Company as it had done in
the past.
The general partner also disclosed in its proxy statement relating to
the now-withdrawn GP Plan that at some time in the future it might elect to
withdraw as general partner. Such a withdrawal would likely result in the
dissolution of the Partnership and could result in a distribution in kind to
the limited partners of the Company's stock owned by the Partnership. In
such a case, the Partnership and the limited partners would lose any
opportunity to obtain a control premium for the Partnership's 66% stock
ownership of the Company. The general partner has stated that a distribution
of the Company's stock to limited partners carries a risk that the market
price for the Company's stock might decline by reason of the sale by limited
partners of a significant amount of the Company's stock within a short period
of time.
Sutherland believes it unlikely that the general partner will resign
because such a resignation would result in the general partner forfeiting any
right to wind up the affairs of the Partnership and permit limited partners
to appoint a liquidator or petition the Delaware Court of Chancery for the
appointment of a liquidator pursuant to Section 17-804(a) of the Act. Given
the identity between the persons controlling the general partner and the
Company, Sutherland believes it is doubtful that they would voluntarily
relinquish control over the winding up of the Partnership's affairs. In
addition, resignation of the general partner would result in the Partnership
having the right to buy out a substantial portion of the general partner's
interest in the Partnership, which could reduce the total returns to the
general partner. For these reasons, Sutherland believes at present that it
is unlikely that the general partner would elect to resign.
ELECTION TO DISSOLVE IRREVOCABLE
The election by limited partners to dissolve the Partnership will be
irrevocable once Sutherland executes and delivers to the Partnership the
written consent of a majority in interest of the limited partners to dissolve
the Partnership. Thereafter, limited partners will not be able to revoke the
dissolution of the Partnership even if circumstances develop that make it
more advantageous to limited partners not to have dissolved the Partnership.
POSSIBLE LITIGATION
Sutherland anticipates that the general partner and management of the
Company and/or certain limited
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partners who supported the GP Plan will oppose the Proposed Dissolution to
which this Proxy Statement relates and may institute litigation in an effort
to prevent Sutherland from soliciting proxies in favor of the Proposed
Dissolution or to enjoin implementation of the Proposed Dissolution. It is
also possible that the general partner will contest the validity of its
removal as general partner. Were any such litigation commenced, it might
delay execution of a written consent to the Proposed Dissolution, deter,
discourage or make more difficult a change of control transaction or
otherwise delay or prevent implementation of the Proposed Dissolution.
RISK OF AMOUNT DUE GENERAL PARTNER
The partnership agreement provides that in the event of a sale of
substantially all of the Partnership's ownership interest in the Company,
after limited partners receive a "Priority Return," the gain realized by the
Partnership from the sale is to be allocated 70% to limited partners as a
group and 30% to the general partner. Under the partnership agreement, the
Priority Return occurs when limited partners have received distributions that
in the aggregate equal their original capital contributions plus interest at
6% per annum, compounded annually. Because limited partners have received no
distributions from the Partnership, for the Priority Return to occur the
limited partners would have to receive, as of September 1998, approximately
$190,000 in respect of each unit.
The Priority Return would be reached, as of September 1998, if the
Partnership receives approximately $27 per share for its stock in the
Company. Thus, if the Trustee liquidates the Partnership through a
transaction in which the Partnership receives more than $27 per share for its
Company stock, the General Partner would be entitled to 30 percent of the
excess proceeds, subject to the Partnership's right to buy out a substantial
portion of the General Partner's interest upon removal, as discussed below.
A clause in the partnership agreement provides that, after the Limited
Partners have received their Priority Return, gain received by the
Partnership in a sale of the Company or in the liquidation of the Partnership
is to be "allocated to the least extent necessary to cause the aggregate
Capital Accounts of the General Partner and of the Limited Partners to be in
a ratio of 30% for the General Partner and 70% for the Limited Partners."
The general partner and certain limited partners who claim to have
participated in the development of the GP Plan have contended, apparently
relying on this clause, that the General Partner would be entitled to
approximately the first $60 or $65 million of distributions made by the
Partnership after the Priority Return is reached. Sutherland believes that
this contention by the general partner and the general partner's application
of the clause in question are both incorrect and inconsistent with
representations made to limited partners in the Partnership's original
offering materials used in connection with the sale of limited partnership
units. The Mills Law Firm and Smith, Katzenstein & Furlow LLP, Sutherland's
attorneys, and an expert consulted by them, have concluded that the capital
accounts of the general partner and of the limited partners will be actually
or approximately equal to zero after distributions are made sufficient to
cause the Priority Return to be reached and that therefore the clause relied
on by the general partner will have no material monetary effect. The expert
consulted by Sutherland's attorneys, Kupperberg & Associates, is a certified
public accounting firm with significant audit, tax and business experience
and has testified in accounting matters in numerous state and federal courts.
Kupperberg & Associates has further advised Sutherland's attorneys that, in
the opinion of Kupperberg & Associates, the purpose of the clause in question
was to adjust partnership distributions in the event that the Priority Return
was reached prior to a sale of the Partnership or liquidation of the Company
and the Partnership then owned assets such as furniture or fixtures. If the
Proposed Dissolution is approved, the Priority Return will be reached, if at
all, only as a result of the liquidation of the Partnership and/or sale of
the Company, because the Partnership has never made any distributions. In
addition, the Company's stock is the Partnership's only substantial asset.
Accordingly, Sutherland's attorneys have concluded that the clause in
question will not be implicated in a manner that would cause it to
significantly affect distributions to the limited partners. This conclusion
is also supported by the fact that the original offering memorandum used by
the general partner in 1987 to sell units in the Partnership stated, in an
illustration of the economic and tax consequences of a hypothetical sale of
the Company, that the general partner would receive 30 percent of the
proceeds after the Priority Return was reached and the limited partners
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would receive 70 percent. However, although Sutherland's attorneys have
concluded that it is unlikely that a court would accept the general partner's
current application of the clause in question, their conclusion may not be
correct and a court may accept the general partner's current application of
the clause. In that case, the return received by the limited partners in the
Proposed Dissolution could be significantly reduced.
The partnership agreement gives the Partnership the right to purchase
the general partner's interest following its removal as general partner,
subject only to the right of the general partner to retain a 7.5% interest in
any gain realized by the Partnership after the Priority Return has been paid
to limited partners. The purchase price for the general partner's interest
is determined by one appraiser appointed by the general partner, one
appraiser appointed by the Partnership, and one appraiser selected by the
other appraisers in the event the two appraisers cannot agree on the value of
the general partner's interest. The plan of dissolution provides (unless the
Trustee determines in his sole discretion that it would not be in the best
interests of the Partnership to do so) that the Trustee will exercise the
Partnership's option to acquire the general partner's interest, as Sutherland
believes that such an acquisition should decrease the amount otherwise
allocable to the general partner and increase correspondingly the amount
allocable to the limited partners. There can be no assurance, however, that
the Trustee will either elect or be able to cause the Partnership to acquire
the general partner's interest or that such acquisition will materially
benefit limited partners.
POSSIBLE DECLINE IN MARKET PRICE FOR THE COMPANY'S STOCK
The future market price for the Company's stock is inherently
unpredictable. General market and economic conditions may adversely affect
the trading price for the Company's stock, as may any adverse developments in
the business of the Company. Thus, there is a risk that the market price
might decline, with the result that the value of a change of control
transaction may decline. In the event that no change of control transaction
is consummated, such that the Company's stock owned by the Partnership is
sold by the Partnership in a registered offering or distributed in kind to
limited partners, the value of the stock at the time of such sale or
distribution may be less than its current market price. Moreover, if
following a distribution of stock by the Partnership a substantial amount of
the distributed stock is sold in a short period of time by limited partners,
such sales may result in a decline in the market price for the Company's
stock. Sutherland believes any such decline caused by sales of the Company's
common stock by limited partners would be temporary. Further, in the event
that the Trustee distributes the Company's common stock, the Trustee will
include with such distribution a notice reminding limited partners of the
possible impact on the market value of the stock if a substantial number of
limited partners immediately sell substantial amounts of the stock received
by them.
CERTAIN TAX RISKS AND POSSIBLE TAX GAIN
The tax consequences to limited partners in connection with a change of
control or other transaction as contemplated by the Proposed Dissolution will
depend on the specific terms of the transaction. Thus, it is not possible to
predict the actual federal and state tax consequences. Generally, however,
were the Partnership to dispose of its stock interest in the Company for
cash, recognizable gain would be incurred by the Partnership in connection
with the sale and allocated to limited partners in accordance with the
partnership agreement. Limited partners would be taxed on the difference
between their tax basis in their units and the gain allocated to them.
It is possible, however, that a change of control transaction might take
a form, such as a like kind exchange or a merger, that would not require the
Partnership or limited partners to recognize any gain in connection with the
change of control transaction. In such a case, recognition of gain by
limited partners may be deferred until disposition of the property received
by them.
Similarly, should no change of control transaction occur, and the
Company's stock owned by the Partnership be distributed to limited partners,
no gain would be recognized by limited partners until they sold the shares
distributed to them.
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The Trustee will attempt to structure a transaction that achieves the
best return reasonably obtainable. While the Trustee will take into account
the tax consequences of a transaction, limited partners will have no control
over the transaction selected by the Trustee except to the extent that the
transaction itself takes a form, such as a merger of the Partnership into
another entity, that requires a vote of limited partners. Accordingly,
limited partners may be unable to avoid adverse tax consequences to them
resulting from a change of control transaction or the Proposed Dissolution.
Limited partners are advised to consult with their own tax advisors
concerning the possible tax consequences to them of the Proposed Dissolution.
POSSIBLE NEED FOR ADDITIONAL LIMITED PARTNER VOTE
The Proposed Dissolution confers broad power on the Trustee to dispose
of the assets of the Partnership. However, it is possible that the Trustee
may determine that the best return to the Partnership and limited partners
may involve a type of change of control transaction, such as a merger of the
Partnership into an acquiror in exchange for cash or other securities, that
requires the approval of the limited partners. It is also possible that a
transaction or series of transactions proposed by the Trustee will be subject
to federal legislation regulating limited partnership roll-ups. Certain
transactions subject to such federal roll-up legislation require approval by
two-thirds or three-fourths in interest of limited partners, depending on the
terms of the transaction. If the Trustee proposes such a transaction, the
appropriate amount in interest of limited partners would have to approve the
transaction for it to be implemented. If the transaction proposed by the
Trustee requires approval by a vote of the limited partners, the Partnership
may bear the additional expense of soliciting proxies in connection with such
a transaction. While the Trustee will endeavor to have such costs and
expenses borne by the other party to the transaction, there is no assurance
that the Trustee will be able to do so. Even if the Trustee is able to do
so, there is no assurance that such costs and expenses will not be borne
indirectly by the Partnership and the limited partners through a reduction in
the amount of the consideration paid for the stock of the Company owned by
the Partnership.
POSSIBLE DELAY IN LIQUIDATION
The Proposed Dissolution and related Plan of Dissolution (see Exhibit A
to this Proxy Statement) do not impose time limitations on the Trustee to
effect any change of control transaction or distribute Partnership assets in
kind following dissolution. The Trustee will have considerable discretion in
determining whether a change of control transaction remains feasible, and
changes in the economy or the stock market may cause the Trustee to delay
implementation of a change of control transaction until the economy or market
conditions improve. Similarly, the Trustee will have considerable discretion
in determining whether to distribute the Partnership's assets in kind to
limited partners. It is likely that the Trustee will delay any distribution
in kind until such time as the Trustee is satisfied that it is not reasonably
likely that a change of control transaction providing a premium over market
will be entered into or consummated. Accordingly, the Proposed Dissolution
carries the risk of a material delay between the approval of the Proposed
Dissolution and the receipt by limited partners of any liquidating
distributions.
THE PROPOSED DISSOLUTION
The dissolution proposed by Sutherland is set forth in a Plan of
Dissolution, a copy of which appears as Exhibit A to this Proxy Statement.
The Proposed Dissolution has four principal components, each of which is
described below. Limited partners should read the description below in
conjunction with the full text of the Plan of Dissolution. Implementation of
each component of the Proposed Dissolution is contingent on the receipt of
proxies sufficient to approve all components of the Proposed Dissolution.
REMOVAL OF GENERAL PARTNER. The first component is the removal of the
general partner. Section 7(g) of the Partnership Agreement authorizes a
majority in interest of the limited partners to remove the general partner if
they determine, in their discretion, that the general partner is not
performing in the best interest of the Partnership or if they determine that
it is otherwise in the best interest of the Partnership to remove the
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general partner. For the reasons described under "Background and Purpose of
the Proposed Dissolution," Sutherland believes that it is in the best
interests of the Partnership and the limited partners to remove the general
partner. Under Section 11(a)(iv) of the Partnership Agreement, removal of
the general partner will result in the dissolution of the Partnership unless
within 90 days of the removal all limited partners vote to elect a successor
general partner. Because Sutherland will not vote in favor of the election
of a successor general partner, upon removal of the general partner the
Partnership would after 90 days be dissolved by virtue of Section 11(a)(iv)
of the partnership agreement. In addition, by removing the general partner,
the Partnership will have the option of acquiring a substantial portion of
the general partner's interest in the Partnership. Sutherland believes that
such an acquisition of the general partner's interest is likely (but not
guaranteed) to decrease the distributions which the general partner will be
entitled to receive upon the dissolution and liquidation of the Partnership
and result in a corresponding increase in the distributions to the limited
partners.
DISSOLUTION OF THE PARTNERSHIP. The second component of the plan of
dissolution is the determination by a majority in interest of limited
partners, contingent on removal of the general partner, to dissolve the
Partnership, pursuant to their right to do so under Section 11(a)(iii) of the
partnership agreement. Although, as explained above, the removal of the
general partner would ultimately result in the dissolution of the
Partnership, the determination by a majority of limited partners to dissolve
the Partnership will cause the Partnership to be dissolved 90 days earlier
than if limited partners only removed the general partner. By causing
dissolution to occur immediately upon the removal of the general partner,
limited partners are entitled under Section 17-803(a) of the Act to
immediately appoint an independent liquidating trustee to wind up the
Partnership's business and affairs.
APPOINTMENT OF INDEPENDENT LIQUIDATING TRUSTEE. The third component of
the Proposed Dissolution is the appointment pursuant to Section 17-803(a) of
the Act of Judge Charles B. Renfrew (retired) as the independent liquidating
trustee (the "Trustee") to carry out the winding up of the Partnership's
business and affairs. See "About the Trustee." The procedures that the
Trustee will follow in winding up the Partnership are described below in
"Approval of Plan of Dissolution." Judge Renfrew has no prior relationship
with the Partnership, the general partner, the Company, Sutherland,
Sutherland's attorneys or, to the knowledge of Sutherland or her attorneys,
any affiliates or associates of any of the foregoing. For more information
about Judge Renfrew, see "About the Trustee." The Plan of Dissolution
provides for the Trustee to receive both a flat fee of $75,000 as well as a
contingent fee (which may range from zero to several hundred thousand
dollars) based on the net value per share received by the Partnership for its
stock in the Company. See "Expenses of the Plan of Dissolution," "About the
Trustee" and Exhibit A for a more complete description of the Trustee's fees.
In addition, the Trustee will be reimbursed for all expenses incurred on
behalf of the Partnership in connection with the dissolution and liquidation
of the Partnership, including the identification, negotiation and
implementation of any change of control transaction. The Trustee will be
entitled to be indemnified for any loss arising out of the performance by the
Trustee of the Trustee's duties, except for any loss resulting from the gross
negligence or willful misconduct of the Trustee. In the event the Trustee is
sued or otherwise involved in any action, suit or proceeding arising out of
the Trustee's service as the liquidating trustee, the Trustee will be
entitled to have all litigation expenses, including attorneys' fees, paid by
the Partnership in advance of the final disposition of the action, suit or
proceeding, provided that the Trustee first furnishes the Partnership with an
undertaking to repay such advances in the event that it is ultimately
determined that the Trustee is not entitled to be indemnified by the
Partnership for such expenses.
APPROVAL OF PLAN OF DISSOLUTION. The fourth component of the Proposed
Dissolution is the approval of a plan of dissolution that the Trustee will
follow in connection with winding up the Partnership's business and affairs.
Under that plan, the Trustee will hire a nationally recognized investment
banking or similar financial firm, or a qualified business broker, to seek
out and structure a change of control transaction in an effort to maximize
the price received by the Partnership for its 66% of the Company's common
stock. The Trustee will seek to identify, enter into and consummate a change
of control transaction as soon as practicable following approval of the plan.
Factors such as litigation, the need for regulatory approvals, or other
circumstances may delay implementation of a change of control transaction.
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If no change of control or similar transaction is identified, or if
identified is not entered into or consummated, and the Trustee determines
that it is not reasonably likely that a change of control transaction can be
consummated within a reasonable period of time, the Trustee will as soon
thereafter as practicable either (a) distribute pro rata to partners the
common stock of the Company owned by the Partnership, net of expenses of the
plan of dissolution, or alternatively (b) sell the Company's stock in a
registered offering and distribute net cash proceeds to limited partners.
(The Partnership and the Company are parties to a registration rights
agreement pursuant to which the Company has agreed to register at its expense
the Company's common stock owned by the Partnership.) In deciding whether to
sell the Company's stock in a registered offering or to distribute the stock
to the limited partners, the Trustee will select the option that, in the good
faith business judgment of the Trustee, produces the highest return for the
limited partners, and in doing so may consider all such factors as the
Trustee in his sole discretion deems appropriate, which may include some or
all of the following: (a) whether the return that could be received for the
Company's stock in a public offering would likely be higher than, lower than,
or equal to the market price of the Company's stock; (b) the impact that
distribution of the Company's stock to the limited partners would likely have
on the market price of the stock; (c) whether there would be any restrictions
on the limited partners' ability to freely trade stock that is distributed to
them; (d) the condition of the stock market; (e) potential tax consequences
to the Partnership and its partners; (f) the expenses likely to be associated
with each of the two options; and (g) the views expressed, if any, by limited
partners.
In addition to the attempt to obtain a price for the common stock of the
Company owned by the Partnership reflective of the going concern value of the
Company, the plan of dissolution provides that the Trustee will exercise the
Partnership's option to acquire a substantial portion of the general
partner's interest in the Partnership following the removal of the general
partner, unless the Trustee determines in his sole discretion that it would
not be in the best interests of the Partnership to do so. The partnership
agreement provides in substance that after the limited partners receive their
Priority Return, any gain resulting from the sale of all or substantially all
of the Partnership's assets is to be allocated 30% to the general partner and
70% to the limited partners. However, the partnership agreement also
provides that in the event that the general partner is removed, the
Partnership has the option of purchasing the general partner's interest at
its appraised value, subject to the right of the general partner to retain a
7.5% interest in distributions after the Priority Return is reached.
Sutherland believes that the cost of acquiring the general partner's interest
in the Partnership will be substantially less than the amount of
distributions that the general partner would be entitled to receive if the
general partner retained its full interest. Thus, Sutherland believes that
distributions to limited partners would likely be increased if the
Partnership exercised its right to acquire a substantial portion of the
general partner's interest. Whether such an increase would occur will depend
on a number of factors not presently ascertainable, including the method used
to appraise the value of the general partner's interest. Whether the
Partnership exercises the option to acquire the general partner's interest
will be determined by the Trustee, in his sole discretion, based on the
circumstances at the time. For example, if the Trustee determines that the
Priority Return will likely not be achieved as a result of a change of
control transaction, or that no change of control transaction is likely and
that the common stock of the Company will thus likely be distributed to
limited partners or sold in a registered offering, the Trustee may also
determine that it would not be in the best interests of the Partnership and
the limited partners to exercise the Partnership's option to acquire the
general partner's interest.
In making any determination related to the implementation of the
Proposed Dissolution, including but not limited to any determination as to
whether it is reasonably likely that a change of control transaction will
occur, whether it is reasonably likely that the Trustee will be able to enter
into one or more agreements relating to a change of control transaction,
whether there is a reasonable likelihood that a change of control transaction
can be consummated, and whether it would be in the best interests of the
Partnership to exercise its option to acquire a part of the general partner's
interest, the Trustee may rely in good faith on the opinion of any person,
including any investment banking firm or similar financial institution or
business broker that the Trustee may retain, any counsel that the Trustee may
retain, or any other person selected by the Trustee as to matters the Trustee
reasonably believes are within such person's professional or expert
competence and
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who has been selected with reasonable care by or on behalf of the Trustee.
NO ASSURANCE OF CHANGE OF CONTROL TRANSACTION. Sutherland cannot
predict what, if any, change of control transaction may be identified by the
Trustee, or whether any such transaction will in fact be consummated.
Accordingly, adoption of the Proposed Dissolution carries a risk that the
Partnership and limited partners will not receive a price for the Company's
common stock owned by the Partnership that is materially greater than the
current market price. However, if such a transaction is consummated, it may
take the form of a sale or exchange for cash or other property (including
securities of another entity) of the common stock of the Company owned by the
Partnership, a merger of the Partnership into another entity, or some other
form of transaction. To ensure liquidity for limited partners, the proposed
plan of dissolution requires the Trustee to dispose of the Partnership's
assets only for cash, cash equivalents, or securities that when distributed
to limited partners will be fully marketable without restriction.
PRINCIPAL INTENDED BENEFITS. The Proposed Dissolution is intended to
provide the following principal benefits:
- The creation of liquidity for limited partners on their investment,
through either a distribution in cash, cash equivalents or other
marketable securities received in a sale or other disposition of the
Partnership's assets or, if such a sale does not take place, through
the distribution of the common stock of the Company owned by the
Partnership.
- Acquirors typically pay a price reflective of a company's going
concern value in return for obtaining control over the company.
Entrusting the liquidation of the Partnership to an independent,
disinterested Trustee is intended to assure that material efforts
will be made to sell the common stock of the Company owned by the
Partnership in a transaction or series of transactions designed to
achieve the best price available.
- As the general partner has itself stated, there is no business purpose
or benefit to limited partners from holding an interest in a
partnership, the sole purpose and activity of which is to hold
publicly traded shares of a single corporation. The dissolution of
the Partnership will eliminate the cost and inefficiency of
maintaining such a partnership entity and will simplify tax reporting
for limited partners.
While Sutherland believes the foregoing intended benefits will result from
adoption of the Proposed Dissolution, there can be no assurance that any of
such intended benefits will in fact result.
RISKS. Among the material risks of the Proposed Dissolution are the
following:
- It is not possible to predict whether a change of control transaction
will be consummated, and if consummated, when proceeds would be
distributed. There may be a material delay between approval of the
Proposed Dissolution and any distribution to the limited partners.
- At the time of any distribution in kind of the common stock of the
Company, its trading price may be significantly lower than the price
at the time limited partners execute proxies.
- Sale of the common stock of the Company by the Partnership will
prevent limited partners from realizing any potential increase in the
value of the stock as a result of the possible growth of the Company's
business or otherwise.
- The Proposed Dissolution could be the subject of litigation.
- The Company's board of directors could oppose the consummation of a
change of control
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transaction arranged by the Trustee.
- The limited partners could fail to approve the Proposed Dissolution.
- The Proposed Dissolution of the Partnership may involve a taxable
event or result in other federal and state tax consequences to limited
partners.
- Once a dissolution is approved by limited partners it cannot be
undone.
- Because neither Delaware law nor the Partnership Agreement provides
limited partners with any right to dissent from or seek an independent
appraisal of the value of the limited partnership interests, limited
partners likely will be bound to accept the terms of the transaction
or transactions entered into on behalf of the Partnership by the
Trustee.
- If the Trustee enters into a form of transaction that is a merger of
the partnership into another entity or that is subject to federal
legislation regulating limited partnership roll-ups, it may be
necessary for the Trustee to hold a second vote to obtain the approval
of limited partners.
- The Partnership will incur material expenses in connection with the
adoption and implementation of the Proposed Dissolution. See "The
Proposed Dissolution - Expenses of the Plan of Dissolution."
See also "Risk Factors."
BACKGROUND AND PURPOSE OF THE PROPOSED DISSOLUTION
LACK OF DISTRIBUTIONS. Since the inception of the Partnership, limited
partners have received no distributions on their investment. By comparison,
the persons controlling the general partner have received benefits that
include not only substantial salaries and bonuses from the Company but also a
substantial number of options to acquire the Company's common stock at
favorable exercise prices. According to the Company's financial reports,
Messrs. Chill, Kenner, Wright, Freed, and Beckman collectively own 360,766
options to acquire Company stock at $10.72 per share. Sutherland estimates
that, as of September __, 1998, the collective value of these options was
over $___ million (based on the September __, 1998 stock price of $______
per share).
FAILURE OF GENERAL PARTNER TO PROTECT INTERESTS OF LIMITED PARTNERS.
Based on various actions by the general partner described below, Sutherland
believes that the general partner has subordinated the interests of limited
partners to those of the Company's management, some of whom control the
general partner, and to the interests of the Company's public stockholders.
1. In 1994 the general partner caused the Partnership as the sole
stockholder of the Company to approve stock option plans pursuant to which
some 486,027 options were granted to directors and officers, some of whom
control the general partner, thereby diluting the Partnership's 100%
ownership of the Company. The existence of the options gave the directors
and officers an incentive to create and increase a public float for the
Company's stock and to liquidate the Partnership in a manner that will
maximize the value of the options. Although the Partnership might have
benefited indirectly from an award of options because of the incentives they
provided to management, other performance-based incentives could have been
used to reward management for their performance without diluting the
Partnership's 100% ownership of the Company. Further, those members of
management who control the general partner already had a financial incentive
to improve the Company's performance by virtue of provisions in the
partnership agreement that allocate 30% of distributions to the general
partner after limited partners receive the Priority Return. See "Risk
Factors - Risk of Amount Due General Partner."
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2. The general partner sought to cause the Partnership to sell its
stock in the Company in a public offering in August of 1996. While such a
sale would have liquidated the Partnership's assets and limited partners
would have received a distribution of net assets, such a sale would have
precluded the Partnership from realizing the going concern value of the
Company in a change of control transaction. Public offerings by their nature
do not involve the transfer of control to one person who will pay the going
concern value in return for obtaining control.
3. The general partner refused to call a meeting of limited partners
to vote on the proposed public offering after more than 10% in interest of
the limited partners requested such a meeting. Instead, in September of
1996, the general partner abandoned the proposed offering of all of the
Partnership's stock in the Company and allowed the Company to conduct a
public offering of approximately 2.8 million new shares of common stock.
That offering was completed in November of 1996.
4. The general partner permitted the 1996 public offering of stock by
the Company to be priced on November 1, 1996 at approximately $13.00 per
share rather than delaying the pricing until the Company had announced a
significant improvement in the Company's earnings. Within less than two
months following the public announcement on November 25, 1996 that the
Company's fourth quarter net sales were up 13.5%, fourth quarter operating
income was up 181%, and operating income for the fiscal year ended September
30, 1996 was up 34.1%, the price of the Company's stock had increased to
nearly $20. Sutherland believes that the interests of the Partnership and
its limited partners would have been better served if the general partner had
required the Company to delay pricing the 1996 public offering until after
the announcement of the significant improvement in the Company's earnings.
5. A principal effect of the 1996 offering of stock by the Company was
to dilute the Partnership's stock ownership from 100% to approximately 67%.
By creating a 33% public stockholder minority, the Company (with the general
partner's cooperation) made it more difficult for the Partnership to dispose
of the Company as a whole. The 1996 public offering did result in the
creation of a public market for the Company's stock. However, the
Partnership generally cannot take advantage of that public market. The
Partnership's ability to sell its stock is limited because the Partnership
owns a controlling interest in the Company and its sales of stock are subject
to restrictions under federal law. The creation of a public market benefited
holders of options to purchase stock of the Company, such as the persons who
control the general partner, as the public market gave value to the options
and a ready market into which to sell shares acquired on exercise of options.
6. As a result of the 1996 public offering by the Company, the Company
received cash proceeds from the offering that were used to reduce debt, a
public market was created for the Company's stock and the net tangible book
value of a share of stock of the Company increased. The Partnership
benefitted from these events, although the Partnership derives only limited
value from the existence of a public market for the Company's stock because
of restrictions on the Partnership's ability to sell its shares of stock in
the public market. Moreover, net tangible book value per share is not
generally recognized as an indicator of the actual value of stock. In
addition, the reduction of the Partnership's ownership interest from 100% to
approximately two thirds may have the effect of lessening the amount the
Partnership might otherwise obtain in a change of control transaction. The
public offering by the Company also created public minority stockholders. As
a result, the board of directors no longer owes fiduciary duties only to the
Partnership as the sole stockholder. To the extent that the interests of the
Partnership conflict with those of the public minority stockholders, the
board of directors of the Company face a conflict of interest that did not
exist prior to the public offering.
7. Prior to the 1996 public offering by the Company, it was not
subject to Section 203 of the Delaware General Corporation Law. As a result
of the public offering in 1996 by the Company, the Company became subject to
Section 203, a statute that makes it more difficult to effect a change of
control transaction. The general partner could have taken steps to cause the
Company not to become subject to Section 203, but did not.
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8. On or about September 6, 1996, the general partner permitted the
Company to enter into employment agreements with executives of the Company,
some of whom also control the general partner, that provide for the payment
of substantial sums to them in the event of a change of control, thereby
impeding change of control transactions. On or about October 24, 1996, the
general partner also caused the Partnership to approve an amendment to the
certificate of incorporation of the Company that eliminated the right of
stockholders to act by written consent in lieu of a meeting. This weakened
the Partnership's control of the Company . Because the Company's
stockholders have no right to call special meetings of stockholders and now
must act at an annual meeting if they wish to replace the board, the
Partnership can no longer act at any time to replace the board of directors.
The amendment thus may deter or make more difficult a change of control
because an acquiror of more than 50% of the stock cannot act immediately to
replace the board. Because the Partnership owned 100% of the stock, and
would continue to own an absolute majority after the November 1996 public
offering by the Company, and management of the Company controlled the general
partner, the Partnership had no need for and received no benefit from the
adoption of any measures that would impede a change of control. Because the
Partnership can no longer act at any time to replace the board and because
the Company is now subject to Section 203, the Partnership's ability to sell
freely its controlling interest in the Company has been impeded.
9. In September of 1997, the general partner proposed a plan of
dissolution (the "GP Plan") that would have dissipated entirely any premium
that might be obtained for the Partnership's two-thirds controlling interest
in the Company in a change of control transaction. Under the GP Plan, the
Partnership Agreement was to be amended to permit limited partners to
withdraw their capital, those limited partners desiring to do so could have
exchanged their limited partnership units for their pro rata share of stock
of the Company, all shares so withdrawn had to be sold immediately in an
underwritten public offering, and all shares not withdrawn would have
remained in the Partnership for distribution to limited partners 360 to 720
days after commencement of implementation of the GP Plan. The general
partner's plan did not afford any opportunity for the Partnership (and
indirectly the limited partners) to capture the going concern value of the
Company through a change of control transaction. The compulsory public
offering would have forced those limited partners who chose to withdraw their
capital in the form of shares to sell the shares immediately at a discount to
market and to pay material underwriters' and brokers' fees and other
expenses. Those limited partners who elected not to withdraw their capital
would have been forced to wait from one to two years (and possibly longer)
after implementation commenced to receive a distribution of capital. A
principal effect of the GP Plan would have been that the Partnership's
two-thirds ownership interest would have been dispersed into the hands of a
large number of public holders of stock, which would have eliminated the
concentration of ownership that resides in the Partnership. Such a result
would have precluded the Partnership from having any opportunity of realizing
the going concern value of the Company through a change of control
transaction and would likely have aided incumbent management in retaining
control of the Company and fending off any change of control transaction.
10. In May of 1998, the general partner transferred 82,056 shares of
common stock of the Company owned by the Partnership to the Company in
payment of $1,759,000 of expenses incurred by the Company on behalf of the
Partnership. The shares were valued at $21.44, approximately the then market
price of Company's publicly traded minority stock, a price that Sutherland
believes to be less than the amount per share that the Partnership could
realize in a change of control transaction. Thus, in Sutherland's view, the
Partnership did not receive for the stock transferred to the Company an
amount per share that approximated the going concern value of the Company.
In addition, as a result of this transaction, the Partnership's ownership of
stock in the Company was reduced from approximately 66.7% to approximately
66.4%, thereby falling below two-thirds of the outstanding stock. This
resulted in the Partnership losing its former ability as a two-thirds
stockholder to cause the Company's certificate of incorporation to be amended
to delete certain provisions that require a two-thirds vote for their
amendment, including the provision that prohibits stockholders from acting by
written consent.
11. The general partner has announced no alternative plan for the
dissolution and liquidation of
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the Partnership, even though the general partner has stated that the
Partnership serves no business purpose and provides no benefit to limited
partners.
Sutherland was also aware that certain limited partners had instituted
two lawsuits, one in the Court of Chancery of the State of Delaware (the
"Chancery Court") and one in the United States District Court for the
Northern District of California (the "District Court"), challenging the
conduct of the general partner and the persons controlling the general
partner. The complaints in those lawsuits were later amended to seek an
injunction against the GP Plan. On October 23, 1997, the Chancery Court
preliminarily enjoined the GP Plan, finding that it was likely that the
plan's terms violated the partnership agreement. On March 19, 1998, the
Delaware Supreme Court affirmed the Chancery Court's grant of a preliminary
injunction. Neither the preliminary injunction nor its affirmance was a
final determination on the merits that the GP Plan violated the partnership
agreement. On November 6, 1997, the District Court issued a temporary
restraining order against implementation of the GP Plan, finding that the
plaintiff had raised serious questions as to whether the plan violated
federal law relating to limited partnership roll-ups and as to whether the
general partner failed to disclose properly what actions limited partners
needed to take to require the GP Plan to be approved by two-thirds in
interest of the limited partners. However, the District Court never made a
final determination on the merits regarding these issues. Sutherland moved
to intervene in the litigation in the District Court, but that motion was
denied. Subsequently, the lead plaintiff in the District Court litigation,
with Sutherland's agreement, moved to have Sutherland added to his complaint
as a named plaintiff and a putative class representative, which motion has
not yet been decided. See "Summary of Certain Pending Litigation." On May
14, 1998, the general partner announced that it had withdrawn the GP Plan and
that the Partnership would continue to hold the Company's stock as it has in
the past.
On December 29, 1997, limited partners commenced a second lawsuit in the
Chancery Court to challenge certain stock options granted by the Company to
certain of its current and former directors and executive officers, some of
whom control the general partner. On or about June 3, 1998, the plaintiffs
in the two actions in the Chancery Court moved to consolidate the two actions
and for leave to file a consolidated third amended and supplemental class and
derivative complaint (the "Third Amended Complaint"). Thereafter, the
defendants advised counsel for the plaintiffs that defendants did not oppose
the motion, and on June 23, 1998, the Chancery Court entered an order
consolidating the two actions and granting leave to file the Third Amended
Complaint. On July 20, 1998, the defendants filed a motion to dismiss the
Third Amended Complaint. See "Summary of Certain Pending Litigation."
In its proxy statement soliciting votes in favor of its now withdrawn
plan, the general partner indicated that the Partnership had outlived its
purpose, stating: "THERE IS NO BUSINESS PURPOSE OR BENEFIT TO INVESTORS
HOLDING INTERESTS IN A PARTNERSHIP, THE SOLE PURPOSE AND ACTIVITY OF WHICH IS
TO HOLD PUBLICLY TRADED SHARES OF A SINGLE CORPORATION." Sutherland agrees,
but believes that the Partnership should now take appropriate steps to ensure
not only liquidity for limited partners, but also that limited partners
receive the maximum return reasonably attainable on their investment.
Sutherland believes that the best return to limited partners is most likely
to result from a sale of the Partnership's 66% ownership interest in the
Company in a change of control transaction in which the Partnership (and
possibly minority stockholders of the Company) receives the going concern
value of the Company, which typically is a higher price per share than the
market price for the Company's common stock prior to the change of control
transaction.
FAILURE OF GENERAL PARTNER TO SEEK OUT A CONTROL PREMIUM. Sutherland
has been advised that, in the pending Chancery Court litigation, the general
partner has consistently argued that there was no significant interest on the
part of any person in acquiring the Company. However, Sutherland has learned
that, in discovery in the Chancery Court litigation, the plaintiffs confirmed
that, prior to proposing the GP Plan, the general partner had made only one
limited effort since January of 1994, at the latest, to explore a sale of the
Company or other change of control transaction. However, since 1994, the
Company's results of operations had significantly improved, making it a more
attractive acquisition candidate, and the stock market had also improved
significantly. Based on the proxy statement for the GP Plan and discovery in
the Chancery Court
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<PAGE>
litigation, it appears that the only effort relating to exploring a change of
control transaction made by or on behalf of the general partner after January
1994 but before the GP Plan was proposed was that Bear Stearns & Co., one of
the general partner's prime advisers, made a limited inquiry in August 1996
concerning a sale of the Company. That inquiry, which apparently consisted
only of mailing a prospectus about the Company to seven industrial companies
and three financial institutions, was made prior to the Company's public
offering and prior to an announcement of significant increases in the
Company's earnings for the fourth quarter and fiscal year ended September 30,
1996. No such inquiry was made contemporaneously with the GP Plan proposed
in 1997.
Recently, Sutherland was told that at least two potential acquirers have
approached the Company within the past year with a view to its acquisition
and that the Company has not cooperated with one of those potential
acquirers. See "Attractiveness of the Company as an Acquisition Candidate."
ATTRACTIVENESS OF THE COMPANY AS AN ACQUISITION CANDIDATE. The Company
would appear to be an attractive candidate for acquisition. On or about
July 9, 1998, attorneys for Sutherland were contacted by representatives of
a European company listed on a major European Stock Exchange (the "European
company"), and which is engaged in businesses similar to those of the Company.
On July 14, 1998, attorneys for Sutherland met in Wilmington, Delaware
with representatives of the European company. During the course of that
meeting, Sutherland's attorneys were told that for some months the European
company had been expressing to the Company an interest in engaging in
substantive discussions concerning a possible acquisition of the Company or a
controlling interest in the Company. Sutherland's attorneys were further
told, however, that the Company had been refusing to disclose sufficient
nonpublic information to the European company, or to engage in substantive
commercial discussions, to enable the European company to make a decision
with respect to making an offer to acquire the Company or a controlling
interest therein and, if appropriate, to formulate the terms of a proposal
therefor. In a subsequent telephone conversation with representatives of the
European company, Sutherland's attorneys were told that the Company had first
approached the European company with a view to acquiring certain assets of
the European company, that the European company had indicated that it was
not interested in disposing of any of its assets to the Company, and that
since that initial contact from the Company, the European company had been
continuously expressing an interest to the Company in discussing a possible
acquisition of the Company or a controlling interest therein. The European
company's representatives indicated that they were disclosing the European
company's interest in acquiring the Company to Sutherland's attorneys in the
belief that limited partners could encourage the Company to engage in
substantive discussions with the European company and also because the
European company wanted to advise Sutherland's attorneys that it viewed
the ongoing Chancery Court and District Court litigations (see "Summary of
Certain Pending Litigation") as an impediment to the consideration of an
acquisition of the Company or a controlling interest therein.
On or about July 16, 1998, Sutherland's attorneys advised an attorney
for the general partner of the substance of the meeting with representatives
of the European company. The attorney for the general partner acknowledged
that the Company had had contacts with the European company and had expressed
interest in acquiring assets of the European company, but he denied that the
European company had expressed interest in acquiring the Company or any of
its assets. The statements to Sutherland's attorneys by counsel for the
general partner appear to be in direct conflict with the representations made
by the representatives of the European company.
In addition to the interest of the European company in acquiring the
Company, attorneys for Sutherland have been told that an American company
headquartered in the Southeastern United States and listed on the New York
Stock Exchange (the "American company") has expressed interest in acquiring
the Company. A representative of the American company advised attorneys for
Sutherland that in May of 1998 attorneys for the American company and the
Company had a preliminary meeting in anticipation of a meeting between the
executives of the American company and the Company, that on June 15, 1998,
executives of both
37
<PAGE>
companies met, and that the American company intended to draft a letter of
intent. Sutherland's attorneys do not know whether there have been any
subsequent material developments with respect to contacts between the
American company and the Company, or the nature of any such material
developments. The American company is a public company serving customers in
the industrial, commercial, institutional, health care and construction
industries, as well as consumers.
As part of Sutherland's effort to determine the attractiveness of the
Company as an acquisition candidate, counsel for Sutherland contacted four
investment banking firms, NationsBank Montgomery Securities ("NationsBank"),
Greif & Co., Sutro & Co. and Donaldson, Lufkin & Jenrette ("DLJ"), each of
which is experienced in valuations and acquisitions. Each has informally
expressed to Sutherland's counsel the view that the Company's stock trades at
a price well below comparable public company valuations and that the
Partnership's control block of stock could likely be sold at a substantial
premium over current market price in a change of control transaction. Such
views are based on internal analyses, if any, done by such firms. Except for
an analysis prepared by DLJ, no such analyses, if performed, have been
disclosed to Sutherland or her counsel.
DLJ prepared a comparable company analysis at the request of
Sutherland's attorneys . That analysis indicates to Sutherland that the per
share going concern value of the Company is higher than the current price of
the Company's publicly traded minority stock.
Except for the comparable company analysis by DLJ, neither Sutherland,
her attorneys nor any advisers retained by her or her attorneys has
undertaken any qualitative or quantitative analysis, such as a discounted
cash flow analysis or comparable company transactions analysis.
GENERAL PARTNER CONTROLLED BY MANAGEMENT OF THE COMPANY. The general
partner is dominated and controlled by individuals who are also executive
officers of the Company. Sutherland believes that this causes the general
partner to have interests that materially conflict with those of the
Partnership and its limited partners, because, in Sutherland's view, the
interests of the Company's management and public stockholders are not the
same as the interests of the Partnership and the limited partners.
NEED FOR INDEPENDENT TRUSTEE. Sutherland believes that the Partnership
has outlived its utility, that the general partner will not diligently seek
out change of control transactions that might yield a premium for the
Partnership's 66% stock ownership of the Company, and that the general
partner has interests that materially conflict with those of the limited
partners. Thus, Sutherland believes that the affairs of the Partnership
would best be wound up by an independent liquidating trustee who will not be
hampered by any conflict of interest and who will actively seek out change of
control transactions in an effort to maximize the return to limited partners.
CONDITIONS TO THE PLAN OF DISSOLUTION
The Proposed Dissolution will not be consummated unless the following
conditions are satisfied:
- Limited partners holding at least a majority of the outstanding units
grant to Sutherland a proxy to execute on their behalf a written
consent of limited partners removing the general partner, dissolving
the Partnership, appointing Judge Charles B. Renfrew (retired) as a
liquidating trustee pursuant to Section 17-803(a) of the Act, adopting
the plan of dissolution, selecting special counsel, and approving the
opinion of special counsel required by the partnership agreement;
- All necessary regulatory approvals, if any, shall have been obtained;
- No provision of applicable law or regulation and no judgment,
injunction, order or decree
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prohibits implementation or consummation of the plan of dissolution;
and
- All actions by or in respect of or filing with any governmental body,
agency or official authority required to permit the consummation of
the plan of dissolution shall have occurred.
EXPENSES OF THE PLAN OF DISSOLUTION
The table below sets forth the material estimated expenses expected to
be incurred by the Partnership in connection with the implementation and
consummation of the Proposed Dissolution. These estimated expenses and the
estimated ranges of expenses given below are only estimates. There is no
assurance that any of the individual items of expenses, or the total
estimated expenses, will be in the amounts or ranges given below. Unforeseen
factors or unanticipated events could cause the actual total expenses to be
materially greater than the estimated expenses set forth below.
<TABLE>
<CAPTION>
AMOUNT INCURRED OR
ESTIMATED TO BE INCURRED
------------------------
<S> <C>
Solicitation Agent's Fees (1) $35,000
Other Solicitation Expenses (2) $30,000
Minimum Trustee's Fee (3) $75,000
Fees and Expenses of Opinion of Counsel (4) $10,000
Repayment of Debt Owed to the Company (5) $434,000
--------------
Total $584,000
</TABLE>
------------------------
1. Estimated total fees and expenses expected to be charged by the
Solicitation Agent, which are being advanced by Sutherland's
attorneys. The Solicitation Agent has entered into a contract with
The Mills Law Firm (one of the two law firms representing Sutherland)
which provides that the Solicitation Agent will be paid a retainer fee
of $20,000 plus certain additional amounts. See "Proxy Procedures."
Sutherland's attorneys will be reimbursed for the Solicitation Agent's
fees if the Proposed Dissolution is approved. See "Interest of
Certain Persons in the Solicitation - The Mills Law Firm" and
"Interest of Certain Persons in the Solicitation - Smith, Katzenstein
& Furlow LLP."
2. Estimated out-of-pocket expenses, exclusive of the fees of the
Solicitation Agent, which Sutherland's attorneys have or expect to
incur in connection with the preparation of the proxy materials for
the Proposed Dissolution and the solicitation of proxies. These
expenses consist primarly of the costs incurred in connection with the
filing of this proxy statement and preliminary versions of this proxy
statement on the EDGAR database system of the Securities and Exchange
Commission (approximately $9,000), the costs of printing the proxy
materials (approximately $13,000), and the costs of mailing the proxy
materials (approximately $7,000). Sutherland's attorneys will be
reimbursed for these expenses if the Proposed Dissolution is approved.
See "Interest of Certain Persons in the Solicitation - The Mills Law
Firm" and "Interest of Certain Persons in the Solicitation - Smith,
Katzenstein & Furlow LLP."
3. The Plan of Dissolution provides for the Trustee to receive a flat fee
of $75,000 plus a contingent fee (which may range from zero to several
hundred thousand dollars) based on the net value per share received by
the Partnership for its stock in the Company. The Trustee is also
entitled to reimbursement for expenses and indemnification. See
"About the Trustee" and Exhibit A for a more complete description of
the Trustee's compensation and
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<PAGE>
indemnification rights. By way of illustration only, the Trustee's
total fee would be $75,000 if the net value per share realized were
$25.00 or less, approximately $146,240 if the net value realized
per share were $30.00, approximately $241,227 if the net value
realized per share were $35.00, and approximately $383,707 if the
net value realized per share were $40.00. There is no assurance
that the Trustee will be able to consummate a transaction that will
result in a net value per share of $25.00, $30.00, $35.00, $40.00,
or any other specific amount.
4. Represents the fees and expenses charged by Special Counsel for
rendering their opinion pursuant to Section 12(d) of the partnership
agreement. Sutherland's attorneys have advanced this amount and will
be reimbursed for it if the Proposed Dissolution is approved. See
"Interest of Certain Persons in the Solicitation - The Mills Law Firm"
and "Interest of Certain Persons in the Solicitation - Smith,
Katzenstein & Furlow LLP."
5. The Partnership stated in its quarterly report on Form 10-Q for the
quarter ended June 30, 1998, that the Partnership retired $1,759,000
of debt due the Company for expenses incurred by the Company on behalf
of the Partnership, by transferring to the Company 82,056 shares of
common stock of the Company owned by the Partnership, and that
$434,000 remains due the Company in respect of expenses paid by the
Company on behalf of the Partnership.
In addition to the foregoing estimated expenses, the Partnership may
incur additional material expenses in connection with the implementation and
consummation of the Proposed Dissolution which are not quantifiable at this
time. These expenses may vary widely based on the type of liquidating
transaction that is ultimately implemented. For example, under the Plan of
Dissolution, the Trustee is authorized to hire a qualified investment banking
firm or similar financial institution or a qualified business broker to
assist the Trustee in identifying, structuring, and consummating a change of
control transaction. Investment bankers often charge commissions of
approximately one to one and a quarter percent of the value of the company
being acquired in the transaction. Such commissions normally are made
contingent upon the consummation of a change of control transaction, except
that a small percentage of the commission amount may be paid up front as a
non-refundable retainer. Other types of business brokers may charge
comparable fees. Alternatively, if no change of control transaction is
consummated, and if the Partnership's Company stock is ultimately disposed of
through a registered offering, the underwriters will likely charge
commissions that may be in the range of approximately 5 percent of the total
offering proceeds. If no change of control transaction is consummated and
the Partnership's stock is distributed directly to the limited partners, the
liquidation expenses will likely be materially less than those associated
with implementation of a change of control transaction or registered
offering.
In addition to being reduced by the expenses described above, the amount
limited partners ultimately receive as a result of the Proposed Dissolution
will also be reduced by the amount of the liquidation proceeds to which the
general partner may be entitled under the terms of the Partnership Agreerment
and by payment of attorneys' fees to Sutherland's attorneys as compensation
for efforts made by them in litigation and otherwise on behalf of limited
partners. See "Risk Factors - Risk of Amount Due General Partner,"
"Interest of Certain Persons in the Solicitation - The Mills Law Firm" and
"Interest of Certain Persons in the Solicitation - Smith, Katzenstein &
Furlow LLP."
SOLICITATION OF PROXIES FROM LIMITED PARTNERS
Limited partners are being asked to grant to Sutherland a proxy to execute
a written consent of limited partners adopting the Proposed Dissolution,
including the removal of the general partner for the reasons set
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<PAGE>
forth in this Proxy Statement, dissolution of the Partnership, appointment of
Judge Charles B. Renfrew (retired) as liquidating trustee for the
Partnership, the adoption of the plan of dissolution attached as Exhibit A to
this Proxy Statement and incorporated herein by reference, selection of
special counsel, and approval of the opinion of Special Counsel attached as
Exhibit B to this Proxy Statement. As a condition to the Proposed
Dissolution, holders of at least a majority in interest of outstanding
Partnership units must grant proxies to Sutherland in order for Sutherland to
be authorized to execute a written consent of limited partners taking the
actions described above. Sutherland intends to execute a written consent of
limited partners as soon as practicable after receipt of proxies from the
holders of at least a majority of the outstanding units. As of the date of
this Proxy Statement, there were 800 units of limited partnership interest
outstanding held by approximately 1,900 limited partners of record.
- -------------------------------------------------------------------------------
YOU ARE URGED TO GRANT YOUR PROXY TO SUTHERLAND TO CONSENT TO THE PROPOSED
DISSOLUTION BY COMPLETING, SIGNING, DATING AND MAILING THE ENCLOSED PROXY IN THE
ENVELOPE THAT HAS BEEN INCLUDED FOR YOUR CONVENIENCE.
PLEASE RESPOND. YOUR PROXY IS IMPORTANT.
- -------------------------------------------------------------------------------
MARKET PRICE FOR UNITS
There is no established market for units of limited partnership
interest. The general partner has indicated that assignments of units have
been extremely limited and sporadic. The partnership agreement does not
permit assignment of units by limited partners without the consent of the
general partner.
PROXY PROCEDURES
This Proxy Statement is furnished in connection with the solicitation of
proxies to authorize Sutherland to execute a written consent of limited
partners of the Partnership adopting the Proposed Dissolution. This Proxy
Statement, together with the enclosed proxy, were first mailed to limited
partners on or about [September ], 1998.
The costs of soliciting proxies are being advanced by attorneys for
Sutherland, who are also the attorneys representing certain limited partners
in litigation against the general partner and against the persons controlling
the general partner. The attorneys advancing such costs will be reimbursed
by the Partnership for such costs in the event that the Proposed Dissolution
is adopted. The attorneys will also reimburse custodians for their
reasonable expenses for forwarding proxy materials to beneficial owners of
units, subject to reimbursement by the Partnership in the event that the
Proposed Dissolution is adopted. Neither Sutherland nor the Partnership will
reimburse the attorneys for proxy solicitation costs if the Proposed
Dissolution is not adopted.
Georgeson & Co., Inc. (the "Solicitation Agent") has been retained to
assist Sutherland in the solicitation of proxies. The Solicitation Agent has
entered into a contract with The Mills Law Firm (one of the two law firms
representing Sutherland) which provides that the Solicitation Agent will be
paid a retainer fee of $20,000 plus the following: $4.00 per call to
individual limited partners and NOBO's; reimbursement of the costs of
printing any supplemental materials used in the solicitation, any postage and
freight charges that may be incurred by the Solicitation Agent in delivering
material, the cost of any telegraphic proxies, any cost of delivery by
courier of proxies to a tabulator, any costs of lists and labels prepared by
the Solicitation Agent
41
<PAGE>
upon request, any relevant travel expenses of the Solicitation Agent's
executives, and any other authorized expenses or disbursements; the charges
of brokers and banks for forwarding proxy solicitation material to beneficial
owners and requesting voting instruction; and $5.50 for each such broker and
bank invoice paid by the Solicitation Agent. Based on this contract, it is
expected that the Solicitation Agent's total fees will be approximately
$35,000. The Solicitation Agent's fees will be advanced by the attorneys for
Sutherland, who will be reimbursed by the Partnership for such expense if the
Proposed Dissolution is adopted.
RECORD DATE
The partnership agreement contains no provisions for the fixing of a
record date in connection with the solicitation of proxies or the execution
of a written consent. Accordingly, no record date has been fixed. Proxies
granted to Sutherland will be valid for one year or until their earlier
revocation. In the event that Sutherland receives proxies from the holders
of at least a majority in interest of outstanding units and executes a
written consent to the actions proposed in this Proxy Statement, Sutherland
believes that to the extent a record date is relevant, it will be the date on
which the written consent is executed and delivered to the Partnership.
The proxy granted to Sutherland will also be valid for voting at any
meeting of limited partners called for the purpose of voting on the Proposed
Dissolution. The proxy granted to Sutherland will not authorize Sutherland to
take any other action by written consent or to vote at any meeting on any
matter other than the Proposed Dissolution.
The solicitation of proxies will continue until Sutherland has received
sufficient proxies to take the action by written consent contemplated by this
Proxy Statement or Sutherland determines to abandon the solicitation by
reason of (i) the inability to obtain proxies from the requisite number of
holders of units or (ii) a determination by Sutherland that a transaction
more beneficial to limited partners than the Proposed Dissolution obviates
the need for the Proposed Dissolution.
Proxies given by limited partners pursuant to this Proxy Statement are
revocable at any time prior to the execution and delivery by Sutherland to
the Partnership of a written consent of limited partners taking the actions
described in this Proxy Statement. Revocation may be effected by delivering
to the Solicitation Agent a written revocation of a proxy, by delivering to
the Solicitation Agent a later dated proxy, or in the event that a meeting of
limited partners is called to consider the actions proposed to be taken by
written consent as described in this Proxy Statement, by attending such
meeting and voting in person.
Limited partners are requested to give their proxies to Sutherland by
completing the enclosed form of proxy and returning it signed and dated by
mail, overnight courier or hand delivery to the Solicitation Agent at the
address set forth below:
Georgeson & Co., Inc.
Wall Street Plaza
New York, New York 10005
CONSENT REQUIRED
To take action by written consent, Sutherland must receive proxies from
the holders of a majority of the outstanding units of limited partnership
interest. A failure to return a proxy to Sutherland or an abstention by a
limited partner is tantamount to a vote against the Proposed Dissolution.
Therefore, each limited partner who desires to consent to the plan of
dissolution must return a proxy to Sutherland so that Sutherland may execute
on behalf of such limited partner a written consent in favor of the Proposed
Dissolution.
Each limited partner of record is entitled to give a proxy to Sutherland
to authorize Sutherland to execute a written consent on behalf of such
limited partner. Only proxies granted by limited partners who are
42
<PAGE>
limited partners on the date they execute the proxy and remain limited
partners of record on the date on which Sutherland executes the written
consent taking the actions described in this Proxy Statement will be valid.
Proxies solicited by Sutherland will be voted in accordance with the
directions on the proxy.
WHERE NO INSTRUCTIONS ARE INDICATED, THE PROXIES WILL BE VOTED FOR THE
PROPOSED DISSOLUTION.
PROBABLE LACK OF APPRAISAL RIGHTS
Neither the partnership agreement nor Delaware law provides any right to
limited partners to dissent from the Proposed Dissolution or to have their
units appraised or redeemed as a result of the adoption of the Proposed
Dissolution.
In the event that the Trustee proposes a transaction or series of
transactions that constitute a limited partnership roll-up under federal law,
limited partners may be afforded appraisal rights. In connection with a
limited partnership roll-up, limited partners must either (i) approve the
roll-up transaction by the affirmative vote of at least 75% in interest of
the limited partners, (ii) be afforded appraisal rights, (iii) appoint a
committee to review, negotiate about and/or recommend the transaction or (iv)
be afforded an opportunity to retain a comparable investment. In addition,
certain transactions that would otherwise be within the definition of a
limited partnership roll-up under federal law are exempt if they are approved
by two-thirds in interest of the limited partners.
Because it is not possible at this time to predict what transaction the
Trustee will enter into in connection with the disposition of the
Partnership's assets, it cannot be determined at this time whether the
transaction will be subject to the federal limited partnership roll-up rules
and regulations or, if subject to such rules and regulations, whether
appraisal rights will be offered to limited partners.
PARTNERSHIP UNITS AND PRINCIPAL HOLDERS THEREOF
As of the date of this Proxy Statement, the Partnership has reported
that there are 800 units of limited partnership interests outstanding held by
approximately 1,900 limited partners of record. As of the same date, no
person was reported by the Partnership, and no person is known to Sutherland,
to own beneficially more than 5% of the outstanding units.
THE PARTNERSHIP
The Partnership is a Delaware limited partnership organized in 1986 for
the purpose of acquiring the Company. An aggregate of 800 Units were issued
for aggregate capital contributions of approximately $78.4 million, which
were used to fund a portion of the purchase price for the Company. Since its
formation, the Partnership has conducted no business other than its ownership
of the Company, and the Partnership owns no assets other than common stock of
the Company. Based on the annual and quarterly reports publicly filed by the
Partnership, Sutherland believes that the Partnership's only material
liability consists of approximately $434,000 owed to the Company for costs
incurred by the Company on the Partnership's behalf. Since its acquisition,
the Company has been highly leveraged and all cash remaining after payment of
debt service and operating costs has been reinvested in the Company's
business. Under certain loan agreements to which the Company is a party, the
Company is prohibited from paying dividends or making distributions to its
stockholders, including the Partnership. Consequently, the Company has not
paid a dividend or made any distributions since its acquisition by the
Partnership, and the Partnership has never made a cash distribution to its
partners.
Originally, the Partnership owned 100% of the common stock of the
Company. In November, 1996, the general partner of the Partnership permitted
the Company to make a public offering of stock. As a
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<PAGE>
consequence, the Partnership's ownership of the Company's stock was diluted
to 5,781,250 shares, representing about 67% of the Company's then issued and
outstanding common stock. In May of 1998, the general partner transferred
82,056 shares of Company stock owned by the Partnership to the Company in
payment of approximately $1,759,000 owed to the Company for expenses incurred
by the Company on behalf of the Partnership. This transaction caused the
Partnership's percentage ownership of the Company to fall from approximately
66.7% to approximately 66.4%.
The sole general partner of the Partnership is SI Management, L.P., a
Delaware limited partnership. The sole general partner of SI Management,
L.P. is Synthetic Management G.P., a Georgia general partnership having five
general partners consisting of five Delaware corporations controlled,
respectively, by Leonard Chill, Ralph Kenner, William Gardner Wright, Jr. and
W. Wayne Freed, current executive officers of the Company, and Jon P.
Beckman, a former executive officer of the Company who is now a paid
consultant to the Company.
THE COMPANY
The Company is a Delaware corporation founded in 1969 to produce
polypropylene-based primary carpet backing. Since that time the Company's
business has expanded into the manufacturing and sale of a full line of
polypropylene-based industrial fabrics, specialty yarns and geotextiles.
The Company is one of the world's leading producers of polypropylene
fabrics and fibers for the home furnishing, construction, environmental,
recreational and agricultural industries. The Company manufactures and sells
more than 2,000 products in over 65 end-use markets. The Company believes
that it is the second largest producer of carpet backing in the world and is
the largest producer of synthetic fiber additives for concrete reinforcement
through its Fibermesh-Registered Trademark- line of products. The Company
also produces polypropylene products for the geotextile and erosion control
markets and is a leader in designing innovative products for speciality
applications. The Company's products are engineered to meet specific
customer criteria such as strength, flexibility, resistance to sunlight and
water/air permeability. The Company aims to compete in markets in which it
can be the primary or secondary provider of such products, with over 93% of
its products meeting this criterion. The Company's consolidated sales have
grown from $195 million in fiscal 1992 to net sales in excess of $345
million in fiscal 1997.
After its public offering of common stock in November 1996, the Company
had 8,656,250 shares of common stock outstanding, of which the Partnership
then owned 5,781,250 shares or approximately 66.8%. Subsequently, a director
of the Company exercised options to purchase 12,500 shares of Company stock,
causing the total number of outstanding shares to rise to 8,668,750. In May
of 1998, the general partner transferred 82,056 shares of Company stock owned
by the Partnership to the Company in payment of approximately $1,759,000 owed
to the Company for expenses incurred by the Company on behalf of the
Partnership. This transfer caused the Partnership's percentage ownership of
the Company to fall from approximately 66.7% to approximately 66.4%. The
Common Stock trades under the symbol "SIND" on the Nasdaq National Market.
The principal executive office of the Company is located at 309
LaFayette Road, Chickamauga, Georgia 30707, and its telephone number is (706)
375-3121.
SELECTED FINANCIAL DATA CONCERNING THE PARTNERSHIP
Since its inception in 1986, the Partnership has conducted no business
other than to own and vote its shares of common stock of the Company. In the
partnership's annual report to the Securities and Exchange Commission on Form
10-K for the fiscal year ended September 30, 1997, the general partner stated
that
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because the Partnership has no independent operations or assets other than
its investment in the Company, the Partnership's financial statements are
substantially identical to those of the Company, with the exception of the
publicly-owned minority interest in the Company and the amount due to the
Company for expenses of the Partnership paid by the Company on behalf of the
Partnership. Based on the annual and quarterly reports publicly filed by the
Partnership, Sutherland believes that the amount of the Partnership's
indebtedness to the Company is at present approximately $434,000.
The selected financial data presented below is reproduced from the
Partnership's annual report to the Securities and Exchange Commission on Form
10-K for the fiscal year ended September 30, 1997. Sutherland disclaims any
responsibility for the completeness or accuracy of the information reproduced
below. See also "Financial Information About the Partnership" and Exhibits C
and D to this Proxy Statement.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net sales $345,572 $299,532 $271,427 $234,977 $210,516
Gross profit 112,385 91,211 76,721 82,672 68,335
Operating income 50,291 37,813 28,687 41,007 29,921
Income from continuing
operations before provision for
income taxes, minority interest
in subsidiary net income and
extraordinary item 29,552 14,341 5,436 20,257 8,134
Income from continuing
operations before minority
interest in subsidiary net
income and extraordinary item 17,011 7,441 1,936 11,657 3,662
Income from continuing
operations attributable to
limited partners 3,165 7,367 1,917 11,540 3,625
Income from discontinued
operations - - - - 1,420
Extraordinary item - loss from
early extinguishment of debt (11,950) - - - (8,892)
Cumulative effect of accounting
change - - - - (8,500)
Net Income (loss) 3,197 7,441 1,936 11,657 (12,310)
Income from continuing
operations per limited
partnership unit $3.96 $9.21 $2.40 $14.43 $4.53
Limited partnership units
outstanding 800 800 800 800 800
BALANCE SHEET DATA:
Working capital $88,032 $63,418 $69,041 $44,116 $42,057
Total assets 394,795 323,756 312,302 287,935 260,374
Long-term debt 220,464 194,353 192,048 172,490 164,723
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Year Ended September 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Partners' capital 68,876 65,185 57,758 55,819 44,425
</TABLE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The discussion below is based on the Internal Revenue Code of 1986 (as
amended) (the "Code"), Treasury Regulations (including proposed regulations)
promulgated thereunder, administrative pronouncements and judicial decisions,
each as now in effect, all of which are subject to change, possibly with
retroactive effect. The discussion below does not purport to address federal
income tax consequences applicable to particular categories of persons, some
of which (for example, financial institutions, insurance companies, foreign
investors or persons who acquired their Partnership interests generally
within a two-year period of the implementation of the Proposed Dissolution)
may be subject to special rules. No ruling on any of the issues discussed
below will be sought from the Internal Revenue Service, and the description
of the income tax consequences below is not binding on the Internal Revenue
Service. Limited partners should consult their own tax advisors in
determining the specific federal, state, local, foreign and any other tax
consequences to them of the implementation of the Proposed Dissolution. The
limited partners are not indemnified for any federal income taxes or other
taxes that may be imposed upon them and the imposition of any such taxes
could reduce the value of the Proposed Dissolution to any particular limited
partner.
The following discussion of federal income tax considerations assumes
that pursuant to the Proposed Dissolution either cash resulting from a sale
by the Partnership of its common stock of the Company or the shares of the
Company's common stock owned by the Partnership will be distributed to
limited partners. It is possible that the Trustee may determine that some
other transaction will result in a greater return to the Partnership and the
limited partners. Any such transaction may have tax consequences that are
materially different from those discussed below. Accordingly, there is no
assurance that the actual tax consequences from implementation of the
Proposed Dissolution will be as described below. Because Sutherland cannot
determine at this time what transaction the Trustee may in fact consummate,
it is not possible to predict the tax consequences of the transaction.
CLASSIFICATION AS A PARTNERSHIP
The federal income tax consequences of the Proposed Dissolution depend,
in part, on the Partnership being classified as a partnership for federal tax
purposes. On December 17, 1996, the Internal Revenue Service issued Treasury
Regulation Sections 301.7701-1 through 301.7701-3 (the "Check-the-Box
Regulations"), thereby changing the longstanding entity classifications
regulations that were in effect at the time the Partnership was formed.
Under the Check-the-Box Regulations, a domestic entity formed under a state
limited partnership law is by default a partnership for federal income tax
purposes, unless such entity elects to be taxed as a corporation. The
Partnership is a limited partnership that was validly formed and has been
recognized as a limited partnership at all times since its inception under
the Act. The Partnership has claimed to be a partnership for federal income
tax purposes since its inception. Sutherland has no reason to believe that
the classification of the Partnership was or is under examination by the
Internal Revenue Service. Assuming the general partner does not cause or
otherwise permit the Partnership to elect to be taxable as a corporation, the
Partnership will remain a partnership for federal income tax purposes.
If, for any reason, the Partnership were treated for federal income tax
purposes as a corporation, the federal income tax consequences of the
implementation of the Proposed Dissolution would be different from
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the description in this "Certain United States Federal Income Tax
Considerations." The Partnership would be required to pay federal income tax
at corporate tax rates on any net gain realized upon the sale or other
disposition or the distribution of the Common Stock to the Partners. Limited
partners generally would recognize gain or loss upon the distribution of
Common Stock.
PRINCIPLES OF PARTNERSHIP TAXATION APPLICABLE TO THE PROPOSED DISSOLUTION
Subject to exceptions not applicable to the implementation of the
Proposed Dissolution and the discussion of Section 731(c) of the Code below,
a partner does not recognize gain upon the distribution of property by a
partnership to the partner, except to the extent that any money distributed
exceeds the adjusted basis of the partner's interest in the partnership
immediately before the distribution. The partner does not recognize loss
upon any such distribution, except when only money and certain other assets
not applicable to the implementation of the Proposed Dissolution are
distributed. As a general rule, partnerships recognize no gain or loss on
the distribution of any property to its partners.
The basis of property (other than money) distributed by a partnership to
a partner other than in liquidation of such partner's interest generally is
the partnership's adjusted basis in the property immediately before the
distribution but, in no event, shall it exceed the distributee partner's
adjusted basis of such partner's interest reduced by any money distributed in
the same transaction. In the context of a liquidation of a partner's
interest in a partnership, the basis of property distributed to a partner
generally is an amount equal to the adjusted basis of such partner's interest
in the partnership, generally determined immediately before the liquidation
(adjusted to reflect any partnership tax items subsequently allocated to such
partner), reduced by any money distributed by the partnership to the partner
as part of the same transaction.
Under Section 731(c) of the Code, marketable securities generally will
be treated as money for purposes of determining whether partners recognize
gain with respect to partnership distributions as described above.
Marketable securities are defined to include, in part, (i) financial
instruments that are actively traded within the meaning of Section 1092(d)(1)
of the Code, (ii) financial instruments the value of which is determined
substantially by reference to marketable securities, (iii) financial
instruments that are readily convertible into, or exchangeable for, money or
marketable securities, and (iv) any interest in an equity if, at the time the
interest is distributed by the partnership, substantially all (i.e., 90
percent or more) of the assets of the entity consist of money, marketable
securities or both. In addition, any interest in an entity will be treated
as a marketable security at the time the interest is distributed by the
partnership. This latter provision applies only if less than 90 percent but
20 percent or more of the assets of the entity (determined by value) at the
time the interest in the entity is distributed consist of money, marketable
securities or both.
The Company's common stock is currently listed on the NASDAQ National
Market and Sutherland believes it likely that it will be so listed if and
when distributed by the Partnership under the Proposed Dissolution. In such
event, the common stock will be a marketable security within the meaning of
Section 731(c) of the Code at that time. Applicable Treasury Regulations
provide that Section 731(c) of the Code does not apply, however, to
marketable securities if the following conditions are met: (1) such
securities must not have been marketable when acquired by a partnership, (2)
the entity that issued the securities had no outstanding marketable
securities at the time such securities were acquired by the partnership, and
(3) the partnership distributed such securities within five years of the date
the securities became marketable. To the best of Sutherland's knowledge the
first two of these three conditions have been met. Therefore, if the
Company's common stock is distributed under the Proposed Dissolution, the
distribution should qualify for this exception to Section 731(c) of the Code
provided that the distribution is completed in accordance with the Proposed
Dissolution.
Despite qualifying for the exception discussed in the immediately
preceding paragraph, the common stock could be a marketable security in whole
or in part subject to Section 731(c) of the Code if 20 percent or more of the
Company's assets consist(ed) of marketable securities, cash or both at the
time the common stock
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<PAGE>
was acquired by the Partnership or at the time it is distributed by the
Partnership. Sutherland believes, based on prior representations of the
general partner and the Company, that, at the time the Partnership acquired
the common stock and at all times since then, the Company has not held money,
marketable securities, or both having a total value equal to or exceeding 20
percent of the total value of all assets of the Company ("excessive money and
marketable securities"). Provided that the Company does not acquire
excessive money and marketable securities and the Partnership does not
acquire money or marketable securities prior to completion of the Proposed
Dissolution, if the Company's stock is distributed to the limited partners
under the Proposed Dissolution, such distribution will not be subject to the
application of Section 731(c) of the Code.
This discussion assumes that the Proposed Dissolution will be completed
(1) by March 1, 2002; (2) at a time when less than 20 percent of the
Company's assets consist of marketable securities, cash or both; and (3) at a
time when the Partnership does not hold or own money or other marketable
securities. If the Proposed Dissolution is approved by the limited partners,
the distribution of the Company's common stock will occur, if at all, as
described in this Proxy Statement. Depending on all of the facts and
circumstances, the federal income tax consequences of failing to meet those
conditions may be minimal. Any gain recognized by a limited partner under
Section 731(c) of the Code upon a later distribution of common stock (or
other marketable securities) generally would be reduced by an amount equal to
the excess of such limited partner's share of total net gain in the
Partnership's marketable securities that would be recognized if the
Partnership sold all of its marketable securities before such distribution
over such limited partners' share of such gain immediately after the
distribution.
TREATMENT OF A DISTRIBUTION
Based on the discussion above, neither the Partnership nor any partner
will recognize gain or loss in the event of the distribution of common stock
pursuant to the Proposed Dissolution. The total tax basis of the common
stock distributed to each limited partner will equal the total tax basis of
such limited partner's Units as determined immediately before a distribution
of stock made pursuant to the Proposed Dissolution (as adjusted to reflect
any Partnership tax items subsequently allocated to such limited partner).
TREATMENT OF REPAYMENT OF PARTNERSHIP LIABILITIES AND PLAN COSTS
As part of the implementation of the Proposed Dissolution, the
Partnership will repay all of its outstanding liabilities (including costs
that it has incurred in connection with the Proposed Dissolution) by selling
shares of the Company's common stock. The use of common stock to repay such
liabilities will result in the recognition of taxable gain or loss which
(along with the costs of the Proposed Dissolution) will be allocated to the
partners in accordance with the terms of the partnership agreement. The
partners will recognize taxable gain or loss resulting from the use of common
stock to repay the liabilities. Variance in the Partnership's costs from
estimated costs could result in additional taxable income being recognized by
the partners. In addition, any other expenses of the partners paid by the
Partnership pursuant to the terms of the Proposed Dissolution could result in
additional taxable income being recognized by the partners. Each limited
partner should consult such limited partner's own tax advisor regarding the
tax consequences of the repayment of Partnership liabilities and costs of the
Proposed Dissolution relevant to such limited partner.
OTHER TAX MATTERS
Sutherland cannot guarantee that any federal income tax consequences
described in this section will be available. The availability of the federal
income tax considerations as described above is, in large part, dependent on
past, present and future facts and circumstances. Thus, the views of
Sutherland represent only Sutherland's best judgment. The views cannot be
relied upon if any of the material facts contained in the relevant documents
or if any of the assumptions are, or later become, materially inaccurate.
The views have no binding effect or official status of any kind, so that no
assurance can be given that the views would be sustained by a court, if
contested, or that legislative or administrative changes or court decisions
will not be
48
<PAGE>
forthcoming which would require modifications of the statements and
conclusions expressed herein. Moreover, Sutherland has not requested and will
not request a private ruling from the Internal Revenue Service regarding the
classification of the Partnership as a partnership for federal income tax
purposes or regarding any of the tax consequences of the Proposed
Dissolution. The Internal Revenue Service is not precluded from challenging
the tax consequences of the Proposed Dissolution described above.
EACH PARTNER ALSO SHOULD BE AWARE THAT THE FOREGOING SUMMARY DOES NOT
DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL INCOME TAXATION THAT MAY BE
RELEVANT TO A PARTICULAR PARTNER IN LIGHT OF HIS OR HER CIRCUMSTANCES AND
INCOME TAX SITUATION. FOR THESE REASONS, EACH PARTNER SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PARTNER OF
THE IMPLEMENTATION OF THE PLAN.
STATE AND OTHER TAX MATTERS
In addition to the federal income tax consequences described in "Certain
United States Federal Income Tax Considerations," the limited partners should
consider the foreign, state and local tax consequences of the implementation
of the Proposed Dissolution. Foreign, state and local tax law may differ
substantially from federal income tax law, and the discussion above does not
describe any aspect of foreign, state or local taxation. Each partner should
consult his, her or its own tax advisor with respect to such tax matters.
SUMMARY OF CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement governs the relationship among the partners
and establishes the respective rights and obligations of the general partner
and the limited partners. Some of the principal provisions of the Partnership
Agreement have been summarized elsewhere in this Proxy Statement. Certain
other provisions of the Partnership Agreement are summarized below. For
complete information, however, limited partners should read the Partnership
Agreement itself, a copy of which was provided to each limited partner in
connection with the original sale of Units by the Partnership and is on file
with the Securities and Exchange Commission as a part of the Registration
Statement relating to the original offering of Units. Sutherland will provide
free of charge a copy of the partnership agreement to any limited partner
requesting a copy.
The following statements and other statements in this Proxy Statement
concerning the Partnership Agreement and related matters are merely a
summary, do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the Partnership Agreement. Such statements
do not and cannot modify or amend the Partnership Agreement.
DISSOLUTION
Section 11(a) of the partnership agreement provides that the Partnership
shall continue its existence until December 31, 2035, unless terminated
earlier as a result of:
(1) the sale or other disposition of all or substantially all of the
assets of the Company (other than to an entity owned in whole or in
part, directly or indirectly, and controlled by, the Partnership);
(2) a determination to dissolve the Partnership by a majority in interest
of the limited partners;
(3) the removal, retirement, death, dissolution, insanity or resignation
of the general partner or the bankruptcy or insolvency of the general
partner which is not discharged or vacated within 90 days from the
date thereof, unless all of the limited partners agree to continue the
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business of the Partnership within 120 days of the occurrence of such
an event; or
(4) the occurrence of any other event causing the dissolution of the
Partnership under the laws of the State of Delaware.
ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS, PRIORITY RETURN
The Partnership Agreement provides that income, gains, losses,
deductions, credits and distributions of the Partnership will generally be
allocated among and credited 99% to the Limited Partners in proportion to
their respective capital account contributions and 1% to the General Partner
until such time as the aggregate of distributions of cash and other property
to all of the Partners is equal to the aggregate capital account
contributions of all of the Partners plus an amount equivalent to a return
thereon of 6%, compounded annually (referred to in the Partnership Agreement
as the "Priority Return"). As of September 1998, the Priority Return would be
reached if the Partnership distributed approximately $190,000 per unit, which
amount would be distributed if the Partnership received approximately $27 per
share for its stock in the Company in a sale of that stock. After the
Priority Return has occurred and until the liquidation and termination of the
Partnership, income, gains, losses, deductions, credits and distributions of
the Partnership will be allocated 70% to the limited partners in proportion
to their respective capital contributions and 30% to the general partner.
Upon the liquidation and termination of the Partnership, distributions will
be allocated 99% to the limited partners in proportion to their respective
capital account contributions and 1% to the general partner until the
Priority Return is paid. After the Priority Return is paid, distributions
generally will be allocated 70% to the limited partners in proportion to
their respective capital account contributions and 30% to the general
partner. A clause in the partnership agreement provides that, after the
Limited Partners have received the Priority Return in a sale of the Company
or in the liquidation of the Partnership, the balance of the gain received by
the Partnership in such a sale or liquidation is to be "allocated to the
least extent necessary to cause the aggregate Capital Accounts of the General
Partner and of the Limited Partners to be in a ratio of 30% for the General
Partner and 70% for the Limited Partners." The general partner and certain
limited partners who claim to have participated in the development of the GP
Plan have contended, apparently relying on this clause, that the General
Partner would be entitled to approximately the first $60 or $65 million of
distributions made by the Partnership after the Priority Return is reached.
Sutherland believes that this contention by the general partner and the
general partner's application of the clause in question are both incorrect
and inconsistent with representations made to limited partners in the
Partnership's original offering materials used in connection with the sale of
limited partnership units. The Mills Law Firm and Smith, Katzenstein &
Furlow LLP, Sutherland's attorneys, and an expert consulted by them, have
concluded that the capital accounts of the general partner and of the limited
partners will be actually or approximately equal to zero after distributions
are made sufficient to cause the Priority Return to be reached and that
therefore the clause relied on by the general partner will have no material
monetary effect. Kupperberg & Associates, the expert consulted by
Sutherland's attorneys, is a certified public accounting firm with
significant audit, tax and business experience and has testified in
accounting matters in numerous state and federal courts. Kupperberg &
Associates has further advised Sutherland's attorneys that, in the opinion of
Kupperberg & Associates, the purpose of the clause in question was to adjust
partnership distributions in the event that the Priority Return was reached
prior to a sale of the Partnership or liquidation of the Company and the
Partnership then owned assets such as furniture and fixtures. If the
Proposed Dissolution is approved, the Priority Return will be reached, if at
all, only as a result of the liquidation of the Partnership and/or sale of
the Company, because the Partnership has never made any distributions. In
addition, the Company's stock is the Partnership's only substantial asset.
Accordingly, Sutherland's attorneys have concluded that the clause in
question will not be implicated in a manner that would cause it to
significantly affect distributions to the limited partners. This conclusion
is also supported by the fact that the original offering memorandum used by
the general partner in 1987 to sell units in the Partnership stated, in an
illustration of the economic and tax consequences of a hypothetical sale of
the Company, that the general partner would receive 30 percent of the
proceeds after the Priority Return was reached and the limited partners would
receive 70 percent. However, although Sutherland's attorneys have concluded
that it is unlikely that a court would accept the general partner's current
application of the clause in question, their conclusion may
50
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not be correct and a court may accept the general partner's current
application of the clause. In that case, the return received by the limited
partners in the Proposed Dissolution could be significantly reduced.
VOTING RIGHTS OF LIMITED PARTNERS
The limited partners do not have the right to participate in the
management or control of the Partnership's business. The partnership
agreement provides that the limited partners may, by vote of the limited
partners whose interests in the aggregate exceed fifty percent (50%) of the
interests of the limited partners who are then partners in the Partnership,
(i) dissolve the Partnership; or (ii) remove any general partner.
Meetings may be called by limited partners holding more than ten percent
(10%) of the then outstanding partnership interests for any matters for which
the partners may vote as set forth in the partnership agreement. If limited
partners desire to exercise their voting rights with respect to (a) a
proposed sale, exchange, mortgage, pledge, transfer, financing or refinancing
of all or substantially all of the assets of the Partnership or (b) removal
of the general partner, an opinion must be delivered to the Partnership by
counsel selected by limited partners whose aggregate interests exceed ten
percent (10%) of the aggregate interests of all of the limited partners. The
opinion must state that the actions to be taken (i) are legal, (ii) may be
effected without subjecting any limited partner to liability as a general
partner under the laws of the State of Delaware or of any other jurisdiction
in which the Partnership is doing business and (iii) may be effected without
changing the status of the Partnership for tax purposes. In addition, the
partnership agreement requires that such opinion be affirmatively approved in
writing by limited partners whose aggregate interests in the Partnership
equal at least the same percentage in interest of the limited partners as is
required to take the action to which the opinion relates.
The partnership agreement, however, provides that an opinion need not be
obtained as regards matters referenced in clause (ii) of the preceding
paragraph if a court having appropriate jurisdiction has entered a judgment
that the actions to be taken may be effected without subjecting any limited
partner to liability as a general partner under the laws of the State of
Delaware or any other jurisdiction in which the Partnership is doing
business. Likewise, an opinion need not be obtained as regards matters
referenced in clause (iii) of the preceding paragraph if a court having
appropriate jurisdiction has entered a judgment, or the Internal Revenue
Service has issued a ruling, that the actions to be taken may be effected
without changing the status of the Partnership for tax purposes.
Sutherland has obtained the opinion of such counsel as required by the
partnership agreement. A copy of the opinion appears as Exhibit B to this
Proxy Statement. In addition to seeking proxies in favor of the Proposed
Dissolution, this Proxy Statement also solicits proxies granting Sutherland
the authority to execute a written consent of limited partners selecting
Roberts, Isaf & Summers as counsel for purposes of rendering the opinion
called for by the partnership agreement and approving the opinion of counsel
rendered by Roberts, Isaf & Summers.
REMOVAL, WITHDRAWAL, BANKRUPTCY, INSOLVENCY, DISSOLUTION, RETIREMENT OR
RESIGNATION OF THE GENERAL PARTNER
The limited partners may, by vote of a majority in interest, remove any
general partner from the Partnership. The general partner is also permitted,
at its discretion, to resign at any time. Unless 100% in interest of the
limited partners designate a successor general partner within 90 days, the
Partnership will be dissolved. In the event of the removal or voluntary
withdrawal of the general partner, the general partner ceases to be a general
partner of the Partnership and a portion of its interest will be assigned,
PRO RATA with the limited partners, to any successor general partner so that
the successor general partner has not less than a 1% interest in the
Partnership. Any such interest not so assigned will, at the option of the
Partnership, either be wholly converted into a special limited partner
interest and retained by the General Partner or partially
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<PAGE>
purchased by the Partnership for its appraised value in accordance with the
terms of the Partnership Agreement and partially converted into a special
limited partner interest entitling the removed or voluntarily withdrawn
general partner to receive 7.5% of all distributions to partners after the
Priority Return has occurred. In the event of the bankruptcy, insolvency,
dissolution, retirement or resignation of the General Partner, if 100% in
interest of the limited partners appoint a successor general partner, the
successor general partner shall succeed to the interest of the bankrupt,
insolvent, dissolved, retired or resigned General Partner without
compensation to the latter.
APPLICABLE LAW
The Partnership Agreement provides that it is to be construed and
enforced in accordance with the laws of the State of Delaware.
ABOUT THE TRUSTEE
Judge Charles B. Renfrew (retired) has agreed to serve as the
liquidating trustee for the Partnership if the Proposed Dissolution is
approved by the limited partners. Judge Renfrew has no prior relation with
the Company, the Partnership, Sutherland, Sutherland's attorneys or, to the
knowledge of Sutherland and her attorneys, any affiliate or associate of any
of the foregoing. Judge Renfrew owns no units of limited partnership
interest in the Partnership and owns no shares of stock in the Company.
BACKGROUND. Judge Renfrew graduated Phi Beta Kappa from Princeton
University in 1952. He graduated from the University of Michigan Law School
in 1956, where he was a member of the Law Review and Order of the Coif. He
served in the United States Navy from 1946 to 1948 and was a forward observer
in Korea for the United States Army in 1952 and 1953.
Judge Renfrew joined the law firm of Pillsbury, Madison & Sutro in 1956,
and became a partner in that firm in 1965. In February of 1972, he was
appointed United States District Judge for the Northern District of
California, where he served until February of 1980. In 1980-1981, Judge
Renfrew was Deputy Attorney General of the United States in Washington, D.C.
He then rejoined Pillsbury, Madison & Sutro for two years. In 1983, he
became Vice President of Chevron Corporation, where he was responsible for
its legal affairs, and in 1984 became a member of its board of directors. In
1993, after retiring from Chevron, Judge Renfrew became a partner at the law
firm of LeBoeuf, Lamb, Greene & MacRae, where he remained until 1997.
In 1998, Judge Renfrew opened his own practice specializing in
alternative dispute resolution and internal corporate investigations. He is
on a national panel of distinguished neutrals of the CPR Institute for
Dispute Resolution and serves as chairman of its board of directors, and is a
member of the London Court of International Arbitration.
Judge Renfrew has served as President of the American College of Trial
Lawyers and Vice Chairman of the Antitrust Section of the American Bar
Association. He is currently on the American Bar Association's Standing
Committee on the Federal Judiciary. He has also served as a member of the
American Law Institute, the American Judicature Society, the Association of
General Counsel, and the Legal Advisory Committee of the New York Stock
Exchange, and as a Fellow of the American Bar Foundation. Judge Renfrew has
taught trial advocacy and other courses at the Boalt Hall School of Law of
the University of California at Berkeley, California. Judge Renfrew has also
been active in many community organizations, including service on the boards
of Princeton University, Claremont University Center, the San Francisco
Symphony, the San Francisco Musuem of Modern Art, the NAACP Legal Defense and
Education Fund, the Lawyers Committee for Civil Rights and the Council for
Civic Unity.
Judge Renfrew's offices are located at 710 Sansome Street, San Francisco,
California 94111-1704
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(telephone: 415-397-3933).
COMPENSATION; INDEMNIFICATION. The Plan of Dissolution provides for the
payment to the Trustee of a flat fee of $75,000 and a contingent fee based on
the price per share realized in a change of control transaction. The flat
fee would be payable in two installments of $25,000 and $50,000. The $25,000
installment would be payable at the commencement of the Trustee's service.
The $50,000 installment would be payable upon the completion of the winding
up of the Partnership.
In addition to the $75,000 flat fee, the Trustee would be entitled to a
contingent fee based on the amount by which the net value received for the
shares of the Company's stock owned by the Partnership exceeds $25.00. If
the value per share exceeds $25.00, the Trustee would receive a contingent
fee of one quarter of one per cent of the net increase above $25.00 per share
up to $30.00 per share, one third of one percent of the net increase above
$30.00 per share and one half of one percent of the net increase in excess of
$35.00 per share. For example, if the Partnership's stock in the Company
were sold for $30.00 net proceeds per share, the Trustee would earn a
contingent fee of approximately $71,240 (based on the 5,699,194 shares
currently owned by the Partnership). If the stock were sold for $35.00 net
proceeds per share, the Trustee's contingent fee would be approximately
$166,227 (consisting of approximately $71,240 for the increment between $25
and $30 per share and approximately $94,987 for the increment between $30 and
$35 per share). If the shares were sold for $40.00 per share, the Trustee's
contingent fee would be approximately $308,707 (consisting of approximately
$71,240 for the increment between $25 and $30 per share, approximately
$94,987 for the increment between $30 and $35 per share, and approximately
$142,480 for the increment between $35 and $40 per share). The net value per
share will be calculated by subtracting all sales-related costs, including
any fees payable to investment bankers or business brokers in connection with
identifying and structuring the sale, or underwriting commissions paid to an
underwriter in the event that the Trustee disposes of the stock in a
registered offering. In the event stock is distributed in kind, the
Trustee's contingent fee would be calculated based on the fair market value
of the stock, determined by the average closing price of the stock for the
five trading days immediately preceding the date of distribution of the
stock. Attorneys' fees paid in connection with the transaction and with
other obligations of the Partnership (including expenses relating to the
solicitation of proxies for the Proposed Dissolution), and any fees and
expenses paid to Sutherland's attorneys (including any fees and expenses
awarded by any court in connection with litigation brought by or on behalf of
limited partners)would not be subtracted. See "Interest of Certain Persons
in the Solicitation -- The Mills Law Firm" and "Interest of Certain Persons
in the Solicitation -- Smith, Katzenstein & Furlow LLP" and Exhibit A to this
Proxy Statement.
The Trustee will also be entitled to reimbursement for all expenses
incurred on behalf of the Partnership in the performance of his duties,
including expenses incurred in connection with the dissolution and
liquidation of the Partnership and the identification, negotiation and
implementation of any change of control transaction. The Trustee will be
entitled to be indemnified for any loss or expense arising out of the
performance by the Trustee of the Trustee's duties, except for any loss
resulting from the gross negligence or willful misconduct of the Trustee. In
the event the Trustee is sued or otherwise involved in any action, suit or
proceeding arising out of the Trustee's service as the liquidating trustee,
the Trustee will be entitled to have all litigation expenses, including
attorneys' fees, paid by the Partnership in advance of the final disposition
of the action, suit or proceeding, provided that the Trustee first furnishes
the Partnership with an undertaking to repay such advances in the event that
it is ultimately determined that the Trustee is not entitled to be
indemnified by the Partnership for such expenses.
ABOUT THE SPECIAL COUNSEL
Roberts, Isaf & Summers has agreed to serve, if selected by at least ten
percent in interest of the limited partners, as Special Counsel for the
purpose of providing the opinion of special counsel which must be approved by
a majority in interest of the limited partners in order for the Proposed
Dissolution to be
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implemented. See "Summary - Selection and Approval of Opinion of Special
Counsel." A copy of the opinion of Roberts, Isaf & Summers is attached as
Exhibit B to this proxy statement.
Roberts, Isaf & Summers, founded in 1986, maintains offices at Suite
1100, 500 Northpark Town Center, 1100 Abernathy Road, N.E., Atlanta, Georgia
30328. The firm is engaged in a full-service, commercial practice, including
practice areas in acquisitions and mergers, commercial real estate,
securities and taxation. The firm's telephone number is (770) 551-9800.
Roberts, Isaf & Summers owns no units of limited partnership interest in
the Partnership and no shares of stock in the Company. Roberts, Isaf &
Summers is being paid approximately $10,000 for rendering the opinion of
Special Counsel. The fees and expenses of Roberts, Isaf & Summers are being
advanced by Sutherland's attorneys, who will be reimbursed by the Partnership
for such advancement if the Proposed Dissolution is approved. Roberts, Isaf
& Summers has been employed in the past by The Mills Law Firm (one of the two
law firms representing Sutherland) to provide legal services in connection
with The Mills Law Firm's representation of limited partners of the
Partnership, including the provision of an opinion of special counsel in
connection with the request by certain limited partners for a meeting of the
Partnership to vote on the initial public offering that was proposed by the
general partner in August 1996 and subsequently withdrawn.
INTEREST OF CERTAIN PERSONS IN THE SOLICITATION
CHARLENE E. SUTHERLAND
Charlene E. Sutherland is a limited partner of the Partnership. She
owns two quarter-units of limited partnership interest. She acquired one of
her quarter-units in the Partnership's original offering of units, and she
acquired her other quarter-unit in the secondary market. She is a certified
financial planner and licensed tax practitioner in the State of California.
Since January of 1990 she has been a registered representative and a
principal of a major registered broker-dealer on an independent contractor
basis. From 1986 to 1990, Sutherland was a registered representative with
Integrated Resources Equity Corp., on an independent contractor basis. From
1979 to 1985, she was employed by Equitec Securities Corp., as a senior
account executive.
From 1990 to 1991, Sutherland served on the board of directors of the
American Association of Limited Partners, a lobbying group that engaged in
lobbying efforts in support of the Limited Partnership Rollup Reform Act of
1993. Between 1987 and 1990, Sutherland served as the producer and moderator
of a local public-access-cable, non-commercial television show called Wealth
Management, an informational show for investors.
Sutherland's father-in-law, Judge Kenneth E. Sutherland (retired), owns
one-quarter unit in the Partnership, and a number of her clients own in the
aggregate another four and three-quarter units.
As a limited partner, Sutherland had serious concerns about various
actions taken by the general partner. She moved to intervene in litigation
involving the Partnership and the general partner in the United States
District Court for the Northern District of California, but that motion was
denied. Subsequently, the lead plaintiff in that litigation, with
Sutherland's agreement, moved to have Sutherland added to his complaint as a
named plaintiff and a putative class representative, which motion has not yet
been decided. See "Summary of Certain Pending Litigation -- United States
District Court for the Northern District of California."
In the event the Proposed Dissolution is approved, Sutherland will be
treated no differently than any other limited partner with respect to
distributions. However, if the Proposed Dissolution is approved, the
out-of-pocket expenses incurred by The Mills Law Firm and Smith, Katzenstein
& Furlow LLP on Sutherland's
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behalf in connection with the solicitation of proxies, including the fees and
expenses of the Solicitation Agent, will be paid by the Partnership. If the
Proposed Dissolution is not approved, neither Sutherland nor the Partnership
will be obligated to reimburse the out-of-pocket expenses incurred by The
Mills Law Firm and Smith, Katzenstein & Furlow LLP in connection with their
assistance to Sutherland in the solicitation of proxies in favor of the
Proposed Dissolution.
THE MILLS LAW FIRM
The Mills Law Firm, together with Smith, Katzenstein & Furlow LLP,
attorneys at law, represent Sutherland in connection with the solicitation of
proxies pursuant to this Proxy Statement. The Mills Law Firm owns no units in
the Partnership, and other than as described herein, has no interest in the
Partnership or in the Proposed Dissolution.
The Mills Law Firm, together with Smith, Katzenstein & Furlow LLP,
represents certain limited partners in the Chancery Court litigation, which
is a derivative action and a putative class action, and the District Court
litigation, which is a putative class action. See "Summary of Pending
Litigation."
The Mills Law Firm, together with Smith, Katzenstein & Furlow LLP, have
participated in the development of the Proposed Dissolution as a means of
protecting the interests of the Partnership and its limited partners. The
Mills Law Firm, together with Smith, Katzenstein & Furlow LLP, have advanced
the costs and expenses of the preparation of this Proxy Statement and the
solicitation of proxies by Sutherland, including the fees and expenses of the
Solicitation Agent. In the event that the Proposed Dissolution is approved
and implemented, The Mills Law Firm and Smith, Katzenstein & Furlow LLP will
be entitled to be reimbursed by the Partnership for the out-of-pocket
expenses advanced by them in connection with the solicitation of proxies by
or on behalf of Sutherland. Such costs and expenses are estimated to be
approximately $65,000 in the aggregate. The Partnership will also reimburse
Sutherland's attorneys, if the Proposed Dissolution is approved, for
advancing approximately $10,000 in fees and expenses charged by the Special
Counsel for providing the opinion of Special Counsel.
The Mills Law Firm and Smith, Katzenstein & Furlow LLP intend to
petition the Delaware Chancery Court and the United States District Court for
the Northern District of California for reasonable attorney's fees and
expenses to compensate them for their efforts on behalf of limited partners.
See "Summary of Certain Pending Litigation." Also, certain limited partners
have signed contingency fee agreements with The Mills Law Firm. The
interests of The Mills Law Firm and Smith, Katzenstein & Furlow LLP in
receiving attorney's fees as compensation for their efforts on behalf of
limited partners give The Mills Law Firm and Smith, Katzenstein & Furlow LLP
an incentive to cause the return the limited partners receive for their
investment in the Partnership to be increased as much as possible. In
derivative and class actions, courts often, but not always, award attorney's
fees in proportion to the benefit generated by the attorneys on behalf of the
class or the investors in the corporation or partnership involved.
Similarly, the contingency fee agreements entered into with The Mills Law
Firm by certain limited partners provide that the attorney's fees of The
Mills Law Firm increase in proportion to the amount those limited partners
receive in the liquidation of the Partnership.
Although The Mills Law Firm believes that its efforts to date in the
pending litigation will entitle the firm to an award of fees and expenses by
one or both of the courts in which such litigation is pending, it is not
possible to predict the amount of fees and expenses, if any, that a court may
ultimately award. Fee awards vary significantly, and are often influenced
by such factors as the magnitude of the benefit achieved, the effort expended
by counsel, the difficulty of the issues, and the stage of proceedings (e.g.,
whether the benefit was obtained through settlement or after trial on the
merits). For example, in the Delaware Court of Chancery, fee awards in
derivative and class actions have generally ranged from approximately 10% to
approximately 25% of the value of the benefit achieved in the litigation, as
determined by the court. Similarly, in the United States District Court for
the Northern District of California, fee awards in derivative and class
actions have generally
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fallen in the range of 25% to 35% of the value of the benefit achieved in the
litigation, with some awards being significantly above this range. In cases
of unusually large benefits in the range of $50 million to $100 million or
more, the courts in the Northern District have tended to use percentages
below or at the lower end of this range in determining fee awards.
The Mills Law Firm's interest in receiving attorney's fees and costs
gives the firm incentives to promote the adoption of the Proposed
Dissolution. To the extent that the Proposed Dissolution increases the
return to the Partnership or the limited partners, the benefit achieved as a
result of the pending litigation may also be increased, which may result in
a larger award of fees by the court(s). In addition, the amount that The
Mills Law Firm will be entitled to under its contingency fee agreements will
increase should the Proposed Dissolution increase the amount received in the
liquidation of the Partnership by limited partners who are party to the
contingency fee agreements.
In the event the Proposed Dissolution is adopted, it is possible that
the Trustee may retain The Mills Law Firm to perform legal services for the
Partnership in connection with the dissolution and liquidation of the
Partnership, including the negotiation and implementation of a change of
control transaction. The Mills Law Firm has no understanding, arrangement
or agreement with the Trustee regarding any retention by the Trustee of The
Mills Law Firm to perform any services on behalf of the Partnership in the
event the Proposed Dissolution is adopted. Because implementation of the
Proposed Dissolution and any consequent change of control transaction is
expected to increase the fees that may be awarded in the pending litigation
or received through The Mills Law Firm's contingency fee agreements, The
Mills Law Firm does not intend to charge the Partnership or the Trustee for
legal services in the event the Trustee retains The Mills Law Firm in
connection with the dissolution and liquidation of the Partnership. However,
The Mills Law Firm will expect reimbursement of any out-of-pocket expenses
incurred by it on behalf of the Partnership or the Trustee. The amount of
any such expenses cannot be estimated at this time.
The Mills Law Firm is located at 300 Drake's Landing, Suite 155,
Greenbrae, California 94904. Its telephone number is (415) 464-4770.
SMITH, KATZENSTEIN & FURLOW LLP
Smith, Katzenstein & Furlow LLP ("SKF"), attorneys at law, together with
The Mills Law Firm, represent Sutherland in connection with the solicitation
of proxies pursuant to this Proxy Statement. SKF owns no units in the
Partnership, and other than as described herein, has no interest in the
Partnership or in the Proposed Dissolution.
SKF, together with The Mills Law Firm, represents certain limited
partners in the Chancery Court litigation and the District Court litigation.
See "Summary of Pending Litigation."
SKF's interests in the Proposed Dissolution are substantially the same
as those of The Mills Law Firm, as described above. The Mills Law Firm and
SKF have agreed to a formula for the allocation between them of any recovery
of attorney's fees that may be obtained in connection with their efforts on
behalf of limited partners in the Partnership, regardless of whether the fees
are received through an award by the Chancery Court, through an award by the
District Court, or through The Mills Law Firm's contingency fee agreements.
The two firms have also agreed that any recovery of costs will be allocated
between the two firms in proportion to the ratio of their total costs.
In the event the Proposed Dissolution is adopted, it is possible that
the Trustee may retain SKF to perform legal services for the Partnership in
connection with the dissolution and liquidation of the Partnership, including
the negotiation and implementation of a change of control transaction. SKF
has no understanding, arrangement or agreement with the Trustee regarding any
retention by the Trustee of SKF to perform any services on behalf of the
Partnership in the event the Proposed Dissolution is adopted. Because
implementation
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of the Proposed Dissolution and any consequent change of control transaction
is expected to increase the fees that may be awarded in the pending
litigation or received as a result of The Mills Law Firm's contingency fee
agreements, SKF does not intend to charge the Partnership or the Trustee for
legal services in the event the Trustee retains SKF in connection with the
dissolution and liquidation of the Partnership. However, SKF will expect
reimbursement of any out-of-pocket expenses incurred by it on behalf of the
Partnership or the Trustee. The amount of any such expenses cannot be
estimated at this time.
SKF is located at 800 Delaware Avenue, Suite 7000, Wilmington, Delaware
19801. Their telephone number is (302) 652-8400.
SUMMARY OF CERTAIN PENDING LITIGATION
DELAWARE COURT OF CHANCERY
PROCEEDINGS IN DELAWARE
Dr. Dwight E. Wininger, a limited partner, commenced on February 11,
1997 a class and derivative action on behalf of limited partners against the
general partner and the persons controlling the general partner (the "First
Delaware Lawsuit"). He amended his complaint in the First Delaware Lawsuit on
June 11, 1997, and again on October 3, 1997. Gary T. Charlebois, a limited
partner, became the second named plaintiff in the First Delaware Lawsuit when
the Delaware complaint was amended on October 3, 1997.
On September 24, 1997, the plaintiffs filed a motion for a preliminary
injunction against the GP Plan. On October 23, 1997, the Delaware Chancery
Court granted the plaintiffs' motion for a preliminary injunction, and
enjoined the defendants from implementing the GP Plan. The defendants
appealed the preliminary injunction to the Delaware Supreme Court. On March
19, 1998, the Delaware Supreme Court affirmed the order of the Court of
Chancery enjoining the GP Plan.
Certain limited partners favoring the GP Plan moved to intervene in the
First Delaware Lawsuit as defendants for the purpose of opposing the
injunctive relief granted by the Court of Chancery. These limited partners
also moved to disqualify The Mills Law Firm, one of the law firms
representing Sutherland and plaintiffs Wininger and Charlebois. The grounds
alleged for disqualification were that certain limited partners then or
formerly represented by The Mills Law Firm favored the GP Plan and that there
was thus a conflict of interest between those partners and the plaintiffs in
the First Delaware Lawsuit. On April 27, 1998, the Chancery Court denied
the motion to disqualify and granted the motion to intervene as defendants.
On June 2, 1998, the intervening limited partners filed a counter claim
against the plaintiffs in the First Delaware Lawsuit. The counterclaim sought
reconsideration of the injunction against the GP Plan, a declaration of the
validity of the GP Plan, an order requiring the plaintiffs to post a
$5,000,000 bond, damages for the injunction against the GP Plan,
disqualification of The Mills Law Firm, and denial of the class certification
of the action as pled by the plaintiffs. On August 19, 1998, the intervening
limited partners stipulated to the dismissal of the counterclaim.
On December 29, 1997, Dr. Wininger, one of the plaintiffs in the First
Delaware Lawsuit, had commenced a second derivative action on behalf of the
Partnership in the Delaware Court of Chancery (the "Second Delaware Lawsuit")
in which he sought to invalidate stock options granted by the Company to
current and former officers and directors of the Company. On or about June
3, 1998, the plaintiffs in the two actions in the Chancery Court moved to
consolidate the two actions and for leave to file a consolidated third
amended and supplemental class and derivative complaint (the "Third Amended
Complaint"). Thereafter, the defendants advised counsel for the plaintiffs
that defendants did not oppose the motion, and on June 23, 1998, the Chancery
Court entered an order consolidating the two actions and granting leave to
file the Third Amended
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Complaint. On July 20, 1998, the defendants moved to dismiss the Third
Amended Complaint. That motion has not yet been fully briefed.
CLAIMS ASSERTED AGAINST THE DEFENDANTS
The current central allegations of the plaintiffs in the Consolidated
Delaware Lawsuit, which are denied by the defendants, are that:
- The defendants have breached their fiduciary duties to the limited
partners by failing to adequately market the Partnership's controlling
interest in the Company as a block and to explore transactions which could
realize a control premium for the Partnership, such as transactions involving
a sale of the controlling interest to a single buyer.
- The individual defendants -- Leonard Chill, Ralph Kenner, W. Wayne
Freed, W. Gardner Wright, and Jon Beckman (collectively, "Management") --
have conflicts of interest. The members of Management own and control the
general partner. Four of them also have executive positions with the Company
which pay them substantial salaries, bonuses, and benefits, and the fifth
receives $125,000 per year as a consultant to the Company. The First
Delaware Lawsuit alleges that Management has incentives not to explore
transactions which could involve a change of control of the Company and which
could thereby realize a control premium for the Partnership, because such a
transaction could cause the members of Management to lose their lucrative
positions with the Company. The First Delaware Lawsuit also alleges that
defendants Chill, Kenner, Freed, and Wright have fiduciary duties to the
minority shareholders in the Company which actually or potentially conflict
with their fiduciary duties to the limited partners.
- The defendants breached their fiduciary duties to the limited
partners by causing the Partnership to approve the granting of stock options
to the members of Management and to other officers of the Company at an
exercise price of $10.72 per share and to non-officer directors of the
Company at an exercise price of $6.83 per share.
- The defendants breached their fiduciary duties to the limited
partners by causing the Company to grant defendants Chill, Kenner, Freed, and
Wright employment agreements with lucrative "golden parachute" provisions
which would entitle the four men to receive lump sum payments in excess of
twice their annual salaries should they be terminated in connection with a
change of control of the Company.
- The defendants breached their fiduciary duties to the limited
partners by attempting to sell all the Partnership's stock in the Company in
a public offering in August 1996 prior to the announcement of significantly
increased Company earnings. (This proposal was abandoned after over ten
percent in interest of the limited partners requested a Partnership meeting
to vote on the proposal.)
- The defendants breached their fiduciary duties to the limited
partners by conducting a public offering in November 1996 of newly-issued
Company stock prior to an announcement of significantly increased Company
earnings. (The First Delaware Lawsuit alleges that this public offering,
because of its timing, unfairly diminished the value of the Partnership's
stock in the Company.)
RELIEF REQUESTED
The principal remedies currently requested by the Consolidated Delaware
Lawsuit are:
- Removal of the General Partner.
- Dissolution of the Partnership.
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- Appointment of a liquidating trustee charged with ensuring that the
limited partners receive the highest possible return for their investment upon
dissolution.
- Invalidation of the defendants' stock options and of the"golden
parachute" provisions of their employment agreements.
- A declaratory judgment stating, among other things, that the
defendants' fiduciary duties require them to obtain the highest possible return
for the limited partners in the liquidation of the Partnership.
- A declaratory judgment stating that the general partner has no right
to receive more than 30 percent of the proceeds of the liquidation of the
Partnership after the Priority Return is reached.
- An injunction against the implementation by the board of directors of
the Company of any measure that would impede a change of control transaction.
- Compensatory damages.
- An award of costs of suit, including attorney's fees and expenses.
UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
PROCEEDINGS IN CALIFORNIA
Dr. Dwight E. Wininger, a limited partner, commenced on May 1, 1997, an
action in the United States District Court for the Northern District of
California (the "District Court") against the general partner and the persons
controlling the general partner (the "California Lawsuit"). In its initial
phase, the California Lawsuit alleged that the defendants violated the
federal securities laws by advocating for the GP Plan, in advance of the
dissemination of a proxy statement, in a letter dated March 21, 1997 and a
press release dated June 9, 1997. On May 23, 1997, the plaintiff moved for a
preliminary injunction to remedy these alleged violations.
On August 4, 1997, the District Court issued an order which decided the
May 23 motion for a preliminary injunction. The District Court ruled that
the plaintiff demonstrated a likelihood of success on the merits on the
California Lawsuit's claims that the defendants violated the federal
securities laws in connection with their March 21 letter and their June 9
press release. The District Court's August 4 order stated that "Defendants
made statements that are probably prohibited by SEC regulations." However,
the District Court denied the May 23 motion for a preliminary injunction,
ruling that the equities weighed against granting injunctive relief as of
August 4.
On August 19, 1997, the District Court appointed plaintiff Wininger as
lead plaintiff and appointed The Mills Law Firm as class counsel, though the
District Court stated that these appointments are subject to reconsideration
at the time class certification is determined. On September 19, 1997, the
lead plaintiff filed a motion for partial summary judgment that the
defendants violated federal securities regulations in connection with their
March 21 letter and their June 9 press release.
On October 1, 1997, the lead plaintiff filed a motion for a temporary
restraining order and a preliminary injunction to prohibit the defendants
from implementing the GP Plan, holding the special meeting at which the GP
Plan was to be voted on, or continuing to solicit proxies for the GP Plan.
On October 15, 1997, in the California Lawsuit, three limited partners,
including Sutherland, with the aid of another law firm, filed a motion to
intervene in the California Lawsuit and a motion for a temporary restraining
order. The latter motion requested that the limited partners be given at
least 120 days to call for a meeting of limited partners at which the GP Plan
would have been required to receive, in order to be passed, approval by
two-thirds in interest of the limited partners.
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On November 6, 1997, the District Court issued a temporary restraining
order prohibiting the defendants from implementing the GP Plan, but did not
enjoin the defendants from proceeding with the special meeting. The District
Court found that the lead plaintiff had raised at least two serious
questions. First, the District Court found that the lead plaintiff raised
serious questions as to whether the defendants properly disclosed what the
limited partners had to do in order to require the GP Plan to be approved by
two-thirds in interest of the limited partners. Second, the District Court
found that the lead plaintiff raised serious questions regarding whether the
GP Plan is a "roll-up transaction" governed by the Limited Partnership Rollup
Reform Act of 1993 ("the Rollup Reform Act"). The District Court noted that
one of the requirements of the Rollup Reform Act is giving limited partners
at least 60 days to vote on a proposed transaction, and that limited partners
were given less than 60 days to decide how to vote on the GP Plan.
In issuing a temporary restraining order, the District Court considered
the papers filed by the three limited partners, including Sutherland, who
moved to intervene in the California Lawsuit. On November 14, 1997, the
parties stipulated that the lead plaintiff's complaint would be amended,
effective as of December 5, 1997, to add claims relating to the proxy
solicitations for the GP Plan.
Certain limited partners favoring the GP Plan moved to intervene in the
California Lawsuit for the purposes of opposing injunctive relief against the
GP Plan. These limited partners also moved to disqualify The Mills Law Firm,
one of the law firms representing Sutherland and plaintiff Wininger, based on
alleged conflicts of interest. The grounds alleged for disqualification
were that certain limited partners then or previously represented by The
Mills Law Firm favored the GP Plan and that there was thus a conflict of
interest between those limited partners and plaintiff Wininger. The
plaintiff moved for class certification on April 10, 1998.
On May 28, 1998, the District Court denied the motions to intervene of
both groups of limited partners who had sought to intervene (including the
motion of the group that included Sutherland), denied the plaintiff's motion
for a preliminary injunction as moot, ordered the defendants to file a motion
to dismiss the remaining claims in the case by June 19, 1997, and denied the
plaintiff's motion for class certification without prejudice to the motion
being refiled if the motion to dismiss is denied. On May 29, 1997, the
District Court gave notice of its tentative intent to deny the motion to
disqualify The Mills Law Firm. On June 1, 1998, the District Court gave
notice of its tentative intent to deny the plaintiff's motion for partial
summary judgment.
On June 19, 1998, the defendants moved to dismiss the California
Lawsuit, contending that the lawsuit is moot. On July 17, 1998, the lead
plaintiff moved for leave of court to amend and supplement his complaint to
add derivative claims for damages on behalf of the Partnership, to make
certain other modifications relating to the relief requested, and to add
Sutherland to the complaint as a named plaintiff and a putative class
representative. On September 4, 1998, a hearing was held on both the
defendants' motion to dismiss and the lead plaintiff's motion for leave to
amend, and the District Court indicated that it intended to issue an order
denying the defendants' motion to dismiss, granting the plaintiff's motion to
amend (except that the Court may not permit Sutherland to be added as a
plaintiff), denying the motion to disqualify The Mills Law Firm, and denying
the plaintiff's motion for partial summary judgment.
CLAIMS ASSERTED AGAINST THE DEFENDANTS
The current central allegations of the plaintiff in the California
Lawsuit, which are denied by the defendants, are that:
- The defendants failed to adequately disclose to the limited partners
in proxy solicitations the defendants' conflicts of interest.
- The defendants failed to disclose that the Partnership could
receive a control premium by engaging in a transaction involving a sale or
other block transfer of its controlling interest in the Company.
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- The defendants falsely or misleadingly represented that, upon the
liquidation and termination of the Partnership, after the Priority Return is
reached, the general partner would be entitled to 100% of the profits of the
Partnership until the ratio of the aggregate capital accounts of all partners
reached 30% for the general partner and 70% for the limited partners. (The
California Lawsuit alleges that the general partner has no right to receive
100% of the profits of the Partnership at any time and only has the right to
receive 30% of the profits of the Partnership after the Priority Return is
reached.)
- The defendants violated the federal securities laws by making
numerous false and misleading statements and failing to disclose many
material facts (in addition to the alleged misrepresentations and
nondisclosures described above) in the proxy solicitations they sent to
limited partners in connection with the GP Plan.
- The defendants violated the federal securities laws by advocating
in favor of the GP Plan, prior to disseminating a proxy statement, in their
March 21 letter and their June 9 press release.
RELIEF REQUESTED
The main remedies currently requested by the California Lawsuit are:
- Damages for certain expenses charged to the Partnership in connection
with the GP Plan.
- An injunction against future violations of the securities laws by the
defendants.
- A declaratory judgment stating that the defendants have violated the
federal securities laws.
- An award of costs of suit, including attorney's fees and expenses.
FINANCIAL INFORMATION ABOUT THE PARTNERSHIP
Since its inception in 1986, the Partnership has conducted no business
other than owning and voting its shares of common stock of the Company. The
general partner has stated that because the Partnership has no independent
operations or assets other than its investment in the Company, the
Partnership's financial statements are substantially identical to those of
the Company, with the exception of the publicly-owned minority interest in
the Company and a debt due to the Company for expenses of the Partnership
paid by the Company on behalf of the Partnership. Based on the annual and
quarterly reports publicly filed by the Partnership, Sutherland believes that
the amount of the Partnership's indebtedness to the Company is at present
approximately $434,000.
The Partnership has furnished financial statements for the fiscal year
ended September 30, 1997 in its annual report on Form 10-K and interim
financial information in its quarterly reports on Form 10-Q for the quarters
ended December 31, 1997, March 31, 1998 and June 30, 1998 filed with the
Securities and Exchange Commission. Copies of the Partnership's annual
report on Form 10-K for the fiscal year ended September 30, 1997 and Form
10-Q for the third quarter ended June 30, 1998 are attached as Exhibits C and
D to this Proxy Statement. See also "Selected Financial Data Concerning the
Partnership."
Sutherland has not seen any financial records of the Partnership other
than those made publicly available by the Partnership. Consequently,
Sutherland makes no representation as to the accuracy of the financial
information appearing in the Partnership's annual and quarterly reports
attached as Exhibits C and D to this Proxy Statement.
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WHERE YOU CAN FIND MORE INFORMATION
The Partnership and the Company are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). In accordance with the Exchange Act, the Partnership and
the Company file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's Regional Offices in New York (Seven World Trade Center, 13th
Floor, New York, New York 10048), and Chicago (Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661). Copies of these
materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such reports, proxy statements and other information may
be electronically accessed at the Commission's site on the World Wide Web
located at http://www.sec.gov. Such reports, proxy statements and other
information concerning the Company may also be inspected at the offices of
the NASDAQ National Market, 1735 K Street, N.W., Washington, D.C. 20006.
/s/ Charlene E. Sutherland
--------------------------
Charlene E. Sutherland
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EXHIBIT A
PLAN OF DISSOLUTION
For the purpose of dissolving and winding up and settling the affairs of
Synthetics Industries, L.P. (the "Partnership"), a limited partnership
organized and existing under the Delaware Revised Uniform Limited Partnership
Act (the "Act") and pursuant to applicable provisions of the Act and the
Partnership's Amended and Restated Limited Partnership Agreement dated as of
November 11, 1986, including the Amendment to Amended and Restated Limited
Partnership Agreement of Synthetic Industries L.P. dated as of November 11,
1986 (as so amended, the "Partnership Agreement"), a majority in interest of
the limited partners of the Partnership adopt this Plan of Dissolution.
1. REMOVAL OF GENERAL PARTNER.
Pursuant to Section 7(g)(i) of the Partnership Agreement, a majority in
interest of limited partners having determined in their discretion that SI
Management, L.P., the general partner of the Partnership, is not fully
performing its powers, duties and obligations in the best interest of the
Partnership and that it is otherwise in the best interest of the Partnership
to do so, the general partner is hereby removed as general partner of the
Partnership, such removal to be effective as of the Effective Date (as
defined in Section 5). From and after the removal of the general partner, it
shall cease to function as such.
2. DISSOLUTION.
Pursuant to Section 11(a)(iii) of the Partnership Agreement, the
Partnership shall, contingent upon the removal of the general partner, be
dissolved, such dissolution to be effective as of the Effective Date.
3. APPOINTMENT OF LIQUIDATING TRUSTEE.
Pursuant to Section 17-803(a) of the Act, and contingent upon the
removal of the general partner, Charles B. Renfrew, having a business address
at 710 Sansome Street, San Francisco, California 94111-1704, is hereby
appointed as, and shall be, the liquidating trustee (the "Trustee") to wind
up the business and affairs of the Partnership. The appointment of the
Trustee shall be effective upon the later to occur of the Trustee's written
acceptance of appointment or the Effective Date. Pursuant to Section
17-803(b) of the Act, the Trustee shall have the power and authority to wind
up the business and affairs of the Partnership, and may, in the name of, and
for and on behalf of, the Partnership, prosecute and defend suits, whether
civil, criminal or administrative, gradually settle and close the
Partnership's business, dispose of and convey the Partnership's property,
discharge or make reasonable provision for the Partnership's liabilities, and
in accordance with the provisions of the Partnership Agreement distribute to
the partners of the Partnership any remaining assets of the Partnership. As
provided in Section 17-803(b) of the Act, neither the appointment of the
Trustee by the limited partners, the acceptance by the Trustee of the
appointment as liquidating trustee, the Trustee's status as liquidating
trustee, nor the performance by the Trustee of the Trustee's duties and
responsibilities in connection with winding up the business and affairs of
the Partnership shall affect the limited liability of limited partners or
impose the liability of a general partner on the Trustee.
4. DISPOSITION OF PARTNERSHIP ASSETS BY TRUSTEE.
In connection with the winding up of the business and affairs of the
Partnership, the Trustee is authorized to dispose of the assets of the
Partnership in such manner and pursuant to such transaction or transactions
or series of related transactions as the Trustee in the Trustee's discretion
determines will result in the highest return to the Partnership and the
partners that the Trustee determines to be reasonably attainable. The
Trustee shall, and by the Trustee's acceptance of the Trustee's appointment
as Trustee, the Trustee agrees to, take the following actions:
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(a) As soon as practicable following the Effective Date, the Trustee
shall seek to dispose of the common stock of Synthetic Industries, Inc., a
Delaware corporation (the "Company"), owned by the Partnership in a
transaction or series of transactions (whether related or unrelated) that
will in the Trustee's judgment result in the realization by the Partnership
of a price per share that reasonably reflects the going concern value of the
Company (a "change of control transaction"). The Trustee is expressly
authorized to exercise all voting rights of the stock of the Company held by
the Partnership, and is further expressly authorized to hire, and shall hire,
a qualified investment banking firm or similar financial institution or
qualified business broker to assist the Trustee in identifying, structuring
and consummating a change of control transaction.
(b) As soon as practicable following the Effective Date, the Trustee
shall take all action deemed by the Trustee to be reasonably necessary,
appropriate or convenient for the purpose of enabling the Partnership to
enter into one or more agreements providing for a change of control
transaction.
(c) If the Trustee enters into one or more agreements on behalf of the
Partnership as contemplated by subsection (b) above, the Trustee shall take
all action deemed by the Trustee to be reasonably necessary, appropriate or
convenient for the purpose of causing the change of control transaction to be
consummated as soon as reasonably practicable.
(d) Any change of control transaction entered into by the Trustee on
behalf of the Partnership, whether involving a sale of stock, exchange of
stock, merger of the Partnership or the Company, or other transaction of a
similar or different kind, shall provide that the consideration to be
received by the Partnership in such transaction shall consist of cash, cash
equivalents or marketable securities.
(e) In the event that the Trustee determines in the exercise of the
Trustee's good faith business judgment and after consultation with the
investment banking firm or similar financial institution or business broker
retained by the Trustee pursuant to Section 4(a) that a change of control
transaction is not reasonably likely to be entered into or consummated, the
Trustee shall liquidate such number of shares of common stock of the Company
as may be necessary to discharge the obligations of the Partnership and (1)
sell as soon as practicable the shares of common stock of the Company in a
registered offering and distribute the net cash proceeds pro rata to the
partners or (2) distribute as soon as practicable the remaining shares of
common stock of the Company pro rata to the partners as their interests may
appear. In the event the Trustee so distributes the Company's stock, the
Trustee shall include with such distribution a notice cautioning limited
partners that if a substantial number of limited partners immediately sell
substantial amounts of the stock received by them, this could cause a decline
in the market price of the stock. In deciding whether to sell the Company's
stock in a registered offering or to distribute the stock to the limited
partners, the Trustee shall select the option that, in the good faith
business judgment of the Trustee, produces the highest return for the limited
partners, and in doing so may consider all such factors as the Trustee in his
sole discretion deems appropriate, which may include some or all of the
following: (a) whether the return that could be received for the Company's
stock in a public offering would likely be higher than, lower than, or equal
to the market price of the Company's stock; (b) the impact that distribution
of the Company's stock to the limited partners would likely have on the
market price of the stock; (c) whether there would be any restrictions on the
limited partners' ability to freely trade stock that is distributed to them;
(d) the condition of the stock market; (e) potential tax consequences to the
Partnership and its partners; (f) the expenses likely to be associated with
each of the two options; and (g) the views expressed, if any, by limited
partners.
(f) As soon as practicable following the removal of the general
partner, the Trustee shall cause the Partnership to exercise its option to
acquire the interest of the removed general partner pursuant to and in
accordance with Section 7(g)(ii) of the Partnership Agreement, PROVIDED,
HOWEVER, that if the Trustee shall in his sole discretion determine that
under all of the circumstances considered by the Trustee it is not in the
best interests of the Partnership to exercise such option, then the Trustee
shall not cause the Partnership to exercise
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such option.
(g) In making any determination, including but not limited to any
determination that it is reasonably likely that a change of control
transaction will occur, that it is reasonably likely that the Trustee will be
able to enter into one or more agreements relating to a change of control
transaction, that there is a reasonable likelihood that a change of control
transaction can be consummated and whether it is in the best interests of the
Partnership to exercise its option to acquire a part of the general partner's
interest, the Trustee may rely in good faith on the opinion of any person,
including any investment banking firm or similar financial institution or
business broker retained by the Trustee pursuant to Section 4(a), any counsel
retained by the Trustee, or any other person selected by the Trustee as to
matters the Trustee reasonably believes are within such person's professional
or expert competence and who has been selected with reasonable care by or on
behalf of the Trustee.
5. EFFECTIVE DATE.
This Plan of Dissolution shall become effective upon the approval of
this Plan of Dissolution by limited partners holding a majority in interest
of the Partnership's outstanding limited partnership interests (the
"Effective Date"). The approval of a majority in interest of the limited
partners may be given by written consent or by vote at a meeting of limited
partners.
6. TIME FOR WINDING UP.
The limited partners and the Trustee recognize that, although the
Trustee will endeavor to identify, negotiate, enter into, and cause to be
consummated a change of control transaction as soon as reasonably
practicable, the time within which a change of control transaction can be
effected, or a determination made that such a transaction is not reasonably
likely to occur, cannot be predicted in light of possible changes in the
economy in general or in the industry in which the Company engages, delays
caused by litigation challenging the plan of dissolution or any change of
control transaction, and other circumstances not within the control of the
Trustee. Accordingly, the Trustee shall be obligated only to wind up the
business and affairs of the Partnership within such period of time as the
Trustee may in the exercise of the Trustee's business judgment determine is
in the best interests of the Partnership and its partners as a whole.
7. COMPENSATION AND REIMBURSEMENT OF TRUSTEE.
The Trustee shall be compensated out of the assets of the Partnership on
the following basis.
(a) The Trustee shall receive a flat fee of $75,000 payable in two
installments of $25,000 and $50,000, respectively. The first installment of
$25,000 shall be payable immediately upon the commencement of the Trustee's
service as Trustee. The second installment of $50,000 shall be payable upon
the completion of the winding up of the Partnership and the filing of a
certificate of cancellation of the Partnership's certificate of limited
partnership.
(b) In addition to the $75,000 fee provided in paragraph 7(a) above,
the Trustee shall be entitled to a contingent fee based on the amount by
which the net value received for the shares of the Company's stock owned by
the Partnership exceeds $25.00. If the value per share exceeds $25.00, the
Trustee will receive a contingent fee of one quarter of one per cent of the
net increase above $25.00 per share up to $30.00 per share, one third of one
percent of the net increase above $30.00 per share and one half of one
percent of the net increase in excess of $35.00 per share. By way of
illustration, if the Partnership were to receive net consideration valued at
$30.00 per share, the Trustee would earn a contingent fee of approximately
$71,240 (based on the 5,699,194 shares currently owned by the Partnership).
If the Partnership were to receive net consideration valued at $35.00 net
proceeds per share, the Trustee's contingent fee would be approximately
$166,227 (consisting of approximately $71,240 for the increment between $25
and $30 per share and
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approximately $94,987 for the increment between $30 and $35 per share). If
the Partnership were to receive net consideration valued at $40.00 per share,
the Trustee's contingent fee would be approximately $308,707 (consisting of
approximately $71,240 for the increment between $25 and $30 per share,
approximately $94,987 for the increment between $30 and $35 per share, and
approximately $142,480 for the increment between $35 and $40 per share). The
net value per share will be calculated by subtracting all sales-related
costs, including any fees payable to investment bankers or business brokers
in connection with identifying and structuring the sale, or underwriting
commissions paid to an underwriter in the event that the Trustee disposes of
the stock in a registered offering. In the event stock is distributed to
partners in kind, the Trustee's contingent fee would be calculated based on
the fair market value of the stock, determined by the average closing price
of the stock for the five trading days immediately preceding the date of
distribution of the stock. Attorneys' fees paid in connection with the
transaction and with other obligations of the Partnership, and any fees and
expenses paid to attorneys representing Charlene E. Sutherland (whether
pursuant to Section 9 below or awarded by a court in connection with
litigation brought by or on behalf of limited partners), would not be
subtracted.
(c) The Trustee shall be reimbursed out of the assets of the
Partnership for all expenses incurred by the Trustee in the performance of
the Trustee's duties or incurred on behalf of the Partnership in connection
with any change of control transaction or other liquidation of Partnership
assets. The Trustee shall look only to the assets of the Partnership for
payment of the Trustee's compensation and for reimbursement of expenses. No
partner shall have any personal liability for any compensation due to the
Trustee or for any expenses for which the Trustee is entitled to be
reimbursed.
8. INDEMNIFICATION OF TRUSTEE.
The Trustee shall not be liable to the Partnership or any general
partner, removed general partner or limited partner except for acts or
omissions constituting gross negligence or willful misconduct. The Trustee
shall be entitled to be indemnified out of the property of the Partnership to
the fullest extent that a director of a corporation may be indemnified under
Section 145 of the General Corporation Law of the State of Delaware. The
right to be indemnified shall include the right to payment of all litigation
expenses, including attorney's fees and expenses, in advance of the final
disposition of any action, suit or proceeding, provided that the Trustee
first executes and delivers to the Partnership an undertaking to repay such
advances in the event that it is ultimately determined that the Trustee is
not entitled to be indemnified as authorized by this Section 8.
9. REIMBURSEMENT OF PROXY SOLICITATION EXPENSES
If this Plan of Dissolution becomes effective, the Partnership shall
reimburse whatever party or parties incur the costs connected with soliciting
proxies to execute a written consent or to vote in favor of the Plan of
Dissolution for costs and expenses actually incurred by or on behalf of them,
including, without limitation, costs and expenses incurred by Charlene E.
Sutherland or attorneys acting on her behalf.
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EXHIBIT B
OPINION OF SPECIAL COUNSEL
, 1998
-------------------
Synthetic Industries, L.P.
Ladies and Gentlemen:
This opinion is being rendered to you in our capacity as Special Counsel
selected by certain Limited Partners of Synthetic Industries, L.P. (the
"Partnership") acting pursuant to paragraph 7(g) and 11(a) of the Amended
and Restated Limited Partnership Agreement dated as of November 11, 1986 of
Synthetic Industries, L.P. (the "Agreement"), as amended by the Amendment to
Amended and Restated Limited Partnership Agreement dated May, 1987 (the
"Amendment"), and with respect to the actions sought to be taken by the
Limited Partners which require the opinion of counsel prescribed by paragraph
12(d) of the Agreement.
We have reviewed unsigned copies of the Agreement and the Amendment which
were filed by the Partnership with the United States Securities and Exchange
Commission (the "SEC") on August 8, 1997, as Exhibit 3.1 to Amendment No. 1
to Form S-4 Registration Statement of the Partnership. For purposes of this
opinion, we have assumed, but have not independently verified, that the
Agreement and the Amendment have been validly executed by the partners of the
Partnership, that the Agreement and the Amendment remain in full force and
effect, and that they have not been further amended. We have also assumed
the authenticity of the Agreement and the Amendment and all other documents
presented to us for our review and the conformity of all copies to the
originals.
In rendering this opinion we have examined paragraphs 7(g), 11(a) and 12(d)
of the Agreement and the Amendment. We have also examined the Proxy
Statement to the Limited Partners of the Partnership by Charlene E.
Sutherland dated _______________, 1998 (the "Proxy Statement").
For purposes of rendering this opinion, we have assumed that the Partnership
is not doing business in any states other than the States of Delaware and
Georgia. We understand that public filings made by the Partnership support
this assumption.
In addition, we have examined certain certificates and other documents, and
we have made such other inquiries with respect to matters of law and fact as
we have deemed relevant as a basis for this opinion.
Our opinion is limited to the opinion that (i) the removal of the General
Partner in accordance with paragraph 7(g) of the Agreement, (ii) the
dissolution of the Partnership in accordance with paragraph 11(a)(iii) of the
Agreement, (iii) the appointment of a liquidating trustee pursuant to Section
17-803(a) of the Delaware Revised Uniform Limited Partnership Act (the "Act")
to carry out the winding up of the Partnership's business and affairs, and
(iv) the approval of a plan of dissolution for the Partnership pursuant to
the Act (all of which are described in the Proxy Statement, and are
collectively hereinafter referred to as the "Actions to be taken by Limited
Partners"), and the authorization of the foregoing four matters by the
written consent of the Limited Partners in accordance with Section 17-302(e)
of the Act (the "Consent"), as well as the
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<PAGE>
calling of a meeting of partners in accordance with paragraph 12(d) of the
Agreement for the purpose of voting on the Actions to be taken by Limited
Partners (hereinafter referred to as "the Calling of a Meeting"), should the
Calling of a Meeting take place, will not have certain results.
Based upon the foregoing, it is our opinion that:
The Actions to be taken by Limited Partners and the Consent, or if it occurs
the Calling of a Meeting, are consistent with the procedures set forth in the
Agreement and the Act and are legal, such may be effected without subjecting
any Limited Partner to liability as a general partner under the laws of the
States of Delaware and Georgia, and such may be effected without changing the
status of the Partnership for tax purposes. Of course, upon completion of
the dissolution the Partnership will no longer exist for tax purposes.
Our opinion is rendered as of the date hereof and is expressly limited as
stated. We assume no responsibility or obligation to withdraw or review our
opinion or notify anyone if a change occurs. This opinion is solely for your
benefit and for your use in connection with the transactions described in
this opinion and may not be reproduced or quoted or otherwise referred to in
any report or documents except to the extent necessary or appropriate to
ensure compliance with paragraphs 7(g), 11(a) and 12(d) of the Agreement.
We understand that our opinion will be filed with the SEC as an exhibit to
the Proxy Statement, and we consent to such filing and the inclusion of our
opinion as an exhibit to the Proxy Statement.
We are members of the State Bar of Georgia and, in addition, have examined
certain laws of the States of Delaware. We are not opining herein as to the
laws of any jurisdictions other than the laws of the United States and the
laws of the States of Georgia and Delaware. We render no opinion regarding
compliance with federal or state securities laws.
Very truly yours,
ROBERTS, ISAF & SUMMERS
A Professional Corporation
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<PAGE>
EXHIBIT C
[Form 10-K for Synthetic Industries, L.P. for the fiscal year ending on
September 30, 1997.]
[Filed on December 29, 1997.]
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<PAGE>
EXHIBIT D
[Form 10-Q For Synthetic Industries, L.P. for the quarter ending on June 30,
1998. ]
[Filed on August 14, 1998.]
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<PAGE>
As filed September 17, 1998
PROXY
CHARLENE E. SUTHERLAND
4512 Bird of Paradise Lane
La Mesa, CA 91941
e-mail: [email protected]
THIS PROXY IS BEING SOLICITED BY CHARLENE E. SUTHERLAND, A LIMITED PARTNER IN
SYNTHETIC INDUSTRIES, L.P., A DELAWARE LIMITED PARTNERSHIP (THE
"PARTNERSHIP"). THIS PROXY IS NOT BEING SOLICITED BY THE GENERAL PARTNER OF
THE PARTNERSHIP.
The undersigned hereby appoints Charlene E. Sutherland ("Sutherland") as
proxy, with full power of substitution and resubstitution, and hereby
authorizes Sutherland to represent and to express written consent by the
undersigned, as designated below, with respect to the Proposed Dissolution.
In the event that a meeting of limited partners of the Partnership is called
for the purpose of voting on the Proposed Dissolution, this Proxy also
appoints and authorizes Sutherland to represent and to vote, as designated
below, at any such meeting. Capitalized terms used but not defined in this
Proxy have the meanings given to them in the Proxy Statement to which this
Proxy relates.
YOU MAY AUTHORIZE SUTHERLAND TO EXPRESS YOUR WRITTEN CONSENT TO OR AGAINST,
OR TO VOTE IN FAVOR OF OR AGAINST, OR ABSTAIN FROM CONSENTING OR VOTING, WITH
RESPECT TO THE PROPOSED DISSOLUTION OR EACH OF THE PROPOSALS COMPRISING THE
PROPOSED DISSOLUTION. HOWEVER, THE ADOPTION OF EACH OF THE PROPOSALS
COMPRISING THE PROPOSED DISSOLUTION IS CONDITIONED ON THE ADOPTION OF ALL OF
THE PROPOSALS COMPRISING THE PROPOSED DISSOLUTION.
IN ORDER TO BE ADOPTED, ALL OF THE PROPOSALS COMPRISING THE PROPOSED
DISSOLUTION MUST RECEIVE THE APPROVAL OF LIMITED PARTNERS HOLDING IN EXCESS
OF 50% OF THE PARTNERSHIP'S OUTSTANDING UNITS OF LIMITED PARTNERSHIP
INTEREST.
<PAGE>
PLEASE MARK (a), (b), OR (c) UNDER SECTION (1) BELOW TO VOTE ON THE PROPOSED
DISSOLUTION AS A WHOLE. IF YOU WISH TO VOTE SEPARATELY ON THE SIX INDIVIDUAL
PROPOSALS COMPRISING THE PROPOSED DISSOLUTION, YOU MAY DO SO UNDER SECTION
(2) BELOW.
1. PROPOSAL TO APPROVE THE PROPOSED DISSOLUTION
(By marking (a) or (b) below, you can vote to adopt or reject
collectively the six individual proposals comprising the Proposed
Dissolution.)
a. / / FOR approval of all of the Proposed Dissolution
b. / / AGAINST approval of all of the Proposed Dissolution
c. / / ABSTAIN from voting on the Proposed Dissolution or any part
of the Proposed Dissolution
2. INDIVIDUAL PROPOSALS COMPRISING THE PROPOSED DISSOLUTION
PLEASE LEAVE THIS SECTION BLANK IF YOU MARK (a), (b), OR (c) IN SECTION (1)
ABOVE. If you do not mark (a), (b), or (c) in section (1) above, you can vote
separately on each of the six proposals comprising the Proposed Dissolution by
marking the appropriate boxes below. PLEASE NOTE THAT NONE OF THE FOLLOWING
PROPOSALS CAN BE ADOPTED ON ITS OWN. THE ADOPTION OF ANY OF THE PROPOSALS SET
FORTH IN THIS SECTION (2) IS CONDITIONED ON THE ADOPTION OF ALL OF THE OTHER
PROPOSALS SET FORTH IN THIS SECTION (2).
i. Removal of SI Management, L.P. as the sole general partner of the
Partnership.
/ / FOR
/ / AGAINST
/ / ABSTAIN
ii. Dissolution of the Partnership.
/ / FOR
/ / AGAINST
/ / ABSTAIN
iii. Election of Judge Charles B. Renfrew (retired) as Liquidating Trustee.
/ / FOR
/ / AGAINST
/ / ABSTAIN
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<PAGE>
iv. Approval of the Plan of Dissolution (Exhibit A to the Proxy
Statement).
/ / FOR
/ / AGAINST
/ / ABSTAIN
v. Selection of Roberts, Isaf & Summers as Special Counsel for purposes
of the legal opinion required by Section 12(d) of the Partnership Agreement.
/ / FOR
/ / AGAINST
/ / ABSTAIN
vi. Approval of the opinion of Roberts, Isaf & Summers (Exhibit B to the
Proxy Statement).
/ / FOR
/ / AGAINST
/ / ABSTAIN
This Proxy, when properly executed and duly returned, will be used to execute
a written consent of limited partners or, if applicable, voted, in the manner
directed above by the undersigned limited partner.
IF NO DIRECTION IS MADE ON THIS PROXY, THIS PROXY WILL AUTHORIZE EXECUTION OF
A WRITTEN CONSENT FOR ALL OF THE PROPOSED DISSOLUTION OR, IF VOTED AT A
MEETING, WILL BE VOTED FOR ALL OF THE PROPOSED DISSOLUTION.
DATED:
--------------------- --------------------------------------
Signature
Name:
Title:
-------------------------------------
Signature (if held jointly)
Name:
Title:
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<PAGE>
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON THE LABEL AFFIXED TO THIS PROXY.
WHEN UNITS ARE HELD BY JOINT TENANTS, PLEASE MAKE SURE THAT THE PROXY IS
SIGNED BY ALL THE JOINT TENANTS. WHEN SIGNING AS AN ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE OF SUCH. IF A
CORPORATION, PLEASE SIGN BY NAME BY AUTHORIZED OFFICER. IF A PARTNERSHIP,
PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
Any limited partner desiring to return this proxy should deliver it to the
Solicitation Agent at the following address:
GEORGESON & CO., INC.
WALL STREET PLAZA
NEW YORK, NY 10005
If you have any questions, please call the Solicitation Agent at (212)
440-9800.
INSTRUCTIONS
1. SIGNATURES OF REGISTERED HOLDERS. In order to be valid, each proxy
must be signed by the registered Limited Partner or Limited Partners. The
signature must correspond exactly with the name(s) as written on the label
affixed to the proxy representing the Units without alteration. If Units are
owned of record by two or more joint owners, all such owners must sign a
single proxy in respect of such Units. If Units are registered in different
names, it will be necessary to complete, sign and submit as many separate
proxies as there are different registrations.
If a proxy is to be signed by a trustee, executor, administrator,
guardian, attorney-in-fact, agent, officer of a corporation or other person
acting in a fiduciary capacity, such person should so indicate when signing.
2. DELIVERY. Delivery of a proxy to an address other than the address
set forth on the proxy does not constitute a valid delivery. If a
partnership meeting is called to vote on the Proposed Dissolution, only
proxies received at such address on or prior to the meeting date will be
valid. The method of delivery of a proxy is at the option and risk of the
tendering limited partner. If delivery is by mail, registered mail with
return receipt requested is recommended. In all cases, sufficient time
should be allowed to insure timely delivery.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for
assistance or additional copies of the Proxy Statement or the proxy may be
directed to Georgeson & Co., Inc., Wall Street Plaza, New York, NY 10005,
telephone (212) 440-9800.
4
