S-4/A: Registration of securities issued in business combination transactions
Published on July 24, 1997
As filed with the Securities and Exchange Commission on July 24, 1997
Registration No. 333-19077
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------
Amendment No. 4
to
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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SunSource Inc.
(Exact name of registrant as specified in its charter)
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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DONALD T. MARSHALL
President and Chief Executive Officer
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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SunSource Capital Trust
(Exact name of registrant as specified in its charter)
501 Silverside Road
Suite 17
Wilmington, Delaware 19809
(302) 798-6665
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------
DONALD T. MARSHALL
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------
Copies to:
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effectiveness of this Registration Statement and
the satisfaction or waiver of all other conditions to the merger of SunSource
L.P. (the "Partnership") and a wholly owned subsidiary of the Partnership with
and into the Registrant pursuant to the Agreement and Plan of Conversion dated
July __, 1997 among the Registrant, the Partnership, LPSub Inc., a Delaware
corporation, Lehman/SDI, Inc., a Delaware corporation and the limited partners
of SDI Partners I, L.P., described in the enclosed Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended, other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box [ ].
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to such Section
8(a), may determine.
Philadelphia, Pennsylvania
August __, 1997
NOTICEOF SPECIAL MEETING OF LIMITED
PARTNERS To Be Held On
September 18, 1997
To the Limited Partners of SunSource L.P.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the limited partners
of SunSource L.P., a Delaware limited partnership (the "Partnership"), will be
held at 3000 One Logan Square, 18th and Cherry Streets, Philadelphia,
Pennsylvania on Thursday, September 18, 1997 at 10:00 a.m., local time.
At the Special Meeting, the limited partners will vote upon a proposal
(the "Conversion Proposal") to convert the Partnership to corporate form (the
"Conversion") through a merger with and into SunSource Inc., a newly formed
Delaware corporation (the "Corporation"). If the limited partners approve the
Conversion Proposal:
o Each Class A limited partnership interest ("A Interest") will be
exchanged for $1.30 in cash and 0.38 of an 11.6% Trust Preferred
Security of SunSource Capital Trust, a business trust holding 11.6%
Junior Subordinated Debentures of the Corporation. The Trust Preferred
Securities will have a liquidation preference of $25, will be entitled
to cumulative distributions of $2.90 per year payable monthly and will
mature in 30 years, subject to optional redemption after five years or
earlier upon the occurrence of a Tax Event.
o Each Class B limited partnership interest ("B Interest") will
be exchanged for 0.25 share of Common Stock of the Corporation (the
"Common Stock").
The Conversion will be accomplished by the following:
o The contribution by the Partnership of its limited partnership interest
in SDI Operating Partners, L.P. (the "Operating Partnership") and by
Lehman/SDI, Inc. ("Lehman/SDI") of its general partnership interest in
SDI Partners I, L.P., the general partner of the Partnership and the
Operating Partnership (the "General Partner"), to a subsidiary of the
Partnership ("LPSub") in exchange for common stock of LPSub.
o The contribution by certain current and former members of management of
their limited partnership interests in the General Partner to the
Corporation, in exchange for 462,000 shares of Common Stock, of which
75,000 shares will be held in escrow to be distributed after two years
if all distributions then due on the Trust Preferred Securities have
then been paid, and the contribution by the Corporation of those
limited partnership interests to a wholly owned subsidiary of the
Corporation.
o A merger (the "Merger") of the Partnership and LPSub with and into the
Corporation, in which (i) the A Interests will be converted into
4,217,837 Trust Preferred Securities and cash; (ii) the B Interests
will be converted into 5,418,936 shares of Common Stock and (iii) the
common stock of LPSub held by Lehman/SDI will be converted into 538,000
shares of Common Stock.
As a result of the Conversion, the Partnership will cease to exist and
subsidiaries of the Corporation will own all of the partnership interests in the
Operating Partnership and the General Partner. Unaffiliated holders of A
Interests will hold 4,187,543 Trust Preferred Securities and affiliated holders
of A Interests will hold 30,294 Trust Preferred Securities (in each case, less
the number of fractional shares for which holders will receive cash in the
Conversion). Unaffiliated holders of B Interests will hold 2,954,601 (less the
number of fractional shares for which holders will receive cash in the
Conversion) shares of Common Stock (46.0% of the total outstanding). The
partners of the General Partner and other affiliates of the General Partner who
presently hold B Interests will hold 3,464,335 shares of Common Stock (54.0% of
the total outstanding).
The Conversion Proposal and related matters are more fully described in
the attached Proxy Statement/Prospectus, which (together with the exhibits
thereto and the documents incorporated by reference therein) forms a part of
this Notice and is incorporated herein by reference. Frequently used capitalized
terms are defined in Exhibit A thereto and a chart illustrating the relative
relationships of the entities before and after the Conversion is set forth
before the Summary to the Proxy Statement/Prospectus.
The Conversion will require (i) the approval of limited partners
holding a majority of the outstanding A Interests and B Interests, each voting
separately as a class, and (ii) the approval of unaffiliated limited partners
(limited partners other than affiliates of the General Partner) holding a
majority of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class. Only limited partners of the
Partnership of record at the close of business on August 4, 1997 are entitled to
notice of and to vote at the Special Meeting.
You are cordially invited to attend the Special Meeting. If you cannot
attend, please sign and date the accompanying form of proxy and return it
promptly in the enclosed envelope. If you attend the meeting, you may vote in
person regardless of whether you have given your proxy. Any proxy may be revoked
at any time before it is exercised, as indicated herein.
By Order of the General Partner
Joseph M. Corvino,
Secretary SDI Partners I,
L.P.
Your vote is important. Accordingly, you are asked to complete, sign and return
the accompanying proxy card in the envelope provided, which requires no postage
if mailed in the United States.
Proxy Statement/Prospectus
SUNSOURCE INC.
6,418,936 Shares of Common Stock
SUNSOURCE CAPITAL TRUST
4,217,837 11.6% Trust Preferred Securities
(Liquidation Amount $25 per Trust Preferred Security)
Fully and unconditionally guaranteed by
SUNSOURCE INC.
This Proxy Statement (which is also a Prospectus) relates to the
issuance of (i) Common Stock, par value $0.01 per share ("Common Stock"), of
SunSource Inc., a Delaware corporation which has been newly formed by SunSource
L.P., a Delaware limited partnership, and (ii) 11.6% Trust Preferred Securities
(the "Trust Preferred Securities") of SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"), representing preferred undivided
beneficial interests in the assets of the Trust, which will consist of 11.6%
Junior Subordinated Debentures ("Junior Subordinated Debentures") of SunSource
Inc. In this Proxy Statement/Prospectus, SunSource Inc. is referred to as the
"Corporation" and SunSource L.P. as the "Partnership." Other frequently used
capitalized terms are defined in Exhibit A hereto (located inside the back
cover).
This Proxy Statement is being sent by the Partnership to the holders of
Class A limited partnership interests ("A Interests") and Class B limited
partnership interests ("B Interests," and together with A Interests,
"Interests") in connection with the solicitation by SDI Partners I, L.P., a
Delaware limited partnership which is the general partner of the Partnership
(the "General Partner"), of proxies to be voted at a Special Meeting of the
Partnership's limited partners in Philadelphia on September 18, 1997. At the
Special Meeting, the limited partners will vote on a proposal (the "Conversion
Proposal") that, if approved, will result in the conversion of the Partnership
to corporate form (the "Conversion").
The Conversion will be accomplished through a merger (the "Merger") of
the Partnership and a subsidiary of the Partnership ("LPSub") with and into the
Corporation. Upon consummation of the Merger, each A Interest will be exchanged
for 0.38 of a Trust Preferred Security and $1.30 in cash. The Trust Preferred
Securities will have a liquidation preference of $25, will be entitled to
cumulative distributions of $2.90 per year payable monthly and will mature in 30
years, subject to optional redemption after five years or earlier upon the
occurrence of a Tax Event (as defined herein). Each B Interest will be exchanged
for 0.25 share of Common Stock of the Corporation. The general partnership
interest in the General Partner held by Lehman/SDI, Inc. ("Lehman/SDI") will be
exchanged for common stock of LPSub, which will be converted into 538,000 shares
of Common Stock in the Merger. The limited partnership interests in the General
Partner held by current and former members of management will be exchanged with
the Corporation for 462,000 shares of Common Stock, of which 75,000 shares will
be held in escrow to be distributed after two years if all distributions on the
Trust Preferred Securities have then been paid. As a result of the Conversion,
(i) the Partnership will cease to exist and subsidiaries of the Corporation will
own all of the partnership interests in the Operating Partnership and the
General Partner; (ii) the unaffiliated holders of A Interests will hold
4,187,543 and affiliated holders of A Interests will hold 30,294 Trust Preferred
Securities (in each case, less the number of fractional shares for which holders
will receive cash in the Conversion); (iii) unaffiliated holders of B Interests
will hold 2,954,601 (less the number of fractional shares for which holders will
receive cash in the Conversion) shares of Common Stock (46.0% of the total
outstanding); and (iv) the partners of the General Partner and affiliates of the
General Partner who presently hold B Interests will hold 3,464,335 shares of
Common Stock (54.0% of the total outstanding).
(cover page continued)
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NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION
OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Proxy Statement/Prospectus is August__, 1997.
Considerations for Holders of A Interests
(references are to page numbers
in this Proxy Statement/Prospectus)
o You will receive in exchange for each of your A Interests:
- $1.30 in cash and
- 0.38 of a $25 Trust Preferred Security
o 0.38 of a $25 Trust Preferred Security will entitle you to:
- $1.10 distribution each year, payable monthly, the same amount and timing
as the Priority Return on your A Interests
- a liquidation preference of $9.50 compared to a liquidation preference for
your A Interest of $10.
o The Trust Preferred Security will be redeemable at $9.50 after five years (or
earlier at $9.595 if certain conditions are met and there is a change in the
applicable tax law affecting the deductibility of interest on the Junior
Subordinated Debentures) whereas the A Interest may only be cashed out in a
liquidation. See page 19.
o Distributions on the Trust Preferred Securities may be deferred for up to
five years. The unpaid distributions will accrue interest at 11.6%, but you
will be required to pay tax on the distributions as they are due. See page
22.
o The debentures underlying the Trust Preferred Securities are subordinate to
the senior indebtedness of the Corporation and its subsidiaries, which is
substantially the case now with the A Interests. See page 23.
o Your receipt of cash and the Trust Preferred Security will be a taxable
event. This effect is described on page 24.
o You presently have the right to vote on mergers, dissolution, the sale of
substantially all of the assets of the Partnership and the removal of the
General Partner. The Trust Preferred Securities will not have those voting
rights. See page 26.
(continued on next page)
Considerations for Holders of B Interests
(references are to page numbers
in this Proxy Statement/Prospectus)
o You will receive in exchange for each of your B Interests 0.25 share of
Common Stock (effectively a one-for-four reverse split).
o The partners of the General Partner (which has a 1% interest in the
Partnership, a 1% interest in the Operating Partnership and the right to
receive an annual management fee of $3,300,000 (the "Management Fee")) will
receive 1,000,000 shares of Common Stock. This will increase the interests
currently held by the partners and their affiliates from 46% of the B
Interests to 54% of the Common Stock.
o After the Conversion you will not be entitled to receive the B Tax
Distribution. However, you will not have any taxable income allocated to you
as has been done in the past.
o We will consider the possibility of paying dividends on the Common Stock
after the Effective Time of the Conversion. The payment of dividends will be
at the discretion of the Corporation's Board of Directors and will depend,
among other things, on earnings, financial condition, capital requirements,
availability of acquisition candidates, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other factors that
the Corporation's Board of Directors deems relevant.
o You should be aware that:
- - there are conflicts of interest between the General Partner and the A
Interests and you. You were not independently represented in the
negotiations. See page 19.
- - you have no right to dissent and demand appraisal in connection with the
Conversion. See page 20.
- - there is no assurance as to the price at which the Common Stock will trade.
The price could be adversely affected if a large number of stockholders sell
their shares immediately after the Conversion. In this regard the Corporation
has agreed to file registration statements for the sale by Lehman Brothers
and management of their shares. See page 21.
(continued on next page)
ii
Considerations for Holders of A Interests
(references are to page numbers
in this Proxy Statement/Prospectus)
o You should be aware that:
- - there are conflicts of interest between the General Partner and the B
Interests and you. You were not independently represented in the
negotiations. See page 21.
- - you have no right to dissent and demand appraisal in connection with the
Conversion. See page 26.
- - there is no assurance as to the price at which the Trust Preferred Securities
will trade although, in view of the cash you will receive, it is likely that
the price will be below the price of the A Interests before the Conversion.
See page 26.
o Other important considerations are set forth on pages 5 to 7 and 19 to 27.
The reasons for the Conversion are set forth on pages 7 and 33.
Before you make your decision on how to vote, we urge you to read the Proxy
Statement/Prospectus carefully.
Considerations for Holders of B Interests
(references are to page numbers
in this Proxy Statement/Prospectus)
- - the fiduciary duties of the directors of the Corporation may be less than
those owed by the General Partner. See page 23.
- - the Corporation will have a stockholders' deficit which could affect the
ability to pay dividends if that action is ultimately decided upon. See
page 19.
- - there will be certain provisions in place which may reduce the likelihood of
a takeover that, if successful, would permit stockholders to receive a
premium over market. See page 22.
o Other important considerations are set forth on pages 5 to 7 and 19 to 24.
The reasons for the conversion are set forth on pages 7 and 33.
Before you make your decision on how to vote, we urge you to read the
Proxy Statement/Prospectus carefully.
The Conversion will require (i) the approval of limited partners
holding a majority of the outstanding A Interests and B Interests, each voting
separately as a class, and (ii) the approval of unaffiliated limited partners
(limited partners other than affiliates of the General Partner) holding a
majority of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class. Such majority approvals will bind
all limited partners regardless of whether they vote against the Conversion. The
affiliates of the General Partner, who own approximately 46% of the B Interests,
have advised the Partnership that they will vote in favor of the Conversion
Proposal. Failure to forward a proxy or to vote in person at the Special Meeting
will have the same effect as if a limited partner had voted against the
Conversion Proposal.
This Proxy Statement/Prospectus and the related form of proxy are first
being sent to limited partners on or about August ___, 1997.
Application has been made to list the Trust Preferred Securities and
Common Stock on the New York Stock Exchange.
No person is authorized to give any information or to make any representation
not contained in this Proxy Statement/Prospectus, and any information or
representation not contained herein must not be relied upon as having been
authorized by the Partnership, the General Partner, the Corporation or the
Trust. This Proxy Statement/Prospectus does not constitute an offer of any
securities other than the registered securities to which it relates or an offer
to any person in any jurisdiction where such offer would be unlawful. Neither
the delivery of this Proxy Statement/Prospectus nor any sales made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Partnership or the Corporation since the date
hereof.
Until 25 days after the date of this Proxy Statement/Prospectus, all dealers
effecting transactions in the Trust Preferred Securities and the Common Stock,
whether or not participating in this distribution, may be required to deliver a
Proxy Statement/Prospectus.
iii
TABLE OF CONTENTS
SUMMARY ................................................................2
The Partnership, the Corporation and the Trust.......................2
Overview of the Conversion...........................................3
Existing Economic Interests of the Partners..........................4
Risk Factors .......................................................5
Reasons to Convert to Corporate Form.................................8
Alternatives to the Conversion.......................................9
Structure of the Conversion.........................................10
Control of SunSource................................................10
Special Committee...................................................10
Recommendation of General Partner and
Fairness Determination..........................................11
Summary Description of Trust Preferred
Securities......................................................11
Comparative Rights of the Interests and the
Securities to be Issued.........................................13
Summary of Certain Federal Income
Tax Consequences................................................13
Conditions to the Conversion........................................13
No Appraisal Rights.................................................14
Consequences if Conversion Is Not Approved..........................14
Limited Partner Litigation..........................................14
Voting at the Special Meeting.......................................14
List of Partners....................................................15
Delivery of Depositary Receipts.....................................15
Reverse Stock Split.................................................15
Summary Financial Information.......................................16
RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER IMPORTANT CONSIDERATIONS..................................19
RISKS TO HOLDERS OF A INTERESTS.........................................19
Conflicts of Interest...............................................19
No Independent Representation.......................................19
Optional Redemption.................................................19
Reduction in Liquidation Preference.................................19
Special Event Redemption or Distribution;
Shortening of Stated Maturity...................................19
Loss of Contractual Right to Distributions..........................22
Option to Extend Interest Payment Period;
Tax Impact of Extension.............................................22
Ranking of Subordinated Obligations
Under Preferred Securities Guarantee
and Junior Subordinated Debentures;
Dependence on the Corporation...................................24
Adverse Tax Implications............................................25
Enforcement of Certain Rights by Holders
of Trust Preferred Securities...................................25
Limited Voting Rights...............................................26
No Dissenters', Appraisal or Similar Rights
for Nonconsenting Limited Partners..............................26
Uncertainty Regarding Market Price for
Trust Preferred Securities......................................27
Elimination of General Partner Liability for
Corporation Obligations.........................................27
Payments Under Deferred Compensation Plans..........................28
Transaction Costs...................................................28
Change in Ownership Rights..........................................28
Other Considerations................................................28
RISKS TO HOLDERS OF B INTERESTS
Conflicts of Interest...............................................19
No Independent Representation.......................................19
Loss of Contractual Right to Distributions..........................19
Certain Delaware Law Considerations.................................19
No Dissenters', Appraisal or Similar Rights
for Nonconsenting Limited Partners..............................20
Adverse Tax Implications............................................20
Uncertainty Regarding Market Price of
Common Stock; Possible Reduction Due to
Sales by Lehman Brothers or Management..........................21
Future Dilution of Common Stock.....................................21
Addition of Provisions that May Discourage
Changes of Control..............................................22
Possible Reduction in Fiduciary Standards...........................23
Elimination of General Partner Liability for
Corporation Obligations.........................................23
Payments Under Deferred Compensation Plans..........................23
Transaction Costs...................................................23
Change in Ownership Rights..........................................23
Other Considerations................................................24
VOTING AND PROXY INFORMATION............................................28
Voting Procedures...................................................28
Revocation of Proxies...............................................28
Vote Required; Quorum...............................................29
Solicitation of Proxies.............................................29
Independent Auditors................................................29
No Appraisal Rights.................................................29
Other Matters.......................................................29
SPECIAL FACTORS.........................................................29
Background of the Conversion........................................29
Existing Partnership Structure......................................31
Existing Economic Interests of the Partners.........................31
Alternatives to the Conversion......................................32
Reasons to Convert to Corporate Form................................37
Terms of the Conversion.............................................38
Consequences if Conversion is Not Approved..........................39
Allocation of Interests in the Conversion...........................41
Distributions and Compensation......................................43
Limited Partner Litigation..........................................44
Determinations of the Special Committee.............................45
Opinion of Smith Barney.............................................58
Recommendation of the General Partner and
Fairness Determination..........................................63
iv
Source and Amount of Funds..........................................64
Accounting Treatment................................................65
Fees and Expenses...................................................65
Exchange of Depositary Receipts.....................................65
Treatment of Fractional Shares......................................66
COMPARISON OF INTERESTS AND SECURITIES
TO BE ISSUED........................................................66
Fiduciary Duties....................................................74
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES........................................................74
Partnership Status and Taxation of the
Partnership....................................................75
General Tax Treatment of the Conversion.............................75
Certain Tax Consequences of the Conversion
to Holders of B Interests.......................................76
Certain Tax Consequences of the Conversion
to Holders of A Interests.......................................78
Other Tax Issues Affecting Limited Partners.........................80
Tax Consequences to the Corporation and
the Partnership.................................................81
Unrelated Business Taxable Income...................................81
Other Tax Aspects...................................................81
MARKET PRICES AND DISTRIBUTIONS.........................................82
CAPITALIZATION..........................................................84
SELECTED HISTORICAL
FINANCIAL INFORMATION .............................................85
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................87
BUSINESS...............................................................100
General............................................................100
Acquisition Strategy...............................................101
Products and Services..............................................102
Marketing..........................................................103
Competition........................................................103
Insurance Arrangements.............................................103
Investment and Borrowing Policies..................................104
Employees..........................................................104
Backlog............................................................104
Federal Income Tax Considerations..................................104
Properties.........................................................105
Legal Proceedings..................................................105
MANAGEMENT.............................................................107
Directors and Executive Officers...................................107
Directors and Executive Officers
after the Conversion...........................................108
Compensation.......................................................108
Deferred Compensation Plans........................................109
Change in Control Arrangements.....................................110
Management Fee.....................................................110
Certain Business Relations.........................................110
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS
AND MANAGEMENT.....................................................111
Security Ownership of Certain Beneficial
Owners.........................................................111
Security Ownership of Certain Beneficial
Owners and Management..........................................111
SUNSOURCE CAPITAL TRUST................................................112
DESCRIPTION OF TRUST PREFERRED
SECURITIES.........................................................114
General............................................................115
Distributions......................................................115
Mandatory Redemption...............................................116
Special Event Redemption or Distribution;
Shortening of Stated Maturity..................................116
Redemption Procedures..............................................118
Subordination of Trust Common Securities...........................119
Liquidation Distribution Upon Dissolution..........................119
No Merger, Consolidation or Amalgamation of
the Trust......................................................119
Declaration Events of Default......................................120
Voting Rights......................................................12-
Modification and Amendment of the
Declaration....................................................122
Book-Entry; Delivery and Form......................................123
Expenses and Taxes.................................................124
Registrar, Transfer Agent and Paying Agent.........................124
Information Concerning the Property Trustee........................124
Governing Law......................................................125
Miscellaneous......................................................125
DESCRIPTION OF PREFERRED
SECURITIES GUARANTEE...........................................125
General............................................................125
Certain Covenants of the Corporation...............................126
Amendments and Assignment..........................................126
Termination of the Preferred Securities
Guarantee......................................................126
Status of the Preferred Securities Guarantee.......................126
Governing Law......................................................127
DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES.........................................................127
General............................................................127
Optional Redemption................................................127
Proposed Tax Legislation...........................................128
Interest...........................................................128
Option to Extend Interest Payment Period...........................129
Compounded Interest................................................129
Certain Covenants of the Corporation Applicable
to the Junior Subordinated Debentures..........................129
v
Subordination......................................................130
Indenture Events of Default........................................130
Modification of the Indenture......................................131
Book-Entry and Settlement..........................................131
Consolidation, Merger and Sale.....................................132
Defeasance and Discharge...........................................132
Governing Law......................................................132
Information Concerning the Indenture Trustee.......................132
Miscellaneous......................................................132
RELATIONSHIP AMONG THE TRUST
PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND
THE PREFERRED SECURITIES
GUARANTEE..........................................................133
DESCRIPTION OF CAPITAL STOCK...........................................134
Preferred Stock....................................................134
Common Stock.......................................................134
Stockholders Agreement.............................................134
Anti-takeover Provisions...........................................135
Limitation of Liability............................................136
Transfer Agent and Registrar.......................................136
RESALE OF SECURITIES...................................................136
Securities Act Restrictions........................................136
Resales by Lehman Brothers and Management..........................136
LEGAL MATTERS..........................................................136
EXPERTS................................................................137
AVAILABLE INFORMATION..................................................137
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE.......................................................137
INDEX TO FINANCIAL STATEMENTS..........................................F-1
EXHIBIT A GLOSSARY OF DEFINED TERMS A-1
EXHIBIT B CONVERSION AGREEMENT B-1
EXHIBIT C SMITH BARNEY FAIRNESS
OPINION C-1
EXHIBIT D MANAGEMENT PROJECTIONS D-1
ORGANIZATION CHART
2
SUMMARY
The following is not intended to be complete and is qualified in all
respects by the more detailed information set forth elsewhere in this Proxy
Statement/Prospectus and the documents incorporated by reference herein. Unless
otherwise indicated, all information in this Proxy Statement/Prospectus assumes
a 1-for-4 reverse stock split that will be effected by the exchange ratio of
0.25 share of Common Stock for each B Interest in the Conversion. A glossary of
frequently used capitalized and other specialized terms is attached as Exhibit A
and a chart describing the SunSource structure before and after the Conversion
is set forth immediately preceding this Summary. Limited partners are urged to
review carefully the entire Proxy Statement/Prospectus and to request such
documents incorporated by reference herein as they desire. This Proxy
Statement/Prospectus contains forward-looking statements that address, among
other things, source and amount of funds, amount of sales, projected capital
expenditures, projected revenue and profit growth, and acquisition strategy.
These statements may be found under "SPECIAL FACTORS," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "BUSINESS,"
and Exhibit D as well as in the Proxy Statement/Prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation, those
discussed in "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS" and matters set forth in the Proxy Statement/Prospectus
generally.
The Partnership, the Corporation and the Trust
SunSource L.P.(the "Partnership") was organized as a Delaware limited
partnership in 1986 under the name Sun Distributors L.P. to conduct the business
formerly conducted by Sun Distributors, Inc. when it was a subsidiary of Sun
Company, Inc. The Partnership assumed its present name in April 1996. The
general partner of the Partnership is SDI Partners I, L.P. (the "General
Partner"), a Delaware limited partnership, whose general partner is Lehman/SDI,
Inc. ("Lehman/SDI"), a Delaware corporation, and whose limited partners are
current or former members of management of the Partnership and the Operating
Partnership. Lehman/SDI is an indirect wholly owned subsidiary of Lehman
Brothers Holdings Inc.
The business of the Partnership is conducted through SDI Operating
Partners, L.P. (the "Operating Partnership"), a Delaware limited partnership.
The General Partner is the general partner of the Operating Partnership and the
limited partner of the Operating Partnership is the Partnership. The Operating
Partnership is one of the largest wholesale distributors of industrial products
and services in the United States, organized in three segments: industrial
services, hardware merchandising and glass merchandising. See "BUSINESS." The
principal executive offices of the Partnership and the Operating Partnership are
located at 2600 One Logan Square, Philadelphia, PA 19103 and their telephone
number is (215) 665-3650.
SunSource Inc. (the "Corporation") is a Delaware corporation which has
been newly formed to accomplish the conversion of the Partnership to corporate
form (the "Conversion"). The outstanding shares of the Corporation are presently
owned by the Partnership. The Corporation's address and telephone number are
the same as the Partnership.
In this Proxy Statement/Prospectus, the term SunSource means the
Partnership prior to the Conversion and/or the Corporation after the Conversion,
in each case including subsidiaries.
SunSource Capital Trust (the "Trust") is a newly formed Delaware statutory
business trust which has been organized to issue the Trust Preferred Securities
(the "Trust Preferred Securities"), representing preferred undivided beneficial
interests in the assets of the Trust, which will be exchanged for A Interests in
the Merger. All of the Trust Common Securities, representing common undivided
beneficial interests in the assets of the Trust, are owned by the Corporation.
The Trust's address is 501 Silverside Road, Suite 17, Wilmington, DE 19809 and
its telephone number is (302) 798-6665.
Overview of the Conversion
In the Conversion:
o The Partnership and a subsidiary of the Partnership will merge with and
into the Corporation (the "Merger").
o In the Merger each A Interest will be exchanged for 0.38 (with a
liquidation preference of $9.50) of a $25 Trust Preferred Security and
$1.30 in cash. Each B Interest will be exchanged for 0.25 share of Common
Stock. Through the Merger and other contributions, the interests of the
general and limited partners of the General Partner will be exchanged for
1,000,000 shares of
3
Common Stock, of which 75,000 shares will be held in escrow to be
distributed after two years if all distributions then due on the Trust
Preferred Securities have then been paid.
o As a result of the Conversion, subsidiaries of the Corporation (SunSub A
and SunSub B) will own all of the partnership interests in the Operating
Partnership and the General Partner.
o At the time of the Conversion, the existing bank credit agreement will be
canceled and the Partnership's long-term debt will be repaid and replaced
with new credit facilities at interest rates expected to be lower than
financing rates currently incurred by the Partnership. The existing credit
agreements (existing senior notes and bank credit revolver) provide
available financing of $113.9 million, of which $84.9 million is
outstanding as of June 30, 1997. The new credit facilities provide for $150
million of available financing, of which approximately $97.0 million is
expected to be outstanding upon consummation of the Conversion. Prepayment
of the Partnership's long-term debt will result in the payment of a
make-whole penalty of approximately $4 million.
The chart on page 1 describes the ownership structure of SunSource before
and after the Conversion.
As a result of the Conversion, the Partnership will cease to exist, the
holders of A Interests will own 100% of the outstanding Trust Preferred
Securities, the holders of B Interests who are not affiliated with the General
Partner will own 46.0% of the Common Stock and affiliates of the General Partner
will own 54.0% of the Common Stock. The directors and certain officers of
Lehman/SDI will become directors and officers of the Corporation. The
Corporation will own, through its wholly owned subsidiaries, 100% of the equity
in the business and operations owned by the Operating Partnership which will
remain in partnership form after the Conversion. The employees of the Operating
Partnership will continue as employees after the Conversion.
The following table illustrates the proposed exchange of partnership
interests for Common Stock:
The General Partner may decide not to pursue the Conversion at any time
before it becomes effective, whether before or after approval by the
Partnership's limited partners.
Existing Economic Interests of the Partners
All cash receipts of the Partnership, less cash used to pay or establish a
reserve for expenses ("Cash Available for Distribution"), are distributed 99% to
the holders of A Interests and 1% to the General Partner until holders of A
Interests have received annually a $1.10 simple, cumulative return (the
"Priority Return"), which has historically been paid on a monthly basis to
holders of record on the first day of the month.
4
After distribution of the Priority Return, Cash Available for Distribution
is distributed 1% to the General Partner and 99% to the holders of B Interests
until such holders have received an annual distribution (the "B Tax
Distribution") equal to the product of (i) 125% of the then applicable maximum
Federal income tax rate for individuals and (ii) the taxable income allocable to
the B Interests. The B Tax Distribution has historically been partially
distributed on a monthly basis to holders of record on the first day of the
month with the balance distributed by March 31 of the succeeding year. See Note
3 of Notes to Consolidated Financial Statements. The Partnership suspended the
payment of monthly advance B Tax Distributions effective January 1, 1997 through
March 31, 1997, pending the Conversion. Due to the delay in completion of the
proposed Conversion, the Partnership resumed payment of monthly advance B Tax
Distributions in April 1997 in the amount of $.03 per B Interest. The
Partnership intends to pay this monthly rate to holders of B Interests until the
effective date of the Conversion, since it expects to allocate sufficient
taxable income on the B Interests in the shortened tax year from January 1, 1997
through the effective date to require the B Tax Distribution payment. The
balance of the required 1997 B Tax Distribution, if any, will be paid on or
before March 31, 1998.
Upon liquidation of the Partnership, after provision for all liabilities,
the holders of A Interests would receive a preferential distribution equal to
$10 per A Interest plus any unpaid Priority Return and the balance would be
distributed to the General Partner and the holders of B Interests in accordance
with their respective capital accounts.
The Operating Partnership distributes its Cash Available for Distribution
99% to the Partnership and 1% to the General Partner until the amount
distributed to the Partnership is sufficient to pay the Priority Return and the
B Tax Distribution. The General Partner also receives a Management Fee from the
Operating Partnership of $3,330,000 annually. To the extent that the Priority
Return and the B Tax Distribution have not been paid on a cumulative basis, the
Management Fee will not be paid, but will be deferred and be paid, together with
any Management Fees then owed with respect to any other year, after the Priority
Return and B Tax Distribution have been paid. In addition, the Management Fee
can be paid only if the Operating Partnership complies with the covenants
required by the Operating Partnership's credit agreements. See Notes 8 and 9 of
Notes to Consolidated Financial Statements of the Partnership as of and for the
three years ended December 31, 1996.
Risk Factors
5
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RISKS TO HOLDERS OF A INTERESTS
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The proposed Conversion necessitates the allocation of the total value of
the Partnership among the holders of the A Interests, the holders of the B
Interests and the General Partner. It would be in the General Partner's interest
to have its partners receive maximum consideration, undertake the least possible
responsibilities and assume minimum risk, all at the limited partners' expense.
Also, it would be in the interest of the holders of A Interests to receive the
maximum consideration for their A Interests, at the expense of the General
Partner and the holders of the B Interests.
o Holders of A Interests were not separately represented in establishing the
terms of the Conversion. Such representation might have caused the terms of
the Conversion to be different in some material respects from those described
herein.
o Unlike A Interests, which are not subject to mandatory or optional redemption
by the Partnership, the Junior Subordinated Debentures held by the Trust may
be redeemed by the Corporation at 100% of the principal amount plus accrued
and unpaid interest at any time after September 30, 2002 or, if certain
conditions are met, earlier at 101% of the principal amount plus accrued
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RISKS TO HOLDERS OF B INTERESTS
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The proposed Conversion necessitates the allocation of the total value of
the Partnership among the holders of the B Interests, the holders of the A
Interests and the General Partner. It would be in the General Partner's interest
to have its partners receive maximum consideration, undertake the least possible
responsibilities and assume minimum risk, all at the limited partners' expense.
Also, it would be in the interest of the holders of B Interests to receive the
maximum consideration for their B Interests, at the expense of the General
Partner and the holders of the A Interests.
o Holders of B Interests were not separately represented in establishing the
terms of the Conversion. Such representation might have caused the terms of
the Conversion to be different in some material respects from those described
herein.
o If the Conversion is approved, holders of B Interests will no longer have the
right to receive tax distributions with respect to their allocable share of
the Partnership's taxable income since they will no longer be taxed with
respect to income of the corporation.
6
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RISKS TO HOLDERS OF A INTERESTS
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and unpaid interest upon the occurrence of a Tax Event. See "DESCRIPTION OF
JUNIOR SUBORDINATED DEBENTURES -- Optional Redemption." This redemption will
result in the redemption of the Trust Preferred Securities.
o Upon the occurrence of a Tax Event, if certain conditions are met, the
Corporation shall have the right under certain circumstances to shorten the
maturity of the Junior Subordinated Debentures to a date not earlier than
September 30, 2002. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special
Event Redemption or Distribution; Shortening of Stated Maturity." If the
Corporation exercises such right, there can be no assurance that the
shortening of the maturity of the Junior Subordinated Debentures will not
have an effect on the market price of the Trust Preferred Securities or
Junior Subordinated Debentures that may be distributed in exchange for Trust
Preferred Securities.
o In view of the cash payment of $1.30 to the holders of A Interests, the
liquidation preference for 0.38 of a Trust Preferred Security will be $9.50
compared to a liquidation preference for an A Interest of $10.00.
o If the Conversion is approved, holders of A Interests will no longer have
their contractual right under the Partnership Agreement to the Priority
Return, although they will be entitled to distributions on the Trust
Preferred Securities in an amount equal to such Priority Return before
dividends, if any, are paid on the Common Stock. The Board of Directors of
the Corporation will have discretion to defer payments on the Junior
Subordinated Debentures for up to five years. If such payments are deferred,
the Trust will be unable to make distributions on the Trust Preferred
Securities, and the Corporation will be prohibited from paying dividends on
the Common Stock.
o Holders of Trust Preferred Securities will be required to accrue original
issue discount income with respect to any unpaid distributions on the Trust
Preferred Securities.
o The obligations of the Corporation under the Junior Subordinated Debentures
will be unsecured obligations and will be subordinate and junior in right of
payment to senior indebtedness of the Corporation and the Operating
Partnership and will be structurally subordinated to all liabilities and
obligations of the Operating Partnership and the Corporation's other
subsidiaries. As of March 31, 1997 (on a pro forma basis, assuming the
Merger had occured on such date), the Corporation and the Operating
Partnership would have had approximately
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RISKS TO HOLDERS OF B INTERESTS
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o The Board of Directors has not yet established a policy regarding the payment
of dividends on the Common Stock after the Effective Time of the Conversion.
The payment of dividends will be at the discretion of the Corporation's Board
of Directors and will depend, among other things, on earnings, financial
condition, capital requirements, availability of acquisition candidates,
level of indebtedness, contractual restrictions with respect to the payment
of dividends and other factors that the Corporation's Board of Directors
deems relevant. It should be noted that the Corporation's unaudited pro forma
balance sheet at March 31, 1997 reflects a stockholders' deficit of
approximately $7.4 million and a negative net book value per common share of
$1.16. Counsel has advised the Partnership and the Corporation that under
Delaware law, dividends or distributions on the stock of a Delaware
corporation may be declared or paid out of surplus, so that the net assets of
the corporation after such payment shall at least equal the amount of its
capital. However, such a dividend or distribution is permissible under such
provision only if the corporation's board of directors concludes that (a)
immediately following payment of such dividend or distribution, the fair
market value of the corporation's assets will exceed its liabilities and (b)
the payment of such dividend or distribution is being made out of the
corporation's surplus (net assets minus capital) and not out of capital in
contravention of Delaware law. In case there shall be no surplus, dividends
may also be paid out of net profits for the fiscal year and/or the preceding
fiscal year. In evaluating the fairness of the proposed Conversion, the
Special Committee did not consider the pro forma stockholders' deficit and
negative book value to be a significant negative factor, because the
accounting measures of stockholders' equity and net book value were not
viewed but the Special Committee's financial advisor. Smith Barney, as
primary determinants of value for ongoing industrial concerns like the
Corporation or the Partnership.
o If distributions on the Trust Preferred Securities are in arrears, the Board
of Directors will not be able to declare and pay dividends on the Common
Stock.
o Holders of B Interests have no dissenters' or appraisal rights in the
Conversion. Therefore, holders of B Interests will not be entitled to receive
cash payments from SunSource for the fair value of their Interests if they
dissent and the Conversion is approved and consummated.
o Prior to the Conversion, there has been no public market for the Common
Stock. The Common Stock received by the holders of the B Interests may trade
at prices below
7
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RISKS TO HOLDERS OF A INTERESTS
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$106.2 million principal amount of senior indebtedness outstanding, and the
Operating Partneship and the Corporation's other subsidiaries would have had
approximately $92.4 million of indebtedness and other liabilities.
o There are no terms in the Trust Preferred Securities or the Junior
Subordinated Debentures that limit the Corporation's or its subsidiaries'
ability to incur additional indebtedness.
o The receipt of Trust Preferred Securities and cash by the holders of A
Interests will be a taxable event. The receipt of Trust Preferred Securities,
Common Stock and cash by holders who hold both A Interests and B Interests
will be a taxable event.
o Holders of A Interests currently have the right to vote as a class on mergers
and together with the holders of B Interests on the sale of substantially all
the assets of the Partnership, amendment of the Partnership Agreement,
dissolution and removal of the General Partner. The Trust Preferred
Securities will not have these voting rights.
o Holders of A Interests have no dissenters' or appraisal rights in the
Conversion. Therefore, holders of A Interests will not be entitled to receive
cash payments from SunSource for the fair value of their Interests if they
dissent and the Conversion is approved and consummated.
o Prior to the Conversion, there has been no public market for the Trust
Preferred Securities. Because the consideration received by the holders of A
Interests includes $1.30 in cash for each A Interest, it is likely that 0.38
of a Trust Preferred Security received in respect of each A Interest will
trade at prices below the market price of the A Interest immediately prior to
the Conversion.
o The Corporation intends to list the Trust Preferred Securities on the New
York Stock Exchange ("NYSE"). The Trust Preferred Securities may trade at
prices that do not fully reflect the value of accrued but unpaid interest
with respect to the underlying Junior Subordinated Debentures. A holder of
Trust Preferred Securities that disposes of its Trust Preferred Securities
between record dates for payments of distribtuions (and consequently does not
receive a distribution from the Trust for the period prior to such
disposition) will nevertheless be required to include as ordinary income,
accrued but
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RISKS TO HOLDERS OF B INTERESTS
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the historical trading levels of the B Interests.
o If a large number of holders of Common Stock were to offer their securities
for sale immediately after consummation of the Conversion, the market could
decline.
o The Corporation has agreed to file a registration statement for the sale of
shares of Common Stock by Lehman Brothers and, subject to certain
limitations, by management, after the Conversion. Lehman Brothers and
management have agreed to cooperate to execute an underwritten secondary
offering of all or some portion of their shares of Common Stock as soon as
practicable after the effective date of the Conversion, subject to market
conditions. The Corporation has agreed not to sell any additional shares of
Common Stock prior to the earlier of such initial secondary offering and the
nine-month anniversary of the Conversion, except the issuance of
unregistered shares in connection with acquisitions. In addition, Lehman
Brothers Capital Partners I, an affiliate of Lehman/SDI holding 5,788,124 B
Interests, may distribute to its partners the shares of Common Stock it
receives as a result of the Conversion (a majority of which shares would be
freely tradeable immediately after such distribution). See "RESALE OF
SECURITIES -- Resales by Lehman Brothers and Management."
o Certain provisions of Delaware law and the Corporation's organizational
documents, as well as provisions of the Stockholders Agreement dated as of
July ___, 1997 among the Corporation and certain of its stockholders (the
"Stockholders Agreement") and the stockholder rights plan, contain provisions
that may reduce the likelihood of a takeover of the Corporation that, if
successful, might permit stockholders to receive a premium over the market
price for the Common Stock. See "DESCRIPTION OF CAPITAL STOCK." Such
provisions could also have a negative effect on the market price of the
Common Stock.
o A benefit to the partners of the General Partner of the Conversion which is
not shared by the limited partners is the elimination of liability, if any,
of the partners of the General Partner for obligations and liabilities of
SunSource which occur after the Conversion.
o The fiduciary duties owed by the directors of the Corporation after the
Conversion may be less than those owed by the General Partner of the
Partnership before the Conversion, which may result in decreased potential
liability of the directors of the Corporation.
8
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RISKS TO HOLDERS OF A INTERESTS
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unpaid interest on the Junior Subordinated Debentures through the date of
disposition. Such holder will recognize a capital loss to the extent the
amount realized with respect to the Trust Preferred Securities is less than
its adjusted tax basis. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income
tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES--Certain Tax
Consequences of the Conversion to Holders of A Interests."
o If a large number of holders of Trust Preferred Securities were to offer
their securities for sale immediately after consummation of the Conversion,
the market price of the Trust Preferred Securities could decline.
o A benefit to the partners of the General Partner of the Conversion which is
not shared by the limited partners is the elimination of liability, if any,
of the partners of the General Partner for obligations and liabilities of
SunSource which occur after the Conversion.
o Certain members of management will receive accelerated payments under certain
deferred compensation plans of the Operating Partnership as a result of the
Conversion. See "MANAGEMENT--Change in Control Arrangements."
o In addition to the factors noted above, an investment in SunSource (whether
in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and market conditions.
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RISKS TO HOLDERS OF B INTERESTS
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o Certain members of management will receive accelerated payments under certain
deferred compensation plans of the Operating Partnership as a result of the
Conversion.
o In addition to the factors noted above, an investment in SunSource (whether
in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and equity market conditions.
Reasons to Convert to Corporate Form
The Conversion will convert SunSource to corporate form, replacing
partnership interests presently held by limited partners with securities of the
Corporation and the Trust. The General Partner believes that there are six
principal reasons for converting to corporate form at this time, which are
discussed at greater length in "SPECIAL FACTORS -- Reasons to Convert to
Corporate Form." All of these reasons are for the benefit of the holders of B
Interests. Other than as described herein under "SPECIAL FACTORS -- Alternatives
to the Conversion," the primary benefit of the Conversion to holders of A
Interests is the simplification of tax reporting, although the General Partner
believes that several of the benefits listed below will increase the likelihood
of timely distributions on the Trust Preferred Securities.
o Expansion of Potential Investor Base. The General Partner anticipates that
the Conversion will expand SunSource's potential investor base to include
institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons.
In addition, the General Partner anticipates that the Common Stock (as
compared to Interests) will receive additional investor interest through
increased review and evaluation by research analysts.
9
o Conservation of Cash. The Corporation will conserve cash by the retention
of the annual Management Fee of $3,330,000 and the retention of
distributions on the General Partner's ownership in the Partnership and
the Operating Partnership amounting to approximately $400,000 annually.
o Tax Consequences. The benefit of being taxed as a partnership will end
under current law after December 31, 1997. Although the Corporation will
also have to pay tax on its income, the Conversion will allow SunSource to
conserve additional cash because the interest payable on the Junior
Subordinated Debentures, which will approximately equal the distributions
currently paid on the A Interests, is deductible for federal income tax
purposes, resulting in a corporate tax benefit of approximately $4,900,000
annually. Four bills are presently pending in Congress to extend or
eliminate the December 31, 1997 deadline. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Partnership Status and Taxation of the Partnership." The
General Partner believes that even if one of these bills is adopted, the
Conversion would still be desirable for the other reasons set forth
herein.
o Acquisition Currency. The General Partner believes that current industry
conditions may provide opportunities for SunSource to grow through the
acquisition of businesses and assets which are complementary to its
existing businesses. In certain cases, SunSource may want to be able to
issue equity interests as payment of the purchase price for such
acquisitions. The General Partner believes that an equity interest in a
corporation will be a more attractive acquisition currency to sellers than
an interest in a partnership. SunSource is not presently party to any
agreement or understanding regarding a material acquisition and currently
has no plans to make a material acquisition.
o Greater Access to Equity Markets. The General Partner expects that the
Corporation will have greater access to the public and private equity
capital markets than the Partnership, potentially enabling it to raise
capital on more favorable terms than are now available to the Partnership.
This greater access may be of particular benefit if SunSource proposes to
issue equity securities to reduce existing debt or to seek additional
funds for capital expenditures or otherwise expand its business. The
Corporation's access to equity capital markets will be limited during the
period from the date of the Conversion to the earlier of an initial
secondary offering of shares held by Lehman Brothers and management and
the nine-month anniversary of the Conversion. See "RESALE OF SECURITIES --
Resales by Lehman Brothers and Management."
o Tax Reporting. The General Partner believes that the complexities of tax
reporting associated with partnership investments are regarded as unduly
burdensome for most limited partners under current conditions. The
ownership of stock rather than Interests will greatly simplify tax
reporting with respect to an investment in SunSource on each limited
partner's individual federal and state income tax returns for future
years.
Alternatives to the Conversion
The alternatives to the Conversion which were considered by the General
Partner were continuing the existence of the Partnership as a limited
partnership and the liquidation of the Partnership. The Board of Directors of
Lehman/SDI believes that the Conversion will be more beneficial to the limited
partners than either of these alternatives. The General Partner believes that
other long-term strategies available to SunSource, such as diversification,
disposition of assets and acquisition of assets, are not materially adversely
affected and may be enhanced by the decision to convert.
o A benefit of continuing the existence of the Partnership as a limited
partnership is the possible reduction of aggregate federal income taxes
payable by the Partnership and its partners compared to the aggregate
federal income taxes payable by the Corporation and its stockholders with
respect to the income of SunSource and its stockholders with respect to
any dividends received. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES --
Partnership Status and Taxation of Partnership." This federal income tax
benefit will end under current law on December 31, 1997, although there
are several bills pending in Congress that could change this result.
Although holders of A Interests would still be entitled to the Priority
Return, the Partnership's ability to pay the Priority Return could be
impeded over time by the payment of corporate income tax. In addition, the
effect of paying the Priority Return from after-tax income would have a
significant adverse effect upon the holders of B Interests.
o The benefit of liquidating the Partnership at this time rather than
effecting the Conversion would be the possibility that the currently
realizable value of the Partnership assets may exceed the value of
SunSource as a continuing business. The General Partner believes that a
liquidation of the Partnership's assets at this time would not result in a
price which would produce an acceptable return to the limited partners,
after the repayment of debt and after paying all costs and expenses of
liquidating and
10
winding up the Partnership, including taxes on the sale of the assets. The
A Interests would receive only $10 upon liquidation. The holders of B
Interests would not be able to have a continuing equity interest in the
business of the Partnership. See "SPECIAL FACTORS -- Alternatives to the
Conversion" and "-- Recommendation of the General Partner and Fairness
Determination."
The holders of A Interests would be entitled to vote on the advisability
of liquidation although the vote required is a majority of the outstanding
A Interests and B Interests voting as a single class. As of July 18, 1997,
there were 11,099,573 A Interests outstanding (representing approximately
33.9% of the total Interests) and 21,675,746 B Interests outstanding
(representing approximately 66.1% of the total Interests). See "SPECIAL
FACTORS -- Alternatives to the Conversion," "-- Reasons to Convert to
Corporate Form" and "-- Consequences if Conversion is Not Approved."
For a more complete description of the impact of the three alternatives on
the holders of A Interests, holders of B Interests and the General Partner, see
"SPECIAL FACTORS -- Alternatives to the Conversion."
Structure of the Conversion
If approved by the limited partners, the Conversion will be effected as
follows:
o The Partnership will contribute its limited partnership interest in the
Operating Partnership and Lehman/SDI, Inc. will contribute its general
partnership interest in the General Partner to LPSub, a newly formed
subsidiary of the Partnership, in exchange for common stock of LPSub.
Current and former members of management who hold limited partnership
interests in the General Partner will contribute their limited partnership
interests in the General Partner to the Corporation, in exchange for
462,000 shares of Common Stock, of which 75,000 shares will be held in
escrow to be distributed after two years if all distributions on the Trust
Preferred Securities then due have then been paid, and the Corporation
will contribute such limited partnership interests to SunSub A, a wholly
owned subsidiary. The Partnership and LPSub will then merge with and into
the Corporation and (i) the A Interests will be converted into 4,217,837
Trust Preferred Securities and cash; (ii) the B Interests will be
converted into 5,418,936 shares of Common Stock and (iii) the common stock
of LPSub held by Lehman/SDI will be converted into 538,000 shares of
Common Stock. The Corporation will contribute the limited partnership
interest in the Operating Partnership to SunSub A and the general
partnership interest in the General Partner to SunSub B, also a wholly
owned subsidiary.
o As a result of the Conversion, the former holders of the A Interests will
be holders of Trust Preferred Securities and the former holders of B
Interests and the partners of the General Partner will be holders of
shares of Common Stock of the Corporation.
o The Corporation, through its subsidiaries, will then be the holder of the
partnership interests in the Operating Partnership and the General
Partner. See page 1 above for a diagram of the corporate structure after
the Conversion.
Control of SunSource
The directors and certain officers of Lehman/SDI will become the directors
and officers of the Corporation at the time of the Conversion. For a list of the
directors and executive officers of the Corporation after the Conversion, see
"MANAGEMENT--Directors and Executive Officers After the Conversion."
Special Committee
Because of its concern regarding the conflicts of interest between the
General Partner and the limited partners with respect to the determination of
the exchange ratios for the exchange of partnership interests, in June 1996 the
Board of Directors of Lehman/SDI appointed a special committee consisting of two
members of the Board of Directors, O. Gordon Brewer, Jr. and Ernest L. Ransome,
III (the "Special Committee"), to consider and advise the Board with respect to
the terms of the Conversion as to the fairness of the terms of the Conversion to
the limited partners, and to make a recommendation to the Board of Directors
with respect to the Conversion. The members of the Special Committee were not
otherwise affiliated with the Partnership. Smith Barney Inc. ("Smith Barney")
was retained to advise the Special Committee as to the fairness from a financial
point of view to the limited partners of the exchange ratios. The Special
Committee retained Dechert Price & Rhoads as its counsel. The limited partners
were not independently represented in the evaluation or negotiation of the
Conversion.
11
For a more detailed description of the deliberations of the Special
Committee and its determinations regarding certain matters related to the
Conversion, see "SPECIAL FACTORS -- Determinations of the Special Committee,"
and "-- Opinion of Smith Barney," and the opinion of Smith Barney attached as
Exhibit C to this Proxy Statement/Prospectus.
For its services, Smith Barney has been paid a fee of $1,250,000, plus
reimbursement of expenses. The fee was not contingent upon the consummation of
the Conversion or any other occurrence. Smith Barney will also be indemnified
against certain liabilities, including liabilities under the Securities Act and
the Exchange Act.
SunSource and its affiliates have had no relationship in the past two
years with Smith Barney other than that described above.
Recommendation of General Partner and Fairness Determination
The Board of Directors of Lehman/SDI has determined that the Conversion is
fair in all respects, including with regard to procedural matters, to the
limited partners. See "SPECIAL FACTORS -- Recommendation of the General Partner
and Fairness Determination." This belief is principally based on the fairness
opinion of Smith Barney, the deliberations concerning the exchange ratios of the
Special Committee consisting of disinterested directors and the requirement that
the Conversion be approved by a majority of the unaffiliated holders of the A
Interests and the B Interests, each voting separately as a class. The Board of
Directors of Lehman/SDI took into account the benefits of the Conversion to
SunSource, the alternatives of continuing in existence as a partnership and
liquidation, and other considerations, including the fact that the General
Partner will no longer have a fiduciary duty to the Partnership and its
partners, and the fact that its partners will no longer have any liability for
the liabilities of SunSource after the Conversion. See "SPECIAL FACTORS --
Determinations of the Special Committee."
The General Partner believes that the Conversion is in the best interests
of the Partnership and the limited partners and recommends that the limited
partners approve the Conversion. There are conflicts of interest between the
General Partner and the limited partners with respect to certain matters
relating to the Conversion. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS," "SPECIAL FACTORS -- Determinations of the Special
Committee," "-- Opinion of Smith Barney," and "-- Recommendation of the General
Partner and Fairness Determination."
Summary Description of Trust Preferred Securities
The Trust is a statutory business trust that was formed under the Delaware
Business Trust Act (the "Business Trust Act") pursuant to a declaration of trust
(as amended and restated, the "Declaration") and the filing of a certificate of
trust with the Secretary of State of Delaware. The Declaration has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
The Trust exists, among other things, for the purpose of issuing (i) its Trust
Preferred Securities to the Corporation in consideration for the deposit by the
Corporation of Junior Subordinated Debentures in the Trust as trust assets, and
(ii) the Trust Common Securities to the Corporation in exchange for cash and
investing the proceeds thereof in an equivalent amount of Junior Subordinated
Debentures. The rights of the holders of the Trust Securities, including
economic rights, rights to information and voting rights, are as set forth in
the Declaration, the Business Trust Act and the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). See "SUNSOURCE CAPITAL TRUST" and
"DESCRIPTION OF TRUST PREFERRED SECURITIES." The Corporation has agreed to pay
for all debts and obligations (other than with respect to the Trust Securities)
and all costs and expenses of the Trust, including the fees and expenses of the
Trustees and any income taxes, duties and other governmental charges, and all
costs and expenses with respect thereto, to which the Trust may become subject,
except for United States withholding taxes. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests,"
"SUNSOURCE CAPITAL TRUST" and "DESCRIPTION OF TRUST PREFERRED SECURITIES."
The Trust Preferred Securities evidence preferred undivided beneficial
interests in the assets of the Trust and will rank pari passu with, and have
terms equivalent to, the Trust Common Securities; provided that (i) if an Event
of Default under the Declaration occurs and is continuing, the holders of Trust
Preferred Securities will have a priority over holders of the Trust Common
Securities with respect to payments in respect of distributions and payments
upon liquidation, redemption or otherwise and (ii) holders of Trust Common
Securities have the exclusive right (subject to the terms of the Declaration) to
appoint, remove and replace Trustees and to increase or decrease the number of
Trustees, subject to the right of holders of Trust Preferred Securities to
appoint a Special Regular Trustee upon the occurrence of an Appointment Event
(as defined herein). The Declaration does not permit the issuance by the Trust
of any securities or beneficial interests in the assets of the Trust other than
the Trust Preferred Securities and the Trust Common Securities, the incurrence
of any indebtedness for borrowed money by the Trust or the making of any
investments other than in the Junior Subordinated Debentures. The Declaration
defines an event of default with respect to the Trust Securities (an "Event of
Default") as the occurrence
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and continuance of an "event of default" under the Indenture with respect to the
Junior Subordinated Debentures (an "Indenture Event of Default").
Periodic cash distributions on each Trust Preferred Security will be fixed
at a rate per annum of $2.90 (11.6% of the stated liquidation amount of $25 per
Trust Preferred Security). Distributions in arrears will compound monthly at the
rate per annum of 11.6% of the amount in arrears. Distributions on the Trust
Preferred Securities will be cumulative, will accrue from the first day
following the Effective Time (the "Accrual Date") and, except as otherwise
described herein, will be made monthly in arrears, on the last day of each
calendar month of each year, commencing on October 31, 1997, but only if and to
the extent that interest payments are made in respect of the Junior Subordinated
Debentures.
The distribution rate and the distribution and other payment dates for the
Trust Preferred Securities will correspond to the interest rate and the interest
and other payment dates on the Junior Subordinated Debentures deposited in the
Trust as trust assets. As a result, if principal or interest is not paid on the
Junior Subordinated Debentures, including as a result of the Corporation's
election to extend the interest payment period on the Junior Subordinated
Debentures as described below, the Trust will not make payments on the Trust
Securities. The Junior Subordinated Debentures provide that, so long as the
Corporation shall not be in default in the payment of interest on the Junior
Subordinated Debentures, the Corporation has the right under the Indenture to
defer payments of interest on the Junior Subordinated Debentures by extending
the interest payment period from time to time for a period not exceeding 60
consecutive months (each, an "Extension Period") and, as a consequence, monthly
distributions on the Trust Preferred Securities would not be made (but would
continue to accrue with interest thereon at the rate of 11.6% per annum,
compounded monthly by the Trust during any such Extension Period). During an
Extension Period, the Corporation may not declare or pay dividends on, or
redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its Common Stock or Preferred Stock or make any guarantee
payments with respect thereto during such Extension Period. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of
A Interests"; "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Interest" and
"-- Option to Extend Interest Payment Period."
The payment of distributions on the Trust Preferred Securities and
payments on liquidation of the Trust and the redemption of Trust Preferred
Securities, as set forth below, are guaranteed by the Corporation on a
subordinated basis as and to the extent set forth under "DESCRIPTION OF
PREFERRED SECURITIES GUARANTEE." The Preferred Securities Guarantee is a full
and unconditional guarantee from the time of issuance of the Trust Preferred
Securities, but the Preferred Securities Guarantee covers distributions and
other payments on the Trust Preferred Securities only if and to the extent that
the Corporation has made a payment to the Property Trustee of interest or
principal on the Junior Subordinated Debentures deposited in the Trust as trust
assets.
The Trust Preferred Securities and Trust Common Securities are redeemable
on a Pro Rata Basis (as defined herein) from time to time, in whole or in part,
to the same extent as the Junior Subordinated Debentures are redeemable by the
Corporation, on or after September 30, 2002, upon not less than 30 nor more than
60 days notice, at $25 per Trust Preferred Security plus accrued and unpaid
distributions thereon to the date of redemption, including distributions accrued
as a result of the Corporation's election to defer payments of interest on the
Junior Subordinated Debentures (the "Redemption Price"), payable in cash. The
Trust Preferred Securities will be redeemed upon the maturity or earlier
redemption of the Junior Subordinated Debentures. See "DESCRIPTION OF TRUST
PREFERRED SECURITIES -- Mandatory Redemption." As used in this Proxy
Statement/Prospectus, the term "Pro Rata Basis" shall mean pro rata to each
holder of Trust Securities according to the aggregate liquidation amount of the
Trust Securities held by the relevant holder in relation to the aggregate
liquidation amount of all Trust Securities outstanding unless, in relation to a
payment, an Event of Default under the Declaration has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Trust Preferred Securities pro rata according to the
aggregate liquidation amount of the Trust Preferred Securities held by the
relevant holder in relation to the aggregate liquidation amount of all Trust
Preferred Securities outstanding, and only after satisfaction of all amounts
owed to the holders of the Trust Preferred Securities, to each holder of Trust
Common Securities pro rata according to the aggregate liquidation amount of the
Trust Common Securities held by the relevant holder in relation to the aggregate
liquidation amount of all the Trust Common Securities outstanding.
In addition, upon the occurrence and during the continuation of a Tax
Event or an Investment Company Event (each as defined herein) arising from a
change in law or a change in legal interpretation or other specified
circumstances, the Trust shall, unless the Junior Subordinated Debentures are
redeemed in the limited circumstances described below, be dissolved with the
result that, after satisfaction of creditors of the Trust, the Junior
Subordinated Debentures will be distributed to the holders of the Trust
Preferred Securities and the Trust Common Securities on a Pro Rata Basis, in
lieu of any cash distribution. If the Junior Subordinated Debentures are
distributed to the holders of the Trust Preferred Securities, the Corporation
will use its best efforts to have the Junior Subordinated Debentures listed on
the NYSE or on such other exchange as Trust Preferred Securities are then
listed. In the case of a Tax Event, the Corporation
13
will have the right in certain circumstances to redeem the Junior Subordinated
Debentures at any time with the result that the Trust will redeem the Trust
Securities on a Pro Rata Basis to the same extent as the Junior Subordinated
Debentures are redeemed. Any redemption for a Tax Event will be at a Redemption
Price of $25.25 per Trust Preferred Security if the redemption occurs within
five years after the Effective Time of the Conversion and at $25 thereafter
plus, in each case, accrued and unpaid distributions to the date of redemption.
If such redemption occurs while the 75,000 shares of Common Stock are held in
escrow on behalf of management employees, Lehman Brothers has agreed that, to
the extent it has disposed of any shares of Common Stock it received in the
Conversion, it will pay to the Corporation a portion of the 1% premium paid by
the Corporation on such redemption proportionate to the percentage interest in
the Corporation that it so disposed of. See "DESCRIPTION OF TRUST PREFERRED
SECURITIES -- Special Event Redemption or Distribution; Shortening of Stated
Maturity."
The Junior Subordinated Debentures will be issued pursuant to an
indenture, dated as of _______, 1997 (the "Indenture") between the Corporation
and The Bank of New York, as trustee (the "Indenture Trustee"). See "DESCRIPTION
OF JUNIOR SUBORDINATED DEBENTURES." The Junior Subordinated Debentures will
mature on September 30, 2027; provided, that in the case of a Tax Event, the
Corporation will have the right in certain circumstances to shorten the stated
maturity of the Junior Subordinated Debentures to a date not earlier than
September 30, 2002 (and thereby cause the Trust Preferred Securities to be
redeemed on such earlier date). See "DESCRIPTION OF TRUST PREFERRED SECURITIES
- -- Special Event Redemption or Distribution; Shortening of Stated Maturity." The
Junior Subordinated Debentures will bear interest at an annual rate of 11.6%
from the Accrual Date. Interest will be payable monthly in arrears on the last
day of each calendar month of each year, commencing on October 31, 1997;
provided that, as described above, so long as the Corporation shall not be in
default in the payment of interest on the Junior Subordinated Debentures, the
Corporation shall have the right to extend the interest payment period from time
to time for a period not exceeding 60 consecutive months. The Corporation has no
current intention of exercising its right to extend an interest payment period.
However, should the Corporation determine to exercise such right in the future,
the market price of the Trust Preferred Securities is likely to be adversely
affected. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks to Holders of A Interests" and "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period."
The Corporation shall have the right to redeem the Junior Subordinated
Debentures, in whole or in part, from time to time, on or after September 30,
2002, upon not less than 30 nor more than 60 days notice, at a redemption price
equal to 100% of the principal amount to be redeemed, plus any accrued and
unpaid interest to the redemption date, including interest accrued as a result
of the Corporation's election to defer payments of interest on the Junior
Subordinated Debentures, payable in cash. In addition, upon the occurrence of a
Tax Event, the Corporation will also have the right if certain conditions are
met to redeem the Junior Subordinated Debentures in whole (but not in part),
upon not less than 30 nor more than 60 days notice, at a redemption price equal
to 101% of the principal amount to be redeemed if the redemption occurs within
five years after the Effective Time and 100% thereafter, plus, in each case, any
accrued and unpaid interest, to the redemption date.
Comparative Rights of the Interests and the Securities to be Issued
If the Conversion is approved, the rights and limitations to which holders
of Trust Preferred Securities and Common Stock will be subject will be similar
in some respects and will differ in other respects from those to which they are
subject as holders of Interests. These rights and limitations are discussed
below under "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED."
Summary of Certain Federal Income Tax Consequences
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" for a general description of
the tax consequences of the Merger and the Conversion to holders of A Interests
and B Interests and tax consequences generally.
Conditions to the Conversion
The principal conditions to the Conversion are (i) the affirmative vote of
limited partners holding an aggregate of more than 50% of the outstanding A
Interests and B Interests, each voting separately as a class; (ii) the
affirmative vote of unaffiliated limited partners (limited partners other than
affiliates of the General Partner) holding an aggregate of more than 50% of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class; (iii) approval of the Trust Preferred Securities and
Common Stock for listing on the NYSE; (iv) no withdrawal of the Special
Committee's determination that the Conversion is fair to the holders of A
Interests and the holders of B Interests or of the fairness opinion of Smith
Barney; (v) receipt of a satisfactory tax opinion; (vi) the availability of
financing to refinance existing senior debt on terms acceptable to the
Corporation; and (vii) no material change in
14
applicable law, including with respect to the taxation of the Conversion, the
Partnership, the Corporation or the Trust Preferred Securities.
No Appraisal Rights
Limited partners who object to the Conversion will have no appraisal,
dissenters' or similar rights. Therefore, limited partners will not be entitled
to receive cash payments from SunSource for the fair value of their Interests if
they dissent and the Conversion is approved and consummated. See "VOTING AND
PROXY INFORMATION -- No Appraisal Rights."
Consequences if Conversion Is Not Approved
If the Conversion is not approved by the limited partners, or if the
Conversion is not consummated for any other reason, the Partnership presently
intends to continue to operate as an ongoing business in its current form. No
other transaction is currently being considered by the Partnership as an
alternative to the Conversion, although the Partnership may from time to time
explore other alternatives. See "SPECIAL FACTORS -- Consequences if Conversion
is Not Approved."
Limited Partner Litigation
On January 16, 1997, a holder of B Interests filed a purported class
action in the Delaware Court of Chancery seeking to enjoin the Conversion on the
terms proposed as well as an order requiring the defendants to account to the
plaintiff and the class for damages and requiring the General Partner or its
affiliates to hold the consideration received in trust pending a determination
of the amounts properly attributable to the General Partner's interest.
Defendants named in the complaint are the Partnership, the Corporation, the
General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the
directors of Lehman/SDI. The complaint alleged that the terms of the Conversion
unfairly transfer substantial equity to the General Partner to the detriment of
the B Interests and constitute a breach of fiduciary duty. A second complaint
containing substantially identical allegations was filed by a limited partner in
the Delaware Court of Chancery on February 11, 1997. The cases have been
consolidated and an amended complaint was filed on April 16, 1997 which added
claims for breach of contract and breach of a covenant of good faith and fair
dealing. For a fuller description of the allegations of the amended complaint
see "SPECIAL FACTORS -- Limited Partner Litigation." The defendants believe the
complaints are without merit and intend to vigorously defend the action.
Voting at the Special Meeting
15
List of Partners
Each limited partner has the right for a proper purpose reasonably related
to the limited partner's interest in the Partnership, upon reasonable demand and
at the limited partner's own expense, to have furnished to the limited partner,
upon notification to the General Partner at 2600 One Logan Square, Philadelphia,
PA 19103, Attention: Joseph M. Corvino, Secretary and Vice President - Finance,
a current list of the name and last known business, residence or mailing address
of each partner.
Delivery of Depositary Receipts
Promptly after the Effective Time, the Corporation will cause to be mailed
to all limited partners of record a letter of transmittal containing
instructions with respect to the surrender of Depositary Receipts for A and B
Interests in exchange for certificates representing Trust Preferred Securities
and shares of Common Stock and cash in the case of A Interests. Upon surrender
to the Corporation of one or more Depositary Receipts, together with a properly
completed letter of transmittal, there will be issued and mailed to former
limited partners a certificate or certificates representing the number of Trust
Preferred Securities and shares of Common Stock (and related Rights) to which
such holder is entitled and a check for cash in the case of A Interests. From
and after the Effective Time, each such Depositary Receipt will evidence only
the right to receive Trust Preferred Securities and cash or shares of Common
Stock. No fractional shares will be issued. Instead, (i) each holder of A
Interests will be entitled to receive cash in an amount equal to the fraction of
a Trust Preferred Security to which the holder is otherwise entitled multiplied
by the average closing price of the Trust Preferred Securities for the five
trading days following the Effective Time; and (ii) each holder of B Interests
shall be entitled to receive cash in an amount equal to the fraction of a share
of Common Stock to which the holder is otherwise entitled multiplied by the
average closing price of the Common Stock for the five trading days following
the Effective Time. Limited partners should not send any Depositary Receipts
with the enclosed proxy. They should retain such Depositary Receipts until their
receipt of the letter of transmittal after the Effective Time.
Reverse Stock Split
As a result of the one-for-four reverse stock split, each holder of B
Interests will receive one post-split share of Common Stock for every four B
Interests held by such holder prior to the Conversion. The General Partner
believes that current trading prices for the B Interests reduce the
attractiveness of the Corporation's equity securities to the financial community
and the investing public. The reverse stock split will not affect a holder's
percentage ownership in the Corporation or of the outstanding Common Stock
(except for minor differences resulting from the elimination of fractional
shares as described herein). It is impossible to predict the market's reaction
to any reverse stock split or, in this case, to separate that reaction from the
market's reaction to the Conversion as a whole. However, the Corporation expects
that immediately after the reverse stock split each share of Common Stock would
be valued at a price approximately four times greater than without the split.
16
Summary Financial Information of the Partnership
and Summary Unaudited Pro Forma Financial Information of the Corporation
(dollars in thousands, except for per unit and per share data)
The following tables set forth summary consolidated historical and unaudited pro
forma financial and operating data of the Partnership and the Corporation as of
the dates and for the periods indicated. The historical financial information
set forth below for the Partnership as of and for the three months ended March
31, 1997 and 1996 is derived from unaudited financial statements included
elsewhere herein. The historical financial information set forth below for the
Partnership as of December 31, 1996 and 1995 and for each of the three years in
the period ended December 31, 1996 are derived from the audited financial
statements included elsewhere herein. The historical financial information set
forth below for the Partnership as of December 31, 1994, 1993 and 1992 and for
each of the two years in the period ended December 31, 1993 are derived from the
financial statements not included elsewhere herein. The summary unaudited pro
forma financial information gives effect to the Conversion as if it occurred at
the beginning of the period presented for the data on pro forma statements of
income and cash flow and as of the date presented with respect to the balance
sheet data. The pro forma financial information is also presented excluding
non-recurring income tax benefits. The summary financial information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
of the Partnership and the unaudited Pro Forma Financial Statements and Notes
thereto of the Corporation included elsewhere herein. See "INDEX TO FINANCIAL
STATEMENTS." See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" for acquisitions and divestitures that affect
comparability, and for a discussion of the Corporation's recently announced
restructuring plans.
17
18
C O R P O R A T I O N - P R O F O R M A
-----------------------------------------------------------
19
RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS
Before completing the enclosed form of proxy, each limited partner should
carefully read this entire Proxy Statement/Prospectus, including the Exhibits
and the Partnership's Form 10-K for the year ended December 31, 1996 and the
other documents incorporated herein by reference, and should give particular
attention to the following considerations.
20
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RISKS OF HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
Conflicts of Interest
The proposed Conversion necessitates the allocation of the total value of the
Partnership among the holders of the A Interests, the holders of the B Interests
and the General Partner. It would be in the General Partner's interest to have
its partners receive maximum consideration, undertake the least possible
responsibilities and assume minimum risk, all at the limited partners'
expense. Also, it would be in the interest of the holders of A Interests to
receive the maximum consideration for their A Interests, at the expense of the
General Partner and the holders of the B Interests.
No Independent Representation
Holders of A Interests were not separately represented in establishing the terms
of the Conversion. Such representation might have caused the terms of the
Conversion to be different in some respects from those described herein.
Optional Redemption
Unlike the A Interests, which are not subject to mandatory or optional
redemption by the Partnership, the Junior Subordinated Debentures held by the
Trust may be redeemed by the Corporation at 100% of the liquidation amount plus
accrued and unpaid distributions at any time after September 30, 2002. In that
case, the Trust Preferred Securities will be redeemed in the same amount.
Special Event Redemption or Distribution; Shortening of Stated Maturity
Upon the occurrence and during the continuation of a Tax Event or Investment
Company Event (each as defined herein), which may occur at any time, the Trust
shall, unless the Junior Subordinated Debentures are redeemed in the
circumstances described below, be dissolved with the result that, in the manner
described in "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Liquidation
Distribution Upon Dissolution," Junior Subordinated Debentures having an
aggregate principal amount equal to the aggregate stated liquidation amount of,
and bearing accrued and unpaid interest equal to accrued and unpaid
distributions on, the Trust Preferred Securities and Trust Common Securities
would be distributed on a Pro Rata Basis to the holders of the Trust Preferred
Securities and Trust Common Securities in liquidation of the Trust.
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF B INTERESTS
- --------------------------------------------------------------------------------
Conflicts of Interest
The proposed Conversion necessitates the allocation of the total value of the
Partnership among the holders of the B Interests, the holders of the A Interests
and the General Partner. It would be in the General Partner's interest to have
its partners receive maximum consideration, undertake the least possible
responsibilities and assume minimum risk, all the limited partners' expense.
Also, it would be in the interest of the holders of B Interests to receive the
maximum consideration for their B Interests, at the expense of the General
Partner and the holders of the A Interests.
No Independent Representation
Holders of B Interests were not separately represented in establishing the terms
of the Conversion. Such representation might have caused the terms of the
Conversion to be different in some respects from those described herein.
Loss of Contractual Right to Distributions
The Partnership Agreement requires the Partnership to distribute Cash Available
for Distribution to the B Interests to the extent of the B Tax Distribution.
However, Cash Available for Distribution is determined after deducting such
reserves as the General Partner, in its sole discretion, determines to be
necessary for capital expenditures and other business purposes. After converting
into corporate form, holders of B Interests will lose this contractual right.
The Board of Directors of the Corporation will have complete discretion as to
the distribution of dividends on the Common Stock. The payment of dividends
will be at the discretion of the Corporation's Board of Directors and will
depend, among other things, on earnings, financial condition, capital
requirements, availability of acquisiton candidates, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Corporation's Board of Directors deems relevant. If
distributions on the Trust Preferred Securities are in arrears, the Board of
Directors will not be able to declare and pay dividends on the Common Stock.
Certain Delaware Corporate Law Considerations
The Corporation's unaudited pro forma balance sheet at March 31, 1997 reflects
a stockholders' deficit of approximately $7.4 million and a negative net book
value per common share of $1.16. Counsel has advised the Partnership and the
Corporation that under Delaware law, dividends or
21
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RISKS TO HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
In the case of a Tax Event, the Corporation will have the right in certain
circumstances to shorten the stated maturity of the Junior Subordinated
Debentures to a date not earlier than September 30, 2002 (and thereby cause the
Trust Preferred Securities to be redeemed on such earlier date) if such Tax
Event would continue even after terminating the Trust and distributing the
Junior Subordinated Debentures in exchange for the Trust Preferred Securities.
See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event Redemption or
Distribution; Shortening of Stated Maturity." If the Corporation exercises such
right, there can be no assurance that the shortening of the maturity of the
Junior Subordinated Debentures will not have an effect on the market price of
the Trust Preferred Securities or the Junior Subordinated Debentures that may be
distributed in exchange for the Trust Preferred Securities.
In addition, in the case of a Tax Event, in certain circumstances, the
Corporation shall have the right to redeem at any time the Junior Subordinated
Debentures, in whole or in part, in which event the Trust will redeem Trust
Preferred Securities and Trust Common Securities on a Pro Rata Basis to the same
extent as the Junior Subordinated Debentures are redeemed.
The price paid on such redemption will be $25.25 in respect of each Trust
Preferred Security if the redemption in the case of a Tax Event occurs within
five years of the Conversion and $25 thereafter plus, in each case, accrued and
unpaid distributions to the date of redemption. There can be no assurance as to
the market prices for the Junior Subordinated Debentures which may be
distributed in exchange for Trust Preferred Securities if a dissolution and
liquidation of the Trust were to occur. Accordingly, the Junior Subordinated
Debentures which the investor may receive on dissolution and liquidation of the
Trust, may trade at a discount. See "DESCRIPTION OF TRUST PREFERRED SECURITIES
- -- Special Event Redemption or Distribution; Shortening of Stated Maturity" and
"DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- General."
Under current United States federal income tax law and interpretations thereof
and assuming, as expected, the Trust is treated as a grantor trust for United
States federal income tax purposes, a distribution by the trust of the Junior
Subordinated Debentures pursuant to a liquidation of the trust will not be a
taxable event to the Trust or to holders of the Trust Preferred Securities and
will result in a holder of the Trust Preferred Securities receiving directly
such holder's pro rata share of the
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF B INTERESTS
- --------------------------------------------------------------------------------
distributions on the stock of a Delaware corporation may be
declared or paid out of surplus, so that the net assets of the corporation after
such payment shall at least equal the amount of its capital. However, such a
dividend or distribution is permissible under such provision only if the
corporation's board of directors concludes that (a) immediately following
payment of such dividend or distribution, the fair market value of the
corporation's assets will exceed its liabilities and (b) the payment of such
dividend or distribution is being made out of the corporation's surplus (net
assets minus capital) and not out of capital in contravention of Delaware law.
In case there shall be no surplus, dividends may also be paid out of net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year.
No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited Partners
If the limited partners approve the Conversion, all holders of Interests will be
bound by such approval even though they, individually, may have voted against
the Conversion. Under applicable state law and the terms of the Partnership
Agreement, limited partners will have no dissenters', appraisal or similar
rights in connection with the Conversion, nor will such rights be voluntarily
accorded to limited partners by the Partnership or the Corporation. Therefore,
limited partners will not be entitled to receive cash payment from SunSource for
the fair value of their Interests if they dissent and the Conversion is approved
and consummated. See "VOTING AND PROXY INFORMATION -- No Appraisal Rights ."
Adverse Tax Implications
A primary disadvantage of converting to corporate form is tax related. The
principal tax disadvantage is that a corporation pays taxes on its taxable
income, and its stockholders generally pay taxes on any dividends from the
corporation out of current or accumulated earnings and profits; whereas a
partnership pays no tax and its partners pay tax on their distributive share
(whether or not actually distributed) of the Partnership's taxable income, gain,
loss, deductions and credits.
Under current law, the Partnership will be taxed as a corporation after December
31, 1997; however, efforts have been made to extend this date and there can be
no assurance that further efforts in this regard will not be successful. As a
result of a conversion of the Partnership to corporate form, limited partners
will forego the potential future tax benefits associated with operating in
partnership form, including primarily the right, through December 31, 1997, to
have the Partnership income subject to only one level of federal income
taxation.
In addition, the Conversion will be a taxable transaction to holders of B
Interests also holding A Interests, who will
22
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RISKS TO HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
Junior Subordinated Debentures (previously held indirectly through the Trust).
If, however, the liquidation of the Trust were to occur because the Trust is
subject to United States Federal income tax with respect to income accrued or
received on the Junior Subordinated Debentures as a result of the occurrence of
a Tax Event or otherwise, the distribution of Junior Subordinated Debentures to
holders of the Trust Preferred Securities by the Trust would be a taxable event
to the Trust and each holder, and holders of the Trust Preferred Securities
would recognize gain or loss as if they had exchanged their Trust Preferred
Securities for the Junior Subordinated Debentures they received upon the
liquidation of the Trust. See "Certain FEDERAL INCOME TAX CONSEQUENCES --
Certain Tax Consequences of the Conversion to Holders of A Interests --
Distribution of Junior Subordinated Debentures to Holders of Trust Preferred
Securities."
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill") was
introduced in the 104th Congress which would have, among other things, generally
denied interest deductions on an instrument, issued by a corporation, that has a
maximum term of more than 20 years and that is not shown as indebtedness on the
separate balance sheet of the issuer or, where the instrument is issued to a
related party (other than a corporation), where the holder or some other related
party issues a related instrument that is not shown as indebtedness on the
issuer's consolidated balance sheet. The above-described provisions of the Bill
were proposed to be effective generally for instruments issued on or after
December 7, 1995. If this provision were to apply to the Junior Subordinated
Debentures, the Company would not be able to deduct interest on the Junior
Subordinated Debentures. However, on March 29, 1996, the Chairmen of the Senate
Finance and House Ways and Means Committees issued a joint statement (the "Joint
Statement") to the effect that it was their intention that the effective date of
the Bill, if enacted, would be no earlier than the date of appropriate
Congressional action.
In addition, subsequent to the publication of the Joint Statement, Senator
Daniel Patrick Moynihan and Representatives Sam M. Gibbons and Charles B. Rangel
wrote letters to Treasury Department officials concurring with the view
expressed in the Joint Statement. The 104th Congress adjourned without enacting
the Bill. Similar legislation was reproposed by the Treasury Department on
February 6, 1997, as part of President Clinton's Fiscal 1998 Budget Proposal
(the "Proposed Legislation"). The Proposed Legislation would, however, generally
deny an interest deduction with respect to an instrument not shown as
indebtedness on the separate or consolidated balance sheet of the issuer (as
described above) and with a maximum term of more than 15 years (as contrasted to
a maximum term of more than 20 years under the provision of the Bill). Such
provision is proposed to be effective generally for instruments issued on or
after the date of the first committee action. If such a provision were
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RISKS TO HOLDERS OF B INTERESTS
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recognize gain equal to the difference between the cash and the fair market
value of the Trust Preferred Securities and Common Stock received in the
Conversion and their aggregate tax basis in the A Interests and B Interests,
which gain will likely be recognized only to the extent of the fair market value
of the Trust Preferred Securities and the cash received in the Conversion. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Uncertainty Regarding Market Price of Common Stock; Possible Reduction Due to
Sales by Lehman Brothers or Management
At present there is no trading market for the Common Stock. Application has been
made to list the Common Stock on the NYSE under the trading symbol SDPB. There
can be no assurance that holders will be able to sell their securities at
favorable prices or that the trading prices for the securities will be
comparable to the trading prices for the B Interests prior to consummation of
the Conversion. A large number of securities may be traded by former limited
partners immediately following completion of the Conversion for various reasons,
including the perceived increased liquidity that the securities may afford to
limited partners. This might tend to depress the market price of the securities.
The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman Brothers and, subject to certain limitations,
by management after the Conversion. Lehman Brothers and management have agreed
to cooperate to execute an underwritten secondary offering of all or some
portion of their shares of Common Stock as soon as practicable after the
effective date of the Conversion, subject to market conditions.
Lehman Brothers Capital Partners I, an affiliate of Lehman/SDI holding 5,788,124
B Interests, may distribute to its partners the shares of Common Stock it
receives in the Merger (a majority of which shares would be freely tradeable
immediately after such distribution). This might tend to depress the market
price of the securities. "RESALES OF SECURITIES -- Resales by Lehman Brothers
and Management." The Corporation has agreed not to sell any additional shares of
Common Stock prior to the earlier of such initial secondary offering and the
nine-month anniversary of the Conversion, except the issuance of unregistered
shares in connection with acquisition.
Future Dilution of Common Stock
The Corporation will be permitted to issue additional equity or debt securities,
including shares of Preferred Stock. Issuances of additional shares of Common
Stock or shares of Preferred Stock could adversely affect stockholders' equity
interest in the Corporation and the market price of the Common Stock, and the
interests in the assets, liabilities, cash flow and results of operations of the
Corporation represented by the shares of Common Stock issued pursuant to the
Conversion may be
23
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RISKS TO HOLDERS OF A INTERESTS
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enacted and were applicable to the Junior Subordinated Debentures, the Indenture
governing the Junior Subordinated Debentures provides that the maturity of the
Junior Subordinated Debentures will be reduced to the maximum period permissible
(but not earlier than September 30, 2002) without affecting the deductibility of
interest payable on the Junior Subordinated Debentures. There can be no
assurance that current or future legislative or administrative proposals or
final legislation will not adversely affect the ability of the Company to deduct
interest on the Junior Subordinated Debentures or otherwise affect the tax
treatment described herein.
Such a change, therefore, could give rise to a Tax Event, which would permit the
Company to cause a redemption of the Trust Preferred Securities or to dissolve
the Trust and distribute the Junior Subordinated Debentures to the holders of
Trust Securities in liquidation of the Trust upon receiving an opinion of
counsel as described more fully under "DESCRIPTION OF TRUST PREFERRED SECURITIES
- -- Special Event Redemption or Distribution; Shortening of Stated Maturity."
Loss of Contractual Right to Distributions
The Partnership Agreement requires the Partnership to distribute Cash Available
for Distribution to the A Interests to the extent of the Priority Return.
However, Cash Available for Distribution is determined after deducting such
reserves as the General Partner, in its sole discretion, determines to be
necessary for capital expenditures and other business purposes. After converting
into corporate form, limited partners will lose this contractual right. Payment
of distributions on the Trust Preferred Securities by the Trust will depend on
payments by the Corporation on the Junior Subordinated Debentures which can be
deferred for as long as five years.
Option to Extend Interest Payment Period; Tax Impact of Extension
So long as the Corporation shall not be in default in the payment of interest on
the Junior Subordinated Debentures, the Corporation has the right under the
Indenture to defer payments of interest on the Junior Subordinated Debentures by
extending the interest payment period from time to time for an Extension Period
not exceeding 60 consecutive months, during which no interest shall be due and
payable. In such an event, monthly distributions on the Trust Preferred
Securities would not be made (but would continue to compound monthly at the rate
of 11.6% per annum) by the Trust during any such Extension Period. If the
Corporation exercises the right to extend an interest payment period, the
Corporation may not during such Extension Period declare or pay dividends on, or
redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its Common Stock or Preferred
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RISKS TO HOLDERS OF B INTERESTS
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diluted. Issuances of additional shares may be more likely after the Conversion
if the corporate form expands the potential investor base, provides greater
access to equity markets and permits the use of capital stock as acquisition
currency. Holders of Common Stock will not be entitled to preemptive rights.
Addition of Provisions that May Discourage Changes of Control
The Partnership Agreement of the Partnership contains many provisions which are
designed to vest in the General Partner the right to manage the business of the
Partnership and to restrict the right of the limited partners to change
management and to approve transactions of a type which are generally subject to
stockholder approval in the case of a corporation. The Partnership does not hold
annual meetings of limited partners and does not permit limited partners to vote
on many of the matters upon which stockholders of the Corporation will be
permitted to vote.
Upon effectiveness of the Conversion, the Partnership will terminate and the
stockholders will have the rights described under the captions "DESCRIPTION OF
TRUST PREFERRED SECURITIES," "DESCRIPTION OF CAPITAL STOCK" and "COMPARISON OF
INTERESTS AND SECURITIES TO BE ISSUED."
The Corporation's Certificate of Incorporation and By-laws, the Stockholders
Agreement and the stockholder rights plan contain certain provisions that may
have the effect of encouraging persons considering an acquisition or takeover of
the Corporation to negotiate with the Board of Directors rather than to pursue
non-negotiated acquisitions or takeover attempts that a stockholder might
consider to be in the stockholders' best interests, including offers that might
result in a premium over market price for the Common Stock.
These provisions include authorization for the Board of Directors to issue
classes or series of Preferred Stock and a requirement that stockholders notify
the Corporation in advance of any director nominees or items of business to be
proposed at any meeting of stockholders. See "DESCRIPTION OF CAPITAL STOCK --
Anti-takeover Provisions." In addition, the deferred compensation plans of the
Operating Partnership will continue to provide that, upon the occurrence of a
change in control as defined in the plans, the vesting provisions of awards
under the plans will be accelerated. See "MANAGEMENT -- Deferred Compensation
Plans." These provisions may reduce interest in the Corporation as a potential
acquisition target or reduce the likelihood of a change in the management or
voting control of the Corporation without the consent of the then incumbent
Board of Directors.
24
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RISKS TO HOLDERS OF A INTERESTS
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Stock.
Prior to the termination of any Extension Period, the Corporation may further
extend such Extension Period; provided that such Extension Period together with
all such previous and further extensions thereof may not exceed 60 consecutive
months. Upon the termination of any Extension Period and the payment of all
amounts then due, the Corporation may commence a new Extension Period, subject
to the above requirements.
The Corporation may also prepay at any time all or any portion of the interest
accrued during an Extension Period. Consequently, there could be multiple
Extension Periods of varying lengths throughout the term of the Junior
Subordinated Debentures. See "DESCRIPTION OF TRUST PREFERRED SECURITIES --
Distributions" and "DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES -- Option
to Extend Interest Payment Period."
Because the Corporation has the right to extend the interest payment period up
to 60 consecutive months on various occasions, the Junior Subordinated
Debentures will be treated as issued with "original issue discount" for United
States federal income tax purposes. As a result, holders of Trust Preferred
Securities will be required to include their pro rata share of original issue
discount in gross income as it accrues for United States federal income tax
purposes in advance of the receipt of cash. Generally, all of a securityholder's
taxable interest income with respect to the Junior Subordinated Debentures will
be accounted for as "original issue discount" and actual distributions of stated
interest will not be separately reported as taxable income. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders
of A Interests -- Accrual of Original Issue Discount and Premium" and "--
Potential Extension of Payment Period on the Junior Subordinated Debentures."
As described above, the Corporation has the right to extend an interest payment
period on the Junior Subordinated Debentures from time to time for a period not
exceeding 60 consecutive monthly interest periods. If the Corporation determines
to extend an interest payment period, or if the Corporation thereafter extends
an Extension Period or prepays interest accrued during an Extension Period as
described above, the market price of the Trust Preferred Securities is likely to
be adversely affected. In addition, as a result of such rights, the market price
of the Trust Preferred Securities (which represent an undivided beneficial
interest in Junior Subordinated Debentures) may be more volatile than other
securities on which original issue discount accrues that do not have such
rights.
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RISKS TO HOLDERS OF B INTERESTS
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Possible Reduction in Fiduciary Standards
At least one Delaware court has stated that the fiduciary duties of a general
partner to limited partners are comparable to those of a director to
stockholders. Other courts, however, have indicated that the fiduciary duties of
a general partner are greater than those of a director to stockholders.
Therefore, although it is unclear whether or to what extent there are any
differences in such fiduciary duties, it is possible that the fiduciary duties
of directors of the Corporation to its stockholders could be less than those of
the General Partner to the limited partners, which may result in decreased
potential liability of the directors of the Corporation. The Certificate of
Incorporation of the Corporation expressly limits the potential liabilities of
the directors for certain breaches of their fiduciary duties. See "COMPARISON OF
INTERESTS AND SECURITIES TO BE ISSUED -- Fiduciary Duties."
Elimination of General Partner Liability for Corporation Obligations
The partners of the General Partner will receive a benefit from the Conversion
which is not shared by all limited partners generally in the elimination of
their liability, if any, for obligations and liabilities of SunSource which may
occur after the Conversion. Under Delaware law, as a general partner of the
Partnership, the General Partner is liable to the extent of its assets for the
debts and obligations of the Partnership. If the Conversion is consummated, the
partners of the General Partner would be stockholders of the Corporation and
would not have liability for the debts and obligations of the Corporation.
Payments Under Deferred Compensation Plans
Certain members of management will receive accelerated payments under certain
deferred compensation plans of the Operating Partnership. See "MANAGEMENT --
Change in Control Arrangements."
Transaction Costs
Transaction costs of approximately $4,500,000 will be incurred by the
Partnership, of which $3,900,000 will be paid by the Partnership whether or not
the Conversion is completed.
Change in Ownership Rights
As a result of the Conversion, holders of B Interests will lose certain rights
associated with their ownership of B Interests and will acquire certain rights
associated with their ownership of shares of Common Stock. A comparison of these
factors, which may relate to investment objectives of limited partners, is set
forth in "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED."
25
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RISKS TO HOLDERS OF A INTERESTS
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A holder that disposes of Trust Preferred Securities during an Extension Period,
therefore, may not receive the same return on investment as a holder that
continues to hold its Trust Preferred Securities. See "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period."
Ranking of Subordinated Obligations under Preferred Securities Guarantee and
Junior Subordinated Debentures; Dependence on the Corporation
The obligations of the Corporation under the Junior Subordinated Debentures are
unsecured obligations of the Corporation and will be subordinate and junior in
right of payment to Senior Indebtedness of the Corporation but senior to its
capital stock. The Corporation's obligations under the Preferred Securities
Guarantee are unsecured and will rank (i) subordinate and junior in right of
payment to all other liabilities of the Corporation, including the Junior
Subordinated Debentures, except those made pari passu or subordinate by their
terms, and (ii) senior to all capital stock now or hereafter issued by the
Corporation and to any guarantee now or hereafter entered into by the
Corporation in respect of its capital stock. Because the Corporation is a
holding company, the Junior Subordinated Debentures (and the Corporation's
obligations under the Preferred Securities Guarantee) are also effectively
subordinated to all existing and future liabilities, including trade payables,
of the Operating Partnership and other subsidiaries of the Corporation, except
to the extent that the Corporation is a creditor of the subsidiaries recognized
as such. There are no terms in the Trust Preferred Securities, the Junior
Subordinated Debentures or the Preferred Securities Guarantee that limit the
Corporation's ability to incur additional indebtedness, including indebtedness
that ranks senior to or pari passu with the Junior Subordinated Debentures and
the Preferred Securities Guarantee, or the ability of its subsidiaries to incur
additional indebtedness. See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE --
Status of the Preferred Securities Guarantee" and "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Subordination."
The Indenture and the Declaration provide that the Corporation shall pay all
debts and obligations (other than with respect to the Trust Securities) and all
costs and expenses of the Trust, including any taxes and all costs and expenses
with respect thereto, to which the Trust may become subject, except for United
States withholding taxes. No assurance can be given that the Corporation will
have sufficient resources to enable it to pay such debts, obligations, costs and
expenses on behalf of the Trust.
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RISKS TO HOLDERS OF B INTERESTS
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Other Considerations
In addition to the factors noted above, an investment in SunSource (whether in
partnership or corporate form) is subject to risks associated with operating
conditions, competitive factors, economic conditions, industry conditions and
equity market conditions.
26
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RISKS TO HOLDERS OF A INTERESTS
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Adverse Tax Implications
The Conversion will be taxable transaction to holders of A Interests, who will
recognize gain or loss equal to the difference between the cash and the fair
market value of the Trust Preferred Securities received in the Conversion and
their tax basis in their A Interests, and to holders of both A and B Interests
who will recognize gain equal to the difference between the cash and the fair
market value of the Trust Preferred Securities and Common Stock received in the
Conversion and their aggregate tax basis in the A Interests and B Interests,
which gain will likely be recognized only to the extent of the fair market value
of the Trust Preferred Securities and the cash received in the Conversion.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Enforcement of Certain Rights by Holders of Trust Preferred Securities
If an Event of Default (as defined herein) under the Declaration occurs and is
continuing, then the holders of Trust Preferred Securities would rely on the
enforcement by the Property Trustee (as defined herein) of its rights as a
holder of the Junior Subordinated Debentures against the Corporation. The
holders of a majority in liquidation amount of the Trust Preferred Securities
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee or to direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, including the right to direct the Property Trustee to exercise the
remedies available to it as a holder of the Junior Subordinated Debentures.
If the Property Trustee fails to enforce its rights with respect to the Junior
Subordinated Debentures held by the Trust, any record holder of Trust Preferred
Securities may, to the fullest extent permitted by law, institute legal
proceedings directly against the Corporation (a "Direct Action") to enforce the
Property Trustee's rights under such Junior Subordinated Debentures without
first instituting any legal proceedings against such Property Trustee or any
other person or entity.
In connection with such Direct Action, the Corporation will be subrogated to the
rights of such holder of Trust Preferred Securities to the rights of such holder
of Trust Preferred Securities under the Declaration to the extent of any payment
made by the Corporation to such holder of Trust Preferred Securities in such
Direct Action. Except as set forth herein, holders of Trust Preferred Securities
will not be able to exercise directly any other remedy available to the holders
of Junior Subordinated Debentures or assert directly any other rights in respect
of the Junior Subordinated Debentures. See "DESCRIPTION OF PREFERRED SECURITIES
GUARANTEE," and "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Indenture
Events of Default." If the Trust's failure to make distributions on the
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RISKS TO HOLDERS OF B INTERESTS
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27
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RISKS TO HOLDERS OF A INTERESTS
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Trust Preferred Securities is a consequence of the Corporation's exercise of its
right to extend the interest payment period for the Junior Subordinated
Debentures, the Property Trustee will have no right to enforce the payment of
distributions on the Trust Preferred Securities until an Event of Default under
the Declaration shall have occurred.
The Trust's ability to make distributions and other payments on the Trust
Preferred Securities is solely dependent upon the Corporation making interest
and other payments on the Junior Subordinated Debentures deposited as trust
assets as and when required. If the Corporation were not to make distributions
or other payments on the Junior Subordinated Debentures for any reason,
including as a result of the Corporation's election to defer the payment of
interest on the Junior Subordinated Debentures by extending the interest period
on the Junior Subordinated Debentures, the Trust will not make payments on the
Trust Securities.
In such an event, holders of the Trust Preferred Securities would not be able to
rely on the Preferred Securities Guarantee since distributions and other
payments on the Trust Preferred Securities are subject to such Guarantee only if
and to the extent that the Corporation has made a payment to the Property
Trustee of interest or principal on the Junior Subordinated Debentures deposited
in the Trust as trust assets. Instead, holders of Trust Preferred Securities
would rely on the enforcement by the Property Trustee of its rights as
registered holder of the Junior Subordinated Debentures against the Corporation
pursuant to the terms of the Indenture and may vote to appoint a Special Regular
Trustee.
Limited Voting Rights
Holders of Trust Preferred Securities will have limited voting rights and,
subject to the rights of holders of Trust Preferred Securities to appoint a
Special Regular Trustee upon the occurrence of an Appointment Event, will not be
able to appoint, remove or replace, or to increase or decrease the number of,
Trustees, which rights are vested exclusively in the holders of Trust Common
Securities.
No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited Partners
If the limited partners approve the Conversion, all holders of Interests will be
bound by such approval even though they, individually, may have voted against
the Conversion. Under applicable state law and the terms of the Partnership
Agreement, limited partners will have no dissenters', appraisal or similar
rights in connection with the Conversion, nor will such rights be voluntarily
accorded to limited partners by the Partnership or the Corporation. Therefore,
limited partners will not be entitled to receive cash payment from SunSource
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RISKS TO HOLDERS OF B INTERESTS
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28
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RISKS TO HOLDERS OF A INTERESTS
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for the fair value of their Interests if they dissent and the Conversion is
approved and consummated. See "VOTING AND PROXY INFORMATION -- No Appraisal
Rights."
Uncertainty Regarding Market Price for Trust Preferred Securities
At present there is no trading market for the Trust Preferred Securities.
Application has been made to list these securities on the NYSE under the trading
symbol SDP. There can be no assurance that holders will be able to sell their
securities at favorable prices or that the trading prices for the securities
will be comparable to the trading prices for the Interests prior to consummation
of the Conversion. A large number of securities may be traded by former limited
partners immediately following completion of the Conversion for various reasons,
including the perceived increased liquidity that the securities may afford to
limited partners. This might tend to depress the market price of the securities.
The Trust Preferred Securities may trade at prices that do not fully reflect
the value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A holder of Trust Preferred Securities that disposes of
its Trust Preferred Securities between record dates for payments of
distributions (and consequently does not receive a distribution from the Trust
for the period prior to such disposition) will nevertheless be required to
include as ordinary income, accrued but unpaid interest on the Junior
Subordinated Debentures through the date of disposition. Such holder will
recognize a capital loss to the extent the amount realized with respect to the
Trust Preferred Securities is less than its adjusted tax basis. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
The closing price on the NYSE on June 30, 1997 for A Interests was $11 7/16.
Elimination of General Partner Liability for Corporation Obligations
The partners of the General Partner will receive a benefit from the Conversion
which is not shared by all limited partners generally in the elimination of
their liability, if any, for obligations and liabilities of SunSource which may
occur after the Conversion. Under Delaware law, as a general partner of the
Partnership, the General Partner is liable to the extent of its assets for the
debts and obligations of the Partnership. If the Conversion is consummated, the
partners of the General Partner would be stockholders of the Corporation and
would not have liability for the debts and obligations of the Corporation.
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RISKS TO HOLDERS OF B INTERESTS
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29
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RISKS TO HOLDERS OF A INTERESTS
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Payments Under Deferred Compensation Plans
Certain members of management will receive accelerated payments under certain
deferred compensation plans of the Operating Partnership. See "MANAGEMENT --
Change in Control Arrangements."
Transaction Costs
Transaction costs of approximately $4,500,000 will be incurred by the
Partnership, of which $3,900,000 will be paid by the Partnership whether or not
the Conversion is completed.
Change in Ownership Rights
As a result of the Conversion, holders of A Interests will lose certain rights
associated with their ownership of A Interests and will acquire certain rights
associated with their ownership of Trust Preferred Securities. A comparison of
these factors, which may relate to investment objectives of limited partners, is
set forth in "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED."
Other Considerations
In addition to the factors noted above, an investment in SunSource (whether in
partnership or corporate form) is subject to risks associated with operating
conditions, competitive factors, economic conditions, industry conditions and
market conditions.
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VOTING AND PROXY INFORMATION
Voting Procedures
Under the Partnership Agreement, a holder of an Interest may vote only if
the holder has been admitted as a limited partner of the Partnership on or
before the record date for the Special Meeting. Each Interest entitles the
holder thereof to one vote with respect to matters to be voted on at the Special
Meeting. The General Partner has set the close of business on August 4, 1997 as
the record date (the "Record Date") for the determination of limited partners
entitled to vote at the Special Meeting.
The Partnership will accept proxies at any time before the Conversion is
voted on at the Special Meeting. The enclosed form of proxy, when properly
completed and returned, will constitute a limited partner's vote for or against,
or abstention on, the Conversion. If a limited partner returns a form of proxy
duly signed without voting, the limited partner will be deemed to have voted for
the Conversion.
Revocation of Proxies
A limited partner may revoke a proxy any time during the solicitation
period before its exercise by (i) delivering written notice of revocation to the
Partnership, (ii) executing and delivering to the Partnership a later dated form
of proxy or (iii)
30
voting in person at the Special Meeting. Any such written notice or later dated
proxy should be sent to SunSource L.P., 2600 One Logan Square, Philadelphia,
Pennsylvania 19103, Attention: Joseph M. Corvino, Secretary.
Vote Required; Quorum
Approval of the Conversion will require (i) the affirmative vote of
limited partners holding an aggregate of more than 50% of the outstanding A
Interests and B Interests, each voting separately as a class, and (ii) the
affirmative vote of unaffiliated limited partners (limited partners other than
affiliates of the General Partner) holding an aggregate of more than 50% of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class. As of the Record Date, there were 11,099,573 A Interests
outstanding, of which 11,019,850 were held by unaffiliated holders, and
21,675,746 B Interests outstanding, of which 11,633,603 were held by
unaffiliated holders. The presence, in person or by proxy, of limited partners
holding an aggregate of more than 50% of each class will constitute a quorum at
the Special Meeting. Abstentions and broker non-votes will be treated as present
for the purpose of determining a quorum but will have the effect of votes
against the Conversion Proposal.
The executive officers, directors and other affiliates of the General
Partner own less than 1% of the outstanding A Interests and 46.3% of the
outstanding B Interests. They have advised the Partnership that they each intend
to vote their Interests in favor of the Conversion, although they will not
participate in the votes by the unaffiliated holders of A Interests and B
Interests. For further information concerning the ownership of Interests by the
General Partner's affiliates, executive officers and directors, see "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Solicitation of Proxies
This solicitation is being made by the General Partner on behalf of the
Partnership. The Partnership will pay the cost of soliciting proxies. The
Partnership will reimburse brokerage houses and other nominees for their
reasonable expenses of forwarding proxy materials to beneficial owners of
Interests. The Partnership has retained D.F. King & Co., Inc. to aid in the
solicitation of proxies and to verify certain records related to the
solicitation of proxies for a fee of $10,000, plus an additional fee of $3.00
for each incoming or outgoing limited partner contact, plus line charges and
other out-of-pocket expenses. In addition, representatives of SunSource may meet
with brokers, research analysts and other members of the investment community to
discuss the Conversion. Representatives of SunSource may also contact limited
partners in person or by telephone, or arrange meetings with limited partners to
discuss the Conversion.
Independent Auditors
Representatives of Coopers & Lybrand L.L.P., the Partnership's independent
accountants, are expected to be present at the Special Meeting.
No Appraisal Rights
Limited partners who object to the Conversion will have no appraisal,
dissenters' or similar rights (i.e., the right, instead of receiving securities
of the Corporation, to seek a judicial determination of the "fair value" of
their Interests and to compel SunSource to purchase their Interests for cash in
that amount) under state law or the Partnership Agreement, nor will such rights
be voluntarily accorded to limited partners by SunSource. Thus, approval of the
Conversion by the requisite vote of limited partners will bind all limited
partners, and objecting limited partners will have no alternative to receipt of
securities of the Corporation other than selling their Interests (or securities
of the Corporation) in the open market.
Other Matters
The enclosed form of proxy grants discretionary authority to the persons
named to vote on any other matters that may properly come before the Special
Meeting. The Partnership is not aware of any other proposals planned to be made
at the Special Meeting and has no current intention of making any additional
proposals.
31
SPECIAL FACTORS
Background of the Conversion
In October 1986, the predecessor to Lehman Brothers acquired all of the
capital stock of Sun Distributors, Inc. ("SDI") from Sun Company, Inc. In
December 1986, the Partnership and the Operating Partnership were organized as
Delaware limited partnerships, and in January 1987 the assets and liabilities of
SDI were transferred to the Operating Partnership in exchange for a note and a
99% limited partnership interest in the Operating Partnership. Lehman Brothers'
predecessor then contributed the limited partnership interest to the Partnership
in exchange for 11,099,573 A Interests and 22,199,146 B Interests. In February
1987, 10,653,990 units (each consisting of one A Interest and one B Interest)
were sold in an underwritten public offering.
At the time of organization, the limited partnership form offered
important tax advantages since there was no federal income tax at the
partnership level. However, in December 1987 Congress passed the Revenue Act of
1987, one of the provisions of which provided that publicly held limited
partnerships ("MLPs"), with certain exceptions not applicable to the
Partnership, would be taxed for federal income tax purposes as corporations.
MLP's existing on December 17, 1987 were "grandfathered" for ten years until
December 31, 1997.
In addition to the limited time period for the tax benefits, management
found that the structure of the Partnership impeded the strategic direction of
its business. Prior to 1987, the business had grown principally through
acquisitions made either with cash or Sun Company stock. With a limited
partnership, acquisitions with Interests became impracticable. Available cash is
limited by the required payment of the B Tax Distribution which has to be made
at 125% of the maximum individual federal income tax rate. This meant that, at
the outset, 38.75% (125% x 31%, the then maximum tax rate) of federal taxable
income allocable to the B Interests had to be distributed. In 1993, the maximum
tax rate was increased to 39.6% meaning that the B Tax Distribution increased to
49.5% of federal taxable income allocable to the B Interests.
During the early 1990s the question whether to convert to a corporation
was examined from time to time. One of the advantages of conversion was that, if
the A Interests could be replaced with debt, the interest on the debt would be
deductible which would offset to some degree the tax disadvantages of being
taxed as a corporation. However, the amount of this much debt on the balance
sheet would have impaired SunSource's ability to borrow money. It therefore
became impracticable to convert without the sale of some assets to provide
additional net worth.
In the spring and summer of 1992, Lehman Brothers and Legg Mason Wood
Walker, Incorporated ("Legg Mason") were engaged to seek out buyers for the
entire Partnership. Lehman Brothers and Legg Mason prepared descriptive
memoranda for the operations of the divisions, solicited confidentiality
agreements from prospective buyers, assisted in the due diligence efforts of the
prospective buyers and received various offers. Approximately 60 companies were
contacted but the effort produced no proposals attractive to pursue, due in part
to the financial and economic climate at that time and its effect on the
Partnership's business.
On September 13, 1993, the Partnership publicly announced that the Board
of Directors of Lehman/SDI had begun to explore the possible sale of assets or
becoming a publicly traded corporation and had authorized the engagement of
financial advisors to assist in the process. Lehman Brothers and Legg Mason (the
"Advisors") were again engaged and conducted an extensive search for buyers of
the entire Partnership or of divisions of the Partnership. Again, the Advisors
prepared memoranda for the operations of the divisions, solicited
confidentiality agreements from and assisted in the due diligence efforts of,
the prospective buyers and received various offers. The Advisors contacted 77
strategic and 44 financial buyers. They received no interest in the Partnership
as a whole from acquirors at an acceptable level. They received a number of bids
for divisions, some of which were attractive. However, the Board of Directors of
Lehman/SDI determined that the realizable sale value of all of the Partnership's
assets was not adequate, and also decided that conversion to a corporation at
that time would be unattractive. Finally the Board of Directors of Lehman/SDI
determined that the bids for the Electrical Group and for the Dorman Products
division should be pursued further and instructed the Advisors to obtain final
bids for these businesses.
The Operating Partnership sold its Electrical Group on December 5, 1994
and the Dorman Products division on January 3, 1995. In addition, although not
the result of the study of strategic alternatives in 1993-1994, the Downey Glass
division was sold on October 27, 1995. The Operating Partnership received an
aggregate cash consideration, net of expenses, of approximately $70 million, of
which $14.2 million was used for a mandatory prepayment on its senior debt.
32
With the regularly scheduled principal payment on the senior debt in
December 1995, the Partnership's total debt as a percentage of its consolidated
capitalization was reduced to 43.5% at December 31, 1995 compared with 55% at
December 31, 1994. The sales not only strengthened the financial position of the
Partnership but enabled it to remove the restriction on acquisitions which had
been imposed by the lenders for 1993 and 1994.
The strengthened balance sheet therefore removed one of the negative
considerations for conversion to a corporation and, with the deadline of
December 31, 1997 approaching, management and Lehman Brothers began to develop a
concept for conversion to a corporation. This concept was presented to the Board
of Lehman/SDI at its June 12, 1996 meeting. The Board of Directors of Lehman/SDI
authorized further work on the conversion and appointed the Special Committee to
review the terms of the conversion proposal to be prepared by the General
Partner. See "-- Determinations of the Special Committee" below.
At the same meeting, the Board of Directors of Lehman/SDI reviewed a
presentation prepared by management which outlined a range of values which might
be realized if the Partnership were to be liquidated. Because the valuations
presented did not suggest an attractive potential sale value for the Partnership
and because of the other difficulties in a liquidation described below, the
Board of Directors of Lehman/SDI decided that pursuit of the conversion
alternative offered a higher expected value for Interest holders than the
liquidation plan. For more information on the liquidation alternative, see "--
Alternatives to the Conversion."
Existing Partnership Structure
The Partnership is a Delaware limited partnership. Unless earlier
terminated pursuant to the Conversion or the Partnership Agreement, the
Partnership will continue in existence until December 31, 2086. The General
Partner holds a 1% general partnership interest. The limited partnership
interests in the Partnership, representing a 99% limited partnership interest,
are represented by 11,099,573 A Interests and 21,675,746 B Interests, both of
which are traded on the NYSE. The Partnership holds a 99% limited partnership
interest in the Operating Partnership and the General Partner holds a 1% general
partnership interest. The Partnership conducts all of its business activities
through the Operating Partnership. Lehman/SDI is the general partner of the
General Partner and makes all the decisions relating to the management of the
Partnership and the Operating Partnership and manages and controls their
activities. Lehman Brothers Holdings Inc., as the sole stockholder of
Lehman/SDI, elects the members of the Board of Directors of Lehman/SDI. See the
chart on page 1 of this Proxy Statement/Prospectus.
The General Partner receives, as part of its general partnership interest
in the Operating Partnership, a Management Fee of $3,330,000 per year from the
Operating Partnership as well as distributions attributable to its general
partnership interests. See "-- Existing Economic Interests of the Partners." All
expenses incurred by the General Partner are paid or reimbursed by the Operating
Partnership, except for the compensation of the non-management directors of
Lehman/SDI.
Existing Economic Interests of the Partners
Cash Available for Distribution of the Partnership (i.e., all cash
receipts of the Partnership, less cash used to pay or establish a reserve for
expenses) is distributed 99% to the holders of A Interests and 1% to the General
Partner until holders of A Interests have received annually a $1.10 simple,
cumulative return. The Priority Return has been paid on a monthly basis to
holders of record on the first day of the month.
After distribution of the Priority Return, Cash Available for Distribution
is distributed 1% to the General Partner and 99% to the holders of B Interests
until such holders have received an annual distribution equal to the product of
(i) 125% of the then applicable maximum Federal income tax rate for individuals
and (ii) the taxable income allocable to the B Interests. The B Tax Distribution
has been partially distributed on a monthly basis to holders of record on the
first day of the month with the balance distributed by March 31 of the
succeeding year. See Note 3 of Notes to Consolidated Financial Statements. The
Partnership suspended the payment of monthly advance B Tax Distributions
effective January 1, 1997, but resumed the payments in April because it did not
expect to effect the Conversion until the summer of 1997.
Upon liquidation of the Partnership, after provision for all liabilities,
the holders of A Interests will receive a preferential distribution equal to $10
per A Interest plus any unpaid Priority Return and the balance will be
distributed to the General Partner and the holders of B Interests in accordance
with their respective capital accounts.
33
The Operating Partnership distributes its available cash 99% to the
Partnership and 1% to the General Partner until the amount distributed to the
Partnership is sufficient to pay the Priority Return and the B Tax Distribution.
The General Partner also receives a Management Fee from the Operating
Partnership of $3,330,000 annually. To the extent that the Priority Return and
the B Tax Distribution have not been paid on a cumulative basis, the Management
Fee will not be paid, but will be deferred and be paid, together with any
Management Fees then owed with respect to any other year, after the Priority
Return and B Tax Distribution have been paid. In addition, the Management Fee
can be paid only if the Operating Partnership complies with the covenants
required by the Operating Partnership's credit agreements. See Notes 8 and 9 of
Notes to Consolidated Financial Statements of the Partnership as of and for the
three years ended December 31, 1996.
Alternatives to the Conversion
The alternatives to the Conversion which were considered by the General
Partner were continuing the existence of the Partnership as a limited
partnership and the liquidation of the Partnership, either immediately or over
an extended period of time.
A benefit of continuing the existence of the Partnership as a limited
partnership is the possible reduction of aggregate federal income taxes payable
by the Partnership and its partners compared to the aggregate federal income
taxes payable by the Corporation with respect to the income of SunSource and its
stockholders with respect to any dividends received. See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES." This federal income tax benefit will end under current law on
December 31, 1997, although there are several bills pending in Congress that
could change this result. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES --
Partnership Status and Taxation of Partnership." Under current tax law, the
Partnership will be taxed as a corporation after December 31, 1997 so that the
Partnership will be subject to tax at the Partnership level and the partners
will also be subject to tax on any distributions received. In addition, payments
of the Priority Return would not be deductible for tax purposes. In view of the
potential double taxation at both the Partnership and the partner levels, the
General Partner no longer believes it would be in the best interests of the
Partnership and the limited partners to remain in partnership form. The
Corporation will be subject to taxation at the corporate level and individual
stockholders will be subject to tax on any dividends received, but payments in
respect of the Junior Subordinated Debentures will be deductible by the
Corporation for income tax purposes. See "-- Consequences if Conversion is Not
Approved."
Another alternative to the Conversion considered by the General Partner
was liquidation. One benefit of liquidating the Partnership at this time rather
than effecting the Conversion would be the possibility that the currently
realizable value of the Partnership assets may exceed the value of SunSource as
a continuing business. Another benefit of liquidating while in partnership form
prior to December 31, 1997 is that under current law a liquidation of the
Partnership would likely result in less federal income taxes payable on any
gains recognized by the Partnership than if the Partnership were converted to a
corporation and subsequently liquidated because the partners of the Partnership
would only pay federal income tax at the partner level on liquidation gains,
while a corporation would pay federal income tax on gains derived from
liquidating its assets and the corporation's stockholders would also pay federal
income tax on the amount by which the liquidation proceeds received by the
stockholders exceeded their basis in the shares.
As set forth above under " -- Background of the Conversion," management
made a presentation to the Board of Directors of Lehman/SDI on June 12, 1996
concerning alternatives to the Conversion. The Board of Directors of Lehman/SDI
again examined the alternatives on June 18, 1997 during a special meeting, using
as the basis for its analysis the management projections furnished to Smith
Barney. See Management Projections included as Exhibit D to this Proxy
Statement/Prospectus, noting particularly the "Qualifications with Respect to
Projections." The Board of Directors of Lehman/SDI considered the estimated
impact upon the limited partners and the General Partner of three alternatives:
1) conversion to corporate form; 2) continuation as a master limited partnership
taxable as a corporation; and 3) liquidation.
The following tables set forth management's estimates with respect to
values that would be received under the three alternatives. These estimates
should not be relied on as indicators of the actual values of the Interests or
the consideration to be received in respect of Interests in the Conversion. The
estimates are based on the following assumptions.
34
Assumptions Relating to Alternatives to the Conversion
A Interests
The reference price for the conversion to corporate form alternative was
determined by discounting the expected monthly cash flows of the Trust Preferred
Securities by a rate that was based on current Treasury Strip Yields for the
same maturities plus an appropriate credit spread as adjusted for the
substantial probability of a call at par five years from the date of the
Conversion.
The reference price for the continuation as a master limited partnership
alternative was determined by discounting the expected A Interest cash flows in
perpetuity by a rate that was based upon current Treasury Forward rates plus the
mean of the historical A Interests credit spread.
B Interests
The reference prices for both the conversion to corporate form and the
continuation as a master limited partnership alternatives were determined by
applying a price/earnings ("P/E") ratio to the appropriate projected net income
figure in each case. The projected P/E ratio was determined by analyzing the
Partnership's historical last twelve months' P/E ratio on a pro forma
tax-adjusted basis, and comparing the results to the similar ratios of the
Partnership's comparable industrial distribution corporations (over five-year
and two-and-a-half-year periods). The results were compared to comparable
industrial distribution corporations because there are no industrial
distribution master limited partnerships comparable to the Partnership. It was
determined that the Partnership historically traded at a P/E ratio discount of
18% to 25% to the comparables. The discount was then applied to the mean of the
comparables resulting in a P/E ratio for the Partnership of 11x to 12x. For the
17 months between January 1, 1996 and June 1, 1997, the P/E ratio averaged
12.0x. The mean of the P/E ratio for comparable industrial distribution
corporations as described herein was 14.6x, which was utilized to determine the
reference price in the conversion to corporate form alternative. While the
General Partner believes that the Conversion will lead to a reduction in the
market discount, there can be no assurance that this will occur.
The estimated effect of the three alternatives upon the A Interests is
shown in the following table. The table assumes for purposes of comparison that
the $1.10 distributions start in 1998.
35
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(1) Includes $1.30 in cash received at the time of Conversion.
The above table shows three estimated outcomes for a current holder of an
A Interest. For example, if a current A Interest holder were to sell the
investment at the end of 1998:
o If the Conversion takes place, an A Interest holder is estimated to receive
$10.65 from the sale of 0.38 of a Trust Preferred Security, plus $1.30 in
cash at the time of Conversion, plus $1.10 in distributions for 1998. Total
cash received is estimated to be $13.05.
o If the Conversion does not take place, an A interest holder is estimated to
receive $11.00 from the sale of the A Interest, plus $1.10 of Priority
Return for 1998. Total cash received is estimated to be $12.10.
o If the Partnership were to be liquidated at the end of 1998, the A Interest
holder would receive $10.00 in liquidation preference plus $1.10 of
Priority Return for 1998. Total cash is estimated to be $11.10.
The General Partner believes the estimated values shown in the above table
support the conclusion that the proposed Conversion is advantageous to the
holders of A Interests.
The estimated effect upon the holders of B Interests is shown in the
following table:
36
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(1) Assumes a P/E multiple of 14.6x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
(2) Before the 1-for-4 reverse stock split.
(3) Assumes a P/E multiple of 12.0x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
The above table shows, subject to the assumptions and caveats set forth
above under " -- Assumptions Relating to Alternatives to the Conversion" and in
Exhibit D, the derived outcomes for a current holder of B Interests under the
three alternatives. The derived values shown under the conversion to corporate
form alternative are significantly better than those shown under the alternative
of continuing as a master limited partnership in all years. With respect to
liquidation, the 5.0x EBITA case is inferior to remaining as a master limited
partnership in all years except 1997. Liquidation at 6.0x EBITA is also inferior
to remaining as a master limited partnership in all years except 1997 and 1998.
However, the 1997 and 1998 liquidation values of $4.15 and $4.76, respectively,
at 6.0x EBITA are below the market price of $5.00 at the time of the meeting of
the Board of Directors of Lehman/SDI on June 18, 1997. Liquidation at 7.0x EBITA
is superior in all years shown relative to the alternative of continuing as a
master limited partnership except 2002, but inferior to the alternative of
converting to corporate form for all years.
The liquidation values derived above were based upon the Management
Projections set forth in Exhibit D, and are subject to all of the assumptions
and caveats described therein. The EBITA figures used to calculate liquidation
values for each year are approximately $13 million higher than the EBITA figures
shown in Exhibit D due to the elimination of the Management Fee and the
administrative expenses of SunSource's home office organization.
The liquidation values shown above also reflect the payment of income taxes
by the Partnership on the gain from sale of assets upon liquidation as required
by present tax law. The combined effective income tax rate for federal, state
and local income taxes is approximately 40%. If the current law taxing MLPs as
corporations in 1998 and thereafter were to be changed, the Partnership might no
longer be required to pay on such gains. In that event, the proceeds to holders
of B interests would increase by the amount of income taxes not paid at the
Partnership level. The increase (decrease) in proceeds due to potential
elimination of Partnership income taxes upon liquidation are shown below:
37
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(1) The incremental proceeds would be taxable to holders of B Interests.
It should be noted that numerous legislative proposals to change the tax
treatment of master limited partnerships have been introduced in Congress in the
years since the current law was enacted in 1987. The General Partner cannot
predict if any of the four proposals currently before Congress will be enacted.
The General Partner believes the principal advantage afforded by the various
legislative proposals is the possible elimination of Partnership level income
tax upon liquidation. The General Partner believes there is considerable
uncertainty that such legislation will be approved. The General Partner further
believes that, even if one of the pending proposals is enacted, it would still
be desirable to convert to corporate form for the reasons set forth under " --
Reasons to Convert to Corporate Form." See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Partnership Status and Taxation of the Partnership."
In discussing the liquidation alternative, the Board of Directors of
Lehman/SDI noted that previous efforts by the Partnership's investment bankers
in 1994 and 1995 had resulted neither in a bid for the entire partnership nor
bids as high as 6.0x EBITA for two of the Partnership's larger business units.
In addition, the most aggressive previous bidder for the Partnership's largest
business group had sharply curtailed its acquisition activity in the United
States. In summary, the Board concluded that there was substantial doubt that
the Partnership could realize as much as 6.0x EBITA for all of its business
units within a reasonable time frame.
Liquidation requires approval of a majority of all the A Interests and all
the B Interests outstanding, voting together as a single class. Because there
are 11.1 million A Interests and 21.7 million B Interests outstanding, the
holders of B Interests would be entitled to cast votes equal to approximately
66.1% of the total votes entitled to be cast on a vote on liquidation if a
liquidation value superior to the alternative of continuing as a master limited
partnership were to become available. In any vote on liquidation, affiliates of
the General Partner, as substantial holders of B Interests, would be entitled to
cast approximately 46.3% of the total votes entitled to be cast. For an analysis
of the impact of liquidation on the General Partner, see the "General Partner
Interest" table below.
Based on the foregoing, the General Partner believes that conversion to
corporate form is advantageous to the holders of B Interests.
The estimated effect upon the General Partner's Interest is shown in the
following table.
38
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(1) Assumes a P/E multiple of 14.6x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
(2) Before 1-for-4 reverse stock split.
(3) Equals the pre-split reference price per share of Common Stock multiplied by
the 4,000,000 shares of Common Stock (before the 1-for-4 reverse stock split) to
be received by the partners of the General Partner in the Conversion.
(4) Based on business enterprise value derived from the reference prices of the
A and B Interests shown above.
(5) Represents the low end of the estimated value range for the Management Fee
proposed by the General Partner to the Special Committee at the commencement of
negotiations.
(6) Includes Management Fee of $3,330 per year plus the General Partner's 1.99%
share of the Priority Return paid to holders of A Interests.
(7) Represents liquidation value of General Partner's 1.99% effective percentage
equity interest as of the end of each year shown.
The above table shows, subject to the caveats and assumptions set forth
above under " -- Assumptions Relating to Alternatives to the Conversion" and in
Exhibit D, the derived values for the GP Interest under the three alternatives.
For 2000 and thereafter, the derived values shown for the alternative of
converting to corporate form are more attractive than those shown under the
alternative of continuing as a master limited partnership, including the
anticipated cumulative cash receipts. Liquidation is the least attractive of the
three alternatives for the General Partner in all years.
However, in view of the substantial ownership of B Interests by affiliates
of the General Partner, it might become in the General Partner's economic
interest to reassess its alternatives if a liquidation alternative of more than
7.0x EBITA were to become available. In 1994 and 1995, the Partnership sold its
electrical business for 6.32x EBITA, its Dorman division for 13.42x EBITA, and
its Downey division for 12.23x EBITA. For all three units, the combined sales
price was 9.49x EBITA. As noted above however, the Board of Directors of
Lehman/SDI believes that there is substantial doubt at this time that it could
realize as much as 6.0x EBITA for all of its remaining business units within a
reasonable time frame.
39
In addition, there are a number of serious risks in pursuing a strategy
of complete liquidation. A risk in the liquidation proposal is the amount of
time it could take to dispose of multiple businesses on satisfactory terms.
Management is concerned that morale could become a problem at those units not
sold quickly, and diminished performance and increased employee defections could
rapidly impair the value of the affected units.
The failure to sell all units would prevent the Partnership from
liquidating. In that event, the requirement to pay the A Interest Priority
Return would place an onerous cash burden upon the remaining operating units.
The Board of Directors of Lehman/SDI determined that the administrative burdens
that would result from an attempt to sell simultaneously all business units in
separate transactions made liquidation an unattractive alternative.
The Board of Directors of Lehman/SDI also considered that liquidation would
create an immediate large taxable gain for the Partnership's investors while the
Conversion would result in a substantially smaller taxable gain.
Based on the considerations described above, the Board of Directors of
Lehman/SDI believes that a liquidation of the Partnership's assets (either
through individual or bulk asset sales or the sale of the Partnership in its
entirety) at this time would not result in the limited partners receiving
acceptable value. The Board did not obtain an appraisal or other valuation of
the assets because, in light of the previous efforts to sell the Partnership's
business units and the Board's conclusions regarding the logistical and
financial risks of liquidation, the Board believed that a liquidation of assets
would not result in sufficient value to the limited partners.
The Board of Directors of Lehman/SDI also rejected the liquidation
alternative because liquidation would not provide the holders of B Interests and
the General Partner with any continuing equity interest in the Partnership and
would be unlikely to be accomplished on a tax-advantaged basis. The General
Partner believes that in the long term the value of the Partnership, whether or
not the Conversion is effected, to the General Partner and the holders of B
Interests would exceed the value of the proceeds of a liquidation at this time.
The General Partner believes that other long-term strategies available to
SunSource such as diversification, disposition of assets and acquisition of
assets are not materially adversely affected by the decision to convert and may
be enhanced by the decision to convert as set forth above. From time to time in
the past, the General Partner has considered, and in some cases effected, the
possibility of disposing of surplus assets, acquiring assets, diversifying its
operations geographically and engaging in new lines of business. For example in
1994 and 1995, the Partnership sold its Electrical Group, Dorman Products
division, and Downey Glass division. Similarly, the Partnership has acquired a
number of companies which complement its operations. See "BUSINESS -- General."
The General Partner believes that SunSource will continue to consider, and in
some cases effect, similar transactions in the future, regardless of whether
SunSource is organized in partnership or corporate form. However, the General
Partner believes that the Conversion will enhance SunSource's ability to pursue
its long-term strategies by conserving cash and creating the possibility of
using Common Stock in future acquisitions. If the December 31, 1997 deadline is
changed by the adoption of one of the bills pending in Congress, the disposal of
appreciated assets would be preferable in partnership form where there is no tax
at the partnership level whereas in corporate form there would be a tax at the
corporate as well as the stockholder level. The General Partner currently is not
considering any significant transaction involving the Partnership or SunSource's
business which is outside the ordinary course of business of the Partnership.
Reasons to Convert to Corporate Form
The General Partner believes that there are six principal reasons to
convert to corporate form at this time: (i) the potential for the Corporation's
and the Trust's equity securities to attain greater acceptance within the
investment community; (ii) the conservation of cash by the retention of the
Management Fee and reduction in tax payments; (iii) the ability to deduct
interest payments on the Junior Subordinated Debentures for federal income tax
purposes; (iv) the potential for the Corporation to issue equity in payment of
the purchase price for complementary acquisitions; (v) the potential for the
Corporation to have greater access to equity capital markets; and (vi) the
simplification and reduction in cost of tax reporting for investors in
SunSource. All of these reasons are for the benefit of the holders of B
Interests. Other than as described above under " -- Alternatives to the
Conversion," the primary benefit of the Conversion to holders of A Interests is
the simplification of tax reporting, although the General Partner believes that
several of the benefits listed below will increase the likelihood of timely
distributions on the Trust Preferred Securities.
o Expansion of Potential Investor Base. The General Partner anticipates that the
Conversion will expand SunSource's potential investor base to include
institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons. In
40
addition, the General Partner anticipates that the Common Stock (as compared
to Interests) will receive additional investor interest through increased
review and evaluation by research analysts.
o Conservation of Cash. The Corporation will conserve cash by the retention of
the annual Management Fee of $3,330,000 and the retention of distributions on
the General Partner's ownership in the Partnership and the Operating
Partnership amounting to approximately $400,000 annually.
o Tax Consequences. The benefit of being taxed as a partnership will end under
current law after December 31, 1997. Although the Corporation will also have
to pay tax on its income, the Conversion will allow SunSource to conserve
additional cash because the interest payable on the Junior Subordinated
Debentures, which will approximately equal the distributions currently paid on
the A Interests, is deductible for federal income tax purposes, resulting in a
corporate tax benefit of approximately $4,900,000 annually. Four bills are
presently pending in Congress which would change the December 31, 1997
deadline. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status
and Taxation of Partnership." The General Partner believes that even if one of
these bills is adopted, the Conversion would still be desirable for the other
reasons set forth herein.
o Acquisition Currency. The General Partner believes that current industry
conditions may provide opportunities for SunSource to grow through the
acquisition of businesses and assets which are complementary to its existing
businesses. In certain cases, SunSource may want to be able to issue equity
interests as payment of the purchase price for such acquisitions. The General
Partner believes that an equity interest in a corporation will be a more
attractive acquisition currency to sellers than an interest in a partnership.
SunSource is not presently party to any agreement or understanding regarding a
material acquisition and currently has no plans to make a material
acquisition.
o Greater Access to Equity Markets. The General Partner expects that the
Corporation will have greater access, after the expiration of the nine-month
lock-up period, to the public and private equity capital markets than the
Partnership, potentially enabling it to raise capital on more favorable terms
than are now available to the Partnership. This greater access may be of
particular benefit if SunSource proposes to issue equity securities to reduce
existing debt, or to raise additional funds for capital expenditures or
otherwise to expand its business. The Corporation's access to equity capital
markets will be limited during the period from the date of the Conversion to
the earlier of an initial secondary offering of shares held by Lehman Brothers
and management and the nine-month anniversary of the Conversion. See "RESALE
OF SECURITIES -- Resales by Lehman Brothers and Management."
o Tax Reporting. In addition, the General Partner believes that the complexities
of tax reporting associated with partnership investments are regarded as
unduly burdensome for most limited partners under current conditions. The
ownership of stock rather than Interests will greatly simplify tax reporting
with respect to an investment in SunSource on each limited partner's
individual federal and state income tax returns for future years.
Terms of the Conversion
Structure of the Conversion. If approved by the limited partners, the
Conversion will be effected as follows:
The Partnership will contribute its limited partnership interest in the
Operating Partnership and Lehman/SDI will contribute its general partnership
interest in the General Partner to LPSub in exchange for common stock of LPSub.
Certain current and former members of management of the General Partner will
contribute their limited partnership interests in the General Partner to the
Corporation, in exchange for 462,000 shares of Common Stock, of which 75,000
shares will be held in escrow to distributed after two years if all
distributions on the Trust Preferred Securities have then been paid, and the
Corporation will contribute such limited partnership interests to SunSub A, a
wholly owned subsidiary. The Partnership and LPSub will then merge with and into
the Corporation and (i) the A Interests will be converted into 4,217,837 Trust
Preferred Securities and cash; (ii) the B Interests will be converted into
5,418,936 shares of Common Stock and (iii) the common stock of LPSub held by
Lehman /SDI will be converted into 538,000 shares of Common Stock. The
Corporation will contribute the limited partnership interests in the Operating
Partnership to SunSub A and the general partnership interest in the General
Partner to SunSub B, also a wholly owned subsidiary.
41
o As a result of the Conversion, the former holders of A Interests will be
holders of Trust Preferred Securities and the former holders of B Interests
and the partners of the General Partner will be holders of shares of Common
Stock of the Corporation.
o The Corporation, through its subsidiaries, will then be the holder of the
general and limited partnership interests in the Operating Partnership and the
General Partner.
The Operating Partnership will be managed by the General Partner, whose
general partner will be Sun Sub B, which will act under the direction of its
parent, the Corporation. By reason of the Merger, the Corporation will be
responsible for all liabilities and obligations of the Partnership.
The Conversion is proposed to be effected pursuant to an Agreement and
Plan of Conversion, attached as Exhibit B and incorporated by reference herein,
among the Corporation, the Partnership, LPSub, Lehman/SDI and the limited
partners of the General Partner (the "Conversion Agreement").
As set forth under "SPECIAL FACTORS --Limited Partner Litigation," the
amended complaint filed in the Delaware Chancery Court alleges that the
Conversion is in breach of the provisions of the partnership agreements
governing the Partnership and the Operating Partnership. While the General
Partner disagrees strongly with these allegations, the Conversion Agreement
provides that, to the extent any of the terms of the Conversion Agreement
violate any of the provisions of the partnership agreements, the adoption of the
Conversion Proposal by the limited partners and the General Partner shall be
deemed to be an amendment and waiver of any such provisions in order to
effectuate the Conversion. Amendments to the partnership agreements are
permitted with the approval of a majority of the unaffiliated holders of A
Interests and B Interests voting as a single class so that approval by the
unaffiliated holders of the Conversion Proposal as set forth in this Proxy
Statement/Prospectus will satisfy that requirement.
Diagrams illustrating the structure of SunSource and its subsidiaries,
both before and after the Conversion, are set forth immediately preceding the
Summary.
Effective Time. If approved at the Special Meeting, the Conversion is
expected to become effective on September 30, 1997 (the "Effective Time").
Conditions to the Conversion. The principal conditions to the Conversion
are (i) the affirmative vote of limited partners holding an aggregate of more
than 50% of the outstanding A Interests and B Interests, each voting separately
as a class; (ii) the affirmative vote of unaffiliated limited partners (limited
partners other than affiliates of the General Partner) holding an aggregate of
more than 50% of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class; (iii) approval of the Trust
Preferred Securities and Common Stock for listing on the NYSE; (iv) no
withdrawal of the Special Committee's determination that the Conversion is fair
to the holders of A Interests and the holders of B Interests or of the fairness
opinion of Smith Barney; (v) receipt of a satisfactory tax opinion; (vi) the
availability of financing to refinance existing senior debt on terms acceptable
to the Corporation; and (vii) no material change in applicable law, including
with respect to the taxation of the Conversion, the Partnership, the Corporation
or the Trust Preferred Securities.
Indemnification. Pursuant to the terms of the Conversion Agreement, the
Partnership prior to the Effective Time, and the Corporation after the Effective
Time, agree to indemnify officers, directors, partners, stockholders, agents or
fiduciaries of the Partnership, the Operating Partnership, the General Partner,
Lehman/SDI or the Corporation and their respective affiliates (collectively,
"Indemnified Parties") for damages paid pursuant to claims based on the fact
that such person was an officer, director, partner or shareholder of one or more
of such entities. The Partnership and the Corporation also agree to reimburse
the Indemnified Parties for expenses (including attorneys' fees) incurred in
defending such claims.
Termination; Amendment. The General Partner may terminate the Conversion
Agreement and abandon the Conversion at any time before it becomes effective,
whether before or after approval by the limited partners. Any provision of the
Conversion Agreement may be waived at any time by the party that is entitled to
the benefits thereof, and the Conversion Agreement may be amended at any time
before or after approval thereof by the limited partners by agreement of the
Board of Directors of Lehman/SDI and the other parties to the Conversion
Agreement. After any such approval, however, no amendment or waiver may be made
that decreases the amount or changes the type of the consideration or that in
any way materially and adversely affects the rights of the holders of Interests
without the approval of a majority of such holders.
42
Consequences if Conversion is Not Approved
If the Conversion is not approved by the limited partners, or if the
Conversion is not consummated for any other reason, the Partnership presently
intends to continue to operate as an ongoing business in its current form. No
other transaction is currently being considered by the Partnership as an
alternative to the Conversion, although the Partnership may from time to time
explore other alternatives.
Failure to consummate the conversion could result in a substantial
reduction in income available to B Interests after December 31, 1997, since it
is likely that payment of the A Interest Priority Return would be distributed
from net income after payment of corporate income taxes. This result could also
impede the Partnership's ability to pay the Priority Return after December 31,
1997. For a discussion of proposed revisions to current tax law that may affect
the taxation of the Partnership if the Conversion is not approved, see "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the
Partnership."
The following table shows the pro forma results for the three months ended
March 31, 1997 and for the year ended December 31, 1996 if the Conversion were
not approved and the Partnership were to be taxed as a Corporation (as it will
be after December 31, 1997 under current tax law) compared to the Partnership
being converted to corporate form in accordance with the terms of the proposed
Conversion.
For the three months ended March 31, 1997, the Partnership's operations
would result in a net loss of $0.031 per existing B Interest if the Partnership
were taxed as a corporation compared to net income of $0.044 per existing B
Interest if the Partnership were to have converted to corporate form. Of the
$0.075 increase in earnings per B Interest in the pro forma results for the
Conversion, $0.063 is attributable to the exchange of A Interests for Trust
Preferred Securities and cash (and the tax benefits of the deduction of the
interest payments on the related Junior Subordinated Debentures) and $0.012 is
attributable to retention of the General Partner's Management Fee and respective
1% ownership interests in the Partnership and the Operating Partnership in
exchange for the issuance of 4,000,000 shares of Common Stock (before reverse
stock split).
For the year ended December 31, 1996, the Partnership's operations would
result in a net loss of $0.076 per existing B Interest if the Partnership were
taxed as a corporation compared with net income of $0.204 per existing B
Interest if the Partnership were to have converted to corporate form. Of the
$0.28 increase in earnings per B Interest in the pro forma results for the
Conversion, $0.232 is attributable to exchange of A Interests for Trust
Preferred Securities and cash (and related tax benefits as previously discussed)
and $0.048 is attributable to the retention of the General Partner's Management
Fee and the exchange of General Partner ownership interests as discussed above.
43
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(1) Includes non-recurring charges of $5,950 related to restructuring.
(2) Excludes amortization costs directly related to purchase accounting on
exchange of the minority interest in the Operating Partnership in the amount of
$93 for the three months ended March 31, 1997 and $370 for the twelve months
ended December 31, 1996.
Under current law, tax distributions to B Interest holders would be
discontinued after December 31, 1997 even if the Conversion is not approved,
because income taxes on the Partnership's income will be paid by the Partnership
(rather than the partners) after that date.
Failure to consummate the Conversion will result in reduced cash flow,
which may inhibit the Partnership's ability to finance adequately future growth
by internal expansion or acquisition. The above table shows pro forma net income
in corporate form of $1.1 million and $5.2 million to holders of corporate B
Interests for the three months ended March 31, 1997 and for the year ended
December 31, 1996, respectively, versus a loss of $.7 million and $1.6 million,
respectively, to holders of B Interests if the Partnership were taxed as a
corporation. If the Conversion is not approved, the General Partner might
reconsider other alternatives, including liquidation of the Partnership. In the
event of a liquidation, the A Interests would be entitled to a liquidation
preference of $10 per Interest.
44
Allocation of Interests in the Conversion
As set forth under " -- Determinations of the Special Committee --
Negotiations with the General Partner," the terms of the Trust Preferred
Securities and the exchange ratio for the A Interests of 0.38 of a Trust
Preferred Security and $1.30 in cash and the number of shares to be allocated to
the partners of the General Partner were the product of negotiations between the
General Partner and the Special Committee and their respective advisors. These
negotiations between the General Partner and the Special Committee took into
account the existing economic interests of the General Partner and the limited
partners, as well as their respective rights under various provisions of the
Partnership Agreement and the Operating Partnership Agreement, including the
General Partner's right to receive the Management Fee under the terms of the
Operating Partnership Agreement. See "-- Existing Economic Interests of the
Partners;" " -- Determinations of the Special Committee." In its deliberations
during these negotiations, the Special Committee considered a number of factors
affecting the terms of the Trust Preferred Securities, the exchange ratio and
amount of cash to be exchanged for the A Interests, and the number of shares of
Common Stock to be allocated to the partners of the General Partner, and the
Special Committee obtained a fairness opinion from its financial advisor with
respect to the terms of the Conversion. For a discussion of the factors
considered by the Special Committee during its deliberations, see "--
Determinations of the Special Committee -- Factors Considered by the Special
Committee." For a discussion of the fairness opinion of Smith Barney, see "--
Opinion of Smith Barney."
The values set forth in the tables below do not fully reflect the
negotiating process by which the allocation of interests was determined nor
should limited partners rely on them as indicators of the actual values of the
Interests or the consideration to be received in respect of Interests in the
Conversion. The information has been prepared by the General Partner based on
preannouncement market prices, the General Partner's estimated value of the
Management Fee and the reference prices determined in the conversion to
corporate form alternative. See "-- Alternatives to the Conversion."
CALCULATION OF VALUE OF PARTNERSHIP INTERESTS BEFORE CONVERSION
- ---------------------
(1) Average closing market price on the five trading days immediately preceding
the public announcement of the terms of the Conversion on December 11, 1996.
(2) Estimated value of GP's 1.99% effective equity ownership interest of
$4,281,000 based on business enterprise value derived from the pre-announcement
market prices of the A and B Interests shown herein, plus the estimated value of
the GP's Management Fee of $26,640,000, representing the low end of the
estimated value range for the Management Fee proposed by the General Partner to
the Special Committee at the commencement of negotiations.
The table below shows the value of the total consideration for each type
of partnership interest based on the 1997 reference price for each of the A and
B Interests as derived in the Conversion alternative. See " -- Alternatives to
the Conversion."
45
CALCULATION OF AGGREGATE VALUE OF POST-CONVERSION CONSIDERATION
- ---------------------
(1) The 11,099,573 A Interests will be exchanged for $14,429,445 of cash and
4,217,837 11.6% Trust Preferred Securities having a liquidation preference of
$25.00.
(2) Based on the 1997 reference price per A Interest derived in the Conversion
alternative, plus $1.30 per A Interest in cash to be received in the Conversion.
See "-- Alternatives to the Conversion -- Per A Interest."
(3) Each B Interest will be exchanged for 0.25 shares of Common Stock. B
Interests shown are before 1-for-4 reverse stock split.
(4) Based on the 1997 reference price per Class B Interest derived in the
Conversion alternative. See "-- Alternatives to the Conversion -- Per B
Interest."
(5) The general partnership interests will be exchanged for 4,000,000 shares of
Common Stock (before giving effect to the 1-for- 4 reverse stock split).
The table set forth below compares the percentages of total value
allocated to each of the A Interests, B Interests and the general partnership
interests pre- and post-Conversion, using the methodologies described above.
Although the percentage of total Partnership value for the A Interests
declines in this table, the total value for the A Interests increases from
$116,546,000 to $134,083,000. The principal reason for the increase in value for
the B Interests is the elimination of the market discount applicable to the B
Interests. See "-- Alternatives to the Conversion."
The terms of the Conversion were the product of negotiations between the
General Partner and the Special Committee and their respective advisors. The
negotiations between the General Partner and the Special Committee and the
deliberations of the Special Committee are described in more detail in "--
Determinations of the Special Committee." Limited partners are strongly urged to
read carefully "-- Factors Considered by the Special Committee" for a discussion
of the material factors considered by the Special Committee during its
deliberations and "-- Opinion of Smith Barney" for a discussion of Smith
Barney's fairness opinion.
The consideration paid in 1987 by the General Partner for its interest in
the Partnership and the Operating Partnership was a capital contribution of
assets of Sun Distributors, Inc. having a stated value of $1,226,364.
46
Distributions and Compensation
The following table sets forth the actual amounts of distributions and
compensation paid by the Partnership to the General Partner, affiliates of
Lehman Brothers and senior management for the Partnership's last three fiscal
years and the amounts of distributions and compensation that would have been
paid if the Conversion had been in effect during such period.
- --------------------
(1) Actual amounts include distributions on A Interests and B Interests held by
senior management. Amounts that would have been paid are distributions on Trust
Preferred Securities to be held by senior management and compensation to senior
management.
(2) Represents amounts paid to Donald T. Marshall, John P. McDonnell and Norman
V. Edmonson as set forth in "MANAGEMENT -- Compensation."
(3) The affiliates of Lehman Brothers and senior management will receive Common
Stock for their B Interests. The partners of the General Partner will receive
Common Stock in place of distributions on the general partnership interests and
the Management Fee. No policy has been established with respect to dividends on
the Common Stock and therefore no amount for such dividends is included in this
column.
(4) Represents $511,752 distributed to the General Partner, $3,535,058
distributed to affiliates of Lehman Brothers, $2,449,244 distributed to senior
management and $3,330,000 for the Management Fee.
(5) Represents $544,780 distributed to the General Partner, $3,977,663
distributed to affiliates of Lehman Brothers, $2,755,724 distributed to senior
management and $3,330,000 for the Management Fee.
(6) Represents $407,983 distributed to the General Partner, $2,144,209
distributed to affiliates of Lehman Brothers and $1,494,065 distributed to
senior management.
Limited Partner Litigation
On January 16, 1997, a holder of B Interests filed a purported class
action in the Delaware Court of Chancery seeking to enjoin the Conversion on the
terms proposed as well as an order requiring the defendants to account to the
plaintiff and the class for damages and requiring the General Partner or its
affiliates to hold the consideration received in trust pending a determination
of the amounts properly attributable to the General Partner's interest.
Defendants named in the complaint are the Partnership, the Corporation, the
General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the
directors of Lehman/SDI. A second complaint containing substantially identical
allegations was filed by a limited partner in the Delaware Court of Chancery on
February 11, 1997. The cases have been consolidated and an amended complaint was
filed on April 16, 1997.
Count I of the amended complaint alleges that the transfer of substantial equity
to the General Partner to the detriment of the B Interests constitutes a breach
of fiduciary duty because (i) the amount of the transfer is an overpayment to
gain the General Partner's cooperation in the implementation of the Conversion
although the General Partner already deemed the Conversion to be in the best
interests of the Partnership and its limited partners; (ii) the approximate
aggregate value of the General Partner's percentage interests in the Partnership
and the Operating Partnership is estimated to be no greater than between $4.1
million and $5.6 million and the General Partner is not entitled to any
additional amount for the Management Fee because it will terminate upon the
Conversion and the payment would be in violation of the partnership agreements;
(iii) the limited partners had no independent representation in the negotiations
and the proposed terms were not the result of arms-length negotiations and were
not based on a valid or independent appraisal of the value of the General
Partner's interests; (iv) the proxy material (as then on file with the SEC) was
misleading because (a) the members of the Special Committee, Messrs. Brewer and
Ransome, were not disinterested because, as directors of Lehman/SDI, they owed
47
fiduciary duties to it and its parent, Lehman Brothers; (b) the presentation of
the methodology employed by Smith Barney was misleading and confusing; (c) the
statement that the Conversion constituted a "change of control" within the
meaning of the Officers' Deferred Compensation Plan is false; and (d) the
statement that SunSource has had no relationship with Smith Barney is a
misrepresentation because Smith Barney acquired a portion of the business of
Shearson Lehman Brothers, Lehman Brothers' predecessor, and had sold 175,000
shares as part of the selling group in the underwritten public offering of the
Partnership in February 1987.
Count II of the amended complaint alleges that the proposed terms
constitute a breach of the partnership agreements governing the Partnership and
the Operating Partnership because (i) the agreements provide only for the
payment of an annual management fee and do not authorize any payments to the
General Partner after the management fee is terminated; (ii) the agreements do
not provide for payment to the General Partner for the present value of future
management services; (iii) the agreements prohibit the payment of additional
consideration to the General Partner for its services and cooperation in
managing the partnerships except with respect to the management fee; (iv) the
distribution of 1,000,000 shares of Common Stock for the General Partner
Interest constitutes a material modification of the order and/or method of
allocation set forth in the Partnership Agreement without the consent of the
public holders of Class B Interests; and (v) the distribution of 1,000,000
shares is in breach of the section which provides that any services rendered to
the Partnership shall be on terms that are fair and reasonable to the
Partnership because the value of the General Partner's future management fees is
zero.
Count III alleges that the conduct described in the amended complaint
constitutes a breach of the covenant of good faith and fair dealing implied in
the SunSource partnership agreement. The amended complaint requests a
preliminary and permanent injunction against the solicitation of proxies and
other steps in consummating the Conversion or rescission if it is completed, an
order that any compensation received by the General Partner or its affiliates be
held in constructive trust pending an independent valuation; and compensatory
damages.
The defendants believe the amended complaint is without merit and
intend to vigorously defend the action.
Determinations of the Special Committee
Appointment of the Special Committee and its Independent Advisors. On June
12, 1996, the Board of Directors of Lehman/SDI appointed the Special Committee
to review, evaluate and reach a determination with respect to the fairness of
the terms of the Conversion to the limited partners, and to make a
recommendation to the Board of Directors with respect to the Conversion. In
connection with these instructions, the Special Committee was authorized to take
such action it deemed necessary or appropriate, including retaining, at the
expense of Lehman/SDI (which expenses are payable by the Partnership and
Operating Partnership pursuant to the terms of the Partnership Agreement and the
Operating Partnership Agreement), legal counsel and a financial advisor. The
Special Committee was also authorized to negotiate and document any agreement
with respect to the Conversion or any revisions thereto. The resolution
establishing the Special Committee provided that the Special Committee is only
advisory in nature and is not authorized or empowered to take any action on
behalf of, or binding upon, Lehman/SDI or its Board of Directors regarding the
Conversion or otherwise. When it created the Special Committee, the Board of
Directors of Lehman/SDI undertook the responsibility of considering the relative
merits of the Conversion as compared to any alternative business strategies that
might exist for the Partnership or the effect of any alternative transaction in
which the Partnership might engage, including the acquisition by one or more
third parties of all or any part of the Partnership or its securities. For a
discussion of the review of certain alternatives to the Conversion considered by
the Board of Directors of Lehman/SDI, see "--Alternatives to the Conversion."
Accordingly, the Special Committee was instructed not to consider the effects of
any such alternatives and, consistent with the resolution establishing the
Special Committee, the Special Committee did not consider the effects of such
alternatives in its deliberations.
O. Gordon Brewer, Jr. and Ernest L. Ransome, III were appointed to serve
on the Special Committee and Mr. Brewer was elected to be the Special
Committee's Chairman. Except for their directorship in Lehman/SDI and the
Corporation and membership on the Special Committee, the members of the Special
Committee are not otherwise affiliated with the Partnership, Operating
Partnership, General Partner, Corporation or Lehman/SDI. Between June 12, 1996
and the date hereof, Mr. Brewer beneficially owned 3,000 A Interests and 1,000 B
Interests and Mr. Ransome beneficially owned 5,000 A Interests and 5,000 B
Interests. As compensation for serving on the Special Committee, Lehman/SDI
agreed to pay to each member of the Special Committee a retainer of $10,000
(subsequently increased to $20,000 in January 1997 at the request of the Special
Committee) in recognition of the substantial effort and time commitment invested
in the Conversion process by the Special Committee, plus a meeting fee of $1,000
per meeting. Lehman/SDI also provided the Special Committee with a letter
acknowledging that the members of the Special Committee would be indemnified,
and have expenses advanced, under Lehman/SDI's bylaws to the fullest extent
permitted under law for any losses or claims arising out of the performance of
the Special Committee.
48
On June 24, 1996, the Special Committee selected Dechert Price & Rhoads as
its independent legal counsel to advise the Special Committee regarding its
fiduciary duties and the legal aspects of the Conversion and any other matters
related to fulfilling the purpose of the Special Committee. On July 16, 1996,
the Special Committee formally engaged Smith Barney to act as independent
financial advisor to the Special Committee and in that capacity, among other
things, to (i) assist the Special Committee in its review of the business and
operations of the Partnership and the Operating Partnership and their historical
and projected financial condition, (ii) assist the Special Committee in its
review, evaluation and negotiation of the financial terms and structure of the
Conversion and (iii) render an opinion to the Special Committee and to the Board
of Directors as to whether (x) the consideration to be received in the
Conversion by the holders of A Interests is fair from a financial point of view
to such holders, (y) the consideration to be received in the Conversion by the
holders of B Interests is fair from a financial point of view to such holders,
and (z) the consideration (the "General Partner Consideration") to be received
by the General Partner in exchange for the General Partnership Interests (as
defined below) is fair from a financial point of view to the holders of A
Interests and to the holders of the B Interests, respectively.
Due Diligence, Evaluation and Preliminary Analysis of Initial Conversion
Proposal. Beginning in July 1996, at the instruction of the Special Committee,
Smith Barney and Dechert Price & Rhoads reviewed certain financial and legal
information relating to the Partnership and its operations to assist the Special
Committee. In addition, representatives of Smith Barney met with the senior
management team to discuss the Partnership's business, operations and prospects.
On August 8, 1996, the Special Committee received the General Partner's
proposal (the "Initial Conversion Proposal"), to convert the Partnership into a
corporation. The Initial Conversion Proposal provided for (i) each A Interest to
be exchanged for a package of preferred stock and subordinated debt of the
Corporation with an aggregate liquidation preference and face value of $10.00
per A Interest and aggregate annual cash distributions of $1.10 per year, (ii)
each B Interest to be exchanged for 0.25 share of Common Stock1, and (iii) the
General Partner's general partnership interests in and rights under the
Partnership and the Operating Partnership (the "General Partnership Interests"),
to be exchanged for 2,285,750 shares of Common Stock. The General Partner
informed the Special Committee that the number of shares of Common Stock
proposed to be exchanged for the General Partnership Interests represented the
General Partner's determination of the value of the General Partnership
Interests, including the General Partner's percentage interest in each of the
Partnership and the Operating Partnership, the value attributable to the General
Partner's right to receive the Management Fee pursuant to the terms of the
Operating Partnership Agreement, and a "control premium" in addition to the
value attributable to the percentage interests and Management Fee. The Initial
Conversion Proposal was supplemented on August 16 with a description of the
terms of the preferred stock and subordinated debt to be exchanged for the A
Interests.
On August 26, 1996, the Special Committee met with its financial and legal
advisors to preliminarily discuss the Initial Conversion Proposal. Smith Barney
discussed with the Special Committee its preliminary views of the financial
aspects of the Initial Conversion Proposal. The Special Committee's advisors
reported on the status of their review of the Partnership and its operations.
After extensive discussion of the terms of the Initial Conversion Proposal, the
Special Committee instructed its advisors to arrange for a meeting with
representatives of the General Partner and its advisors to express a number of
areas of concern to the General Partner, including the likely effect on market
liquidity for holders of A Interests resulting from the proposed issuance of
multiple classes of securities in exchange for the A Interests.
On September 4, 1996, the General Partner modified the Initial Conversion
Proposal and provided the Special Committee and its advisors with draft terms
for trust preferred securities which were proposed to be exchanged for the A
Interests. Each A Interest would be exchanged for 0.40 trust preferred
securities, with a liquidation preference of $25.00 (or $10.00 for each A
Interest) and cumulative cash distributions of 11% per annum ($1.10 per year for
each A Interest).
Negotiations with the General Partner. On September 9, 1996,
representatives of Smith Barney and Dechert Price & Rhoads met with
representatives of the General Partner (including Lehman Brothers and the
Partnership's management) and legal counsel to Lehman Brothers. The Special
Committee's advisors informed the General Partner that in evaluating the
fairness of any exchange of securities for A Interests in the Conversion, the
Special Committee would attribute significant weight to the current market price
of the A Interests as opposed to their $10 liquidation preference, and that the
terms of the Conversion should reflect the taxable nature of the exchange of A
- --------
(1) All references to shares of Common Stock reflect the one-for-four reverse
stock split implied by the exchange ratio for B Interests in the Conversion.
49
Interests and any elimination of existing economic and other rights currently
available to the A Interests. With respect to the proposed consideration for the
General Partnership Interests, the General Partner was informed that the Special
Committee believed the number of shares of Common Stock proposed to be exchanged
for General Partnership Interests substantially overstated the value of the
General Partnership Interests. The Special Committee had taken note of certain
limitations on the value of the Management Fee, including the limited partners'
right under the Partnership Agreement to remove the General Partner by a vote of
80% of the outstanding unaffiliated Interests and the termination of the General
Partner's right to receive the Management Fee upon the liquidation of the
Partnership. The General Partner was also advised that the Special Committee did
not believe that the General Partner was entitled to a "control premium" for the
General Partnership Interests (i.e., any value over and above the value
attributable to the General Partner's percentage interest in each of the
Partnership and the Operating Partnership and the Management Fee), especially in
view of the significant Common Stock ownership which Lehman Brothers, its
affiliates and management would have in the Corporation after the Conversion and
their representation on the Corporation's Board of Directors. Moreover, the
Special Committee's legal counsel conveyed the Special Committee's concern with
a number of issues relating to the governance of the Corporation after the
Conversion, including (i) the potential shift in voting power from the current
unaffiliated holders of A Interests and B Interests to Lehman Brothers, its
affiliates and management as a result of both the issuance of a significant
number of shares of Common Stock in exchange for the General Partnership
Interests and the loss of voting rights previously belonging to the A Interests,
(ii) the potential for a post-Conversion sale by Lehman Brothers of a control
block of Common Stock at a premium not available to all holders of Common Stock
generally or otherwise in a manner not in the best interests of all holders, and
(iii) the need for a meaningful independent check on any decision by Lehman
Brothers or management with respect to any major transaction by the Corporation
with change of control implications occurring shortly after the Conversion,
particularly given the substantial equity to be received by the General Partner
in exchange for the General Partnership Interests, and Lehman Brothers'
expression of interest in possibly liquidating some or all of its Common Stock
holdings after the Conversion. For a discussion of the Special Committee's
consideration of these corporate governance issues and the provisions negotiated
by the Special Committee, see "-- Certain Corporate Governance Matters" below.
From September 10-17, 1996, representatives of Lehman Brothers and Smith
Barney had a number of discussions regarding the value and terms of the proposed
trust preferred securities. Lehman Brothers indicated that, in response to the
Special Committee's concerns, the General Partner was prepared to increase the
annual yield on the proposed securities to 11.8%, resulting in the holders of A
Interests receiving cash distributions of $1.18 per annum with respect to the
trust preferred securities received in exchange for each A Interest. During the
same period, counsel to the Special Committee and Lehman Brothers discussed the
corporate governance issues raised by the Special Committee.
On September 17 and 18, 1996, the Special Committee met telephonically and
in person with its legal counsel and financial advisors to consider the
revisions to the Conversion proposal. The Special Committee received a report
from its advisors regarding the September 9 meeting and reviewed with them the
revised Conversion proposal. The Special Committee identified as its major areas
of concern (i) the value of the trust preferred securities, (ii) the taxable
nature of the Conversion to holders of the A Interests, (iii) the differences
between the trust preferred securities and the A Interests, including the
Corporation's right to call the trust preferred securities at par after five
years or at any time upon the occurrence of a Tax Event, and the Corporation's
ability to defer payments on the trust preferred securities at any time or from
time to time for up to 60 consecutive months, (iv) the number of shares of
Common Stock proposed to be issued with respect to the General Partnership
Interests, and (v) the need for certain corporate governance provisions for the
benefit of unaffiliated holders of Common Stock given the Special Committee's
concerns in this area noted above.
On October 22, 1996, the General Partner presented the Special Committee
with a new set of proposed terms for the Conversion (the "Second Conversion
Proposal"). The Second Conversion Proposal provided for (i) each A Interest to
be exchanged for (a) 0.38 of an 11.6% Trust Preferred Security with a
liquidation amount of $25.00 (or $9.50 per A Interest), callable at par in five
years, and (b) $1.00 in cash, (ii) each B Interest to be exchanged for 0.25
share of Common Stock, and (iii) the General Partnership Interests to be
exchanged for an aggregate of 1,375,000 shares of Common Stock, 1,000,000 shares
of which would be received by the General Partner upon consummation of the
Conversion, and the remaining 375,000 shares of which would be received by the
General Partner in 125,000 share installments on the first three anniversaries
of the Conversion, provided that if there were accrued and unpaid distributions
on the Trust Preferred Securities on such dates, such shares would not be
received by the General Partner until such distributions had been paid. The
Second Conversion Proposal also contained a restriction on the ability of Lehman
Brothers and management to vote or transfer the shares of Common Stock which
they received in exchange for the General Partnership Interests, although such
restrictions did not apply to Common Stock received by them with respect to
their B Interests. In response to the Special Committee's concerns regarding the
dominant influence of certain stockholders after the Conversion, the Second
Conversion Proposal also provided for the Corporation's Board of Directors to
consist of nine directors, up to two designated by Lehman Brothers and its
affiliates, three from management and four independent directors (the
"Independent Directors").
50
On October 23 and 24, 1996, the Special Committee met telephonically and
in person with its financial and legal advisors to discuss the Second Conversion
Proposal. At these meetings the Special Committee determined to advise the
General Partner that the Second Conversion Proposal did not adequately
compensate holders of the A Interests and that the 1,375,000 shares of Common
Stock proposed to be exchanged for the General Partnership Interests was not
acceptable to the Special Committee. The Special Committee discussed with its
advisors various alternative structures regarding the timing of the issuance of
Common Stock for the General Partnership Interests, including the possibility of
issuing a smaller number of shares without any vesting requirements, or linking
a portion of the shares to a contingent vesting schedule based on the financial
performance of the Corporation after the Conversion. As to the corporate
governance aspects of the Second Conversion Proposal, the Special Committee
determined to continue negotiating for additional provisions protecting
minority, unaffiliated stockholders, including as to voting and resale
restrictions on Lehman Brothers' and management's Common Stock, and a provision
requiring approval of a majority of the Independent Directors for some period of
time following the Conversion with respect to certain types of transactions.
Later on October 24, the Special Committee and its advisors met with Lehman
Brothers, management, and counsel to Lehman Brothers and the Partnership to
further negotiate the terms of the Second Conversion Proposal. The parties were
unable to reach an agreement with respect to the number of shares comprising the
General Partner Consideration, although they did reach agreement on the $1.30
cash payment to be included as part of the consideration for the A Interests and
the nature of the restrictions on the voting power of Lehman Brothers and
management after the Conversion. See "--Factors Considered by the Special
Committee -- Certain Corporate Governance Matters" and "DESCRIPTION OF CAPITAL
STOCK -- Stockholders Agreement."
During the next three weeks, the Special Committee's advisors continued to
discuss the General Partner Consideration, the terms of any vesting of
contingent shares and further refinements to the corporate governance provisions
with the General Partner and its counsel, including the prohibition on certain
resales of Common Stock by Lehman Brothers and certain senior members of
management, and the requirement of Independent Director approval of certain
types of transactions after the Conversion. See "--Factors Considered by the
Special Committee -- Certain Corporate Governance Matters" and "DESCRIPTION OF
CAPITAL STOCK -- Stockholders Agreement." On November 15, 1996, the Special
Committee met with Mr. Donald T. Marshall, the Partnership's Chairman and Chief
Executive Officer. Mr. Marshall proposed various vesting alternatives and
performance targets which resulted in a maximum of 1,125,000 shares being paid
out for the General Partnership Interests if all such performance targets were
met. The parties were unable to reach agreement on the number of shares or
performance targets.
During telephonic meetings on November 7, 14, 15, 18 and 25 and December 3,
the Special Committee continued to examine with its advisors the terms of the
Conversion. The Special Committee concluded that it was unlikely that the
Special Committee and the General Partner would be able to reach agreement on
the appropriate performance vesting targets and determined to drop its request
for vesting based on performance targets in exchange for a reduction in the
aggregate number of shares to be paid for the General Partnership Interests.
During November and the first week of December 1996, the Special Committee
and its advisors had a series of discussions with Lehman Brothers, management,
counsel to Lehman Brothers and counsel to the Partnership regarding the
resolution of the remaining issues on the proposal, including the agreement that
1,000,000 shares of Common Stock be exchanged for the General Partnership
Interests. On December 4, 1996, during a telephone conference among the members
of the Special Committee, Lehman Brothers, Mr. Marshall and Mr. Edmonson, the
parties agreed upon a premium of 101% of liquidation value upon a Tax Event
redemption of the Trust Preferred Securities and a two year vesting requirement
for 75,000 shares of the Common Stock to be exchanged for the General
Partnership Interests. At the Special Committee's request, the General Partner
clarified that the three most senior members of management (Messrs. Marshall,
Edmonson and McDonnell) would agree to waive any right to receive accelerated
payments under the change in control provisions of the Partnership's deferred
compensation plans. See "MANAGEMENT -- Change in Control Arrangements." On
December 9, 1996, the Special Committee received the final draft of the summary
terms of the Conversion proposal (the "Term Sheet") from the General Partner
reflecting the terms agreed upon.
51
Initial Determination to Recommend the Conversion, Fairness Opinion. On
December 2, 1996, and again on December 10, 1996, the Special Committee met with
Smith Barney and Dechert Price & Rhoads for a comprehensive review of the terms
of the Conversion proposal. At both meetings, Smith Barney made a presentation
to the Special Committee regarding the fairness of the consideration to be
received in the Conversion from a financial point of view to the holders of the
A Interests and the B Interests, respectively, and the fairness from a financial
point of view of the General Partner Consideration to the holders of the A
Interests and the B Interests, respectively. At the December 10 meeting, Smith
Barney, upon the Special Committee's request, rendered a written fairness
opinion, dated December 10, 1996.
Upon receipt of Smith Barney's written fairness opinion, the Special
Committee unanimously determined to recommend to the Board of Directors of
Lehman/SDI that, as of such date, (i) the terms of the Conversion set forth on
the Term Sheet were (x) fair to the holders of the A Interests and (y) fair to
the holders of the B Interests, and (ii) the consideration to be received in the
Conversion by the holders of the general and limited partnership interests in
the General Partner (the "General Partner Consideration") in exchange for their
general and limited partnership interests in the General Partner was fair to the
holders of the A Interests and the holders of the B Interests, respectively. The
Special Committee's recommendation was subject to its review of, and
satisfaction with, the definitive documentation effecting the Conversion and to
its receipt of an updated written fairness opinion of Smith Barney, in form and
substance satisfactory to the Special Committee, after such definitive
documentation had been completed.
On December 11, 1996, the Special Committee and its financial and legal
advisors met with the Board of Directors of Lehman/SDI and advised the Board of
Directors of Lehman/SDI that the Special Committee had reviewed the proposed
terms of the Conversion set forth on the Term Sheet submitted to it by the
General Partner and that at the Special Committee meeting held the previous
afternoon, the Special Committee had received a written fairness opinion dated
December 10, 1996 from Smith Barney and the Special Committee delivered to the
Board of Directors of Lehman/SDI a letter of recommendation as described above
with respect to the proposed terms of the Conversion. The Special Committee and
Smith Barney advised the Board of Directors of Lehman/SDI that their analyses
did not include any effects of the restructuring charge related to the
Partnership's Technology Services divisions and Glass Merchandising business,
which was finalized and announced later that day. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of
Operations -- Restructuring Charges." The Special Committee informed the Board
of Directors of Lehman/SDI that, when it convened to review the final
documentation of the Conversion prior to the mailing of the Proxy
Statement/Prospectus, it and Smith Barney would include the effects, if any, of
such restructuring charge in any updated recommendations by the Special
Committee or fairness opinions rendered by Smith Barney. The Board of Directors
then considered the recommendation of the Special Committee and unanimously
approved the proposed terms of the Conversion.
On December 11, 1996, the Partnership issued press releases announcing the
Conversion and the restructuring.
On June 19, 1997, the Special Committee met with its financial and legal
advisors to review the terms of the Conversion as described herein. At this
meeting, Smith Barney reviewed with the Special Committee the effects of the
previously announced restructuring charge, the Partnership's recent operating
results, the Partnership's most recent financial projections and forecasts, and
the terms of the Conversion. Smith Barney made a presentation to the Special
Committee updating its analysis of the fairness from a financial point of view
of the consideration to be received in the Conversion by the holders of the A
Interests and the B Interests, respectively, and the fairness from a financial
point of view of the General Partner Consideration to the holders of the A
Interests and the B Interests, respectively. Smith Barney rendered a written
fairness opinion, dated June 19, 1997, to the effect that, as of such date based
upon and subject to certain matters stated therein, (i) the consideration to be
received in the Conversion by the holders of A Interests is fair, from a
financial point of view to such holders, (ii) the consideration to be received
in the Conversion by the holders of B Interests is fair, from a financial point
of view to such holders, and (iii) the General Partner Consideration to be
received in the Conversion is fair from a financial point of view to the holders
of A Interests and to the holders of B Interests, respectively. See "SPECIAL
FACTORS -- Opinion of Smith Barney."
Upon receipt of Smith Barney's written fairness opinion, the Special
Committee unanimously determined to reaffirm its recommendation to the Board of
Directors of Lehman/SDI that, as of such date, (i) the terms of the Conversion
were (x) fair to the holders of A Interests and (y) fair to the holders of B
Interests, and (ii) the General Partner Consideration was fair to the holders of
the A Interests and the holders of the B Interests, respectively. Consistent
with its instructions from the Board of Directors of Lehman/SDI (which undertook
the responsibility of considering alternatives to the Conversion), the Special
52
Committee noted that it had not considered the relative merits of the Conversion
as compared to any alternative business strategies that might exist for the
Partnership or the effect of any alternative transaction in which the
Partnership might engage, including the acquisition by one or more third parties
of all or any part of the Partnership or its securities or the liquidation of
the Partnership. For a discussion of the review of certain alternatives to the
Conversion considered by the Board of Directors of Lehman/SDI, see "--
Alternatives to the Conversion." For a discussion of the scope of the Special
Committee's authority, see "Determinations of the Special Committee--
Appointment of the Special Committee and its Independent Advisors." The Special
Committee then delivered to the Board of Directors of Lehman/SDI a letter of
recommendation as described above with respect to the Conversion. The Special
Committee was aware of recent legislative attempts to amend existing federal
income tax law affecting securities such as the Trust Preferred Securities and
publicly traded limited partnerships such as the Partnership and advised the
Board of Directors of Lehman/SDI that its recommendation was based upon existing
tax laws. For a discussion of possible tax law changes that may affect the Trust
Preferred Securities or the taxation of the Partnership, see "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the Partnership."
Management Projections
A description of the projections provided by management to the Special
Committee and its advisors and to prospective lenders is included as Exhibit D
to this Proxy Statement/Prospectus. The projections provided to the Special
Committee and its advisors are filed as exhibits to the Schedule 13E-3 filed
with the SEC in connection with the Conversion.
Factors Considered by Special Committee
In reaching its recommendations, the Special Committee considered a number
of factors. The Special Committee's recommendations were made after considering
all of the factors as a whole with respect to each such recommendation, and were
not based on any single factor. In making its recommendations, the members of
the Special Committee exercised their independent business judgment assisted by
their independent financial and legal advisors. The material factors considered
by the Special Committee included the following:
o Fairness Opinion and Related Presentations. The Special Committee reviewed,
considered and analyzed information provided by the Partnership and its
advisors during various meetings and telephone conferences, including the
information as to the historical and forecasted financial performance of the
Partnership and the Corporation (including the restructuring charge announced
by the Partnership in December 1996) and the pro forma effects of the
Conversion, the information and analyses relating to the Partnership and the
Corporation (including their respective values as going concerns), the A
Interests, the B Interests, the General Partnership Interests (including the
Management Fee), the Trust Preferred Securities and the Common Stock, and the
terms and conditions of the Trust Preferred Securities and the corporate
governance arrangements. In reaching its determination as to the fairness of
the Conversion to each of the A Interests and the B Interests, the Special
Committee placed particular weight on the fairness opinion rendered by Smith
Barney. In reviewing Smith Barney's fairness opinion, the Special Committee
was aware that Smith Barney was relying, among other things, on operating
projections prepared by management which are described in Exhibit D to the
Proxy Statement/Prospectus. As described in Exhibit D, the Partnership
instructed the Special Committee and its advisors not to use in their analyses
certain refinancing projections prepared by the Partnership for prospective
lenders in connection with the Conversion. See Exhibit D and "SPECIAL FACTORS
-- Opinion of Smith Barney."
o Trading Volumes and Market Prices. The Special Committee considered (i) the
relatively low trading volumes of the A Interests and the B Interests, (ii)
the relatively narrow trading ranges of $10 1/4 to $11 3/4 for the A Interests
and $4 to $5 1/8 for the B Interests between January 1, 1995 and December 9,
1996, (iii) the absence of a trading market for the Trust Preferred Securities
and Common Stock at the time of the Special Committee's recommendation, and
(iv) the reverse stock split implied by the exchange ratio of B Interests for
Common Stock. The closing sales prices of the A Interests and B Interests on
December 9, 1996, were $10 1/2 and $4 3/8, respectively. For more information
regarding the trading ranges and market prices of the A Interests and the B
Interests, see "MARKET PRICES AND DISTRIBUTIONS."
As to the matters noted in (i) and (ii) above, the Special Committee
recognized that the Conversion will benefit the holders of Trust Preferred
Securities and Common Stock to the extent the Conversion expands the potential
investor base for the Corporation's securities. See "-- Reasons to Convert to
53
Corporate Form." As to the matter noted in (ii) above, the Special Committee
considered the presentations and analyses of Smith Barney and its fairness
opinion. See "- - Opinion of Smith Barney." In assessing the fairness of the
consideration to be received by the holders of the A Interests in the
Conversion, the Special Committee attributed significant weight to the market
price of the A Interests prior to the public announcement of the proposed
terms of the Conversion (which was $10 1/2 at December 9, 1996; see "MARKET
PRICES AND DISTRIBUTIONS") as opposed to their liquidation value of $10.00 per
Interest. As to the matter noted in (iii) above, the Special Committee
recognized, and discussed with its financial advisor, the possibility of
short-term selling pressure on the Trust Preferred Securities and Common Stock
as a result of the change in the form of investment for holders of the A
Interests and B Interests. The Special Committee was also aware that there
could be downward pressure on the market price of the Common Stock after the
Conversion to the extent Lehman Brothers or management take steps to sell any
of their Common Stock holdings. See "RESALE OF SECURITIES -- Resales by Lehman
Brothers and Management." As to the matters noted in (iii) and (iv) above, the
Special Committee consulted with Smith Barney with respect to the level of
market acceptance of the Trust Preferred Securities and Common Stock. However,
Smith Barney's fairness opinion did not express any opinion as to what the
value of the Trust Preferred Securities or the Common Stock actually will be
when issued to holders of A Interests and B Interests, or the prices at which
the Trust Preferred Securities or Common Stock will trade subsequent to the
Conversion. See "-- Opinion of Smith Barney." The Special Committee noted that
the Trust Preferred Securities and Common Stock will be new securities. See
"RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS --
Risks to Holders of A Interests -- Uncertainty Regarding Market Price for
Trust Preferred Securities" and " -- Risks to Holders of B Interests --
Uncertainty Regarding Market Price of Common Stock; Possible Reduction Due to
Sales by Lehman Brothers." In addition, Smith Barney advised the Special
Committee that the valuation of the Trust Preferred Securities was further
complicated by the limited number of Trust Preferred Securities of issuers of
generally comparable credit quality. As to the matter noted in (iv) above, the
Special Committee noted that the General Partner had structured the reverse
stock split implied by the exchange ratio in the Conversion with respect to
the B Interests because it believes the current trading prices for the B
Interests ($4 3/8 at December 9, 1996; see also "MARKET PRICES AND
DISTRIBUTIONS") reduce the attractiveness of the Corporation's equity
securities to the financial community and the investing public. After
consultation with Smith Barney, the Special Committee determined this stated
reason was reasonable and credible. See "SUMMARY -- Reverse Stock Split."
o General Partner's Reasons to Convert to Corporate Form. The Special Committee
considered the reasons expressed by the General Partner in support of the
Conversion. See "-- Reasons to Convert to Corporate Form." The Special
Committee consulted with its financial and legal advisors to assess the
validity of these reasons and determined that they were reasonable and
credible.
o Maintain Current Annual Distributions to Holders of A Interests. The Special
Committee recognized that holders of the Trust Preferred Securities would
receive distributions of $2.90 per annum for each Trust Preferred Security,
which equates to the Priority Return paid of $1.10 per annum on each A
Interest after giving effect to the exchange ratio of Trust Preferred
Securities for A Interests. The Special Committee believed that maintaining
the aggregate annual amount of distributions payable was a benefit to the
holders of the A Interests.
o Differences Between A Interests and Trust Preferred Securities. In evaluating
the Trust Preferred Securities, the Special Committee, considered the various
differences between the A Interests and the Trust Preferred Securities. These
differences included, among others: (i) the Corporation's ability to defer
interest payments on the Junior Subordinated Debentures with respect to the
Trust Preferred Securities at any time or from time to time for a period up to
60 consecutive months, in which case no distributions will be paid on the
Trust Preferred Securities although holders of Trust Preferred Securities will
still be required to accrue original issue discount income with respect to the
unpaid distributions on the Trust Preferred Securities (see "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Risks to Holders of A
Interests -- Option to Extend Interest Payment Period; Tax Impact of
Extension"); (ii) the subordination of the Management Fee to the Priority
Return on A Interests; (iii) the Corporation's ability to redeem at par the
Junior Subordinated Debentures on or after September 30, 2002; (iv) the
Corporation's ability to cause the Trust Preferred Securities to be redeemed
at 101% of their liquidation preference during the first five years upon the
occurrence of a Tax Event if certain conditions are met (see "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Risks to Holders of A
Interests -- Special Event Redemption or Distribution; Shortening of Stated
Maturity;" (v) that holders of A Interests are entitled under the terms of the
Partnership Agreement to receive in liquidation, after the satisfaction of all
liabilities of the Partnership, an amount equal to their capital account
($10.00), whereas holders of Trust Preferred Securities will receive in
liquidation, after satisfaction of all liabilities of the Trust, the
equivalent of $9.50 for each A Interest previously held; and (vi) the loss of
certain rights associated with the ownership of A Interests, such as voting
rights, rights to remove the General Partner, rights to compel dissolution and
duration of the holder's investment (see "COMPARISON OF INTERESTS AND
SECURITIES TO BE ISSUED").
54
As to the matters noted in (i) and (ii) above, the Special Committee discussed
with its advisors the credit quality of the Junior Subordinated Debentures and
Trust Preferred Securities and the prospective terms of the refinancing,
including the circumstances under which the lenders could block payment of the
Junior Subordinated Debentures (see "-- Source and Amount of Funds"). The
Special Committee viewed as a negative factor the Corporation's right, for any
reason or no reason, to defer payments on the Junior Subordinated Debentures.
Also, the Special Committee considered that the monetization of the General
Partner's interest in the Management Fee is a negative factor for the holders
of the Trust Preferred Securities to the extent it would eliminate to some
degree the discipline afforded by the subordination feature of the Management
Fee to keep current any due payments on the Trust Preferred Securities.
However, the unfettered deferral right and the absence of an effective
Management Fee subordination feature were viewed as counterbalanced to some
extent by (a) the adverse consequences any unpaid distributions on the Trust
Preferred Securities would have on the Corporation and the market value of the
Common Stock and the Trust Preferred Securities, (b) the fact that interest
would accrue on such unpaid distributions at a rate of 11.6% per annum
compounded monthly, and (c) the two-year escrow for some of the shares of
Common Stock to be issued to senior management of the Corporation in exchange
for the General Partnership Interests, with payment of such shares being
contingent on prior payment of all distributions due on the Trust Preferred
Securities. See "SUMMARY -- Overview of the Conversion." As to the matters
noted in (iii) above, the Special Committee discussed with Smith Barney its
view of the effect of the optional redemption feature of the Junior
Subordinated Debentures including its effect on the trading yield of the Trust
Preferred Securities. See "-- Opinion of Smith Barney -- Valuation of the A
Consideration." As to the matters noted in (iv) above, the Special Committee
discussed with its advisors the possibility of changes in federal tax law
which might give rise to a Tax Event redemption. The Special Committee
believed that any risk of a Tax Event redemption was mitigated by the
redemption price of $25.25 per Trust Preferred Security (101% of liquidation
value) negotiated by the Special Committee and the provisions of the Indenture
restricting such Tax Event redemptions to circumstances where shortening the
maturity of the Junior Subordinated Debentures does not preserve the tax
deductibility of interest payments on the Junior Subordinated Debentures, as
well as the other benefits of the Conversion to the holders of the A
Interests, including the maintenance of a level of income distributions on the
Trust Preferred Securities equivalent to the Priority Return, the $1.30 cash
consideration, the conservation of the Corporation's cash resulting from the
retention of the Management Fee and the tax deductibility of the interest on
Junior Subordinated Debentures, and the simplified tax reporting for investors
in the Corporation. The Special Committee considered and discussed with its
advisors the possibility of a change in federal tax law affecting securities
similar to the Junior Subordinated Debentures or the Trust Preferred
Securities. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks to Holders of A Interests -- Special Event Redemption
or Distribution; Shortening of Stated Maturity." The Special Committee's
recommendation as to the fairness of the Conversion was based upon existing
tax laws. For a discussion of possible tax law changes that may affect the
taxation of the Trust Preferred Securities, see "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests
-- Special Event Redemption or Distribution; Shortening of Stated Maturity."
It is a condition to the effectiveness of the Conversion that no tax
legislation be pending or in effect which would adversely affect the tax
consequences of the Trust Preferred Securities, although there can be no
assurance that a Tax Event will not occur after the Conversion is completed.
As to the matters noted in (v) above, the Special Committee believed that the
difference in liquidation value between the A Interests and the Trust
Preferred Securities was adequately compensated for by the 11.6% distribution
rate of the Trust Preferred Securities (as opposed to the 11.0% annual
distribution rate on the A Interests), which higher rate equates to the $1.10
per annum distribution currently received by holders of A Interests, and the
$1.30 in cash to be received with respect to each A Interest in the
Conversion. As to the matters noted in (vi) above, the Special Committee
viewed the loss of such voting and other rights as negative factors. However,
the Special Committee noted that both the A Interests and Trust Preferred
Securities are principally yield-oriented preferred securities (with fixed
rates of distribution and the right to participate in liquidating
distributions to the extent of their liquidation preference) with attributes
similar to preferred stock, as opposed to common stock or similar equity
securities and, after consultation with its financial and legal advisors, the
Special Committee concluded that, on balance, the loss of such voting and
other rights was outweighed by the benefits of the Conversion to the holders
of the A Interests discussed herein (including the 11.6% distribution rate and
$1.30 in cash referred to above).
55
o Certain Federal Income Tax Consequences of the Conversion. The Special
Committee considered the applicable federal income tax consequences of the
Conversion to the Partnership and to the Corporation and the holders of A
Interests and B Interests, including the tax consequences noted below:
o Tax Advantages to Corporation of Trust Preferred Securities. The Special
Committee considered the tax benefits to the Corporation of the issuance of
the Trust Preferred Securities and the deductibility of interest on the
Junior Subordinated Debentures. See "-- Reasons to Convert to Corporate Form
-- Tax Consequences." The Special Committee's recommendation as to the
fairness of the Conversion was based upon existing tax laws. For a
discussion of possible tax law changes that may affect the taxation of the
Trust Preferred Securities, see "RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Special
Event Redemption or Distribution; Shortening of Stated Maturity."
o Corporate Level Tax. The Special Committee considered as a negative factor
the loss of the potential future tax benefits associated with operating in
partnership form, including primarily the right to have Partnership income
subject to only one level of federal income taxation. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders
of B Interests -- Adverse Tax Implications." In addition, the Special
Committee considered the loss of the Partnership's favorable tax status for
the period from the date of consummation of the Conversion until December
31, 1997. The Special Committee was aware of recent attempts to amend
existing federal income tax laws to permit certain publicly traded
partnerships, such as the Partnership, to continue to be taxed as
partnerships after December 31, 1997 under certain circumstances. The
Special Committee's recommendation as to the fairness of the Conversion was
based upon existing tax laws. There can be no assurance that future changes
in tax law would not materially affect the Partnership, the Corporation or
their securities or security holders. For a discussion of possible tax law
changes that may affect the Partnership, see "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Partnership Status and Taxation of the Partnership."
o Exchange of A Interests for Trust Preferred Securities and Cash is Taxable.
The Special Committee considered the potential tax consequences of the
Conversion to holders of A Interests. The Special Committee negotiated the
cash portion of the consideration to be exchanged for the A Interests in the
Conversion in part to provide that the holders of the A Interests would be
compensated for, and have the liquidity to pay, income tax which may be
incurred by them as a result of the Conversion. In connection with its
consideration of the tax position of holders of A Interests, the Special
Committee discussed with its advisors and the General Partner the historical
trading prices and volumes of the A Interests, as well as certain tax basis
estimates prepared by management. However, the Special Committee realized
that it could not determine precisely the financial impact of those federal
income tax consequences of the Conversion because the tax basis of each
holder of A Interests in his or her A Interests may be different and tax
rates vary depending on the circumstances and tax status of each holder.
Furthermore, in assessing the tax consequences the Special Committee
recognized that the taxes imposed on any gain recognized as a result of the
Conversion essentially represent an acceleration of the tax gain which a
holder of an A Interest would incur when such holder sold his or her A
Interests in the future. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES --
Certain Tax Consequences of the Conversion to Holders of A Interests." The
Special Committee also considered the likely income tax consequences of the
Conversion to holders of A Interests and B Interests together. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- General Tax Treatment of the Conversion."
o Termination of Tax Distributions on B Interests. The Special Committee
considered the termination of the B Tax Distribution as a consequence of the
Conversion, and the Corporation's current intention regarding the payment of
cash dividends on the Common Stock. The Special Committee noted that the
purpose of the B Tax Distribution was to provide holders of the B Interests
with the cash required to pay income taxes on the Partnership's taxable
income which is allocable and taxable to holders of the B Interests. The
Special Committee believed that termination of the B Tax Distribution is
mitigated by the fact that holders of Common Stock generally will be taxed
only on distributions of money or other property received from the
Corporation and not on their allocable share of the Corporation's taxable
income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax
Consequences of the Conversion to Holders of the B Interests." The Special
Committee also compared the B Tax Distribution, which is made at the rate of
49.5% of the taxable income allocated to the B Interests, with the
56
Corporation's estimate of federal, state and local income taxes payable on
its taxable income at the effective rate of approximately 40%. The Special
Committee was aware that applicable tax rates vary depending upon the
individual circumstances and tax status of each holder. The Special
Committee viewed as a negative factor the possibility that the B Tax
Distribution was a cash resource to B Interest holders to the extent of its
monthly payout feature, particularly for certain holders of B Interests with
respect to the portion of the B Tax Distribution which exceeded the holders'
federal, state and local income taxes on their allocable portion of the
taxable income of the Partnership. However, the Special Committee considered
that this factor was mitigated by the increased cash flow to the Corporation
from this aspect of the Conversion, which in the Special Committee's view
benefits both the A Interests and the B Interests, and that, on balance, the
loss of the B Tax Distribution was outweighed by the benefits of the
Conversion to the holders of the B Interests, including the expansion of the
potential investor base for the Common Stock, the conservation of the
Corporation's cash resulting from the retention of the Management Fee and
the tax deductibility of interest on the Junior Subordinated Debentures, the
Corporation's potential for better access to equity markets and the
potential use of the Common Stock as an acquisition currency, the simplified
tax reporting for investors in the Corporation, and the restrictions on
Lehman Brothers' and management's voting power and ability to resell shares
under the Stockholders' Agreement.
o Possible Reduction in Fiduciary Duties. The Special Committee considered the
elimination of the fiduciary duties owed to the limited partners by the
General Partner, the nature of the fiduciary duties owed to the holders of
Common Stock and Trust Preferred Securities, and the absence generally of
fiduciary duties of the directors of the Corporation to the Trust holding the
Junior Subordinated Debentures or the holders of the Trust Preferred
Securities. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks to Holders of B Interests -- Possible Reduction in
Fiduciary Standards." The Special Committee believed the change in the scope
of the fiduciary duties owed to the former limited partners, especially with
respect to the A Interests exchanged for Trust Preferred Securities, to be a
negative factor, mitigated to some extent because the Special Committee viewed
the A Interests as principally yield-oriented securities.
o Certain Effects of the Conversion. The Special Committee also considered the
pro forma effects of the Conversion (including the transaction costs
associated with the Conversion and the Corporation's pro forma negative
stockholders' equity). See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Transaction
Costs" and "-- Risks to Holders of B Interests -- Transaction Costs" For a
discussion of the pro forma effects of the Conversion, see the pro forma
financial statements included in "INDEX TO FINANCIAL STATEMENTS."
The Special Committee noted that after giving effect to the Conversion, the
Corporation would have pro forma negative stockholders' equity and the Common
Stock would have a pro forma negative book value per share, resulting
primarily from the exchange of Trust Preferred Securities for the A Interests.
The Special Committee did not consider this to be a significant negative
factor, because the accounting measures of stockholders' equity and net book
value per share of Common Stock (in the case of the Corporation) or per
partnership interest (in the case of the Partnership) were not viewed by Smith
Barney as primary determinants of value for ongoing industrial concerns like
the Corporation or the Partnership. The Special Committee also considered the
effects of the foregoing pro forma computations with respect to the
Corporation's ability to legally pay dividends or other distributions on the
Trust Preferred Securities and the Common Stock. For a discussion of these
restrictions, see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risk Factors Applicable to Holders of B Interests -- Certain
Delaware Corporate Law Considerations."
The Special Committee was aware that, as a result of the Conversion, holders
of the A Interests and the B Interests would no longer have a contractual
right to receive the Priority Return and the B Tax Distribution. See "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks
Applicable to Holders of A Interests and B Interests -- Loss of Contractual
Right to Distributions." The Special Committee was also aware that the shares
of Common Stock issued in the Conversion may be diluted by additional
issuances, which may be more likely as a result of the Conversion. See "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to
Holders of B Interests -- Future Dilution of Common Stock."
o Benefits to General Partner of Conversion. In evaluating the fairness to the
holders of the A Interests and the B Interests of the allocation of the number
of shares of Common Stock to be issued with respect to the General Partnership
Interests and the effects of the Conversion, the Special Committee considered
and discussed with its financial and legal advisors a number of factors
benefiting the partners of the General Partner, including: (i) the elimination
57
of the partners of the General Partner's liability for obligations of the
Partnership and Operating Partnership (see "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests
-- Elimination of General Partner Liability for Corporation Obligations" and "
-- Risks to Holders of B Interests -- Elimination of General Partner Liability
for Corporation Obligations"); (ii) the ability of the partners of the General
Partner to convert their illiquid General Partnership Interests into a liquid
security, thereby facilitating the possible sale by the former general and
limited partners of some or all of their Common Stock in the Corporation, and
the value to Lehman Brothers and management of the registration rights they
will receive pursuant to the Registration Rights Agreement; (iii) the value to
the partners of the General Partner of monetizing the Management Fee and
receiving most of their shares of Common Stock immediately upon consummation
of the Conversion; (iv) the potential for the General Partner to treat as
capital gain income some or all of the income realized by them as a result of
the exchange of the General Partnership Interests for shares of Common Stock;
and (v) the acceleration of benefits under the Operating Partnership's
deferred compensation plans due to certain limited partners of the General
Partner (although the Special Committee viewed as a mitigating factor the
waiver of such acceleration by the three most senior members of the
Partnership's management.) See "MANAGEMENT -- Change in Control Arrangements."
o Valuation of General Partnership Interest. In evaluating the fairness to the
holders of the A Interests and the B Interests of the number of shares of
Common Stock to be issued with respect to the General Partnership Interests,
the Special Committee considered and discussed with its financial and legal
advisors a number of factors, including: (i) the value of the General
Partner's 1% percentage interest in the capital and income of the Partnership;
(ii) the value of the General Partner's 1% percentage interest in the capital
and income of the Operating Partnership; (iii) the present value of the
General Partner's right to receive the Management Fee pursuant to the terms of
the Operating Partnership Agreement; (iv) the value to the Partnership of the
services provided by the General Partner with respect to the Management Fee;
(v) the subordination of the Management Fee to the liabilities and obligations
of the Operating Partnership and Partnership and to the Priority Return on the
A Interests and the B Tax Distribution on the B Interests; (vi) the potential
termination of the Management Fee upon the liquidation of the Partnership;
(vii) the potential removal of the General Partner by a vote of 80% of the
Interests owned by unaffiliated limited partners, voting as a single class,
which would result in the payment to the General Partner of 1.01% of the
aggregate fair market value of the A Interests and the B Interests (with no
additional payment with respect to the Management Fee); (viii) the potential
for all or a portion of the Management Fee to be deductible to the Corporation
for income tax purposes after the Conversion if the Corporation and the
General Partner entered into a management agreement providing for the
continuation of the Management Fee on the same terms and conditions presently
applicable; and (ix) the value of the A Interests and B Interests prior to the
Conversion, including the going concern value of the Partnership, and the
value of the shares of Common Stock after the Conversion, including the going
concern value of the Corporation. In addition, the Special Committee
considered certain benefits to the General Partner arising out of the
Conversion discussed under "--Benefits to General Partner of Conversion"
above.
As to the matters noted above generally, the Special Committee considered, and
placed particular weight on, the presentations and analyses of Smith Barney
and its fairness opinion. See "-- Opinion of Smith Barney." As to the matters
noted in (vi) and (vii) above, the Special Committee observed that, although
the Partnership Agreement and the Operating Partnership Agreement essentially
provided for no payment to the General Partner attributable to the General
Partner's right to receive the Management Fee upon liquidation or removal of
the General Partner, the Conversion was neither a liquidation nor a removal of
the General Partner. The Special Committee recognized that the Board of
Directors of Lehman/SDI had considered and rejected the alternative of
liquidation at this time, and liquidation would likely be an unattractive
option in corporate form because of the two levels of income taxation
applicable to corporate liquidations. See "-- Alternatives to the Conversion"
and "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS --
Risks to Holders of A Interests -- Adverse Tax Implications" and "-- Risks to
Holders of B Interests -- Adverse Tax Implications" In addition, the Special
Committee recognized that the right of the unaffiliated limited partners to
remove the General Partner required a supermajority vote of the outstanding
Interests of the unaffiliated limited partners, which made it difficult for
the unaffiliated limited partners to successfully remove the General Partner.
The Special Committee also recognized that the ongoing participation of the
General Partner was required for the Conversion. In this regard, the Special
Committee had been advised by the General Partner that it is the General
Partner's belief that it has no duty to advocate and pursue a transaction that
does not provide the General Partner fair value for all of the economic
components of its General Partnership Interest, including the fair value for
its otherwise continuing right to receive the Management Fee. As to the matter
noted in (viii) above, the Special Committee considered this tax aspect of the
Management Fee and during negotiations raised the possibility of continuation
of the Management Fee after the Conversion. The Special Committee ultimately
58
concluded that continuation of the Management Fee in corporate form would be
unduly burdensome to the Corporation and that the retention of the Management
Fee and the substitution of Common Stock for its value, as provided for in the
Conversion, more closely aligns the interests of the beneficial owners of the
General Partner with the interests of holders of Common Stock. The Special
Committee also believed that the resulting incremental cash flow to the
Corporation was a benefit to the holders of the A Interests and the B
Interests. As to the matters noted in (ix) above, the Special Committee placed
particular weight on the presentations and analyses of Smith Barney and its
fairness opinion. See "-- Opinion of Smith Barney." During its deliberations,
the Special Committee did not attach any weight to the General Partner's
request for a "control premium" for the General Partnership Interests (i.e.,
any value over and above the value attributable to the General Partner's
percentage interest in each of the Partnership and the Operating Partnership
and the Management Fee), especially in view of the significant Common Stock
ownership which Lehman Brothers, its affiliates and management would have in
the Corporation after the Conversion and their representation on the
Corporation's Board of Directors.
o No Appraisal Rights; Separate Class Vote. The Special Committee noted the
absence of appraisal or dissenters' rights for the benefit of holders of
Interests. The Special Committee believed this factor was mitigated by the
requirement that the Conversion be approved by the affirmative vote of
unaffiliated limited partners holding an aggregate of more than 50% of the A
Interests and B Interests, respectively, each voting separately as a class.
See "VOTING AND PROXY INFORMATION -- Vote Required; Quorum" and "-- No
Appraisal Rights."
o Certain Corporate Governance Matters. The Special Committee recognized that
the Conversion altered, or could potentially alter, a number of the existing
corporate governance relationships among the General Partner, Lehman Brothers,
management, and the unaffiliated limited partners. These included in
particular (i) the increased voting power that could accrue to Lehman Brothers
or senior management, (ii) potential sales of control blocks of stock, and
(iii) the potential effect of Conversion on major strategic decisions, in each
case as discussed in "-- Negotiations with the General Partner" above.
As to the matters noted in (i) above, the Special Committee was aware that as
a result of the loss of voting rights of the A Interests and the issuance of
Common Stock for the General Partnership Interests, Lehman Brothers' and
management's pro forma voting power would have increased from 18.0% and 12.6%,
respectively, to 31.4% and 22.6%, respectively. Accordingly, the Special
Committee negotiated a provision in the Stockholders Agreement with Lehman
Brothers and certain members of senior management that restricts the
respective voting power of such persons to the voting power held by each of
them with respect to a vote of the limited partners prior to the Conversion.
See "DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." Under the terms
of such restriction, such persons will agree to vote, in the same proportion
as the shares not owned by them (the "Unaffiliated Shares") that are voted on
any such matter, that percentage of Excess Voting Shares held by them at such
time that equals the percentage of outstanding Unaffiliated Shares that are
voted on such matter. The Special Committee was aware of the significant
ownership of Interests by Lehman Brothers and management in partnership form
and the absence of any voting restrictions on such Interests in the
Partnership Agreement. The Special Committee believed the voting restrictions
obtained in the Stockholders Agreement (which effectively provides that, as to
matters requiring a majority vote of stockholders of the Corporation, the
holders of approximately 77% of the Common Stock held by persons other than
Lehman Brothers and its affiliates and certain members of senior management
have the ability to control the outcome of any such vote) were of benefit to
the other holders of Common Stock, particularly in view of the fact that the
provision in the Partnership Agreement providing for the removal of the
General Partner upon the affirmative vote of 80% of the Interests of the
unaffiliated limited partners would not be carried forward in the
Corporation's Certificate of Incorporation or Bylaws. See "COMPARISON OF
INTERESTS AND SECURITIES TO BE ISSUED."
As to the matter noted in (ii) above, the Special Committee viewed the
Conversion as significantly enhancing the possibility of change of control
transactions involving major stockholders of the Corporation given its more
simplified corporate structure and the likelihood of broader market liquidity
for its Common Stock. After extensive negotiations with the General Partner,
the Special Committee concluded that the general prohibition on sales to third
persons which would beneficially own more than 10% (or in certain cases
involving institutional stockholders, 15%) of the Common Stock substantially
diminished the likelihood of Lehman Brothers or management selling shares of
Common Stock for a premium not available to all stockholders, or effecting a
change of control transaction without the consent of the Independent
Directors. The Special Committee was not aware of any plans or proposals on
the part of the General Partner, Lehman Brothers, management or their
respective affiliates to engage in any block sales of Common Stock, whether or
not prohibited by the terms of the Stockholders Agreement. See "DESCRIPTION OF
CAPITAL STOCK -- Stockholders Agreement."
59
As to the matter noted in (iii) above, the Special Committee believed it
important that there be some meaningful independent check on any decision by
Lehman Brothers or management with respect to any major transaction by the
Corporation with change of control implications occurring shortly after the
Conversion, particularly in light of the substantial equity to be received by
the partners of the General Partner in exchange for their General Partnership
Interests and Lehman Brothers' expression of interest in possibly liquidating
some or all of its Common Stock holdings after the Conversion. Accordingly,
the Special Committee negotiated provisions in the Stockholders Agreement
requiring that at least four of the nine members of the Corporation's Board of
Directors be Independent Directors, and that, for three years after the
Conversion, certain specified transactions, including mergers, asset sales,
liquidations and tender and exchange offers for the Corporation, be approved
by a majority of the Independent Directors on the Corporation's Board of
Directors. Also, the Stockholders Agreement provides for the approval by the
Independent Directors of certain transactions between management and Lehman
Brothers, on the one hand, and the Corporation, on the other. See "DESCRIPTION
OF CAPITAL STOCK -- Stockholders Agreement."
As to the matters noted in (i), (ii) and (iii) above, the Special Committee
was also aware that certain provisions in the Corporation's Certificate of
Incorporation and Bylaws and the Corporation's stockholder rights plan could
have certain anti-takeover effects. See "DESCRIPTION OF CAPITAL STOCK --
Anti-takeover Provisions." However, the Special Committee believed such
provisions and the stockholder rights plan could also facilitate the Special
Committee's objectives in preventing sale of control transactions that were
not in the best interests of all holders of Common Stock as discussed above.
The Special Committee was aware that the Corporation's Certificate of
Incorporation provides that it shall not be subject to Section 203 of the
Delaware General Corporation Law and considered this a negative factor
mitigated to some extent by the other corporate governance provisions
discussed above.
o Conflicts of Interest. In considering the proposed Conversion, the Special
Committee was aware of certain conflicts of interest with respect to the
Committee's deliberations (in addition to those conflicts of interest noted
under "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS
-- Risks to Holders of A Interests -- Conflicts of Interest" and " -- Risks to
Holders of B Interests -- Conflicts of Interest" applicable to the proposed
Conversion generally). These conflicts included the following: (i) the Special
Committee considered the fairness of the proposed Conversion with respect to
both the A Interests and the B Interests (as opposed to having separate
committees consider the terms of the proposed Conversion with respect to the A
Interests and B Interests, respectively); (ii) Smith Barney's fairness
opinion, upon which the Special Committee relied in recommending the proposed
Conversion to the Board of Directors, dealt with fairness from a financial
point of view for both the A Interests and the B Interests (as opposed to
having separate investment banks render fairness opinions with respect to the
A Interests and B Interests, respectively); (iii) the Special Committee
members' beneficial ownership of A Interests and B Interests; (iv) the Special
Committee members' compensation for serving on the Special Committee and
indemnification rights with respect to their service on the Committee, as
described in "--Appointment of the Special Committee and its Independent
Advisors" above; (v) the Special Committee members' status as directors of
Lehman/SDI with fiduciary duties to the stockholder of Lehman/SDI; and (vi)
the designation of the Special Committee as a committee of the Board of
Directors of Lehman/SDI (as opposed to formally and directly representing the
holders of the A Interests and B Interests, respectively--see "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders
of A Interests -- No Independent Representation" and "-- Risks to Holders of B
Interests -- No Independent Representation" above), as well as the general
expectation of the Special Committee members' continuing to serve on the Board
of Directors of the Corporation after the consummation of the proposed
Conversion.
As to the matters noted in (i) and (ii) above, the Special Committee believed
that the conflicts of interest were mitigated by the different terms of the A
Interests and the B Interests. The Special Committee viewed the A Interests as
securities with attributes generally like preferred stock, and therefore
principally as yield-oriented securities. On the other hand, the Special
Committee viewed the B Interests as securities with attributes generally like
common stock, and therefore principally as growth-oriented securities.
Consequently, the Special Committee considered the two instruments as
sufficiently different vis-a-vis their competing claims on the Partnership's
resources to accommodate a single committee review and engagement of one
financial advisor to render fairness opinions for both classes of securities.
In addition, the Special Committee noted the requirement that the Conversion
be approved by a majority of the outstanding unaffiliated A Interests and B
Interests, voting as separate classes. See "VOTING AND PROXY INFORMATION --
Vote Required; Quorum." As to the matter noted in (iii) above, the members of
the Special Committee did not consider their ownership of A and B Interests to
be meaningful in light of the relatively small number of Interests involved.
See "-- Determinations of the Special Committee -- Appointment of the Special
Committee and its Independent Advisors" above. As to the matter noted in (iv)
above, the Special Committee viewed as mitigating factors the Committee's
belief that the compensation and indemnification provisions are generally
60
customary for transactions of this nature and beneficial to the overall
process in light of its complex and time-consuming nature. As to the matters
noted in (v) and (vi) above, the Special Committee considered that its
designation as a committee of the Board of Directors of Lehman/SDI and its
members' prospective continued service on the Corporation's Board of Directors
were mitigated by the Special Committee's retention of independent advisors,
as well as the Special Committee's charge to negotiate any modifications to
the General Partner's proposal if necessary.
o Extent of Negotiations. The Special Committee and its independent financial
and legal advisors were involved in extensive negotiations regarding the terms
of the Conversion with the General Partner, Lehman/SDI, management and counsel
to Lehman/SDI and the Partnership. The Special Committee believed that it had
significant leverage in these negotiations, because it understood that the
Conversion was not likely to proceed without approval from the Special
Committee. The Special Committee considered whether further negotiations would
have resulted in more favorable results for the A Interests or the B
Interests, especially in relation to the amount of consideration exchanged for
the General Partnership Interests. In addition, the Special Committee
considered that additional delays in the negotiation process could adversely
affect the timing of the Conversion or jeopardize the Corporation's ability to
realize the benefits of the Trust Preferred Securities in view of possible
changes in tax laws. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Special Event
Redemption or Distribution; Shortening of Stated Maturity."
o Limitation of Scope of Special Committee's Review. Consistent with its
instructions from the Board of Directors of Lehman/SDI, the Special Committee
did not specifically consider the relative merits of the Conversion as
compared to any alternative strategies or transactions, including liquidation
or sale of the Partnership. See "-- Determinations of the Special Committee."
For a discussion of the review of certain alternatives to the Conversion
considered by the Board of Directors of Lehman/SDI, see "-- Alternatives to
the Conversion." For a discussion of the scope of the Special Committee's
authority, see "-- Determinations of the Special Committee -- Appointment of
the Special Committee and its Independent Advisors." Accordingly, the Special
Committee did not specifically consider the potential liquidation values of
the A Interests and B Interests, although the Special Committee was aware of
the $10.00 liquidation preference of the A Interests and the liquidation
analyses previously undertaken by the Board of Directors of Lehman/SDI and the
Board's determination that liquidation was not an acceptable alternative to
the Partnership. In addition, the Special Committee did not consider, and was
not aware of, any firm offers during the preceding 18 months for the
Partnership or all or any substantial part of its assets.
The foregoing is a summary of the information and factors considered by the
Special Committee and is not intended to be exhaustive but is believed to
include all material factors considered by the Special Committee. In reaching
its recommendation that the Conversion is fair to the holders of the A Interests
and fair to the holders of the B Interests, and that the General Partner
Consideration is fair to the holders of the A Interests and the holders of the B
Interests, respectively, the Special Committee did not assign specific or
relative weights to the foregoing factors, except that each member placed
significant weight on the fairness opinion of Smith Barney.
For additional information regarding certain risks relating to the
Conversion, limited partners should read carefully "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS" herein.
Opinion of Smith Barney
The Special Committee, Lehman/SDI, the Partnership, the Operating
Partnership and the General Partner have retained Smith Barney to act as
financial advisor to the Special Committee in connection with the Conversion. In
connection with its engagement, Smith Barney has delivered to the Special
Committee its written opinions, dated December 10, 1996 and June 19, 1997, to
the effect that, as of such dates based upon and subject to certain matters as
stated therein, (i) the consideration to be received in the Conversion by the
holders of A Interests is fair, from a financial point of view to such holders,
(ii) the consideration to be received in the Conversion by the holders of B
Interests is fair, from a financial point of view to such holders, and (iii) the
General Partner Consideration to be received in the Conversion is fair from a
financial point of view to the holders of the A Interests and to the holders of
the B Interests, respectively. The description set forth below pertains to Smith
Barney's June 19, 1997 opinion.
In rendering its opinion Smith Barney reviewed the Registration Statement
on Form S-4 of SunSource Inc. and SunSource Capital Trust filed with the
Securities and Exchange Commission, as amended on May 12, 1997 (the
"Registration Statement") and the partnership agreements of the Partnership, the
Operating Partnership, and the General Partner and held discussions with certain
of the senior operating management of the Partnership and the Operating
Partnership ("Management") and representatives and advisors of the Partnership,
61
the Operating Partnership and the General Partner to discuss the business,
operations and prospects of the Partnership. Smith Barney also examined certain
publicly available business and financial information relating to the
Partnership as well as internal financial statements, forecasts and other
financial and operating data concerning the Partnership prepared by Management.
Smith Barney reviewed the financial terms of the Conversion as set forth in the
Registration Statement in relation to current and historical market prices and
trading volumes of the A Interests and B Interests, historical and projected
earnings and operating data of the Partnership and projected earnings and
operating data of the Corporation, and the capitalization and financial
condition of the Partnership. Smith Barney analyzed certain financial, capital
market and other publicly available information relating to the businesses of
other companies whose operations Smith Barney considered comparable to those of
the Partnership. In addition to the foregoing, Smith Barney conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as it deemed necessary to arrive at its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts and other
information furnished to or otherwise reviewed by or discussed with Smith
Barney, Smith Barney was informed by Management that such forecasts and other
information were reasonably prepared on bases reflecting the best currently
available estimates and judgments of Management as to the expected future
financial performance of the Partnership or the Corporation, as the case may be.
Smith Barney further relied on the assurances of Management that it was unaware
of any facts that would make the information or forecasts provided to Smith
Barney incomplete or misleading. Smith Barney did not express any opinion as to
what the value of the Common Stock or the Trust Preferred Securities actually
will be when issued to holders of A Interests and B Interests, respectively, or
the prices at which the Common Stock or the Trust Preferred Securities will
trade subsequent to the Conversion. In addition, Smith Barney did not make and
was not provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Partnership. Smith Barney was not
asked to and did not express an opinion as to the relative merits of the
Conversion as compared to any alternative business strategies that might exist
for the Partnership or the effect of any other transaction in which the
Partnership might engage. Smith Barney was not asked to solicit third-party
indications of interest in acquiring all or any part of the Partnership. Smith
Barney's opinion is necessarily based upon financial, capital market and other
conditions and circumstances, including current tax laws, existing and disclosed
to Smith Barney as of the date of its opinion. No limitation was imposed by the
Special Committee, Lehman/SDI, the Partnership, the Operating Partnership or the
General Partner on the scope of the investigation by Smith Barney in connection
with its fairness opinion.
The full text of the written opinion of Smith Barney, which sets forth the
assumptions made, matters considered and limitation on the review undertaken, is
attached as Exhibit C to this Proxy Statement/Prospectus and is incorporated
herein by reference. Holders of A Interests and B Interests are urged to read
this opinion carefully in its entirety. Smith Barney's opinion is directed only
to the fairness of the consideration to be received by holders of A Interests
and B Interests and of the General Partner Consideration from a financial point
of view to holders of A Interests and B Interests, respectively, and has been
provided for the use of the Special Committee and the Board of Directors of
Lehman/SDI in their evaluation of the Conversion, does not address any other
aspect of the Conversion or any related transaction and does not constitute a
recommendation to any holder of A Interests or B Interests as to how such holder
should vote at the Special Meeting. The summary of the opinion of Smith Barney
set forth in this Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
In preparing its opinion to the Special Committee, Smith Barney performed a
variety of financial and comparative analyses, including those described below.
The summary of such analyses contains the material analyses, but does not
purport to be a complete description of the analyses underlying Smith Barney's
opinion. The preparation of a fairness opinion is a complex analytic process
involving various determinations as to the most appropriate and relevant methods
of financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not necessarily susceptible to
summary description. In arriving at its opinion, Smith Barney did not attribute
any particular weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance and relevance of such analyses
and factors. Accordingly, Smith Barney believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinion. In
its analyses, Smith Barney made numerous assumptions with respect to the
Partnership, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Partnership. The estimates contained in such analyses are not necessarily
indicative of actual values or predictive of actual future results or values,
which may be significantly more or less favorable than suggested by such
analyses. In addition, analyses relating to the value of the businesses or
securities do not purport to be appraisals or to reflect the prices at which the
business or securities may actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
62
A Interests
Valuation of A Interests. In order to value the A Interests, Smith Barney
performed discounted cash flow analyses of the distributions payable to the
holders of A Interests taking into account the preferential distribution of $10
per A Interest that holders of A Interests are entitled to receive upon
retirement of the A Interests. Due to the fact that holders of A Interests do
not have a right to immediately receive $10 per A Interest, Smith Barney
performed discounted cash flow analyses assuming the A Interests are retired at
June 30, 2037, which approximates valuing it in perpetuity. In this analysis,
discount rates of 9.5%, 10.5% and 11.5% were used. These discount rates were
based on the trading yield of the A Interests immediately prior to the public
announcement of the terms of the Conversion. The implied valuation range for the
A Interests resulting from this analysis was $106.2 million ($9.57 per A
Interest) to $128.1 million ($11.54 per A Interest). The mid-point of the
implied valuation range was then calculated to be $117.2 million ($10.56 per A
Interest).
Valuation of the A Consideration. Upon consummation of the Merger, each A
Interest will be exchanged for 0.38 share of Trust Preferred Securities and
$1.30 in cash (collectively, the "A Consideration"). Smith Barney analyzed the
value of the Trust Preferred Securities in relation to the trading value of the
A Interests. Unlike the A Interests which are not redeemable (other than in a
liquidation of the Partnership), the Trust Preferred Securities are callable by
the Corporation at liquidation value five years after the date of issuance.
Based on the treasury yield curve on December 6, 1996, assumed interest rate
volatility of 9% and a 40 year maturity, Smith Barney estimated that an
additional yield of 93 basis points (0.93%) would be required to compensate
holders of A Interests for this change in call protection.
In addition to the changes in the distribution rate and call protection in
the Trust Preferred Securities, in analyzing the differences between the A
Interests and the Trust Preferred Securities, Smith Barney also considered (i)
the market risk associated with the Trust Preferred Securities, (ii) the
potential for the deferment for up to 60 months of the monthly distributions on
the Trust Preferred Securities, and (iii) the differences in voting and other
rights. In comparing the value of the A Consideration with the value of the A
Interests, Smith Barney also considered the potential payment of taxes by
holders of A Interests in the Conversion and the fact that the amount of monthly
distributions to be received by holders of A Interests in the Conversion would
be the same as the monthly distributions payable on the A Interests prior to the
Conversion.
Smith Barney analyzed the value of the A Consideration assuming a range of
trading yields on the Trust Preferred Securities of 9.5% to 12.5% on a yield to
first call basis. The range of implied values for the A Consideration based on
such yields on the Trust Preferred Securities was calculated to be $10.48 to
$11.59. The range of implied values of the A Consideration was compared to
$10.50, the average of the closing market prices of an A Interest on the five
trading days preceding December 12, 1996, the day the Partnership announced the
terms of the Conversion (the "Announcement Date"). The range of (discounts) /
premiums of such implied values over such average market price for an A Interest
was (0.2%) to 10.4%. The range of implied values of the A Consideration was also
compared to the mid-point of the discounted cash flow valuation range of the A
Interests and the range of (discounts) / premiums over such valuation was (0.7%)
to 9.8%. The conclusion that the value of the consideration to be received for
an A Interest is likely to be greater than the value of an A Interest supports
Smith Barney's fairness conclusion.
B Interests
Valuation of B Interests. In order to value the B Interests, Smith Barney
performed discounted cash flow analyses of the projected free cash flows of the
Partnership for the five fiscal years ended December 31, 2001 assuming the
Partnership begins paying corporate income taxes in 1998. Smith Barney was
unable to value the B Interests based on trading values of comparable companies
as was done in valuing the B Consideration (as defined below), since there are
no publicly traded limited partnership interests for companies comparable to the
Partnership. See: "Valuation of the B Consideration -- Comparable Company
Analysis." In its discounted cash flow analyses, Smith Barney also assumed
discount rates of 11.5%,12.5% and 13.5% and terminal multiples of earnings
before interest, taxes, depreciation and amortization ("EBITDA") of 5.5x to
7.0x. The discount rates used were based on the cost of capital of the
Partnership, adjusted to take into account that beginning in 1998, distributions
on the A Interests would not be tax deductible. The terminal multiples used were
based on the trading multiples of the Comparable Companies (as defined below).
63
Smith Barney performed the discounted cash flow analyses on the operating
projections prepared by Management. These analyses resulted in an implied
valuation range for the B Interests of $88.9 million ($4.10 per B Interest) to
$166.4 million ($7.68 per B Interest). The mid-point of the implied valuation
range was then calculated to be $127.7 million ($5.89 per B Interest).
Valuation of the B Consideration. Upon consummation of the Merger, each B
Interest will be exchanged for 0.25 shares of Common Stock (the "B
Consideration"). Smith Barney analyzed the value of the Common Stock by
examining trading multiples of comparable companies and performing discounted
cash flow analyses of the Corporation's projected free cash flows.
Comparable Company Analysis. Using publicly available information, Smith
Barney analyzed the market values and trading multiples of a group of eight
selected comparable wholesale distributors of industrial products and services
comprised of Barnes Group, Inc., BMC West Corp., Applied Industrial
Technologies, Inc. (formerly Bearings, Inc.), Cameron Ashley Building Products,
Inc., Hughes Supply, Inc., Lawson Products, Inc., NCH Corporation and Rexel Inc.
(collectively the "Comparable Companies").
Smith Barney compared market values as multiples of historical net income
and projected 1997 and projected 1998 net income. The multiples of the latest
twelve months ended March 31, 1997 ("LTM") net income and projected 1997 and
projected 1998 net income of the Comparable Companies were between the following
ranges: (i) LTM net income: 10.9x to 17.3x (with a mean of 14.3x and a median of
14.3x); (ii) projected 1997 net income: 9.3x to 16.9x (with a mean of 13.2x and
a median of 13.9x); and (iii) projected 1998 net income: 8.1x to 13.6x (with a
mean of 11.7x and a median of 12.5x). Smith Barney also compared market values
as multiples of historical EBITDA and projected 1997 and projected 1998 EBITDA.
The multiples of LTM EBITDA and projected 1997 and projected 1998 EBITDA of the
Comparable Companies were between the following ranges: (i) LTM EBITDA: 5.5x to
9.2x (with a mean of 7.4x and a median of 7.1x); (ii) projected 1997 EBITDA:
5.4x to 8.1x (with a mean of 6.8x and a median of 6.8x); and (iii) projected
1998 EBITDA: 5.1x to 7.4x (with a mean of 6.2x and a median of 6.3x).
Smith Barney also compared the debt to capitalization ratios, interest
coverage ratios, historical profit margins, historical EBITDA and net income
growth, returns of average assets, equity and invested capital (total debt plus
book value of common equity plus book value of preferred equity plus book value
of minority interests plus deferred income tax liabilities), dividend yield and
projected earnings per share ("EPS") growth of the Comparable Companies. All
projected EPS figures for the Comparable Companies were based on the consensus
net income estimates of selected investment banking firms and all projections
for the Corporation were based on operating projections prepared by Management.
All multiples were based on closing stock prices as of June 16, 1997.
Smith Barney applied a range of trading multiples representative of the
Comparable Companies to pro forma historical and projected operating data of the
Corporation (derived by adjusting the operating data of the Partnership to
reflect consummation of the Conversion and application of a 40% corporate tax
rate) to arrive at a range of implied equity values for the shares of Common
Stock. Smith Barney applied the Comparable Companies' mean and median multiples
of 14.3x and 14.3x to LTM net income, and 13.2x and 13.9x to projected 1997 net
income, and 11.7x and 12.5x to projected 1998 net income. Based on these
multiples, Smith Barney arrived at an implied valuation range of $23.28 to
$27.89 per share of Common Stock or $5.82 to $6.97 for the B Consideration.
Smith Barney also applied the Comparable Companies' mean and median multiples of
7.4x and 7.1x to LTM EBITDA, 6.8x and 6.8x to projected 1997 EBITDA, and 6.2x
and 6.3x to projected 1998 EBITDA. Based on these multiples of EBITDA, Smith
Barney arrived at an implied valuation range of $13.08 to $16.42 per share of
Common Stock or $3.27 to $4.11 for the B Consideration. In valuing the Common
Stock, Smith Barney relied more heavily on the implied valuation range derived
from the multiples of net income rather than the multiples of EBITDA since they
believe that net income multiples are a better indicator of the trading value of
the Common Stock.
Smith Barney compared the implied equity valuation range for the B
Consideration based on multiples of net income to $4.35, the average closing
market price of a B Interest on the five trading days immediately preceding the
Announcement Date, and derived a range of premiums of 33.8% to 60.2%. The
above-described range of implied values for the B Consideration was also
compared to the mid-point of the implied valuation range of a B Interest using
the discounted cash flow analysis methodology ($5.89 per B Interest) and the
range of (discounts)/ premiums over such valuation was (1.2%) to 18.3%.
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None of the Comparable Companies is identical to the Corporation.
Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics that could
affect the public trading value of the Comparable Companies or the company to
which they are being compared.
Discounted Cash Flow Analyses. Smith Barney also performed discounted cash
flow analyses of the projected free cash flows of the Corporation for the five
fiscal years ended December 31, 2001. Smith Barney assumed discount rates of
9.0%, 10.0% and 11.0% and terminal multiples of EBITDA of 6.0x to 7.5x. The
discount rates used were based on the cost of capital of the Partnership,
adjusted to take into account the capital structure of the Corporation and the
fact that distributions on the Trust Preferred Securities will be tax
deductible. The terminal multiples used were based on the trading multiples of
the Comparable Companies. The discounted cash flow analyses were performed on
the operating projections prepared by Management and resulted in an implied
equity valuation range per share of Common Stock of $18.36 to $33.19 or $4.59 to
$8.30 for the B Consideration.
Smith Barney compared the implied equity valuation range for the B
Consideration based on the discounted cash flow analyses to $4.35, the average
closing market price of a B Interest on the five trading days immediately
preceding the Announcement Date, and derived a range of premiums of 5.5% to
90.8%. The above-described range of implied values for the B Consideration was
also compared to $5.89, the mid-point of the implied valuation range of a B
Interest, and the range of (discounts)/premiums over such valuation was (22.1%)
to 40.9%.
The conclusion that the range of values of B Consideration is greater than
(i) the average closing market price of a B Interest on the five trading days
immediately preceding the Announcement Date and (ii) the implied valuation range
of a B Interest based on the discounted cash flow analyses supports Smith
Barney's fairness conclusion.
General Partnership Interests
Valuation of the General Partnership Interests. Smith Barney analyzed the
value of the General Partnership Interests consisting of (i) the Management Fee
and (ii) an effective percentage equity interest of 1.99% in the Operating
Partnership (the "1.99% Interest"). In order to determine the potential value
attributable to the General Partnership Interests, Smith Barney performed a net
present value calculation of the Management Fee in perpetuity assuming discount
rates of 9.5%, 10.5% and 11.5%. Based on these net present value calculations,
Smith Barney estimated the range of the total potential value of the Management
Fee to be $29.0 million to $35.1 million. Since the Management Fee does not have
a fixed redemption value, Smith Barney also estimated the range of values by
capitalizing the Management Fee based on the Comparable Companies' mean and
median LTM EBITDA multiples (7.4x and 7.1x) and capitalizing the after-tax
equivalent of the Management Fee based on the Comparable Companies' mean and
median LTM net income multiples (14.3x and 14.3x). This method of valuation was
used to show the impact of the Management Fee on the LTM net income and the LTM
EBITDA available to the Partnership. On the basis of this analysis, a range of
values for the Management Fee was calculated. The capitalization of the
Management Fee resulted in a range of total potential value of $23.6 million to
$28.6 million. The two methodologies produced a composite total potential
valuation range for the Management Fee of $23.6 million to $35.1 million.
In addition to looking at the valuation methodologies described in the
preceding paragraph, Smith Barney took into consideration the following factors
which detract from the value of the Management Fee in analyzing the value of the
Management Fee: (i) the accelerated timing of the receipt by the General Partner
of value for the Management Fee in the Conversion; (ii) the illiquidity of the
right to receive the Management Fee; (iii) the potential for the Management Fee
to be terminated in the event of (a) liquidation or sale of the Partnership, or
(b) removal of the General Partner upon the vote of 80% of the unaffiliated
limited partners; (iv) the subordination of the Management Fee to the payment of
distributions on the A Interests; and (v) the termination of the services
provided by the General Partner following the consummation of the Conversion.
Smith Barney estimated the value for the 1.99% Interest by taking 1.99% of
the enterprise value for the Partnership less net debt. Enterprise value for the
Partnership was calculated using discounted cash flow analyses of the projected
free cash flows of the Partnership assuming the Partnership begins paying
corporate income taxes in 1998. Smith Barney also assumed discount rates of
11.5%, 12.5% and 13.5% and terminal multiples of EBITDA of 5.5x to 7.0x. Smith
Barney performed these analyses on the operating projections prepared by
Management. These analyses resulted in an implied valuation range for the 1.99%
Interest of $4.1 million to $5.6 million. Smith Barney then added the range of
total potential values derived from the analysis of the Management Fee and the
range of implied values of the 1.99% Interest and derived a total potential
value range for the General Partnership Interests of $27.7 million to $40.7
million with a resulting mid-point of $34.2 million. The total potential value
did not take into account the factors listed in the preceding paragraph that
detract from the value of the Management Fee.
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Valuation of the General Partner Consideration. Upon consummation of the
Merger, the General Partnership Interests will be exchanged for 1,000,000 shares
of Common Stock (the "General Partner Consideration"). Smith Barney analyzed the
value of the Common Stock using the equity values implied by the comparable
company trading multiples and discounted cash flow analyses described above. See
" -- B Interests -- Valuation of the B Consideration." Smith Barney derived an
implied equity valuation range per share of Common Stock of $20.82 to $30.54 by
averaging the composite values derived through the comparable company analysis
based on net income multiples and the discounted cash flow analysis. The
valuation range for the General Partner Consideration was then calculated to be
$20.8 million to $30.5 million. Since the value to be paid for the General
Partner Consideration is less than the total potential value of the General
Partnership Interests, it supports Smith Barney's fairness conclusion.
Other Factors and Comparative Analyses
In rendering its opinion, Smith Barney considered certain other factors and
conducted certain other comparative analyses, including a review of (i) the
projected financial results of the Partnership, (ii) the history of trading
prices for the A and B Interests, (iii) certain pro forma effects on the
Partnership resulting from the Conversion and (iv) the pro forma ownership of
the Corporation.
The Special Committee, Lehman/SDI, the Partnership, the Operating
Partnership and the General Partner entered into an engagement letter with Smith
Barney on July 16, 1996 pursuant to which the Partnership agreed to pay Smith
Barney fees of $1.25 million, comprised of a retainer fee of $250,000, which was
paid upon execution of the engagement letter and an opinion fee of $1.0 million,
which was paid shortly after delivery of Smith Barney's opinion, dated December
10, 1996. The Partnership has agreed to reimburse Smith Barney for its
out-of-pocket expenses, including reasonable fees and disbursements of counsel
provided that such fees and expenses of counsel shall not be in excess of
$25,000 in the aggregate without the prior written consent of the Special
Committee, which consent shall not be unreasonably withheld. Lehman/SDI, the
General Partner, the Partnership and the Operating Partnership have also agreed,
in a separate letter agreement, to indemnify Smith Barney and its affiliates,
their respective directors, officers, agents and employees and each person, if
any, controlling Smith Barney or any of its affiliates against certain
liabilities, including liabilities under the federal securities laws and
expenses related to Smith Barney's engagement.
In light of Smith Barney's familiarity with, and understanding of, the
operations of the Partnership as well as their experience in advising on matters
relating to the conversion of partnerships to corporate form generally, the
Special Committee believed that it was advisable to engage Smith Barney in
connection with the proposed Conversion. Smith Barney is a nationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Other than acting as financial advisor in connection with the
Conversion (and delivery of its fairness opinion), Smith Barney has not
previously rendered investment banking services to the Partnership, Lehman/SDI,
the Operating Partnership or the General Partner in the past two years. In the
ordinary course of its business, Smith Barney may, from time to time, buy and
sell securities of the Partnership.
The reports of Smith Barney on December 10, 1996 and June 19, 1997 are
filed as exhibits to the Rule 13e-3 Transaction Statement on Schedule 13E-3, as
amended, filed with the Commission by the Partnership, the General Partner,
Lehman Brothers Capital Partners I, L.P., LB I Group, Inc., Lehman Ltd. I, Inc.,
Norman V. Edmonson, Donald T. Marshall, John P. McDonnell and Lehman/SDI
relating to the Conversion and may be obtained in the manner described in
"AVAILABLE INFORMATION."
Recommendation of the General Partner and Fairness Determination
The General Partner believes the Conversion is fair to and in the best
interests of the Partnership and the limited partners. The General Partner
recommends that the limited partners approve the Conversion. There are conflicts
of interest between the General Partner and the limited partners with respect to
certain matters relating to the Conversion.
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As described under "-- Alternatives to the Conversion," the General Partner
does not believe that liquidation is a viable alternative for the Partnership
because, among other things, there was substantial doubt that acceptable prices
could be found for all of the business units within an acceptable time period.
The General Partner's determination to recommend that SunSource convert to
corporate form is based on its belief that the Conversion will result in the
benefits to the limited partners and to the Corporation described above under
"-- Reasons to Convert to Corporate Form." On the other hand, the General
Partner considered the potential disadvantages of the Conversion, see "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" and, given
the alternatives to the Conversion, believes that the advantages of the
Conversion outweigh any potential disadvantages.
In determining the fairness of the Conversion to the A Interests, the
General Partner considered the factors considered by the Special Committee
discussed above under "--Factors Considered by Special Committee." It considered
the current and historical market prices of the A Interests, noting particularly
the fact that the market price of the A Interests has fluctuated in accordance
with market changes in interest yields. In this respect, fairness is provided by
the establishment of a distribution rate on the Trust Preferred Securities
(11.6%) greater than the Priority Return on the A Interests (11%). The General
Partner also considered liquidation value as it applied to the A Interests and
the fact that the holders would only be entitled to $10 on liquidation. The
liquidation preference on the Trust Preferred Securities is being reduced to
$9.50 but this is offset by the cash payment of $1.30 in the Conversion.
Although the A Interests are not callable and the Trust Preferred Securities
will be callable at liquidation value after five years, the General Partner
believes that the cash received is adequate to compensate holders of A Interests
for this change in call protection. The General Partner also considered, as
discussed below, the opinion of Smith Barney in determining the fairness of the
Conversion to the A Interests. The comparative effects upon the A Interests of
the three alternatives of Conversion, remaining a master limited partnership
taxable as a corporation, or liquidation are shown in the "Per A Interest" table
under "-- Alternatives to the Conversion."
The General Partner believes that the reference prices shown in the "Per A
Interest" table under "-- Alternatives to the Conversion" and allocation of
values information support its conclusion that the Conversion is fair to the
holders of A Interests. See "-- Allocation of Interests in the Conversion." The
General Partner did not consider net book value or going concern value because
it believed that the fixed return on the A Interests made these factors not
significant. The General Partner also did not consider purchases of A Interests
in the preceding two years or offers during the preceding 18 months for a
merger, acquisition, tender offer or change of control because no purchases or
offers occurred during those periods.
In determining the fairness of the Conversion to the B Interests, the
General Partner again considered the factors discussed under "-- Factors
Considered by Special Committee." It took into account the current and
historical market prices of the B Interests and its belief that conversion to
corporate form would provide substantially greater coverage of the Company by
financial analysts and expand the potential investor base to include mutual
funds and other entities that currently do not invest in limited partnerships.
It also took into account its belief that the Common Stock will constitute a
more attractive acquisition currency. The General Partner also believes that the
elimination of the relatively burdensome tax reporting requirements of the
partnership form would remove a current impediment to investing in the
Partnership. As noted under "-- Alternatives to the Conversion," the B Interests
have traded at a price/earnings discount of 18% to 25% to comparable industrial
distribution companies. The General Partner believes that expansion of the
potential investor base and the other benefits of the Conversion would enhance
the market price of the Common Stock to be issued for the B Interests.
Liquidation value was considered based upon the previous experience of the
Partnership as discussed under "-- Alternatives to the Conversion." The General
Partner also considered the going concern value of the business and concluded
that the elimination of the Management Fee and the General Partner distribution
would enhance that value. The General Partner, as discussed below, considered
the opinion of Smith Barney in determining the fairness of the conversion to the
B Interests. The comparative effects upon the B Interests of the three
alternatives of Conversion, remaining a master limited partnership taxable as a
corporation, or liquidation are shown in the "Per B Interest" table under "--
Alternatives to the Conversion."
The General Partner believes that the reference prices shown in the "Per B
Interest" table under "-- Alternatives to the Conversion" and allocation of
values information support its conclusion that the Conversion is fair to the
holders of B Interests. See "-- Allocation of Interests in the Conversion." The
General Partner did not consider net book value because it believed this was not
a true determinant of value. As noted above, there were no purchases of B
Interests during the preceding two years or offers for a merger, acquisition,
tender offer or change of control during the preceding 18 months.
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In reaching a recommendation with respect to the Conversion, the General
Partner also considered (i) the fact that the consideration to be received and
the other terms of the Conversion resulted from arms-length negotiation with the
Special Committee and were determined by the Special Committee to be fair to the
limited partners and (ii) the fact that Smith Barney has delivered its opinion
(and the basis for such opinion) to the Special Committee to the effect that,
(a) the consideration to be received in the Conversion by the holders of A
Interests is fair, from a financial point of view to such holders, (b) the
consideration to be received in the Conversion by the holders of B Interests is
fair, from a financial point of view to such holders, and (c) the General
Partner Consideration to be received in the Conversion is fair from a financial
point of view to the holders of the A Interests and to the holders of the B
Interests, respectively. The General Partner also considered the consequences to
the Partnership and its partners if the Conversion is not consummated, as
discussed under "-- Consequences if Conversion is Not Approved" and other
information about the Conversion and the Corporation included in this Proxy
Statement/Prospectus, and concluded that the Conversion was in the best
interests of the Partnership and the limited partners. No particular weight was
assigned to any one factor in arriving at its decision.
The General Partner sought to provide procedural fairness to the limited
partners in connection with the consideration of the Conversion by (i) creating
a Special Committee composed of disinterested directors to advise the Board of
Directors with respect to the terms of the Conversion as to its fairness to the
limited partners, and to make a recommendation to the Board of Directors with
respect to the Conversion, (ii) authorizing the Special Committee to select a
financial advisor and legal counsel to assist it in its deliberations, and (iii)
implementing the Conversion only if approved by the affirmative vote of a
majority of the unaffiliated A Interests and B Interests, each voting separately
as a class. Through these arrangements the General Partner believes it has
provided procedural fairness to the limited partners and minimized the extent to
which the consideration of the Conversion was subject to conflicts of interest
of management and affiliates of the General Partner.
Source and Amount of Funds
It is estimated that the funds required to make the $1.30 cash payment to
the A Interests and to pay for fractional shares and for the fees and expenses
described below will be less than $19,500,000. Payments to be made prior to the
Conversion will be made from funds borrowed under the Partnership's existing
bank credit agreement which is described in Note 8 of Notes to Consolidated
Financial Statements. Upon consummation of the Conversion, the existing bank
credit agreement and the Partnership's long-term debt will be repaid and
replaced with new credit facilities at interest rates expected to be lower than
financing rates currently incurred by the Partnership. See "BUSINESS --
Investment and Borrowing Policies." Prepayment of the Partnership's long-term
debt will result in the payment of a make-whole penalty of approximately $4
million.
Accounting Treatment
For financial accounting purposes, the Conversion will be treated as a
recapitalization except for the exchange of the General Partner's 1% minority
interest (the "Minority Interest") in the Operating Partnership for Common Stock
of the Corporation which is subject to purchase accounting in accordance with
Accounting Principles Bulletin ("APB") No. 16, "Business Combinations".
Accordingly, the assets and liabilities of the Partnership will be recorded by
the Corporation at their historical cost basis, except for the excess of fair
value of the consideration received for the Minority Interest over the book
value of the General Partner's 1% interest in the Operating Partnership which
will be recorded as goodwill of the Corporation. The Corporation will also
record incremental deferred tax assets in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), relating to the temporary differences
for certain assets and liabilities of the Partnership at the date of conversion
to corporate form. The existing values of the tax basis in assets and
liabilities of the Partnership at the date of conversion will carry over to the
Corporation, which will also record a provision for U.S. federal and state
income taxes on its taxable earnings.
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Corporation and, accordingly, the accounts of the Trust will be included
in the consolidated financial statements of the Corporation. The Trust Preferred
Securities will be presented in the consolidated balance sheet of the
Corporation as a separate line item directly above stockholders' equity under
the caption "Guaranteed Preferred Beneficial Interest in the Corporation's
Junior Subordinated Debentures" and appropriate disclosures about the Trust
Preferred Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the Notes to the Consolidated Financial Statements. For financial
reporting purposes, the Corporation will record distributions payable on the
Trust Preferred Securities as an expense in its consolidated statements of
income.
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Fees and Expenses
All legal and other costs and expenses incurred by the Corporation or the
Partnership in connection with the Conversion will be paid by the Partnership,
whether or not the Conversion is consummated. The following is a statement of
certain estimated fees and expenses incurred by the Corporation in connection
with the Conversion:
SEC registration fee........................................ $ 67,000
New York Stock Exchange listing fee......................... 60,000
Legal fees and expenses..................................... 1,300,000
Financial advisory fees and expenses........................ 1,525,000
Accounting fees and expenses................................ 1,100,000
Solicitation fees and expenses.............................. 200,000
Printing and engraving expenses............................. 225,000
Miscellaneous .............................................. 23,000
----------
Total ............................................ $4,500,000
==========
Exchange of Depositary Receipts
Limited partners should not send any depositary receipts with the enclosed
proxy. They should retain the depositary receipts until they receive further
instructions if the Conversion is consummated.
Promptly after the Effective Time, the Corporation will mail to all limited
partners of record a letter of transmittal containing instructions with respect
to the surrender of depositary receipts for Interests in exchange for
certificates representing Trust Preferred Securities or shares of Common Stock
and cash in the case of A Interests. Upon surrender to the Corporation of one or
more depositary receipts, together with a properly completed letter of
transmittal, there will be issued and mailed to former limited partners of
record at the Effective Time a certificate or certificates representing the
number of Trust Preferred Securities or shares of Common Stock to which such
holder is entitled and a check for cash in the case of A Interests. From and
after the Effective Time, each depositary receipt will evidence only the right
to receive Trust Preferred Securities and shares of Common Stock and cash in the
case of A interests.
No distributions or dividends with respect to the Trust Preferred
Securities or Common Stock payable to the holders of record thereof after the
Effective Time will be paid to the holder of any unsurrendered depositary
receipts until such depositary receipts are surrendered for exchange, at which
time accumulated interest or dividends will be paid, without interest, subject
to any applicable escheat laws.
If any certificate representing Trust Preferred Securities or Common Stock
is to be issued in a name other than that in which the depositary receipt
surrendered in exchange therefor is registered on the books of the Partnership
as of the Effective Time, it will be a condition of such issuance that (i) the
depositary receipt so surrendered be properly endorsed and otherwise in proper
form for transfer, and (ii) the person requesting such exchange pay to the
Corporation any transfer or other taxes required by reason of the issuance of a
certificate representing Trust Preferred Securities or Common Stock in any name
other than that of the registered owner of the depositary receipt surrendered,
or the person requesting such exchange establish to the satisfaction of the
Corporation that such tax has been paid or is not applicable.
After the Effective Time, there will be no further registration of
transfers of Interests that were issued and outstanding immediately before such
time. If, after the Effective Time, depositary receipts representing Interests
are presented for transfer, they will be canceled and exchanged for one or more
certificates representing Trust Preferred Securities or shares of Common Stock
and cash in the case of A Interests.
Treatment of Fractional Shares
No fractional shares will be issued. Instead, (i) each holder of A
Interests will be entitled to receive cash in an amount equal to the fraction of
a Trust Preferred Security to which the holder is otherwise entitled multiplied
by the average closing price of the Trust Preferred Securities for the five
trading days following the Effective Time; and (ii) each holder of B Interests
shall be entitled to receive cash in an amount equal to the fraction of a share
of Common Stock to which the holder is otherwise entitled multiplied by the
average closing price of the Common Stock for the five trading days following
the Effective Time.
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COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED
The following summary compares a number of differences between
ownership of Interests and ownership of Trust Preferred Securities and Common
Stock and the effects relating thereto.
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Fiduciary Duties
As a general partner of a limited partnership, the General Partner owes the
limited partners, under Delaware law, the fiduciary duties of good faith and
loyalty in handling the affairs of the Partnership, including, in certain
instances, a duty to disclose material information concerning the Partnership's
affairs. The General Partner believes it has satisfied its fiduciary duties in
connection with the Conversion. Following consummation of the Conversion, the
directors of Lehman/SDI will become directors of the Corporation. Under Delaware
law, a director's fiduciary duties to the stockholders of the Corporation in
such capacity will be substantially similar to those currently owed by the
General Partner to limited partners under Delaware law.
The Partnership Agreement further provides that neither the General Partner
nor any of its affiliates will be liable to the Partnership or the limited
partners for any act or omission if (i) taken in good faith and in a manner
reasonably believed to be in, or not opposed to, the interests of the
Partnership, and (ii) the conduct did not constitute gross negligence or willful
or wanton misconduct. Thus, the General Partner and its affiliates may have a
more limited liability to the limited partners than would otherwise be the case
absent such provisions. Similarly, the Corporation's Certificate of
Incorporation provides that a director of the Corporation shall not be liable
for any act or omission in the director's capacity as director except to the
extent the director is found liable for (i) a breach of the duty of loyalty,
(ii) an act or omission not in good faith, (iii) a transaction in which the
director received an improper benefit or (iv) an act or omission for which the
liability of a director is expressly provided for by statute. Under the
Partnership Agreement, the Partnership is required to indemnify the General
Partner and the officers, directors, employees and agents of the General Partner
against liabilities and expenses incurred by the General Partner or such persons
if (i) the General Partner or such persons acted in good faith, and in a manner
reasonably believed to be in, or not opposed to, the interests of the
Partnership and, with respect to any criminal proceeding, had no reason to
believe the conduct was unlawful and (ii) the General Partner's or such persons'
conduct did not constitute actual fraud, gross negligence or willful misconduct.
The Corporation's By-laws provide indemnification to all its directors,
officers, employees and agents.
After the Conversion, the general partner of the General Partner will be
SunSub B, a subsidiary of the Corporation.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes certain federal income tax
considerations relating to the Conversion. These summaries are included herein
for general information only. They do not discuss all aspects of federal income
taxation that may be relevant to a particular taxpayer in light of the
taxpayer's personal tax circumstances or to certain types of taxpayers subject
to special treatment under the federal income tax laws. No legal opinion
regarding such tax considerations is being rendered hereby. Except as otherwise
indicated, statements of legal conclusion regarding tax treatments, tax effects
or tax consequences reflect the opinions of Morgan, Lewis & Bockius LLP, counsel
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for the Corporation and the Partnership, which has rendered its opinion
regarding the accuracy of the discussion herein to the Partnership. A copy of
Morgan, Lewis & Bockius LLP's opinion has been filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus forms a part,
and a copy of the opinion may be obtained by written request addressed to
SunSource L.P., 2600 One Logan Square, Philadelphia, Pennsylvania 19103,
Attention: Joseph M. Corvino, Secretary, telephone number (215) 665-3650. The
Partnership has not requested, and does not intend to request, a ruling from the
Internal Revenue Service ("IRS"). An opinion of counsel is not binding on the
IRS or the courts, and no assurance can be given that the IRS will not challenge
the tax treatment of certain matters discussed herein, or if it does, that it
will be unsuccessful. Accordingly, each limited partner should consult the
limited partner's own tax advisor as to the specific tax consequences to the
limited partner including the application and effect of state or local income
and other tax laws.
The following discussion is based on existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
and existing administrative interpretations and court decisions. Future
legislation, regulations, administrative interpretations or court decisions
could significantly change such authorities either prospectively or
retroactively.
Partnership Status and Taxation of the Partnership
The Partnership is properly classified for federal income tax purposes as a
partnership rather than an association taxable as a corporation. Currently, the
Partnership is not itself subject to federal income tax. Rather, each limited
partner is subject to income tax based on the limited partner's allocable share
of Partnership taxable income, gain, loss, deduction, and credits, whether or
not any cash is actually distributed to such limited partner.
The Revenue Act of 1987 amended the Code to treat certain publicly-traded
partnerships as corporations rather than partnerships for federal income tax
purposes. Under a transition rule, however, an existing publicly-traded
partnership, such as the Partnership, will not be classified as a corporation
until the earlier of (i) the partnership's first taxable year beginning after
December 31, 1997 or (ii) the time at which the partnership adds a new line of
business that is substantial. Under the above-described transition rule, the
Partnership will be taxed as a corporation no later than its taxable year
beginning on January 1, 1998. At that time the Partnership will be treated as if
it had transferred all of its assets (subject to its liabilities) to a newly
formed corporation in exchange for the stock of the corporation, and then
distributed such stock to its partners in liquidation of their interests in the
Partnership. Upon classification as a corporation for tax purposes, the
Partnership would be subject to federal income tax on its earnings at corporate
tax rates.
There are four bills pending in Congress that would change the treatment of
publicly-traded partnerships after December 31, 1997. H.R. 1443, introduced
April 24, 1997, and S. 907, introduced June 16, 1997, would eliminate the
transition rule so that publicly-traded partnerships would continue to be taxed
as partnerships after December 31, 1997. The bill passed by the House Ways and
Means Committee in June 1997 provides that a publicly-traded partnership can
avoid being taxed as a corporation if it elects to be subject to a 15% tax on
gross income. The bill passed by the Senate Finance Committee in June 1997 has a
similar provision except the tax on gross income would be 3.5%. The differences
between these two bills must be resolved by the conference committee before
being submitted to the President for his signature. It is not possible to
predict at this time if one of these bills or a compromise bill will ultimately
be adopted by Congress and signed by the President.
General Tax Treatment of the Conversion
The Partnership has been a Delaware limited partnership since it began
operations in 1987. In the Conversion, the Partnership and a subsidiary of the
Partnership will be merged with and into the Corporation with each A Interest
being exchanged for Trust Preferred Securities and cash and each B Interest
being exchanged for Common Stock.
There is no specific authority dealing with a substantially similar
transaction. Accordingly, counsel cannot predict with certainty how the
Conversion will be treated for federal income tax purposes.
The exchange of A Interests for Trust Preferred Securities and cash
pursuant to the Merger will be a taxable transaction. In the case of a holder
who exchanges A Interests, gain or loss will be recognized in an amount equal to
the difference between the sum of the amount of cash and the fair market value
of Trust Preferred Securities received in the exchange and the exchanging
holder's tax basis in the A Interests exchanged. Such gain or loss will be
long-term capital gain or loss if the A Interests have been held for more than
one year as of such date and if such Interests have been held as capital assets.
Under current law, the Corporation does not expect that any portion of the gain
79
will be treated as ordinary income pursuant to the rules of section 751 of the
Code. Legislation has been passed by the House and Senate, however, that, if
enacted prior to the Conversion, would result in a portion of the gain being
treated as ordinary income pursuant to Section 751 of the Code. Specifically,
any amount received by a holder of A Interests that is attributable to inventory
items would be treated as an amount realized from the sale or exchange of
property that is not a capital asset and would result in ordinary income to the
exchanging holder of A Interests. A holder of A Interests will have a tax basis
in the Trust Preferred Securities received in the Merger equal to the fair
market value of such Trust Preferred Securities received. A holder's aggregate
tax basis in his pro rata share of the underlying Junior Subordinated Debentures
will be equal to his pro rata share of their "issue price" at the Effective Time
as defined below.
As to holders of B Interests, counsel is of the opinion that the limited
partners will be treated as exchanging their B Interests for shares of Common
Stock in an exchange described in Section 351 of the Code, pursuant to which
such holders should not recognize gain or loss, except to the extent of any cash
received in lieu of fractional shares. Any such cash should result in capital
gain to the recipient, assuming that the B Interests are held as capital assets.
Counsel's opinion that holders of B Interests will be treated as exchanging
their Partnership interests for stock of the Corporation is based on the federal
income tax treatment of analogous transactions. It is well settled, and the
Service has issued published rulings to the effect that, if a parent corporation
forms a transitory subsidiary corporation and merges it into another corporation
to enable the parent to acquire the stock of such other corporation, the merger
of the transitory subsidiary corporation into such other corporation will be
ignored, and the stockholders of the target corporation will be treated as
receiving directly from the parent corporation stock or other property of the
parent in exchange for their shares of the target. In addition, the Service has
issued private letter rulings addressing the treatment of transactions in which
a corporation forms a transitory partnership and merges it into an existing
partnership as a means of transforming the partners of the existing partnership
into stockholders of the corporation. The conclusions expressed in the private
letter rulings are consistent with the treatment of the Conversion expressed
above. Holders of B Interests should be aware that, unlike published rulings,
private letter rulings cannot be cited as authority, and may be relied upon only
by the taxpayer requesting the ruling, although the conclusions expressed
therein are indicative of the Service's thinking on a particular matter.
As to persons that hold both A Interests and B Interests at the time of the
Conversion, while not free from doubt, a likely result is that these investors
will recognize gain on an aggregate basis - i.e. the difference between their
aggregate tax basis in the A Interests and the B Interests and the aggregate
fair market value of the cash, Trust Preferred Securities and Common Stock
received in the Conversion will constitute the gain realized, which realized
gain will be recognized to the extent of the fair market value of cash or other
property ("boot") received in the Conversion - i.e. the sum of the cash and the
fair market value of the Trust Preferred Securities received. Such gain should
be treated as long-term capital gain, provided that the Interests have been held
for more than one year, and provided that such Interests have been held as
capital assets. As noted earlier, under current law, the Corporation does not
expect that any portion of the gain will be treated as ordinary income pursuant
to section 751 of the Code. As further discussed above, however, proposed
legislation could result in a portion of the gain being treated as ordinary.
Such a holder's basis in the Common Stock received in the Conversion will be
equal to sum of such holder's basis in the A Interests and B Interests exchanged
therefor, plus the amount of gain recognized, less the amount of cash and the
value of the Trust Preferred Securities received. If the aggregate tax basis of
the A and B Interests exceeds the aggregate fair market values of the cash,
Trust Preferred Securities, and Common Stock received in the Conversion, it is
likely that no loss will be recognized. A person that holds both A Interests and
B Interests could take the position that a treatment of the Conversion other
than the aggregate basis approach described above should apply, and such persons
should consult their own tax advisors regarding the tax consequences of the
aggregate basis approach.
The Partnership and the Corporation intend to treat the Conversion in
accordance with the positions reflected in the foregoing description and to
prepare reports and tax information accordingly. Except as otherwise noted, the
following discussion assumes the correctness of such treatment.
Certain Tax Consequences of the Conversion to Holders of B Interests
Nonrecognition of Gain or Loss. Section 351 (a) of the Code provides, in
general, that no gain or loss is recognized upon the transfer by one or more
persons of property (such as partnership interests) to a corporation solely in
exchange for stock in such corporation if, immediately after the exchange, such
person or persons are in control of the corporation to which the property was
transferred. Section 368(c) of the Code defines control as the ownership of
stock possessing at least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of the total number of
shares of all other classes of stock. Section 351 (b) of the Code provides that
if boot is received in addition to stock in an otherwise qualifying transaction,
taxable income must be recognized in an amount equal to the lesser of (i) any
gain realized on the exchange or (ii) the amount of boot received. For this
purpose, gain realized is generally equal to the excess, if any, of (x) the
amount of cash and the fair market value of stock and other property received
from the corporation over (y) the adjusted basis of property transferred to the
corporation. In determining realized gain, a limited partner's share of
partnership liabilities is treated as cash received upon the transfer. Section
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357(c) of the Code generally provides that if the sum of the liabilities assumed
in the Section 351 exchange exceeds the aggregate tax basis of the assets
transferred in the exchange, such excess is treated as gain from the sale or
exchange of the assets transferred. Section 752 of the Code generally provides
that a partner's tax basis for its partnership interest includes its share of
the liabilities of the partnership, as determined under Treasury regulations. A
published ruling issued by the Service holds that upon the transfer of a
partnership interest to a corporation in a Section 351 transaction, the
transferor's share of partnership liabilities is treated as assumed by the
corporation for purposes of Section 357(c) of the Code.
Assuming the Conversion is treated for federal income tax purposes in the
manner described above under "General Tax Treatment of the Conversion," it is
counsel's opinion that the exchange by holders of B Interests of their Interests
for Common Stock will be treated as part of a transaction described in Code
Section 351(a). Accordingly, holders of B Interests should incur no federal
income tax liability as a result of the exchange, except to the extent of any
cash received in lieu of fractional shares. Any such cash should result in
capital gain to the recipient, assuming that such B Interests are held as
capital assets. This conclusion is based on the assumption that (i) such holders
do not own any A Interests (see the discussion above), (ii) holders of B
Interests and the parties exchanging their interests in the General Partner
(together, the "Transferors") as steps in the Conversion will own, immediately
after such transfers, more than 80 percent of each class of stock of the
Corporation and (iii) not more than 20 percent of the shares of stock
transferred to the Transferors pursuant to the Conversion will be subsequently
disposed of pursuant to contracts or other formal or informal agreements entered
into prior to the Conversion (the "Control Assumption"). If the Control
Assumption were not correct, each holder of B Interests could recognize gain or
loss on the Conversion as if such holder had sold the B Interests in a taxable
transaction for an amount equal to the value of stock received in the
Conversion. Counsel is not aware of any contracts or other formal or informal
agreements entered into by persons receiving shares of stock to dispose of such
shares.
Notwithstanding the above, any holders of B Interests who are treated as
receiving shares of stock in exchange for services will be taxed on the receipt
of the stock to the extent of the value thereof.
Any portion of the liabilities of the Partnership allocated to a holder of
B Interests would increase such holder's tax basis in such B Interest by an
amount equal to such allocated liability. As such allocated liability cannot
exceed such holder's tax basis in the B Interest, no gain recognition under
Section 357(c) of the Code will result from the Conversion for a holder of B
Interests.
Basis and Holding Period of Common Stock. The aggregate tax basis of the
Common Stock that a holder of B Interests receives in the exchange will be equal
to the tax basis of their B Interests immediately prior to the Conversion.
The holding period for Common Stock received in the Conversion will include
the exchanging holder's holding period for the B Interests, provided such holder
held such Interests as capital assets at the time of the Conversion.
Sale of Stock. In general, any gain or loss from the sale or exchange of
the Common Stock received in the Conversion will be characterized as capital
gain or loss provided such item was held as a capital asset. Gain or loss will
be measured by the difference between the amount realized and the holder's
adjusted tax basis in the Common Stock.
Ownership of Stock. After the Conversion, a holder of Common Stock
generally will be taxed only on distributions of money or other property
received from the Corporation, if any, out of current or accumulated earnings
and profits. Such income will be characterized as a dividend and as investment
or portfolio income for purposes of certain tax rules, e.g., those regarding
deductibility of interest expense, under Section 163 of the Code. To the extent
that the Corporation has no current or accumulated earnings and profits at the
time of a distribution, the amount of the distribution will first reduce a
stockholder's adjusted basis in the Common Stock and, thereafter, will be taxed
as an amount received from the sale or exchange of the Common Stock. The
Corporation will have no accumulated earnings and profits as it begins
operations following consummation of the Conversion. Distributions in connection
with a complete liquidation of the Corporation will be treated as amounts
received from the sale or exchange of the Common Stock. Distributions received
in connection with a redemption will be treated as dividends or as amounts
received from the sale or exchange of the stock depending upon the redeeming
stockholder's actual or constructive ownership of other stock of the
Corporation.
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Certain Tax Consequences of the Conversion to Holders of A Interests
Classification of the Trust. In connection with the issuance of the Trust
Preferred Securities, Morgan, Lewis & Bockius LLP, counsel to the Corporation
and the Trust, will render its opinion generally to the effect that, under then
current law and assuming full compliance with the terms of the Declaration, the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
each holder of Trust Preferred Securities (a "Securityholder") will be
considered the owner of a pro rata portion of the Junior Subordinated Debentures
held by the Trust. Accordingly, each Securityholder will be required to include
in gross income the Securityholder's pro rata share of the income accrued on the
Junior Subordinated Debentures.
Recognition of Gain or Loss. The exchange of A Interests for Trust
Preferred Securities and cash pursuant to the Merger will be a taxable
transaction. Gain or loss will be recognized in an amount equal to the
difference between the sum of the cash and the fair market value of Trust
Preferred Securities received in the exchange and the exchanging holder's tax
basis in the A Interests exchanged. Under current law, such gain will be
long-term capital gain or loss if the A Interests has been held for more than
one year as of such date and if such Interests have been held as capital assets.
Legislation has been passed by the House and the Senate, however, that, if
enacted prior to the Conversion, would result in a portion of the gain being
treated as ordinary income pursuant to Section 751 of the Code. Specifically,
any amount received by a holder of A Interests that is attributable to inventory
items would be treated as an amount realized from the sale or exchange of
property that is not a capital asset and would result in ordinary income to the
exchanging holder of A Interests.
Basis and Holding Period of Junior Subordinated Debentures. A
Securityholder's initial tax basis for the Securityholder's pro rata share of
the Junior Subordinated Debentures will be equal to the Securityholder's pro
rata share of their "issue price" (for each $25 principal amount of Junior
Subordinated Debentures the "issue price" will be equal to the fair market value
of a Trust Preferred Security at the Effective Time (reduced by Pre-Issuance
Accrued Interest (as defined below)), which may be more or less than $25) and
will be increased by original issue discount (as discussed below) accrued with
respect thereto, and reduced by the amount of cash distributions (including the
amount of any Pre-Issuance Accrued Interest) paid to such Securityholder.
Accrual of Original Issue Discount and Premium. The Junior Subordinated
Debentures will be considered to have been issued with "original issue discount"
and each Securityholder, including a taxpayer who otherwise uses the cash method
of accounting, will be required to include the Securityholder's pro rata share
of original issue discount on the Junior Subordinated Debentures in income as it
accrues, in accordance with a constant yield method based on a compounding of
interest, before the receipt of cash distributions on the Trust Preferred
Securities. Generally, all of a Securityholder's taxable interest income with
respect to the Junior Subordinated Debentures will be accounted for as "original
issue discount" and actual distributions of stated interest will not be
separately reported as taxable income. So long as the interest payment period is
not extended, cash distributions received by an initial holder for any monthly
interest period (assuming no disposition prior to the record date for such
distribution) will equal or exceed the sum of the daily accruals of income for
such monthly interest period, unless the issue price of the Junior Subordinated
Debentures is less than $25.
The total amount of "original issue discount" on the Junior Subordinated
Debentures will equal the difference between the issue price of the Junior
Subordinated Debentures and their "stated redemption price at maturity." Because
the Corporation has the right to extend the interest payment period of the
Junior Subordinated Debentures, all of the stated interest payments on the
Junior Subordinated Debentures will be includible in determining their "stated
redemption price at maturity." The issue price of each $25 principal amount of
the Junior Subordinated Debentures will be equal to the fair market value of a
Trust Preferred Security at the Effective Time (reduced by Pre-Issuance Accrued
Interest), which may be more or less than $25, with the result that the total
amount of original issue discount on the Junior Subordinated Debentures may be
more or less than the amount of stated interest payable with respect thereto.
No portion of the amounts received on the Trust Preferred Securities will
be eligible for the dividends received deduction applicable to holders that are
U.S. corporations, unless the Trust Preferred Securities constitute "high yield
discount obligations" ("HYDOs") under the Internal Revenue Code. If the Trust
Preferred Securities do constitute HYDOs, the original issue discount on the
Trust Preferred Securities will not be deductible by the Corporation until
actually paid by the Corporation, and depending upon the instrument's yield as
computed under the original issue discount rules, a portion of such original
issue discount (the "Disqualified Portion") may not be deductible by the
Corporation at any time. Such Disqualified Portion, if any, will be eligible for
the dividends received deduction for corporate holders of A Interests, however,
if the Corporation has sufficient earnings and profits. The question whether the
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Trust Preferred Securities will constitute HYDOs cannot be determined at the
time of this writing, because the issue depends, in part, on factors that will
not be determined until the date of issuance of the Trust Preferred Securities
(including their "issue price" and the prevailing "applicable federal rate"
under the Code). In order to constitute HYDOs, the yield to maturity on the
Trust Preferred Securities must equal or exceed five percentage points over the
applicable federal rate. For August 1997, the applicable federal rate is 6.39%.
Potential Extension of Payment Period on the Junior Subordinated
Debentures. Securityholders will continue to accrue original issue discount with
respect to their pro rata share of the Junior Subordinated Debentures during an
extended interest payment period, and any holders who dispose of Trust Preferred
Securities prior to the record date for the payment of interest following such
extended interest payment period, will not receive from the Trust any cash
related thereto.
Distribution of Junior Subordinated Debentures to Holders of Trust
Preferred Securities. Under current law, except in the unlikely event that the
Trust were determined to be taxable as a corporation for tax purposes, a
distribution by the Trust of the Junior Subordinated Debentures as described in
the Prospectus detailing the terms of the Trust Preferred Securities under the
caption "DESCRIPTION OF THE TRUST PREFERRED SECURITIES -- Special Event
Redemption or Distribution; Shortening of Stated Maturity," will be non-taxable
and will result in the Securityholder receiving directly his pro rata share of
the Junior Subordinated Debentures previously held indirectly through the Trust,
with a holding period and tax basis equal to the holding period and adjusted tax
basis such Securityholder was considered to have had in his pro rata share of
the underlying Junior Subordinated Debentures prior to such distribution.
Treatment of the Payment of Pre-issuance Accrued Interest. "Pre-Issuance
Accrued Interest" payable on the first interest payment date should be treated
as a return of capital with respect to a Securityholder's pro rata interest in
the Junior Subordinated Debentures, reducing the Securityholder's tax basis in
his pro rata share of the Junior Subordinated Debentures.
Market Discount and Bond Premium. Securityholders other than initial
holders may be considered to have acquired their pro rata interest in the Junior
Subordinated Debentures with market discount, acquisition premium or amortizable
bond premium. Such holders are advised to consult their tax advisors as to the
income tax consequences of the acquisition, ownership and disposition of the
Trust Preferred Securities.
Disposition of the Trust Preferred Securities. Upon a sale, exchange or
other disposition of the Trust Preferred Securities (including a distribution of
cash in redemption of a Securityholder's Trust Preferred Securities upon
redemption or repayment of the underlying Junior Subordinated Debentures, but
excluding the distribution of Junior Subordinated Debentures), a Securityholder
will be considered to have disposed of all or part of the Securityholder's pro
rata share of the Junior Subordinated Debentures, and will recognize gain or
loss equal to the difference between the amount realized and the
Securityholder's adjusted tax basis in the Securityholder's pro rata share of
the underlying Junior Subordinated Debentures deemed disposed of. Gain or loss
will be capital gain or loss (except to the extent of any accrued market
discount with respect to such Securityholder's pro rata share of the Junior
Subordinated Debentures not previously included in income) provided the Trust
Preferred Securities are a capital asset in a Securityholder's hands. See "--
Market Discount and Bond Premium" above. Such gain or loss will be long-term
capital gain or loss if the Trust Preferred Securities have been held for more
than one year.
The Trust Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. A Securityholder who disposes of Trust Preferred
Securities between record dates for payments of distributions thereon will
nevertheless be required to include in income accrued but unpaid interest on the
Junior Subordinated Debentures through the date of disposition, and to add such
amount to the Securityholder's adjusted tax basis in the Securityholder's pro
rata share of the underlying Junior Subordinated Debentures deemed disposed of.
Accordingly, such a Securityholder will recognize a capital loss to the extent
the selling price (which may not fully reflect the value of accrued but unpaid
interest) is less than the Securityholder's adjusted tax basis (which will
include accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
United States Alien Holders. For purposes of this discussion, a "United
States Alien Holder" is any corporation, individual, partnership, estate or
trust that is, as to the United States, a foreign corporation, a non-resident
alien individual, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust.
Under present United States federal income tax law:
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(i) payments by the Trust or any of its paying agents to any
holder of a Trust Preferred Security who or which is a United States Alien
Holder will not be subject to United States federal withholding tax,
provided that (a) the beneficial owner of the Trust Preferred Security does
not actually or constructively own 10 percent or more of the total combined
voting power of all classes of stock of the Corporation entitled to vote,
(b) the beneficial owner of the Trust Preferred Security is not a
controlled foreign corporation that is related to the Corporation through
stock ownership, and (c) either (A) the beneficial owner of the Trust
Preferred Security certifies to the Trust or its agent, under penalties of
perjury, that it is not a United States holder and provides its name and
address or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution") and holds the Trust Preferred
Security certifies to the Trust or its agent under penalties of perjury
that such statement has been received from the beneficial owner by it or by
a Financial Institution between it and the beneficial owner and furnishes
the Trust or its agent with a copy thereof;
(ii) a United States Alien Holder of a Trust Preferred Security
will not be subject to United States federal withholding tax on any gain
realized upon the sale or other disposition of a Preferred Security; and
(iii) any gain realized by a United States Alien Holder upon the
exchange of A Interests for Trust Preferred Securities will not be subject
to United States federal withholding tax.
Information Reporting to Holders. The Trust will report the original issue
discount that accrued during the year with respect to the Junior Subordinated
Debentures, and any gross proceeds received by the Trust from the retirement or
redemption of the Junior Subordinated Debentures, annually to the holders of
record of the Trust Preferred Securities and the Internal Revenue Service. The
Trust currently intends to deliver such reports to holders of record prior to
January 31 following each calendar year. It is anticipated that persons who hold
Trust Preferred Securities as nominees for beneficial holders will report the
required tax information to beneficial holders.
Backup Withholding. Payments made on, and proceeds from the sale of, Trust
Preferred Securities may be subject to a "backup" withholding tax of 31 percent
unless the holder complies with certain identification requirements. Any
withheld amounts will generally be allowed as a credit against the holder's
federal income tax, provided the required information is timely filed with the
Internal Revenue Service.
Other Tax Issues Affecting Limited Partners
Pre-Conversion Operations of the Partnership. The income and deductions of
the Partnership incurred during 1997 prior to the Conversion will be allocated
among the partners, and each partner's basis in its general or limited
partnership interest will be adjusted by such allocations, in essentially the
same manner they would have been allocated and adjusted apart from the
Conversion. Each partner will receive a Schedule K-1 for 1997 reflecting the
income and deductions allocated to the partner during the period in 1997 in
which the partner owned such Interests, even if the partner sells the Interests
prior to the Conversion.
Pre-Conversion Sale of Interests. The tax consequences to a limited partner
who sells a Partnership Interest prior to the Conversion are not affected by the
Conversion.
(i) The limited partner may recognize both ordinary income and
capital gain or loss. The ordinary income amount will be approximately the
amount of ordinary income, including depreciation recapture and other
unrealized receivables as defined in Section 751 of the Code, that would
have been allocated to the limited partner if the Partnership had sold all
its assets. Such amount will vary depending on the amount paid for the
Partnership Interests, the date acquired and other factors. The capital
gain or loss amount will normally be the difference between the limited
partner's adjusted tax basis and the amount realized from the sale of the
Interest (reduced by the portion treated as ordinary income).
(ii) The deductibility of a noncorporate taxpayer's investment
interest expense is generally limited to the amount of such taxpayer's net
investment income. Investment interest expense includes (1) interest on
indebtedness incurred or continued to purchase or carry property held for
investment (such as the Common Stock); (2) a partnership's interest expense
attributed to the portfolio income of the Partnership under the passive
activity loss rules; and (3) that portion of interest expense incurred or
continued to purchase or carry an interest in a passive activity (such as a
limited partner's Interest in the Partnership) to the extent attributed to
portfolio income (within the meaning of the passive activity loss rules).
Investment interest deductions which are disallowed may be carried forward
and deducted in subsequent years to the extent of net investment income in
such years.
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Reporting Requirements. Each limited partner who receives Common Stock in
the Conversion will be required to file with the limited partners' federal
income tax return a statement that provides details relating to the property
transferred and the stock received in the Conversion. The Corporation will
provide former limited partners with information to assist them in preparing
such statement.
Tax Consequences to the Corporation and the Partnership
The following discussion assumes that the Conversion will be treated for
federal income tax purposes in the manner described above under "--Tax Treatment
of the Conversion." In counsel's opinion, the acquisition by the Corporation of
the various partnership interests and other interests as a result of the
Conversion and issuance of cash, the Trust Preferred Securities and Common Stock
will not give rise to the recognition of gain or loss by the Corporation or the
Partnership, and the basis of the Partnership interests received by the
Corporation in exchange for cash, the Trust Preferred Securities and Common
Stock will generally be determined by reference to the tax basis of the B
Interests in the hands of the exchanging partners immediately prior to the
Conversion increased by the fair market value of the cash and Trust Preferred
Securities received by the holders of A Interests.
The acquisition of Partnership interests by the Corporation will result in
a constructive termination of the Partnership for federal income tax purposes
under Section 708 of the Code. This section provides that a "sale or exchange"
(which includes a transfer in connection with a Section 351 transaction) of 50
percent or more of the total interest in a partnership's capital and profits
within a 12-month period terminates a partnership for tax purposes. Upon such
termination, there is a hypothetical liquidation and distribution of the
partnership's assets to the transferees of the partnership interests and the
remaining partners, and a hypothetical contribution of the assets to the
partnership, which for tax purposes is considered a new partnership. The
constructive termination of the Partnership under Section 708 of the Code
results in a constructive termination of the Operating Partnership. The
Corporation does not expect that this termination will result in any material
adverse tax consequences to the Corporation or the Partnership.
As part of the Conversion, the Partnership will be merged with the
Corporation. The merger of the Partnership and the transfer of its assets to the
Operating Partnership will not result in the recognition of gain or loss to the
Partnership or the Operating Partnership.
Unrelated Business Taxable Income
Certain persons otherwise generally exempt from federal income taxes (such
as pension plans and other exempt organizations) are taxed under Section 511 of
the Code on unrelated business taxable income. Currently, substantially all
taxable income generated by the Partnership is considered unrelated business
taxable income for tax-exempt organizations. Dividends distributed by the
Corporation will not be taxed under Section 511 of the Code, except to the
extent that the Common Stock is debt-financed property as that term is defined
in Section 514 of the Code.
Other Tax Aspects
Apart from federal income taxes, no attempt has been made to determine any
tax that may be imposed on limited partners by the country, state or
jurisdiction in which such partner resides or is a citizen. In addition to
federal income taxes, limited partners may be subject to other taxes, such as
state or local income taxes that may be imposed by various jurisdictions, and
may be required to file tax returns through the date of consummation of the
Conversion in those states in which properties owned by the Partnership (through
the Operating Partnership) are located. Limited partners may also be subject to
income, intangible property, estate, and inheritance taxes in their state of
domicile. Limited partners should consult their own tax advisors with regard to
state income, inheritance, and estate taxes.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED TO PROVIDE
ONLY A GENERAL SUMMARY AND DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY
WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION
DOES NOT ADDRESS ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF DISPOSITION OF
INTERESTS IN THE PARTNERSHIP PURSUANT TO THE CONVERSION. ACCORDINGLY, EACH
LIMITED PARTNER IS STRONGLY URGED TO CONSULT HIS OWN TAX ADVISOR TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES TO SUCH LIMITED PARTNER OF THE CONVERSION,
INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX
LAWS.
85
MARKET PRICES AND DISTRIBUTIONS
Effective May 1, 1990, the Partnership separated its publicly traded
limited partnership unit into one A Interest and one B Interest. The A Interests
and B Interests trade separately on the NYSE under the symbols SDP and SDPB,
respectively.
The following table shows the quarterly range of high and low closing sales
prices for the A Interests and B Interests separately for the periods indicated.
A Interests B Interests
----------- -----------
High Low High Low
---- --- ---- ---
1995
- ----
First Quarter 10 3/4 10 1/4 4 3/4 4
Second Quarter 11 10 3/8 4 3/8 4
Third Quarter 11 3/8 10 3/4 4 7/8 4
Fourth Quarter 11 3/8 10 7/8 5 1/8 4 1/2
1996
- ----
First Quarter 11 3/4 11 1/4 5 1/8 4
Second Quarter 11 1/2 10 7/8 4 1/2 4
Third Quarter 11 1/8 10 3/8 4 1/2 4 1/4
Fourth Quarter 11 1/4 10 3/8 4 5/8 4 1/8
1997
- ----
First Quarter 11 1/2 10 7/8 4 1/2 4 1/8
Second Quarter 12 11 1/8 5 1/8 4
The closing sales prices on August __, 1997, the date of this Proxy
Statement/Prospectus, were ____ per A Interest and ____ per B Interest. The
closing sales prices on December 11, 1996, the last trading day before the
Partnership publicly announced the planned Conversion, were $10 1/2 per A
Interest and $4 1/4 per B Interest.
As of July 18, 1997, the Partnership had 11,099,573 A Interests and
21,675,746 B Interests outstanding. The total number of record holders of A
Interests and B Interests as of July 18, 1997 was 1,603 and 913, respectively.
The holders of the A Interests are entitled to receive annually $1.10 per A
Interest (the "Priority Return") to the extent that cash is available for
distribution. Priority Return distributions are paid monthly on the last day of
the month to holders of record on the first day of that month.
When federal taxable income is allocated to the holders of B Interests,
such holders are entitled to annual tax distributions (the "B Tax Distribution")
equal to the product of (i) 125% of the then applicable maximum federal income
tax rate for individuals and (ii) the federal taxable income allocated to the
holders of B Interests with respect to the preceding year.
The Priority Return and B Tax Distribution will be paid to the extent cash
is available for distribution and accumulate until paid. To the extent that the
Priority Return and B Tax Distribution have not been paid on a cumulative basis,
Management Fees due the General Partner will be deferred, and will be paid,
together with any Management Fees then owed with respect to any other year,
after the Priority Return and B Tax Distribution have been paid. If cash
available for distribution exceeds the amount necessary to pay the Priority
Return and B Tax Distribution, the General Partner may make additional
discretionary distributions to the holders of B Interests, provided that no
distribution, except the B Tax Distribution, may be made to holders of the B
Interests if, after such distribution, such holders' capital accounts with
respect to their B Interests would be below $.50 on a per Interest basis.
86
The Partnership paid Priority Return distributions of $1.10 per A Interest
in 1995 and 1996. For 1994, the B Tax Distribution amounted to $10,895,000 or
$.492619 per B Interest which was partially paid in the amount of $.009352 per B
Interest per month for the period January through March 1994 and $.02 per B
Interest per month during the period April through December 1994. The monthly
tax distributions were paid to holders of record on the first day of each month
during 1994 and aggregated $.208056 per B Interest for the full year 1994. On
March 31, 1995, the Partnership distributed the balance of the tax distribution
due of $.284563 per B Interest, as follows: approximately $.01981 per month to
holders of record of B Interests on the first day of the month during January
through March 1994; $.00916 per month for April through November 1994; and
$.15185 for December 1994 which included $.14269 related to the capital gain on
the sale of the Electrical Group divisions on December 5, 1994.
For 1995, the B Tax Distribution amounted to $14,807,000 or $.669517 per B
Interest which was partially paid in the amount of $.02 per B interest per month
for the period January through December, 1995, along with a partial distribution
of $.15 on April 10, 1995 to holders of record on December 30, 1994, related to
the taxable gain on the sale of Dorman Products. The monthly tax distributions
were paid to holders of record on the first day of each month during 1995 and
aggregated $.24 per B interest for the full year 1995. On March 29, 1996, the
Partnership distributed the balance of the tax distribution due of $.279517 per
B Interest, as follows: $.174544 to holders of record on December 30, 1994 for
the balance due on the taxable gain on the sale of Dorman Products; $.001968 per
month to holders of record of B Interests on the first day of the month during
January through December 1995 for the balance due on ordinary taxable income;
and $.081356 to holders of record on September 29, 1995 related to the taxable
gain on the sale of Downey Glass on October 27, 1995.
For 1996, the B Tax Distribution amounted to $7.7 million or $.35 per B
Interest, which was partially paid in the amount of $.02 per B Interest per
month for the period January through April 1996 and in the amount of $.03 per B
Interest per month for the period May through December 1996 (including a
distribution declared November 18, 1996, payable December 31, 1996, to holders
of record November 29, 1996). On March 31, 1997, the Partnership distributed the
balance of the tax distribution due of $.0265 per B Interest to the holders of
record for the entire year.
The Partnership suspended the payment of monthly advance B Tax
Distributions effective January 1, 1997 through March 31, 1997, pending the
conversion to corporate form. Due to the delay in completion of the proposed
corporate conversion, the Partnership resumed payment of monthly advance B Tax
Distributions in April 1997 in the amount of $.03 per B Interest. The
Partnership intends to pay this monthly rate to holders of B Interests until the
effective date of the conversion, since it expects to allocate sufficient
taxable income on the B Interests in the shortened tax year from January 1, 1997
through the effective date to require the B Tax Distribution payment. The
balance of the required 1997 B Tax Distribution, if any, will be paid on or
before March 31, 1998. For the period January 1, 1997 through the Effective
Time, the Partnership expects to pay Priority Return distributions of
approximately $.091666 per month per A Interest.
After the Effective Time, the former holders of A Interests will be
entitled to monthly distributions on the Trust Preferred Securities subject to
the right of the Corporation to defer payments on the Junior Subordinated
Debentures for up to five years in which case the distributions will accumulate,
compounding monthly. Dividends on the Common Stock will be payable when and as
declared by the Board of Directors of the Corporation. The payment of dividends
will be at the discretion of the Corporation's Board of Directors and will
depend, among other things, on earnings, financial condition, capital
requirements, availability of acquisition candidates, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Corporation's Board of Directors deems relevant.
87
CAPITALIZATION
The following table sets forth the historical capitalization of the
Partnership at March 31, 1997, and the pro forma capitalization of the
Corporation as if the conversion had occurred on March 31, 1997. The table
should be read in conjunction with the historical and pro forma financial
statements of the Partnership and related Notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus.
88
SELECTED HISTORICAL FINANCIAL INFORMATION
(dollars in thousands, except for partnership interest data)
The following table sets forth selected consolidated historical financial
data of the Partnership as of the dates and for the periods indicated. The
selected financial information set forth below for the Partnership as of and for
the three months ended March 31, 1997 and 1996 is derived from unaudited
financial statements included elsewhere herein. The selected financial
information set forth below for the Partnership as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 are
derived from the audited financial statements included elsewhere herein. The
selected financial information set forth below for the Partnership as of
December 31, 1994, 1993 and 1992 and for each of the two years in the period
ended December 31, 1993 are derived from the financial statements not included
elsewhere herein. The selected financial information should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
appearing elsewhere herein. See "INDEX TO FINANCIAL STATEMENTS." See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" for acquisitions and divestitures that affect comparability.
89
(i) Excluding non-recurring items recorded in 1997 and 1996, the ratio is 1.20
and 1.21, respectively.
90
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Partnership's operations and
financial condition. The discussion pertains to the consolidated statements of
income of the Partnership and subsidiary for the years ended December 31, 1994,
1995 and 1996 (audited) and for the three months ended March 31, 1997
(unaudited) and the consolidated balance sheets dated December 31, 1995 and 1996
(audited) and March 31, 1997 (unaudited) and should be read in conjunction with
these consolidated financial statements and notes thereto appearing elsewhere
herein. In connection with the proposed conversion of the partnership to a C
corporation, references are also made, where appropriate, to the unaudited pro
forma financial statements contained elsewhere herein.
General
The Partnership is a publicly held master limited partnership operating in
the wholesale industrial distribution industry through a subsidiary partnership,
SDI Operating Partners, L.P. (the "Operating Partnership"). The Partnership
consists of a headquarters operation and three business segments which are
Industrial Services, Hardware Merchandising and Glass Merchandising.
The Partnership's Industrial Services segment is comprised of the Sun
Inventory Management ("SIMCO") divisions and the Sun Technology Services
divisions. The SIMCO divisions are Kar Products, A&H Bolt,
SIMCO/Special-T-Metals and SIMCO de Mexico. The SIMCO divisions provide
maintenance products and inventory management services to both original
equipment manufacturers and maintenance and repair facilities, including
in-plant systems. Sun Technology Services, formerly the Fluid Power group, is
comprised of Activation, Air-Dreco, J.N. Fauver Co., Hydra-Power de Mexico,
Walter Norris and Warren Fluid Power. The Technology Services divisions provide
fluid power products, engineering design, and equipment repair services to a
wide variety of industrial customers.
The Partnership's Hardware Merchandising segment consists of the Hillman
division. Hillman distributes hardware items and related products and also
provides merchandising systems service and support to both large and small
hardware retailers.
The Partnership's Glass Merchandising segment consists of the Harding Glass
division. Harding provides glass products and point-of-sale related services
such as the installation and repair of automobile and flat glass.
Conversion to Corporate Form
The Partnership has recorded $2.5 million of transaction costs related to
the proposed conversion as of March 31, 1997 ($2.1 million in the fourth quarter
of 1996 and $.4 million in the first quarter of 1997) and anticipates incurring
an additional $2.0 million of transaction costs to complete the conversion
process. See Note 1 of Notes to Consolidated Financial Statements of the
Partnership as of and for the three years ended December 31, 1996, for a
discussion of the accounting recognition of these costs.
Sale of Certain Divisions
The Operating Partnership sold its Downey Glass division on October 27,
1995, its Dorman Products division on January 3, 1995 and its three Electrical
Group divisions on December 5, 1994, for an aggregate cash consideration, net of
expenses, of approximately $70.6 million (subject to certain post-closing
adjustments) and the assumption of certain liabilities. The proceeds from these
divestitures were used to reduce debt and for general Partnership purposes,
including acquisitions for integration with its remaining businesses.
Sales from the divested divisions aggregated $ 29.1 million for the year
ended December 31, 1995 and $177.1 million for the year ended December 31, 1994.
Income contributions from these divisions aggregated $.3 million or $.01 per
Class B interest in 1995 and $8.6 million or $.39 per Class B interest in 1994.
91
Acquisitions
On April 11, 1996, the Partnership's Industrial Services segment, through
its Warren Fluid Power division, purchased certain assets of Hydraulic Depot,
Inc. of Reno, Nevada for an aggregate purchase price of $.7 million. Annual
sales of Hydraulic Depot, Inc. are approximately $2.5 million. This acquisition
expands Warren's previous geographic markets.
On November 13, 1995, the Partnership's Hardware Merchandising segment,
through its Hillman division, purchased certain assets of the Retail Division of
Curtis Industries of Eastlake, Ohio for an aggregate purchase price of $8.0
million and the assumption of certain liabilities. The Curtis Retail operation
was integrated with the Hillman division. Curtis' sales were $1.6 million from
the acquisition date through December 31, 1995 and approximately $11.0 million
for the twelve months ended December 31, 1996.
Results of Operations
Market Developments
In 1996, the Industrial Services and Hardware Merchandising segments
continued to expand as a result of economic strength in most product markets and
the addition of new product lines and value-added services. However, the Glass
business has experienced a decline in sales volume primarily attributable to the
discontinuation of certain product lines and markets served and competitive
pressures from major glass manufacturers who have more aggressively pursued the
wholesale distribution business in recent years. This decline has been partially
offset by real growth in Harding's retail glass business, it's primary strategic
focus. Growth in the retail glass business is expected to continue, complemented
by internal expansion and acquisition growth opportunities.
Operating expense control and liquidity in working capital investment
allows the operating divisions to respond quickly to market conditions affected
by economic recession or growth. Management will continue to respond to changing
market conditions.
Restructuring Charges
On December 11, 1996, the Board of Directors of Lehman/SDI approved
management's plan to restructure its Technology Services divisions and its Glass
Merchandising business. During the fourth quarter of 1996, the Partnership
recorded a $6.0 million restructuring charge, of which only $.2 million was paid
by December 31, 1996, related to the integration and consolidation of its five
domestic Technology Services divisions and the write-off of certain
non-performing assets in the Glass Merchandising segment. The restructuring plan
is expected to result in the elimination of 175 employees in the Technology
Services divisions by December 31, 1998, and is expected to produce net
annualized cost savings of approximately $5.0 million per year upon its
completion. See Note 1 of Notes to Consolidated Financial Statements for the
accounting recognition of the restructuring charges.
Pro Forma Results
As shown in the accompanying Pro Forma Consolidated Financial Statements
included herein, net income on a pro forma corporate basis for the three months
ended March 31, 1997, is $1.1 million resulting in $0.18 per common share or
approximately $0.05 per Class B interest (before the reverse stock split).
Net income on a pro forma corporate basis for the year ended December 31,
1996 is $5.2 million resulting in $0.81 per common share or approximately $0.20
per Class B interest (before the reverse stock split). Excluding the
aforementioned restructuring charge of $6.0 million, net income on a pro forma
corporate basis for the year ended December 31, 1996, would have amounted to
$8.8 million resulting in $1.37 per common share or approximately $0.34 per
Class B interest (before the reverse stock split).
Three Months Ended March 31, 1997 and March 31, 1996
Net income for the quarter ended March 31, 1997, was $4.6 million compared
with $4.0 million in 1996. The results for the first quarter of 1997 included a
$.4 million charge for transaction costs associated with the proposed conversion
to a C corporation. Excluding this non-recurring item, net income increased $.9
million or 22.8% over the first quarter of 1996.
92
Net sales increased $14.1 million or 9.1% over the first quarter of 1996
resulting primarily from an increase in the volume of products sold due to
continued strengthening in existing product markets as well as additional market
penetration from new product lines and value-added services. Sales recorded in
the first quarter of 1997 were $169.0 million compared with the first quarter of
1996 of $154.9 million.
Sales increases (decreases) by business segment are as follows:
Sales Increase (Decrease)
-------------------------
Amount %
------ -
Industrial Services
Technology Services 5.9 million 8.1 %
Inventory Management 5.5 million 14.5 %
-----
Total Industrial Services 11.4 million 10.3 %
Hardware Merchandising 4.1 million 18.5 %
Glass Merchandising (1.4) million (6.6)%
-----
Total Partnership $14.1 million 9.1 %
=====
The sales increase in the Hardware Merchandising segment is due primarily
to an expansion of Hillman's customer base and market penetration from new
product lines associated with the Curtis acquisition. The increase in sales in
the Inventory Management divisions is comprised of sales growth primarily from
new inventory management programs of $4.2 million and in maintenance products of
$1.3 million.
The decline in sales volume in the Glass Merchandising Segment is
attributable to decreases in retail flat glass, wholesale glass and other
product line sales aggregating $1.8 million, offset by an increase in retail
automotive glass sales of $.4 million.
Cost of sales increased $8.4 million or 9.1% from the first quarter of
1996, due primarily to increased sales levels in the comparison period. The 1996
period also reflects a reclassification of $.6 million in costs from selling,
warehouse and delivery and general and administrative expense (S,G&A) to cost of
sales.
Gross margins were 40.0% in the first quarter of 1997 and 1996, comprised
by business segment as follows:
First Quarter
-------------
1997 1996
---- ----
Industrial Services
Technology Services 25.8% 25.7%
Inventory Management 58.5% 63.0%
Total Industrial Services 37.3% 38.4%
Hardware Merchandising 51.8% 50.6%
Glass Merchandising 40.8% 36.9%
The erosion in gross margin in the Industrial Services segment is due
mainly to competitive pricing pressures and changes in sales mix, primarily in
the Inventory Management divisions.
Gross margins in the Hardware Merchandising segment increased due to
reduced packaging costs from the comparable 1996 period.
The increase in gross margins in the Glass Merchandising segment is due
primarily to improved purchasing management in retail glass and exiting from
low-margin product lines.
93
SG&A expenses increased by $4.5 million or 8.3% over the first quarter of
1996, comprised as follows: increased selling expenses of $2.0 million or 7.5%,
supporting increased 1997 sales levels; increased warehouse and delivery
expenses of $.9 million or 9.2% due to the addition of five large in-plant
accounts in the Industrial Services segment and expansion programs by certain
operating units; and increased general and administrative expenses of $1.6
million or 9.2% to support the increased number of system accounts in the
Industrial Services segment and the overall increase in 1997 sales levels.
S,G&A expenses as a percentage of sales, were as follows:
First Quarter
1997 1996
---- ----
Selling Expenses
Warehouse and Delivery Expenses 16.7% 17.0%
General and Administrative Expenses 6.2% 6.2%
Total S,G&A Expenses 11.8% 11.8%
----- -----
34.7% 35.0%
===== =====
Overall, as a percentage of sales, total S,G&A expense decreased due mainly
to the increase in sales levels in relation to the fixed cost component of S,G&A
expenses.
As calculated in accordance with the partnership agreement, the Management
Fee due the General Partner (the "GP") annually amounts to $3.3 million which is
based on 3% of the aggregate initial capital investment ($111 million) of the
limited partners. The Management Fee is accrued each quarter in the amount of
approximately $.8 million.
Interest expense increased $.2 million in the comparison period due
primarily to increased borrowing levels under the Partnership's revolving credit
facility to support working capital requirements, offset by reduced financing
costs from the scheduled principal repayment on senior notes in the amount of
$6.4 million on December 1, 1996.
Other income increased by $.1 million in the comparison period due
primarily to gains from the sale of fixed assets.
Currently, the Partnership incurs state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
Operations. Also, the Partnership provides for deferred income taxes as
determined in accordance with Statement of Financial Accounting Standard No. 109
("SFAS #109"). As currently calculated, deferred income taxes represent state
and federal income tax benefits expected to be realized after December 31, 1997,
when the Partnership will be taxed as a corporation.
The allocation of net income to the GP is based on the GP's 1% ownership
interest in the profits of the Partnership. The allocation of net income to the
limited partners for financial statement purposes represents a 99% interest in
the profits of the Partnership. The net income allocation resulted in $.27 of
income per Class A limited partnership interest for the quarters ended March 31,
1997 and March 31, 1996; and $.07 of income per Class B limited partnership
interest in the first quarter of 1997 compared with $.04 of income per Class B
interest for the first quarter of 1996. Income per Class B interest in 1997
includes non-recurring transaction costs related to the proposed conversion to
corporate form of $.01. Excluding the transaction costs, income per Class B
limited partnership interest amounted to $.08 in the first quarter of 1997
compared with $.04 in the first quarter of 1996.
Operating Results Excluding Divisions Sold
As previously stated, the Operating Partnership sold certain divisions in
1994 and 1995. In order to provide an analysis of the results of ongoing
operations, the sales, gross profit and operating expenses of these divisions
have been excluded from the following discussion of results of operations. The
table below reflects the results from ongoing operations of the Partnership for
each year:
94
Years Ended December 31, 1996 and 1995
--------------------------------------
Net income for the year ended December 31, 1996 was $19.3 million compared
with $44.1 million in 1995. As previously mentioned, 1996 results included a
$4.9 million charge (net of $1.1 million in deferred tax benefits), related to
the restructuring of the Technology Services and Glass Merchandising divisions
and a $2.1 million charge for transaction costs associated with the conversion
to a C corporation. The 1995 results included a combined gain of $20.6 million
from the sale of the Downey Glass division in October 1995 and the Dorman
Products division in January 1995. Results for 1995 also included a $.6 million
charge related to the early retirement of debt and $.3 million of operating
income from Downey Glass. Excluding these non-recurring items, net income for
1996 amounted to $26.3 million or 10.5% above the comparable 1995 earnings of
$23.8 million.
Net sales increased $49.4 million or 8.2% over 1995 resulting primarily
from an increase in the volume of products sold due to continued strengthening
in existing product markets as well as additional market penetration from new
product lines and value-added services. Sales recorded in 1996 were $649.3
million compared with 1995 sales of $599.9 million, excluding divisions sold.
Sales increases (decreases) by business segment are as follows:
Sales Increase (Decrease)
Amount %
------ -
Industrial Services
Technology Services 13.6 million 4.8 %
Inventory Management 18.2 million 13.1 %
-----
Total Industrial Services 31.8 million 7.5 %
Hardware Merchandising 18.8 million 22.2 %
Glass Merchandising (1.2) million (1.3)%
------
Total Partnership $49.4 million 8.2 %
=====
The sales increase in the Hardware Merchandising segment includes
approximately $11.0 million which is due to the Curtis acquisition and the
balance of $7.8 million in growth from new accounts, expansion of existing
product lines and market penetration of new product lines. The increase in sales
in the SIMCO divisions is comprised of sales growth from new inventory
management programs of $10.5 million or 42.9% and in maintenance products of
$7.7 million or 6.7%.
95
The decline in sales volume in the Glass Merchandising segment is
attributable to the discontinuation of certain product lines and markets served,
accounting for $.2 million of the sales decline and a decrease in wholesale
glass, brokerage and other product line sales of $2.8 million, offset by an
increase in retail glass sales of $1.8 million, or 4.2%.
Cost of sales increased $31.2 million or 8.8% from the twelve months ended
December 31, 1995, due primarily to increased sales levels in the comparison
period.
Gross margins were 40.5% in 1996 compared with 40.8% in 1995, excluding
divisions sold, comprised by business segment as follows:
Year Ended December 31,
-----------------------
1996 1995
---- ----
Industrial Services
Technology Services 26.7% 27.4%
Inventory Management 61.1% 64.5%
Total Industrial Services 38.6% 39.5%
Hardware Merchandising 50.8% 52.4%
Glass Merchandising 38.8% 35.9%
The erosion in gross margin in the SIMCO divisions is due mainly to
competitive pricing pressures and changes in sales mix. Gross margins in the
Hardware Merchandising segment decreased due to reduced packaging productivity
levels and costs associated with integration costs for the Curtis acquisition
and other business expansion programs.
Gross margins in the Glass Merchandising segment increased due primarily to
improved purchasing management and better sales in retail glass which carries
higher margins than the other product lines in this segment.
Selling, warehouse and delivery, and general and administrative ("S,G&A")
expenses increased by $16.4 million or 8.0% over 1995, excluding divisions sold,
comprised as follows: increased selling expenses of $7.4 million or 7.5%,
supporting increased 1996 sales levels; increased warehouse and delivery
expenses of $6.3 million or 17.2% due to the integration of the Curtis retail
division, expansion programs by certain operating units, and the addition of
seven large in-plant accounts in the SIMCO divisions; and increased general and
administrative expenses of $2.8 million or 3.9% due primarily to cost
containment efforts.
Excluding divisions sold, S,G&A expenses as a percentage of sales, were as
follows:
Year Ended December 31,
-----------------------
1996 1995
---- ----
Selling Expenses 16.3% 16.4%
Warehouse and Delivery Expenses 6.6% 6.1%
General and Administrative Expenses 11.2% 11.7%
----- -----
Total S,G&A Expenses 34.1% 34.2%
===== =====
The Management Fee due the General Partner is accrued in the amount of $3.3
million, as previously discussed.
Depreciation expense increased $.3 million in the comparison period due
primarily to an increase in the depreciable fixed asset base.
Interest income decreased $.3 million in 1996 due primarily to the reduced
investment of excess cash that was generated during the fourth quarter of 1994
and the first quarter of 1995 from divisions sold.
96
Interest expense decreased $.4 million in 1996 due primarily to reduced
financing costs from the prepayment of senior notes on March 14, 1995, offset by
higher interest expense from increased borrowing levels under the Partnership's
revolving credit facility.
Other income increased $.3 million in the comparison period due primarily
to lowered minority interest expense.
As previously stated, the Partnership incurs state, local and foreign
income taxes and provides for deferred income taxes as determined in accordance
with SFAS #109. The Partnership's provision for income taxes in 1996 decreased
$1.7 million from 1995 due to the recording of the following: $.5 million
deferred income tax benefit relating to book/tax differences in the
Partnership's casualty loss insurance program, a $1.1 million deferred income
tax benefit relating to book/tax differences from restructuring costs and a $.1
million favorable adjustment to prior year's state income tax provisions. See
"Income Taxes" below for a discussion of the effect of the proposed conversion
to corporate form on deferred income taxes.
The allocation of net income, which was previously discussed, resulted in
$1.10 of income per Class A limited partnership interest for the years ended
December 31, 1996 and December 31, 1995; and $.32 of income per Class B limited
partnership interest in 1996 compared with $1.45 of income per B Interest for
the year ended December 31, 1995. Income per B Interest in 1996 was reduced by
the restructuring charge, net of deferred tax benefits and transaction costs
amounting to $.22 and $.10, respectively. Income per B Interest for the twelve
months ended December 31, 1995 included a combined gain of $.94 from the sale of
the Dorman Products and Downey Glass divisions, an extraordinary loss of $.03
from the early extinguishment of debt and $.01 of income from the divested
Downey Glass division. Excluding these non-recurring items, income per B
Interest was $.64 compared with $.53 in 1995, an increase of approximately 21%.
Years Ended December 31, 1995 and 1994
Net income for the year ended December 31, 1995 was $44.1 million including
a combined gain of $20.6 million from the sale of the Dorman Products and Downey
Glass divisions, compared with $29.5 million earned in 1994, which included a
gain of $3.5 million from the sale of the Electrical Group divisions in December
1994. Results for 1995 also included a $.6 million charge related to the early
retirement of debt and a reduction in net financing costs of almost $3.2 million
from the prior year. 1994 net income included income from the Electrical Group
of $4.1 million, from Dorman Products of $2.8 million, and from Downey Glass of
$1.7 million. Excluding income contributions and gains from divisions sold, as
well as the extraordinary loss on early extinguishment of debt, net income for
1995 amounted to $23.8 million or 36.7% above the comparable 1994 earnings of
$17.4 million.
Net sales increased $41.1 million or 7.4% over 1994 resulting primarily
from an increase in the volume of products sold due to strengthening in most
product markets and significant growth from sales programs and services
initiated since 1992. Substantially all of the Partnership's growth in revenues
is related to increases in the volume of products sold. Excluding divisions
sold, sales recorded in 1995 were $599.9 million compared with 1994 sales of
$558.8 million. Sales increases (decreases) by business segment were as follows:
Sales Increase (Decrease)
Amount %
------ -
Industrial Services
Technology Services 25.0 million 9.6 %
Inventory Management 10.1 million 7.9 %
-----
Total Industrial Services 35.1 million 9.1 %
Hardware Merchandising 11.9 million 16.3 %
Glass Merchandising (5.9) million (6.1) %
------
Total Partnership $41.1 million 7.4 %
=====
97
The decline in sales volume in the Glass Merchandising segment was
primarily attributable to the discontinuation of certain product lines and
markets served, resulting in a sales reduction of $5.0 million from 1994. On a
comparable basis sales decreased $.9 million, or .9%, in the Glass Merchandising
segment.
Cost of sales increased $23.4 million or 7.1%, due primarily to increased
sales levels in the existing businesses in the comparison period.
Excluding divisions sold, gross margins were 40.8% in 1995 compared with
40.7% in 1994, comprised by business segment as follows:
Year Ended December 31,
-----------------------
1995 1994
---- ----
Industrial Services
Technology Services 27.4% 27.7%
Inventory Management 64.5% 65.9%
Total Industrial Services 39.5% 40.3%
Hardware Merchandising 2.4% 51.0%
Glass Merchandising 35.9% 34.4%
Sales mix was the principal contributor to the changes in gross margins.
S,G&A expenses, excluding divisions sold, increased by $15.9 million or
8.4% over 1994, comprised as follows: increased selling expenses of $8.9 million
or 9.9%, increased warehouse and delivery expenses of $3.2 million or 10.0% and
increased general and administrative expenses of $3.9 million or 5.7%. The
increase in S,G&A expenses supported increased 1995 sales levels and expansion
programs by certain operating units.
Excluding divisions sold, S,G&A expenses, as a percentage of sales were as
follows:
Year Ended December 31,
-----------------------
1995 1994
---- ----
Selling Expenses 16.4% 16.1%
Warehouse and Delivery Expenses 6.1% 5.7%
General and Administrative Expenses 11.7% 12.1%
----- -----
Total S,G&A Expenses 34.2% 33.9%
===== =====
The increase in S, G&A as a percentage of sales was due mainly to increased
support payments, incentive programs and marketing efforts for the sales force.
The Management Fee due the General Partner is accrued in the amount of $3.3
million annually, as previously discussed.
Depreciation expense increased $.1 million in the comparison period due
primarily to an increase in the depreciable fixed asset base at the remaining
divisions of the Partnership.
Amortization expense decreased $.2 million in the comparison period due
primarily to the expiration of non-compete agreements in the Glass Merchandising
segment.
Interest income increased $.3 million in the comparison period due
primarily to the investment of excess cash generated from divisions sold.
98
Interest expense decreased $2.6 million in the comparison period due to
reduced financing costs of approximately $1.5 million from the prepayment of
senior notes on March 14, 1995, and $1.1 million from reduced borrowing levels
under the Partnership's revolving credit facility.
Other income was $.3 million for the twelve months ended December 31, 1995,
compared to $1.7 million of other expense recorded in the 1994 comparison
period. This change was primarily due to the favorable settlement of certain
non-recurring insurance and legal matters in the 1995 period.
As previously stated, the Partnership incurs state, local and foreign
income taxes and provides for deferred income taxes as determined in accordance
with SFAS #109. The Partnership's provision for income taxes in 1995 increased
$0.4 million from 1994 due primarily to an increase in state taxes as a result
of gains on divisions sold.
The allocation of net income, which was discussed previously, resulted in
$1.10 of income per A Interest for the years ended December 31, 1995 and
December 31, 1994; and $1.45 of income per B Interest in 1995 compared with $.79
of income per B Interest for the year ended December 31, 1994. Income per B
Interest in 1995 included a combined gain of $.94 from the sale of the Dorman
Products and Downey Glass divisions and an extraordinary loss of $.03 from the
early extinguishment of debt. Income per B Interest for the twelve months ended
December 31, 1994 included a gain of $.16 on the sale of the Electrical Group
divisions. Income per B Interest for the twelve months ended December 31, 1995
and 1994 included $.01 and $.39, respectively, of income from divisions sold.
Liquidity and Capital Resources
Net cash used for operations in the first quarter of 1997 was $2.1 million
compared with net cash provided by operations in the first quarter of 1996 of
$2.1 million, a change of $4.2 million. This change was due primarily to
increased working capital investment in operations in the comparison period of
approximately $4.8 million offset by increased net income of $.6 million. The
Partnership's net interest coverage ratio (earnings before interest, taxes and
gain on sale of divisions over net interest expense) improved to 3.68x in the
first quarter of 1997 from 3.42x in the comparable prior year period.
Net cash provided by operations for the twelve months ended December 31,
1996 was $23.3 million, an increase of $6.2 million from the prior year level of
$17.1 million. The Partnership's net interest coverage ratio (earnings before
interest, taxes, gain on sale of divisions, and 1996 restructuring charges and
transaction costs over net interest expense) improved to 4.81x in 1996 from the
1995 level of 4.56x.
The Partnership's cash position of $3.1 million as of March 31, 1997,
decreased $1.4 million from the balance at December 31, 1996. Cash was provided
during this period primarily from borrowings under the bank credit agreement of
$9.0 million and proceeds from the sale of property and equipment of $.3
million. Cash was used during this period predominantly for operations,
distributions to the general and limited partners, capital expenditures,
repayments under other credit facilities and other items in the amounts of $2.1
million, $3.7 million, $1.0 million, $1.0 million and $.1 million, respectively.
The Partnership's cash position of $1.7 million as of December 31, 1996,
decreased $4.2 million from the balance at December 31, 1995. Cash was provided
during 1996 primarily from operations of $23.3 and borrowings under the bank
credit agreement of $11.0 million. Cash was used during this period
predominantly for distributions to the general and limited partners ($25.6
million), repayment of debt obligations ($6.4 million), acquisitions ($.7
million), capital expenditures ($4.3 million), repayments under other credit
facilities($.1 million) and the purchase of life insurance ($1.4 million).
The Partnership's working capital position of $90.8 million at March 31,
1997, represents a decrease of $10.0 million from the December 31, 1996 level of
$100.8 million. The decrease is attributable to an increase in current
liabilities of $20.0 million as a result of the classification of bank revolver
debt as current at March 31, 1997, an increase in interest payable on senior
notes of $1.4 million, and an increase in distributions payable to partners of
$.1 million; offset by reinvestment in working capital of $7.6 million, an
increase in cash balance of $1.4 million and a decrease in Management Fee
payable to the General Partner of $2.5 million. The Partnership's current ratio
decreased to 1.82 at March 31, 1997 from the December 31, 1996 level of 2.16,
primarily as a result of the classification of bank revolver debt as current at
March 31, 1997, compared with long-term at December 31, 1996.
99
The Partnership's working capital position of $100.2 million at December
31, 1996, represents an increase of $4.4 million from the December 31, 1995
level of $95.8 million. The increase is primarily attributable to reinvestment
in working capital of $2.7 million, a decrease in distributions payable of $5.4
million and acquired working capital of $.5 million related to the Hydraulic
Depot acquisition, offset by a decrease in cash of $4.2 million. The
Partnership's current ratio increased to 2.16 at December 31, 1996 from the
December 31, 1995 level of 2.11.
As of March 31, 1997, the Partnership's total debt as a percentage of its
consolidated capitalization is 46.6% compared with 43.7% as of March 31, 1996.
On December 1, 1996 and 1995, the Operating Partnership paid scheduled
principal repayments on its senior notes aggregating $6.4 million and $4.8
million, respectively. On March 14, 1995, the Partnership prepaid a portion of
its senior notes in the amount of $14.2 million, including accrued interest
thereon of $.4 million and a make-whole penalty of $.6 million. As of December
31, 1996, the Partnership's total debt as a percentage of its consolidated
capitalization is 43.9% compared with 42.3% as of December 31, 1995.
The Partnership anticipates spending approximately $4.7 million for capital
expenditures in 1997, primarily for machinery and equipment.
The Partnership's existing bank credit facility of $50 million expires
December 31, 1997. Financing commitments of $150 million are available to the
Partnership until September 30, 1997, to fund costs related to its conversion to
corporate form, prepay its existing senior notes and provide capital for
internal and acquisition growth. The new financing arrangements will provide
capital for a five-year term from the date of conversion to corporate form. If
the Conversion is not consummated, an extension of the Partnership's existing
bank credit facility beyond December 31, 1997, will be requested. See Note 4 of
Notes to Consolidated Financial Statements as of and for the three months ended
March 31, 1997.
As of March 31, 1997, the Operating Partnership had $24.4 million available
under its $50.0 million Bank Credit Agreement which provides revolving credit
for working capital purposes and acquisitions. The $25.6 million outstanding
under the Bank Credit Agreement consisted of bank borrowings totaling $20.0
million and Letter of Credit commitments aggregating $5.6 million. In addition,
an indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a
$2.5 million Canadian dollar line of credit for working capital purposes, of
which no amount was outstanding at March 31, 1997.
The Partnership was restricted from making acquisition investments in 1994
under the Senior Note and Bank Credit Agreements. The acquisition restriction in
1994 was a result of an amendment to the credit agreements executed in the first
quarter of 1994 that eased certain coverage ratios and other financial
requirements of the credit agreements. Acquisition spending amounted to $.7
million and $8.0 million in 1996 and 1995, respectively. Management intends to
continue its acquisition strategy in 1997, with authorized spending of up to
$15.0 million per year in the aggregate, to complement internal growth.
The Operating Partnership was required to reduce permanently the bank
revolver commitment under the bank credit agreement by approximately $13.0
million as a result of the sale of certain operating divisions. However, the
banks have waived this permanent reduction and maintained the existing bank
credit commitment of $50.0 million. For 1995 and future years, the lenders have
agreed to revise certain covenant tests to exclude the impact of cash
distributions to holders of Class B interests related solely to tax gains on
divisions sold.
The Partnership suspended the payment of monthly advance B tax
distributions effective January 1, 1997 through March 31, 1997, pending the
conversion to corporate form. Due to the delay in completion of the proposed
corporate conversion, the Partnership resumed payment of monthly advance Class B
tax distributions in April 1997 in the amount of $.03 per B Interest.
The Partnership intends to pay this monthly rate to Class B holders until the
effective date of the conversion since it expects to allocate sufficient Class B
taxable income in the shortened tax year from January 1, 1997, through the
effective date to require the B tax distribution payment. The balance of the
required 1997 Class B tax distribution, if any will be paid on or before March
31, 1998. As a result of the proposed conversion, the Corporation would not be
required to make tax-related cash distributions to the holders of B Interests.
Accordingly, a decision regarding dividends on common stock received in exchange
for B Interests would solely be within the discretion of the Board of Directors
of the Corporation.
On March 31, 1997, the Partnership distributed the balance of the tax
distribution due of $.0265 per Class B Interest to holders of record for the
entire year of 1996 which amounted to $.6 million in the aggregate. The 1996
Class B tax distribution amounted to $7.7 million or $.35 per B interest, which
was partially paid in the amount of $.02 per B interest per month for the period
January through April 1996 and in the amount of $.03 per B interest per month
for the period May through December 1996.
100
The taxable gain from the sale of the Dorman Products and Downey Glass
divisions in 1995 amounted to $.927 and $.232 per B Interest, respectively. The
sale of the Electrical Group divisions in December 1994 resulted in a taxable
gain of $.408 per B Interest. With respect to the sale of Dorman Products on
January 3, 1995, the Operating Partnership paid a partial tax distribution on
April 10, 1995 to holders of B Interests of record as of December 30, 1994, in
the amount of $.15 per B Interest. The remaining balance of the tax distribution
for the taxable gain on the sale of Dorman Products in the amount of $.175 per B
Interest was paid on March 29, 1996, along with a tax distribution in the amount
of $.081 per B Interest to holders of record as of September 29, 1995 related to
the sale of the Downey Glass division on October 27, 1995. Related to the sale
of the Electrical Group divisions, the Partnership made a tax distribution on
March 31, 1995 to holders of B Interests of record as of December 30, 1994,
equal to approximately $.143 per B Interest.
See "SPECIAL FACTORS -- Limited Partner Litigation" and "BUSINESS -- Legal
Proceedings" and Note 14 of Notes to Consolidated Financial Statements, as of
and for the three years ended December 31, 1996 and Note 5 of Notes to
Consolidated Financial Statements as of and for the three months ended March 31,
1997, included herein, for the description of a lawsuit with respect to the sale
of the Partnership's Dorman Products division and recent lawsuits involving the
Partnership's General Partner related to the proposed conversion to corporate
form. Certain other legal proceedings are pending which are either in the
ordinary course of business or incidental to the Partnership's business. Those
legal proceedings incidental to the business of the Partnership are generally
not covered by insurance or other indemnity. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial position, operations or cash flows of the Partnership.
Pro Forma Liquidity and Capital Resources
In connection with the proposed conversion of the Partnership to a
Corporation, SunSource's cash flow is expected to improve due to the following:
(i) retention of the General Partner's Management Fee in the amount of $3.3
million per year, (ii) retention of distributions on the General Partner's
ownership in the Partnership and the Operating Partnership amounting to
approximately $.4 million annually, and (iii) a reduction in income tax rates,
offset in part by increased interest expense as discussed below. As a
Corporation, the Corporation's current effective tax rate for state and federal
income taxes is expected to be approximately 40% compared with the Partnership's
current tax distribution rate of 49.5% (based on 125% of the maximum individual
federal income tax rate of 39.6% applied to B Interest taxable ordinary income
in accordance with the partnership agreement) plus the elimination of certain
partnership-only state and local taxes of approximately 1.5% of Partnership
taxable income.
The proposed conversion to corporate form will result in SunSource
reporting a negative net worth due to the exchange of Trust Preferred Securities
and cash for the A Interests. The Trust Preferred Securities have certain equity
characteristics but also have certain creditors' rights, thereby being
classified between liabilities and equity on the balance sheet. The new 11.6%
Trust Preferred Securities are cumulative, callable after five years at the
SunSource's option and the interest on the Junior Subordinated Debentures is
deductible for income tax purposes. SunSource's fixed charge to its Class A
holders will remain at $12.2 million annually after the exchange of Trust
Preferred Securities for A Interests. The holders of A Interests will continue
to receive approximately $.092 per month for each current Class A interest
owned, which will aggregate approximately $1.10 annually.
Also, SunSource anticipates financing cost savings of approximately 100
basis points through refinancing of its current outstanding debt of $84.9
million as of June 30, 1997, with a combination of new long-term fixed rate debt
of $60 million at 7.66% and a bank revolver of $90 million, of which
approximately $105.4 million would be outstanding on a pro forma basis as a
corporation at March 31, 1997. Borrowing rates on the five-year revolver will be
determined according to the Corporation's consolidated funded debt to EBITDA
ratio which will result in interest rates based on the London Interbank Offered
Rate ("LIBOR") plus 1.0% to 1.5%. As a result of its refinancing, SunSource will
prepay its outstanding senior notes in whole upon consummation of the proposed
conversion. SunSource would incur a make-whole penalty of approximately $4.0
million as a result of prepayment of the senior notes in their entirety. The
refinancing is expected to provide SunSource with additional working capital for
reinvestment in its businesses and acquisition capital for future growth.
Overall, debt will increase as a result of the proposed conversion due to
the payment of $14.4 million to the Class A holders as part of the exchange
offer previously discussed and $4.5 million in transaction costs. Also, debt
will increase due to the prepayment of the senior notes previously mentioned
resulting in an expected make-whole payment of about $4.0 million. Interest
expense, net for the year ended December 31, 1996, is $8.1 million on a
pro-forma corporate basis compared with $6.9 million as a partnership. The
increase in interest expense is the result of incremental debt incurred directly
related to the conversion as noted herein.
101
The Partnership's consolidated capitalization (including the current
portion of bank revolving credit and senior notes) as of March 31, 1997, was
$180.0 million in its current partnership form compared to $203.5 million as a
corporation on a pro forma basis. Total debt as a percentage of SunSource's
consolidated capitalization is expected to increase to 51.8% as a corporation on
a pro forma basis from its current 46.6% as of March 31, 1997.
Income Taxes
As a result of the Partnership's adoption of SFAS No. 109 in 1992, the
Partnership has a deferred tax asset aggregating $5.0 million as of December 31,
1996. Management believes that the Partnership's deferred tax asset will be
realized through the reversal of existing temporary differences at the earlier
of the date of conversion to a C corporation should the proposed conversion be
approved, or after December 31, 1997, when the Partnership will be treated as a
corporation for federal income tax purposes. The temporary differences expected
to reverse at the date of conversion to a C corporation or after December 31,
1997, between the financial statement and tax bases, are composed of prepayment
penalties in the amount of $.8 million, insurance casualty loss liabilities in
the amount of $1.4 and deferred compensation liabilities in the amount of $8.3
million, net of a valuation allowance of $.2 million. See Note 13 of Notes to
Consolidated Financial Statements.
The minimum level of future taxable income necessary to realize the
Partnership's recorded deferred tax asset at December 31, 1996, is approximately
$12.5 million. For the three years ended December 31, 1996, the Partnership's
consolidated net income per the financial statements reconciled to federal
taxable income in thousands of dollars is shown below:
Partnership Tax Status
As previously stated, under current law, the Partnership will be taxed as a
corporation for federal income tax purposes either upon conversion to a
corporation should the proposed conversion be approved, or after December 31,
1997, whichever is earlier. If the proposed conversion is approved and the
Partnership converts to a corporation, the Corporation will record a provision
for U.S. federal, state and foreign income taxes on its taxable earnings.
If the Partnership remains a limited partnership, the effect of the change
in taxation after December 31, 1997 will result in the Partnership paying a
corporate income tax at the Partnership level. Therefore, in accordance with the
Partnership Agreement, the Partnership's income will not be allocated for tax
purposes to the partners as is currently being done, and limited partners will
pay taxes only on distributions from the Partnership, if any. Additionally, in
accordance with the Partnership Agreement, the Partnership would no longer make
tax distributions with respect to B Interests. Accordingly, a decision on
102
whether any other distribution will be made with respect to the B Interests is
solely within the discretion of the General Partner. Based on current
operations, it is likely that cash would be retained in the Partnership to fund
its acquisition program and other partnership requirements. If the Partnership
remains a limited partnership, payment of the Priority Return distribution is
expected to continue to the A Interests in the amount of $.0917 per month to
each A Interest to aggregate $1.10 annually.
Inflation
Inflation in recent years has had a modest impact on the operations of the
Partnership. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Partnership's operating divisions to raise prices is dependent on competitive
market conditions.
103
BUSINESS
General
The Partnership through the Operating Partnership is one of the largest
wholesale distributors of industrial products and services in the United States.
Since January 1987, the business of the Partnership and the Operating
Partnership has been managed by the General Partner, a limited partnership whose
general partner is Lehman/SDI, an indirect, wholly owned subsidiary of Lehman
Brothers Holdings Inc. ("Lehman Holdings"). The General Partner owns 1% of the
Partnership and 1% of the Operating Partnership. All of the limited partnership
interests in the General Partner are beneficially owned by members of management
of the Partnership and the Operating Partnership (current and former executive
officers, the "Management Employees").
The current organization consists of its headquarters operation and three
business segments comprised of twelve operating divisions, as follows:
On December 11, 1996, the Board of Directors of Lehman/SDI, approved
management's plan to restructure its Technology Services divisions and its Glass
Merchandising business. During the fourth quarter of 1996, the Partnership
recorded a $6.0 million restructuring charge related to the integration and
consolidation of its five domestic Technology Services divisions and the
write-off of certain non-performing assets in the Glass Merchandising segment.
The restructuring plan is expected to result in the elimination of 175 employees
in the Technology Services divisions by December 31, 1998, through integration
of its finance, administration, purchasing, warehousing and service center
functions. Redeployment of the Partnership's assets in its Glass business will
focus management's attention on the strategic growth in the retail sector. See
Note 1 of Notes to Consolidated Financial Statements.
104
In November 1995, the Operating Partnership's Hillman division acquired the
retail hardware business of Curtis Industries for $8.0 million. Annual sales of
Curtis' Retail division are approximately $11 million. The acquisition of Curtis
significantly expanded Hillman's position as a supplier of goods and services to
the hardware home center market where Curtis has concentrated much of its
attention. In addition, the Curtis product line can now be offered to Hillman's
present customer base. This acquisition continues Hillman's long-term growth
strategy to become a major provider of products and services to all segments of
the Hardware merchandising business.
On April 11, 1996, the Partnership's Industrial Services Segment, through
its Warren Fluid Power Division, purchased certain assets of Hydraulic Depot,
Inc. of Reno, Nevada, for an aggregate purchase price of $0.7 million. Annual
sales of Hydraulic Depot, Inc., are approximately $2.5 million. This acquisition
expands Warren's previous geographic markets.
The Operating Partnership sold the Electrical Products Group divisions on
December 5, 1994, the Dorman Products division on January 3, 1995, and the
Downey Glass division on October 27, 1995, (the "divested operations or
divisions sold") as listed below:
Divisions Sold Principal Location
- -------------- ------------------
Electrical Products Group Divisions
- - American Electric Company St. Joseph, MI
- - Philips & Company Columbia, MI
- - Keathley-Patterson Electric Co. N. Little Rock, AR
Dorman Products Division Warsaw, KY
Downey Glass Division Los Angeles, CA
For the year ended December 31, 1996, the Partnership had net sales of
approximately $649 million, with the largest operating division contributing
approximately $164 million.
The Partnership's business strategy has been to identify and develop
specific industrial distribution markets. However, the Partnership's current
strategic plan seeks to increase its emphasis on sales of high gross-margin
products by providing its customers with value added services, such as
engineering design services through its Sun Technology Services divisions and
inventory management and integrated supply services primarily through its SIMCO
divisions. In addition, the Partnership has opened new service centers for
repair of fluid power equipment and seeks to expand this service outside its
core geography and across Canada. The Partnership also continues to enhance its
retail service offerings in the glass segment and broaden its retail
merchandising of hardware related products.
Presidents of the Partnership's operating divisions exercise broad
discretion in the conduct of their businesses, including responsibility for the
management of their suppliers, customers and employees. Strong formal and
informal planning and monitoring functions are performed by the General Partner,
and the individual presidents of operating units are evaluated against the
financial and non-financial goals established jointly each year with the General
Partner. A substantial portion of each president's compensation is tied to the
performance of his division against its annual plan. Also, certain presidents
can earn substantial deferred compensation for maintaining the results of their
operations in the upper quartile within the industrial distribution industry.
Management believes that much of the Partnership's prior success has been the
result of fostering and perpetuating the entrepreneurial drive of operating
management.
The Partnership evaluates on an ongoing basis the performance and prospects
of each of its operating divisions in light of the Partnership's overall
business strategy.
Acquisition Strategy
Since the organization of its predecessor in 1975, the business of the
Partnership has grown primarily through acquisitions of existing distribution
companies. The acquisition strategy has expanded the Partnership's operations,
both geographically and in the number and type of products offered. The
Partnership evaluates companies that have developed attractive product/market
niches and have demonstrated their ability to achieve high returns on invested
capital. The Partnership looks for companies with strong management capabilities
and stable growth patterns. Prior to making certain acquisitions, an extensive
operational review is performed by an external consulting firm. Prior to most
acquisitions, certain agreed upon procedures are performed by internal and
external auditors.
105
In accordance with the terms of its credit agreements, the Partnership was
not permitted to make acquisitions in 1994. Acquisition spending amounted to
$8.0 million and $0.7 million in 1995 and 1996, respectively. See Notes 5, 8 and
9 of Notes to Consolidated Financial Statements.
As the result of an analysis of strategic alternatives by the Partnership,
the Partnership sold the non-strategic businesses described above in 1994 and
1995. Through the sale, the Partnership strengthened its balance sheet and
positioned itself to resume its acquisition program by focusing on businesses
which fit its current strategic plan. The Partnership has authorized spending of
up to $15.0 million per year for acquisitions in accordance with the terms of
its credit agreements.
Products and Services
Excluding the divested operations discussed previously, the Partnership
provides distribution and value-added services related to over 1,300 product
lines. Such value-added services are typically provided to the Partnership's
customers on a non-fee basis and are an integral component of the Partnership's
marketing strategy. The Partnership recognizes revenue upon shipment of products
to customers, net of any allowances for return merchandise and credits. These
products and services are provided in three main business segments: (1)
industrial services which consist of inventory management, engineering and
integrated supply services to industrial businesses through sales of products
such as fasteners (nuts, bolts, screws, etc.), hydraulic, pneumatic and
electronic systems and parts; (2) retail merchandising services through sales of
fasteners and related products to hardware and home center retail stores; and
(3) retail glass services consisting of installation and repair through sales of
glass products such as large sheet glass, auto glass, insulated glass, mirrors
and specialty glass. The average single sale during the year ended December 31,
1996, was approximately $297.
Inasmuch as the Partnership is principally providing distribution and
related services, most of the products sold are manufactured by others. However,
several divisions sell a majority of their products under their own labels. In
some cases, most notably through its Technology Services divisions, the
Partnership assembles products or designs systems to the specifications of the
end-users and performs related product repairs. Through its Glass Merchandising
segment, the Partnership produces insulated glass units according to customer
specifications. In addition, several of the products which the Partnership
distributes are purchased by the Partnership in bulk and subsequently repackaged
in small quantities.
The Partnership regularly uses a large number of suppliers and has
long-term relationships with many of them. Most items which the Partnership
distributes are purchased from several sources, and the Partnership believes
that the loss of any single supplier would not significantly affect the
operations of the Partnership viewed as a whole. No single supplier accounted
for more than 5% of the Partnership's purchases for the three months ended March
31, 1997 and for the year ended December 31, 1996.
The following table shows the percentages of consolidated net sales
reported for the years ended December 31, 1996, 1995 and 1994 derived from the
Partnership's current business segments, excluding divisions sold:
106
Marketing
While the Partnership sells across three main business segments (industrial
services, hardware merchandising and glass merchandising), a substantial portion
of its sales are industrially based, and sales performance is tied closely to
the overall performance of the non-defense-goods producing sector of Gross
Domestic Product in the United States. However, risks and economic changes in
the marketplace demand a customer-based focus on value-added services which vary
by business segment. The principal markets for the Partnership's products and
services by business segment, as determined by management are as follows:
Maintenance and Repair Markets and Original Equipment Manufacturers
Customers in this market are served by the divisions in the Industrial
Services segment. These customers include diverse industrial plants and
commercial establishments as well as producers of automotive equipment, farm
equipment, machine tools and a broad range of other equipment.
Hardware Merchandising
This market is primarily comprised of retail hardware stores, home service
centers, and lumberyards seeking merchandising services for hardware related
products.
Glass Merchandising
This market is primarily comprised of individuals seeking automotive and
residential glass replacement as well as contractors seeking glazing materials
and services.
The Partnership has over 180,000 customers, the largest of which accounted
for less than 5% of net sales for the three months ended March 31, 1997 and for
the year ended December 31, 1996. Each division maintains its own sales force
which is compensated for the most part on a commission basis. The divisions'
sales forces vary in size, the largest of which has approximately 740 sales
people.
The Partnership's products and services are sold in all 50 states. While
its Glass Merchandising segment sells in regional markets, the remaining two
segments sell on a national scale. In general, fluid power products and
technology services are sold primarily in the upper Midwest, Southeast,
Southwest, Canada and Mexico; maintenance products and inventory management
services are sold nationwide in the U.S., Canada, and Mexico; retail
merchandising products and services are sold nationally in the U.S. and Mexico;
and retail glass products and services are sold primarily in the West, the
Midwest, the Mid-Atlantic and the Southeast.
Competition
The distribution business is highly competitive, with the principal methods
of competition being quality of service, quality of products, product
availability, credit terms, price and the provision of value-added services such
as engineering design, integrated supply and inventory management. The
Partnership encounters competition from a large number of regional and local
distributors and from several national distributors, some of which have greater
financial resources than the Partnership. The wholesale distribution business is
highly fragmented, with a majority of the wholesale distributors in the United
States being operated as family-owned businesses. The Partnership's competitors
have annual sales of approximately $5 million on the average with approximately
one-half under $2 million. The Partnership believes that its business differs
from that of other large national distributors in that the Partnership carries a
diverse range of product lines and provides significant value-added services,
while most large distributors concentrate on only one or two product groups.
Insurance Arrangements
Under the Partnership's current insurance programs, commercial umbrella
coverage is obtained for catastrophic exposure and aggregate losses in excess of
expected claims. Since October 1991, the Partnership has retained the exposure
on certain expected losses related to workman's compensation, general liability
and automobile. The Partnership also retains the exposure on expected losses
related to health benefits of certain employees. The Partnership believes that
its present insurance is adequate for its businesses. See Note 14 of Notes to
Consolidated Financial Statements.
107
Investment and Borrowing Policies
The Partnership invests in cash equivalents consisting of commercial paper,
U.S. Treasury obligations and other liquid securities purchased with initial
maturities less than 90 days. If the Conversion is approved, the Corporation
expects no material change in its cash investment policy.
Currently, the Partnership has financing capacity of $113.9 million
consisting of $63.9 million in outstanding senior notes at a weighted average
borrowing rate of 8.9% and a $50 million bank revolving credit facility at
borrowing rates based on LIBOR plus 1.75% and prime. The existing senior note
and bank credit agreements require the maintenance of specific coverage ratios
and levels of financial position and restricts the incurrence of additional
debt, the sale of assets and distributions from the Operating Partnership.
On March 4, 1997, the Operating Partnership received the last of two
financing commitments which together aggregate $150.0 million from lenders.
These commitments are available to the Partnership until September 30, 1997. The
Operating Partnership intends to utilize the debt capacity to fund transaction
costs and other payments related to the Conversion, refinance its current
outstanding senior notes of $63.9 million as of June 30, 1997, including
interest thereon and related make-whole amount of approximately $4.0 million,
and outstanding bank revolver borrowings of $21.0 million as of June 30, 1997.
Also, the new credit facilities will provide for working capital for
reinvestment in its businesses and acquisition capital for future growth. The
new financing commitments consist of a $60.0 million five year fixed rate note
at 7.66% and $90.0 million five year bank revolver with terms and conditions
more favorable than the Partnership's existing senior notes and bank credit
lines including fewer restrictive covenants and an effective interest rate
reduction of approximately 1.00%. Borrowings under the new bank credit facility
will be based on LIBOR plus 1.0% to 1.5% and prime. The new financing
arrangements will limit the Corporation's ability to incur additional
indebtedness, distribute dividends and repurchase either Common Stock or the
Trust Preferred Securities.
Employees
As of July 1, 1997, the Partnership, through the Operating Partnership,
employed 4,060 employees. As of December 31, 1996, the Partnership, through the
Operating Partnership, employed 3,984 employees, of which 1,675 are sales
personnel, 1,308 are employed as warehouse and delivery personnel, and 1,001
hold administrative positions. The Operating Partnership has collective
bargaining agreements with five unions representing a total of 80 employees. In
the opinion of management, employee relations are good.
Backlog
The Partnership's sales backlog excluding divested operations was
$59,531,000 as of December 31, 1996, and $54,935,000 as of December 31, 1995.
Normally, in the distribution business, orders are shipped within a week of
receipt. On average, the Partnership's backlog is less than one month's sales.
Federal Income Tax Considerations
The Revenue Act of 1987 (the "1987 Act") amended the Code with respect to
the tax treatment of publicly traded partnerships, such as the Partnership, and
the passive activity losses and credits attributable thereto. Section 7704 of
the Code provides that publicly traded partnerships generally will be treated as
corporations for tax purposes commencing in tax years beginning after 1987. The
effective date of this amendment was delayed, however, for certain "existing
partnerships," such as the Partnership, until the taxable year beginning after
December 31, 1997, provided that such partnerships do not add any substantial
new line of business before the delayed effective date. The Partnership does not
intend to add any substantial new line of business during the period when it
otherwise qualifies for delayed effectiveness under Section 7704. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES."
Section 469 of the Code provides that, in the case of publicly traded
partnerships that are not treated as corporations under Section 7704, net losses
and credits attributable to an interest in each such partnership shall not be
applied against the partner's other income. Such net losses and credits are
suspended and carried forward to be applied against net income from the
Partnership in succeeding years. Since the commencement of operations, the
Partnership has not incurred a net loss for federal income tax purposes.
However, if the Partnership should incur a net loss for federal income tax
purposes in any subsequent year until taxable years beginning after December 31,
1997, such net losses will be suspended at the limited partner level, carried
forward and netted in a later year or years against the limited partner's share
of the net income of the Partnership, or will be used when the entire investment
is disposed of in a taxable transaction. Similarly, a limited partner's share of
any credits of the Partnership in excess of the tax liability attributable to
108
his or her interest in the Partnership will be suspended, carried forward and
applied against the tax liability attributable to the Partnership in a
subsequent year or years, or may be used to increase the basis of such
partnership interest when the entire investment is disposed of in a taxable
transaction. Generally, these credits may not be applied against tax liability
attributable to other activities.
Assuming the continued effectiveness of Section 7704 of the Code in its
current form, if the Partnership remains a publicly traded partnership, the
Partnership would be treated as a corporation for tax purposes beginning in
fiscal year 1998. Section 469 would then be inapplicable to the limited
partners' treatment of income or credits attributable to the Partnership. The
income of the Partnership would be taxed to it as a separate entity, and any
losses of the Partnership would not be deductible by limited partners. This tax
at the corporate level would reduce the amount distributable to partners and
cash distributions to limited partners would be taxed at the individual level as
dividends to the extent of earnings and profits.
The Revenue Reconciliation Act of 1993 (the "1993 Act") amended the Code
with respect to the tax treatment of unrelated business taxable income ("UBTI")
in an effort to allow pension funds and other tax-exempt organizations (such as
individual retirement accounts and charitable organizations) to invest in
publicly traded partnerships. Such entities are subject to federal income tax on
net UBTI in excess of $1,000.
The 1993 Act repeals the rule that automatically treats income from
publicly traded partnerships as gross income that is derived from an unrelated
trade or business. As a result, investments in publicly traded partnerships will
be treated the same as investments in other partnerships for purposes of the
UBTI rules for partnership years beginning on or after January 1, 1994.
Section 708 of the Code, in general, provides for termination of a
partnership if 50 percent or more of the total interest in partnership capital
and profits is sold or exchanged within a twelve-month period. However, the
legislative history to the Technical and Miscellaneous Revenue Act of 1988
indicates that termination of a partnership within the meaning of Section 708
will not cause a partnership to cease to qualify as an "existing partnership"
for purposes of Section 7704. Accordingly, sales or exchanges of Interests in
the Partnership pursuant to trading of the Partnership's Interests on the NYSE
will not impair the status of the Partnership as an "existing partnership" that
qualifies for a delayed effective date under Section 7704.
Properties
The Partnership currently has approximately 200 warehouse and stocking
facilities located throughout the United States, Canada and Mexico. Most of
these include sales offices. Approximately 16% of these facilities are owned and
the remainder are leased. The Partnership's principal properties are warehouse
facilities used by the Operating Partnership, as follows:
Division Location Description
-------- -------- -----------
Hillman Cincinnati, Ohio 190,000 sq. ft. (leased)
Harding Glass Denver, Colorado 184,000 sq. ft. (owned)
Kar Products Itasca, Illinois 80,000 sq. ft. (owned)
In the opinion of management, the Partnership's existing facilities are in
good condition.
Legal Proceedings
A civil complaint was filed by Dorman Products of America, Ltd. ("Dorman"),
a subsidiary of R&B, Inc. ("R&B"), against the Operating Partnership, in the
United States District Court for the Eastern District of Pennsylvania on
February 27, 1996, alleging misrepresentation of certain facts by the Operating
Partnership upon which R&B allegedly based their offer to purchase the assets of
the Dorman Products division of the Operating Partnership. The complaint sought
damages of approximately $21 million. The Operating Partnership moved to dismiss
for lack of jurisdiction and the complaint was withdrawn. On April 25, 1996, the
Operating Partnership filed an action against Dorman and R&B in the Court of
Common Pleas of Montgomery County, Pennsylvania alleging breach of contract,
intentional interference with contractual relations and negligence and
requesting a declaratory judgment that the Operating Partnership did not make
any misrepresentations in connection with the sale of the division. Dorman and
R&B have counterclaimed making the same allegations which were made in the
original complaint.
See "SPECIAL FACTORS -- Limited Partner Litigation" for a description of
litigation instituted by two limited partners with respect to the Conversion.
109
In the opinion of management, the ultimate resolution of these matters
will not have a material effect on the consolidated financial position,
operations or cash flows of the Partnership.
110
MANAGEMENT
Executive Officers and Directors
The business of the Partnership and the Operating Partnership is
managed by the General Partner, whose general partner is Lehman/SDI. The
directors of Lehman/SDI, each of whom has served as such since February 1987,
except for Mr. Eliot M. Fried, April 2, 1997 who has served since December 1994,
Mr. Henri I. Talerman, who has served since March 1995, and Mr. John P.
McDonnell, who has served since May 1995, are set forth below. The description
of the principal occupation is for the entire five-year period unless otherwise
indicated.
111
All directors hold office until the next annual meeting of the sole
stockholder of Lehman/SDI and until their successors are duly elected and
qualified.
The executive officers of the Partnership and the Operating Partnership
(constituting, except for Mr. Brus, the "Management Employees" referred to
herein), each of whom has served as such for the past five years, except as
noted, are set forth below:
All executive officers hold office at the pleasure of the board of
directors.
Directors and Executive Officers After the Conversion
The directors of the Corporation after the Conversion will be the same
as the existing directors of Lehman/SDI. Pursuant to the terms of the
Stockholders Agreement, the nine directors will consist of three directors
nominated by management, two directors nominated by Lehman/SDI as long as it
(together with its affiliates) holds 20% or more of the outstanding Common Stock
or one member if it (together with its affiliates) holds between 10% and 20% of
the outstanding Common Stock, and four independent directors. The officers of
the Corporation will be: Donald T. Marshall, Chairman and Chief Executive
Officer of the Corporation; John P. McDonnell, President and Chief Operating
Officer; Norman V. Edmonson, Executive Vice President and Joseph M. Corvino,
Vice President Finance, Chief Financial Officer, Treasurer and Secretary.
Compensation
The following table sets forth all cash compensation paid and accrued
by the Operating Partnership for services rendered during the three years ended
December 31, 1996, by each of the Chief Executive Officer and the four other
most highly compensated executive officers of the Partnership and the Operating
Partnership whose remuneration exceeded $100,000.
112
Summary Compensation Table
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(1) Represents Earned Bonus for services rendered in each year. Does not
include the Management Fee payable to the General Partner. See "Management
Fee" below.
(2) Represents primarily term life insurance premiums paid by the Operating
Partnership for the benefit of the named executive officer.
(3) Represents deferred compensation earned and awarded for services rendered
in the year which unconditionally vests at the rate of 20% per year over
the five-year period from the date earned.
The above table excludes deferred compensation awards earned through 1996
by the executive officers in accordance with the Partnership's Long-Term
Performance Share Plan since the awards earned are subject to reduction or
forfeiture through 1998 if performance goals are not achieved. The value of the
awards credited as of December 31, 1996, for each executive officer are as
follows: Donald T. Marshall, $1,126,486; Norman V. Edmonson, $740,261; John P.
McDonnell, $354,036; Harold J. Cornelius, $354,036; and Max W. Hillman,
$354,036.
Directors of Lehman/SDI who are not employees of the Partnership or Lehman
Brothers Inc. are paid an annual fee of $14,000 and a fee of $1,000 for each
board or committee meeting attended. Such fees are paid by the General Partner.
As described under "SPECIAL FACTORS -- Determinations of the Special Committee,"
Messrs. Brewer and Ransome as members of the Special Committee also received a
retainer of $20,000 plus a meeting fee of $1,000 per meeting for their work on
the Special Committee.
Deferred Compensation Plans
The Partnership's deferred compensation plans are described in Note 11 to
Consolidated Financial Statements. Completion of the Conversion will result in
100% vesting for all participant balances as of the date of the Conversion. The
present intention is to continue operation of the plans following the
Conversion.
The Partnership's Long-Term Performance Share Plan (the "Share Plan") is
based upon annual and cumulative performance for a five year term ending
December 31, 1998. If the Conversion is approved, the participants will be
entitled to 100% vesting of the awards earned through December 31, 1996 in
accordance with the change of control provision of the Share Plan. See "--
Change in Control Arrangements." If the conversion is approved, the Share Plan
will continue to run from January 1, 1997 to December 31, 1998, to complete the
Share Plan's original five-year performance cycle.
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Change in Control Arrangements
The executive officers named above were participants in the Operating
Partnership's Deferred Compensation Plans (the "Plans") in certain years. Upon a
change in control, the Plans provide for payment of all vested and non-vested
amounts including accrued interest. The change in control provision is triggered
upon a sale of all of the Operating Partnership's business, a change in the
General Partner (including its reorganization), or a change, other than due to
death or retirement, in a majority of the directors of Lehman/SDI during any
one-year period. See Note 11 of Notes to Consolidated Financial Statements. As a
result of the proposed conversion, the change of control provisions of the Plans
will be triggered because a majority of the directors of Lehman/SDI will not
continue as directors of Lehman/SDI after the Conversion. Participants will be
offered an opportunity to defer receipt of amounts available for payment under a
new deferred compensation plan, the "Deferred Compensation Plan for Key
Employees of SDI Operating Partners, L.P.," effective December 1, 1996. The
Partnership estimates that approximately $9.2 million of deferred compensation
balances will become payable as a result of the change of control provision and
eligible for elective deferral. Management expects approximately $6.5 million of
these balances eligible for payment to be deferred and $2.7 million to be paid.
Payments to current and former executive officers are expected to aggregate
about $0.1 million. Messrs. Marshall, McDonnell and Edmonson have waived their
rights to accelerate payments.
Management Fee
The Operating Partnership pays the Management Fee to the General Partner.
The Management Fee, payable annually on March 31 (with respect to the preceding
year), is equal to 3% of the aggregate initial capital investment of
$110,995,730 by the limited partners. The amount of the Management Fee paid on
March 31, 1997 with respect to 1996, was $3,329,872. The amount of Management
Fee paid in 1996 with respect to 1995 was $3,329,872. See footnotes (1) and (2)
to the table under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" for ownership of the General Partner. The interests of Lehman/SDI
and the Management Employees, in the fee for 1996 were as follows: Lehman/SDI,
$1,791,471; Harold J. Cornelius, $92,304; Joseph M. Corvino, $30,768; Norman V.
Edmonson, $384,600; Max W. Hillman, Jr., $92,304; Donald T. Marshall, $599,977;
and John P. McDonnell, $184,608.
Certain Business Relations
Mr. Scott is a partner in Morgan, Lewis & Bockius LLP, a law firm that has
performed services for the Partnership during the last fiscal year.
Messrs. Fried and Talerman are officers of Lehman Brothers Inc., which
performed investment banking services for the Partnership during 1995 and 1996.
Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which
performed investment banking services for the Partnership during 1996.
The Partnership and the Corporation propose to have these firms perform
similar services as needed during the current fiscal year.
114
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
Since the Partnership is managed by its General Partner and has no Board of
Directors, there are no "voting securities" of the Partnership outstanding
within the meaning of Item 403(a) of Regulation S-K and Rule 12b-2 under the
Securities Exchange Act of 1934. As set forth above, the general partner of the
General Partner is Lehman/SDI, an indirect, wholly owned subsidiary of Lehman
Brothers Holdings Inc., American Express Tower, World Financial Center, New
York, NY 10285-1800.
Security Ownership of Certain Beneficial Owners and Management
The following table shows for (i) each director, (ii) each executive
officer, (iii) certain persons known to the Company to own beneficially more
than 5% of the outstanding interests and (iv) all officers and directors as a
group, the beneficial ownership of A and B Interests of the Partnership as of
July 1, 1997. None of the amounts equals more than 1% of the outstanding A
Interests.
115
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(1) In addition to the Interests listed, Lehman/SDI owns the general partnership
interest, and the Management Employees beneficially own limited partnership
interests, in the General Partner (the "GP Interests"). The GP Interests held by
Lehman/SDI represents 53.8% of the GP Interests and the GP Interests held by the
Management Employees collectively represent 46.2% of the GP Interests. The
General Partner owns 1% of the Partnership and the Operating Partnership. The
table does not include the GP Interests owned by the Management Employees.
(2) Represents less than 1% of the outstanding B Interests or shares of Common
Stock.
(3) Does not include (i) 108,554 B Interests owned by Lehman LTD I, Inc., or
(ii) 5,788,124 B Interests owned by Lehman Brothers Capital Partners I ("Capital
Partners"), affiliates of Lehman Brothers Inc. Messrs. Hoffman and Fried, as
limited partners of Capital Partners, derive economic benefit of approximately
1% from interests held by Capital Partners. An affiliate of Lehman Brothers
Inc., of which Messrs. Fried and Talerman are officers, also owns all of the
capital stock of Lehman/SDI.
(4) Does not include 1,447,031 shares of Common Stock expected to be owned by
Capital Partners after the Conversion.
(5) 3,000 of these A and B Interests are owned by Hoffman Investment Co., of
which Mr. Hoffman is Managing Partner. In addition, Mr. Hoffman's children own
4,000 A and B Interests with respect to which he disclaims beneficial ownership.
(6) 2,500 of these A and B Interests are held in a trust, of which Mr. Ransome
is a trustee.
SUNSOURCE CAPITAL TRUST
The Trust is a statutory business trust that was formed under the Business
Trust Act pursuant to the filing of a certificate of trust with the Secretary of
State of the State of Delaware and the entering into of a declaration of trust
(as amended and restated, the "Declaration") among the Trustees and the
Corporation and the filing of a certificate of trust with the Secretary of State
of Delaware. The Declaration is qualified under the Trust Indenture Act. Upon
issuance of the Trust Preferred Securities, the holders thereof will own all of
the issued and outstanding Trust Preferred Securities. The Corporation has
agreed to acquire Trust Common Securities in an amount equal to at least 3% of
the total capital of the Trust and will own, directly or indirectly, all of the
issued and outstanding Trust Common Securities. The Trust Preferred Securities
and the Trust Common Securities will rank pari passu with each other and will
have equivalent terms; provided that (i) if an Event of Default under the
Declaration occurs and is continuing, the holders of Trust Preferred Securities
will have a priority over holders of the Trust Common Securities with respect to
payments in respect of distributions and payments upon liquidation, redemption
or otherwise and (ii) holders of Trust Common Securities have the exclusive
right (subject to the terms of the Declaration) to appoint, remove or replace
Trustees and to increase or decrease the number of Trustees, subject to the
right of holders of Trust Preferred Securities to appoint a Special Regular
Trustee upon the occurrence of an Appointment Event.
The number of Trustees of the Trust shall initially be five. Three of the
Trustees will be the Regular Trustees. The fourth trustee is The Bank of New
York which is unaffiliated with the Corporation and which will serve as the
Property Trustee and act as the indenture trustee for purposes of the Trust
Indenture Act. The fifth trustee is an affiliate of Bank of New York and will
serve as the Delaware Trustee. Pursuant to the Declaration, legal title to the
Junior Subordinated Debentures will be held by the Property Trustee for the
benefit of the holders of the Trust Securities and the Property Trustee will
have the power to exercise all rights, powers and privileges under the Indenture
with respect to the Junior Subordinated Debentures. In addition, the Property
Trustee will maintain exclusive control of a segregated non-interest bearing
account (the "Property Account") to hold all payments in respect of the Junior
Subordinated Debentures for the benefit of the holders of Trust Securities. The
Property Trustee will promptly make distributions to the holders of the Trust
Securities out of funds from the Property Account. The Preferred Securities
Guarantee is separately qualified under the Trust Indenture Act and will be held
by Bank of New York acting in its capacity as indenture trustee with respect
thereto, for the benefit of the holders of the Trust Preferred Securities.
Subject to the right of holders of Trust Preferred Securities to appoint a
Special Regular Trustee upon the occurrence of an Appointment Event, the
Corporation, as the direct or indirect owner of all of the Trust Common
Securities, has the exclusive right (subject to the terms of the Declaration) to
appoint, remove or replace Trustees and to increase or decrease the number of
Trustees, provided that the number of Trustees shall at least be three, a
majority of which shall Regular Trustees.
116
The Trust exists for the purpose of (a) issuing (i) its Trust Preferred
Securities to the Corporation in consideration of the deposit by the Corporation
of Junior Subordinated Debentures in the Trust as trust assets, and (ii) its
Trust Common Securities to the Corporation in exchange for cash and investing
the proceeds thereof in an equivalent amount of Junior Subordinated Debentures
and (b) engaging in such other activities as are necessary or incidental
thereto. The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Declaration, the Business Trust Act and the Trust Indenture Act.
Under the Declaration, the Trust shall not, and the Trustees shall cause
the Trust not to, engage in any activity other than in connection with the
purposes of the Trust or other than as required or authorized by the
Declaration. In particular, the Trust shall not and the Trustees shall not (a)
invest any proceeds received by the Trust from holding the Junior Subordinated
Debentures but shall promptly distribute from the Property Account all such
proceeds to holders of Trust Securities pursuant to the terms of the Declaration
and of the Trust Securities; (b) acquire any assets other than as expressly
provided in the Declaration; (c) possess Trust property for other than a Trust
purpose; (d) make any loans, other than loans represented by the Junior
Subordinated Debentures; (e) possess any power or otherwise act in such a way as
to vary the Trust assets or the terms of the Trust Securities in any way
whatsoever; (f) issue any securities or other evidences of beneficial ownership
of, or beneficial interests in, the assets of the Trust other than the Trust
Securities; (g) incur any indebtedness for borrowed money or (h)(i) direct the
time, method and place of exercising any trust or power conferred upon the
Indenture Trustee with respect to the Junior Subordinated Debentures or the
Property Trustee with respect to the Trust Preferred Securities, (ii) waive any
past default that is waivable under the Indenture or the Declaration, (iii)
exercise any right to rescind or annul any declaration that the principal of all
of the Junior Subordinated Debentures shall be due and payable or (iv) consent
to any amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures or the Declaration, in each case where such consent
shall be required, unless in the case of this clause (h) the Property Trustee
shall have received an unqualified opinion of nationally recognized independent
tax counsel recognized as expert in such matters to the effect that such action
will not cause the Trust to be classified for United States federal income tax
purposes as an association taxable as a corporation or a partnership and that
the Trust will continue to be classified as a grantor trust for United States
federal income tax purposes.
The books and records of the Trust will be maintained at the principal
office of the Trust and will be open for inspection by a holder of Trust
Preferred Securities or the holder's representative for any purpose reasonably
related to the holder's interest in the Trust during normal business hours. Each
holder of Trust Preferred Securities will be furnished annually with unaudited
financial statements of the Trust as soon as available after the end of the
Trust's fiscal year.
Except as provided below or under the Business Trust Act and the Trust
Indenture Act, holders of Trust Preferred Securities have no voting rights. If
(i) distributions on the Trust Preferred Securities are in arrears for 18
consecutive months or (ii) an Event of Default under the Declaration occurs and
is continuing, holders of Trust Preferred Securities shall have the right to
vote, as a single class, for the appointment of a Special Regular Trustee who
need not be an employee or officer of or otherwise affiliated with the
Corporation. The Special Regular Trustee shall have the same rights, powers and
privileges under the Declaration as the Regular Trustees. See "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Voting Rights."
The Property Trustee, for the benefit of the holders of the Trust
Securities, is authorized under the Declaration to exercise all rights under the
Indenture with respect to the Junior Subordinated Debentures to enforce the
Corporation's obligations under the Junior Subordinated Debentures upon the
occurrence of an Indenture Event of Default. The Property Trustee shall also be
authorized to enforce the rights of holders of Trust Preferred Securities under
the Preferred Securities Guarantee. If the Trust's failure to make distributions
on the Trust Preferred Securities is a consequence of the Corporation's exercise
of its right to extend the interest payment period for the Junior Subordinated
Debentures, the Property Trustee will have no right to enforce the payment of
distributions on the Trust Preferred Securities until an Event of Default shall
have occurred. Holders of at least a majority in liquidation amount of the Trust
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and the Preferred Securities
Guarantee. If the Property Trustee fails to enforce its rights under the
Indenture or fails to enforce the Preferred Securities Guarantee, any holder of
Trust Preferred Securities may, after a period of 30 days has elapsed from such
holder's written request to the Property Trustee to enforce such rights or the
Preferred Securities Guarantee, to the fullest extent permitted by law,
institute a legal proceeding against the Corporation to enforce such rights or
the Preferred Securities Guarantee, as the case may be, See "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Voting Rights."
If an Indenture Event of Default occurs and is continuing with respect to
the Junior Subordinated Debentures, an Event of Default under the Declaration
will occur and be continuing with respect to the Trust Securities. In such
event, the Declaration provides that the holder of Trust Common Securities will
be deemed to have waived any such Event of Default with respect to the Trust
Common Securities until all Events of Default with respect to the Trust
Preferred Securities have been so cured or waived, the Property Trustee will be
deemed to be acting solely on behalf of the holders of the Trust Preferred
Securities and only the holders of the Trust Preferred Securities will have the
right to direct the Property Trustee with respect to certain matters under the
Declaration and consequently under the Indenture. In the event that any Event of
Default with respect to the Trust Preferred Securities is waived by the holders
of the Trust Preferred Securities as provided in the Declaration, the holders of
117
Trust Common Securities pursuant to the Declaration have agreed that such waiver
also constitutes a waiver of such Event of Default with respect to the Trust
Common Securities for all purposes under the Declaration without any further
act, vote or consent of the holders of the Trust Common Securities. See
"DESCRIPTION OF TRUST PREFERRED SECURITIES."
The Declaration provides that the Trustees may treat the person in whose
name a certificate for a Trust Preferred Security is registered on the books and
records of the Trust as the sole holder thereof and of the Trust Preferred
Securities represented thereby for purposes of receiving distributions and for
all other purposes and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such certificate or in the Trust
Preferred Securities represented thereby on the part of any person, whether or
not the Trust shall have actual or other notice thereof. Trust Preferred
Securities will be issued in fully registered form. Investors may elect to hold
their Trust Preferred Securities directly or, subject to the rules and
procedures of The Depository Trust Company ("DTC") described under "DESCRIPTION
OF TRUST PREFERRED SECURITIES -- Book- Entry; Delivery and Form," hold interests
in a global certificate registered on the books and records of the Trust in the
name of DTC or its nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal with DTC
(or any successor depositary) for all purposes, including the payment of
distributions and receiving approvals, votes or consents under the
Declaration, and except as set forth in the Declaration with respect to the
Property Trustee, shall have no obligation to persons owning Trust
Preferred Securities ("Beneficial Owners") registered in the name of and
held by DTC or its nominee; and
(ii) the rights of Beneficial Owners shall be exercised only
through DTC (or any successor depositary) and shall be limited to those
established by law and agreements between such Owners and DTC and/or its
participants. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Book-Entry;
Delivery and Form." With respect to Trust Preferred Securities registered
in the name of and held by DTC or its nominee, all notices and other
communications required under the Declaration shall be given to, and all
distributions on such Trust Preferred Securities shall be given or made to,
DTC (or its successor).
In the Indenture and the Declaration, the Corporation has agreed to pay for
all debts and obligations (other than with respect to the Trust Securities) and
all costs and expenses of the Trust, including the fees and expenses of the
Trustees and any taxes and all costs and expenses with respect thereto, to which
the Trust may become subject, except for United States withholding taxes. The
foregoing obligations of the Corporation under the Declaration are for the
benefit of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice hereof. Any such Creditor may enforce such
obligations of the Corporation directly against the Corporation and the
Corporation has irrevocably waived any right or remedy to require that any such
Creditor take any action against the Trust or any other person before proceeding
against the Corporation. The Corporation has agreed in the Declaration to
execute such additional agreements as may be necessary or desirable in order to
give full effect to the foregoing.
THE FOREGOING SUMMARY OF CERTAIN PROVISIONS OF THE DECLARATION CONTAINS ALL
MATERIAL ELEMENTS OF THE DECLARATION BUT DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION WHICH HAS BEEN FILED
AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROXY
STATEMENT/PROSPECTUS IS A PART.
The business address of the Trust is 501 Silverside Road, Suite 17,
Wilmington, DE 19809, telephone number (302) 798-6665.
DESCRIPTION OF TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be issued pursuant to the terms of the
Declaration which is qualified under the Trust Indenture Act. The Property
Trustee, Bank of New York, but not the other Trustees of the Trust, will act as
the indenture trustee for purposes of the Trust Indenture Act. The terms of the
Trust Preferred Securities and the Declaration include those stated in the
Declaration and those made part of the Declaration by the Trust Indenture Act.
The summary of material terms and provisions of the Trust Preferred Securities
set forth below contains all material elements of the Trust Preferred
Securities, but does not purport to be complete and is subject to and qualified
in its entirety by reference to the Declaration, which has been filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
forms a part, the Business Trust Act and the Trust Indenture Act.
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General
The Declaration authorizes the Trust to issue the Trust Preferred
Securities, which represent preferred undivided beneficial interests in the
assets of the Trust, and the Trust Common Securities, which represent common
undivided beneficial interests in the assets of the Trust. All of the Trust
Common Securities will be owned, directly or indirectly, by the Corporation. The
Trust Common Securities and the Trust Preferred Securities will have equivalent
terms except that (i) if an Event of Default under the Declaration occurs and is
continuing, the rights of the holders of the Trust Common Securities to payment
in respect of periodic distributions and payments upon liquidation, redemption
or otherwise are subordinated to the rights of the holders of the Trust
Preferred Securities and (ii) holders of Trust Common Securities have the
exclusive right (subject to the terms of the Declaration) to appoint, remove or
replace Trustees and to increase or decrease the number of Trustees, subject to
the right of holders of Trust Preferred Securities to appoint a Special Regular
Trustee upon the occurrence of an Appointment Event. The Declaration does not
permit the issuance by the Trust of any securities or other evidences of
beneficial ownership of, or beneficial interests in, the assets of the Trust
other than the Trust Preferred Securities and the Trust Common Securities, the
incurrence of any indebtedness for borrowed money by the Trust or the making of
any investment other than in the Junior Subordinated Debentures. Pursuant to the
Declaration, the Property Trustee will own and hold the Junior Subordinated
Debentures as trust assets for the benefit of the holders of the Trust Preferred
Securities and the Trust Common Securities. The payment of distributions out of
moneys held by the Property Trustee and payments on redemption of the Trust
Preferred Securities or liquidation of the Trust are guaranteed by the
Corporation on a subordinated basis as and to the extent described under
"DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Property Trustee will hold
the Preferred Securities Guarantee for the benefit of holders of the Trust
Preferred Securities. The Preferred Securities Guarantee is a full and
unconditional guarantee from the time of issuance of the Trust Preferred
Securities, but the Preferred Securities Guarantee covers distributions and
other payments on the Trust Preferred Securities only if and to the extent that
the Corporation has made a payment to the Property Trustee of interest or
principal on the Junior Subordinated Debentures deposited in the Trust as trust
assets.
Distributions
Distributions on the Trust Preferred Securities will be fixed at a rate per
annum of $2.90 (11.6% of the stated liquidation amount of $25) per Trust
Preferred Security. Distributions in arrears will compound monthly thereon at
the rate per annum of 11.6% thereof. The term "distributions" as used herein
includes any such interest payable unless otherwise stated. The amount of
distributions payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months and for any period shorter than a full monthly
period for which distributions are computed, the amount of the distribution
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month.
Distributions on the Trust Preferred Securities will be cumulative, will
accrue from the Accrual Date and, except as otherwise described below, will be
payable monthly in arrears, on the last day of each calendar month of each year,
commencing on July 31, 1997, but only if, and to the extent that, interest
payments are made in respect of Junior Subordinated Debentures held by the
Property Trustee.
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation has the right
under the Indenture to defer payments of interest on the Junior Subordinated
Debentures by extending the interest payment period from time to time for a
period not exceeding 60 consecutive months and, as a consequence, distributions
on the Trust Preferred Securities would not be made (but would continue to
accrue with interest thereon at the rate of 11.6% per annum, compounded monthly)
by the Trust during any such Extension Period. If the Corporation exercises the
right to extend an interest payment period, the Corporation may not declare or
pay dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its Common Stock or Preferred Stock
during such Extension Period. Prior to the termination of any such Extension
Period, the Corporation may further extend such Extension Period; provided that
such Extension Period together with all such previous and further extensions
thereof may not exceed 60 consecutive months. Upon the termination of any
Extension Period and the payment of all amounts then due, the Corporation may
commence a new Extension Period, subject to the above requirements. The
Corporation may also prepay at any time all or any portion of the interest
accrued during an Extension Period. Consequently, there could be multiple
Extension Periods of varying lengths (up to five Extension Periods of 60
consecutive monthly interest periods each or more numerous shorter Extension
Periods) throughout the term of the Junior Subordinated Debentures. See "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Additional Risks
Applicable to Holders of A Interests," "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Interest" and "-- Option to Extend Interest Payment Period."
Payments of accrued distributions will be payable to holders of Trust Preferred
Securities as they appear on the books and records of the Trust on the first
record date after the end of an Extension Period.
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Distributions on the Trust Preferred Securities must be paid on the dates
payable to the extent that the Property Trustee has cash on hand in the Property
Account to permit such payment. The funds available for distribution to the
holders of the Trust Preferred Securities will be limited to payments received
by the Property Trustee in respect of the Junior Subordinated Debentures that
are deposited in the Trust as trust assets. See "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES." If the Corporation does not make interest payments on
the Junior Subordinated Debentures, the Property Trustee will not make
distributions on the Trust Preferred Securities. Under the Declaration, if and
to the extent the Corporation does make interest payments on the Junior
Subordinated Debentures deposited in the Trust as trust assets, the Property
Trustee is obligated to make distributions on the Trust Securities on a Pro Rata
Basis. The payment of distributions on the Trust Preferred Securities is
guaranteed by the Corporation on a subordinated basis as and to the extent set
forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Preferred
Securities Guarantee is a full and unconditional guarantee from the time of
issuance of the Trust Preferred Securities but the Preferred Securities
Guarantee covers distributions and other payments on the Trust Preferred
Securities only if and to the extent that the Corporation has made a payment to
the Property Trustee of interest or principal on the Junior Subordinated
Debentures deposited in the Trust as trust assets. As used in this Proxy
Statement/Prospectus the term "Pro Rata Basis" shall mean pro rata to each
holder of Trust Securities according to the aggregate liquidation amount of the
Trust Securities held by the relevant holder in relation to the aggregate
liquidation amount of all Trust Securities outstanding unless, in relation to a
payment, an Event of Default under the Declaration has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Trust Preferred Securities pro rata according to the
aggregate liquidation amount of the Trust Preferred Securities held by the
relevant holder in relation to the aggregate liquidation amount of all the Trust
Preferred Securities outstanding, and only after satisfaction of all amounts
owed to the holders of the Trust Preferred Securities, to each holder of Trust
Common Securities pro rata according to the aggregate liquidation amount of the
Trust Common Securities held by the relevant holder in relation to the aggregate
liquidation amount of all the Trust Common Securities outstanding.
Distributions on the Trust Preferred Securities will be made to the holders
thereof as they appear on the books and records of the Trust on the relevant
record dates, which will be the first business day of the month of the relevant
distribution payment date. The Declaration provides that the payment dates or
record dates for the Trust Preferred Securities shall be the same as the payment
dates and record dates for the Junior Subordinated Debentures. Distributions
payable on any Trust Preferred Securities that are not punctually paid on any
distribution date as a result of the Corporation having failed to make the
corresponding interest payment on the Junior Subordinated Debentures will
forthwith cease to be payable to the person in whose name such Trust Preferred
Security is registered on the relevant record date, and such defaulted
distribution will instead be payable to the person in whose name such Trust
Preferred Security is registered on the special record date established by the
Regular Trustees, which record date shall correspond to the special record date
or other specified date determined in accordance with the Indenture; provided,
however, that distributions shall not be considered payable on any distribution
payment date falling within an Extension Period unless the Corporation has
elected to make a full or partial payment of interest accrued on the Junior
Subordinated Debentures on such distribution payment date. Distributions on the
Trust Preferred Securities will be paid through the Property Trustee who will
hold amounts received in respect of the Junior Subordinated Debentures in the
Property Account for the benefit of the holders of the Trust Securities. All
distributions paid with respect to the Trust Securities shall be paid on a Pro
Rata Basis to the holders thereof entitled thereto. If any date on which
distributions are to be made on the Trust Preferred Securities is not a Business
Day, then payment of the distribution to be made on such date will be made on
the next succeeding day that is a Business Day (and without any interest or
other payment in respect of any such delay) except that, if such Business Day is
in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date.
Mandatory Redemption
Upon the repayment of the Junior Subordinated Debentures, whether at
maturity, upon redemption or otherwise, the proceeds from such repayment or
payment will be promptly applied to redeem Trust Preferred Securities and Trust
Common Securities having an aggregate liquidation amount equal to the Junior
Subordinated Debentures so repaid, upon not less than 30 nor more than 60 days
notice, at the Redemption Price. The Trust Common Securities will be entitled to
be redeemed on a Pro Rata Basis with the Trust Preferred Securities, except that
if an Event of Default under the Declaration has occurred and is continuing, the
Trust Preferred Securities will have a priority over the Trust Common Securities
with respect to payment of the Redemption Price. Subject to the foregoing, if
fewer than all outstanding Trust Preferred Securities and Trust Common
Securities are to be redeemed, the Trust Preferred Securities and Trust Common
Securities will be redeemed on a Pro Rata Basis.
Special Event Redemption or Distribution; Shortening of Stated Maturity
If, at any time, a Tax Event or an Investment Company Event (each as
defined herein, and each a "Special Event") shall occur and be continuing, the
Trust shall, unless the Junior Subordinated Debentures are redeemed in the
circumstances described below, be dissolved with the result that, after
satisfaction of creditors of the Trust, Junior Subordinated Debentures with an
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aggregate principal amount equal to the aggregate stated liquidation amount of
the Trust Preferred Securities and the Trust Common Securities would be
distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities
and the Trust Common Securities in liquidation of such holders' interests in the
Trust, within 90 days following the occurrence of such Special Event; provided,
however, that in the case of the occurrence of a Tax Event, as a condition of
such dissolution and distribution, the Regular Trustees shall have received an
opinion of nationally recognized independent tax counsel experienced in such
matters (a "No Recognition Opinion"), which opinion may rely on any then
applicable published revenue rulings of the Internal Revenue Service, to the
effect that the holders of the Trust Preferred Securities will not recognize any
gain or loss for United States federal income tax purposes as a result of such
dissolution and distribution of Junior Subordinated Debentures; and, provided,
further, that, if at the time there is available to the Trust the opportunity to
eliminate, within such 90-day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure, which has no adverse effect on the Trust
or the Corporation or the holders of the Trust Preferred Securities, the Trust
will pursue such measure in lieu of dissolution. In addition, if a Tax Event
shall occur and be continuing and in the opinion of nationally recognized
independent tax counsel to the Trust, there would in all cases, after effecting
the termination of Trust and the distribution of the Debentures to the holders
of the Trust Preferred Securities in exchange therefor upon liquidation of the
Trust, be more than an insubstantial risk that the Tax Event would continue,
then the Corporation shall have the right to shorten the stated maturity of the
Junior Subordinated Debentures to the latest date permissible without adversely
affecting the deductibility of interest payable on the Junior Subordinated
Debentures, but not earlier than September 30, 2002 (and thereby cause the Trust
Preferred Securities to be redeemed on such earlier date) such that, in the
opinion of nationally recognized independent tax counsel to the Trust, after
advancing the stated maturity of the Debentures, interest paid on the Junior
Subordinated Debentures will be deductible by the Corporation for federal income
tax purposes. Furthermore, if in the case of the occurrence of a Tax Event, (i)
the Regular Trustees have received an opinion (a "Redemption Tax Opinion") of
nationally recognized independent tax counsel experienced in such matters that,
as a result of a Tax Event, there is more than an insubstantial risk that the
Corporation would be precluded from deducting the interest on the Junior
Subordinated Debentures for United States federal income tax purposes even if
the Junior Subordinated Debentures were distributed to the holders of Trust
Preferred Securities and Trust Common Securities in liquidation of such holders'
interests in the Trust as described above or if the Corporation shortened the
stated maturity of the Junior Subordinated Debentures as described above or (ii)
the Regular Trustees shall have been informed by such tax counsel that a No
Recognition Opinion cannot be delivered to the Trust, the Corporation shall have
the right, upon not less than 30 nor more than 60 days notice, to redeem the
Junior Subordinated Debentures in whole or in part for cash within 90 days
following the occurrence of such Tax Event, and promptly following such
redemption Trust Preferred Securities and Trust Common Securities with an
aggregate liquidation amount equal to the aggregate principal amount of the
Junior Subordinated Debentures so redeemed will be redeemed by the Trust at the
Redemption Price on a Pro Rata Basis at $25.25 if the redemption occurs within
five years after the Effective Time of the Conversion and at $25.00 thereafter;
provided, however, that if at the time there is available to the Corporation or
the Regular Trustees the opportunity to eliminate, within such 90-day period,
the Tax Event by taking some ministerial action, such as filing a form or making
an election, or pursuing some other similar reasonable measure, which has no
adverse effect on the Trust, the Corporation or the holders of the Trust
Preferred Securities, the Corporation, or the Regular Trustees on behalf of the
Trust, will pursue such measure in lieu of redemption and provided further that
the Corporation shall have no right to redeem the Junior Subordinated Debentures
while the Regular Trustees on behalf of the Trust are pursuing any such
ministerial action. The Trust Common Securities will be redeemed on a Pro Rata
Basis with the Trust Preferred Securities, except that, if an Event of Default
under the Declaration has occurred and is continuing, the Trust Preferred
Securities will have a priority over the Trust Common Securities with respect to
payment of the Redemption Price.
"Tax Event" means that the Regular Trustees shall have obtained an opinion
(a "Dissolution Tax Opinion") of nationally recognized independent tax counsel
experienced in such matters to the effect that on or after the Effective Time as
a result of (a) any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, (b) any amendment
to, or change in, an interpretation or application of any such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination), (c) any interpretation or
pronouncement that provides for a position with respect to such laws or
regulations that differs from the theretofore generally accepted position or (d)
any action taken by any governmental agency or regulatory authority, which
amendment or change is enacted, promulgated, issued or effective or which
interpretation or pronouncement is issued or announced or which action is taken,
in each case on or after the Effective Time, there is more than an insubstantial
risk that (i) the Trust is, or will be within 90 days of the date thereof,
subject to United States federal income tax with respect to income accrued or
received on the Junior Subordinated Debentures, (ii) the Trust is, or will be
within 90 days of the date thereof, subject to more than a de minimis amount of
other taxes, duties or other governmental charges or (iii) interest payable by
the Corporation to the Trust on the Junior Subordinated Debentures is not, or
within 90 days of the date thereof will not be, deductible by the Corporation
for United States federal income tax purposes.
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It should be noted that certain legislation proposed as recently as
February 1997 would have applied to securities similar to the Junior
Subordinated Debentures, with the result that the Corporation would not have
been entitled to an interest deduction with respect to the payments on the
Junior Subordinated Debentures. See the discussion above under "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS." No prediction can be
made as to the likelihood that such legislation will be enacted or as to whether
such legislation would be effective retroactively to deny interest deductions
with respect to securities issued prior to the date of enactment of such
legislation. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests --
Special Event Redemption or Distribution; Shortening of Stated Maturity."
"Investment Company Event" means that the Regular Trustees shall have
received an opinion of nationally recognized independent counsel experienced in
practice under the Investment Company Act of 1940, as amended (the "1940 Act"),
that as a result of the occurrence of a change in law or regulation or a change
in interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
there is more than an insubstantial risk that the Trust is or will be considered
an "investment company" which is required to be registered under the 1940 Act,
which Change in 1940 Act Law becomes effective on or after the Effective Time.
On the date fixed for any distribution of Junior Subordinated Debentures,
upon dissolution of the Trust, (i) the Trust Preferred Securities and the Trust
Common Securities will no longer be deemed to be outstanding and (ii)
certificates representing Trust Preferred Securities will be deemed to represent
Junior Subordinated Debentures having an aggregate principal amount equal to the
stated liquidation amount of, and bearing accrued and unpaid interest equal to
accrued and unpaid distributions on, such Trust Preferred Securities until such
certificates are presented to the Corporation or its agent for transfer or
reissuance.
There can be no assurance as to the market price for the Junior
Subordinated Debentures which may be distributed in exchange for Trust Preferred
Securities if a dissolution and liquidation of the Trust were to occur.
Accordingly, the Junior Subordinated Debentures which the investor may
subsequently receive on dissolution and liquidation of the Trust may trade at a
discount to the price of the Trust Preferred Securities exchanged. If the Junior
Subordinated Debentures are distributed to the holders of Trust Preferred
Securities upon the dissolution of the Trust, the Corporation will use its best
efforts to list the Junior Subordinated Debentures on the NYSE or on such other
exchange on which the Trust Preferred Securities are then listed.
Redemption Procedures
The Trust may not redeem fewer than all the outstanding Trust Preferred
Securities unless all accrued and unpaid distributions have been paid on all
Trust Preferred Securities for all monthly distribution periods terminating on
or prior to the date of redemption.
If the Trust gives a notice of redemption in respect of Trust Preferred
Securities (which notice will be irrevocable) then immediately prior to the
close of business on the redemption date, provided that the Corporation has paid
to the Property Trustee a sufficient amount of cash in connection with the
related redemption or maturity of the Junior Subordinated Debentures,
distributions will cease to accrue on the Trust Preferred Securities called for
redemption, such Trust Preferred Securities shall no longer be deemed to be
outstanding and all rights of holders of such Trust Preferred Securities so
called for redemption will cease, except the right of the holders of such Trust
Preferred Securities to receive the Redemption Price, but without interest on
such Redemption Price. Neither the Trustees nor the Trust shall be required to
register or cause to be registered the transfer of any Trust Preferred
Securities which have been so called for redemption. If any date fixed for
redemption of Trust Preferred Securities is not a Business Day, then payment of
the Redemption Price payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay) except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on such date fixed for
redemption. If the Corporation fails to repay Junior Subordinated Debentures on
maturity or on the date fixed for redemption or if payment of the Redemption
Price in respect of Trust Preferred Securities is improperly withheld or refused
and not paid by the Property Trustee or by the Corporation pursuant to the
Preferred Securities Guarantee described under "DESCRIPTION OF THE PREFERRED
SECURITIES GUARANTEE," distributions on such Trust Preferred Securities will
continue to accrue, from the original redemption date of the Trust Preferred
Securities to the date of payment, in which case the actual payment date will be
considered the date fixed for redemption for purposes of calculating the
Redemption Price.
If a partial redemption of the Trust Preferred Securities would result in
the delisting of the Trust Preferred Securities by any national securities
exchange or other organization on which the Trust Preferred Securities are then
listed, the Corporation pursuant to the Indenture will only redeem Junior
Subordinated Debentures in whole and, as a result, the Trust may only redeem the
Trust Preferred Securities in whole.
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Subject to the foregoing and applicable law (including, without limitation,
United States federal securities laws), the Corporation or any of its
subsidiaries may at any time and from time to time purchase outstanding Trust
Preferred Securities by tender, in the open market or by private agreement.
Subordination of Trust Common Securities
Payment of distributions on, and the redemption price of, the Trust
Preferred Securities and the Trust Common Securities, as applicable, shall be
made pro rata based on the liquidation amount of such Trust Preferred Securities
and Trust Common Securities; provided, however, that if on any distribution date
or redemption date an Indenture Event of Default shall have occurred and be
continuing, no payment of any distribution on, or redemption price of, any of
the Trust Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Trust Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid distributions on
all of the outstanding Trust Preferred Securities for all distribution periods
terminating on or prior thereto, or in the case of payment of the redemption
price, the full amount of such redemption price on all of the outstanding Trust
Preferred Securities then called for redemption, shall have been made or
provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all distributions on, or redemption
price of, the Trust Preferred Securities then due and payable.
Liquidation Distribution Upon Dissolution
In the event of any voluntary or involuntary dissolution, winding-up or
termination of the Trust, the holders of the Trust Preferred Securities and
Trust Common Securities at the date of dissolution, winding-up or termination of
the Trust will be entitled to receive on a Pro Rata Basis solely out of the
assets of the Trust, after satisfaction of creditors of the Trust (to the extent
not satisfied by the Corporation as provided in the Declaration), an amount
equal to the aggregate of the stated liquidation amount of $25 per Trust
Security plus accrued and unpaid distributions thereon to the date of payment
(such amount being the "Liquidation Distribution"), unless, in connection with
such dissolution, winding-up or termination, Junior Subordinated Debentures in
an aggregate principal amount equal to the aggregate stated liquidation amount
of such Trust Securities and bearing accrued and unpaid interest in an amount
equal to the accrued and unpaid distributions on such Trust Securities, shall be
distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities
and Trust Common Securities in exchange therefor, after satisfaction of
creditors of the Trust (to the extent not satisfied by the Corporation as
provided in the Declaration).
If, upon any such dissolution, the Liquidation Distribution can be paid
only in part because the Trust has insufficient assets available to pay in full
the aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Trust Preferred Securities and the Trust Common Securities shall be
paid on a Pro Rata Basis. The holders of the Trust Common Securities will be
entitled to receive distributions upon any such dissolution on a Pro Rata Basis
with the holders of the Trust Preferred Securities, except that if an Event of
Default under the Declaration has occurred and is continuing, the Trust
Preferred Securities shall have a priority over the Trust Common Securities with
respect to payment of the Liquidation Distribution.
Pursuant to the Declaration, the Trust shall dissolve: (i) on _________,
2027, (ii) when all of the Trust Securities shall have been called for
redemption and the amounts necessary for redemption thereof shall have been paid
to the holders of Trust Securities in accordance with the terms of the Trust
Securities, (iii) when all of the "Regular Trustees elect to dissolve the Trust
in accordance with the terms of the Trust Securities, (iv) upon the bankruptcy
of the Corporation or the Trust, (v) upon the filing of a certificate of
dissolution or the equivalent with respect to the Corporation, the consent of at
least a majority in liquidation amount of the Trust Securities, voting together
as a single class, to dissolve the Trust, or the revocation of the charter of
the Corporation and the expiration of 90 days after the date of revocation
without a reinstatement thereof, or (vi) upon the entry of a decree of judicial
dissolution of the Corporation or the Trust.
No Merger, Consolidation or Amalgamation of the Trust
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets to, any
corporation or other entity.
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Declaration Events of Default
An Indenture Event of Default will constitute an event of default under the
Declaration with respect to the Trust Securities (an "Event of Default");
provided that pursuant to the Declaration, the holder of the Trust Common
Securities will be deemed to have waived any such Event of Default with respect
to the Trust Common Securities until all Events of Default with respect to the
Trust Preferred Securities have been cured or waived. Until all such Events of
Default with respect to the Trust Preferred Securities have been so cured or
waived, the Property Trustee will be deemed to be acting solely on behalf of the
holders of the Trust Preferred Securities, and only the holders of the Trust
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and consequently under the
Indenture. In the event that any Event of Default with respect to the Trust
Preferred Securities is waived by the holders of the Trust Preferred Securities
as provided in the Declaration, the holders of Trust Common Securities pursuant
to the Declaration have agreed that such waiver also constitutes a waiver of
such Event of Default with respect to the Trust Common Securities for all
purposes under the Declaration without any further act, vote or consent of the
holders of the Trust Common Securities.
Upon the occurrence of an Event of Default, the Property Trustee as the
holder of all of the Junior Subordinated Debentures will have the right under
the Indenture to declare the principal of and interest on the Junior
Subordinated Debentures to be immediately due and payable. In addition, the
Property Trustee will have the power to exercise all rights, powers and
privileges under the Indenture. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES."
If the Property Trustee fails to enforce its rights with respect to the
Junior Subordinated Debentures held by the Trust, to the fullest extent
permitted by law, any record holder of Trust Preferred Securities may institute
legal proceedings directly against the Corporation to enforce the Property
Trustee's rights under such Junior Subordinated Debentures without first
instituting any legal proceedings against such Property Trustee or any other
person or entity. In addition, if an Event of Default under the Declaration has
occurred and is continuing and such event is attributable to the failure of the
Corporation to pay interest, principal or other required payments on the Junior
Subordinated Debentures issued to the Trust on the date such interest, principal
or other payment is otherwise payable (or, in the case of redemption, the
redemption date), then a record holder of Trust Preferred Securities may, on or
after the respective due dates specified in the Junior Subordinated Debentures,
institute a proceeding directly or indirectly against the Corporation under the
Indenture for enforcement of payment on Junior Subordinated Debentures having a
principal amount equal to the aggregate liquidation amount of the Trust
Preferred Securities held by such holder without first (i) directing the
Property Trustee to enforce the terms of the Junior Subordinated Debentures or
(ii) instituting a legal proceeding against the Corporation to enforce the
Property Trustee's rights under the Junior Subordinated Debentures. In
connection with such Direct Action, the Corporation will be subrogated to the
rights of such record holder of Trust Preferred Securities to the extent of any
payment made by the Corporation to such record holder of Trust Preferred
Securities in such Direct Action. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES."
Voting Rights
Except as provided below, under "-- Modification and Amendment of the
Declaration" and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE -- Amendments
and Assignment" and as otherwise required by the Business Trust Act, the Trust
Indenture Act and the Declaration, the holders of the Trust Preferred Securities
will have no voting rights.
If (i) the Trust fails to make distributions in full on the Trust Preferred
Securities for 18 consecutive months or (ii) an Event of Default under the
Declaration occurs and is continuing (each, an "Appointment Event"), then the
holders of the Trust Preferred Securities, acting as a single class, will be
entitled, by the vote of holders of Trust Preferred Securities representing a
majority in aggregate liquidation amount of the outstanding Trust Preferred
Securities, to appoint a Special Regular Trustee (who need not be an officer or
an employee of or otherwise affiliated with the Corporation) who shall have the
same rights, powers and privileges under the Declaration as the Regular
Trustees. Any holder of Trust Preferred Securities (other than the Corporation
or any of its affiliates) shall have the right to nominate any person to be
appointed as Special Regular Trustee. For purposes of determining whether the
Trust has failed to pay distributions in full for 18 consecutive months,
distributions shall be deemed to remain in arrears, notwithstanding any payments
in respect thereof, until full cumulative distributions have been or
contemporaneously are paid with respect to all monthly distribution periods
terminating on or prior to the date of payment of such cumulative distributions.
Not later than 30 days after such right to appoint a Special Regular Trustee
arises, the Regular Trustees will convene a meeting for the purpose of
appointing a Special Regular Trustee. If the Regular Trustees fail to convene
such meeting within such 30-day period, the holders of Trust Preferred
Securities representing 10% in liquidation amount of the outstanding Trust
Preferred Securities will be entitled to convene such meeting. The provisions of
the Declaration relating to the convening and conduct of the meetings of the
holders will apply with respect to any such meeting. If, at any such meeting,
holders of less than a majority in aggregate liquidation amount of Trust
Preferred Securities entitled to vote for the appointment of a Special Regular
Trustee vote for such appointment, no Special Regular Trustee shall be
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appointed. Any Special Regular Trustee may be removed without cause at any time
by holders of Trust Preferred Securities representing a majority in liquidation
amount of the Trust Preferred Securities and holders of Trust Preferred
Securities representing 10% in liquidation amount of the Trust Preferred
Securities shall be entitled to convene a meeting for such purpose. Any Special
Regular Trustee appointed shall cease to be a Special Regular Trustee if the
Appointment Event pursuant to which the Special Regular Trustee was appointed
and all other Appointment Events have been cured and cease to be continuing.
Notwithstanding the appointment of any such Special Regular Trustee, the
Corporation shall retain all rights under the Indenture, including the right to
extend the interest payment period as provided under "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period." If such an
extension occurs, there will be no Indenture Event of Default for failure to
make any scheduled interest payment during the Extension Period on the date
originally scheduled.
The holders of a majority in aggregate liquidation amount of the Trust
Preferred Securities have the right (i) on behalf of all holders of Trust
Securities, to waive any past default that is waivable under the Declaration and
(ii) to direct the time, method and place of conducting any proceeding for any
remedy available to the Property Trustee, or exercising any trust or power
conferred upon the Property Trustee under the Declaration, including the right
to direct the Property Trustee, as the holder of the Junior Subordinated
Debentures, to (a) direct the time, method and place of conducting any
proceeding for any remedy available to the Indenture Trustee, or exercising any
trust or power conferred on the Indenture Trustee with respect to the Junior
Subordinated Debentures, (b) waive any past default that is waivable under the
Indenture, or (c) exercise any right to rescind or annul a declaration that the
principal of all the Junior Subordinated Debentures shall be due and payable;
provided that where a consent under the Indenture would require the consent of
(1) holders of Junior Subordinated Debentures representing a specified
percentage greater than a majority in principal amount of the Junior
Subordinated Debentures or (2) each holder of Junior Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of, in the case of clause (1) above, holders of Trust
Preferred Securities representing such specified percentage of the aggregate
liquidation amount of the Trust Preferred Securities or, in the case of clause
(2) above, each holder of all Trust Preferred Securities affected thereby. The
Property Trustee shall not revoke any action previously authorized or approved
by a vote of the holders of Trust Preferred Securities. The Property Trustee
shall notify all holders of record of Trust Preferred Securities of any notice
of default received from the Indenture Trustee with respect to the Junior
Subordinated Debentures. Other than with respect to directing the time, method
and place of conducting any proceeding for any remedy available to the Property
Trustee or the Indenture Trustee as set forth above, the Property Trustee shall
be under no obligation to take any of the foregoing actions at the direction of
the holders of the Trust Preferred Securities unless the Property Trustee shall
have obtained an opinion of nationally recognized independent tax counsel
recognized as expert in such matters to the effect that the Trust will not be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership on account of such action and will be
treated as a grantor trust for United States federal income tax purposes
following such action. If the Property Trustee fails to enforce its rights under
the Declaration (including, without limitation, its rights, powers and
privileges as a holder of the Junior Subordinated Debentures under the
Indenture) to the fullest extent permitted by law, any holder of Trust Preferred
Securities may, upon such holder's written request to the Property Trustee to
enforce such rights, institute a legal proceeding directly against the
Corporation to enforce the Property Trustee's rights under the Declaration,
without first instituting a legal proceeding against the Property Trustee or any
other Person; provided that any holder may institute a direct action without
prior request to the Property Trustee to enforce the Corporation's payment
obligations on the Junior Subordinated Debentures.
A waiver of an Indenture Event of Default by the Property Trustee at the
direction of holders of the Trust Preferred Securities will constitute a waiver
of the corresponding Event of Default under the Declaration in respect of the
Trust Securities.
In the event the consent of the Property Trustee as the holder of the
Junior Subordinated Debentures is required under the Indenture with respect to
any amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures, the Property Trustee shall request the direction of the
holders of the Trust Securities with respect to such amendment, modification or
termination and shall vote with respect to such amendment, modification or
termination as directed by a majority in liquidation amount of the Trust
Securities voting together as a single class; provided, however, that where any
such amendment, modification or termination under the Indenture would require
the consent of (i) holders of Junior Subordinated Debentures representing a
specified percentage greater than a majority in principal amount of the Junior
Subordinated Debentures or (ii) each holder of Junior Subordinated Debentures
affected thereby, the Property Trustee may only give such consent at the
direction of the holders of Trust Securities representing such specified
percentage of the aggregate liquidation amount of the Trust Securities in the
case of clause (i) above, or each holder of Trust Securities affected thereby,
in the case of clause (ii) above; and, provided, further, that the Property
Trustee shall be under no obligation to take any such action in accordance with
the directions of the holders of the Trust Securities unless the Property
Trustee has obtained an opinion of nationally recognized independent tax counsel
recognized as expert in such matters to the effect that the Trust will not be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership on account of such action and will be
treated as a grantor trust for United States federal income tax purposes
following such action.
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Any required approval or direction of holders of Trust Preferred Securities
may be given at a separate meeting of holders of Trust Preferred Securities
convened for such purpose, at a meeting of all of the holders of Trust
Securities or pursuant to written consent. The Regular Trustees will cause a
notice of any meeting at which holders of Trust Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be mailed to each holder of record of Trust Preferred
Securities. Each such notice will include a statement setting forth (i) the date
of such meeting or the date by which such action is to be taken, (ii) a
description of any resolution proposed for adoption at such meeting on which
such holders are entitled to vote or of such matter upon which written consent
is sought and (iii) instructions for the delivery of proxies or consents.
No vote or consent of the holders of Trust Preferred Securities will be
required for the Trust to redeem and cancel Trust Preferred Securities or
distribute Junior Subordinated Debentures in accordance with the Declaration.
Notwithstanding that holders of Trust Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the Trust
Preferred Securities at such time that are owned by the Corporation or by any
entity directly or indirectly controlling or controlled by or under direct or
indirect common control with the Corporation shall not be entitled to vote or
consent and shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
The procedures by which persons owning Trust Preferred Securities
registered in the name of and held by DTC or its nominee may exercise their
voting rights are described under "Book-Entry; Delivery and Form" below.
Subject to the right of holders of Trust Preferred Securities to appoint a
Special Regular Trustee upon the occurrence of an Appointment Event, holders of
the Trust Preferred Securities will have no rights to increase or decrease the
number of Trustees or to appoint, remove or replace a Trustee, which rights are
vested exclusively in the holders of the Trust Common Securities.
Modification and Amendment of the Declaration
The Declaration may be modified and amended on approval of a majority of
the Regular Trustees, provided that, if any proposed modification or amendment
provides for, or the Regular Trustees otherwise propose to effect, (i) any
action that would materially adversely affect the material powers, preferences
or special rights of the Trust Securities, whether by way of amendment to the
Declaration or otherwise, or (ii) the dissolution, winding-up or termination of
the Trust other than pursuant to the terms of the Declaration, then the holders
of the outstanding Trust Securities as a class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of at least 66 2/3% in liquidation amount of the Trust
Securities, provided that if any amendment or proposal referred to in clause (i)
above would adversely affect only the Trust Preferred Securities or the Trust
Common Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of 66 2/3% in liquidation amount of such class of
securities.
Notwithstanding the foregoing, (i) no amendment or modification may be made
to the Declaration unless the Regular Trustees shall have obtained (A) either a
ruling from the Internal Revenue Service or a written unqualified opinion of
nationally recognized independent tax counsel experienced in such matters to the
effect that such amendment will not cause the Trust to be classified for United
States federal income tax purposes as an association taxable as a corporation or
a partnership and to the effect that the Trust will continue to be treated as a
grantor trust for purposes of United States federal income taxation and (B) a
written unqualified opinion of nationally recognized independent counsel
experienced in such matters to the effect that such amendment will not cause the
Trust to be an "investment company" which is required to be registered under the
1940 Act; (ii) certain specified provisions of the Declaration may not be
amended without the consent of all of the holders of the Trust Securities; (iii)
no amendment which materially adversely affects the material rights, powers and
privileges of the Property Trustee shall be made without the consent of the
Property Trustee; (iv) Article IV of the Declaration relating to the obligation
of the Corporation to purchase the Trust Common Securities and to pay certain
obligations and expenses of the Trust as described under "SUNSOURCE CAPITAL
TRUST" may not be amended without the consent of the Corporation; (v) the rights
of holders of Trust Common Securities under Article V of the Declaration to
increase or decrease the number of, and to appoint, replace or remove, Trustees
(other than a Special Regular Trustee) shall not be amended without the consent
of each holder of Trust Common Securities; and (vi) the rights of holders of
Trust Preferred Securities under the Declaration to appoint or remove a Special
Regular Trustee and their rights under the Declaration to vote on the election
of Successor Trustees and Property Trustees shall not be amended without the
consent of each holder of Trust Preferred Securities.
The Declaration further provides that it may be amended without the consent
of the holders of the Trust Securities to (i) cure any ambiguity, (ii) correct
or supplement any provision in the Declaration that may be defective or
inconsistent with any other provision of the Declaration, (iii) add to the
covenants, restrictions or obligations of the Corporation, (iv) preserve the
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status of the Trust as a grantor trust for federal income tax purposes, and (v)
to conform to changes in, or a change in interpretation or application of
certain 1940 Act requirements by the SEC, which amendment does not adversely
affect the rights, preferences or privileges of the holders.
Book-Entry; Delivery and Form
Trust Preferred Securities will be issued in fully registered form.
Investors may elect to hold their Trust Preferred Securities directly or,
subject to the rules and procedures of DTC described below, hold interests in a
global certificate (the "Trust Preferred Securities Global Certificate")
registered in the name of DTC or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in a global Trust
Preferred Security.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the NYSE, the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Securities and Exchange Commission.
Upon issuance of a Trust Preferred Securities Global Certificate, DTC will
credit on its book-entry registration and transfer system the number of Trust
Preferred Securities represented by such Trust Preferred Securities Global
Certificate to the accounts of institutions that have accounts with DTC.
Ownership of beneficial interests in a Trust Preferred Securities Global
Certificate will be limited to Participants or persons that may hold interests
through Participants. The ownership interest of each actual purchaser of each
Trust Preferred Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Trust Preferred
Securities. Transfers of ownership interests in the Trust Preferred Securities
are to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of the Trust Preferred
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Trust Preferred Securities are credited, which may or may
not be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers. So long as DTC,
or its nominee, is the owner of a Trust Preferred Securities Global Certificate,
DTC or such nominee, as the case may be, will be considered the sole owner and
holder of record of the Trust Preferred Securities represented by such Trust
Preferred Securities Global Certificate for all purposes.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Trust Preferred Securities are being redeemed, DTC will reduce pro rata (subject
to adjustment to eliminate fractional Trust Preferred Securities) the amount of
interest of each Direct Participant in the Trust Preferred Securities to be
redeemed.
Although voting with respect to the Trust Preferred Securities is limited,
in those instances in which a vote is required, neither DTC nor Cede & Co.
itself will consent or vote with respect to Trust Preferred Securities. Under
its usual procedures, DTC would mail an Omnibus Proxy to the Trust as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Trust Preferred Securities are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
127
Distribution payments on the Trust Preferred Securities represented by a
Preferred Series Global Certificate will be made by the Property Trustee to DTC.
DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participants and not of DTC, the Trust or the Corporation, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of distributions to DTC is the responsibility of the Trust, disbursement
of such payments to Direct Participants is the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners is the responsibility of
Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Trust Preferred Securities at any time by giving reasonable
notice to the Trust. Under such circumstances, if a successor securities
depository is not obtained, Trust Preferred Security certificates will be
required to be printed and delivered. Additionally, the Trust may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depository). In that event, certificates for the Trust Preferred
Securities will be printed and delivered.
Expenses and Taxes
In the Indenture and the Declaration, the Company, as borrower, has agreed
to pay all debts and other obligations (other than with respect to the Trust
Securities) and all costs and expenses of the Trust (including costs and
expenses relating to the organization of the Trust, the fees and expenses of the
Trustees and the costs and expenses relating to the operation of the Trust) and
to pay any and all taxes and all costs and expenses with respect thereto (other
than United States withholding taxes) to which the Trust might become subject.
The foregoing obligations of the Company under the Indenture are for the benefit
of, and shall be enforceable by, any person to whom any such debts, obligations,
costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor
has received notice thereof. Any such Creditor may enforce such obligations of
the Corporation directly against the Corporation, and the Corporation has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Company. The Corporation has also agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give effect to the
foregoing.
Registrar, Transfer Agent and Paying Agent
Payment of distributions and payments on redemption of the Trust Preferred
Securities will be payable, the transfer of the Trust Preferred Securities will
be registrable, and Trust Preferred Securities will be exchangeable for Trust
Preferred Securities of other denominations of a like aggregate liquidation
amount, at the principal corporate trust office of the Property Trustee in The
City of New York; provided that payment of distributions may be made at the
option of the Regular Trustees on behalf of the Trust by check mailed to the
address of the persons entitled thereto and that the payment on redemption of
any Trust Preferred Security will be made only upon surrender of such Trust
Preferred Security to the Property Trustee.
Registrar and Transfer Company or one of its affiliates will act as
registrar and transfer agent for the Trust Preferred Securities. Registrar and
Transfer Company will also act as paying agent and, with the consent of the
Regular Trustees, may designate additional paying agents.
Registration of transfers of Trust Preferred Securities will be effected
without charge by or on behalf of the Trust, but upon payment (with the giving
of such indemnity as the Trust or the Corporation may require) in respect of any
tax or other governmental charges that may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Trust Preferred Securities after such Trust Preferred Securities
have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, prior to a default with respect to the Trust
Securities, undertakes to perform only such duties as are specifically set forth
in the Declaration and, after default, shall exercise the same degree of care as
a prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provision, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the Declaration at the request of any
holder of Trust Preferred Securities, unless offered reasonable indemnity by
such holder against the costs, expenses and liabilities which might be incurred
thereby. The Property Trustee is not required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties if
the Property Trustee reasonably believes that repayment or adequate indemnity is
not reasonably assured to it.
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Governing Law
The Declaration and the Trust Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
Miscellaneous
Application has been made to list the Trust Preferred Securities on the
NYSE, subject to notice of issuance.
The Regular Trustees are authorized and directed to take such action as
they deem reasonable in order that the Trust will not be deemed to be an
"investment company" required to be registered under the 1940 Act or that the
Trust will not be classified for United States federal income tax purposes as an
association taxable as a corporation or a partnership and will be treated as a
grantor trust for United States federal income tax purposes. In this connection,
the Regular Trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust or the Declaration, that the Regular
Trustees determine in their discretion to be reasonable and necessary or
desirable for such purposes, as long as such action does not adversely affect
the interests of holders of the Trust Securities.
The Corporation and the Regular Trustees on behalf of the Trust will be
required to provide to the Property Trustee annually a certificate as to whether
the Corporation and the Trust, respectively, are in compliance with all the
conditions and covenants under the Declaration.
DESCRIPTION OF PREFERRED SECURITIES GUARANTEE
Set forth below is a summary of information concerning the Preferred
Securities Guarantee that will be executed and delivered by the Corporation for
the benefit of the holders from time to time of Trust Preferred Securities. The
Preferred Securities Guarantee is separately qualified under the Trust Indenture
Act and will be held by Bank of New York acting in its capacity as indenture
trustee with respect thereto, for the benefit of the holders of the Trust
Preferred Securities. The terms of the Preferred Securities Guarantee include
those stated in such Guarantee and those made part of the Preferred Securities
Guarantee by the Trust Indenture Act. The summary set forth below contains all
material elements of the Preferred Securities Guarantee but does not purport to
be complete and is subject in all respects to the provisions of, and is
qualified in its entirety by reference to, the Preferred Securities Guarantee,
which is filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part, and the Trust Indenture Act.
General
Pursuant to the Preferred Securities Guarantee, the Corporation will
irrevocably and unconditionally agree, to the extent set forth therein, to pay
in full, to the holders of the Trust Preferred Securities, the Guarantee
Payments (as defined below) (without duplication of amounts theretofore paid by
the Trust), to the extent not paid by the Trust, regardless of any defense,
right of set-off or counterclaim that the Trust may have or assert. The
following payments or distributions with respect to the Trust Preferred
Securities to the extent not paid or made by the Trust (the "Guarantee
Payments") will be subject to the Guarantee (without duplication): (i) any
accrued and unpaid distributions on the Trust Preferred Securities and the
redemption price, including all accrued and unpaid distributions to the date of
the redemption, with respect to the Trust Preferred Securities called for
redemption by the Trust but if and only to the extent that in each case the
Corporation has made a payment to the Property Trustee of interest or principal
on the Junior Subordinated Debentures and (ii) upon a voluntary or involuntary
dissolution, winding-up or termination of the Trust (other than in connection
with the distribution of Junior Subordinated Debentures to holders of Trust
Preferred Securities or the redemption of all of the Trust Preferred Securities
upon the maturity or redemption of the Junior Subordinated Debentures), the
lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid
distributions on the Trust Preferred Securities to the date of payment, to the
extent the Trust has funds available therefor, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Trust Preferred
Securities in liquidation of the Trust. The Corporation's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Corporation to the holders of Trust Preferred Securities or by causing the
Trust to pay such amounts to such holders. The Preferred Securities Guarantee,
when taken together with the Corporation's obligations under the Junior
Subordinated Debentures and the Indenture and its obligations under the
Declaration, including its obligation to pay costs, expenses and certain
liabilities of the Trust, constitutes a full and unconditional guarantee of
amounts due on the Trust Preferred Securities.
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Certain Covenants of the Corporation
In the Preferred Securities Guarantee, the Corporation will covenant that,
so long as the Trust Preferred Securities remain outstanding, the Corporation
will not declare or pay any dividends on, or redeem, purchase, acquire or make a
distribution or liquidation payment with respect to, any of its common stock or
preferred stock or make any guarantee payment with respect thereto if at such
time (i) the Corporation shall be in default with respect to its Guarantee
Payments or other payment obligations under the Preferred Securities Guarantee,
(ii) there shall have occurred any Indenture Event of Default or (iii) the
Corporation shall have given notice of its selection of an Extension Period as
provided in the Indenture and such period, or any extension thereof, is
continuing. In addition, so long as any Trust Preferred Securities remain
outstanding, the Corporation has agreed (i) to remain the sole direct or
indirect owner of all of the outstanding Trust Common Securities and shall not
cause or permit the Trust Common Securities to be transferred except to the
extent permitted by the Declaration; provided that any permitted successor of
the Corporation under the Indenture may succeed to the Corporation's ownership
of the Trust Common Securities and (ii) to use reasonable efforts to cause the
Trust to continue to be treated as a grantor trust for United States federal
income tax purposes except in connection with a distribution of Junior
Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes that do not adversely affect the rights
of holders of Trust Preferred Securities (in which case no consent will be
required), the Preferred Securities Guarantee may be amended only with the prior
approval of the holders of not less than 66 2/3% in liquidation amount of the
outstanding Trust Preferred Securities. The manner of obtaining any such
approval of holders of the Trust Preferred Securities will be as set forth under
"DESCRIPTION OF TRUST PREFERRED SECURITIES -- Voting Rights." All guarantees and
agreements contained in the Preferred Securities Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Corporation
and shall inure to the benefit of the holders of the Trust Preferred Securities
then outstanding. Except in connection with a consolidation, merger or sale
involving the Corporation that is permitted under the Indenture, the Corporation
may not assign its obligations under the Preferred Securities Guarantee.
Termination of the Preferred Securities Guarantee
The Preferred Securities Guarantee will terminate and be of no further
force and effect as to the Trust Preferred Securities upon full payment of the
Redemption Price of all Trust Preferred Securities, or upon distribution of the
Junior Subordinated Debentures to the holders of Trust Preferred Securities in
exchange for all of the Trust Preferred Securities, or upon full payment of the
amounts payable upon liquidation of the Trust. Notwithstanding the foregoing,
the Preferred Securities Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of Trust Preferred
Securities must restore payment of any sums paid with respect to the Trust
Preferred Securities or the Preferred Securities Guarantee.
Status of the Preferred Securities Guarantee
The Corporation's obligations under the Preferred Securities Guarantee to
make the Guarantee Payments will constitute an unsecured obligation of the
Corporation and will rank (i) subordinate and junior in right of payment to all
other liabilities of the Corporation, including the Junior Subordinated
Debentures, except those made pari passu or subordinate by their terms, and (ii)
senior to all capital stock now or hereafter issued by the Corporation and to
any guarantee now or hereafter entered into by the Corporation in respect of any
of its capital stock. Because the Corporation is a holding company, the
Corporation's obligations under the Preferred Securities Guarantee are also
effectively subordinated to all existing and future liabilities, including trade
payables, of the Corporation's subsidiaries, except to the extent that the
Corporation is a creditor of the subsidiaries recognized as such. The
Declaration provides that each holder of Trust Preferred Securities by
acceptance thereof agrees to the subordination provisions and other terms of the
Preferred Securities Guarantee.
The Preferred Securities Guarantee will constitute a guarantee of payment
and not of collection (that is, the guaranteed party may institute a legal
proceeding directly against the guarantor to enforce its rights under the
guarantee without first instituting a legal proceeding against any other person
or entity). The Preferred Securities Guarantee will be deposited with the
Property Trustee, to be held in trust for the benefit of the holders of the
Trust Preferred Securities. The Property Trustee shall enforce the Preferred
Securities Guarantee on behalf of the holders of the Trust Preferred Securities
although any holder of Trust Preferred Securities may bring a direct action
against the Corporation to enforce the Preferred Securities Guarantee without
prior notice to the Property Trustee. The holders of not less than a majority in
aggregate liquidation amount of the Trust Preferred Securities, have the right
to direct the time, method and place of conducting any proceeding for any remedy
available in respect of the Preferred Securities Guarantee, including the giving
of directions to the Property Trustee.
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Governing Law
The Preferred Securities Guarantee will be governed by and construed in
accordance with the laws of the State of New York.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
Set forth below is a description of the Junior Subordinated Debentures
which will be deposited in the Trust as trust assets. The terms of the Junior
Subordinated Debentures include those stated in the Indenture dated __________,
1997 (the "Indenture"), between the Corporation and Bank of New York, as trustee
(the "Indenture Trustee"), the form of which has been filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus forms a part,
and those made part of the Indenture by the Trust Indenture Act. The following
description contains all material elements of the Junior Subordinated Debentures
but does not purport to be complete and is qualified in its entirety by
reference to the Indenture and the Trust Indenture Act. Whenever particular
provisions or defined terms in the Indenture are referred to herein, such
provisions or defined terms are incorporated by reference herein. Section and
Article references used herein are references to provisions of the Indenture.
Under certain circumstances involving the dissolution of the Trust
following the occurrence of a Special Event, Junior Subordinated Debentures may
be distributed to the holders of the Trust Securities in liquidation of the
Trust. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event
Redemption or Distribution; Shortening of Stated Maturity."
General
The Junior Subordinated Debentures are unsecured, subordinated obligations
of the Corporation, limited in aggregate principal amount to an amount equal to
the sum of (i) the stated liquidation amount of the Trust Preferred Securities
issued by the Trust in the Conversion and (ii) the proceeds received by the
Trust upon issuance of the Trust Common Securities to the Corporation (which
proceeds will be used to purchase an equal principal amount of Junior
Subordinated Debentures).
The entire principal amount of the Junior Subordinated Debentures will
become due and payable, together with any accrued and unpaid interest thereon,
on September 30, 2027. The Junior Subordinated Debentures are not subject to any
sinking fund.
If Junior Subordinated Debentures are distributed to holders of Trust
Preferred Securities in dissolution of the Trust, such Junior Subordinated
Debentures will be so issued in certificated form in denominations of $25 and
integral multiples thereof and may be transferred or exchanged at the offices
described below.
Payments of principal and interest on Junior Subordinated Debentures will
be payable, the transfer of the Junior Subordinated Debentures will be
registrable, and Junior Subordinated Debentures will be exchangeable for Junior
Subordinated Debentures of other denominations of a like aggregate principal
amount, at the corporate trust office of the Indenture Trustee in The City of
New York; provided that payment of interest may be made at the option of the
Corporation by check mailed to the address of the persons entitled thereto and
that the payment of principal with respect to any Junior Subordinated Debenture
will be made only upon surrender of such Junior Subordinated Debenture to the
Indenture Trustee.
If the Junior Subordinated Debentures are distributed to the holders of
Trust Preferred Securities upon the dissolution of the Trust, the Corporation
will use its best efforts to list the Junior Subordinated Debentures on the NYSE
or on such other exchange on which the Trust Preferred Securities are then
listed.
Optional Redemption
Except as provided below, the Junior Subordinated Debentures may not be
redeemed prior to September 30, 2002. The Corporation shall have the right to
redeem the Junior Subordinated Debentures, in whole or in part, from time to
time, on or after September 30, 2002, upon not less than 30 nor more than 60
days notice, at a redemption price equal to 100% of the principal amount to be
redeemed, plus any accrued and unpaid interest, to the redemption date,
including interest accrued during an Extension Period. The Corporation will also
have the right to redeem the Junior Subordinated Debentures at any time upon the
occurrence of a Tax Event if certain conditions are met as described under
"DESCRIPTION OF THE TRUST PREFERRED SECURITIES -- Special Event Redemption or
Distribution; Shortening of Stated Maturity." The redemption price for such
redemption within five years of the Conversion will be 101% of the principal
amount of the Junior Subordinated Debentures plus accrued and unpaid interest.
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If the Corporation gives a notice of redemption in respect of Junior
Subordinated Debentures (which notice will be irrevocable) then, by 11:00 a.m.,
New York City time, on the redemption date, the Corporation will deposit
irrevocably with the Indenture Trustee funds sufficient to pay the applicable
redemption price and will give irrevocable instructions and authority to pay
such redemption price to the holders of the Junior Subordinated Debentures. If
notice of redemption shall have been given and funds deposited as required, then
upon the date of such deposit, interest will cease to accrue on the Junior
Subordinated Debentures called for redemption, such Junior Subordinated
Debentures will no longer be deemed to be outstanding and all rights of holders
of such Junior Subordinated Debentures so called for redemption will cease,
except the right of the holders of such Junior Subordinated Debentures to
receive the applicable redemption price, but without interest on such redemption
price. If any date fixed for redemption of Junior Subordinated Debentures is not
a Business Day, then payment of the redemption price payable on such date will
be made on the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay) except that, if such
Business Day falls in the next calendar year, such payment will be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date fixed for redemption. If payment of the redemption price
in respect of Junior Subordinated Debentures is improperly withheld or refused
and not paid by the Corporation, interest on such Junior Subordinated Debentures
will continue to accrue compounded monthly, from the original redemption date to
the date of payment, in which case the actual payment date will be considered
the date fixed for redemption for purposes of calculating the applicable
redemption price. If fewer than all of the Junior Subordinated Debentures are to
be redeemed, the Junior Subordinated Debentures to be redeemed shall be selected
by lot or pro rata or in some other equitable manner determined by the Indenture
Trustee.
In the event of any redemption in part, the Corporation shall not be
required to (i) issue, register the transfer of or exchange any Junior
Subordinated Debentures during a period beginning at the opening of business 15
days before any selection for redemption of Junior Subordinated Debentures and
ending at the close of business on the earliest date on which the relevant
notice of redemption is deemed to have been given to all holders of Junior
Subordinated Debentures to be redeemed and (ii) register the transfer of or
exchange any Junior Subordinated Debentures so selected for redemption, in whole
or in part, except the unredeemed portion of any Junior Subordinated Debentures
being redeemed in part.
Proposed Tax Legislation
Certain tax law changes have been proposed that may, if enacted, deny
corporate issuers a deduction for interest in respect of certain debt
obligations, such as the Junior Subordinated Debentures. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks
Applicable to Holders of A Interests -- Special Event Redemption or
Distribution; Shortening of Stated Maturity."
Interest
The Junior Subordinated Debentures will bear interest at an annual rate of
11.6% from the Accrual Date. Interest will be payable monthly in arrears on the
last day of each calendar month of each year (each, an "Interest Payment Date"),
commencing on July 31, 1997, to the person in whose name such Junior
Subordinated Debenture is registered, subject to certain exceptions, at the
close of business on the first day of the month in which such Interest Payment
Date occurs. Interest payable on any Junior Subordinated Debenture that is not
punctually paid or duly provided for on any Interest Payment Date will forthwith
cease to be payable to the person in whose name such Junior Subordinated
Debenture is registered on the relevant record date, and such defaulted interest
will instead be payable to the person in whose name such Junior Subordinated
Debenture is registered on the special record date or other specified date
determined in accordance with the Indenture; provided, however, that interest
shall not be considered payable by the Corporation on any Interest Payment Date
falling within an Extension Period unless the Corporation has elected to make a
full or partial payment of interest accrued on the Junior Subordinated
Debentures on such Interest Payment Date.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months and for any period shorter than a full
monthly period for which interest is computed, the amount of interest payable
will be computed on the basis of the actual number of days elapsed in such a
30-day month. If any Interest Payment Date is not a Business Day, then payment
of the interest payable on such date will be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on such date.
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Option to Extend Interest Payment Period
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation shall have the
right to extend the interest payment period from time to time for a period not
exceeding 60 consecutive months. The Corporation has no current intention of
exercising its right to extend an interest payment period. No interest shall be
due and payable during an Extension Period, except at the end thereof. During
any Extension Period, the Corporation shall not declare or pay any dividends on,
or redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its common stock or preferred stock or make any guarantee
payments with respect thereto. Prior to the termination of any such Extension
Period, the Corporation may further extend the interest payment period; provided
that such Extension Period together with all such previous and further
extensions thereof may not exceed 60 consecutive months. On the Interest Payment
Date occurring after the end of each Extension Period, the Corporation shall pay
to the holders of Junior Subordinated Debentures of record on the record date
for such Interest Payment Date (regardless of who the holders of record may have
been on other dates during the Extension Period) all accrued and unpaid interest
on the Junior Subordinated Debentures, together with interest thereon at the
rate specified for the Junior Subordinated Debentures to the extent permitted by
applicable law, compounded monthly ("Compounded Interest"). Upon the termination
of any Extension Period and the payment of all amounts then due, the Corporation
may commence a new Extension Period, subject to the above requirements. The
Corporation may also prepay at any time all or any portion of the interest
accrued during an Extension Period. Consequently, there could be multiple
Extension Periods of varying lengths (up to five Extension Periods of 60
consecutive months each or more numerous shorter Extension Periods) throughout
the term of the Junior Subordinated Debentures. The failure by the Corporation
to make interest payments during an Extension Period would not constitute a
default or an event of default under the Indenture or the Corporation's
currently outstanding indebtedness.
If the Trust shall be the sole holder of the Junior Subordinated
Debentures, the Corporation shall give the Property Trustee and the Indenture
Trustee notice of its selection of such Extension Period ten Business Days prior
to the earlier of (i) the date the distributions on the Trust Preferred
Securities are payable or (ii) the date the Trust is required to give notice to
the NYSE or other applicable self-regulatory organization or to holders of the
Trust Preferred Securities of the record date or the date such distribution is
payable, but in any event not less than one Business Day prior to such record
date. The Trust shall give notice of the Corporation's selection of such
Extension Period to the holders of the Trust Preferred Securities.
If Junior Subordinated Debentures have been distributed to holders of Trust
Securities, the Corporation shall give the holders of the Junior Subordinated
Debentures notice of its selection of such Extension Period ten Business Days
prior to the earlier of (i) the next succeeding interest payment date or (ii)
the date the Corporation is required to give notice to the NYSE (if the Junior
Subordinated Debentures are then listed thereon) or other applicable
self-regulatory organization or to holders of the Junior Subordinated Debentures
of the record or payment date of such related interest payment.
Compounded Interest
The Corporation will make payments of Compounded Interest to the Trust with
respect to the Junior Subordinated Debentures held by the Trust, and the
Property Trustee will make such funds available to pay any interest on
distributions in arrears in respect of the Trust Preferred Securities pursuant
to the terms thereof.
Certain Covenants of the Corporation Applicable to the Junior Subordinated
Debentures
In the Indenture, the Corporation will covenant that, so long as any Trust
Preferred Securities remain outstanding, the Corporation will not declare or pay
any dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its common stock or preferred stock
or make any guarantee payment with respect thereto if at such time (i) the
Corporation shall be in default with respect to its Guarantee Payments or other
payment obligations under the Preferred Securities Guarantee, (ii) there shall
have occurred any Indenture Event of Default with respect to the Junior
Subordinated Debentures or (iii) the Corporation shall have given notice of its
selection of an Extension Period as provided in the Indenture and such period,
or any extension thereof, is continuing. In addition, so long as the Trust
Preferred Securities remain outstanding, the Corporation has agreed (i) not to
cause or permit the Trust Common Securities to be transferred except to the
extent permitted by the Declaration, provided that any permitted successor of
the Corporation under the Indenture may succeed to the Corporation's ownership
of the Trust Common Securities, (ii) to comply fully with all of its obligations
and agreements contained in the Declaration and (iii) not to take any action
which would cause the Trust to cease to be treated as a grantor trust for United
States federal income tax purposes except in connection with a distribution of
Junior Subordinated Debentures.
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Subordination
The Indenture provides that the Junior Subordinated Debentures are
subordinate and junior in right of payment to all Senior Indebtedness of the
Corporation. In the event (a) of any insolvency or bankruptcy proceedings, or
any receivership, liquidation, reorganization or other similar proceedings in
respect of the Corporation or its property or any proceeding for voluntary
liquidation, dissolution or other winding up of the Corporation, or (b) Junior
Subordinated Debentures are declared due and payable before their expressed
maturity because of the occurrence of an Indenture Event of Default (under
circumstances other than as set forth in clause (a) above), then the holders of
all Senior Indebtedness shall first be entitled to receive payment of the full
amount due thereon in money, before the holders of any of the Junior
Subordinated Debentures are entitled to receive a payment on account of the
principal of, premium, if any, or interest on the indebtedness evidenced by such
Junior Subordinated Debentures. In the event and during the continuation of any
default in payment of any Senior Indebtedness or if any event of default shall
exist under any Senior Indebtedness resulting in the acceleration of the
maturity thereof, or the right to accelerate maturity thereof, as "event of
default" is defined therein or in the agreement under which the same is
outstanding, then no payment of the principal of, premium, if any, or interest
on the Junior Subordinated Debentures shall be made.
The term "Senior Indebtedness" shall mean the principal of and premium, if
any, and interest on (a) all indebtedness of the Corporation, whether
outstanding on the date of the Indenture or thereafter created, (i) for money
borrowed by the Corporation,(ii) for money borrowed by, or obligations of,
others and either assumed or guaranteed, directly or indirectly, by the
Corporation, (iii) in respect of letters of credit and acceptances issued or
made by banks, or (iv) constituting purchase money indebtedness, or indebtedness
secured by property included in the property, plant and equipment accounts of
the Corporation at the time of the acquisition of such property by the
Corporation, for the payment of which the Corporation is directly liable, and
(b) all deferrals, renewals, extensions and refundings of, and amendments,
modifications and supplements to, any such indebtedness. As used in the
preceding sentence the term "purchase money indebtedness" means indebtedness
evidenced by a note, debenture, bond or other instrument (whether or not secured
by any lien or other security interest) issued or assumed as all or a part of
the consideration for the acquisition of property, whether by purchase, merger,
consolidation or otherwise, unless by its terms such indebtedness is subordinate
to other indebtedness of the Corporation. Notwithstanding anything to the
contrary in the Indenture or the Junior Subordinated Debentures, Senior
Indebtedness shall not include (i) amounts owed to trade creditors in the
ordinary course of business, (ii) any indebtedness of the Corporation which, by
its terms or the terms of the instrument creating or evidencing it, is
subordinate in right of payment to or pari passu with the Junior Subordinated
Debentures, as the case may be, and, in particular, the Junior Subordinated
Debentures shall rank pari passu with respect to all other debt securities and
guarantees in respect thereof issued to any other trusts, partnerships or other
entity affiliated with the Corporation which is a financing vehicle of the
Corporation in connection with the issuance of preferred securities by such
financing vehicle, or (iii) any indebtedness of the Corporation to a subsidiary
of the Corporation.
The Indenture does not limit the aggregate amount of indebtedness,
including Senior Indebtedness, that may be issued. Because the Corporation will
be a holding company after the Merger, the Junior Subordinated Debentures will
be effectively subordinated to all existing and future liabilities, including
trade payables, of the Corporation's subsidiaries. Any right of the Corporation
to participate in any distribution of the assets of any of the Corporation's
subsidiaries, including the Operating Partnership, upon the liquidation,
reorganization or insolvency of such subsidiary (and the consequent right of the
holders of the Junior Subordinated Debentures to participate in those assets)
will be subject to the claims of the creditors (including trade creditors) and
preferred stockholders of such subsidiary, except to the extent that claims of
the Corporation itself as a creditor of such subsidiary may be recognized, in
which case the claims of the Corporation would still be subordinate to any
security interest in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Corporation. At December 31, 1996, the
Operating Partnership had outstanding indebtedness of $85,244,000, all of which
had been guaranteed by the Partnership. For a discussion of indebtedness to be
outstanding after the Merger, see "CAPITALIZATION." There are no terms in the
Trust Preferred Securities, the Junior Subordinated Debentures or the Preferred
Securities Guarantee that limit the Corporation's ability to incur additional
indebtedness, including indebtedness that ranks senior to or pari passu with the
Junior Subordinated Debentures and the Preferred Securities Guarantee, or the
ability of its subsidiaries to incur additional indebtedness. See "DESCRIPTION
OF PREFERRED SECURITIES GUARANTEE -- Status of the Preferred Securities
Guarantee."
Indenture Events of Default
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Indenture Event of
Default" with respect to the Junior Subordinated Debentures:
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(a) failure for 30 days to pay interest on the Subordinated
Debentures when due; provided that a valid extension of the interest payment
period by the Corporation shall not constitute a default in the payment of
interest for this purpose; or
(b) failure to pay principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at maturity, upon redemption, by
declaration or otherwise; or
(c) failure to observe or perform any other covenant contained in
the Indenture with respect to the Junior Subordinated Debentures for 90 days
after written notice to the Corporation from the Indenture Trustee or the
holders of at least 25% in principal amount of the outstanding Junior
Subordinated Debentures; or
(d) certain events in bankruptcy, insolvency or reorganization of
the Corporation.
In each and every such case, unless the principal of all the Junior
Subordinated Debentures shall have already become due and payable, either the
Indenture Trustee or the holders of not less than 25% in aggregate principal
amount of the Junior Subordinated Debentures then outstanding, by notice in
writing to the Corporation (and to the Indenture Trustee if given by such
holders), may declare the principal of all the Junior Subordinated Debentures to
be due and payable immediately, and upon any such declaration the same shall
become and shall be immediately due and payable.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon an Indenture Event of Default,
but the holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures may annul such declaration and waive the default
if the default has been cured and a sum sufficient to pay all matured
installments of interest and principal otherwise than by acceleration and any
premium has been deposited with the Indenture Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures then outstanding may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal, premium, if any, or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal otherwise than by acceleration and any premium has been deposited
with the Indenture Trustee) or a call for redemption of Junior Subordinated
Debentures. The Corporation is required to file annually with the Indenture
Trustee a certificate as to whether or not the Corporation is in compliance with
all the conditions and covenants under the Indenture.
An Indenture Event of Default also constitutes an Event of Default under
the Declaration. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -Declaration
Events of Default."
Modification of the Indenture
The Indenture contains provisions permitting the Corporation and the
Indenture Trustee, with the consent of the holders of not less than a majority
in principal amount of the outstanding Junior Subordinated Debentures, to modify
the Indenture or any supplemental indenture affecting the rights of the holders
of such Junior Subordinated Debentures; provided that no such modification may,
without the consent of the holder of each outstanding Junior Subordinated
Debenture affected thereby, (i) change the time for payment of principal or
interest on any Junior Subordinated Debenture; (ii) reduce the principal of, or
any installment of principal of, or interest on, or reduce any premium payable
upon the redemption of, any Junior Subordinated Debenture; (iii) change the coin
or currency in which any Junior Subordinated Debenture or interest thereon is
payable; (iv) impair the right to institute suit for the enforcement of any
payment on or with respect to any Junior Subordinated Debenture; (v) reduce the
percentage in principal amount of the outstanding Junior Subordinated Debentures
the consent of which holders is required for modification or amendment of the
Indenture or for waiver of compliance with certain provisions of the Indenture
or for waiver of certain defaults; (vi) change the obligation of the Corporation
to maintain an office or agency in the places and for the purposes specified in
the Indenture; (vii) modify the provisions relating to waiver of certain
defaults or any of the foregoing provisions; or (viii) modify the provisions
with respect to the subordination of the Junior Subordinated Debentures.
Book-Entry and Settlement
If any Junior Subordinated Debentures are distributed to holders of Trust
Preferred Securities (see "DESCRIPTION OF TRUST PREFERRED SECURITIES"), such
Junior Subordinated Debentures will be issued in fully registered form. In such
event, investors may elect to hold their Junior Subordinated Debentures directly
or, subject to the rules and procedures of DTC, hold interests in a global
certificate registered in the name of DTC or its nominee.
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For a description of DTC and DTC's book-entry system, see "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Book-Entry; Delivery and Form." As of the date of
this Proxy Statement/Prospectus, the description herein of DTC's book-entry
system and DTC's practices as they relate to purchases, transfers, notices and
payments with respect to the Trust Preferred Securities apply in all material
respects to any Junior Subordinated Debentures registered in the name of and
held by DTC or its nominee.
Consolidation, Merger and Sale
The Indenture provides that the Corporation may not consolidate with or
merge into any other person or sell, convey, transfer or lease or otherwise
dispose of all or substantially all of its properties and assets to any person
and may not permit any person to merge into or consolidate with the Corporation
unless (i) either the Corporation will be the resulting or surviving entity or
any successor or purchaser is a corporation organized under the laws of the
United States of America, any State or the District of Columbia, and any such
successor or purchaser expressly assumes the Corporation's obligations under the
Indenture and (ii) immediately after giving effect to the transaction no
Indenture Event of Default, and no event which, after notice or lapse of time or
both, would become an Indenture Event of Default, shall have occurred and be
continuing.
Defeasance and Discharge
Under the terms of the Indenture, the Corporation will be discharged from
any and all obligations in respect of the Junior Subordinated Debentures (except
in each case for certain obligations to register the transfer or exchange of
Junior Subordinated Debentures, replace stolen, lost or mutilated Junior
Subordinated Debentures, maintain paying agencies and hold moneys for payment in
trust) if (i) the Corporation irrevocably deposits with the Indenture Trustee
cash or U.S. Government Obligations, as trust funds in an amount certified to be
sufficient to pay at maturity (or upon redemption) the principal of, premium, if
any, and interest on all outstanding Junior Subordinated Debentures; (ii) the
Corporation delivers to the Indenture Trustee an opinion of counsel to the
effect that the holders of the Junior Subordinated Debentures will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance and that defeasance will not otherwise alter such holders'
United States federal income tax treatment of principal, premium and interest
payments on such Junior Subordinated Debentures (such opinion must be based on a
ruling of the Internal Revenue Service or a change in United States federal
income tax law occurring after the date of such Indenture, since such a result
would not occur under current tax law); and (iii) no event or condition shall
exist that, pursuant to certain provisions described under "- Subordination"
above, would prevent the Corporation from making payments of principal of,
premium, if any, and interest on the Junior Subordinated Debentures at the date
of the irrevocable deposit referred to above.
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed by,
and construed in accordance with, the laws of the State of New York.
Information Concerning the Indenture Trustee
The Indenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Junior Subordinated Debentures, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities that might be incurred thereby. The Indenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it.
Miscellaneous
The Corporation will have the right at all times to assign any of its
rights or obligations under the Indenture to a direct or indirect wholly owned
subsidiary of the Corporation; provided that, in the event of any such
assignment, the Corporation will remain jointly and severally liable for all
such obligations. Subject to the foregoing, the Indenture will be binding upon
and inure to the benefit of the parties thereto and their respective successors
and assigns. The Indenture provides that it may not otherwise be assigned by the
parties thereto other than by the Corporation to a successor or purchaser
pursuant to a consolidation, merger or sale permitted by the Indenture.
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RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
distributions and other payments due on the Trust Preferred Securities primarily
because (i) the aggregate principal amount of Junior Subordinated Debentures
held as trust assets will be equal to the sum of the aggregate stated
liquidation amount of the Trust Preferred Securities and the proceeds received
by the Trust upon issuance of the Trust Common Securities to the Corporation;
(ii) the interest rate and interest and other payment dates on the Junior
Subordinated Debentures will match the distribution rate and distribution and
other payment dates for the Trust Preferred Securities; (iii) the Indenture and
Declaration provides that the Corporation shall pay for all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust, including any taxes and all costs and expenses with
respect thereto, to which the Trust may become subject, except for United States
withholding taxes; and (iv) the Declaration further provides that the Trustees
shall not cause or permit the Trust, among other things, to engage in any
activity that is not consistent with the limited purposes of the Trust. With
respect to clause (iii) above, however, no assurance can be given that the
Corporation will have sufficient resources to enable it to pay such debts,
obligations, costs and expenses on behalf of the Trust.
Payments of distributions and other payments due on the Trust Preferred
Securities are guaranteed by the Corporation on a subordinated basis as and to
the extent set forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." If
the Corporation does not make interest or other payments on the Junior
Subordinated Debentures, the Trust will not make distributions or other payments
on the Trust Preferred Securities. Under the Declaration, if and to the extent
the Corporation does make interest or other payments on the Junior Subordinated
Debentures, the Property Trustee is obligated to make distributions or other
payments on the Trust Preferred Securities. The Preferred Securities Guarantee
is a guarantee from the time of issuance of the Trust Preferred Securities, but
the Preferred Securities Guarantee covers distributions and other payments on
the Trust Preferred Securities only if and to the extent that the Corporation
has made a payment to the Property Trustee of interest or principal on the
Junior Subordinated Debentures deposited in the Trust as trust assets. In the
event the Corporation fails to make such payments, a holder of Trust Preferred
Securities may institute a legal proceeding directly against the Corporation
under the Indenture to enforce payment of such distributions to such holder
after the respective due dates. Taken together, the Corporation's obligations
under the Junior Subordinated Debentures, the Indenture and the Preferred
Securities Guarantee provide, in the aggregate, a full and unconditional
guarantee of payments of distributions and other amounts due on the Trust
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full and unconditional guarantee of the Trust's
obligations under the Trust Preferred Securities.
If an Appointment Event occurs, the Declaration provides that the holders
of the Trust Preferred Securities may appoint a Special Regular Trustee who will
have the same rights, powers and privileges under the Declaration as the Regular
Trustees. The Property Trustee will have the power to exercise all rights,
powers and privileges under the Indenture with respect to the Junior
Subordinated Debentures, including its rights as the holder of the Junior
Subordinated Debentures to enforce the Corporation's obligations under the
Junior Subordinated Debentures upon the occurrence of an Indenture Event of
Default, and will also have the right to enforce the Preferred Securities
Guarantee on behalf of the holders of the Trust Preferred Securities. In
addition, the holders of at least a majority in liquidation amount of the Trust
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and the Preferred Securities
Guarantee. Under certain circumstances, holders of Trust Preferred Securities
may institute a legal proceeding against the Corporation to enforce the
Preferred Securities Guarantee and the Corporation's payment obligations on the
Junior Subordinated Debentures. See "DESCRIPTION OF TRUST PREFERRED SECURITIES"
and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE."
The above mechanisms and obligations, taken together, constitute a full and
unconditional guarantee by the Corporation of payments due on the Trust
Preferred Securities.
If a Special Event shall occur and be continuing, the Trust shall be
dissolved unless the Junior Subordinated Debentures are redeemed in the limited
circumstances described below, with the result that Junior Subordinated
Debentures held by the Trust having an aggregate principal amount equal to the
aggregate stated liquidation amount of the Trust Preferred Securities and Trust
Common Securities will be distributed on a Pro Rata Basis in exchange for the
outstanding Trust Preferred Securities and Trust Common Securities, subject in
the case of a Tax Event to the Corporation's right in certain circumstances to
redeem Junior Subordinated Debentures as described under "DESCRIPTION OF TRUST
PREFERRED SECURITIES -- Special Event Redemption or Distribution; Shortening of
Stated Maturity." The Trust Preferred Securities represent preferred undivided
137
beneficial interests in the assets of the Trust, a statutory business trust
which exists for the purpose of (a) issuing (i) its Trust Preferred Securities
to the Corporation in consideration for the deposit by the Corporation of Junior
Subordinated Debentures in the Trust as trust assets, and (ii) its Trust Common
Securities to the Corporation in exchange for cash and investing the proceeds
thereof in an equivalent amount of Junior Subordinated Debentures and (b)
engaging in such other activities as are necessary or incidental thereto.
Upon any voluntary or involuntary dissolution, winding-up or termination of
the Trust, the holders of Trust Preferred Securities will be entitled to receive
the Liquidation Distribution in cash or Junior Subordinated Debentures and will
be entitled to the benefits of the Preferred Securities Guarantee with respect
to any such distribution. See "DESCRIPTION OF TRUST PREFERRED SECURITIES --
Liquidation Distribution Upon Dissolution." Upon any voluntary or involuntary
liquidation or bankruptcy of the Corporation, the holders of Junior Subordinated
Debentures would be subordinated creditors of the Corporation, subordinated in
right of payment to all Senior Indebtedness, but entitled to receive payment in
full of principal, premium, if any, and interest, before any stockholders of the
Corporation receive payments or distributions.
A default or event of default under any Senior Indebtedness would not
constitute a default or event of default under the Junior Subordinated
Debentures. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness, the subordination provisions of the Junior Subordinated
Debentures provide that no payments may be made in respect of the Junior
Subordinated Debentures. Failure to make required payments on the Junior
Subordinated Debentures would constitute an event of default under the
Indenture.
DESCRIPTION OF CAPITAL STOCK
Preferred Stock
The Certificate of Incorporation of the Corporation authorizes the issuance
of 1,000,000 shares of Preferred Stock, par value $.01 per share, by the Board
of Directors in one or more classes or series and with such voting powers,
designations, preferences and relative participating, optional or other special
rights and such qualifications, limitations, or restrictions thereof as shall be
set forth in the resolutions of the Board of Directors authorizing such
issuance. There will be no shares of Preferred Stock outstanding after the
Merger. There will be reserved for issuance 64,189 shares of Series A Junior
Participating Preferred Shares pursuant to the Corporation's Stockholder Rights
Plan. See "-- Stockholder Rights Plan."
Common Stock
The Certificate of Incorporation of the Incorporation authorizes the
issuance of 20,000,000 shares of Common Stock, par value $.01 per share, of
which 1,000 shares are currently outstanding and owned by the Partnership. After
the Merger, there will be 6,418,936 shares of Common Stock outstanding.
Holders of shares of the Corporation's Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders. There are no
cumulative voting rights with respect to the election of directors. Subject to
preferences that may be applicable to any outstanding Preferred Stock, holders
of shares of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Corporation, the holders of shares of Common Stock are entitled to
share ratably in all assets after satisfaction of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. Shares of
Common Stock have no preemptive, conversion or other subscription rights and
there are no redemption or sinking fund provisions applicable to the Common
Stock.
Stockholders Agreement
The Corporation and certain of its stockholders have entered into a
Stockholders Agreement dated as of July __, 1997, that contains certain
restrictions with respect to voting and sale of shares of Common Stock. The
Stockholders Agreement requires the Corporation to include certain provisions in
its bylaws. See " -- Anti-takeover Provisions -- Bylaws Provisions." In
addition, the Stockholders Agreement provides that Lehman Brothers and each of
the following members of management, Donald T. Marshall, John P. McDonnell,
Norman V. Edmonson, Harold J. Cornelius, Max W. Hillman and Joseph M. Corvino
(the "Senior Executives") will agree with the Corporation not to sell any shares
of Common Stock that they beneficially own, in a single transaction or series of
related transactions, to any third person(s) which, to the knowledge of Lehman
Brothers and its affiliates and the Senior Executives, after reasonable inquiry,
would beneficially own after such transactions more than 10% of the outstanding
Common Stock (or more than 15% of the outstanding common stock if such third
person(s) are eligible to report the acquisition of such shares on Schedule 13G
pursuant to clauses (i), (ii) and (iii) of Rule 13d-1(b)(1) under the Exchange
Act, as such rule is currently in effect.) The Stockholders Agreement also
contains provisions that restrict the respective voting power of Lehman Brothers
138
and the Senior Executives. Under the terms of such restriction, such persons
will agree to vote, in the same proportion as the "Unaffiliated Shares" that are
voted on any such matter, that percentage of Excess Voting Shares held by them
at such time that equals the percentage of outstanding Unaffiliated Shares that
are voted on such matter. "Excess Voting Shares" means the shares of Common
Stock beneficially owned by Lehman Brothers and its affiliates and the Senior
Executives, at any time, that represents voting power in excess of the
respective voting powers immediately prior to the Conversion that they would
have had in a vote of the holders of A Interests and B Interests voting together
as a single class. See also "-- Bylaw Provisions" below.
The Stockholders Agreement contains a provision regarding nomination of the
Board of Directors of the Corporation. The Board of Directors of the Corporation
will consist of up to nine members, of whom three will be nominated by
management, four will be independent and either one or two will be appointed by
Lehman Brothers, depending upon the percentage of Common Stock held by Lehman
Brothers.
Anti-takeover Provisions
Certain provisions of the Corporation's Bylaws, the Stockholder Rights Plan
and the change in control provisions in the Deferred Compensation Plans could
have an anti-takeover effect. See "MANAGEMENT -- Change in Control
Arrangements." These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Corporation's Board of
Directors and management and in the policies formulated by the Board of
Directors and to discourage an unsolicited takeover of the Corporation if the
Board of Directors determines that the takeover is not in the best interests of
the Corporation and its stockholders. However, these provisions could have the
effect of discouraging certain attempts to acquire the Corporation or remove
incumbent management even if some or a majority of stockholders deemed such an
attempt to be in their best interests.
Bylaws Provisions. The Bylaws provide that stockholders are permitted to
call a special meeting or to require that the Board of Directors call a special
meeting of stockholders if such meeting is called by holders of at least 25% of
outstanding Common Stock. In addition, the stockholders may act by written
consent in lieu of a meeting with a number of votes sufficient for such action.
The Bylaws establish an advance notice procedure for the nomination of
candidates for election as directors, other than by or at the direction of the
Board of Directors, as well as for other stockholder proposals to be considered
at annual meetings of stockholders. In general, notice of intent to nominate a
director or raise business at such meetings must be received at least 60 days
prior to any annual meeting and must contain certain specified information
concerning the persons to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.
Pursuant to the terms of the Stockholders Agreement, the Bylaws provide
that prior to the third anniversary of the date of the Conversion, the approval
of at least a majority of the Corporation's Independent Directors is required to
approve and authorize (i) amendments to the Corporation's Certificate of
Incorporation or Bylaws or any stockholder rights plan of the Corporation
(including the redemption of the rights thereunder or waiver of any provision
thereof) or any waiver of, or "opt- out" from, the benefit or effect of any
anti-takeover statute or other provision applicable to the Corporation or (ii)
any agreement binding the Corporation in respect of the sale, in a single
transaction or a series of related transactions, of all or a substantial part of
the Corporation. In addition, the approval of at least a majority of the
Corporation's Independent Directors is required to approve and authorize (i) any
transaction or series of related transactions between the Corporation or any of
its subsidiaries, on the one hand, and SDI Partners I, L.P., Lehman Brothers
Capital Partners I, L.P., Lehman Ltd. I Inc., LB I Group Inc., Lehman/SDI, Inc.
or Lehman Brothers Inc. or any affiliate of these entities on the other, so long
as any of such entities and its affiliates own, in the aggregate, at least 10%
of the outstanding Common Stock, (ii) any amendment to, or waiver of, any
provision of the Stockholders Agreement, or (iii) any amendment to the
Certificate of Incorporation or Bylaws that would amend these restrictive
provisions.
Stockholder Rights Plan. The Corporation has adopted a Stockholder Rights
Plan pursuant to a Rights Agreement, effective as of the Effective Time, between
the Corporation and Registrar and Transfer Company. The Plan is designed to
insure that all stockholders of the Corporation receive fair value for their
shares of Common Stock in the event of any proposed takeover of the Corporation
and to guard against the use of partial tender offers or other coercive tactics
to gain control of the Corporation without offering fair value to the
Corporation's stockholders. Under the Rights Plan, each share of Common Stock
will have attached thereto a Right. Each Right entitles the registered holder to
purchase from the Corporation one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Corporation (the
"Preferred Shares"), or a combination of securities and assets of equivalent
value, at a Purchase Price of $75, subject to adjustment. The Purchase Price may
be paid, at the option of the holder, in cash or shares of Common Stock having a
value at the time of exercise equal to the Purchase Price.
139
Until the Distribution Date, ownership of the Rights will be evidenced by
and will be transferred with and only with the certificates representing the
shares of Common Stock, and no separate Rights Certificates will be distributed.
The Distribution Date will occur upon the earlier of (i) ten days following a
public announcement that a person or group has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding shares of
Common Stock, or (ii) the close of business on a date fixed by the Board of
Directors following the commencement of a tender offer or exchange offer that
would result in a person or group beneficially owning 20% or more of the
outstanding shares of Common Stock. The Rights are not exercisable until the
Distribution Date and will expire at the close of business on __________, 2007,
unless earlier redeemed by the Corporation as described below. The percentage
ownership of shares of Common Stock held by Lehman Brothers after the Conversion
will not cause a Distribution Date to occur.
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable for one one-hundredth of a Preferred Share (a
"Preferred Share Fraction"). Each Preferred Share Fraction carries voting and
dividend rights that are intended to produce the equivalent of one share of
Common Stock. Each Preferred Share Fraction will entitle the holder to receive
dividends each calendar quarter in an amount equal to the aggregate per share
amount in cash of all dividends or other distributions (other than dividends
payable in Common Stock) declared on the Common Stock during the preceding
quarter. Each Preferred Share Fraction will entitle the holder to one vote on
all matters submitted to a vote of the stockholders of the Corporation. Each
Preferred Share Fraction will have a liquidation preference equal to the greater
of $1.00 per share, plus accrued dividends, or an amount per share equal to the
aggregate amount to be distributed per share to holders of Common Stock. The
Preferred Share Fractions are not redeemable.
It is unlikely that a holder of a Right will ever exercise the Right to
receive Preferred Shares. The Rights may be exercised if a "Flip-in" or
"Flip-over" event occurs.
If a "Flip-in" event occurs and the Distribution Date has passed, the
holder of each Right, with the exception of the Acquiror, is entitled to
purchase $75 worth of shares of Common Stock for $37.50. The Rights will no
longer be exercisable into Preferred Shares at that time. A "Flip-in" event
takes place if one of the following happens:
o A person or group acquires 20% or more of the outstanding Common Stock.
o A 20% stockholder merges with or acquires the Corporation and an equity
security of the Corporation remains outstanding.
o A 20% stockholder engages in "self-dealing" transactions with the
Corporation, defined as (i) the receipt of securities from the
Corporation; (ii) the sale of assets by the 20% stockholder to, from or
with the Corporation having a value of more than $5,000,000 or on terms
and conditions less favorable to the Corporation than the Corporation
would be able to obtain in an arm's length negotiation with an
unaffiliated third party; (iii) the receipt by the 20% stockholder of
compensation other than for full time employment at regular rates; and
(iv) the receipt by the 20% stockholder of the benefit of any loans,
guarantees or other financial assistance or tax credits from the
Corporation. The Board of Directors of the Corporation has the power to
administer and interpret the Plan.
If a "Flip-over" event occurs, the holder of Rights is entitled to purchase
$75 worth of the Acquiror's stock for $37.50 for each Right held. A "Flip-over"
event occurs if the Corporation is acquired or merged and no outstanding shares
remain or if 50% of the Corporation's assets or earning power is sold or
transferred. The Rights Plan prohibits the Corporation from entering into this
sort of transaction unless the Acquiror agrees to comply with the "Flip-over"
provisions of the Plan.
The Rights can be redeemed by the Corporation for $.005 per right until up
to ten days after the public announcement that someone has acquired 20% or more
of the Corporation's Common Shares or the Board can extend the redemption period
for as long as it determines appropriate. If the Rights are not redeemed or
substituted by the Corporation, they will expire on _________, 2007.
Limitation of Liability
As permitted by the Delaware General Corporation Law (the "DGCL"), the
Corporation's Certificate of Incorporation provides that directors of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to prohibited dividends or distributions or
the repurchase or redemption of stock, or (iv) for any transaction from which
the director derives an improper personal benefit.
140
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is Registrar and
Transfer Company.
RESALE OF SECURITIES
Securities Act Restrictions
Trust Preferred Securities and shares of Common Stock received by persons
who may be deemed to be "affiliates" of the Partnership may be sold by those
persons only in accordance with the provisions of Rule 145 under the Securities
Act, pursuant to an effective registration under the Securities Act or in
transactions that are exempt from registration under the Securities Act. Rule
145 provides, in general, that the securities may be sold by the affiliate
during the one year following the date the securities were acquired from the
Corporation if (i) there is available adequate current public information with
respect to the Corporation and (ii) the number of Trust Preferred Securities or
shares of Common Stock sold within any three month period does not exceed the
greater of 1% of the total number of outstanding Trust Preferred Securities or
shares of Common Stock, as the case may be, or the average weekly trading volume
of the particular security during the four calendar weeks immediately preceding
the date of receipt of the order to execute the transaction by a broker or the
date of execution of the transaction directly with a market maker and (iii) the
securities are sold in transactions directly with a "market maker" or in
"brokers' transactions" within the meaning of Rule 144 under the Securities Act.
Rule 145 further provides that during the second year following the date the
securities were acquired from the Corporation the affiliate may sell such
securities if the affiliate is not an affiliate of the Corporation and there is
available adequate public information with respect to the Corporation, and
thereafter the affiliate may sell the securities without restriction if the
affiliate is not, and has not been for at least three months, an affiliate of
the Corporation.
Resales by Lehman Brothers and Management
Lehman Brothers and Messrs. Marshall, McDonnell and Edmonson have agreed to
cooperate to execute an underwritten secondary offering of their shares of
Common Stock, as soon as practicable after the effective date of the Conversion
pursuant to the registration rights described below, subject to market
conditions. Such parties have agreed not to sell their shares of Common Stock
prior to such secondary offering; provided that such restriction will lapse with
respect to sales pursuant to Rule 144 or Rule 145 under the Securities Act if
the secondary offering has not been consummated within nine months after the
effective date of the Conversion. Notwithstanding the foregoing, such parties
have agreed that Lehman Brothers Capital Partners I L.P. may distribute shares
of Common Stock that it holds to its partners at any time and that the
subsequent sale or transfer of such shares by such partners (other than shares
distributed to the general partner of Lehman Brothers Capital Partners I L.P.)
is not restricted.
In connection with the foregoing, the Corporation has entered into a
registration rights agreement with Lehman Brothers and Messrs. Marshall,
McDonnell and Edmonson affording registration rights with respect to all of the
shares of Common Stock to be acquired by Lehman Brothers pursuant to the
Conversion and 20% of the shares of Common Stock to be acquired by such
individuals pursuant to the Conversion. Lehman Brothers has the right to demand
registration of all or part of its registrable shares in the contemplated
initial secondary offering and registration of any remaining shares pursuant to
a shelf registration statement. Such individuals have the right to register
their registrable shares on a pro rata basis with Lehman Brothers in the initial
secondary offering. In addition, Lehman Brothers and such individuals have
piggy-back registration rights with respect to all subsequent primary and
secondary offerings of Common Stock.
The Corporation has agreed not to sell any additional shares of Common
Stock prior to the earlier of such initial secondary offering and the nine-month
anniversary of the Conversion, except the issuance of unregistered shares in
connection with acquisitions.
LEGAL MATTERS
The validity of the securities offered hereby, and certain federal income
tax matters set forth under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," will be
passed upon for the Partnership by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Morgan, Lewis & Bockius LLP will rely as to certain matters of
Delaware law on Richards, Layton & Finger, Wilmington, Delaware. Donald A.
Scott, a partner in Morgan, Lewis & Bockius LLP, is a director of Lehman/SDI and
of the Corporation.
141
EXPERTS
The consolidated balance sheets of the Partnership at December 31, 1996 and
1995 and the consolidated statements of income, changes in partners' capital and
cash flows for the three years in the period ended December 31, 1996 included
and incorporated by reference in this prospectus and the balance sheet of
SunSource, Inc. at December 31, 1996 included in this prospectus, have been
included and incorporated herein in reliance on the reports of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
AVAILABLE INFORMATION
The Partnership is (and following the Conversion, the Corporation will be)
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files (and
will file) reports and other information with the Securities and Exchange
Commission (the "SEC"). Such reports and other information may be inspected and
copied at the public reference facilities maintained by the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven
World Trade Center, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this
material should also be available on-line through EDGAR and may be obtained at
the prescribed rates from the Public Reference Section of the SEC at its
principal office in Washington, D.C. The SEC also maintains a Web site
(http://www.sec.gov) that contains reports and other information regarding
SunSource. Such reports and other information concerning the Partnership can
also be inspected at the office of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005, the exchange on which the limited partnership
interests are listed (and on which application has been made to list the Trust
Preferred Securities and Common Stock).
The Partnership, the General Partner, Lehman/SDI, Lehman Brothers Capital
Partners I, L.P., LB I Group Inc., Lehman Ltd. I Inc., Norman V. Edmonson,
Donald T. Marshall and John P. McDonnell have filed with the SEC a Schedule
13E-3 under the Exchange Act. The Corporation and the Trust have filed with the
SEC a Registration Statement on Form S-4 under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the securities offered hereby.
This Proxy Statement/Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Schedule 13E-3 and
in the Registration Statement and the exhibits and schedules thereto on file
with the SEC pursuant to the Exchange Act and the Securities Act and the rules
and regulations of the SEC thereunder. Statements contained in this Proxy
Statement/Prospectus as to the contents of any contract or other document are
necessarily summaries of such documents, and, although all material elements of
such documents or descriptions are set forth in this Proxy Statement/Prospectus,
such statements are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement or Schedule 13E-3, each such statement being qualified in
all respects by such reference.
No separate financial statements of the Trust have been included or
incorporated by reference herein. The Corporation and the Trust do not consider
that such financial statements would be material to holders of Trust Preferred
Securities because (i) all of the voting securities of the Trust will be owned,
directly or indirectly, by the Corporation, a reporting company under the
Exchange Act, (ii) the Trust has no independent operations but exists for the
sole purpose of issuing securities representing undivided beneficial interests
in its assets and investing the proceeds thereof in Junior Subordinated
Debentures issued by the Corporation, and (iii) the obligations of the Trust
under the Trust Preferred Securities are fully and unconditionally guaranteed by
the Corporation as described herein. See "RELATIONSHIP AMONG THE TRUST PREFERRED
SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES
GUARANTEE."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement/Prospectus incorporates documents by reference which
are not presented herewith. These documents (without exhibits, unless such
exhibits are specifically incorporated by reference herein) are available
without charge to each person to whom a copy of this Proxy Statement/Prospectus
is delivered, upon written or oral request addressed to SunSource L.P., 2600 One
Logan Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino,
Secretary, telephone number (215) 665-3650. In order to ensure timely delivery
of the documents, any request should be made by August __, 1997.
142
The following document of the Partnership has been filed with the SEC and
is incorporated herein by reference:
(a) Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
(b) Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1997.
All documents filed by the Partnership pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement/Prospectus and to
be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
which also is incorporated herein) modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed to constitute a
part hereof except as so modified or superseded.
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INDEX TO FINANCIAL STATEMENTS
SunSource L.P. and Subsidiaries
F - 1
SunSource L.P. and Subsidiaries
Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated financial statements of SunSource
L.P. ("the Partnership"), give effect to the proposed conversion of the
Partnership to corporate form. In connection with the conversion, the
Partnership intends to recapitalize its existing credit facilities. The
Conversion and recapitalization ("the transaction") will be effected through the
formation of a new corporation, SunSource Inc.
The pro forma balance sheet assumes the transaction occurred on March 31, 1997.
The pro forma consolidated statements of income and cash flows for the three
months ended March 31, 1997 and twelve months ended December 31, 1996, assume
the transaction occurred at the beginning of the periods presented.
The pro forma consolidated financial statements are not necessarily indicative
of operating results, cash flows, or financial position that would have been
achieved had the transaction occurred on the dates indicated and should not be
construed as representative of future operating results, cash flows, or
financial position.
The pro forma consolidated financial statements and accompanying notes should be
read in conjunction with the historical financial statements and related notes
thereto included in this Proxy Statement/Prospectus.
F - 2
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 3
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 4
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 5
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 6
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 7
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include pro forma consolidated accounts of
SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). On December 11, 1996, the
Partnership announced the terms of a plan to convert from its current limited
partnership structure to a taxable C corporation, which must be approved by a
majority of the holders of the Class A and Class B interests unaffiliated with
SDI Partners I, L.P., the General Partner ("GP"), and Lehman Brothers Holdings,
Inc. ("Lehman Holdings") and affiliates, each voting separately as a class. In
connection with the conversion of the partnership to corporate form, the
Partnership intends to refinance its outstanding long-term debt (see Note 2E).
The conversion and refinancing ("the transaction") will be effected through the
formation of a new corporation, SunSource Inc. ("the Corporation").
The exchange of the General Partner's 1% interest in the Operating Partnership
(the "Minority Interest") for common stock of the Corporation is subject to
purchase accounting in accordance with Accounting Principles Bulletin ("APB")
No. 16, "Business Combinations". Accordingly, the excess of fair value of the
consideration received for the Minority Interest over the book value of the
General Partner's 1% interest in the Operating Partnership, which amounts to
$14,797, has been recorded as goodwill by the Corporation (see Note 2C).
Ownership of the General Partner's 1% Minority Interest and 1% General
Partnership Interest in the Partnership will be exchanged for 1,000,000 shares
of the Corporation's Common Stock (the "GP Exchange") whose recipients will be
Lehman/SDI, the general partner of the General Partner and current and former
officers of the Partnership, the limited partners of the General Partner
(reference "Exchange of Partnership Interests", below). The Corporation will
also record incremental deferred tax assets in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes", relating to the temporary differences for certain assets and liabilities
at the date of conversion to corporate form (see note 2B below). The incremental
deferred tax benefits have not been included in the pro forma income statement
due to their non-recurring nature. The Corporation will also record a tax
provision on its taxable income for federal and state corporate income taxes.
Transaction costs of the conversion are estimated to be $4,500, of which $2,500
has been recorded by the Partnership through March 31, 1997 and $2,000 will be
recorded by the Partnership in the consolidated statement of income prior to the
conversion. Concurrent with the conversion, the Corporation will incur a
make-whole penalty, estimated at $4,000, related to the repayment of its
existing senior notes with borrowing under new credit facilities.
See Notes 2, 3 and 4 for a description of the other adjustments made on the pro
forma financial statements to effect the transaction. The accompanying pro forma
consolidated financial statements and related notes have not been audited. In
management's opinion, all adjustments considered necessary for the fair
presentation of financial position and income for the unaudited pro forma
financial statements presented have been reflected. Results for periods for
which pro forma statements are provided are not necessarily indicative of those
to be expected in future periods, should the proposed transaction be approved.
Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted for the unaudited pro forma statements, although
management believes that disclosures are adequate to make the information
presented not misleading.
F - 8
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation, continued:
Exchange of Partnership Interests:
The general and limited partners of the GP and the Limited Partners of the
Partnership will exchange with the Corporation their respective partnership
interests for Guaranteed Preferred Beneficial Interests in the Corporation's
Junior Subordinated Debentures ("Trust Preferred Securities"), Common Stock and
cash, which have been recorded in the accompanying pro forma Balance Sheet as of
March 31, 1997 as follows:
11,099,573 Class A Limited Partnership Interests in the Partnership
will be exchanged for 4,217,838 Trust Preferred Securities with a
liquidation value of $25.00 per interest. Accordingly, the Preferred
Securities have been recorded at estimated fair value of $105,446.
Class A Limited Partnership Interests will also receive $14,429 in
cash, which has been recorded as a charge to the Class A Partners'
Capital Account.
Class B Limited Partnership Interests in the Partnership and the
general and limited partnership interests in the GP will be exchanged
for 6,418,936 shares of Common Stock of the Corporation. This exchange
has been recorded at the historical amounts of the Class B Limited
Partnership Interests and the General Partnership Interest in the
Partnership and at estimated fair value with respect to the Minority
Interest (see note 2C).
The following table illustrates the proposed exchange of Partnership Interests
for Common Stock:
(a) Net of 523,400 Class B interests held in the Partnership's treasury.
(b) Represents exchange of each Class B interest for .25 shares of the
Corporation's Common Stock.
(c) Represents limited partnership ownership of 4.62% in the GP exchanged by
former officers of the Partnership.
(d) Represents general partnership ownership of 53.8% in the GP exchanged by
Lehman/SDI, Inc.
(e) Represents limited partnership ownership of 41.58% in the GP exchanged by
current officers of the Partnership.
F - 9
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation, continued:
Conversion of Partners' Capital:
The following table illustrates the pro forma conversion of Partners' Capital of
the Partnership to Stockholder's Deficit of the Corporation as of March 31,
1997:
(a) Minority interest of $979 is classified by the Partnership as Other
liabilities in the Consolidated Balance Sheet.
(b) Valuation of the Class A exchange package (see Note 2H).
(c) Charge for par value of common stock - classified as a separate component
of stockholder's deficit (see Note 2H).
(d) Goodwill related to exchange of GP minority interest (see Note 2C).
(e) Estimated charges to be recognized at the time of conversion, including
unpaid transaction costs of $2,000, make-whole penalty on the prepayment
of Senior Notes of $4,000, and write-off of deferred financing fees on
existing debt of $131 (see Note 2D).
(f) Credit for recognition of incremental deferred tax assets upon conversion
(see Note 2B).
F - 10
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated March 31, 1997:
A. Reclassify cash to new bank revolver; all excess cash is assumed to reduce
current borrowing.
B. Upon conversion, under SFAS No. 109, the Corporation will be entitled to
record additional deferred tax assets not previously available to the
Partnership due to its partnership status. These deferred tax assets
represent temporary differences between book and tax bases of assets and
liabilities which are expected to reverse before December 31, 1997. The
net incremental deferred tax asset of $7,716 (current and long-term
portion) is recorded on a pro forma basis as a credit to corporate
accumulated deficit upon conversion. Additionally, the Corporation may
receive a step-up in the tax basis of assets and liabilities acquired from
the Partnership and, as a result, would record additional deferred tax
assets at the conversion date. Should the transaction be approved, the
actual amount of the aggregate additional deferred tax assets will be
calculated based on temporary differences existing at the date of
conversion to a C corporation. The following is the composition of the pro
forma adjustment to historical deferred tax assets at March 31, 1997:
C. To record the excess of fair value over book value related to the exchange
of the GP's Minority Interest for Common Stock of the Corporation, as
follows:
Fair value of Minority Interest (i) $15,776
Less book value of the GP Minority Interest (ii) 979
-------
Excess over book value recorded as goodwill $14,797
=======
(i) Represents 92.8% of the GP Exchange (the portion allocable to the
Minority Interest) valued at $17,000 in the aggregate for
1,000,000 shares of common stock, based on the closing price of
the Class B interest on the New York Stock Exchange at December
11, 1996, the date of the announcement of the Corporate
Conversion, adjusted for reverse stock split (see Note 1).
(ii) As reported on the balance sheet of the Partnership at March 31,
1997.
F - 11
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated March 31, 1997, continued:
D. Write-off historical balance of deferred financing fees of $131, which
relate to Series A and B Senior Notes, to the Class B capital account.
Capitalize estimated deferred financing fees of $510 related to commitment
fees on the replacement credit facilities.
E. Record the proposed refinancing of existing credit facilities. On March 4,
1997, the Operating Partnership received the last of two financing
commitments, which together aggregate $150,000, from lenders. These
commitments are available to the Partnership until June 30, 1997. The new
financing commitments consist of a $60,000 five-year fixed rate note at
7.66% and a $90,000 five-year bank revolver based on the London Interbank
Offered Rate ("LIBOR") plus 1% to 1.5% resulting in an effective interest
rate reduction of approximately 1% on a combined basis.
Reclassify $20,000 balance of existing revolver debt from current to
long-term liabilities and record incremental pro forma debt requirements
and related adjustments to the existing credit facilities which are
summarized in the following table as of March 31, 1997, based on the
proposed refinancing commitments (see related note disclosures):
F. Record payment of $925 of the historical liability of $1,994 for
distributions payable as of March 31, 1997, leaving a balance of $1,019
which represents the initial distribution payable to the new Trust
Preferred Securities.
G. Record payment of the management fee payable to GP at March 31, 1997.
H. Issue 4,217,838 shares of Trust Preferred Securities with a liquidation
value of $25.00, in exchange for all 11,099,573 Class A limited
partnership interests, which amounts to .38 Preferred Securities for each
Class A interest. The Trust Preferred Securities have been credited at
estimated fair value of $105,446 for the newly issued shares. Holders of
Class A interests will also receive $1.30 of cash per A interest, or
$14,429 in the aggregate. The initial accumulated deficit of the
Corporation will be charged for the difference between the fair value of
the total Class A exchange package, aggregating $119,875, and the stated
value of the Class A capital account at March 31, 1997 of $67,642, or
$52,233 (see Note 1). The Preferred Securities have equity characteristics
but creditors' rights, thereby being classified between liabilities and
stockholders' equity on the balance sheet.
F - 12
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated March 31, 1997, continued:
Authorize 1,000,000 shares of preferred stock, none being issued.
Authorize 20,000,000 shares and issue 6,418,936 shares of common stock
with a par value of $0.01. Holders of existing Class B limited partnership
interests will be issued 5,418,936 shares of Common Stock upon conversion,
in exchange for all 21,675,746 outstanding Class B interests, which
amounts to .25 common shares for each Class B interest. The general
partner, Lehman/SDI, Inc., and limited partners, current and former
executive officers of the Partnership, in the GP, will receive 1,000,000
shares of the Corporation's Common Stock in exchange for their respective
partnership interests. Common stock of the new corporation will be
credited $64 from the Class B capital account for the newly issued shares.
The Cumulative Foreign Currency Translation Adjustment of $1,850 will be
classified as a separate component of accumulated deficit of the
Corporation. See Note 1 for a description of additional charges and
credits which make up the initial accumulated deficit of the Corporation
at March 31, 1997 in the amount of $6,413.
3. Pro Forma Adjustments to Consolidated Statements of Income:
A. To eliminate, in consolidation, the management fee paid to the GP.
B. To record the amortization of the goodwill associated with the exchange of
the Minority Interest using the Partnership's current estimated useful
life of goodwill.
C. To eliminate transaction costs related entirely to the proposed conversion
which have been recorded by the Partnership through each period presented.
D. Adjust interest expense, net, to reflect incremental debt incurred
directly related to the conversion (the Class A exchange distribution of
$1.30 per A interest, or $14,429, and the transaction costs of $4,500).
The interest rate utilized to calculate the pro forma interest expense
adjustment was based on current average LIBOR rates of 5.54% (1997
year-to-date through June 27) plus 125 basis points or 6.79%, which
reflects pricing under the new revolving credit facility on the
incremental debt. Each 1/8 percent (.00125) change in interest rate
represents a $24 increase or decrease in the pro forma interest expense
adjustment.
E. Eliminate minority interest expense as a result of the conversion.
F. Record an expense for the monthly distributions on Trust Preferred
Securities; the annual yield is 11.6% on the liquidation amount of the
securities of $105,446, resulting in an approximate charge of $1,019 per
month.
G. Adjust the provision or benefit for income taxes to reflect current and
deferred income tax expense or benefit that would be expected under
corporate form. Under partnership form, the Partnership books a current
provision for state partnership and foreign taxes only and a deferred tax
benefit relating only to those temporary differences between book and tax
assets that are expected to reverse after December 31, 1997, when the
Partnership would begin paying federal corporate income taxes. For pro
forma purposes, the assumed combined federal and state corporate tax rate
utilized is 39.875%, applied to taxable income.
F - 13
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
3. Pro Forma Adjustments to Consolidated Statements of Income, continued:
The following table summarizes the pro forma adjustment required to record
a provision for income taxes on a corporate basis:
Pro forma adjustments Three Months
to provision (benefit) Ended Year Ended
for income taxes 3/31/97 12/31/96
---------------------- ------------ -----------
Eliminate state
partnership taxes $ (126) $ (418)
Record current tax
provision based
on taxable income 1,330 7,238
Adjustment to deferred
portion (3) (979)
----------- -----------
Total pro forma adjustments $ 1,201 $ 5,841
=========== ===========
4. Pro Forma Adjustments to Consolidated Statements of Cash Flows:
A. Record changes in cash flows from operations to reflect the elimination,
in consolidation, of the management fee, elimination of the transaction
costs related to the Conversion and inclusion of the payment of the
distribution on trust preferred securities, the goodwill amortization
associated with the GP exchange, and the change in tax status.
B. Eliminate cash distributions to partners which would not be paid under
corporate form.
C. Adjust cash flows from financing activities to reflect a reduction in
required borrowings based on the net cash flow impact of all cash flow
related pro forma adjustments.
F - 14
Report of Independent Accountants
To the Board of Directors
SunSource Inc.
We have audited the accompanying balance sheet of SunSource Inc. as of December
31, 1996. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and the significant estimates made by management, as
well as evaluating the overall balance sheet presentation. We believe that our
audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material aspects, the financial position of SunSource Inc. as of December 31,
1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 1, 1997
F - 15
SUNSOURCE INC.
BALANCE SHEET
as of DECEMBER 31, 1996
ASSETS
------
Receivable from SunSource L.P. $1,000
======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Commitments and Contingencies (Note 4)
STOCKHOLDERS' EQUITY
- ---------------------
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued or outstanding $ --
Common stock, $.01 par value, 20,000,000 shares
authorized, 1,000 shares issued and outstanding 10
Paid-In-Capital 990
-------
Total liabilities and stockholders' equity $ 1,000
=======
See accompanying notes to balance sheet
F - 16
SUNSOURCE INC.
NOTES TO BALANCE SHEET
as of DECEMBER 31, 1996
1. Organization and Operation:
SunSource Inc. (the "Corporation") is a Delaware corporation which was formed in
December 1996 to accomplish the conversion of SunSource L.P. (the "Partnership")
to corporate form (the "Conversion"). On December 11, 1996, the Partnership
announced the terms of a plan to convert from its current limited partnership
structure to a taxable C corporation.
The outstanding shares of the Corporation are presently owned by the
Partnership. In the Conversion, the Partnership and a subsidiary of the
Partnership will merge with and into the Corporation (the "Merger"). In the
Merger, the Class A limited partnership interests in the Partnership will be
exchanged for Trust Preferred Securities of SunSource Capital Trust, a newly
formed Delaware statutory business trust (the "Trust"), affiliated with the
Corporation, and the Class B limited partnership interests in the Partnership
will be exchanged for common stock of the Corporation. As a result of the
Merger, the interests of the general and limited partners of the General Partner
in the Partnership and the Operating Partnership will be indirectly exchanged
for common stock of the Corporation.
As a result of the Conversion, subsidiaries of the Corporation will own all of
the partnership interests in the Operating Partnership and the General Partner.
The Corporation will own, through its wholly-owned subsidiaries, 100% of the
equity in the business and operations owned by the Operating Partnership, which
will remain in partnership form after the Conversion. The employees of the
Operating Partnership will continue as employees after the Conversion.
The Corporation's only asset at December 31, 1996 is a receivable from the
Partnership (see Note 3). The Corporation has not conducted any operations and
all activities related to the Conversion and the Merger have been conducted by
the Partnership and its General Partner.
2. Summary of Significant Accounting Policies:
Income Taxes:
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", requires the Corporation to recognize deferred tax assets and
liabilities for expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the temporary differences are
expected to reverse. The Corporation currently has no deferred taxes.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported periods. Actual
results could differ from those estimates; however, management does not believe
these differences would have a material effect on operating results.
F - 17
SUNSOURCE INC.
NOTES TO BALANCE SHEET
as of DECEMBER 31, 1996
3. Related Party Transactions:
On December 30, 1996, the Corporation recorded a receivable from the Partnership
for the capital contribution to establish the Corporation. On March 11, 1997 the
Partnership paid $1,000 to the Corporation to satisfy the receivable due from
the Partnership.
4. Commitments and Contingencies:
On January 16, 1997, a holder of Class B Interests in the Partnership, filed a
purported class action which alleged that the terms of the Conversion unfairly
transfer substantial equity to the General Partner of the Partnership to the
detriment of the B Interests and constitute a breach of fiduciary duty. A second
complaint containing substantially identical allegations was filed by a limited
partner on February 11, 1997. The cases have been consolidated and an amended
complaint was filed on April 16, 1997 which added claims for breach of contract
and breach of a covenant of good faith and fair dealing. The Corporation was
named as a defendant in these actions.
In the opinion of management, the ultimate resolution of this matter will not
have a material effect on the consolidated financial position, operations or
cash flows of the Partnership or the Corporation.
F - 18
Report of Independent Accountants
The Board of Directors
Lehman/SDI, Inc.
We have audited the accompanying consolidated balance sheets of SunSource L.P.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in partners' capital and cash flows for each of
the three years in the period ended December 31, 1996. We have also audited the
financial statement schedules listed in Item 14 (a)(2) of this Form 10-K. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of SunSource L.P. and
subsidiary as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center Philadelphia, Pennsylvania January 29, 1997, except for
Note 9 as to which the date is March 21, 1997 and Note 19 as to which the date
is March 4, 1997
F - 19
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 20
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for partnership interest amounts)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 21
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 22
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED
(dollars in thousands)
PARTNERS' CAPITAL
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 23
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). All significant inter-company
balances and transactions have been eliminated.
Nature of Operations:
The Partnership is one of the largest wholesale distributors of industrial
products and related services in the United States. The Partnership's three
segments are: (1) industrial products and services, primarily maintenance and
fluid power products and inventory management services sold to industrial
customers for machine and plant maintenance and for manufacturing of original
equipment; (2) retail merchandising products and services, primarily fasteners
and related products sold to retail hardware stores; and (3) retail glass
products and services sold to construction and retail markets. Based on net
sales of existing divisions for the year ended December 31, 1996, the Industrial
Services Segment provides approximately 70% of the Partnership's sales through
its Sun Technology Services divisions (46% of net sales) and the Sun Inventory
Management Company ("SIMCO") divisions (24% of net sales). The Hardware
Merchandising and Glass Merchandising segments provide approximately 16% and
14%, respectively, of the Partnership's net sales.
Although its sales are primarily industrially-based, the Partnership has over
180,000 customers, the largest of which accounted for less than 5% of net sales
for the year ended December 31, 1996. The Partnership's products and services
are sold throughout all 50 states as well as in Canada and Mexico. Foreign sales
account for less than 5% of total revenues. The average single sale during the
year ended December 31, 1996 was less than three hundred dollars. Sales
performance is tied closely to the overall performance of the non-defense-goods
producing sector of Gross Domestic Product in the United States.
Restructuring Charges:
On December 11, 1996 (the "commitment date"), the Board of Directors of
Lehman/SDI, Inc. ("Lehman/SDI"), the general partner of the Partnership's
General Partner, approved the Partnership's plan to restructure its Technology
Services divisions and its Glass Merchandising business. The Partnership
recorded a provision for these charges on the commitment date in the amount of
$5,950, of which $4,400 related to Technology Services and $1,550 to Glass
Merchandising. The following disclosures are made in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity."
F - 24
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
1. Basis of Presentation, continued:
The following is a summary of the balance sheet classification of the accrued
restructuring charges in the accompanying balance sheet at December 31, 1996:
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ---------------------------- -------- ---------- -----
Current - other accrued expenses $ 829 $896 $1,725
Long-term - other liabilities $2,014 $573 $2,587
Restructuring Charges - Technology Services Divisions
The restructuring charges for the Technology Services Divisions include
termination benefits of $2,955 covering 175 employees, including sales (40),
warehouse (27), purchasing (16), branch operations (56) and accounting (36).
Other exit costs for Technology Services include legal and consulting costs of
$525 to develop severance agreements and to conduct employee meetings and lease
termination and related costs of $920 to close ten leased warehouse and office
facilities. The Board's approval on the commitment date provided the
Partnership's management with the authority to involuntarily terminate
employees. The Partnership has established the levels of benefits that the
terminated employees would receive and informed the employees of their
termination benefits prior to December 31, 1996.
The following table summarizes the restructuring costs charged, the balance
sheet classification, and payments or adjustments between the commitment date
and December 31, 1996:
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ---------------------------- -------- ---------- -----
Opening Balance at
December 11, 1996:
Current - other accrued expense $ 941 $872 $1,813
Long-term - other liabilities $2,014 $573 $2,587
Payments during period:
Current - other accrued expense * $ (112) $(55) $ (167)
Ending Balance at
December 31, 1996:
Current - other accrued expense $ 829 $817 $1,646
Long-term - other liabilities $2,014 $573 $2,587
* termination benefits paid to 9 employees; other exit costs for legal and
consulting charges paid.
F - 25
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
1. Basis of Presentation, continued:
Restructuring Charges - Glass Merchandising Divisions
The restructuring charges for the Glass Merchandising division represent
primarily costs to withdraw from certain geographic markets as part of the
Partnership's restructuring plan. The largest component of these charges is the
write-off of unamortized goodwill from purchase business combinations in the
amount of $1,321, which is not recoverable. The remaining charges represent the
excess of undepreciated fixed assets over their fair value, in the amount of
$150, with fair value determined using the estimated prices of similar assets.
The Partnership applied the provisions of SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in
connection with the determination of these charges. The decision to withdraw
from these markets was primarily strategic based on an overall review of the
operations of the Glass Merchandising segment; in the Partnership's view, any
recognition of asset impairment prior to the commitment date would not have been
appropriate under SFAS No. 121., since the specific locations to be closed were
decided upon only in the process of finalizing the restructuring plan. These
amounts are included as restructuring charges since they were recognized at the
commitment date as part of the overall plan of restructuring. Also included are
$79 of lease termination costs recognized in accordance with EITF No. 94-3 as
exit costs.
The following table summarizes other exit costs charged, the balance sheet
classification, and payments or adjustments between the commitment date and
December 31, 1996:
Balance Sheet Classification
- ------------------------------------ Total
-----
Opening Balance at December 11, 1996
- ------------------------------------
Unamortized Goodwill $ 1,321
Excess of undepreciated fixed assets $ 150
Current - other accrued expenses $ 79
Charges during period:
- ----------------------
Unamortized Goodwill $(1,321)
Excess of undepreciated fixed assets $ (150)
Ending Balance at December 31, 1996:
- ------------------------------------
Current - other accrued expenses $ 79
Transaction Costs:
On December 11, 1996, the Partnership announced the terms of a plan to convert
from its current limited partnership structure to a taxable C corporation, which
must be approved by a majority of the holders of the Class A and Class B
interests unaffiliated with SDI Partners I, L.P., the General Partner, each
voting separately as a class.
In connection with the proposed conversion, the Partnership has incurred certain
costs related to the transaction which are included as a separate component of
income from operations, due to the infrequent nature of the conversion
transaction.
F - 26
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies:
Cash Equivalents:
Cash equivalents consist of commercial paper, U.S. Treasury obligations and
other liquid securities purchased with initial maturities less than 90 days and
are stated at cost which approximates market value.
Inventories:
Inventories, which consist of products purchased for resale, are valued at the
lower of cost or market, cost being determined principally on the first-in,
first-out method.
Property and Equipment:
Property and equipment, including assets acquired under capital leases, is
carried at cost and includes expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold, or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations.
Depreciation:
For financial accounting purposes, depreciation, including that related to plant
and equipment acquired under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets, generally three to
twenty-five years, or, if shorter, over the terms of the related leases.
Goodwill and Other Intangible Assets:
Goodwill related to the excess of acquisition cost over the fair value of net
assets acquired is amortized on a straight-line basis over forty years. Other
intangible assets arising principally from acquisitions by the Operating
Partnership are amortized on a straight-line basis over periods ranging from
three to ten years.
F - 27
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Income Taxes:
As a partnership, taxable income and losses are included on the federal tax
returns of the partners; accordingly, the Partnership incurs no liability for
U.S. federal income taxes. Accordingly, no current provision for federal income
taxes is reflected in the accompanying consolidated financial statements.
However, the Partnership does incur certain state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
operations. Therefore, a current provision for state, local and foreign income
taxes is reflected in the accompanying consolidated financial statements.
The Revenue Act of 1987 provides that certain "existing publicly traded
partnerships", such as the Partnership, generally will not be treated as
corporations for federal income tax purposes until after December 31, 1997,
provided that such partnerships do not add any substantial new line of business
before the effective date.
Statement of Financial Accounting Standards ("SFAS") No. 109 requires the
Partnership to recognize deferred tax assets and liabilities for expected future
tax consequences of events that have been recognized in the consolidated
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the temporary differences are expected to reverse.
The Partnership's deferred taxes are determined from temporary differences
expected to reverse after December 31, 1997, or the date of conversion, if
earlier, when the Partnership will be taxed as a corporation. Therefore, a
deferred provision or benefit for state and federal income taxes is reflected in
the accompanying consolidated statements of income.
Retirement Benefits:
Certain employees are covered under profit-sharing retirement plans ("defined
contribution plans") for which contributions are determined on an annual basis
in accordance with the requirements of each plan.
Defined benefit plan contributions covering certain employees are funded, at a
minimum, in accordance with the requirements of the Employee Retirement Income
Security Act of 1974, as amended.
In accordance with collective bargaining agreements, annual contributions to
multi-employer pension plans are made. These contributions, which are based on
fixed contributions per month for each hour worked, are charged to income as
incurred.
Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan. The
Partnership has elected to amortize the accumulated post-retirement benefit
liability (transition obligation) resulting in delayed recognition. The impact
of the adoption on the Partnership's financial position and results of
operations is immaterial.
F - 28
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Fair Value of Financial Instruments:
Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value because of the short-term maturity or
revolving nature of these instruments. The fair values of the Partnership's debt
instruments are disclosed in Note 9.
Translation of Foreign Currencies:
The translation of applicable foreign-currency-based financial statements into
U.S. dollars is performed for balance sheet accounts using exchange rates in
effect at the balance sheet date and for revenue and expense accounts using an
average exchange rate during the period. The changes in the cumulative foreign
translation adjustment for each period relate to translation adjustments in
their entirety.
Exchange adjustments resulting from foreign currency transactions are recognized
in net income and were immaterial for the three years ending December 31, 1996.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F - 29
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure:
The General Partner of the Partnership and the Operating Partnership is SDI
Partners I, L.P. (the "GP"), a Delaware limited partnership whose sole general
partner is Lehman/SDI, formerly known as Shearson/SDI, Inc., an indirect,
wholly-owned subsidiary of Lehman Brothers Holdings, Inc. ("Lehman Holdings"),
formerly known as Shearson Lehman Brothers Holdings, Inc.
The Partnership's Class A and Class B limited partnership interests outstanding,
as of December 31, 1996, are held as follows:
Class A Class B
Interests Interests
--------- ---------
Public Investors 11,019,850 ( 99.3%) 11,633,603 ( 53.7%)
Lehman Holdings
And Affiliates -- 5,896,678 ( 27.2%)
Executive Officers and
Directors (a) 79,723 ( 0.7%) 4,145,465 ( 19.1%)
------------------- -------------------
Total 11,099,573 (100.0%) 21,675,746 (100.0%)(b)
=================== ======================
(a) Executive officers of the Partnership and the Operating Partnership
and Directors of Lehman/SDI, including beneficial ownership.
(b) Net of 523,400 Class B interests held in the Partnership's treasury
as of December 31, 1996.
Except as expressly limited by the partnership agreement, the GP has complete
and exclusive discretion in the management and control of the affairs and
business of the Partnership and its subsidiary partnership. The holders of Class
A and Class B interests have certain limited voting rights under the partnership
agreement generally regarding the removal of the GP and the sale of all or
substantially all of the assets of the Partnership or the Operating Partnership
or dissolution of the Partnership.
Holders of Class A interests are entitled to receive, to the extent cash is
available, $1.10 annually (the "priority return") per Class A interest, which is
currently paid monthly. On December 19, 1996, the Partnership declared a
priority return distribution for the month of January 1997 in the amount of
$1,038 or $.091666 per Class A interest payable January 31, 1997, to holders of
record December 31, 1996. The Class A capital account as of December 31, 1996
and 1995, was $10.00 per Class A interest.
All items of income and loss and cash distributions of the Operating Partnership
are allocated 99% to the Partnership and l% to the GP. The GP is allocated l% of
the Partnership's share of income or loss and cash distributions, with the
remaining 99% allocated to the limited partners.
Income for federal income tax purposes is allocated to the holders of Class A
interests, until the Class A capital account of each holder is equal to the sum
of their initial capital investment ($10.00 per Class A interest), plus any
unpaid priority return. For years 1996, 1995, and 1994, federal taxable income
per Class A interest amounted to $1.10 per year, all of which represented
ordinary income. Any remaining income after the Class A allocation is allocated
to the holders of Class B interests. The holders of Class B interests receive an
allocable share of loss until the Class B capital account (as defined in the
partnership agreement) of each holder is reduced to zero. Thereafter, any
unallocated loss is allocated to the holders of Class A interests.
F - 30
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
For 1996, 1995 and 1994, federal taxable income amounted to $.70, $1.6923 and
$1.1146 per Class B interest, respectively. In 1996, federal taxable income
consisted of ordinary income only. Federal taxable income in 1995 consisted of
ordinary income of $.5326 per Class B interest and a combined capital gain of
$1.1597 per Class B interest related to the sale of the Dorman Products and
Downey Glass divisions (see Note 5, Acquisitions/Divestitures). Federal taxable
income in 1994 consisted of ordinary income of $.7069 per Class B interest and a
capital gain of $.4077 per Class B interest related to the sale of the
Electrical Products Group divisions. The Class B capital account as of December
31, 1996 and 1995, was approximately $2.89 and $2.54 per Class B interest,
respectively.
Holders of Class B interests are entitled to receive annual cash distributions
sufficient to cover their tax liabilities on taxable income allocated to the
Class B interests (the "Class B Tax Distribution"). For 1996, the Class B Tax
Distribution amounted to $7,663 or $.3465 per Class B interest which was
partially paid in the amount of $.02 per Class B interest per month for the
period January through April 1996 and $.03 for the period May through December
1996. On March 31, 1997, the Partnership intends to distribute the balance of
the tax distribution due of $.0265 per Class B interest to holders of record for
the entire year.
For 1995, the Class B Tax Distribution amounted to $14,807 or $.6695 per Class B
interest which was partially paid in the amount of $.02 per Class B interest per
month for the period January through December 1995 and a partial distribution of
$.15 paid on April 10, 1995 to holders of record on December 30, 1994, related
to the taxable gain on the sale of the Dorman Products division on January 3,
1995. On March 29, 1996, the Partnership distributed the balance of the tax
distribution of $.2795 per Class B interest, as follows: approximately $.1745 to
holders of record on December 30, 1994 for the balance due on the taxable gain
on the sale of Dorman Products; $.00197 per month to holders of record of Class
B interests on the first day of the month during January through December 1995
for the balance due on ordinary income; and $.0814 to holders of record on
September 29, 1995 related to the taxable gain on the sale of the Downey Glass
division (see Note 5, Acquisitions/Divestitures).
For 1994, the Class B Tax Distribution amounted to $10,895 or $.492619 per Class
B interest which was partially paid in the amount of $.009352 per Class B
interest per month for the period January through March 1994 and $.02 per Class
B interest per month during the period April through December 1994. The monthly
tax distributions were paid to holders of record on the first day of each month
during 1994 and aggregated $.208056 per Class B interest for the full year 1994.
On March 31, 1995, the Partnership paid the balance of the tax distribution due
of $.284563 per Class B interest, as follows: approximately $.01981 per month to
holders of record of Class B interests on the first day of the month during
January through March 1994, $.00916 per month for April through November 1994,
and $.15185 for December 1994 which includes $.14269 related to the capital gain
on the sale of the Electrical Products Group divisions. (See Note 5,
Acquisitions/Divestitures.)
F - 31
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
On December 19, 1996, the Partnership in anticipation of its conversion to
corporate form, suspended payment of the monthly tax-related distributions to
Class B interest holders effective January 1, 1997, through March 31, 1997. Due
to the delay in completion of the proposed corporate conversion, the Partnership
intends to resume payment of monthly advance Class B tax distributions in April
1997 in the amount of $.03 per B Interest. On March 20, 1997, the Partnership
declared a B tax distribution in the amount of $.03 per B Interest payable April
30, 1997, to holders of record April 1, 1997. The Partnership intends to pay
this monthly rate to Class B holders until the effective date of the conversion
since it expects to allocate sufficient Class B taxable income in the shortened
tax year from January 1, 1997, through the effective date to require the B tax
distribution payment. The balance of the required 1997 Class B tax distribution,
if any will be paid on or before March 31, 1998.
4. Extraordinary Loss:
In 1995, the Partnership recorded an extraordinary loss of $629 or approximately
$.03 per Class B limited partnership interest, due to early extinguishment of a
portion of the Operating Partnership's Series A 9.08% and Series B 8.44% Senior
Notes (See Note 9, Long-Term Debt).
5. Acquisitions/Divestitures:
On April 11, 1996, the Partnership's Industrial Services segment, through its
Warren Fluid Power division purchased certain assets of Hydraulic Depot, Inc.,
of Reno, Nevada, for an aggregate purchase price of $700. Annual sales of
Hydraulic Depot, Inc., are approximately $2,500.
In November 1995, the Partnership's Hillman Fastener division purchased certain
assets of the Retail division of Curtis Industries of Eastlake, Ohio, for an
aggregate purchase price of $8,011 and the assumption of certain liabilities.
The aggregate purchase price includes goodwill of $3,442. The purchase price and
goodwill amounts include post-closing adjustments recorded in 1996. This
acquisition has been accounted for as a purchase and, accordingly, the results
of operations have been included in the accompanying consolidated financial
statements from the date of acquisition.
On October 27, 1995, the Operating Partnership sold certain assets of its Downey
Glass division for a cash consideration, net of expenses, of approximately
$6,237 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $4,144 or $.19 per Class B interest included in the 1995
consolidated statement of income. The aggregate assets sold, net of liabilities,
in connection with the sale of the Downey Glass division was approximately
$2,093.
On January 3, 1995, the Operating Partnership sold certain assets of its Dorman
Products division for a cash consideration, net of expenses, of approximately
$36,600 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $16,500 or $.75 per Class B interest included in the 1995
consolidated statement of income. The aggregate assets sold, net of liabilities,
in connection with the sale of Dorman Products was approximately $20,100.
F - 32
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
5. Acquisitions/Divestitures, continued:
On December 5, 1994, the Operating Partnership sold certain assets of its
Electrical Products Group divisions for a cash consideration, net of expenses,
of approximately $27,800 (subject to certain post-closing adjustments) and the
assumption of certain liabilities. The Operating Partnership recorded a gain on
the sale in the amount of $3,523 or $.16 per Class B interest included in the
1994 consolidated statement of income. The aggregate assets sold, net of
liabilities, in connection with the sale of the Electrical Products Group
divisions was approximately $24,300.
6. Related Party Transactions:
The GP earns a management fee annually from the Operating Partnership equal to
3% of the aggregate initial Capital Investment of the holders of Class A
interests ($110,996). The management fee will be paid only after cumulative
outstanding priority returns and additional required cash distributions are
paid. In addition, the management fee can be paid only if the Partnership
complies with covenants required by the credit agreements (see Note 8, Lines of
Credit, and Note 9, Long-Term Debt). Management fees earned but not paid
accumulate until paid. Management fees earned in each of years 1996, 1995 and
1994 were $3,330. The management fees for the years 1995 and 1994 were paid in
full in March 1996 and 1995, respectively. Management expects to pay in full the
1996 management fee due March 31, 1997.
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1996 and 1995:
1996 1995
-------- ------
Land $ 3,289 $ 3,319
Buildings and leasehold improvements 18,642 18,048
Machinery and equipment 18,680 16,290
Furniture and fixtures 10,368 9,208
------- -------
50,979 46,865
Less accumulated depreciation 29,570 26,684
------- -------
$21,409 $20,181
======= =======
8. Lines of Credit:
On December 22, 1992, the Operating Partnership entered into a $50,000 bank
credit agreement with three lenders. This agreement provides borrowings on a
revolving credit basis at interest rates based on the London Interbank Offered
Rate ("LIBOR") plus 1 and 3/4% and prime. Letters of credit commitments are
issued at varying rates. The bank credit agreement's original termination date
of December 22, 1995 has been extended to December 31, 1997. The credit facility
requires a commitment fee of 1/2 of 1% per year on the average daily unused
portion of the commitment and an annual agent's fee. There is no compensating
balance requirement under this facility. As of December 31, 1996, the Operating
Partnership had $33,152 available under this Credit Agreement. The $16,848
outstanding consists of bank borrowings amounting to $11,000 as reflected on the
Partnership's consolidated balance sheet at December 31, 1996, and letter of
credit commitments aggregating $5,848.
F - 33
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
8. Lines of Credit, continued:
The bank credit agreement contains covenants restricting distributions from the
Operating Partnership to the Partnership and the GP. Amounts available for
distribution in accordance with the bank credit agreement at December 31, 1996,
were $4,164. The agreement also requires the maintenance of specific coverage
ratios and levels of financial position and restricts incurrence of additional
debt and the sale of assets. The bank credit agreement did not permit the
Partnership to consummate acquisitions in 1994. Amendments to the agreement were
negotiated in March and December of 1994 to ease certain coverage ratios and
other financial requirements in 1994 and future years. The December 1994
amendment allows for acquisition spending in 1995 and future years up to $15,000
in any calendar year, absent a default or event of default as defined in the
bank credit agreement.
In connection with the sale of operating divisions (see note 5, Acquisitions/
Divestitures), the Operating Partnership was required to reduce permanently the
bank revolver commitment under the bank credit agreement by approximately
$13,000. However, the banks waived this permanent reduction and maintained the
existing bank credit commitment of $50,000. For 1995 and future years, the
lenders have agreed to revise certain covenant tests to exclude the impact of
cash distributions to holders of Class B interests related solely to tax gains
on divisions sold.
The Operating Partnership has another credit facility available in the amount of
$500 for letters of credit of which no amount was outstanding at December 31,
1996. The letters of credit commitments are issued at varying rates. This
facility, renewable annually, is not subject to compensating balance
requirements or unused commitment fees.
An indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a
$2,500 Canadian dollar line of credit with a local lender for working capital
purposes of which $557 USD was outstanding at December 31, 1996. This facility,
which is renewable annually, provides bank borrowings at an interest rate of
prime plus 1/4 of 1%. There are no compensating balance requirements or
commitment fees associated with this facility.
Notes payable consisted of the following at December 31, 1996 and 1995:
1996 1995
---- ----
Short-term bank borrowings drawn on
working capital lines of credit $ 557 $ 463
Trade notes payable in accordance with
glass inventory financing arrangements 1,193 1,474
Notes payable in accordance with insurance
financing arrangements 920 816
------ ------
$2,670 $2,753
====== ======
The weighted average interest rate on the outstanding notes payable borrowings
at December 31, 1996 and 1995 was 3.05% and 3.01%, respectively.
F - 34
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt:
On December 22, 1992, the Operating Partnership issued $95,000 of senior notes
with a final maturity of December 1, 2002, through a private placement with
several institutional investors.
The new senior notes were issued in two series, as follows: $65,000 Series A
notes at 9.08% and $30,000 Series B notes at 8.44%. Interest is required to be
paid semiannually on June 1 and December 1 on the outstanding principal of the
senior notes. The Operating Partnership repaid $4,375, $3,282 and $3,900 in
Series A notes, and $2,020, $1,514 and $1,800 in Series B notes in 1996, 1995
and 1994, respectively. Principal repayments required on the senior notes during
each of the five years subsequent to December 31, 1996, are as follows:
Series A Series B
-------- --------
December 1, 1997 $4,375 $2,020
December 1, 1998 5,468 2,522
December 1, 1999 6,562 3,030
December 1, 2000 8,201 3,786
December 1, 2001 9,297 4,290
Optional prepayments, in multiples of $100, may be made at anytime, as a whole
or in part, with accrued interest thereon plus a penalty ("make-whole amount"),
if any, as defined in the note agreement.
If the Partnership sells a significant amount of assets as defined in the note
agreement, it must make an offer of prepayment of note principal to the senior
noteholders determined on an applicable share basis with the bank credit
agreement. The prepayment offer also must include accrued interest thereon plus
a make-whole amount, if any, as defined in the note agreement. Related to the
sale of operating divisions in December 1994 and January 1995 (see Note 5,
Acquisition/Divestitures), the Operating Partnership was required to offer the
noteholders prepayment of senior notes in the amount of $14,175. The noteholders
accepted the prepayment offer which the Operating Partnership paid on March 14,
1995, including accrued interest thereon of $360 and a prepayment penalty of
$629 (see Note 4, Extraordinary Loss).
The senior note agreement contains covenants restricting distributions from the
Operating Partnership to the Partnership and the GP. Additionally, the note
agreement restricts the incurrence of additional debt and the sale of assets and
requires the maintenance of specific coverage ratios and levels of financial
position. Also, the senior note agreement did not permit the Partnership to
consummate acquisitions in 1994. For 1994 and future years, the senior
noteholders have agreed to ease certain coverage ratios and other financial
requirements.
Provisions made during the year for restructuring charges and transaction costs
(Note 7) rendered the Operating Partnership unable to comply with certain
financial covenants of the bank credit agreement and the senior note agreement.
On March 21, 1997, the Partnership received the final consent in which the banks
and senior note holders agreed to a modification of these covenants effective
for the fiscal quarters ending December 31, 1996 through: (i) June 30, 1997 for
the bank credit agreement; and (ii) September 30, 1997 for the senior note
agreement. The Partnership is in compliance with the modified covenants.
F - 35
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt, continued:
As of December 31, 1996, the fair value estimate of the Partnership's senior
notes is approximately $65,000 as determined in accordance with SFAS No. 107.
The Partnership discounted the future cash flows of its senior notes based on
borrowing rates for debt with similar terms and remaining maturities. The fair
value estimate is made at a specific point in time and is subjective in nature
and involves uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly
affect the estimate.
10. Leases:
Certain warehouse and office space and equipment are leased under capital and
operating leases with terms in excess of one year. Future minimum lease payments
under noncancellable leases consisted of the following at December 31, 1996:
Capital Operating
Leases Leases
------ ------
1997 $151 $ 9,210
1998 151 7,696
1999 151 5,475
2000 151 4,204
2001 134 2,875
Later years -- 10,692
---- -------
Total minimum lease payments $738 $40,152
=======
Less amounts representing interest (127)
-----
Present value of Net Minimum Lease
payments (including $107 currently
payable) $611
====
Total rental expenses for all operating leases amounted to $15,239 in 1996,
$14,232 in 1995, and $15,153 in 1994.
11. Deferred Compensation Plans:
Certain officers and employees earn performance-based compensation, payment of
which is deferred until future periods.
The Partnership adopted a new deferred compensation plan for its officers
effective January 1, 1994. Under this plan, awards are earned based on operating
performance over a five-year period which vest and are paid in cash only at the
end of the fifth year. At the end of any year within the five-year program, the
cumulative award is subject to reduction or forfeiture if performance goals are
not achieved. Upon a change in control of the Operating Partnership,
participants are entitled to payment of awards earned through completion of the
most recent plan year. The amounts charged to income under this plan were $378
in 1996, $1,186 in 1995 and $850 in 1994. The portion of the Operating
Partnership's deferred compensation liability attributable to this plan is
$2,414 as of December 31, 1996.
F - 36
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
11. Deferred Compensation Plans, continued:
For a plan adopted in 1987 and amended thereafter, certain employees earned
awards which vest at the rate of 20% per year over the 5-year period following
the year in which the award was earned. The awards will be paid at age 60, if
elected by the employee, or upon death, disability or retirement and accrue
investment earnings until paid. Upon a change in control of the Operating
Partnership, participants are entitled to payment of all vested and non-vested
amounts including accrued interest. The full award is charged to operations in
the year earned. The amounts charged to income under the plan were $677, $1,135
and $2,295 in 1996, 1995 and 1994, respectively. During the three years ended
December 31, 1996, distributions from the plan amounted to $1,160 in 1996,
$1,422 in 1995, and $240 in 1994. The deferred compensation liability
attributable to the plan amounted to $5,998 at December 31, 1996 of which $564
is included in other accrued expenses.
Under a former plan, effective through December 31, 1986, certain employees and
officers earned deferred compensation amounts which unconditionally vested at
the rate of 20% per year over the 5-year period following the year in which the
award was earned. Participants of the former plan have elected to defer all
outstanding awards until retirement. Upon a change in control of the Operating
Partnership, participants are entitled to payment of their total account balance
including accrued interest. Amounts charged to income and distributions related
to the former plan for the three years ended December 31, 1996 were immaterial.
The portion of the Operating Partnership's deferred compensation liability
attributable to this plan is $796 at December 31, 1996.
In December 1995, the Operating Partnership established a Rabbi trust to assist
in funding the liabilities of the Deferred Compensation plans described above.
This trust purchased insurance policies on the lives of certain participants in
the Deferred Compensation plans. The Operating Partnership is the sole
beneficiary of these insurance policies. The cash surrender value of these
insurance policies was $4,566 at December 31, 1996.
The change of control provision in the deferred compensation plans is triggered
upon a sale of all of the Operating Partnership's business, a change in the GP
including its reorganization or a change, other than due to death or retirement,
in a majority of the directors of Lehman/SDI during any one-year period.
The Partnership adopted a new deferred compensation plan effective December 1,
1996, to offer key employees an opportunity to defer a portion of their
compensation including bonuses and any amounts credited to the accounts of such
employees which otherwise may become payable to such employees under other
incentive compensation programs maintained by the Partnership. This new plan
would allow participants eligible for accelerated payments under the change in
control provision of the Partnership's deferred compensation plans an election
to continue to defer their balances.
F - 37
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits, continued:
Net periodic pension cost (income) in 1996, 1995, and 1994 for non-contributory
defined benefit plans consists of:
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Partnership's balance sheets at December 31, 1996 and
1995:
F - 38
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits, continued:
The discount rate assumptions used in determining actuarial present value of
benefit obligations at December 31, 1996 and 1995 was 7.25%.
Certain employees of the Partnership's Kar Products, J.N. Fauver Co., and its
divested Dorman Products and American Electric Co. divisions are covered by
these defined benefit retirement plans. Assets of the defined benefit plans
consist of insurance contracts and assets managed under a commingled trust
agreement. The trust assets are invested primarily in equity and fixed income
holdings.
Costs charged to operations under all retirement benefit plans are as follows:
1996 1995 1994
---- ---- ----
Defined contribution plans $1,327 $2,693 $3,498
Multi-employer pension plans 189 374 362
Defined benefit plans 20 259 266
------ ------ ------
Total $1,536 $3,326 $4,126
====== ====== ======
Management estimates that its share of unfunded vested liabilities under
multi-employer pension plans is not material.
For the years ended December 31, 1996, 1995 and 1994, the costs of
post-retirement benefits charged to income were $87, $81 and $115, respectively.
The 1996 and 1995 charges were determined in accordance with SFAS No. 106 on an
accrual basis with costs recognized in prior years upon payment of the
post-retirement obligations. The Partnership's unrecognized accumulated
post-retirement benefit liability as of December 31, 1996, 1995 and 1994 was
$477, $516 and $744, respectively.
13. Income Taxes:
Deferred tax assets are comprised of the following at December 31, 1996 and
1995:
1996 1995
---- ----
Gross deferred tax assets:
Deferred compensation $3,292 $2,936
Deferred restructuring changes 1,034 --
Casualty Loss Insurance Program 548 --
Prepayment penalties related to
early extinguishment of debt 304 299
------ ------
5,178 3,235
Valuation allowance for deferred
tax assets (171) (391)
------- -------
Net deferred tax asset $5,007 $2,844
======= ======
Management has determined, based on the Partnership's history of prior operating
earnings and its expectations for the future, that operating income of the
Partnership will more likely than not be sufficient to recognize fully these net
deferred tax assets. The Partnership has no deferred tax liability at December
31, 1996 or December 31, 1995.
As of December 31, 1996, the Partnership's tax basis of its assets and
liabilities was greater than its financial statement basis by approximately
$77,000.
F - 39
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
13. Income Taxes, continued:
The provision (benefit) for income taxes consists of the following:
1996 1995 1994
-------- ------- ------
Current income taxes
State and local $ 605 $ 608 $ 276
Foreign 418 629 558
------- ------ -----
1,023 1,237 834
------- ------ -----
Deferred income taxes
Federal (1,897) (627) (657)
State and local (266) (73) (77)
-------- ------- ------
(2,163) (700) (734)
-------- ------- ------
Total income taxes $(1,140) $ 537 $ 100
======== ======= =====
14. Commitments and Contingencies:
Performance and bid bonds are issued on the Partnership's behalf during the
ordinary course of business through surety bonding companies as required by
certain contractors. As of December 31, 1996, the Partnership had outstanding
performance and bid bonds aggregating $234. As required by sureties, the
Partnership has standby letters of credit outstanding in the amount of $650 as
of December 31, 1996.
Letters of credit are issued by the Partnership during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 1996, the
Partnership had outstanding letters of credit in the aggregate amount of $1,872
related to these activities.
As of December 31, 1996 the Partnership has guaranteed approximately $1,181
worth of lease obligations, principally relating to businesses previously
divested. The Partnership is not currently aware of any existing conditions
which would cause a financial loss related to these guarantees.
Under the Partnership's insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of normal
claims. Beginning in 1991, the Partnership has retained risk on certain expected
losses from both asserted and unasserted claims related to workman's
compensation, general liability and automobile as well as the health benefits of
certain employees. Provisions for losses expected under these programs are
recorded based on an analysis of historical insurance claim data and certain
actuarial assumptions. As of December 31, 1996, the Partnership has provided
insurers letters of credit aggregating $3,326 related to certain insurance
programs.
On February 27, 1996, a lawsuit was filed against the Operating Partnership by
the buyer of its Dorman Products division for alleged misrepresentation of
certain facts by the Partnership upon which the buyer allegedly based its offer
to purchase Dorman. The complaint seeks damages of approximately $21,000.
On January 16, 1997, a holder of B Interests filed a purported class action
alleging that the terms of the Conversion unfairly transfer substantial equity
to the General Partner to the detriment of the B Interests and constitute a
breach of fiduciary duty. A second complaint containing substantially identical
allegations was filed by a limited partner on February 11, 1997.
In the opinion of management, the ultimate resolution of these matters will not
have a material effect on the consolidated financial position, operations or
cash flows of the Partnership.
F - 40
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
14. Commitments and Contingencies, continued:
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Partnership's business. Those legal
proceedings incidental to the business of the Partnership are generally not
covered by insurance or other indemnity. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial position, operations or cash flows of the Partnership.
15. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
1996 1995 1994
------- ------- -------
Cash paid during the period for:
Interest $ 6,769 $ 7,304 $10,097
------- ------- -------
Income taxes $ 1,189 $ 1,190 $ 792
------- ------- -------
Supplemental schedule of non-cash
investing activities:
Assumed liabilities in connection with
the purchase of assets (See Note 5,
Acquisitions/Divestitures) $ -- $ 232 $ --
------- ------- -------
F - 41
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
16. Quarterly Data (unaudited):
1996 First Second Third Fourth
---- ----- ------ ----- ------
Net sales $154,892 $167,500 $167,125 $159,737
Gross profit 62,464 67,104 68,029 65,406
Net income 4,010 8,313 8,286 (1,342)*
Net income (loss) per limited
partnership interest
- Class A $.27 $.28 $.27 $.28
- Class B $.04 $.24 $.24 ($.20)
* Includes non-recurring restructuring charges and transaction costs of of
$5,950 and $2,150, respectively.
1995 First Second Third Fourth
---- ----- ------ ----- ------
Net sales $154,792 $163,820 $163,214 $147,109
Gross profit 61,441 65,902 66,510 59,657
Income before 19,862** 8,377 7,828 8,678***
extraordinary loss
Extraordinary loss (Note 4) (629) -- -- --
Net income 19,233 8,377 7,828 8,678
Net income per limited partnership interest:
Income before extraordinary loss:
- Class A $.27 $.28 $.27 $.28
- Class B $.77 $.24 $.22 $.25
Extraordinary loss:
- Class A $ -- $ -- $ -- $ --
- Class B $(.03) $ -- $ -- $ --
Net Income:
- Class A $.27 $.28 $.27 $.28
- Class B $.74 $.24 $.22 $.25
** Includes gain on sale of Dorman Products division of $16,500.
*** Includes gain on sale of Downey Glass division of $4,144.
17. Concentration of Credit Risk:
Financial instruments which potentially subject the Partnership to concentration
of credit risk consist principally of cash and cash equivalents and trade
receivables. The Partnership places its cash and cash equivalents with high
credit quality financial institutions. Concentrations of credit risk with
respect to sales and trade receivables are limited due to the large number of
customers comprising the Partnership's customer base, and their dispersion
across many different industries and geographies. The Partnership performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.
F - 42
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
18. Segment Information:
The following are the segment disclosures required under SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," with respect to the
Partnership's reportable segments as identified in Note 1, "Basis of
Presentation" under "Nature of Operations":
Year Ended December 31,
Industry Segment Data: --------------------------------------
1996 1995 1994
================================================================================
Net Sales
Industrial Services $ 456,798 $ 424,978 $ 532,719
Hardware Merchandising 103,503 84,720 72,841
Glass Merchandising 90,369 120,650 132,063
Adjustments and eliminations (1,416) (1,413) (1,762)
--------- --------- ---------
Consolidated Net Sales $ 649,254 $ 628,935 $ 735,861
- --------------------------------------------------------------------------------
Income from Operations
Industrial Services $ 33,437 $ 31,834 $ 39,773
Hardware Merchandising 9,074 9,592 7,096
Glass Merchandising 3,037 3,387 5,756
Corporate Expenses (21,096)* (13,511) (14,866)
--------- --------- ---------
Consolidated Income from Operations $ 24,452 $ 31,302 $ 37,759
- --------------------------------------------------------------------------------
Identifiable Assets
Industrial Services $ 166,849 $ 162,681 $ 181,545
Hardware Merchandising 46,331 36,340 24,357
Glass Merchandising 37,734 42,041 53,058
Corporate Assets 13,140 13,635 7,352
Adjustments and Eliminations (1,499) (106) (126)
--------- --------- ---------
Consolidated Assets $ 262,555 $ 254,591 $ 266,186
- --------------------------------------------------------------------------------
Capital Expenditures
Industrial Services $ 2,180 $ 2,315 $ 2,736
Hardware Merchandising 1,985 539 339
Glass Merchandising 640 1,254 1,094
Corporate 159 191 94
--------- --------- ---------
Consolidated Capital Expenditures $ 4,964 $ 4,299 $ 4,263
- --------------------------------------------------------------------------------
Depreciation and Amortization
Industrial Services $ 3,448 $ 3,339 $ 4,458
Hardware Merchandising 639 401 364
Glass Merchandising 1,355 1,839 2,271
Corporate 105 78 49
--------- --------- ---------
Consolidated Total $ 5,547 $ 5,657 $ 7,142
===============================================================================
* Includes non-recurring restructuring charges and transaction costs of
$5,950 and $2,150, respectively.
F - 43
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
19. Subsequent Event:
On March 4, 1997, the Operating Partnership received the last of two financing
commitments which together aggregate $150,000 from lenders. These commitments
are available to the Partnership until May 30, 1997. The Partnership intends to
utilize the debt capacity to fund transaction costs and other payments related
to its conversion to corporate form, refinance its current outstanding senior
notes of $63,934 as of December 31, 1996, including interest thereon and related
make-whole amount of approximately $5,000, and outstanding bank revolver
borrowings of $11,000 as of December 31, 1996. Also, the new credit facilities
will provide working capital for reinvestment in its businesses and acquisition
capital for future growth. The new financing commitments consist of a $60,000
five-year fixed rate note at 7.66% and a $90,000 five-year bank revolver with
terms and conditions more favorable than the Partnership's existing senior notes
and bank credit lines including less restrictive covenants and an effective
interest rate reduction of approximately 1.00%.
Consummation of the refinancing with the new credit facilities is contingent
upon approval of the Partnership's conversion into corporate form and certain
other terms and conditions of closing being satisfied in a manner acceptable to
the lenders.
F - 44
EXHIBIT A
----------
GLOSSARY OF DEFINED TERMS
---------------------------
A Interests Class A limited partnership interests in the
Partnership including depositary receipts
therefor.
Accrual Date First day following the Effective time.
Appointment Event When the Trust has failed to make full
distributions on the Trust Preferred Securities
for 18 consecutive months or an Event of
Default under the Declaration.
B Interests Class B limited partnership interests in the
Partnership including depositary receipts
therefor.
B Tax Distribution Distribution to B Interests from Cash Available
for Distribution equal to the product of (i)
125% of the then applicable maximum Federal
income tax rate for individuals and (ii) the
taxable income allocable to the B Interests.
Business Trust Act Delaware Business Trust Act.
Cash Available for Distribution All cash receipts of the Partnership less cash
used to pay or establish a reserve for
expenses.
Code Internal Revenue Code of 1986, as amended.
Common Stock Common Stock, par value $.01 per share, of the
Corporation.
Contribution Agreement Contribution Agreement dated _______, 1997
between the Corporation and Lehman Brothers
Holdings Inc.
Conversion The conversion of the Partnership to corporate
form as generally described in this Proxy
Statement/Prospectus and related transactions
entered into pursuant to the Conversion
Agreement.
Conversion Agreement Agreement and Plan of Conversion,
dated ______ 1997, among the Partnership, the
Corporation, LPSub, Lehman/SDI and the limited
partners of the General Partner.
Conversion Proposal The proposal to convert the Partnership to
corporate form.
Corporation SunSource Inc., a Delaware corporation.
Creditor Person to whom the Trust owes any debts,
obligations, costs, expenses and taxes.
Declaration Declaration of trust of the Trust.
Depositary receipts Depositary receipts for A Interests or B
Interests.
Delaware Trustee The Bank of New York (Delaware), an affiliate
of the Indenture Trustee.
DGCL Delaware General Corporation Law.
Direct Action A proceeding by a holder of Trust Preferred
Securities to enforce payment of principal or
interest on the Junior Subordinated Debentures.
A - 1
Direct Participants Securities brokers and dealers, banks, trust
companies, clearing corporations, and certain
other organizations that are participants in
DTC.
Distributions Payments with respect to the Trust Preferred
Securities.
DTC The Depository Trust Company
Effective Time The date on which the Conversion will become
effective. The specific date will be determined
by the General Partner and will be publicly
announced no later than the date of the Special
Meeting.
Event of Default Event of Default with respect to the Trust
Securities.
Exchange Act Securities and Exchange Act of 1934, as
amended.
Guarantee Payments Payments on distributions guaranteed by the
Corporation pursuant to the Preferred
Securities Guarantee.
General Partner SDI Partners I, L.P., a Delaware limited
partnership.
Indenture Indenture dated as of ______________, 1997
between the Corporation and Bank of New York,
as Trustee governing the Junior Subordinated
Debentures.
Indenture Event of Default Event of default under the Indenture with
respect to the Junior Subordinated Debentures.
Indenture Trustee The Bank of New York.
Indirect Participants Securities brokers and dealers, banks and trust
companies that clear through or maintain a
custodial relationship with a Direct
Participant of DTC, either directly or
indirectly.
Interests Limited partnership interests in the
Partnership.
Interest Payment Date The last day of each calendar month of each
year.
Investment Company Event The Regular Trustees shall have received a
legal opinion that the Trust may be considered
an investment company under the Investment
Company Act of 1940, as amended.
IRS Internal Revenue Service
Junior Subordinated Debentures Junior Subordinated Debentures of the
Corporation.
Lehman Brothers Lehman/SDI and any of its affiliates.
Lehman/SDI Lehman/SDI, Inc., a Delaware corporation,
general partner of the General Partner.
limited partners Holders of Interests, including holders that
are admitted to the Partnership as limited
partners, and holders who are merely assignees
of the Interests.
Liquidation Distribution Distribution on dissolution or liquidation of
the Trust.
LPSub LPSub Inc., a wholly owned subsidiary of the
Partnership.
Management Fee Management fee payable by the Operating
Partnership to the General Partner of
$3,330,000 annually.
A - 2
Merger Merger of the Partnership and LPSub with and
into the Corporation pursuant to the Conversion
Agreement.
NYSE New York Stock Exchange.
Operating Partnership SDI Operating Partners, L.P., a Delaware
limited partnership.
Operating Partnership Agreement Amended and Restated Agreement of Limited
Partnership of the Operating Partnership.
Pari passu Equal in priority.
Partners Both the holder of the general partnership
interest in the Partnership and holders of A
Interests and B Interests.
Partnership SunSource L.P., a Delaware limited partnership.
Partnership Agreement Amended and Restated Agreement of Limited
Partnership of the Partnership.
Preferred Securities Guarantee Guarantee by the Corporation on a subordinated
basis of the payment of distributions on the
Trust Preferred Securities and payments on
liquidation of the Trust and redemption of
Trust Preferred Securities.
Preferred Share Fraction One one-hundredth of a Preferred Share,
carrying voting and dividend rights that are
intended to produce the equivalent of one share
of Common Stock.
Preferred Shares Series A Junior Participating Preferred Shares,
par value $0.01 per share, of the Corporation.
Priority Return Distribution to A Interests from Cash Available
for Distribution annually of $1.10 simple
cumulative return.
Pro Rata Basis Pro rata to each holder of Trust Securities
according to the aggregate liquidation amount
of the Trust Securities held by the relevant
holder in relation to the aggregate liquidation
amount of all Trust Securities outstanding.
Property Account Account maintained by the Property Trustee to
hold all payments in respect of the Junior
Subordinated Debentures for the benefit of the
holders of the Trust Preferred Securities.
Property Trustee The Bank of New York.
Record Date Close of business on August 4, 1997, for the
determination of limited partners entitled to
vote at the Special Meeting.
Redemption Price $25 plus accrued and unpaid distributions on
the Trust Preferred Securities to the date of
redemption.
Regular Trustees Three individual trustees of the Trust.
Rights Rights to purchase Preferred Shares and, in
certain cases, Common Stock of the Corporation,
as described in the Rights Agreement.
Rights Agreement Rights Agreement dated ___________, 1997
between the Corporation and Registrar and
Transfer Company, as Rights Agent.
SEC Securities and Exchange Commission.
A - 3
Securities Act Securities Act of 1933, as amended.
Smith Barney Smith Barney, Inc., financial adviser to the
Special Committee.
Special Committee Elected by the Board of Directors of Lehman/SDI
to consider and advise the entire Board
concerning the fairness to the limited partners
of the terms of the Conversion related to the
exchange of general and limited partnership
interests in the Partnership. The members of
the Special Committee are O. Gordon Brewer, Jr.
and Ernest L. Ransome, III.
Special Event A Tax Event or Investment Company Event.
Special Meeting The Special Meeting of the limited partners of
SunSource L.P., to be held at 3000 One Logan
Square, Philadelphia, Pennsylvania on September
18, 1997 at 10:00 a.m., local time. At the
Special Meeting, the limited partners will vote
upon the proposed Conversion.
Special Regular Trustee Trustee to be elected by holders of Trust
Preferred Securities if distributions are in
arrears for 18 consecutive months or there is
an Event of Default.
SunSource The Partnership, prior to the Conversion, and
the Corporation, after the Conversion,
including in each case their respective
subsidiaries.
SunSub A SunSub A Inc., a wholly owned subsidiary of the
Corporation.
SunSub B SunSub B Inc., a wholly owned subsidiary of the
Corporation.
Tax Event The Regular Trustees shall have received a tax
opinion to the effect that the payment of
interest to the Trust may be taxable to the
Trust or interest payable by the Corporation on
the Junior Subordinated Debentures may not be
deductible by the Corporation for federal
income tax.
Trust SunSource Capital Trust, a Delaware statutory
business trust.
Trust Indenture Act Trust Indenture Act of 1939, as amended.
Trust Common Securities Trust Common Securities, representing common
undivided beneficial interests in the assets of
the Trust.
Trust Preferred Securities 11.6% Trust Preferred Securities, representing
preferred undivided beneficial interests in the
assets of the Trust.
Trust Preferred Securities Certificate representing interests in Trust
Global Certificate Preferred Securities registered in the name of
DTC or its nominee.
Trust Securities Trust Preferred Securities and Trust Common
Securities.
A - 4
EXHIBIT B
AGREEMENT AND PLAN OF CONVERSION
AGREEMENT AND PLAN OF CONVERSION, dated as of July __, 1997, by and
among SunSource Inc., a Delaware corporation (the "Corporation"); SunSource
L.P., a Delaware limited partnership (the "Partnership"); LPSub Inc., a Delaware
corporation ("LPSub"); Lehman/SDI, Inc. a Delaware corporation ("Lehman/SDI");
and the limited partners of SDI Partners I, L.P. ("GP Limited Partners").
B A C K G R O U N D
The Partnership is a master limited partnership whose general partner
is SDI Partners I, L.P. ("the General Partner") and whose Class A and Class B
limited partnership interests ("A Interests" and "B Interests") are publicly
held. Lehman/SDI is the general partner of the General Partner. The parties
desire to convert the Partnership to corporate form (the "Conversion") and to
that end have newly formed the Corporation and LPSub, a wholly owned subsidiary
of the Partnership. The Partnership owns the limited partnership interest in SDI
Operating Partners, L.P. (the "Operating
The Corporation has also newly formed SunSource Capital Trust, a
Delaware statutory business trust (the "Trust"). The Corporation will contribute
Junior Subordinated Debentures to the Trust in exchange for 11.6% Trust
Preferred Securities, representing preferred undivided beneficial interests in
the assets of the Trust (the "Trust Preferred Securities") and cash in exchange
for Trust Common Securities, representing common undivided beneficial interests
in the assets of the Trust (the "Trust Common Securities").
The parties desire to accomplish the Conversion through (i) the
contribution by the Partnership of the limited partnership interest in the
Operating Partnership to LPSub in exchange for shares of Class A Common Stock of
LPSub; (ii) the contribution by Lehman/SDI of its general partnership interest
in the General Partner to LPSub in exchange for shares of Class B Common Stock
of LPSub; (iii) the contribution by the GP Limited Partners of their limited
partnership interests in the General Partner to the Corporation in exchange for
shares of Common Stock of the Corporation; and (iv) the merger provided for
herein (the "Merger") by which the Partnership and LPSub will be merged into the
Corporation and the A Interests will receive Trust Preferred Securities of the
Trust and cash and the B Interests and Lehman/SDI will receive Common Stock of
the Corporation.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Conversion and the mode of carrying
the same into effect, the parties hereto, intending to be legally bound, hereby
agree as follows:
ARTICLE I
THE CONVERSION
SECTION 1.1 The Contributions. Immediately prior to the Effective Time
( as hereinafter defined) (i) the Partnership shall contribute the limited
partnership interest in the Operating Partnership to LPSub in exchange for 1,000
shares of Class A Common Stock of LPSub; (ii) Lehman/SDI shall contribute its
general partnership interest in the General Partner to LPSub in exchange for
1,000 shares of Class B Common Stock of LPSub; (iii) the GP Limited Partners
shall contribute their limited partnership interests in the General Partner to
the Corporation in exchange for an aggregate of 468,000 shares of Common Stock
of the Corporation, provided that 75,000 of such shares shall be held in escrow
until the second anniversary of the Effective Time and shall only be distributed
to the GP Limited Partners if the Corporation is then current on distributions
on the Trust Preferred Securities; and (iv) the Corporation shall
B-1
contribute the limited partnership interests in the General Partner to a newly
formed wholly owned subsidiary.
SECTION 1.2 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time, the Partnership and LPSub shall be merged with
and into the Corporation (such parties to the Merger being sometimes hereinafter
collectively referred to as the "Constituent Entities") pursuant to the
Agreement of Merger attached hereto as Annex 1 (the "Merger Agreement") and the
separate existence of the Partnership and LPSub shall cease. The Corporation
shall be the surviving entity in the Merger (sometimes hereinafter referred to
as the "Surviving Entity") and shall continue to be governed by the laws of the
State of Delaware, and all rights, privileges, immunities and franchises of the
Constituent Entities shall vest in the Surviving Entity and continue unaffected
by the Merger.
SECTION 1.3 Terms and Conditions of The Merger. The manner of
converting the securities of the Constituent Entities shall be as set forth in
Section 5 of the Merger Agreement.
SECTION 1.4 Timing; Approvals
(a) Limited Partner Approval. The Partnership shall submit the
proposal to convert to corporate form (the "Conversion Proposal") to its limited
partners for approval and adoption at a meeting to be held as soon as
practicable. In connection with such meeting, the Partnership shall take such
reasonable steps as shall be necessary for the prompt preparation and filing by
the Partnership of a proxy statement (the "Proxy Statement") under the
Securities Exchange Act of 1934 (the "Exchange Act") and by the Corporation of a
registration statement (the "Registration Statement") and prospectus (the
"Prospectus") under the Securities Act of 1933 (the "Securities Act"), with the
Securities and Exchange Commission ("SEC") and shall cause the Proxy
Statement/Prospectus to be mailed to the limited partners of the Partnership as
soon as practicable. Adoption of the Conversion Proposal requires (i) the
approval of limited partners holding a majority of the outstanding A Interests
and B Interests, each voting separately as a class, and (ii) the approval of
unaffiliated limited partners (limited partners other than affiliates of the
General Partner) holding a majority of the outstanding A Interests and B
Interests held by unaffiliated limited partners, each voting separately as a
class (the "Class Votes").
(b) Approval by Other Parties. The Partnership and Lehman/SDI,
as stockholders of LPSub at the time of the Closing (as hereinafter defined),
approve and adopt the Merger Agreement. The Partnership and the GP Limited
Partners, as stockholders of the Corporation at the time of the Closing, approve
and adopt the Merger Agreement. LPSub, as general partner of the General Partner
at the time of the Closing, approves and adopts the Merger Agreement on behalf
of the General Partner.
(c) Closing and Effective Time. Subject to the Conversion
Proposal receiving the requisite approval by the limited partners and subject to
the provisions of this Agreement, the parties shall hold a closing (the
"Closing") on (i) the later of (A) the business day following the meeting of the
limited partners of the Partnership to consider and vote upon the Conversion
Proposal or (B) the business day on which the last of the conditions set forth
in Article IV is fulfilled or waived or (ii) at such other date as the parties
hereto may agree (the "Closing Date"), at 10:00 A.M. (local time) at the offices
of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, or at such other
place or time as the parties hereto may agree. The Merger shall become effective
as set forth in Section 3 of the Merger Agreement (the "Effective Time"). At the
Closing, the contributions provided in Section 1.1 hereof shall be made and
immediately thereafter a certificate of merger shall be filed in the Office of
the Secretary of State of Delaware.
(d) Certificate of Incorporation and Bylaws. From and after
the Effective Time, and pursuant to the Merger, the Certificate of Incorporation
and Bylaws of the Corporation as attached as Annexes 2 and 3, respectively,
shall continue to be the Certificate of Incorporation and Bylaws of the
Corporation as the surviving entity without change or amendment until further
amended in accordance with the provisions thereof and applicable law.
(e) Amendment to Partnership Agreement. To the extent that any
terms of this Article I shall be found to be a breach of any of the provisions
of the Amended and Restated Agreement of Limited Partnership of the Partnership
dated February 1, 1987 or the Amended and Restated Agreement of Limited
B-2
Partnership of the Operating Partnership dated February 1, 1987, the approval
and adoption of the Conversion Proposal by the limited partners as set forth in
subsection 1.4(a) and by LPSub on behalf of the General Partner shall be deemed
to be an amendment and waiver of any such provisions in order to effectuate the
Conversion.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Representations and Warranties by the Partnership. The
Partnership represents and warrants to the other parties that:
(a) Organization and Good Standing of the Partnership, the
Operating Partnership and LPSub. Each of the Partnership and the Operating
Partnership is a limited partnership duly formed, validly existing and in good
standing under the laws of the State of Delaware. LPSub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
(b) Capitalization. The sole general partner of the
Partnership is the General Partner and there are issued and outstanding
11,099,573 A Interests and 21,675,746 B Interests of the Partnership. The sole
general partner of the Operating Partnership is the General Partner and the sole
limited partner of the Operating Partnership is the Partnership. The authorized
capital stock of LPSub consists of 1,001 shares of Class A Common Stock, par
value $.01 per share, of which one share is outstanding and owned by the
Partnership, and 1,000 shares of Class B Common Stock, of which no shares are
outstanding.
There is no outstanding option, warrant or other agreement or
commitment to which either the Partnership, the Operating Partnership or LPSub
is a party or by which it is bound providing for the issuance of any additional
securities of the Partnership, the Operating Partnership or LPSub.
(c) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary action on
the part of the Partnership and LPSub other than the approval of the Conversion
Proposal by the limited partners of the Partnership. This Agreement has been
duly executed and delivered by the Partnership and LPSub and is enforceable
against each of LPSub and the Partnership in accordance with its terms.
(d) Proxy Statement; Other Information. The Partnership
represents that the Registration Statement, the Proxy Statement, the Schedule
13E-3 and all other filings with the SEC in connection with the Conversion
comply in all material respects with the Securities Act and the Exchange Act, as
the case may be, and that these materials do not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading.
(e) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Partnership and LPSub nor the
consummation of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the Agreement of Limited Partnership of
the Partnership (the "Partnership Agreement"); (ii) require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority or body, except (A) pursuant to the
Securities Act and the Exchange Act or the rules and requirements of any
national securities exchange or the National Association of Securities Dealers,
Inc., (B) the filing of a certificate of merger pursuant to the Delaware Revised
Uniform Limited Partnership Act (the "Delaware RULPA") and the General
Corporation Law of the State of Delaware (the "DGCL"), (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the Partnership or the Operating Partnership; (iii) result in a
default (or give rise to any right of termination, unilateral modification or
amendment, cancellation or acceleration) under any of the terms, conditions or
B-3
provisions of any note, license, agreement or other instrument or obligation to
which the Partnership or the Operating Partnership is a party or by which the
Partnership or the Operating Partnership or any of their respective assets may
be bound, except for such defaults (or rights of termination, unilateral
modification or amendment, cancellation or acceleration) which in the aggregate
would not have a material adverse effect on the Partnership or the Operating
Partnership; or (iv) violate any order, writ, injunction, decree, judgment,
ordinance, statute, rule or regulation applicable to the Partnership or the
Operating Partnership or any of their respective properties or businesses,
except for violations (other than of orders, writs, injunctions or decrees)
which would not in the aggregate have a material adverse effect on the
Partnership or the Operating Partnership.
SECTION 2.2 Representations and Warranties by the Corporation.
The Corporation represents and warrants to the other parties that:
(a) Organization and Good Standing of the Corporation and the
Trust. The Corporation is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Trust is a statutory
business trust duly created, validly existing and in good standing under the
laws of the State of Delaware.
(b) Capitalization. The authorized capital stock of the
Corporation consists of 1,000,000 shares of Preferred Stock, par value $.01 per
share, of which none are outstanding, and 20,000,000 shares of Common Stock, par
value $.01 per share, of which 1,000 shares are outstanding and owned by the
Partnership. The authorized securities of the Trust consist of 4,217,837 Trust
Preferred Securities, of which none are outstanding, and 130,449 Trust Common
Securities, of which 100 outstanding and owned by the Corporation.
There is no outstanding option, warrant or other agreement or
commitment to which either the Corporation or the Trust is a party or by which
it is bound providing for the issuance of any additional securities of the
Corporation or the Trust except for the issuance by the Trust to the Corporation
of 4,217,837 Trust Preferred Securities in exchange for Junior Subordinated
Debentures and 130,349 Trust Common Securities for cash and except pursuant to
this Agreement.
(c) Authorization. The execution, delivery and performance of
this Agreement has been duly and validly authorized by all necessary corporate
action on the part of the Corporation. This Agreement has been duly executed and
delivered by the Corporation and is enforceable against it in accordance with
its terms.
(d) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Corporation nor the consummation
of the transactions contemplated hereby will (i) conflict with or result in any
breach of any provision of the Corporation's Certificate of Incorporation or
Bylaws; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and the DGCL, (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the Corporation; (iii) result in a default (or give rise to any right
of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which the Corporation is
a party or by which it or any of its assets may be bound, except for such
defaults (or rights of termination, unilateral modification or amendment,
cancellation or acceleration) which in the aggregate would not have a material
adverse effect on the Corporation; or (iv) violate any order, writ, injunction,
decree, judgment, ordinance, statute, rule or regulation applicable to the
Corporation or any of its properties or businesses, except for violations (other
than of orders, writs, injunctions or decrees) which would not in the aggregate
have a material adverse effect on the Corporation.
B-4
SECTION 2.3 Representations and Warranties by Lehman/SDI and the GP
Limited Partners. Each of Lehman/SDI and the GP Limited Partners severally
represents and warrants to the other parties that:
(a) Organization and Good Standing. It is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
(b) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary corporate
action on its part. This Agreement has been duly executed and delivered by it.
(c) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by it nor the consummation of the
transactions contemplated hereby will (i) conflict with or result in any breach
of any provision of the Agreement of Limited Partnership of the General Partner,
the Partnership Agreement or its certificate of incorporation or bylaws, as the
case may be; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and DGCL, (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the General Partner or on it; (iii) result in a default (or give rise
to any right of termination, unilateral modification or amendment, cancellation
or acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which it or the General
Partner is a party or by which they or any of their assets may be bound, except
for such defaults (or rights of termination, unilateral modification or
amendment, cancellation or acceleration) which in the aggregate would not have a
material adverse effect on it or on the General Partner; or (iv) violate any
order, writ, injunction, decree, judgment, ordinance, statute, rule or
regulation applicable to it or to the General Partner or any of its properties
or businesses, except for violations (other than of orders, writs, injunctions
or decrees) which would not in the aggregate have a material adverse effect on
it or on the General Partner.
(d) Certain Agreements. Except as disclosed in the
Registration Statement, (i) there are no agreements in effect between the
General Partner or any of its affiliates, on the one hand, and the Partnership
and the Operating Partnership, on the other; and (ii) there are no material
written agreements in effect between Lehman Brothers or any of its affiliates,
on the one hand, and any member of management, on the other.
(e) Ownership of Partnership Interests; Title. It is the owner
of record and beneficially of the general or a limited partnership interest in
the General Partner described opposite its name on Exhibit A hereto and that the
information in such exhibit relating to the ultimate beneficial ownership of
such interests is true and correct. It has not received any notice of any
adverse claim to the ownership of any such interest and does not have any reason
to know of any such adverse claim that may be justified. On the Closing Date, it
shall have good and transferable title to such interest, free and clear of all
liens.
ARTICLE III
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 3.1 Legal Conditions to Conversion. Each of the parties hereto
will take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Conversion.
B-5
SECTION 3.2 Affiliates. Prior to the Closing Date the Partnership shall
deliver to the Corporation a letter identifying all persons who are, at the time
the Conversion Proposal is submitted for approval to the limited partners of the
Partnership, "affiliates" of the Partnership for purposes of Rule 145 under the
Securities Act. The Partnership shall use its best efforts to cause each such
person to deliver to the Corporation on or prior to the Closing Date executed
affiliates' letters in customary form.
SECTION 3.3 Fees and Expenses. Whether or not the Conversion is
consummated, all costs and expenses incurred by the Partnership in connection
with this Agreement and the transactions contemplated hereunder shall be paid by
the Partnership.
SECTION 3.4 Stock Exchange Listing. The Corporation shall use its best
efforts to cause the Trust Preferred Securities and Common Stock to be issued in
the Conversion to be approved for listing on the New York Stock Exchange (the
"NYSE"), subject to official notice of issuance, prior to the Closing Date. The
A Interests and the B Interests will be delisted at or immediately after the
Effective Time.
SECTION 3.5 Indemnification.
(a) The Partnership shall, and from and after the Effective
Time, the Corporation shall, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director, partner, shareholder,
agent or fiduciary of the Partnership, the Operating Partnership, the General
Partner, Lehman/SDI or the Corporation (the "Companies") or an affiliate of such
person (collectively, the "Indemnified Parties") against all losses, claims,
damages, costs, expenses, liabilities or judgments, or amounts that are paid in
settlement with the approval of the indemnifying party (which approval shall not
be unreasonably withheld) of, or in connection with, any claim, action, suit,
proceeding or investigation ("Proceeding") based in whole or in part out of the
fact that such person is or was an officer, director, partner or shareholder of
one or more of the Companies or an affiliate of such person, whether pertaining
to any matter existing or occurring at or prior to the Effective Time and
whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities") in each case to the full extent a partnership or a
corporation is permitted under Delaware law to indemnify such persons or
entities; and the Partnership (and after the Effective Time, the Corporation)
will pay or reimburse expenses in advance of the final disposition of any such
Proceeding to each Indemnified Party to the full extent permitted by law upon
receipt of an undertaking to repay such expenses if and when requested to do so
under applicable law. Without limiting the foregoing, in the event any such
Proceeding is brought against any Indemnified Party (whether arising before or
after the Effective Time), (i) the Indemnified Parties may retain counsel
satisfactory to them, (ii) the Partnership (and after the Effective Time, the
Corporation) shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties promptly as statements therefor are received, and (iii) the
Partnership (and after the Effective Time, the Corporation) will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that neither the Partnership nor the Corporation shall be liable for
any settlement of any claim effected without its written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification under this Section 3.5, upon learning of any Proceeding,
shall notify the Partnership (and after the Effective Time, the Corporation)
(but the failure so to notify the Partnership or the Corporation, as the case
may be, shall not relieve the Partnership or the Corporation from any liability
which it may have under this Section 3.5 except to the extent such failure
prejudices the indemnifying party) and shall deliver to the Partnership (and
after the Effective Time, the Corporation) the undertaking referred to above.
The Indemnified Parties as a group may retain only one law firm to represent
them with respect to each such matter unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(b) The provisions of this Section 3.5 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and the
Indemnified Party's heirs, representatives, successors and assigns.
B-6
ARTICLE IV
CONDITIONS TO THE CONVERSION
SECTION 4.1 Conditions to Each Party's Obligation to Effect the
Conversion. The respective obligations of the parties to effect the Conversion
shall be subject to the satisfaction, on or before the Closing Date, of each of
the following conditions:
(a) Representations and Warranties and Performance. The
representations and warranties of each of the other parties herein contained
shall be true and correct on the Closing Date with the same effect as though
made at such time. Each of the other parties shall have performed in all
material respects all obligations and complied in all material respects with all
agreements, undertakings, covenants and conditions required by this Agreement to
be performed or complied with by it at or prior to the Closing Date.
(b) Pending Litigation. There shall not be any litigation or
other proceeding pending or threatened to restrain or invalidate the
transactions contemplated by this Agreement.
(c) Limited Partner Approval. The Conversion Proposal shall
have been approved and adopted by the requisite vote of the holders of the A
Interests and B Interests pursuant to the Class Votes.
(d) Regulatory Approval. All authorizations, consents and
permits required to perform this Agreement and the Merger Agreement shall have
been obtained and the required statutory waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, shall have
expired or been terminated.
(e) Registration Statement. The Registration Statement filed
pursuant to Section 1.4 (a) shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceeding seeking a stop
order.
(f) NYSE Listing. The Trust Preferred Securities and the
Common Stock to be issued in the Conversion shall have been approved for listing
on the NYSE upon official notice of issuance.
(g) Blue Sky Compliance. The Corporation shall have complied
with all requirements of state securities or "blue sky" laws with respect to the
issuance of the securities in the Conversion.
(h) Special Committee Determination. The Special Committee
shall not have withdrawn its determination that the Conversion is fair to the
holders of A Interests and B Interests.
(i) Fairness Opinion. The fairness opinion delivered to the
Partnership by Smith Barney Inc. and included as an exhibit to the Proxy
Statement/Prospectus shall not have been rescinded prior to the Closing Date.
(j) Tax Opinion. The tax opinion of Morgan, Lewis & Bockius
LLP delivered to the Partnership and filed as an exhibit to the Registration
Statement shall not have been rescinded prior to the Closing Date.
(k) Validity Opinion. The Delaware law opinion of Richards,
Layton & Finger regarding the validity of the Trust Preferred Securities
delivered to the Trust and filed as an exhibit to the Registration Statement
shall not have been rescinded prior to the Closing Date.
(l) Available Financing. The Corporation shall have available
financing to refinance existing senior debt on terms acceptable to the
Corporation and the General Partner or shall have received approval of the
Conversion by the existing senior lenders.
B-7
(m) Deferred Compensation Plan. The Corporation shall have
received from Donald T. Marshall, John P. McDonnell and Norman V. Edmonson
("Management") undertakings to defer into the Deferred Compensation Plan for Key
Employees of the Operating Partnership all payments due under the previous
Deferred Compensation Plans and Long Term Performance Share Plan of the
Operating Partnership.
(n) Changes in Applicable Law. There shall have been no
material change, in effect or pending, in applicable law, including with respect
to the taxation of the Conversion, the Partnership, the Corporation or the Trust
Preferred Securities.
(o) Contribution Agreement. The Corporation shall have entered
into a Contribution Agreement with Lehman Brothers Inc. on terms satisfactory to
the parties hereto.
(p) Stockholders Agreement. The Corporation, SDI Partners I,
L.P., Lehman Brothers Inc., Lehman/SDI, Inc., Lehman Ltd I, Inc., Lehman
Brothers Capital Partners I, L.P., LB I Group Inc. and Donald T. Marshall, John
P. McDonnell, Norman V. Edmonson, Harold J. Cornelius, Max W. Hillman and Joseph
M. Corvino shall have entered into a Stockholders Agreement on terms
satisfactory to the parties hereto.
(q) Registration Rights Agreement. The Corporation, certain
affiliates of Lehman Brothers Inc. and Management shall have entered into a
Registration Rights Agreement on terms satisfactory to the parties hereto.
(r) Escrow Agreement. The Corporation and the Escrow Agent
shall have entered into an Escrow Agreement on terms satisfactory to the parties
hereto.
(s) Resale Agreement. The Corporation, certain affiliates of
Lehman Brothers Inc. and Management shall have entered into an agreement
regarding resale of the Corporation's Common Stock.
(t) Other Documentation. The parties hereto shall have entered
into such other agreements as are contemplated by the Conversion, including,
without limitation, the Indenture and Declaration of Trust in respect of the
Junior Subordinated Debentures and Trust Preferred Securities, on terms
satisfactory to the parties hereto.
ARTICLE V
TERMINATION AND ABANDONMENT
SECTION 5.1 Termination and Abandonment. This Agreement may be
terminated and the Conversion may be abandoned at any time prior to the
Effective Time, whether before or after approval by the limited partners of the
Partnership, by action of the Board of Directors of Lehman/SDI.
SECTION 5.2 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that after approval of the Conversion Proposal by the limited partners
of the Partnership, no amendment may be made which decreases the amount or
changes the type of consideration to which the limited partners of the
Partnership are entitled under this Agreement or otherwise materially adversely
affects the rights of the limited partners of the Partnership without the
further approval of the limited partners.
SECTION 5.3 Waiver. Any time prior to the Effective Time, whether
before or after the meeting referred to in Section 1.4(a), any party hereto may
waive compliance with any of the agreements of any other party or with any
conditions to the obligations of such party; provided, however, that after
approval of the Conversion Proposal by the limited partners of the Partnership,
no waiver may be given which materially adversely affects the rights of the
limited partners of the Partnership without the further approval of the limited
partners . Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party by a duly authorized officer.
B-8
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Notices. Any notices or other communications required or
permitted hereunder shall be sufficiently given if sent by telecopy or facsimile
transmission (with hard copy to follow), registered or certified mail, postage
prepaid, or Federal Express or similar overnight delivery services addressed, in
the case of all parties at
2600 One Logan Square
Philadelphia, PA 19103
Attn: Norman V. Edmonson
with required copies to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Attn: Donald A. Scott, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attn: George R. Krouse, Esq.
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attn: William G. Lawlor, Esq.
or such other address as shall be furnished in writing by any party to the
others prior to the giving of the applicable notice or communication.
SECTION 6.2 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.3 Headings. The headings herein are for convenience of
reference only, do not constitute a part of this Agreement, and shall not be
deemed to limit or affect any of the provisions hereof.
SECTION 6.4 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties, with respect to the subject matter hereof.
SECTION 6.5 Cooperation. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its reasonable efforts to take,
or cause to be taken, such action, to execute and deliver, or cause to be
executed and delivered, such governmental notifications and additional documents
and instruments and to do, or cause to be done, all things necessary, proper or
advisable under the provisions of this Agreement and under applicable law to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 6.6 No Rights, Etc.. Nothing in this Agreement express or
implied is intended to confer upon any other person any rights or remedies under
or by reason of this Agreement.
SECTION 6.7 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Delaware applicable to contracts made and to be performed in that
State.
B-9
SECTION 6.8 Special Committee. Any determination by the Corporation or
the General Partner that any of the conditions in Article IV hereof have been
satisfied or waived, or any amendment of this Agreement, shall require the
affirmative vote of the Special Committee (as defined in the Registration
Statement).
B-10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Conversion to be duly executed as of the date first above written.
SUNSOURCE INC.
By_______________________________
Chairman
SUNSOURCE L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By________________________________
Chairman
LPSUB INC.
By________________________________
President
LEHMAN/SDI, INC.
By________________________________
President
DOTMAR CORP.
By________________________________
President
JPM CORP.
By________________________________
President
B-11
NORVED CORP.
By___________________________
President
DIACOR CORP.
By___________________________
President
HJC CORP.
By___________________________
President
MWH CORP.
By___________________________
President
LJC CORP.
By__________________________
President
CELAR CORP.
By__________________________
President
B-12
EXHIBIT A
Entity Interests Held
Lehman/SDI, Inc. 53.8% general partner interest
Dotmar Corp.
JPM Corp.
Norved Corp.
Diacor Corp.
HJC Corp.
MWH Corp.
LJC Corp.
Celar Corp.
B-13
ANNEX 1
AGREEMENT OF MERGER
OF
SUNSOURCE L.P.
(a Delaware limited partnership)
AND
LPSUB INC.
(a Delaware corporation)
WITH AND INTO
SUNSOURCE INC.
(a Delaware corporation)
AGREEMENT OF MERGER, dated as of ___________, 1997, by and among
SunSource L.P., a Delaware limited partnership (the "Partnership"), LPSub Inc.,
a Delaware corporation ("LPSub"; and together with the Partnership, the
"Disappearing Entities"), and SunSource Inc., a Delaware corporation (the
"Corporation"), with reference to the following RECITALS:
A. The Partnership is a Delaware limited partnership whose general
partner is SDI Partners I, L.P. Its limited partnership interests are publicly
held, consisting of 11,099,573 Class A limited partnership interests ("A
Interests") and 21,675,746 Class B limited partnership interests ("B Interests).
B. LPSub is a Delaware corporation whose authorized and outstanding
stock consists of 1,001 shares of Class A Common Stock, par value $.01 per
share, all of which are owned of record and beneficially by the Partnership, and
1,000 shares of Class B Common Stock, par value $.01 per share, all of which are
owned of record and beneficially by Lehman/SDI, Inc., a Delaware corporation.
LPSub is the general partner of SDI Partners I, L.P.
C. The Corporation is a Delaware corporation whose authorized capital
stock consists of 1,000,000 shares of Preferred Stock, par value $.01 per share,
of which none are outstanding, and 20,000,000 shares of Common Stock, par value
$.01 per share, of which 1,000 shares are outstanding and owned by the
Partnership.
D. The Corporation has created SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"), which has authorized and issued
4,217,837 11.6% Trust Preferred Securities, representing preferred undivided
beneficial interests in the assets of the Trust (the "Trust Preferred
Securities") and 130,449 Trust Common Securities, representing common undivided
beneficial interests in the assets of the Trust, all of which are owned by the
Corporation.
E. The partners of the Partnership and the Boards of Directors and
stockholder of LPSub and the Corporation have approved and adopted resolutions
approving and adopting this Agreement of Merger in accordance with the General
Corporation Law of the State of Delaware (the "DGCL") and the Delaware Revised
Uniform Limited Partnership Act (the "DRULPA").
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants herein contained and intending to be legally bound, agree as follows:
1. Parties to Merger. The Disappearing Entities and the Corporation
(such parties to the merger being
B-14
hereinafter sometimes collectively referred to as the "Constituent Entities")
shall effect a merger (the "Merger") in accordance with and subject to the terms
and conditions of this Agreement of Merger (the "Agreement").
2. Merger. At the Effective Time (as defined in Section 3 hereof), each
of the Disappearing Entities shall be merged with and into the Corporation
(which latter entity shall be, and is hereinafter sometimes referred to as, the
"Surviving Entity").
3. Filing and Effective Time. A certificate of merger and such other
documents and instruments as are required by, and complying in all respects
with, the DGCL and DRULPA shall be filed in the Office of the Secretary of State
of Delaware. The Merger shall become effective, following the filing of all such
documents and instruments, at 11:59 p.m. on __________, 1997 (the "Effective
Time").
4. Effect of Merger. At the Effective Time, the separate existence of
each of the Disappearing Entities shall cease, the Surviving Entity shall
continue to be a corporation organized and governed by the laws of the State of
Delaware and the Merger shall have the effects provided therefor by the DGCL and
DRULPA.
5. Partnership Interests and Capital Stock. At the Effective Time:
(a) Each A Interest of the Partnership issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holders thereof, be converted into 0.38
share of Trust Preferred Securities and $1.30 in cash;
(b) Each B Interest of the Partnership issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holders thereof, be converted into 0.25
share of Common Stock of the Corporation;
(c) The shares of Class B Common Stock of LPSub issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into 538,000 shares of Common Stock of the Corporation;
(d) The shares of Class A Common Stock of LPSub issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be canceled;
and
(e) No fractional interests shall be issued in the Merger but
in lieu thereof each holder of A Interests shall be entitled to receive cash in
an amount equal to the fraction of a Trust Preferred Security to which the
holder is otherwise entitled multiplied by the average closing price of the
Trust Preferred Securities for the five trading days following the Effective
Time and each holder of B Interests shall be entitled to receive cash in an
amount equal to the fraction of a share of Common Stock to which the holder is
otherwise entitled multiplied by the average closing price of the Common Stock
for the five trading days following the Effective Time.
6. Exchange of Certificates. Promptly after the Effective Time, the
Corporation will mail to all former limited partners of the Partnership of
record at the Effective Time a letter of transmittal containing instructions
with respect to the surrender of depositary receipts for A Interests in exchange
for certificates representing Trust Preferred Securities and cash and the
surrender of depositary receipts for B Interests in exchange for certificates
representing shares of Common Stock. Upon surrender to the Corporation of one or
more depositary receipts, together with a properly completed letter of
transmittal, there will be issued and mailed to former limited partners of
record at the Effective Time a certificate or certificates representing the
number of Trust Preferred Securities and cash or a certificate or certificates
for shares of Common Stock to which such holder is entitled. From and after the
Effective Time, each depositary receipt will evidence only the right to receive
Trust Preferred Securities and cash or shares of Common Stock. No distributions
or dividends with respect to the Trust Preferred Securities or Common Stock
payable to the holders of record thereof after the Effective Time will be paid
to the holder of any unsurrendered depositary receipts until such depositary
receipts are surrendered for exchange, at which time accumulated distributions
or dividends will be paid, without interest, subject to any applicable escheat
laws.
B-15
7. Further Assurances. Each of the Disappearing Entities shall at any
time, or from time to time, as and when requested by the Surviving Entity, or by
its successors and assigns, execute and deliver, or cause to be executed and
delivered in its name by its last acting officers, or by the corresponding
officers of the Surviving Entity, all such conveyances, assignments, transfers,
deeds, or other instruments, and shall take, or cause to be taken, such further
or other action as the Surviving Entity, or its successors and assigns, may deem
required or convenient in order to evidence the transfer, vesting or devolution
of any property, right, privilege, immunity, power or purpose, or to vest or
perfect in or confirm to the Surviving Entity, or its successors and assigns,
title to and possession of all the properties, rights, privileges, immunities,
powers and purposes of the Disappearing Entities and otherwise to carry out the
intent and purposes hereof.
8. Termination. Notwithstanding approval by the partners and
stockholder of the Constituent Entities of this Agreement, this Agreement may be
terminated at any time prior to the Effective Time by action of SDI Partners I,
L.P.
9. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware, without giving effect to
principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto, pursuant to the approval and
authority duly given by resolutions approved and adopted by their respective
partners and Boards of Directors and stockholder, have duly executed this
Agreement of Merger as of the day and year first written above.
SUNSOURCE L.P.
By SDI Partners I, L.P.,
Its General Partner
By LPSub Inc.,
Its General Partner
By________________________________
Chairman
LPSUB INC.
By________________________________
President
SUNSOURCE INC.
By________________________________
Chairman
B-16
ANNEX 2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF SUNSOURCE INC.
SunSource Inc., a Delaware corporation, the original Certificate of
Incorporation of which was filed with the Secretary of State of the State of
Delaware on December 30, 1996, HEREBY CERTIFIES that this Amended and Restated
Certificate of Incorporation restating, integrating and amending its Certificate
of Incorporation was duly proposed by its Board of Directors and adopted by its
sole stockholder in accordance with Sections 242 and 245 of the General
Corporation Law of the State of Delaware, as amended (the "GCL").
1. Corporate Name. The name of the corporation is SunSource Inc.
(hereinafter referred to as the "Corporation").
2. Registered Office. The registered office of the Corporation is
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, in the County of New Castle, in the State of Delaware. The name of
its registered agent at that address is The Corporation Trust Company.
3. Corporate Purpose. The purpose of the Corporation is to engage in
any lawful act or activity for which a corporation may now or hereafter be
organized under the GCL.
4. Capital Stock.
4.1 Authorized Amount. The Corporation shall be authorized to
issue 21,000,000 shares of capital stock, of which 20,000,000 shares shall be
Common Stock, par value $0.01 per share, and 1,000,000 shares shall be Preferred
Stock, par value $0.01 per share.
4.2 Authority of Board to Fix Terms of Preferred Stock. The
Board of Directors of the Corporation is hereby expressly authorized at any time
and from time to time to provide for the issuance of all or any shares of the
Preferred Stock in one or more series, and to fix for each such series such
voting powers, full or limited, or no voting powers, and such distinctive
designations, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issuance of such series and to the fullest extent as
may now or hereafter be permitted by the GCL, including, without limiting the
generality of the foregoing, the authority to provide that any such series may
be (i) subject to redemption at such time or times and at such price or prices;
(ii) entitled to receive dividends (which may be cumulative or non-cumulative)
at such rates, on such conditions, and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or classes
or any other series; (iii) entitled to such rights upon the dissolution of, or
upon any distribution of the assets of, the Corporation; or (iv) convertible
into, or exchangeable for, shares of any other class or classes of stock, or of
any other series of the same or any other class or classes of stock, or other
securities or property, of the Corporation at such price or prices or at such
rates of exchange and with such adjustments, all as may be stated in such
resolution or resolutions. Unless otherwise provided in such resolution or
resolutions, shares of Preferred Stock of any series which shall be issued and
thereafter acquired by the Corporation through purchase, redemption, exchange,
conversion or otherwise shall return to the status of authorized but unissued
Preferred Stock.
5. Section 203. The Corporation shall not be governed by Section 203 of
the Delaware General Corporation Law (pertaining to business combinations with
interested stockholders), or any successor provision or provisions.
6. Liability of Directors. A director of the Corporation shall not be
liable to the Corporation or its stockholders for monetary damages (including,
without limitation, any judgment, amount paid in settlement, fine, penalty,
punitive damages, excise tax assessed with respect to an employee benefit plan,
or expense of any nature, including attorneys' fees) for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the GCL; or (iv) for any
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transaction from which the director derived an improper personal benefit.
If the GCL is amended after the date hereof to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall automatically be eliminated
or limited to the fullest extent permitted by the GCL as so amended. Neither the
amendment nor repeal of this Article 6 nor the adoption of any provision of this
Restated Certificate of Incorporation inconsistent with this Article 6 shall
eliminate or reduce the effect of this Article 6 in respect of any matter
arising or relating to any actions or omissions occurring prior to such
amendment, repeal or adoption of an inconsistent provision.
7. Amendment of Bylaws. The Board of Directors shall have the power to
adopt, amend or repeal the Bylaws of the Corporation. Whenever the Bylaws of the
Corporation shall require for action by the Board of Directors, by the holders
of any class or series of shares or by the holders of any other securities
having voting power, the vote of a greater number or proportion than is required
by any provision of applicable law, the Certificate of Incorporation or the
general amendment provisions of the Bylaws, the provision of the Bylaws
requiring such greater vote shall not be altered, amended or repealed except by
such greater vote.
8. Amendment of Certificate of Incorporation. The Corporation reserves
the right to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders are granted subject to this
reservation.
IN WITNESS WHEREOF, SunSource Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed and acknowledged on this 2nd day of
June, 1997 in its name by a duly authorized officer.
SUNSOURCE INC.
By: _______________________________
Donald T. Marshall
Chairman and Chief Executive Officer
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ANNEX 3
B Y L A W S
OF
SUNSOURCE INC.
(a Delaware Corporation)
---------------------
ARTICLE I
Offices and Fiscal Year
SECTION 1.01. Registered Office.--The registered office of the
corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware until otherwise established by resolution of the board of directors,
and a certificate certifying the change is filed in the manner provided by
statute.
SECTION 1.02. Other Offices.--The corporation may also have offices at
such other places within or without the State of Delaware as the board of
directors may from time to time determine or the business of the corporation
requires.
SECTION 1.03. Fiscal Year.--The fiscal year of the corporation shall
end on the 31st of December in each year.
ARTICLE II
Notice - Waivers - Meetings
SECTION 2.01. Notice, What Constitutes.--Whenever, under the provisions
of the Delaware General Corporation Law ("GCL") or the certificate of
incorporation or these bylaws, notice is required to be given to any director or
stockholder, it shall not be construed to mean personal notice, but such notice
may be given in writing, by mail or by telegram (with messenger service
specified), telex or TWX (with answerback received) or courier service, charges
prepaid, or by facsimile transmission to the address (or to the telex, TWX,
facsimile or telephone number) of the person appearing on the books of the
corporation, or in the case of directors, supplied to the corporation for the
purpose of notice. If the notice is sent by mail, telegraph or courier service,
it shall be deemed to be given when deposited in the United States mail or with
a telegraph office or courier service for delivery to that person or, in the
case of telex or TWX, when dispatched, or in the case of facsimile transmission,
when received.
SECTION 2.02. Notice of Meetings of Board of Directors.--Notice of a
regular meeting of the board of directors need not be given. Notice of every
special meeting of the board of directors shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone,
telex, TWX or facsimile transmission) or 48 hours (in the case of notice by
telegraph, courier service or express mail) or five days (in the case of notice
by first class mail) before the time at which the meeting is to be held. Every
such notice shall state the time and place of the meeting. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of the
board need be specified in a notice of the meeting.
SECTION 2.03. Notice of Meetings of Stockholders.--Written notice of
the place, date and hour of every meeting of the stockholders, whether annual or
special, shall be given to each stockholder of record entitled to vote at the
meeting not less than ten nor more than 60 days before the date of the meeting.
Every notice of a special
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meeting shall state the purpose or purposes thereof. If the notice is sent by
mail, it shall be deemed to have been given when deposited in the United States
mail, postage prepaid, directed to the stockholder at the address of the
stockholder as it appears on the records of the corporation.
SECTION 2.04. Waivers of Notice.
(a) Written Waiver.--Whenever notice is required to be given under any
provisions of the GCL or the certificate of incorporation or these bylaws, a
written waiver, signed by the person or persons entitled to the notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders, directors, or members of a committee of
directors need be specified in any written waiver of notice of such meeting.
(b) Waiver by Attendance.--Attendance of a person at a meeting, either
in person or by proxy, shall constitute a waiver of notice of such meeting,
except where a person attends a meeting for the express purpose of objecting at
the beginning of the meeting to the transaction of any business because the
meeting was not lawfully called or convened.
SECTION 2.05. Exception to Requirements of Notice.
(a) General Rule.--Whenever notice is required to be given, under any
provision of the GCL or the certificate of incorporation or these bylaws, to any
person with whom communication is unlawful, the giving of such notice to such
person shall not be required and there shall be no duty to apply to any
governmental authority or agency for a license or permit to give such notice to
such person. Any action or meeting which shall be taken or held without notice
to any such person with whom communication is unlawful shall have the same force
and effect as if such notice had been duly given.
(b) Stockholders Without Forwarding Addresses.--Whenever notice is
required to be given, under any provision of the GCL or the certificate of
incorporation or these bylaws, to any stockholder to whom (i) notice of two
consecutive annual meetings, and all notices of meetings or of the taking of
action by written consent without a meeting to such person during the period
between such two consecutive annual meetings, or (ii) all, and at least two,
payments (if sent by first class mail) of dividends or interest on securities
during a 12 month period, have been mailed addressed to such person at the
person's address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth the person's then current address, the requirement that notice be
given to such person shall be reinstated.
SECTION 2.06. Conference Telephone Meetings.--One or more directors may
participate in a meeting of the board, or of a committee of the board, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Participation in a
meeting pursuant to this section shall constitute presence in person at such
meeting.
ARTICLE III
Meetings of Stockholders
SECTION 3.01. Place of Meeting.--All meetings of the stockholders of
the corporation shall be held at the registered office of the corporation, or at
such other place within or without the State of Delaware as shall be designated
by the board of directors in the notice of such meeting.
SECTION 3.02. Annual Meeting.--The board of directors may fix and
designate the date and time of the annual meeting of the stockholders, but if no
such date and time is fixed and designated by the board, the meeting for any
calendar year shall be held on the fourth Tuesday in April in such year, if not
a legal holiday under the laws of Delaware, and, if a legal holiday, then on the
next succeeding business day, not a Saturday, at 10 o'clock A.M.,
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and at said meeting the stockholders then entitled to vote shall elect directors
and shall transact such other business as may properly be brought before the
meeting.
SECTION 3.03. Special Meetings.--Special meetings of the stockholders
of the corporation may be called at any time by the chairman or a majority of
the board of directors, or at the request, in writing, of stockholders entitled
to cast 25% of the votes that all stockholders are entitled to cast at the
particular meeting. At any time, upon the written request of any person or
persons who have duly called a special meeting, which written request shall
state the purpose or purposes of the meeting, it shall be the duty of the
secretary to fix the date of the meeting which shall be held at such date and
time as the secretary may fix, not less than ten nor more than 60 days after the
receipt of the request, and to give due notice thereof. If the secretary shall
neglect or refuse to fix the time and date of such meeting and give notice
thereof, the person or persons calling the meeting may do so.
SECTION 3.04. Quorum, Manner of Acting and Adjournment.
(a) Quorum.--The holders of a majority of the shares entitled to vote,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders except as otherwise provided by the GCL, by the
certificate of incorporation or by these bylaws. If a quorum is not present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented. At any such adjourned
meeting at which a quorum is present or represented, the corporation may
transact any business which might have been transacted at the original meeting.
If the adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
(b) Manner of Acting.--Directors shall be elected by a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. In all matters other than the
election of directors, the affirmative vote of the majority of shares present in
person or represented by proxy at the meeting and entitled to vote thereon shall
be the act of the stockholders, unless the question is one upon which, by
express provision of the applicable statute, the certificate of incorporation or
these bylaws, a different vote is required in which case such express provision
shall govern and control the decision of the question. The stockholders present
in person or by proxy at a duly organized meeting can continue to do business
until adjournment, notwithstanding withdrawal of enough stockholders to leave
less than a quorum.
SECTION 3.05. Organization.--At every meeting of the stockholders, the
chairman, if there be one, or in the case of a vacancy in the office or absence
of the chairman, one of the following persons present in the order stated: the
vice chairman, if one has been appointed, the president, the vice presidents in
their order of rank or seniority, a chairman designated by the board of
directors or a chairman chosen by the stockholders entitled to cast a majority
of the votes which all stockholders present in person or by proxy are entitled
to cast, shall act as chairman, and the secretary, or, in the absence of the
secretary, an assistant secretary, or in the absence of the secretary and the
assistant secretaries, a person appointed by the chairman, shall act as
secretary.
SECTION 3.06. Voting.
(a) General Rule.--Unless otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote, in person or by
proxy, for each share of capital stock having voting power held by such
stockholder.
(b) Voting and Other Action by Proxy.--
(i) A stockholder may execute a writing authorizing another
person or persons to act for the stockholder as proxy. Such execution may be
accomplished by the stockholder or the authorized officer, director, employee or
agent of the stockholder signing such writing or causing his or her signature to
be affixed to such writing by any reasonable means including, but not limited
to, by facsimile signature. A stockholder may authorize another person or
persons to act for the stockholder as proxy by transmitting or authorizing the
transmission of a telegram, cablegram, or other means of electronic transmission
to the person who will be the holder of the proxy or to a proxy solicitation
firm, proxy support service organization or like agent duly authorized by the
person who
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will be the holder of the proxy to receive such transmission if such telegram,
cablegram or other means of electronic transmission sets forth or is submitted
with information from which it can be determined that the telegram, cablegram or
other electronic transmission was authorized by the stockholder.
(ii) No proxy shall be voted or acted upon after three years
from its date, unless the proxy provides for a longer period.
(iii) A duly executed proxy shall be irrevocable if it states
that it is irrevocable and if, and only so long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally.
SECTION 3.07. Consent of Stockholders in Lieu of Meeting.--Any action
required to be taken at any annual or special meeting of stockholders of the
corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered to the corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Every written consent shall bear the date
of signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to therein unless,
within 60 days of the earliest dated consent delivered in the manner required in
this section to the corporation, written consents signed by a sufficient number
of holders to take action are delivered to the corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to a corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
SECTION 3.08. Voting Lists.--The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting. The list shall be arranged in alphabetical order, showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 3.09. Inspectors of Election.
(a) Appointment.--All elections of directors shall be by written
ballot, unless otherwise provided in the certificate of incorporation; the vote
upon any other matter need not be by ballot. In advance of any meeting of
stockholders the board of directors may appoint inspectors, who need not be
stockholders, to act at the meeting. If inspectors are not so appointed, the
chairman of the meeting may, and upon the demand of any stockholder or his proxy
at the meeting and before voting begins shall, appoint inspectors. The number of
inspectors shall be either one or three, as determined, in the case of judges
appointed upon demand of a stockholder, by stockholders present entitled to cast
a majority of the votes which all stockholders present are entitled to cast
thereon. No person who is a candidate for office shall act as an inspector. In
case any person appointed as an inspector fails to appear or fails or refuses to
act, the vacancy may be filled by appointment made by the board of directors in
advance of the convening of the meeting, or at the meeting by the chairman of
the meeting.
(b) Duties.--If inspectors are appointed, they shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum and the authenticity,
validity
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and effect of proxies, shall receive votes or ballots, shall hear and determine
all challenges and questions in any way arising in connection with the right to
vote, shall count and tabulate all votes, shall determine the result, and shall
do such acts as may be proper to conduct the election or vote with fairness to
all stockholders. If there be three inspectors of election, the decision, act or
certificate of a majority shall be effective in all respects as the decision,
act or certificate of all.
(c) Report.--On request of the chairman of the meeting or of any
stockholder or his proxy, the inspectors shall make a report in writing of any
challenge or question or matter determined by them, and execute a certificate of
any fact found by them.
SECTION 3.10. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the board of
directors of the corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders (A) pursuant
to the corporation's notice of meeting, (B) by or at the direction of the board
of directors or (C) by any stockholder of the corporation who was a stockholder
of record at the time of giving of notice provided for in this bylaw, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this bylaw.
(ii) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (C) of paragraph
(a)(i) of this bylaw, the stockholder must have given timely notice thereof in
writing to the secretary of the corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is more than 30 days
before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the l0th day following the day on which public announcement of the date of such
meeting is first made by the corporation. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a stockholder's notice as described above. Such stockholder's
notice shall set forth (A) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (B) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (C) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the corporation's books, and of
such beneficial owner and (ii) the class or series and number of shares of the
corporation which are owned of record and beneficially by such stockholder and
such beneficial owner.
(iii) Notwithstanding anything in the second sentence of
paragraph (a)(ii) of this bylaw to the contrary, in the event that the number of
directors to be elected to the board of directors of the corporation is
increased and there is no public announcement by the corporation naming all of
the nominees for director or specifying the size of the increased board of
directors at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this bylaw shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the secretary at the
principal executive offices of the corporation not later than the close of
business on the l0th day following the day on which such public announcement is
first made by the corporation.
(b) Special Meetings of Stockholders.--Only such business shall be
conducted at a special meeting of
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stockholders as shall have been brought before the meeting pursuant to a proper
notice of meeting. Nominations of persons for election to the board of directors
may be made at a special meeting of stockholders at which directors are to be
elected pursuant to a proper notice of meeting (i) by or at the direction of the
board of directors or (ii) by any stockholder of the corporation who is a
stockholder of record at the time of giving of notice provided for in this
bylaw, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in this bylaw. In the event a special meeting of
stockholders is called for the purpose of electing one or more directors to the
board of directors, any stockholder may nominate a person or persons (as the
case may be), for election to such position(s) as specified in a proper notice
of meeting, if the stockholder's notice required by paragraph (a)(ii) of this
bylaw shall be delivered to the Secretary at the principal executive offices of
the corporation not earlier than the close of business on the 90th day prior to
such special meeting and not later than the close of business on the later of
the 60th day prior to such special meeting or the 10th day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the board of directors or other stockholders to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
(c) General.
(i) Only such persons who are nominated in accordance with the
procedures set forth in this bylaw shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this bylaw. Except as otherwise provided by law, the certificate of
incorporation, or these bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this bylaw and, if any proposed
nomination or business is not in compliance with this bylaw, to declare that
such defective proposal or nomination shall be disregarded.
(ii) For purposes of this bylaw, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this bylaw,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights
(A) of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (B) of the holders of
any series of Preferred Stock to elect directors under specified circumstances.
ARTICLE IV
Board of Directors
SECTION 4.01. Powers.--All powers vested by law in the corporation
shall be exercised by or under the authority of, and the business and affairs of
the corporation shall be managed under the direction of, the board of directors.
SECTION 4.02. Number and Term of Office.--The board of directors shall
consist of such number of directors as may be determined from time to time by
resolution of the board of directors. Each director shall hold office until the
expiration of the term for which he or she was selected and until a successor
shall have been elected and qualified or until his or her earlier death,
resignation or removal. Directors need not be residents of Delaware or
stockholders of the corporation.
SECTION 4.03. Vacancies.--Vacancies and newly created directorships
resulting from any increase in the authorized number of directors elected by all
of the stockholders having a right to vote as a single class may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the
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directors so chosen shall hold office until their successors are elected and
qualified or until their earlier death, resignation or removal. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute. Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected. If, at the time of filling any vacancy or any
newly created directorship, the directors then in office shall constitute less
than a majority of the whole board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent of the total number of the shares at
the time outstanding having the right to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office.
SECTION 4.04. Resignations.--Any director may resign at any time upon
written notice to the corporation. The resignation shall be effective upon
receipt thereof by the corporation or at such subsequent time as shall be
specified in the notice of resignation and, unless otherwise specified in the
notice, the acceptance of the resignation shall not be necessary to make it
effective.
SECTION 4.05. Removal.--Any director or the entire board of directors
may be removed, with or without cause, by the holders of shares entitled to cast
a majority of the votes which all stockholders are entitled to cast at an
election of directors.
SECTION 4.06. Organization.--At every meeting of the board of
directors, the chairman, if there be one, or, in the case of a vacancy in the
office or absence of the chairman, one of the following officers present in the
order stated: the vice chairman, if there be one, the president, the vice
presidents in their order of rank and seniority, or a chairman chosen by a
majority of the directors present, shall preside, and the secretary, or, in the
absence of the secretary, an assistant secretary, or in the absence of the
secretary and the assistant secretaries, any person appointed by the chairman of
the meeting, shall act as secretary.
SECTION 4.07. Place of Meeting.--Meetings of the board of directors
shall be held at such place within or without the State of Delaware as the board
of directors may from time to time determine, or as may be designated in the
notice of the meeting.
SECTION 4.08. Regular Meetings.--Regular meetings of the board of
directors shall be held without notice at such time and place as shall be
designated from time to time by resolution of the board of directors.
SECTION 4.09. Special Meetings.--Special meetings of the board of
directors shall be held whenever called by the chairman or by two or more of the
directors.
SECTION 4.10. Quorum, Manner of Acting and Adjournment.
(a) General Rule.--At all meetings of the board a majority of the total
number of directors shall constitute a quorum for the transaction of business.
The vote of a majority of the directors present at any meeting at which a quorum
is present shall be the act of the board of directors, except as may be
otherwise specifically provided by the GCL or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present.
(b) Unanimous Written Consent.--Unless otherwise restricted by the
certificate of incorporation, any action required or permitted to be taken at
any meeting of the board of directors may be taken without a meeting, if all
members of the board consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the board.
SECTION 4.11. Executive and Other Committees.
(a) Establishment.--The board of directors may, by resolution adopted
by a majority of the whole board,
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establish an Executive Committee and one or more other committees, each
committee to consist of one or more directors. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee and the alternate or alternates, if
any, designated for such member, the member or members of the committee present
at any meeting and not disqualified from voting, whether or not they constitute
a quorum, may unanimously appoint another director to act at the meeting in the
place of any such absent or disqualified member.
(b) Powers.--The Executive Committee, if established, and any such
other committee to the extent provided in the resolution establishing such
committee shall have and may exercise all the power and authority of the board
of directors in the management of the business and affairs of the corporation
and may authorize the seal of the corporation to be affixed to all papers which
may require it; but no such committee shall have the power or authority in
reference to amending the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the GCL, fix the designation and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of shares of any series), adopting an agreement of merger or
consolidation under Section 251 or 252 of the GCL, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
bylaws of the corporation. The Executive Committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock and to adopt
a certificate of ownership and merger pursuant to Section 253 of the GCL. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee so
formed shall keep regular minutes of its meetings and report the same to the
board of directors when required.
(c) Committee Procedures.--The term "board of directors" or "board,"
when used in any provision of these bylaws relating to the organization or
procedures of or the manner of taking action by the board of directors, shall be
construed to include and refer to the Executive Committee or other committee of
the board.
SECTION 4.12. Approval of Independent Directors for Certain
Actions.--(a) Prior to _____________ 2000, the approval of at least a majority
of the corporation's Independent Directors (as defined below) shall be required
to approve (i) any amendment to the certificate of incorporation or bylaws of
the corporation or any stockholder rights plan of the corporation (including the
redemption of the rights thereunder or waiver of any provision thereof) or any
waiver of, or "opt-out" from, the benefit or effect of any provision thereof) or
other provision applicable to the corporation; or (ii) any agreement binding the
corporation in respect of the sale, in a single transaction or a series of
related transactions, of all or a Substantial Part of the corporation (as
defined below), whether by liquidation, consolidation, dissolution, sale of
capital stock or assets, tender or exchange offer, merger or other business
combination.
(b) The approval of at least a majority of the corporation's
Independent Directors shall be required to approve and authorize (i) any
transaction or series of related transactions between the corporation or any of
its subsidiaries, on the one hand, and any Stockholder (as defined below) or any
affiliate of a Stockholder, on the other hand, so long as any of such entities
and its affiliates own, in the aggregate, at least 10% of the outstanding Common
Stock, (ii) any amendment to, or waiver of, any provisions of the Stockholders
Agreement, dated as of July __ , 1997, among the corporation and certain of its
stockholders, or (iii) notwithstanding the terms of the preceding paragraph (a),
any amendment to the certificate of incorporation or bylaws of the corporation
which would amend, repeal, waive, contravene or otherwise alter this paragraph
(b), including amendments of the defined terms used herein.
For purposes of the foregoing:
"Independent Director" means a director of the corporation who is not
(apart from such directorship) (i) an officer, director, affiliate, employee,
principal stockholder, consultant or partner of a Stockholder or any affiliate
of a Stockholder or of any entity that was dependent upon a Stockholder or any
affiliate of a Stockholder for more
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than 5% of its revenues or earnings in its most recent fiscal year, or (ii) an
officer, employee, consultant or partner of the corporation or any affiliate of
the corporation or an officer, employee, principal stockholder, consultant or
partner of an entity that was dependent upon the corporation or any affiliate of
the corporation for more than 5% of its revenues or earnings in its most recent
fiscal year;
"Stockholder" means SDI Partners I, L.P., Lehman Brothers Capital
Partners I, L.P., Lehman Ltd I, Inc., LB I Group, Inc., Lehman/SDI, Inc., Lehman
Brothers Inc., and their respective affiliates or successors; and
"Substantial Part of the corporation" means, as of any date, thirty
percent (30%) or more of (i) the outstanding capital stock of the corporation
(measured by economic interest or voting power), or (ii) the book value of the
consolidated tangible assets of the corporation and its subsidiaries, taken as a
whole (without regard to any liabilities of the corporation or any of its
subsidiaries), as of the end of its most recent fiscal quarter ending prior to
the time the determination is made.
SECTION 4.13. Compensation of Directors.--Unless otherwise restricted
by the certificate of incorporation, the board of directors shall have the
authority to fix the compensation of directors.
ARTICLE V
Officers
SECTION 5.01. Number, Qualifications and Designation.--The officers of
the corporation shall be chosen by the board of directors and shall be a
chairman, a president, one or more vice presidents, a secretary, a treasurer,
and such other officers as may be elected in accordance with the provisions of
section 5.03 of this Article. Any number of offices may be held by the same
person. Officers may, but need not, be directors or stockholders of the
corporation.
SECTION 5.02. Election and Term of Office.--The officers of the
corporation, except those elected by delegated authority pursuant to section
5.03 of this Article, shall be elected annually by the board of directors, and
each such officer shall hold office for a term of one year and until a successor
is elected and qualified, or until his or her earlier resignation or removal.
Any officer may resign at any time upon written notice to the corporation.
SECTION 5.03. Subordinate Officers, Committees and Agents.--The board
of directors may from time to time elect such other officers and appoint such
committees, employees or other agents as it deems necessary, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as are provided in these bylaws, or as the board of directors may from
time to time determine. The board of directors may delegate to any officer or
committee the power to elect subordinate officers and to retain or appoint
employees or other agents, or committees thereof, and to prescribe the authority
and duties of such subordinate officers, committees, employees or other agents.
SECTION 5.04. The Chairman.--The chairman shall be the chief executive
officer of the corporation, shall preside at all meetings of the stockholders
and of the board of directors, and shall perform such other duties as may from
time to time be assigned by the board of directors.
SECTION 5.05. The President.--The president shall be the chief
operating officer of the corporation and shall perform such other duties as from
time to time may be assigned by the board of directors and the chairman.
SECTION 5.06. The Vice Presidents.--The vice presidents shall perform
the duties of the president in the absence of the president and such other
duties as may from time to time be assigned to them by the board of directors or
by the president.
SECTION 5.07. The Secretary.--The secretary, or an assistant secretary,
shall attend all meetings of the stockholders and of the board of directors and
shall record the proceedings of the stockholders and of the directors
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and of committees of the board in a book or books to be kept for that purpose;
shall see that notices are given and records and reports properly kept and filed
by the corporation as required by law; shall be the custodian of the seal of the
corporation and see that it is affixed to all documents to be executed on behalf
of the corporation under its seal; and, in general, shall perform all duties
incident to the office of secretary, and such other duties as may from time to
time be assigned by the board of directors or the president.
SECTION 5.08. The Treasurer.--The treasurer, or an assistant treasurer,
shall have or provide for the custody of the funds or other property of the
corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the corporation;
shall deposit all funds in his or her custody as treasurer in such banks or
other places of deposit as the board of directors may from time to time
designate; whenever so required by the board of directors, shall render an
account showing his or her transactions as treasurer and the financial condition
of the corporation; and, in general, shall discharge such other duties as may
from time to time be assigned by the board of directors or the president.
SECTION 5.09. Officers' Bonds.--No officer of the corporation need
provide a bond to guarantee the faithful discharge of the officer's duties
unless the board of directors shall by resolution so require a bond in which
event such officer shall give the corporation a bond (which shall be renewed if
and as required) in such sum and with such surety or sureties as shall be
satisfactory to the board of directors for the faithful performance of the
duties of office.
SECTION 5.10. Salaries.--The salaries of the officers and agents of the
corporation elected by the board of directors shall be fixed from time to time
by the board of directors.
ARTICLE VI
Certificates of Stock, Transfer, Etc.
SECTION 6.01. Form and Issuance.
(a) Issuance.--The shares of the corporation shall be represented by
certificates unless the board of directors shall by resolution provide that some
or all of any class or series of stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until the
certificate is surrendered to the corporation. Notwithstanding the adoption of
any resolution providing for uncertificated shares, every holder of stock
represented by certificates and upon request every holder of uncertificated
shares shall be entitled to have a certificate signed by, or in the name of the
corporation by, the chairman, or the president or vice president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary,
representing the number of shares registered in certificate form.
(b) Form and Records.--Stock certificates of the corporation shall be
in such form as approved by the board of directors. The stock record books and
the blank stock certificate books shall be kept by the secretary or by any
agency designated by the board of directors for that purpose. The stock
certificates of the corporation shall be numbered and registered in the stock
ledger and transfer books of the corporation as they are issued.
(c) Signatures.--Any of or all the signatures upon the stock
certificates of the corporation may be a facsimile. In case any officer,
transfer agent or registrar who has signed, or whose facsimile signature has
been placed upon, any share certificate shall have ceased to be such officer,
transfer agent or registrar, before the certificate is issued, it may be issued
with the same effect as if the signatory were such officer, transfer agent or
registrar at the date of its issue.
SECTION 6.02. Transfer.--Transfers of shares shall be made on the share
register or transfer books of the corporation upon surrender of the certificate
therefor, endorsed by the person named in the certificate or by an attorney
lawfully constituted in writing. No transfer shall be made which would be
inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform
Commercial Code-Investment Securities.
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SECTION 6.03. Lost, Stolen, Destroyed or Mutilated Certificates.--The
board of directors may direct a new certificate of stock or uncertificated
shares to be issued in place of any certificate theretofore issued by the
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or the legal representative of the owner,
to give the corporation a bond sufficient to indemnify against any claim that
may be made against the corporation on account of the alleged loss, theft or
destruction of such certificate or the issuance of such new certificate or
uncertificated shares.
SECTION 6.04. Record Holder of Shares.--The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
SECTION 6.05. Determination of Stockholders of Record.
(a) Meetings of Stockholders.--In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the board of directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the board of directors, and which record
date shall not be more than 60 nor less than ten days before the date of such
meeting.
If no record date is fixed by the board of directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting unless the board of
directors fixes a new record date for the adjourned meeting.
(b) Consent of Stockholders.--In order that the corporation may
determine the stockholders entitled to consent to corporate action in writing
without a meeting, the board of directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the board of directors, and which date shall not be more than ten
days after the date upon which the resolution fixing the record date is adopted
by the board of directors. Any stockholder of record seeking to have the
stockholders authorize or take corporate action by written consent shall, by
written notice to the secretary, request the board of directors to fix a record
date. The board of directors shall promptly, but in all events within 10 days
after the date on which such a request is received, adopt a resolution fixing
the record date. If no record date has been fixed by the board of directors
within 10 days of the date on which such a request is received, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required by
the GCL, shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the corporation by
delivery to its registered office in Delaware, its principal place of business,
or an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the board of
directors and prior action by the board of directors is required by the GCL, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the day on
which the board of directors adopts the resolution taking such prior action.
(c) Dividends.--In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights of the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than 60 days
prior to such action. If no record date
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is fixed, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
ARTICLE VII
Indemnification of Directors, Officers and
Other Authorized Representatives
SECTION 7.01. Indemnification of Authorized Representatives in Third
Party Proceedings.--The corporation shall indemnify, to the fullest extent
permitted by law, any person who was or is an authorized representative of the
corporation, and who was or is a party, or is threatened to be made a party to
any third party proceeding, by reason of the fact that such person was or is an
authorized representative of the corporation, against expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such third party proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed
to, the best interests of the corporation and, with respect to any criminal
third party proceeding, had no reasonable cause to believe such conduct was
unlawful. The termination of any third party proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that the authorized representative did
not act in good faith and in a manner which such person reasonably believed to
be in or not opposed to, the best interests of the corporation, and, with
respect to any criminal third party proceeding, had reasonable cause to believe
that such conduct was unlawful.
SECTION 7.02. Indemnification of Authorized Representatives in
Corporate Proceedings.--The corporation shall indemnify, to the fullest extent
permitted by law, any person who was or is an authorized representative of the
corporation and who was or is a party or is threatened to be made a party to any
corporate proceeding, by reason of the fact that such person was or is an
authorized representative of the corporation, against expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such corporate proceeding if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such corporate proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such authorized representative is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
SECTION 7.03. Mandatory Indemnification of Authorized
Representatives.--To the extent that an authorized representative or other
employee or agent of the corporation has been successful on the merits or
otherwise in defense of any third party or corporate proceeding or in defense of
any claim, issue or matter therein, such person shall be indemnified, to the
fullest extent permitted by law, against expenses actually and reasonably
incurred by such person in connection therewith.
SECTION 7.04. Determination of Entitlement to Indemnification.--Any
indemnification under section 7.01, 7.02 or 7.03 of this Article (unless ordered
by a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
or other employee or agent is proper in the circumstances because such person
has either met the applicable standard of conduct set forth in section 7.01 or
7.02 or has been successful on the merits or otherwise as set forth in section
7.03 and that the amount requested has been actually and reasonably incurred.
Such determination shall be made:
(a) by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to such third party or corporate proceeding;
or
(b) if such a quorum is not obtainable, or even if obtainable, a quorum
of disinterested directors so directs, by independent legal counsel in a written
opinion; or
(c) by the stockholders.
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SECTION 7.05. Advancing Expenses.--Expenses actually and reasonably
incurred in defending a third party or corporate proceeding shall be paid on
behalf of an authorized representative by the corporation in advance of the
final disposition of such third party or corporate proceeding upon receipt of an
undertaking by or on behalf of the authorized representative to repay such
amount if it shall ultimately be determined that the authorized representative
is not entitled to be indemnified by the corporation as authorized in this
Article. The financial ability of any authorized representative to make a
repayment contemplated by this section shall not be a prerequisite to the making
of an advance. Expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the board of directors deems
appropriate.
SECTION 7.06. Definitions.--For purposes of this Article:
(a) "authorized representative" shall mean any and all directors and
officers of the corporation and any person designated as an authorized
representative by the board of directors of the corporation (which may, but need
not, include any person serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise);
(b) "corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued;
(c) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor or investigative proceeding by the corporation;
(d) "criminal third party proceeding" shall include any action or
investigation which could or does lead to a criminal third party proceeding;
(e) "expenses" shall include attorneys' fees and disbursements;
(f) "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan;
(g) "not opposed to the best interests of the corporation" shall
include actions taken in good faith and in a manner the authorized
representative reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan;
(h) "other enterprises" shall include employee benefit plans;
(i) "party" shall include the giving of testimony or similar
involvement;
(j) "serving at the request of the corporation" shall include any
service as a director, officer or employee of the corporation which imposes
duties on, or involves services by, such director, officer or employee with
respect to an employee benefit plan, its participants, or beneficiaries; and
(k) "third party proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, other than an action by or in the right of the corporation.
SECTION 7.07. Insurance.--The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
the person and incurred by the person in any such capacity, or arising out of
his or her status as such, whether or not the corporation would have the power
or the obligation to indemnify
B-31
such person against such liability under the provisions of this Article.
SECTION 7.08. Scope of Article.--The indemnification of authorized
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. The indemnification and advancement of
expenses provided by or granted pursuant to this Article shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be an authorized representative and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 7.09. Reliance on Provisions.--Each person who shall act as an
authorized representative of the corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article.
ARTICLE VIII
General Provisions
SECTION 8.01. Dividends.--Subject to the restrictions contained in the
GCL and any restrictions contained in the certificate of incorporation, the
board of directors may declare and pay dividends upon the shares of capital
stock of the corporation.
SECTION 8.02. Contracts.--Except as otherwise provided in these bylaws,
the board of directors may authorize any officer or officers, or any agent or
agents, to enter into any contract or to execute or deliver any instrument on
behalf of the corporation and such authority may be general or confined to
specific instances.
SECTION 8.03. Corporate Seal.--The corporation shall have a corporate
seal, which shall have inscribed thereon the name of the corporation, the year
of its organization and the words "Corporate Seal, Delaware". The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or in any
other manner reproduced.
SECTION 8.04. Deposits.--All funds of the corporation shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
SECTION 8.05. Corporate Records.
(a) Examination by Stockholders.--Every stockholder shall, upon written
demand under oath stating the purpose thereof, have a right to examine, in
person or by agent or attorney, during the usual hours for business, for any
proper purpose, the stock ledger, list of stockholders, books or records of
account, and records of the proceedings of the stockholders and directors of the
corporation, and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of attorney or such other writing which authorizes the attorney or other agent
to so act on behalf of the stockholder. The demand under oath shall be directed
to the corporation at its registered office in Delaware or at its principal
place of business. Where the stockholder seeks to inspect the books and records
of the corporation, other than its stock ledger or list of stockholders, the
stockholder shall first establish (i) that the stockholder has complied with the
provisions of this section respecting the form and manner of making demand for
inspection of such documents; and (ii) that the inspection sought is for a
proper purpose. Where the stockholder seeks to inspect the stock ledger or list
of stockholders of the corporation and has complied with the provisions of this
section respecting the form and manner of making demand for inspection of such
documents, the burden of proof shall be upon the corporation to establish that
the inspection sought is for an improper purpose.
B-32
(b) Examination by Directors.--Any director shall have the right to
examine the corporation's stock ledger, a list of its stockholders and its other
books and records for a purpose reasonably related to the person's position as a
director.
SECTION 8.06. Amendment of Bylaws.--Subject to Section 4.12 hereof,
these bylaws may be altered, amended or repealed or new bylaws may be adopted
either (a) by vote of the stockholders at a duly organized annual or special
meeting of stockholders (or by their written consent), or (b) by vote of a
majority of the board of directors at any regular or special meeting of
directors if such power is conferred upon the board of directors by the
certificate of incorporation.
B-33
EXHIBIT C
SMITH BARNEY FAIRNESS OPINION
SMITH BARNEY
- ------------
A Member of Travelers Group
June 19, 1997
The Special Committee of the Board of Directors of Lehman/SDI, Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attention: O. Gordon Brewer, Jr. and Ernest L. Ransome, III The Special
Committee of the Board of Directors of Lehman/SDI, Inc.
Gentlemen:
In connection with the proposed conversion of SunSource L.P. ("SunSource" or the
"Partnership") to corporate form (the "Conversion"), you have requested our
opinion as to the fairness, from a financial point of view, to holders of
SunSource's Class A Limited Partnership Interests ("Class A Interests") and
Class B Limited Partnership Interests ("Class B Interests") of the Partnership
of (i) the consideration to be received by holders of Class A Interests and
holders of Class B Interests, respectively, and (ii) the General Partner
Consideration (as defined herein) in the Conversion. The terms of the Conversion
are set forth in the Registration Statement on Form S-4, as amended, of
SunSource Inc. and SunSource Capital Trust filed with the Securities and
Exchange Commission on May 12, 1997 (the "Registration Statement"). The
Registration Statement provides that (i) holders of Class A Interests will
receive in exchange for each Class A Interest, 0.38 shares of 11.6% Trust
Preferred Securities, par value $25.00 per share (the "Preferred Securities") of
SunSource Capital Trust and $1.30 in cash, (ii) holders of Class B Interests
will receive in exchange for each Class B Interest 0.25 share of common stock,
par value $.01 per share (the "Common Stock") of a newly formed Delaware
corporation (the "Company"), and (iii) the holders of the general and limited
partner interests in SDI Partners I, L.P. (the "General Partner") will receive
1,000,000 shares of Common Stock in exchange for their general and limited
partnership interests in the General Partner. The Common Stock to be received by
the holders of such interests in the General Partner is referred to herein as
the "General Partner Consideration."
In arriving at our opinion, we have reviewed the Registration Statement and
exhibits thereto and the limited partnership agreements of the Partnership, SDI
Operating Partners L.P. (the "Operating Partnership"), and the General Partner,
and held discussions with certain senior operating management of the Operating
Partnership ("Management") and representatives and advisors of the Partnership,
the Operating Partnership and the General Partner to discuss the business,
operations and prospects of the Partnership. We have examined certain publicly
available business and financial information relating to the Partnership as well
as internal financial statements, forecasts and other financial and operating
data concerning the Partnership prepared by Management. We have reviewed the
financial terms of the Conversion as set forth in the Registration Statement in
relation to, among other things: current and historical market prices and
trading volumes of the Class A Interests and Class B Interests; historical and
projected earnings and operating data of the Partnership; the capitalization and
financial condition of the Partnership;
SMITH BARNEY INC. 388 Greenwich Street, New York, NY 10013 212-816-6000
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and the pro forma effect of the Conversion. We also analyzed certain financial,
capital market and other publicly available information relating to the business
of other companies whose operations we considered comparable to those of the
Partnership. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
furnished to or otherwise reviewed by or discussed with us, we have been advised
by Management that such forecasts and other information were reasonably prepared
on bases reflecting the best currently available estimates and judgments of
Management as to the expected future financial performance of the Partnership or
the Company, as the case may be, and we further relied on the assurances of
management that it is unaware of any facts that would make the information or
forecasts provided to us incomplete or misleading.
We are not expressing any opinion as to what the value of the Preferred
Securities or the Common Stock actually will be when issued to holders of Class
A Interests and Class B Interests, respectively, or the prices at which the
Preferred Securities or Common Stock will trade subsequent to the Conversion. We
have not made or been provided with an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of the Partnership. We have
not been asked to express an opinion as to the relative merits of the Conversion
as compared to any alternative business strategies that might exist for the
Partnership or the effect of any alternative transaction in which the
Partnership might engage. We were not asked to solicit third-party indications
of interest in acquiring all or any part of the Partnership. Our opinion is
necessarily based upon financial, capital market and other conditions and
circumstances, including current tax laws, existing and disclosed to us as of
the date hereof.
We have been engaged to render financial advisory services to the Special
Committee (the "Special Committee") of the Board of Directors of Lehman/SDI,
Inc. in connection with the Conversion and have received a fee for our services,
including a fee for the delivery of this opinion. In the ordinary course of
business, we and our affiliates may actively trade or hold the Class A Interests
and Class B Interests for our own account or for the account of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
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It is understood that this opinion is for the information of the Special
Committee and the Board of Directors of Lehman/SDI, Inc. only and may not be
used for any other purpose without prior written consent, except that this
opinion may be included in any proxy statement, registration statement or
similar document prepared in connection with a Conversion. Provided however,
that the opinion shall be included in its entirety and any other reference to
Smith Barney shall be accurate and complete and shall not be included without
the consent of Smith Barney, which consent shall not be unreasonably withheld.
Based upon and subject to the foregoing, our experience as investment bankers
and other factors we deemed relevant, we are of the opinion that, as of the date
hereof, (i) the consideration to be received in the Conversion by the holders of
Class A Interests is fair from a financial point of view to such holders, (ii)
the consideration to be received in the Conversion by the holders of Class B
Interests is fair from a financial point of view to such holders, and (iii) the
General Partner Consideration to be received in the Conversion is fair from a
financial point of view to the holders of Class A Interests and to the holders
of the Class B Interests, respectively.
Very truly yours,
SMITH BARNEY INC.
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EXHIBIT D
MANAGEMENT PROJECTIONS
Management Projections Furnished to Smith Barney
To assist the Special Committee and its advisors in their due
diligence, SunSource management prepared financial projections for the
Partnership through the year 2001. The first set of projections was provided in
July 1996, adjustments were provided in November 1996 and a second set of
projections was provided in April 1997. These documents have been filed as
exhibits to the Schedule 13E-3 filed with the SEC in connection with the
Conversion.
SunSource does not make multi-year projections in the ordinary course
of running its business. Instead, the business is managed by measuring the
performance of each of its twelve divisions versus the one-year projections
which form the basis for their annual operating plans. The annual plan
objectives are also used to determine the amount of incentive compensation
earned by all levels of SunSource management for the calendar year covered by
the plan, and should not be used to predict actual results. SunSource does not
make its internal projections public because it considers such forecasts
unreliable and to be increasingly unreliable the further in the future they
extend.
The July 1996 Projection was based on the actual unaudited results of
operations for the six months ended June 30, 1996 and estimated results of
operations for the six months ended December 31, 1996 and projections of sales
growth and profit margins for the five years ended December 31, 2001.
The July 1996 Projection was as follows:
July 1996 Projection
(dollars in millions)
- --------------------
* Includes commission income of $0.2 million in all years.
** Earnings before Interest, Taxes, Depreciation and Amortization
SunSource sells its products and services across an extremely broad
spectrum of the economy -- manufacturing, forest products, agriculture, mining,
construction, energy and many other segments. As a result, SunSource's sales are
broadly influenced by macroeconomic factors. It is not possible to predict with
accuracy the timing or magnitude of a recession or other major economic
disruption. Therefore, projections have been made on the basis of average sales
growth rates expected to be realized across an economic cycle.
Sales were projected to grow at a compound growth rate of 8.6% per year
through 2001, generally in the range of SunSource's historical growth rates as
shown below.
5 year compound growth, 1991-1995 7.02% (1990 as base year)
5 year compound growth, 1992-1996 9.09% (1991 as base year)
6 year compound growth, 1991-1996 7.30% (1990 as base year)
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While the overall sales growth rate was projected at 8.6%, the growth
rates of the individual business segments varied significantly. Hillman was
projected to have the highest average sales growth rate of approximately 12% per
year due to the introduction of new product lines from the Curtis acquisition
into existing Hillman accounts, introduction of Hillman products into former
Curtis accounts, and additional penetration of Hillman products into existing
accounts who currently buy only an estimated 60% of the full Hillman line.
Sales of the six divisions comprising the Technology Services Group
were projected to grow at an average rate of 8% per year. The Activation and
Air-Dreco divisions, serving primarily the southeastern U.S. plus Texas and
Oklahoma, showed the slowest growth rates (2%-5% per year) due to the expected
cyclical slowness in the next few years of the timber and energy markets which
comprise much of their demand base. The highest projected sales growth rate (7%
per year) for a domestic division within the Group was expected for the
Warren/Air-Draulics division which services the rapidly expanding commercial
economy of Colorado, Utah, Nevada and Arizona. This region has been the
beneficiary of the out-migration of business from California during much of this
decade. The Group's only foreign division, Hydra Power de Mexico, was expected
to grow at approximately 25% per year from its 1996 sales of $1.6 million by
adding product lines and an expanded range of technical services.
The Inventory Management Group is comprised of two divisions: Kar
Products/A&H and Special-T Metals/SIMCO. The Group was projected to grow in the
range of 9%-10% per year, with Kar/A&H projected at 6%-7% and Special-T
Metals/SIMCO at 17%-22%. Kar/A&H sells across the entire commercial/industrial
market spectrum of the United States and Canada. There is a very large service
component to their product sales, and this is reflected in the premium pricing
strategy followed by this division. Sales growth has historically been limited
primarily by the division's ability to recruit and retain a highly motivated
full commission sales force. Special-T Metals/SIMCO is pursuing twin strategies
of becoming either a single source provider to industrial facilities for their
maintenance, repair and operating (MRO) supplies, or an exclusive provider of
fasteners and related products to the operations of original equipment
manufacturers (OEM's). The division's strategies are expected to enjoy
good success as the result of the current trend toward outsourcing of
non-critical functions by the division's principal customer base.
Harding Glass was projected to grow at only 4.2% per year to reflect
the continued erosion of sales to the less-profitable wholesale business as
glass manufacturers were expected to continue their incursions into that market.
Also, the forecast reflected Harding's modest success to date in growing its
full service retail glass shops.
In July, SunSource's consolidated EBITDA as a percentage of sales (the
"EBITDA Margin" ) was projected to increase from 6.65% in 1996 to 8.00% in 2001.
Each of SunSource's three business segments had materially different projections
for EBITDA Margin. At the divisional level (excluding home office administrative
expenses), Hillman's EBITDA margin was projected to increase from 9.5% in 1996
to 12.1% in 2001. All of this margin improvement was due to the impact of lower
operating expenses as a percentage of sales as Hillman was projected to realize
positive operating leverage by selling more products through its existing
distribution system and no longer having to incur the extraordinary expenses of
building a national sales force.
The EBITDA margin of the Technology Services Group was projected to
improve from 6.9% in 1996 to 7.9% in 2001. Gross project margins were projected
to improve by 0.3% of sales due to an increasing contribution from the sales of
value-added services such as systems design and repair work, which tend to have
higher than average gross margins. Operating expenses were expected to decrease
by 0.7% of sales due to increased consolidation and centralization of
administrative and logistic functions.
The Inventory Management Group was projected to have a decrease in
EBITDA margin from 13.1% in 1996 to 12.6% in 2001. The larger division of this
Group (Kar Products/A&H Bolt) was projected to maintain its EBITDA margin at
15.6% throughout the projection period. The smaller division (Special-T
Metals/SIMCO) was
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projected to improve its EBITDA margin from 3.5% in 1996 to 5.5% in 2001, due
entirely to expected operating leverage from spreading its overhead from a sales
base of $31 million in 1996 to $73 million in 2001. However, sales growth for
Special-T Metals/SIMCO is projected to average approximately 18% per year during
the period, versus only 7% or so for Kar/A&H. As a result, Special-T
Metals/SIMCO was expected to account for 30.0% of the Inventory Management
Group's sales in 2001 versus only 20.2% in 1996. This change in sales mix was
expected to produce the lower EBITDA margin for the Group in 2001 versus 1996.
The principal contributor to Harding's improvement in EBITDA margin
from 5.0% in 1996 to 5.7% in 2001 was expected to be lower operating expenses as
a percentage of sales due to consolidation of administrative expenses as a
result of centralization made possible by an improved information system.
In November 1996, SunSource concluded that the EBITDA Margins in the
July Projection were too ambitious. A projection of significant improvement in
EBITDA Margin is an appropriate goal when negotiating performance standards for
purposes of incentive compensation for a given year. However, SunSource has
never achieved the consistent year-to-year improvement for each year of a
five-year projection. Therefore, management decided to apply a " consolidated
risk adjustment" to the portfolio of divisional projections because of the
improbability that the projected performance levels would be achieved by all
twelve divisions in each year of the projection. The purpose of the consolidated
risk adjustment was to adjust the consolidated projected performance to reflect
more closely the Partnership's actual historical performance.
The consolidated risk adjustments furnished to the Special Committee
and its advisors in November are shown below:
November Consolidated Risk Adjustments to EBITDA
(dollars in millions)
The November 1996 Projection as adjusted was as follows:
November 1996 Projection
(dollars in millions)
- --------------------
* Includes commission income of $0.2 mllion in all years.
D-3
The EBITDA Margins in the November Projection show an increase from
6.60% in 1996 to only 6.67% in 2001. SunSource's actual EBITDA Margins in the
past five years have varied from a low of 6.4% to a high of 6.9%, with the
average being 6.6%.
The April 1997 Projection was based on actual audited results of
operations for the year ended December 31, 1996, actual unaudited results of
operations for the three months ended March 31, 1997 and estimated results of
operations for the nine months ended December 31, 1997 and projections of sales
growth and profit margins for the four years ended December 31, 2001.
The April 1997 Projection was as follows:
April 1997 Projection
(dollars in millions)
The sales growth rates are the same as used for the July and November
Projections. The EBITDA Margins are the same as used in the November Projection,
adjusted to reflect the expected profit improvements due to the restructuring of
the Partnership's Technology Services Business. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Restructuring
Charges."
The April Projection assumes that 80% of the net benefits expected from
the restructuring will be converted to profit. This reduction is intended to
take account of the probability that SunSource's competitors will also be
successful in lowering their costs of doing business, thereby enabling them to
lower selling prices while maintaining their current profit margins. In that
environment, SunSource would not realize the full amount of restructuring cost
savings as improved profits.
Management Projection Furnished to Prospective Lenders
In January 1997, the Partnership also prepared a projection for
prospective lenders in order to meet the requirement of the proposed Conversion
that SunSource refinance its existing bank loans and long term debt. The primary
issue to be addressed in this process was to determine the amount of financing
required to support SunSource's operations during the next five years. In
addition, SunSource's goal was to establish the financial capacity to support
the internal growth of its core businesses, resume its acquisition program on a
scale similar to its past experience, and to provide for the possibility of
paying dividends on the Common Stock at some future time. It was in SunSource's
interest to be optimistic in its growth assumptions underlying the Refinancing
Projections to ensure that SunSource would have sufficient financial capacity to
support a broad range of future possibilities.
The Refinancing Projection provided to the lenders was as follows:
D-4
Refinancing Projection
(dollars in millions)
- --------------------
* For years 1997 through 2001, includes commission income of $0.3 million.
The Refinancing Projection used as its starting point SunSource's 1997
Operating Plan. This plan represented the consolidation of divisional plans
negotiated by the senior executives of SunSource with the management of the
twelve operating divisions. 1997 management incentive compensation plans are
tied to the performance levels imbedded in the 1997 Operating Plan.
With respect to sales, the assumption was that the sales growth rate
would decline from the 13.36% reflected in the 1997 Operating Plan toward
SunSource's long term historical growth rate in the 8% range. With respect to
EBITDA Margin, the projections assumed the successful completion of all of the
initiatives being undertaken by the operating divisions to improve
profitability, plus realization of 100% of the benefits contemplated by
restructuring of the Technology Services divisions.
Senior management did not make a consolidated risk adjustment to the
EBITDA percentages in the Refinancing Projection to bring them to the levels of
historical experience because they did not believe doing so would have a
material impact on the lenders' decision processes. The amount that SunSource
will actually borrow will rise and fall with the level of sales since more than
80% of SunSource's tangible assets are current assets, such as accounts
receivable and inventory, which tend to closely follow sales. The agreement with
the lenders provides that the interest rate paid on borrowed money varies as a
function of the ratio of debt to EBITDA. As the actual ratio increases or
decreases relative to the Refinancing Projection, the interest rate paid by
SunSource will vary accordingly.
The Refinancing Projection was provided to the Special Committee and
its advisors in February 1997. The Partnership instructed the Special Committee
and its advisors not to use such projections in their analysis because such
projections were to be used to establish sufficient financial capacity to
support a broad range of future corporate possibilities as described above.
In April 1997, the lenders were furnished with the April Projection
given to Smith Barney, plus additional projections based on the possibility of
acquisitions and dividend payments.
Qualifications with Respect to Projections
The projections furnished to the Special Committee and its advisors
were intended solely for their use in evaluating the fairness of the Conversion.
Similarly, the projections furnished to the lenders were intended solely for
their use in determining the terms for the refinancing. The recipients
understand the limitations inherent in five year projections.
D-5
The projections were not intended for use by public investors and
should not be relied upon by them. The information was not prepared with a view
to compliance with published guidelines established by the American Institute of
Certified Public Accountants regarding projections or forecasts. The projections
are forward looking statements which depend upon a number of important factors
which could cause actual results to differ materially from those set forth.
These factors include (a) a slowing of the economy or a recession which could
adversely affect sales and reduce profit margins due to the inability to reduce
fixed costs; (b) a reduction in sales which could cause an inventory buildup
resulting in reduced cash flow and increased financing charges; (c) action by
competitors which could adversely affect profit margins; (d) the failure to
achieve the expense reductions contemplated by the restructuring; and (e) the
failure of SunSource to convert to corporate form and realize the financial
benefits from the Conversion.
SunSource does not intend to update, revise or correct any of these
projections after the Conversion.
D-6
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("Section
145") permits indemnification of directors, officers, employees and agents of a
corporation under certain conditions and subject to certain limitations. Article
VII of the Bylaws, requires the Registrant to indemnify directors and officers
of the Registrant or any other authorized representative against expenses,
judgments and any settlement amounts incurred in a third party proceeding
brought by reason of the fact that the person is an authorized representative of
the Registrant. The Bylaws also require indemnification of expenses incurred by
an authorized representative in connection with a proceeding brought in the name
of the corporation. The Bylaws further specify procedures for such
indemnification. Section 145 also empowers the Registrant to purchase and
maintain insurance that protects its officers, directors, employees and agents
against any liabilities incurred in connection with their service in such
positions.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits:
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(b) Financial Statement Schedules:
Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
Item 22. Undertakings
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
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(b) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(2) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(3) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(6) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), the registrant has duly caused this Amendment No. 4 to
Registration Statement ("Amendment No. 4") to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on July
22, 1997.
SUNSOURCE INC.
By: *
-------------------------------------
Donald T. Marshall
President and Chief Executive Officer
Pursuant to the Securities Act, this Amendment No. 4 has been signed by
the following persons in the capacities and on the dates indicated.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), the registrant has duly caused this Amendment No. 4 to
Registration Statement ("Amendment No. 4") to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on July
22, 1997.
SUNSOURCE CAPITAL TRUST
By: SUNSOURCE INC., as Sponsor
By: /s/ Donald T. Marshall
-------------------------------------
Donald T. Marshall
President and Chief Executive Officer