-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rp2A8QyojQOvfObwpOqrar2F69TY2L0mwD5E2QKRx5shKAJPkx6yjsLDrspD4DmP OV6LDvwjQtnJi6XSZv8WaA== 0000950109-96-001816.txt : 19960329 0000950109-96-001816.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950109-96-001816 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN DISTRIBUTORS L P CENTRAL INDEX KEY: 0000807396 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 232439550 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09375 FILM NUMBER: 96540046 BUSINESS ADDRESS: STREET 1: 2600 ONE LOGAN SQ CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2156653650 MAIL ADDRESS: STREET 1: 2600 ONE LOGAN SQ CITY: PILADELPHIA STATE: PA ZIP: 19103 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission file number 1-9375 Sun Distributors L.P. --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 23-2439550 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 One Logan Square Philadelphia, Pennsylvania 19103 - ---------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 665-3650 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Class A Limited Partnership New York Interests and Depositary Stock Exchange Receipts therefore. Class B Limited Partnership New York Interests and Depositary Stock Exchange Receipts therefore. Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for, such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x]. NO _____. ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] ----- PART I Item 1 - Business. - ----------------- General - ------- Sun Distributors L.P., a Delaware limited partnership (the "Company"), through its subsidiary limited partnership, SDI Operating Partners, L.P. (the "Operating Partnership"), is one of the largest wholesale distributors of industrial products and services in the United States. Since January 1987, the business of the Company and the Operating Partnership has been managed by SDI Partners I, L.P. (the "General Partner"), a limited partnership whose general partner is Lehman/SDI, Inc., formerly known as Shearson/SDI, Inc., a Delaware corporation and an indirect, wholly owned subsidiary of Lehman Brothers Holdings, Inc. ("Lehman Holdings"). The General Partner owns 1% of the Company and 1% of the Operating Partnership. All of the limited partnership interests in the General Partner are beneficially owned by members of management of the Company and the Operating Partnership (the "Management Employees"). While the Company has historically viewed its operations as one business segment, changes in the marketplace, risks and the economy demand that the Company now measure and value its businesses with a customer-based focus on value added services such as engineering design, inventory management, and integrated supply. These services are expected to provide greater revenue growth in future years than general product distribution. In December 1995, the Company reorganized its operating businesses, operating management, and current strategic plan to support this service oriented direction. The current organization consists of its headquarters operation and three business segments comprised of eleven operating divisions, as follows:
Principal Year Acquired/ Location Organized ------------ -------------- Sun Distributors Headquarters Phila., Pa. 1975 Industrial Services Segment Sun Inventory Management Company ("SIMCO") Divisions - Kar Products Chicago, Il. 1977 - A&H Bolt & Nut Company Windsor, Ontario 1989 - SIMCO/Special-T-Metals Lenexa, Ks. 1992/1981 Sun Technology Services Divisions - Walter Norris Rosemont, Il. 1976 - J.N. Fauver Company Madison Heights, Mi. 1978 - Warren Fluid Power Denver, Co. 1987 - Air-Dreco Houston, Tx. 1988 - Activation Birmingham, Al. 1991 - Hydra Power Tlalnepantla, C.P., Mexico 1992 Retail Merchandising Segment - Hillman Fastener Cincinnati, Oh. 1982 Retail Glass Services Segment - Harding Glass Industries Kansas City, Mo. 1980
2 General, continued - ------------------ Beginning in 1996, the Company will report its financial results on the basis of the aforementioned segments. However, for ease of comparability, certain financial information in this report has been presented on the current segment basis. In November 1995, the Operating Partnership's Hillman Fastener division acquired the retail hardware business of Curtis Industries. Annual sales of Curtis' Retail division are approximately $17 million. The acquisition of Curtis will significantly expand Hillman's position as a supplier of goods and services to the hardware home center market where Curtis has concentrated much of its attention. In addition, the Curtis product line can now be offered to Hillman's present customer base. This acquisition continues Hillman's long-term growth strategy to become a major provider of products and services to all segments of the retail hardware business. The Operating Partnership sold the Electrical Products Group divisions on December 5, 1994, the Dorman Products division on January 3, 1995, and the Downey Glass division on October 27, 1995, (the "divested operations or divisions sold") as listed below:
Divisions Sold Principal Location -------------- ------------------ Electrical Products Group Divisions - American Electric Company St. Joseph, Mo. - Philips & Company Columbia, Mo. - Keathley-Patterson Electric Co. N. Little Rock, Ar. Dorman Products Division Warsaw, Ky. Downey Glass Division Los Angeles, Ca.
For the year ended December 31, 1995, the Company had net sales of approximately $600 million, excluding sales from the divested Downey Glass division of $29 million, with the largest operating division contributing approximately $154 million. The Company's business strategy has been to identify and develop specific industrial distribution markets. However, the Company'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 Company has opened new service centers for repair of fluid power equipment and seeks to expand this service outside its core geography and across Canada. The Company also continues to enhance its retail service offerings in the glass segment and broaden its retail merchandising of hardware related products. 3 General, continued - ------------------ Presidents of the Company'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 Company's prior success has been the result of fostering and perpetuating the entrepreneurial drive of operating management. The Company evaluates on an ongoing basis the performance and prospects of each of its operating divisions in light of the Company's overall business strategy. Acquisition Strategy - -------------------- Since its inception in 1975, the business of the Company has grown primarily through acquisitions of existing distribution companies. The acquisition strategy has expanded the Company's operations, both geographically and in the number and type of products offered. The Company evaluates companies that have developed attractive product/market niches and have demonstrated their ability to achieve high returns on invested capital. The Company looks for companies with strong management capabilities and stable growth patterns. Prior to making certain acquisitions, an extensive operational review is performed by an external consulting firm. Subsequent to most acquisitions, certain agreed upon procedures are performed by internal and external auditors. In December 1992, the Company refinanced its then outstanding $110.0 million 9 1/2% Senior Notes through proceeds provided by institutional investors in the amount of $95.0 million and the balance from a $50.0 million Bank Credit Agreement. Under the credit agreements, the Company was not permitted to make acquisitions in 1993 and 1994. In 1995, this restriction was removed and acquisition spending amounted to $7.5 million with authorized spending of up to $15.0 million in accordance with the terms of the Company's credit agreements. See Notes 5, 8 and 9 of Notes to Consolidated Financial Statements. As the result of an analysis of strategic alternatives by the Company, the Company sold the non-strategic businesses described above. Through the sale, the Company has strengthened its balance sheet and is now in a position to resume its acquisition program by focusing on businesses which fit its current strategic plan. 4 Products and Services - --------------------- Excluding the divested operations discussed previously, the Company provides distribution and value-added services related to over 1,300 product lines. These services are provided in three main business segments: (1) industrial services which consist of inventory management, engineering and integrated supply services to industrial businesses through sales of products such as fasteners (nuts, bolts, screws, etc.), hydraulic, pneumatic and electronic systems and parts; (2) retail merchandising services through sales of fasteners and related products to hardware and home center retail stores; and (3) retail glass services consisting of installation and repair through sales of glass products such as large sheet glass, auto glass, insulated glass, mirrors and specialty glass. The average single sale during the year ended December 31, 1995, was approximately $297. Inasmuch as the Company 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 Company assembles products or designs systems to the specifications of the end-users and performs related product repairs. Through its Retail Glass Services Segment, the Company produces insulated glass units according to customer specifications. In addition, several of the products which the Company distributes are purchased by the Company in bulk and subsequently repackaged in small quantities. The Company regularly uses a large number of suppliers and has long-term relationships with many of them. Most items which the Company distributes are purchased from several sources, and the Company believes that the loss of any single supplier would not significantly affect the operations of the Company viewed as a whole. No single supplier accounted for more than 5% of the Company's purchases for the year ended December 31, 1995. The following table shows the percentages of consolidated net sales reported for the years ended December 31, 1995, 1994, and 1993 derived from the Company's current business segments, excluding divisions sold:
Percentage of Consolidated Net Sales for ---------------------------------------- Year Ended December 31, ---------------------- Business Segment 1995 1994 1993 - ------------------ ------ ------ ------ Industrial Services Technology Services divisions 47.6% 46.6% 45.5% SIMCO divisions 23.0% 22.9% 23.9% ------ ------ ------ Total Industrial Services 70.6% 69.5% 69.4% Retail Glass Services 15.3% 17.4% 19.2% Retail Merchandising 14.1% 13.1% 11.4% ------ ------- ------ 100.0% 100.0% 100.0%
5 Marketing - --------- While the Company sells across three main business segments (industrial services, retail glass, and retail 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 Company'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. Retail Glass ------------ This market is primarily comprised of customers seeking automotive and residential glass replacement as well as glazing contractor services. Retail Merchandising -------------------- This market is primarily comprised of retail hardware stores, home service centers, and lumberyards seeking merchandising services for hardware related products. The Company has over 179,000 customers, the largest of which accounted for less than 4% of net sales for the year ended December 31, 1995. Each division maintains its own sales force which is compensated for the most part on a commission basis. The divisions' sales forces vary in size, the largest of which has approximately 775 sales people. The Company's products and services are sold in all 50 states. While its Retail Glass 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. 6 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 Company encounters competition from a large number of regional and local distributors and from several national distributors, some of which have greater financial resources than the Company. The wholesale distribution business is highly fragmented, with a majority of the wholesale distributors in the United States being operated as family-owned businesses. The Company's competitors have annual sales of approximately $5 million on the average with approximately one- half under $2 million. The Company believes that its business differs from that of other large national distributors in that the Company carries a diverse range of product lines and provides significant value-added services, while most large distributors concentrate on only one or two product groups. Insurance Arrangements - ---------------------- Under the Company's current insurance programs, commercial umbrella coverage is obtained for catastrophic exposure and aggregate losses in excess of expected claims. Since October 1991, the Company has retained the exposure on certain expected losses related to workman's compensation, general liability and automobile. The Company also retains the exposure on expected losses related to health benefits of certain employees. The Company believes that its present insurance is adequate for its businesses. See Note 14 of Notes to Consolidated Financial Statements. Employees - --------- Currently, the Company, through the Operating Partnership, employs 3,843 employees, of which 1,670 are sales personnel, 1,142 are employed as warehouse and delivery personnel, and 1,031 hold administrative positions. The Operating Partnership has collective bargaining agreements with 5 unions representing a total of 65 employees. In the opinion of management, employee relations are good. Backlog - ------- The Company's sales backlog excluding divested operations was $54,935,000 as of December 31, 1995, and $56,335,000 as of December 31, 1994. Normally, in the distribution business, orders are shipped within a week of receipt. On average, the Company's backlog is less than one month's sales. 7 Federal Income Tax Considerations - --------------------------------- The Revenue Act of 1987 (the "1987 Act") amended the Internal Revenue Code of 1986, as amended (the "Code") with respect to the tax treatment of publicly traded partnerships, such as the Company, and the passive activity losses and credits attributable thereto. Section 7704 of the Code provides that publicly traded partnerships generally will be treated as corporations for tax purposes commencing in tax years beginning after 1987. The effective date of this amendment was delayed, however, for certain "existing partnerships," such as the Company, until the taxable year beginning after December 31, 1997, provided that such partnerships do not add any substantial new line of business before the delayed effective date. The Company does not intend to add any substantial new line of business during the period when it otherwise qualifies for delayed effectiveness under Section 7704. Section 469 of the Code provides that, in the case of publicly traded partnerships that are not treated as corporations under Section 7704, net losses and credits attributable to an interest in each such partnership shall not be applied against the partner's other income. Such net losses and credits are suspended and carried forward to be applied against net income from the partnership in succeeding years. Since the commencement of operations, the Company has not incurred a net loss for federal income tax purposes. However, if the Company should incur a net loss for federal income tax purposes in any subsequent year until taxable years beginning after December 31, 1997, such net losses will be suspended at the limited partner level, carried forward and netted in a later year or years against the limited partner's share of the net income of the Company, or will be used when the entire investment is disposed of in a taxable transaction. Similarly, a limited partner's share of any credits of the Company in excess of the tax liability attributable to his or her interest in the Company will be suspended, carried forward and applied against the tax liability attributable to the Company in a subsequent year or years, or may be used to increase the basis of such partnership interest when the entire investment is disposed of in a taxable transaction. Generally, these credits may not be applied against tax liability attributable to other activities. Assuming the continued effectiveness of Section 7704 of the Code in its current form, if the Company remains a publicly traded partnership, the Company would be treated as a corporation for tax purposes beginning in fiscal year 1998. Section 469 would then be inapplicable to the limited partners' treatment of income or credits attributable to the Company. The income of the Company would be taxed to it as a separate entity, and any losses of the Company would not be deductible by limited partners. This tax at the corporate level would reduce the amount distributable to partners and cash distributions to limited partners would be taxed at the individual level as dividends to the extent of earnings and profits. See Part II, Item 5, Market for Registrant's Partnership Interests and Related Matters -Partnership Tax Status. The Revenue Reconciliation Act of 1993 (the "1993 Act") amended the Code with respect to the tax treatment of unrelated business taxable income ("UBTI") in an effort to allow pension funds and other tax-exempt organizations (such as individual retirement accounts and charitable organizations) to invest in publicly traded partnerships. Such entities are subject to federal income tax on net UBTI in excess of $1,000. 8 Federal Income Tax Considerations, continued - -------------------------------------------- The 1993 Act repeals the rule that automatically treats income from publicly traded partnerships as gross income that is derived from an unrelated trade or business. As a result, investments in publicly traded partnerships will be treated the same as investments in other partnerships for purposes of the UBTI rules for partnership years beginning on or after January 1, 1994. Section 708 of the Code, in general, provides for termination of a partnership if 50 percent or more of the total interest in partnership capital and profits is sold or exchanged within a twelve-month period. However, the legislative history to the Technical and Miscellaneous Revenue Act of 1988 indicates that termination of a partnership within the meaning of Section 708 will not cause a partnership to cease to qualify as an "existing partnership" for purposes of Section 7704. Accordingly, sales or exchanges of Interests in the Company pursuant to trading of the Company's Interests on the New York Stock Exchange will not impair the status of the Company as an "existing partnership" that qualifies for a delayed effective date under Section 7704. Item 2 - Properties. - ------------------- The Company currently has 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 Company's principal properties are warehouse facilities used by the Operating Partnership, as follows:
Division Location Description -------- -------- ----------- Hillman Fastener 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 Company's existing facilities are in good condition. Item 3 - Legal Proceedings. - -------------------------- A civil complaint was filed by Dorman Products of America, Ltd., a subsidiary of R&B, Inc. ("R&B"), against the Company's 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 Company upon which R&B based their offer to purchase the assets of the Dorman Products division of the Company. The complaint seeks damages of approximately $21 million. In the opinion of management, the ultimate resolution of this matter will not have a material effect on the consolidated financial position, operations or cash flows of the Company. Item 4 - Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------ Not applicable. 9 PART II Item 5 - Market for Registrant's Partnership Interests and Related Matters - -------------------------------------------------------------------------- Market Prices - ------------- Effective May 1, 1990, the Company separated its publicly traded limited partnership Unit into one Class A Limited Partnership Interest and one Class B Limited Partnership Interest. The Class A Interests and Class B Interests trade separately on the New York Stock Exchange under the symbols SDP and SDPB, respectively. The following table shows the quarterly range of high and low closing sales prices for the Class A and Class B Interests separately during 1995 and 1994.
CLOSING SALES PRICE ------------------- 1995 1994 ------------------ ------------------ HIGH LOW HIGH LOW ------- ------- ------- ------- Class A Interests - ------------------- First Quarter $10 3/4 $10 1/4 $10 3/4 $10 1/4 Second Quarter 11 10 3/8 10 3/4 10 1/4 Third Quarter 11 3/8 10 3/4 10 7/8 10 1/4 Fourth Quarter 11 3/8 10 7/8 10 5/8 10 1/8 Class B Interests - ------------------- First Quarter $ 4 3/4 $ 4 $ 4 3/4 $ 4 Second Quarter 4 3/8 4 6 1/8 4 Third Quarter 4 7/8 4 6 5 1/4 Fourth Quarter 5 1/8 4 1/2 5 5/8 4 1/8
The total number of Class A Interests outstanding as of December 31, 1995 and 1994, was 11,099,573. The total number of Class B Interests outstanding as of December 31, 1995 and 1994 was 21,675,746. The total number of Class A and Class B Interest holders as of December 31, 1995 and 1994 was approximately 14,082 and 14,459, respectively. 10 Cash Distributions - ------------------ The holders of the Class A Interests are entitled to receive annually $1.10 per Class A Interest (the "Priority Return") to the extent that cash is available for distribution. Priority Return distributions are paid monthly on the last day of the month to holders of record on the first day of that month. When federal taxable income is allocated to the holders of Class B Interests, such holders are entitled to annual tax distributions (the "Class B Tax Distribution") equal to the product of (i) 125% of the then applicable maximum federal income tax rate for individuals and (ii) the federal taxable income allocated to the holders of Class B Interests with respect to the preceding year. The Priority Return and Class B Tax Distribution will be paid to the extent cash is available for distribution and accumulate until paid. To the extent that the Priority Return and Class B Tax Distribution have not been paid on a cumulative basis, management fees due the General Partner will be deferred, and will be paid, together with any management fees then owed with respect to any other year, after the Priority Return and Class B Tax Distribution have been paid. If cash available for distribution exceeds the amount necessary to pay the Priority Return and Class B Tax Distribution, the General Partner may make additional discretionary distributions to the holders of Class B Interests, provided that no distribution, except the Class B Tax Distribution, may be made to holders of the Class B Interests if, after such distribution, such holders' capital accounts with respect to their Class B Interests would be below $.50 on a per Interest basis. The Company paid Priority Return distributions of $1.10 per Class A Interest in 1995 and 1994. For 1995, the Class B Tax Distribution amounted to $14,807,000 or $.669517 per Class B Interest which was partially paid in the amount of $.02 per Class B interest per month for the period January through December, 1995, along with a partial distribution of $.15 on April 10, 1995 to holders of record on December 30, 1994, related to the taxable gain on the sale of Dorman Products. The monthly tax distributions were paid to holders of record on the first day of each month during 1995 and aggregated $.24 per Class B interest for the full year 1995. On March 29, 1996, the Partnership will distribute the balance of the tax distribution due of $.279517 per Class 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 Class 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 1994, the Class B Tax Distribution amounted to $10,895,000 or $.492619 per Class B Interest which was partially paid in the amount of $.009352 per Class B Interest per month for the period January through March 1994 and $.02 per Class B Interest per month during the period April through December 1994. The monthly tax distributions were paid to holders of record on the first day of each month during 1994 and aggregated $.208056 per Class B Interest for the full year 1994. On March 31, 1995, the Partnership distributed 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 included $.14269 related to the capital gain on the sale of the Electrical Group divisions on December 5, 1994. 11 Cash Distributions, continued - ----------------------------- Upon dissolution of the Company, the assets of the Company will be liquidated and after payment of, or provision for, liabilities of the Company, the remaining proceeds will be distributed in accordance with the partners' respective ownership Interests. As a result, the holders of Class A Interests generally will receive a preferential distribution, to the extent available, equal to the amount of their initial capital investment ($10 per Class A Interest) plus the amount, if any, of the Priority Return not previously distributed to the holders of Class A Interests. The remaining proceeds will be distributed to the General Partner and the holders of Class B Interests in accordance with their respective ownership interests. Taxable Income Allocations - -------------------------- Income taxes with respect to the Class A and Class B Interests are payable by limited partners based upon the allocation of taxable income or loss pursuant to the provisions of the Partnership Agreement. The allocation is made on a monthly basis to the holders of record on the first day of each month. For 1995, federal taxable income (ordinary income) was allocated to each Class A Interest in the amount of $.0917 per month or an aggregate of $1.10 for the entire year. Federal taxable income allocated to each Class B interest in 1995 amounted to ordinary income of $.5326 and capital gains of $1.1597, of which $.9273 was related to the sale of Dorman Products on January 3, 1995 and $.2324 was related to the sale of Downey Glass on October 27, 1995. For 1994, federal taxable income (ordinary income) was allocated to each Class A Interest in the amount of $.0917 per month or an aggregate of $1.10 for the entire year. Federal taxable income allocated to each Class B Interest in 1994 amounted to ordinary income of $.7069 and a capital gain of $.4077 related to the sale of the Electrical Group divisions on December 5, 1994. Capital Accounts - ---------------- The Class A capital account (as defined in the Partnership Agreement) was $10.00 per Class A Interest as of December 31, 1995 and 1994. The Class B Capital Account (as defined in the Partnership Agreement) at December 31, 1995 and 1994, was approximately $2.54 and $1.52 per Class B Interest, respectively. Partnership Tax Status - ---------------------- As previously stated, after December 31, 1997, the Company will be taxed as a corporation for federal income tax purposes. Management has been exploring various restructuring alternatives such as converting into corporate form or remaining as a limited partnership. If the Company remains a limited partnership, the effect of the change in taxation will result in the Company paying a corporate income tax at the Company level. Therefore, in accordance with the Partnership Agreement, the Company'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 Company, if any. Additionally, in accordance with the Partnership Agreement, the Company would no longer make tax distributions with respect to Class B limited partnership interests. Accordingly, a decision on whether any other distribution will be made with respect to the Class B interests is solely within the discretion of the General Partner. Based on current operations, it is likely that cash will be retained in the Company to fund its acquisition program and corporate requirements. If the Company remains a limited partnership, there will be no change with respect to the priority return distribution paid to the Class A interests in the amount of $.0917 per month to each Class A interest to aggregate $1.10 annually. 12 Item 6 - Selected Financial Data. - ------ ----------------------- The following table sets forth selected consolidated financial data of the Company as of and for the five years ended December 31, 1995. Data for all periods shown is derived from financial statements of the Company which have been audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in their reports thereon, except that sales from divisions sold have been excluded from net sales and the results of operations for divisions sold are included in income from operations (see Note 5, Acquisitions/Divestitures, in Notes to Consolidated Financial Statements). (dollars in thousands, except per partnership interest amounts)
Income Statement Data for Years 1995 1994 1993 1992 1991 Ended December 31: --------------------------------------------------- Net sales $599,865 $558,754 $493,437 $452,140 $420,619 Income from operations 31,302 37,759 28,975 29,712 27,225 Gain on Sale of Divisions (Note 5) 20,644 3,523 -- -- -- Provision for income taxes 537 100 869 493 630 Income before extraordinary loss and cumulative effect of change in accounting principle 44,745 29,544 18,506 17,691 15,073 Extraordinary loss (629) -- -- (3,434) -- Cumulative effect on prior years of change in accounting principle -- -- -- 822 -- Net income 44,116 29,544 18,506 15,079 15,073 Earnings per limited partnership interest: Income before extraordinary loss and cumulative effect of change in accounting principle - Class A $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10 - Class B $ 1.48 $ .79 $ .28 $ .25 $ .13 Extraordinary loss - Class A $ -- $ -- $ -- $ -- $ -- - Class B $ (.03) $ -- $ -- $ (.16) $ -- Cumulative effect on prior years of change in accounting principle - Class A $ -- $ -- $ -- $ -- $ -- - Class B $ -- $ -- $ -- $ .04 $ -- Net income - Class A $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10 - Class B $ 1.45 $ .79 $ .28 $ .13 $ .13 Cash provided by operations $ 17,050 $ 17,704 $ 23,571 $ 27,056 $ 30,038 Cash distributions declared per limited partnership interest - Class A $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10 - Class B $ .67 $ .49 $ .27 $ .13 $ .13 Balance Sheet Data at December 31: Total assets $254,591 $266,186 $273,493 $261,588 $264,544 Long-term debt and capitalized lease obligations 63,934 74,781 104,185 115,503 120,108
See accompanying Notes to Consolidated Financial Statements See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for acquisitions and divestitures that affect comparability. 13 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion provides information which management believes is relevant to an assessment and understanding of the Company's operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. General The Company is a publicly held master limited partnership operating in the wholesale industrial distribution industry through a subsidiary partnership, SDI Operating Partners, L.P. (the "Operating Partnership"). The Operating Partnership consists of a headquarters operation and three business segments (Industrial Services, Retail Merchandising and Retail Glass Services), comprised of eleven operating divisions. Industrial Services consists of Sun Technology Services divisions and Sun Inventory Management ("SIMCO") divisions. Certain divisions have operations in Canada and Mexico. Refer to Part I, Item 1 - Business, for information on the realignment of the company's operating divisions into business segments which reflect the value-added services provided to customers. For ease of comparison, certain financial data is presented in accordance with the current business segments of the Company. Results of Operations Market Developments ------------------- In 1995, the business of the Industrial Services and Retail Merchandising Segments continued to expand as a result of both economic strength across most of the product markets and internal growth strategies developed since 1992. A decline in sales volume experienced by the Retail Glass Services Segment is primarily attributable to the discontinuation of certain product lines and markets. Operating expense control and liquidity in working capital investment allows the operating divisions to respond quickly to market conditions effected by economic recession or growth. Management has and will continue to respond to changing market conditions. Sale of Certain Divisions The Operating Partnership sold its three Electrical Group divisions on December 5, 1994, its Dorman Products division on January 3, 1995, and its Downey Glass division on October 27, 1995, 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. Sales from these divisions aggregated $ 29.1 million for the year ended December 31, 1995, $177.1 million for the year ended December 31, 1994, and $162.3 million for the year ended December 31, 1993. Income contributions from these divisions aggregated $.3 million or $.01 per Class B interest in 1995, $8.6 million or $.39 per Class B interest in 1994, and $6.6 million or $.30 per Class B interest in 1993. The proceeds from these divestitures were used to reduce debt and for general Company purposes, including acquisitions for integration with its remaining businesses. 14 The Company considered a number of strategic alternatives as part of the process which led to the decision to sell these divisions. Other alternatives considered but which were not ultimately pursued, included a sale of the entire Company; the sale of all of its divisions followed by liquidation; or a recapitalization and conversion to a corporate structure from the current partnership form. The sale of these divisions brought to a conclusion the process of considering strategic alternatives. The sale of these non-strategic businesses has benefited the Operating Partnership by strengthening its balance sheet, positioning it to resume its acquisition program and providing increased management focus on its remaining businesses. Acquisitions On November 13, 1995, the Company's Retail Merchandising Segment, through its Hillman Fastener Division, purchased certain assets of the Retail Division of Curtis Industries of Eastlake, Ohio for an aggregate purchase price of $7.5 million and the assumption of certain liabilities. Annual sales of Curtis' Retail Division are approximately $17 million. The Curtis Retail division will be integrated with the Hillman Fastener division. Curtis' sales were $1.6 million from the acquisition date through December 31, 1995. There was no income contribution from Curtis during this period due primarily to certain non- recurring transition costs. Results of Operations Years Ended December 31, 1995 and 1994 -------------------------------------- Net income for the year ended December 31, 1995 was $44.1 million including a combined gain of $20.6 million from the sale of the Downey Glass division in October 1995 and the Dorman Products division in January 1995, compared with $29.5 million earned in 1994 which included a gain of $3.5 million from the sale of the Electrical Group divisions. Results for 1995 also included 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 the early extinguishment of debt, net income for 1995 amounted to $23.8 million or 36.7% above the comparable 1994 earnings of $17.4 million. Net sales increased $41.1 million or 7.4% over 1994 due to strengthening in most product markets and significant growth from sales programs and services initiated since 1992. Excluding divisions sold, sales recorded in 1995 were $599.9 million compared with 1994 sales of $558.8 million. Sales increases (decreases) by business segment are as follows:
Sales Increase (Decrease) -------------------------- Amount % ------ - Industrial Services Technology Services divisions $ 25.0 million 9.6 % SIMCO divisions 10.1 million 7.9 % ---------------- Total Industrial Services 35.1 million 9.1 % Retail Merchandising 11.9 million 16.3 % Retail Glass Services (5.9)million (6.1)% ---------------- Total Company $ 41.1 million 7.4 % ================
15 The decline in sales volume in the Retail Glass Services Segment is 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 Retail Glass Services Segment. Cost of sales increased $23.4 million or 7.1% from the twelve months ended December 31, 1994, due primarily to increased sales levels in the comparison period. Excluding divisions sold, gross margins were 40.8% in 1995 compared with 40.7% in 1994, comprised by business segment as follows:
Year Ended December 31, ------------------------- 1995 1994 ---- ---- Industrial Services Technology Services divisions 27.4% 27.7% SIMCO divisions 64.5% 65.9% Total Industrial Services 39.5% 40.3% Retail Merchandising 52.4% 51.0% Retail Glass Services 35.9% 34.4%
Sales mix contributed principally to the changes in gross margins. Selling, general and administrative ("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 16.5% 16.1% Warehouse and Delivery Expenses 5.8% 5.7% General and Administrative Expenses 11.9% 12.1% ---- ---- Total S,G&A Expenses 34.2% 33.9% ==== ====
The increase in S,G&A as a percentage of sales is due mainly to increased support payments, incentive programs and marketing efforts for the sales force. As calculated in accordance with the partnership agreement, the management fee due the General Partner (the "GP") annually amounts to $3.3 million which is based on 3% of the aggregate initial capital investment ($111 million) of the limited partners. Depreciation expense increased $.1 million in the comparison period due primarily to an increase in the depreciable fixed asset base at the remaining divisions of the Company. Amortization expense decreased $.2 million in 1995 compared with 1994 due primarily to the expiration of non-compete agreements in the Retail Glass Services segment. Net results of operations from divisions sold in the 1995 period includes only the Downey Glass division compared with results of operations from all divisions sold in the 1994 period, as follows: the Electrical Group divisions ($4.1 million), the Dorman Products division ($2.8 million) and the Downey Glass division ($1.7 million). 16 Interest income increased $.3 million in the comparison period due primarily to the investment of excess cash generated from divisions sold. Interest expense decreased $2.6 million in the comparison period due primarily to reduced financing costs of approximately $1.5 million from the prepayment of senior notes on March 14, 1995, and $1.1 million from reduced borrowing levels under the Company'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. Currently, the Company incurs state and local income taxes on its domestic operations and foreign income taxes on its Canadian and Mexican Operations. Also, the Company provides for deferred income taxes as determined in accordance with Statement of Financial Accounting Standard No. 109 ("SFAS #109"). Deferred income taxes represent state and federal income tax benefits expected to be realized after December 31, 1997, when the Company will be taxed as a corporation. The Company's provision for income taxes in 1995 increased $.4 million from 1994 due primarily to an increase in state taxes for the gains on divisions sold. The allocation of net income to the GP is based on the GP's 1% ownership interest in the profits of the Company. The allocation of net income to the limited partners for financial statement purposes represents a 99% interest in the profits of the Company. The net income allocation resulted in $1.10 of income per Class A limited partnership interest for the years ended December 31, 1995 and December 31, 1994; and $1.45 of income per Class B limited partnership interest in 1995 compared with $.79 of income per Class B interest for the year ended December 31, 1994. Income per Class B interest in 1995 included a combined gain of $.94 from the sale of the Dorman Products and Downey Glass divisions and an extraordinary loss of $.03 from the early extinguishment of debt. Income per Class B interest for the twelve months ended December 31, 1994 included a gain of $.16 on the sale of the Electrical Group divisions. Income per Class B interest for the twelve months ended December 31, 1995 and 1994 included $.01 and $.39, respectively, of income from divisions sold. Years Ended December 31, 1994 and 1993 -------------------------------------- Net income for the year ended December 31, 1994 was $29.5 million including a gain of $3.5 million from the sale of the Electrical Group divisions in December 1994, compared with $18.5 million earned in 1993. This increase was a result of continued economic expansion across all product markets and internal growth strategies implemented primarily in 1993 and 1994. Results for 1994 and 1993 included income from divisions sold as follows: Downey Glass division of $ 1.7 and $ .1 million; Dorman Products division of $2.8 and $3.3 million; and Electrical Group divisions of $4.1 and $3.2 million, respectively. Excluding income contributions and gains from divisions sold, net income for 1994 amounted to $17.4 million or 46.9% above the comparable 1993 earnings of $11.9 million. 17 Excluding divisions sold, net sales increased $65.4 million or 13.2 % over 1993 due to strengthening in most product markets and significant growth from sales programs and services initiated since 1992. Sales recorded in 1994 were $558.8 million compared with 1993 sales of $493.4 million. Sales increases by business segment were as follows:
Sales Increase -------------------------- Amount % ------ - Industrial Services Technology Services divisions $ 35.9 million 16.0 % SIMCO divisions 10.4 million 8.8 % ------- Total Industrial Services 46.3 million 13.5 % Retail Merchandising 16.2 million 28.6 % Retail Glass Services 2.9 million 3.0 % ------- Total Company $ 65.4 million 13.2 % =======
Cost of sales increased $38.7 million or 13.2%, due primarily to increased sales levels in the existing businesses in the comparison period. Excluding divisions sold, gross margins were 40.7% in 1994 compared with 40.6% in 1993, comprised by business segment as follows:
Year Ended December 31, ------------------------- 1994 1993 ---- ---- Industrial Services Technology Services divisions 27.7% 27.2% SIMCO divisions 65.9% 66.4% Total Industrial Services 40.3% 40.7% Retail Merchandising 51.0% 50.7% Retail Glass Services 34.4% 34.4%
The erosion in gross margin in the SIMCO divisions is due mainly to increased sales allowances related to business expansion programs and competitive pricing pressures. Sales mix contributed principally to the change in gross margins in the remaining divisions/segments. Excluding divisions sold, total S,G&A expenses increased by $20.4 million or 12.1% compared with 1993, comprised as follows: increased selling expenses of $12.1 million or 15.5%, increased warehouse and delivery expenses of $3.3 million or 11.7% and increased general and administrative expenses of $5.0 million or 8.0%. Selling and warehouse and delivery expense increased during 1994 to support the substantial increase in 1994 sales levels and expansion programs. General and administrative expenses in 1994 increased primarily by inflationary growth in fixed costs and increased incentive-based compensation for the management segment as a result of 1994 net income performance. Excluding divisions sold, S,G&A expenses, as a percentage of sales were as follows in 1994 and 1993:
Year Ended December 31 ------------------------ 1994 1993 ---- ---- Selling Expenses 16.1% 15.8% Warehouse and Delivery Expenses 5.7% 5.8% General and Administrative Expenses 12.1% 12.7% ---- ---- Total S,G&A Expenses 33.9% 34.2% ---- ----
18 Overall, as a percentage of sales, total S,G&A expenses decreased due mainly to the increase in sales levels in relation to the fixed cost component of S,G&A expenses. As calculated in accordance with the partnership agreement, the management fee due the GP annually amounts to $3.3 million which is based on 3% of the aggregate initial capital investment ($111 million) of the limited partners. Depreciation expense decreased $.3 million due primarily to a reduction in the depreciable fixed asset base as a result of fully depreciated assets. Amortization expense decreased $.3 million due primarily to the expiration of non-compete agreements in the Retail Glass Services Segment. Net results of operations from divisions sold in 1994 and 1995 increased $2.0 million over 1993 due to economic strengthening in 1994. Interest expense increased $.1 million in the comparison period due mainly to higher interest rates in 1994 over the comparable 1993 year. Other expense of $1.7 million in 1994 consisted primarily of provisions for legal, insurance and investment banking matters compared with favorable resolution of legal and insurance matters in 1993 resulting in other income of $.2 million. Currently, the Company incurs state and local income taxes on its domestic operations and foreign income taxes on its Canadian and Mexican Operations. Also, the Company provides for deferred income taxes as determined in accordance with Statement of Financial Accounting Standard No. 109 ("SFAS #109"). Deferred income taxes represent state and federal income tax benefits expected to be realized after December 31, 1997, when the Company will be taxed as a corporation. The Company's provision for income taxes in 1994 decreased $.8 million from 1993 due to increased deferred tax benefits related to deferred compensation. The allocation of net income to the GP is based on the GP's 1% ownership interest in the profits of the Company. The allocation of net income to the limited partners for financial statement purposes represents a 99% interest in the profits of the Company. The net income allocation resulted in $1.10 of income per Class A limited partnership interest for the year ended December 31, 1994, and December 31, 1993; and $.79 of income per Class B limited partnership interest in 1994 including a gain of $.16 per Class B interest from the sale of the Electrical Group divisions, compared with $.28 of income per Class B limited partnership interest in 1993. Income per Class B interest for the twelve months ended December 31, 1994 and 1993 included $.39 and $.30, respectively, of income from divisions sold. 19 Liquidity and Capital Resources Net cash provided by operations for the twelve months ended December 31, 1995 was $17.1 million a decrease of $.6 million from the prior year level of $17.7 million. The Company's net interest coverage ratio (earnings before interest, taxes and gain on sale of divisions over net interest expense) improved to 4.56X in 1995 from the 1994 level of 3.58X. The Company's cash position of $5.9 million as of December 31, 1995, increased $1.0 million from the balance at December 31, 1994. Cash was provided during 1995 primarily from operations of $17.1 million and proceeds from the sale of the Dorman Products and Downey Glass divisions of $44.9 million. Cash was used during this period predominantly for distributions to the general and limited partners ($27.2 million), repayment of debt obligations ($19.0 million), acquisitions ($7.4 million), capital expenditures ($4.3 million) and the purchase of life insurance ($3.1 million). The Company's working capital position of $95.8 million at December 31, 1995, represents an increase of $19.8 million from the December 31, 1994 level of $76.1 million. The increase is primarily attributable to reinvestment in working capital of $12.8 million, a decrease in the current portion of Senior Notes of $12.5 million due to repayments, and acquired working capital of $5.0 million related to the Curtis acquisition, offset by $10.5 million of divested working capital related to the sale of Dorman Products and Downey Glass. The Company's current ratio increased to 2.11 at December 31, 1995 from the December 31, 1994 level of 1.72. The Company's financial position has strengthened as a result of the sale of its Electrical Group divisions, and the Dorman Products and Downey Glass divisions. On March 14, 1995, the Company 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. On December 1, 1995 and 1994, the Operating Partnership paid scheduled principal repayments on its senior notes aggregating $4.8 million and $5.7 million, respectively. As of December 31, 1995, the Company's total debt as a percentage of its consolidated capitalization is 43.5% compared with 55.0% as of December 31, 1994. The Company anticipates spending approximately $3.4 million for capital expenditures in 1996, primarily for machinery and equipment. As of December 31, 1995, the Operating Partnership had $39.9 million available under its $50.0 million Bank Credit Agreement which provides revolving credit for working capital purposes and acquisitions through December 31, 1997. The Company had no bank borrowings outstanding at December 31, 1995 under the Bank Credit Agreement. The $10.1 million outstanding under the Bank Credit Agreement represented letter of credit commitments only. 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 $.5 million USD was outstanding at December 31, 1995. In accordance with its Senior Note and Bank Credit Agreements, the Company was not permitted to make acquisitions in 1993 and 1994. The acquisition restriction in 1994 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. In 1995, acquisition spending amounted to $7.5 million. Management intends to continue its acquisition strategy in 1996, with authorized spending of up to $15.0 million in the aggregate, to complement internal growth. 20 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 taxable gain from the sale of the Dorman Products and Downey Glass divisions in 1995 amounted to $.927 and $.232 per Class B interest, respectively. The sale of the Electrical Group divisions in December 1994 resulted in a taxable gain of $.408 per Class B Interest. With respect to the sale of Dorman Products on January 3, 1995, the Operating Partnership paid a partial tax distribution on April 10, 1995 to Class B holders of record as of December 30, 1994, in the amount of $.15 per Class B Interest. The remaining balance of the tax distribution for the taxable gain on the sale of Dorman Products in the amount of $.175 per Class B Interest will be paid on March 29, 1996, along with a tax distribution in the amount of $.081 per Class B interest to holders of record as of September 29, 1995 related to the sale of the Downey Glass division on October 27, 1995. Related to the sale of the Electrical Group divisions, the Partnership made a tax distribution on March 31, 1995 to Class B holders of record as of December 30, 1994, equal to approximately $.143 per Class B Interest. See Item 3 - Legal Proceedings, for the description of a recent lawsuit with respect to the sale of the Company's Dorman Products division. Certain other legal proceedings are pending which are either in the ordinary course of business or incidental to the Company's business. Those legal proceedings incidental to the business of the Company are generally not covered by insurance or other indemnity. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial position, operations or cash flows of the Company. Income Taxes As a result of the Company's adoption of SFAS No. 109 in 1992, the Company has a deferred tax asset aggregating $2.8 million as of December 31, 1995. Management believes that the Company's deferred tax asset will be realized through the reversal of existing temporary differences after December 31, 1997, when the Company will be treated as a corporation for federal income tax purposes. The temporary differences expected to reverse after December 31, 1997, between the financial statement and tax bases, are composed of prepayment penalties in the amount of $.8 million and deferred compensation liabilities in the amount of $7.5 million, net of a valuation allowance of $.4 million. See Note 13 of Notes to Consolidated Financial Statements. 21 The minimum level of future taxable income necessary to realize the Company's recorded deferred tax asset at December 31, 1995, is approximately $7.1 million. For the three years ended December 31, 1995, the Company's consolidated net income per the financial statements reconciled to federal taxable income in thousands of dollars is shown below:
1995 1994 1993 -------- ------- -------- Consolidated Net Income per the Financial Statements ("Book") $44,116 $29,544 $18,506 Tax Adjustments to Book Income: - ------------------------------- Goodwill & Other Intangible Asset Amortization 1,252 1,634 1,807 Depreciation 467 506 796 Deferred Compensation, net 942 2,917 384 Self-Insurance Accrued Expenses, net (776) 844 3,331 Tax gain in excess of book gain from sale of Divisions 1,977 1,216 -- Other Increase (Decrease) to Book Income, net 1,893 451 (288) ------- ------- ------- Federal Taxable Income $49,871 $37,112 $24,536 ======= ======= =======
Partnership Tax Status As previously stated, after December 31, 1997, the Company will be taxed as a corporation for federal income tax purposes. Management has been exploring various restructuring alternatives such as converting into corporate form or remaining as a limited partnership. If the Company remains a limited partnership, the effect of the change in taxation will result in the Company paying a corporate income tax at the Company level. Therefore, in accordance with the Partnership Agreement, the Company'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 Company, if any. Additionally, in accordance with the Partnership Agreement, the Company would no longer make tax distributions with respect to Class B limited partnership interests. Accordingly, a decision on whether any other distribution will be made with respect to the Class B interests is solely within the discretion of the General Partner. Based on current operations, it is likely that cash will be retained in the Company to fund its acquisition program and corporate requirements. If the Company remains a limited partnership, there will be no change with respect to the priority return distribution paid to the Class A interests in the amount of $.0917 per month to each Class A interest to aggregate $1.10 annually. Inflation Inflation in recent years has had a modest impact on the operations of the Company. Continued inflation, over a period of years at higher than current rates, would result in significant increases in inventory costs and operating expenses. However, such higher cost of sales and operating expenses can generally be offset by increases in selling prices, although the ability of the Company's operating divisions to raise prices is dependent upon competitive market conditions. 22 Item 8 - Financial Statements and Supplementary Data. - ------------------------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page Report of Independent Accountants 24 Financial Statements: Consolidated Balance Sheets, December 31, 1995 and 1994 25 Consolidated Statements of Income, Years ended December 31, 1995, 1994 and 1993 26 Consolidated Statements of Cash Flows, Years ended December 31, 1995, 1994 and 1993 27 Consolidated Statements of Changes in Partners' Capital, Years ended December 31, 1995, 1994 and 1993 28 Notes to Consolidated Financial Statements 29-43 Financial Statement Schedules: I Condensed Financial Information of Registrant 44 II Valuation Accounts 45 23 Report of Independent Accountants The Board of Directors Lehman/SDI, Inc. We have audited the accompanying consolidated balance sheets of Sun Distributors L.P. and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1995. We have also audited the financial statement schedules listed in Item 14 (a)(2) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sun Distributors L.P. and subsidiary as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand, LLP 2400 Eleven Penn Center Philadelphia, Pennsylvania March 8, 1996 24 SUN DISTRIBUTORS L.P. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (dollars in thousands)
ASSETS ------------ DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- Current assets: Cash and cash equivalents $ 5,900 $ 4,903 Accounts and notes receivable, net of allowance for doubtful accounts of $1,827 and $2,472, respectively 75,824 77,521 Inventories 96,022 92,653 Other current assets 4,742 6,703 -------- -------- Total current assets 182,488 181,780 Property and equipment, net 20,181 27,514 Goodwill (net of accumulated amortization of $11,739 and $11,259, respectively) 44,250 48,458 Other intangibles (net of accumulated amortization of $13,724 and $14,396, respectively) 1,312 2,477 Deferred income taxes 2,844 2,144 Cash surrender value of life insurance policies 3,009 --- Other assets 507 3,813 -------- -------- Total assets $254,591 $266,186 ======== ======== LIABILITIES AND PARTNERS' CAPITAL ------------------------------------- Current liabilities: Accounts payable $ 42,437 $ 44,435 Notes payable 2,753 2,709 Current portion of senior notes 6,395 18,970 Current portion of capitalized lease obligations --- 387 Distributions payable to partners 7,819 7,774 Accrued expenses: Salaries and wages 5,109 7,131 Management fee due the general partner 3,330 3,330 Income and other taxes 3,398 3,338 Other accrued expenses 15,406 17,646 -------- -------- Total current liabilities 86,647 105,720 Senior notes 63,934 70,330 Capitalized lease obligations --- 4,451 Deferred compensation 7,829 6,398 Other liabilities 1,238 68 -------- -------- Total liabilities 159,648 186,967 -------- -------- Commitments and contingencies Partners' capital: General partner 963 791 Limited partners: Class A interests 67,642 67,642 Class B interests 29,252 12,300 Class B interests held in treasury ( 1,514) ( 1,514) Cumulative foreign currency translation adjustment ( 1,400) --- -------- -------- Total partners' capital 94,943 79,219 -------- -------- Total liabilities and partners' capital $254,591 $266,186 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 SUN DISTRIBUTORS L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, (dollars in thousands, except for partnership interest amounts)
1995 1994 1993 ----------- ----------- ----------- Net sales $ 599,865 $ 558,754 $ 493,437 Cost of sales 355,004 331,609 292,878 ----------- ----------- ----------- Gross profit 244,861 227,145 200,559 ----------- ----------- ----------- Operating expenses: Selling, general and administrative expenses 205,180 189,252 168,839 Management fee to general partner 3,330 3,330 3,330 Depreciation 3,358 3,249 3,556 Amortization 1,961 2,143 2,496 ----------- ----------- ----------- Total operating expenses 213,829 197,974 178,221 ----------- ----------- ----------- Net results of operations from divisions sold (note 5) 270 8,588 6,637 ----------- ----------- ----------- Income from operations 31,302 37,759 28,975 Interest income 412 66 85 Interest expense 7,332 9,956 9,876 Other income (expense), net 256 ( 1,748) 191 Gain on sale of divisions (note 5) 20,644 3,523 -- ----------- ----------- ----------- Income before provision for income taxes 45,282 29,644 19,375 Provision for income taxes 537 100 869 ----------- ----------- ----------- Income before extraordinary loss 44,745 29,544 18,506 Extraordinary loss from early extinguishment of debt (note 4) ( 629) -- -- ----------- ----------- ----------- Net income $ 44,116 $ 29,544 $ 18,506 =========== =========== =========== Net income allocated to partners: General partner $ 441 $ 295 $ 185 ----------- ----------- ----------- Class A limited partners $ 12,210 $ 12,210 $ 12,210 ----------- ----------- ----------- Class B limited partners $ 31,465 $ 17,039 $ 6,111 ----------- ----------- ----------- Earnings per Limited partnership interest: Income before extraordinary loss - Class A interest $ 1.10 $1.10 $ 1.10 - Class B interest $ 1.48 $ .79 $ .28 Extraordinary loss - Class A interest -- -- -- - Class B interest ( $0.03) -- -- Net income - Class A interest $ 1.10 $1.10 $ 1.10 - Class B interest $ 1.45 $ .79 $ .28 Weighted average number of outstanding limited partnership interests: - Class A interests 11,099,573 11,099,573 11,099,573 - Class B interests 21,675,746 21,675,746 21,675,746
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26 SUN DISTRIBUTORS L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (dollars in thousands)
1995 1994 1993 -------- -------- -------- Cash flows from operating activities: Net income $ 44,116 $ 29,544 $ 18,506 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization-Existing divisions 5,319 5,392 6,052 Depreciation and amortization-Divested divisions 338 1,750 1,902 Decrease in cash value of life insurance 58 --- --- Gain on sale of divisions ( 20,644) ( 3,523) --- Extraordinary loss 629 --- --- Provision for deferred compensation 2,340 3,187 721 Deferred income tax expense (benefit) ( 700) ( 734) 208 Changes in current operating items: Increase in accounts and notes receivable ( 3,666) ( 11,783) ( 4,855) Increase in inventories ( 8,209) ( 9,436) ( 10,689) Decrease (increase) in other current assets 857 347 ( 815) Increase in accounts payable 2,531 1,865 10,542 Increase (decrease) in accrued interest ( 141) ( 42) 516 Increase (decrease) in other accrued liabilities ( 6,062) 4,836 2,415 Other items, net 284 ( 3,699) ( 932) -------- -------- -------- Net cash provided by operating activities 17,050 17,704 23,571 -------- -------- -------- Cash flows from investing activities: Proceeds from sale of divisions 44,873 26,561 --- Proceeds from sale of property and equipment 757 724 384 Payment for purchase of assets ( 7,385) --- --- Investment in life insurance policies ( 3,067) --- --- Capital expenditures ( 4,299) ( 4,263) ( 3,734) Other, net ( 93) 228 55 -------- -------- -------- Net cash provided by (used for) investing activities 30,786 23,250 ( 3,295) -------- -------- -------- Cash flows from financing activities: Repayment of senior notes ( 18,971) ( 5,700) --- Repayments under the bank credit agreement, net --- ( 10,000) ( 5,000) Prepayment penalties and related costs ( 629) --- --- Cash distributions to partners ( 27,218) ( 20,357) ( 14,940) Borrowings (repayments) under other credit facilities, net 44 ( 702) 817 Principal payments under capitalized lease obligations ( 65) ( 619) ( 618) Other, net --- --- 47 -------- -------- -------- Net cash used for financing activities ( 46,839) ( 37,378) ( 19,694) -------- -------- -------- Net increase in cash and cash equivalents 997 3,576 582 Cash and cash equivalents at beginning of period 4,903 1,327 745 -------- -------- -------- Cash and cash equivalents at end of period $ 5,900 $ 4,903 $ 1,327 ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 SUN DISTRIBUTORS L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED (dollars in thousands)
PARTNERS' CAPITAL ------------------------------------------------------------ Cumulative Foreign Currency Class A Class B Class B Translation General Limited Limited Treasury Adjustment TOTAL ------- -------- -------- -------- ----------- -------- Balance, December 31, 1992 726 67,642 5,721 (1,514) --- $ 72,575 Net income 185 12,210 6,111 --- --- 18,506 Cash distributions paid and/or declared to partners ( 182) ( 12,210) ( 5,807) --- --- ( 18,199) ----- -------- -------- -------- ----------- -------- Balance, December 31, 1993 729 67,642 6,025 ( 1,514) --- 72,882 Net income 295 12,210 17,039 --- --- 29,544 Cash distributions paid and/or declared to partners ( 233) ( 12,210) ( 10,764) --- --- ( 23,207) ----- -------- -------- -------- ----------- -------- Balance, December 31, 1994 791 67,642 12,300 ( 1,514) --- 79,219 Net income 441 12,210 31,465 --- --- 44,116 Cash distributions paid and/or declared to partners ( 269) ( 12,210) ( 14,513) --- --- ( 26,992) Cumulative foreign currency translation adjustment --- --- --- --- ( 1,400) ( 1,400) ----- -------- -------- -------- ----------- -------- Balance, December 31, 1995 $ 963 $ 67,642 $ 29,252 ( $1,514) ( $1,400) $ 94,943 ===== ======== ======== ======== =========== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. Basis of Presentation: The accompanying financial statements include the consolidated accounts of Sun Distributors L.P. (the "Company") and its subsidiary partnership, SDI Operating Partners, L.P. (the "Operating Partnership"). All significant intercompany balances and transactions have been eliminated. Nature of Operations: --------------------- The Company is one of the largest wholesale distributors of industrial products and related services in the United States. The Company's three principal lines of business are: (1) industrial products and services, primarily maintenance and fluid power products and inventory management services sold to industrial customers for machine and plant maintenance and for manufacturing of original equipment; (2) retail merchandising products and services, primarily fasteners and related products sold to retail hardware stores; and (3) retail glass products and services sold to construction and retail markets. Based on net sales of existing divisions for the year ended December 31, 1995, the Industrial Services Segment provides approximately 71% of the Company's sales through its Sun Technology Services divisions (48% of net sales) and the Sun Inventory Management Company ("SIMCO") divisions (23% of net sales). The Retail Merchandising and Retail Glass Services Segments provide approximately 14% and 15%, respectively, of the Company's net sales. Although its sales are primarily industrially-based, the Company has over 179,000 customers, the largest of which accounted for less than 4% of net sales for the year ended December 31, 1995. The Company's products and services are sold throughout all 50 states as well as in Canada and Mexico. Foreign sales account for less than 5% of total revenues. The average single sale during the year ended December 31, 1995 was less than three hundred dollars. Sales performance is tied closely to the overall performance of the non-defense-goods producing sector of Gross Domestic Product in the United States. 2. Summary of Significant Accounting Policies: Cash Equivalents: ---------------- Cash equivalents consist of commercial paper, U.S. Treasury obligations and other liquid securities purchased with initial maturities less than 90 days and are stated at cost which approximates market value. Inventories: ----------- Inventories, which consist of products purchased for resale, are valued at the lower of cost or market, cost being determined principally on the first- in, first-out method. 29 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 2. Summary of Significant Accounting Policies, continued: Property and Equipment: ---------------------- Property and equipment, including assets acquired under capital leases, is carried at cost and includes expenditures for new facilities and major renewals. Maintenance and repairs are charged to expense as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and the resulting gain or loss is reflected in current operations. Depreciation: ------------ For financial accounting purposes, depreciation, including that related to plant and equipment acquired under capital leases, is computed on the straight-line method over the estimated useful lives of the assets, generally three to twenty-five years, or, if shorter, over the terms of the related leases. Goodwill and Other Intangible Assets: ------------------------------------ Goodwill related to the excess of acquisition cost over the fair value of net assets acquired is amortized on a straight-line basis over forty years. Other intangible assets arising principally from acquisitions by the Operating Partnership are amortized on a straight-line basis over periods ranging from three to ten years. Income Taxes: ------------ As a partnership, the Company incurs no liability for federal income taxes. Accordingly, no current provision for federal income taxes is reflected in the accompanying consolidated financial statements. However, the Company does incur certain state and local income taxes on its domestic operations and foreign income taxes on its Canadian and Mexican operations. Therefore, a current provision for state, local and foreign income taxes is reflected in the accompanying consolidated financial statements. The Revenue Act of 1987 provides that certain "existing publicly traded partnerships", such as the Company, generally will not be treated as corporations for federal income tax purposes until after December 31, 1997, provided that such partnerships do not add any substantial new line of business before the effective date. Statement of Financial Accounting Standards ("SFAS") No. 109 requires the Company to recognize deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The Company's deferred taxes are determined from temporary differences expected to reverse after December 31, 1997, when the Company will be taxed as a corporation. Therefore, a deferred provision or benefit for state and federal income taxes is reflected in the accompanying consolidated statements of income. 30 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 2. Summary of Significant Accounting Policies, continued: Retirement Benefits: ------------------- Certain employees are covered under profit-sharing retirement plans ("defined contribution plans") for which contributions are determined on an annual basis in accordance with the requirements of each plan. Defined benefit plan contributions covering certain employees are funded, at a minimum, in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. In accordance with collective bargaining agreements, annual contributions to multi-employer pension plans are made. These contributions, which are based on fixed contributions per month for each hour worked, are charged to income as incurred. Certain employees are covered under post-retirement benefit plans for which benefits are determined in accordance with the requirements of each plan. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers Accounting for Post-retirement Benefits Other Than Pensions". The Company has elected to amortize the accumulated post-retirement benefit liability (transition obligation) resulting in delayed recognition. The impact of the adoption on the Company's financial position and results of operations is immaterial. Fair Value of Financial Instruments: ----------------------------------- SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" requires disclosure of the fair value of certain financial instruments. Cash, accounts receivable, short-term borrowings, accounts payable, accrued liabilities and bank revolving credit are reflected in the consolidated financial statements at fair value because of the short-term maturity or revolving nature of these instruments. The fair values of the Company's debt instruments are disclosed in Note 9. Translation of Foreign Currencies: ---------------------------------- The translation of applicable foreign-currency-based financial statements into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The cumulative foreign currency translation adjustment was included in non-current liabilities prior to 1995. In 1995 such amount has been classified as a separate component of partner's capital. Exchange adjustments resulting from foreign currency transactions are recognized in net income and were immaterial for the three years ending December 31, 1995. Use of Estimates in the Preparation of Financial Statements: ------------------------------------------------------------ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 31 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 3. Ownership Structure: The General Partner of the Company and the Operating Partnership is SDI Partners I, L.P. (the "GP"), a Delaware limited partnership whose sole general partner is Lehman/SDI, Inc., formerly known as Shearson/SDI, Inc., an indirect, wholly-owned subsidiary of Lehman Brothers Holdings, Inc. ("Lehman Holdings"), formerly known as Shearson Lehman Brothers Holdings, Inc. The Company's Class A and Class B limited partnership interests outstanding, as of December 31, 1995, are held as follows:
Class A Class B Interests Interests --------- --------- Public Investors 11,010,035 ( 99.2%) 11,637,103 ( 53.7%) Lehman Holdings and Affiliates -- 5,896,678 ( 27.2%) Executive Officers and Directors (a) 89,538 ( 0.8%) 4,141,965 ( 19.1%) ------------------- ------------------- Total 11,099,573 (100.0%) 21,675,746 (100.0%)(b) =================== ======================
(a) Executive officers of the Company and the Operating Partnership and Directors of Lehman/SDI, Inc., including beneficial ownership. (b) Net of 523,400 Class B interests held in the Company's treasury as of December 31, 1995. Except as expressly limited by the partnership agreement, the GP has complete and exclusive discretion in the management and control of the affairs and business of the Company and its subsidiary partnership. The holders of Class A and Class B interests have certain limited voting rights under the partnership agreement generally regarding the removal of the GP and the sale of all or substantially all of the assets of the Company or the Operating Partnership or dissolution of the Company. Holders of Class A interests are entitled to receive, to the extent cash is available, $1.10 annually (the "priority return") per Class A interest, which is currently paid monthly. On December 15, 1995, the Company declared a priority return distribution for the month of January 1996 in the amount of $1,038 or $.091666 per Class A interest payable January 31, 1996, to holders of record December 29, 1995. The Class A capital account as of December 31, 1995 and 1994, was $10.00 per Class A interest. All items of income and loss and cash distributions of the Operating Partnership are allocated 99% to the Company and l% to the GP. The GP is allocated l% of the Company's share of income or loss and cash distributions, with the remaining 99% allocated to the limited partners. Income for federal income tax purposes is allocated to the holders of Class A interests, until the Class A capital account of each holder is equal to the sum of their initial capital investment ($10.00 per Class A interest), plus any unpaid priority return. For years 1995, 1994, and 1993, federal taxable income per Class A interest amounted to $1.10 per year, all of which represented ordinary income. Any remaining income after the Class A allocation is allocated to the holders of Class B interests. The holders of Class B interests receive an allocable share of loss until the Class B capital account (as defined in the partnership agreement) of each holder is reduced to zero. Thereafter, any unallocated loss is allocated to the holders of Class A interests. 32 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 3. Ownership Structure, continued: For 1995, 1994 and 1993, federal taxable income amounted to $1.6923, $1.1146 and $.5411 per Class B interest, respectively. Federal taxable income in 1995 consists of ordinary income of $.5326 per Class B interest and a combined capital gain of $1.1597 per Class B interest related to the sale of the Dorman Products and Downey Glass divisions (see Note 5, Acquisitions/Divestitures). Federal taxable income in 1994 consisted of ordinary income of $.7069 per Class B interest and a capital gain of $.4077 per Class B interest related to the sale of the Electrical Products Group divisions. In 1993, federal taxable income consisted of ordinary income only. The Class B capital account as of December 31, 1995 and 1994, was approximately $2.54 and $1.52 per Class B interest, respectively. Holders of Class B interests are entitled to receive annual cash distributions sufficient to cover their tax liabilities on taxable income allocated to the Class B interests (the "Class B Tax Distribution"). For 1995, the Class B Tax Distribution amounted to $14,807 or $.6695 per Class B interest which was partially paid in the amount of $.02 per Class B interest per month for the period January through December 1995 and a partial distribution of $.15 paid on April 10, 1995 to holders of record on December 30, 1994, related to the taxable gain on the sale of the Dorman Products division on January 3, 1995. On March 29, 1996, the Partnership intends to distribute the balance of the tax distribution due of $.2795 per Class B interest, as follows: approximately $.1745 to holders of record on December 30, 1994 for the balance due on the taxable gain on the sale of Dorman Products; $.00197 per month to holders of record of Class B interests on the first day of the month during January through December 1995 for the balance due on ordinary income; and $.0814 to holders of record on September 29, 1995 related to the taxable gain on the sale of the Downey Glass division (see Note 5, Acquisitions/Divestitures). For 1994, the Class B Tax Distribution amounted to $10,895 or $.492619 per Class B interest which was partially paid in the amount of $.009352 per Class B interest per month for the period January through March 1994 and $.02 per Class B interest per month during the period April through December 1994. The monthly tax distributions were paid to holders of record on the first day of each month during 1994 and aggregated $.208056 per Class B interest for the full year 1994. On March 31, 1995, the Partnership paid the balance of the tax distribution due of $.284563 per Class B interest, as follows: approximately $.01981 per month to holders of record of Class B interests on the first day of the month during January through March 1994, $.00916 per month for April through November 1994, and $.15185 for December 1994 which includes $.14269 related to the capital gain on the sale of the Electrical Products Group divisions. (See Note 5, Acquisitions/Divestitures.) For 1993, the Class B Tax Distribution amounted to $5,925 or $.267864 per Class B interest which was paid in the amount of $.009352 per Class B interest per month during 1993 to holders of record on the first day of each month. The remaining balance due of $.15564 per Class B Interest was paid on March 31, 1994 to holders of record on the first day of each month during 1993 in the amount of $.01297 per Class B Interest. On December 15, 1995, the Company declared a Class B Tax Distribution for the month of January 1996 in the amount of $442 or $.02 per Class B interest payable January 31, 1996, to holders of record on December 29, 1995. 33 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 4. Extraordinary Loss: In 1995, the Company recorded an extraordinary loss of $629 or approximately $.03 per Class B limited partnership interest, due to early extinguishment of a portion of the Operating Partnership's Series A 9.08% and Series B 8.44% Senior Notes (See Note 9, Long-Term Debt). 5. Acquisitions/Divestitures: In November 1995, the Company's Hillman Fastener division purchased certain assets of the Retail division of Curtis Industries of Eastlake, Ohio, for an aggregate purchase price of $7,457 and the assumption of certain liabilities. The aggregate purchase price includes goodwill of $2,051. This acquisition has been accounted for as a purchase and, accordingly, the results of operations have been included in the accompanying consolidated financial statements from the date of acquisition. No acquisitions were consummated during 1994 and 1993 as a result of restrictions on acquisition expenditures imposed by the credit agreements of the Operating Partnership (See Note 8, Lines of Credit and Note 9, Long-Term Debt). On October 27, 1995, the Operating Partnership sold certain assets of its Downey Glass division for a cash consideration, net of expenses, of approximately $6,237 (subject to certain post-closing adjustments) and the assumption of certain liabilities. The Operating Partnership recorded a gain on the sale in the amount of $4,144 or $.19 per Class B interest included in the 1995 consolidated statement of income. The aggregate assets sold, net of liabilities, in connection with the sale of the Downey Glass division was approximately $2,093. On January 3, 1995, the Operating Partnership sold certain assets of its Dorman Products division for a cash consideration, net of expenses, of approximately $36,600 (subject to certain post-closing adjustments) and the assumption of certain liabilities. The Operating Partnership recorded a gain on the sale in the amount of $16,500 or $.75 per Class B interest included in the 1995 consolidated statement of income. The aggregate assets sold, net of liabilities, in connection with the sale of Dorman Products was approximately $20,100. On December 5, 1994, the Operating Partnership sold certain assets of its Electrical Products Group divisions for a cash consideration, net of expenses, of approximately $27,800 (subject to certain post-closing adjustments) and the assumption of certain liabilities. The Operating Partnership recorded a gain on the sale in the amount of $3,523 or $.16 per Class B interest included in the 1994 consolidated statement of income. The aggregate assets sold, net of liabilities, in connection with the sale of the Electrical Products Group divisions was approximately $24,300. For comparison purposes the Company has reported the results of operations for the divisions sold during 1994 and 1995 as a separate component of income from operations on the Consolidated Statement of Income, and has reclassified prior periods accordingly. Sales from the divested divisions aggregated $29,077, $177,107 and $162,270 for the years ended December 31, 1995, 1994 and 1993, respectively, and have been excluded from net sales reported on the Consolidated Statement of Income. Total assets for the divested divisions were $37,982 at December 31, 1994 and are included in the Consolidated Balance Sheets. 34 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 6. Related Party Transactions: The GP earns a management fee annually from the Operating Partnership equal to 3% of the aggregate initial Capital Investment of the holders of Class A interests ($110,996). The management fee will be paid only after cumulative outstanding priority returns and additional required cash distributions are paid. In addition, the management fee can be paid only if the Company complies with covenants required by the credit agreements (see Note 8, Lines of Credit, and Note 9, Long-Term Debt). Management fees earned but not paid accumulate until paid. Management fees earned in each of years 1995, 1994 and 1993 were $3,330. In March 1995, the Operating Partnership paid $3,330 of the 1994 management fee. In March 1994, the Operating Partnership paid $1,665 of the 1993 management fee and deferred payment of the remaining $1,665 until June 1994 to maintain compliance with requirements of the credit agreements. In March of 1993, the Operating Partnership paid $1,665 of the 1992 management fee and deferred payment of the remaining $1,665 until June 1993 to maintain compliance with requirements of credit agreements. Management expects to pay in full the 1995 management fee due March 31, 1996. Certain warehouse and office facilities are leased from employees under various operating leases. Charges to income applicable to these leases totaled $260 in 1995, $405 in 1994, and $367 in 1993. Aggregate future minimum lease obligations under these leases at December 31, 1995, were $156. 7. Property and Equipment: Property and equipment consist of the following at December 31, 1995 and 1994:
1995 1994 ------- ------- Land $ 3,319 $ 3,589 Buildings and leasehold improvements 18,048 24,133 Machinery and equipment 16,290 23,526 Furniture and fixtures 9,208 9,316 ------- ------- 46,865 60,564 Less accumulated depreciation 26,684 33,050 ------- ------- $20,181 $27,514 ======= =======
8. Lines of Credit: On December 22, 1992, the Operating Partnership entered into a $50,000 bank credit agreement with three lenders. This agreement provides borrowings on a revolving credit basis at interest rates based on the London Interbank Offered Rate ("LIBOR") plus 1 and 3/4% and prime. Letters of credit commitments are issued at varying rates. The bank credit agreement's original termination date of December 22, 1995 has been extended to December 31, 1997. The credit facility requires a commitment fee of 1/2 of 1% per year on the average daily unused portion of the commitment and an annual agent's fee. There is no compensating balance requirement under this facility. The Company had no bank borrowings outstanding at December 31, 1995, under the bank credit agreement. The $10,103 outstanding balance under the facility at December 31, 1995, represents letter of credit commitments only. 35 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 8. Lines of Credit, continued: The bank credit agreement contains covenants restricting distributions from the Operating Partnership to the Company and the GP. Amounts available for distribution in accordance with the bank credit agreement at December 31, 1995, were $8,620. The agreement also requires the maintenance of specific coverage ratios and levels of financial position and restricts incurrence of additional debt and the sale of assets. The bank credit agreement did not permit the Company to consummate acquisitions in 1994 and 1993. Amendments to the agreement were negotiated in March and December of 1994 to ease certain coverage ratios and other financial requirements in 1994 and future years. The December 1994 amendment allows for acquisition spending in 1995 and future years up to $15,000 in any calendar year, absent a default or event of default as defined in the bank credit agreement. In connection with the sale of operating divisions (see note 5, Acquisitions/ Divestitures) the Operating Partnership was required to reduce permanently the bank revolver commitment under the bank credit agreement by approximately $13,000. However, the banks waived this permanent reduction and maintained the existing bank credit commitment of $50,000. For 1995 and future years, the lenders have agreed to revise certain covenant tests to exclude the impact of cash distributions to holders of Class B interests related solely to tax gains on divisions sold. The Operating Partnership has another credit facility available in the amount of $500 for letters of credit of which no amount was outstanding at December 31, 1995. The letters of credit commitments are issued at varying rates. This facility, renewable annually, is not subject to compensating balance requirements or unused commitment fees. An indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a $2,500 Canadian dollar line of credit with a local lender for working capital purposes of which $463 USD was outstanding at December 31, 1995. This facility, which is renewable annually, provides bank borrowings at an interest rate of prime plus 1/4 of 1%. There are no compensating balance requirements or commitment fees associated with this facility. Notes payable consisted of the following at December 31, 1995 and 1994:
1995 1994 ------ ------ Short-term bank borrowings drawn on working capital lines of credit $ 463 $ 449 Trade notes payable in accordance with glass inventory financing arrangements 1,474 1,474 Notes payable in accordance with insurance financing arrangements 816 786 ------ ------ $2,753 $2,709 ====== ======
The weighted average interest rate on the outstanding notes payable borrowings at December 31, 1995 and 1994 was 3.01% and 2.84%, respectively. 36 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 9. Long-Term Debt: On December 22, 1992, the Operating Partnership issued $95,000 of senior notes with a final maturity of December 1, 2002, through a private placement with several institutional investors. The proceeds from the sale of the senior notes in conjunction with the bank credit were used principally to extinguish $110,000 9 1/2% senior notes, interest thereon and related prepayment penalties (see Note 8, Lines of Credit). The new senior notes were issued in two series, as follows: $65,000 Series A notes at 9.08% and $30,000 Series B notes at 8.44%. Interest is required to be paid semiannually on June 1 and December 1 on the outstanding principal of the senior notes. The Operating Partnership repaid $4,796 and $5,700 of principal on December 1, 1995 and 1994, respectively. This consisted of $3,282 and $3,900 in Series A notes, and $1,514 and $1,800 in Series B notes in 1995 and 1994, respectively. Principal repayments required on the senior notes during each of the five years subsequent to December 31, 1995, are as follows:
Series A Series B -------- -------- December 1, 1996 $4,375 $2,020 December 1, 1997 4,375 2,020 December 1, 1998 5,468 2,522 December 1, 1999 6,562 3,030 December 1, 2000 8,201 3,786
Optional prepayments, in multiples of $100, may be made at anytime, as a whole or in part, with accrued interest thereon plus a penalty ("make-whole amount"), if any, as defined in the note agreement. If the Company sells a significant amount of assets as defined in the note agreement, it must make an offer of prepayment of note principal to the senior noteholders determined on an applicable share basis with the bank credit agreement. The prepayment offer also must include accrued interest thereon plus a make-whole amount, if any, as defined in the note agreement. Related to the sale of operating divisions in December 1994 and January 1995 (see Note 5, Acquisition/Divestitures), the Operating Partnership was required to offer the noteholders prepayment of senior notes in the amount of $14,175. The noteholders accepted the prepayment offer which the Operating Partnership paid on March 14, 1995, including accrued interest thereon of $360 and a prepayment penalty of $629 (see Note 4, Extraordinary Loss). The senior note agreement contains covenants restricting distributions from the Operating Partnership to the Company and the GP. Additionally, the note agreement restricts the incurrence of additional debt and the sale of assets and requires the maintenance of specific coverage ratios and levels of financial position. Also, the senior note agreement did not permit the Company to consummate acquisitions in 1993 and 1994. For 1994 and future years, the senior noteholders have agreed to ease certain coverage ratios and other financial requirements. The Operating Partnership is permitted acquisition spending in 1995 and future years of up to $15,000 in any calendar year, absent a default or event of default as defined in the senior note agreement. 37 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 9. Long-Term Debt, continued: As of December 31, 1995, the fair value estimate of the Company's senior notes is approximately $73,000 as determined in accordance with SFAS No. 107. The Company discounted the future cash flows of its senior notes based on borrowing rates for debt with similar terms and remaining maturities. The fair value estimate is made at a specific point in time and is subjective in nature and involves uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimate. 10. Leases: Certain warehouse and office space and equipment are leased under capital and operating leases with terms in excess of one year. Future minimum lease payments under noncancellable leases consisted of the following at December 31, 1995:
Operating Leases --------- 1996 $ 9,362 1997 7,892 1998 6,086 1999 4,084 2000 3,228 Later years 5,933 ------- Total minimum lease payments $36,585 =======
Total rental expenses for all operating leases amounted to $14,232 in 1995, $15,153 in 1994, and $13,830 in 1993. 11. Deferred Compensation Plans: Certain officers and employees earn performance-based compensation, payment of which is deferred until future periods. The Company adopted a new deferred compensation plan for its officers effective January 1, 1994. Under this plan, awards are earned based on operating performance over a five-year period which vest and are paid in cash only at the end of the fifth year. At the end of any year within the five- year program, the cumulative award is subject to reduction or forfeiture if performance goals are not achieved. Upon a change in control of the Operating Partnership, participants are entitled to payment of awards earned through completion of the most recent plan year. The amounts charged to income under this plan were $1,186 in 1995 and $850 in 1994. The portion of the Operating Partnership's deferred compensation liability attributable to this plan is $2,036 as of December 31, 1995. 38 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 11. Deferred Compensation Plans, continued: For a plan adopted in 1987 and amended thereafter, certain employees earned awards which vest at the rate of 20% per year over the 5-year period following the year in which the award was earned. The awards will be paid at age 60, if elected by the employee, or upon death, disability or retirement and accrue interest until paid. Upon a change in control of the Operating Partnership, participants are entitled to payment of all vested and non- vested amounts including accrued interest. The full award is charged to operations in the year earned. The amounts charged to income under the plan were $1,135, $2,295 and $700 in 1995, 1994 and 1993, respectively. During the three years ended December 31, 1995, distributions from the plan amounted to $1,422 in 1995, $240 in 1994, and $332 in 1993. The deferred compensation liability attributable to the plan amounted to $6,229 at December 31, 1995 of which $1,160 is included in other accrued expenses. Under a former plan, effective through December 31, 1986, certain employees and officers earned deferred compensation amounts which unconditionally vested at the rate of 20% per year over the 5-year period following the year in which the award was earned. Participants of the former plan have elected to defer all outstanding awards until retirement. Upon a change in control of the Operating Partnership, participants are entitled to payment of their total account balance including accrued interest. Amounts charged to income and distributions related to the former plan for the three years ended December 31, 1995 were immaterial. The portion of the Operating Partnership's deferred compensation liability attributable to this plan is $724 at December 31, 1995. In December 1995, the Operating Partnership established a Rabbi trust to assist in funding the liabilities of the Deferred Compensation plans described above. This trust purchased insurance policies on the lives of certain participants in the Deferred Compensation plans. The Operating Partnership is the sole beneficiary of these insurance policies. The cash surrender value of these insurance policies was $3,009 at December 31, 1995. The change of control provision in the deferred compensation plans is triggered upon a sale of all of the Operating Partnership's business, a change in the GP or a change, other than due to death or retirement, in a majority of the directors of Lehman/SDI, Inc., during any one-year period. 12. Retirement Benefits: Assets of the defined benefit plans consist of insurance contracts and assets managed under a commingled trust agreement. The trust assets are invested primarily in equity and fixed income holdings. Costs charged to operations under retirement benefit plans are as follows:
1995 1994 1993 ------ ------ ------ Defined contribution plans $2,693 $3,498 $2,574 Multi-employer pension plans 374 362 422 Defined benefit plans 259 266 144 ------ ------ ------ Total $3,326 $4,126 $3,140 ====== ====== ======
Management estimates that its share of unfunded vested liabilities under multi-employer pension plans is not material. 39 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 12. Retirement Benefits, continued: For the years ended December 31, 1995, 1994 and 1993, the costs of post- retirement benefits charged to income were $81, $115 and $347, respectively. The 1995 and 1994 charges were determined in accordance with SFAS No. 106 on an accrual basis with costs recognized in prior years upon payment of the post-retirement obligations. The Company's unrecognized accumulated post- retirement benefit liability as of December 31, 1995, 1994 and 1993 was $705, $744 and $840, respectively. 13. Income Taxes: Deferred tax assets are comprised of the following at December 31, 1995 and 1994:
1995 1994 ------- ------- Gross deferred tax assets: Deferred compensation $2,936 $2,123 Prepayment penalties related to early extinguishment of debt 299 346 ------ ------ 3,235 2,469 Valuation allowance for deferred tax assets (391) (325) ------ ------ Net deferred tax asset $2,844 $2,144 ====== ======
Management has determined, based on the Company's history of prior operating earnings and its expectations for the future, that operating income of the Company will more likely than not be sufficient to recognize fully these net deferred tax assets. The Company has no deferred tax liability at December 31, 1995 or December 31, 1994. As of December 31, 1995, the Company's tax basis of its assets and liabilities was greater than its financial statement basis by approximately $72,000. The provision (benefit) for income taxes consists of the following:
1995 1994 1993 ------- ------ ----- Current income taxes State and local $ 608 $ 276 $ 260 Foreign 629 558 401 ------ ----- ----- 1,237 834 661 ------ ----- ----- Deferred income taxes Federal (627) (657) 186 State and local (73) (77) 22 ------ ----- ----- (700) (734) 208 ------ ----- ----- Total income taxes $ 537 $ 100 $ 869 ====== ===== =====
14. Commitments and Contingencies: Performance and bid bonds are issued on the Company's behalf during the ordinary course of business through surety bonding companies as required by certain contractors. As of December 31, 1995, the Company had outstanding performance and bid bonds aggregating $911. As required by sureties, the Company has standby letters of credit outstanding in the amount of $650 as of December 31, 1995. 40 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 14. Commitments and Contingencies, continued: Letters of credit are issued by the Company during the ordinary course of business through major domestic banks as required by certain vendor contracts, legal proceedings and acquisition activities. As of December 31, 1995, the Company had outstanding letters of credit in the aggregate amount of $4,902 related to these activities. As of December 31, 1995 the Company has guaranteed approximately $1,773 worth of lease obligations, principally relating to businesses previously disposed. The Company is not currently aware of any existing conditions which would cause a financial loss related to these guarantees. Under the Company's insurance programs, commercial umbrella coverage is obtained for catastrophic exposure and aggregate losses in excess of normal claims. Beginning in 1991, the Company has retained risk on certain expected losses from both asserted and unasserted claims related to workman's compensation, general liability and automobile as well as the health benefits of certain employees. Provisions for losses expected under these programs are recorded based on an analysis of historical insurance claim data and certain actuarial assumptions. As of December 31, 1995, the Company has provided insurers letters of credit aggregating $4,551 related to certain insurance programs. On February 27, 1996, a lawsuit was filed against the Operating Partnership by the buyer of its Dorman Products division for alleged misrepresentation of certain facts by the Company upon which the buyer based its offer to purchase Dorman. The complaint seeks damages of approximately $21,000. In the opinion of management, the ultimate resolution of this matter will not have a material effect on the consolidated financial position, operations or cash flows of the Company. Certain other legal proceedings are pending which are either in the ordinary course of business or incidental to the Company's business. Those legal proceedings incidental to the business of the Company are generally not covered by insurance or other indemnity. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial position, operations or cash flows of the Company. 15. Statements of Cash Flows: Supplemental disclosures of cash flow information are presented below:
1995 1994 1993 ------- ------- ------- Cash paid during the period for: Interest $7,304 $10,097 $9,412 ------ ------- ------ Income taxes $1,190 $ 792 $ 955 ------ ------- ------ Supplemental schedule of non-cash investing activities: Assumed liabilities in connection with the purchase of assets (See Note 5, Acquisitions/Divestitures) $ 232 $ -- $ -- ------ ------- ------
41 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 16. Quarterly Data (unaudited): In 1995 the Company reclassified results of operations for divisions sold to a separate component of income from operations on the Consolidated Statement of Income (see Note 5, Acquisitions/Divestitures). For comparability, quarterly sales and gross profit information previously reported have been restated herewith:
1995 First Second Third Fourth ---- ----- ------ ----- ------ Net sales, as reported on Form 10-Q $154,792 $163,820 $163,214 $ N/A Less net sales, divisions sold 8,385 8,843 9,097 N/A -------- -------- -------- -------- Net sales 146,407 154,977 154,117 144,634 Gross profit, as reported on Form 10-Q 61,441 65,902 66,510 N/A Less gross profit, divisions sold 2,264 2,802 2,909 N/A -------- -------- -------- -------- Gross profit 59,177 63,100 63,601 $ 58,983 Income before extraordinary loss 19,862 8,377 7,828 8,678 Extraordinary loss (Note 4) (629) -- -- -- Net income 19,233 8,377 7,828 8,678 Earnings per limited partnership interest: Income before extraordinary loss: - Class A $ .27 $ .28 $ .27 $ .28 - Class B $ .77 $ .24 $ .22 $ .25 Extraordinary loss: - Class A $ -- $ -- $ -- $ -- - Class B $ (.03) $ -- $ -- $ -- Net Income: - Class A $ .27 $ .28 $ .27 $ .28 - Class B $ .74 $ .24 $ .22 $ .25 1994 ---- Net sales, as reported on Form 10-Q* $175,109 $189,360 $192,547 $178,845 Less net sales, divisions sold 42,455 45,991 48,023 40,638 -------- -------- -------- -------- Net sales 132,654 143,369 144,524 138,207 Gross profit, as reported on Form 10-Q* 67,457 72,019 73,486 71,114 Less gross profit, divisions sold 14,193 14,112 14,979 13,647 -------- -------- -------- -------- Gross profit 53,264 57,907 58,507 57,467 Net income 4,165 8,026 7,656 9,697 Net income per limited partnership interest - Class A $ .27 $ .28 $ .27 $ .28 - Class B $ .05 $ .23 $ .21 $ .30
*Fourth Quarter as reported on Form 10-K for the year ended December 31, 1994. 42 SUN DISTRIBUTORS L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 17. Concentration of Credit Risk: Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high credit quality financial institutions. Concentrations of credit risk with respect to sales and trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different industries and geographies. 43 SUN DISTRIBUTORS L.P. AND SUBSIDIARY SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (dollars in thousands)
Balance Sheets as of December 31 1995 1994 1993 - -------------------------------- ---- ---- ---- Assets Investment in SDI Operating Partners, L.P. $94,943 $79,219 $ 72,882 ======= ======= ======== Partners' Capital General partner's capital $ 963 $ 791 $ 729 Limited partners' capital-Class A Interests 67,642 67,642 67,642 Limited partners' capital-Class B Interests 29,252 12,300 6,025 Class B interests held in treasury (1,514) (1,514) (1,514) Cumulative foreign currency translation adjustment (1,400) -- -- ------- ------- -------- Total partners' capital $94,943 $79,219 $ 72,882 ======= ======= ======== Statements of Income for the Years Ended Decembe 31 - --------------------------------------------------- Equity in net income of SDI Operating Partners, L.P. $44,116 $29,544 $ 18,506 ======= ======= ======== Net income allocated to general partner $ 441 $ 295 $ 185 ------- ------- -------- Net income allocated to limited partners - Class A interests $12,210 $12,210 $ 12,210 ------- ------- -------- - Class B interests $31,465 $17,039 $ 6,111 ------- ------- -------- Statement of Cash Flows for the Years Ended December 31 - ------------------------------- Cash provided by operations -- -- -- Cash provided from investment in SDI Operating Partners, L. P. $ 26,946 $ 20,153 $ 14,791 Cash distributions to general partner and limited partners $(26,946) $(20,153) $(14,791) -------- -------- -------- Increase (decrease) in cash -- -- -- ======== ======== ========
This financial information should be read in conjunction with the consolidated financial statements of the Company. 44 SUN DISTRIBUTORS L.P. AND SUBSIDIARY Schedule II - VALUATION ACCOUNTS (dollars in thousands)
Deducted From Assets in Balance Sheet ------------------------------------------------------------------------------ Valuation Allowance for Allowance for Accumulated Accumulated Allowance for Doubtful Obsolete Amortization Amortization Deferred Accounts Inventories of Goodwill of Intangibles Income Taxes ------------- ------------- ------------ --------------- ------------- Balance, December 31, 1992 $2,356 $2,702 $ 8,833 $12,588 $225 Additions charged to cost and expenses 1,714 1,859 1,772 1,233 100 Deductions 1,688(A) 1,393(A) -- -- -- ------- ------ ------ ------ --- Balance, December 31, 1993 2,382 3,168 10,605 13,821 325 Additions charged to cost and expenses 1,453 2,236 1,629 1,168 -- Deductions 1,363(A) 1,622(A) -- -- -- Sale of divisions -- 291 975 593 -- ------- ------ ------ ------ --- Balance, December 31, 1994 2,472 3,491 11,259 14,396 325 Additions charged to cost and expenses 1,070 1,704 1,364 845 66 Deductions 1,552(A) 1,306(A) -- -- -- Sale of divisions 163 479 884 1,517 -- ------- ------ ------ ------ --- Balance, December 31, 1995 $1,827 $3,410 $11,739 $13,724 $391 ====== ======= ======= ======= ====
Notes: (A) Includes write-off of accounts receivable (net of bad debt recoveries) and inventories. 45 Item 9 - Disagreements on Accounting and Financial Disclosure. - ------------------------------------------------------------- Not applicable. 46 PART III Item 10 - Directors and Executive Officers of the Registrant. - ------------------------------------------------------------ The business of the Company and the Operating Partnership is managed by the General Partner, whose general partner is Lehman/SDI, Inc., formerly known as Shearson/SDI, Inc. The directors of Lehman/SDI, Inc., each of whom has served as such since February 1987, except for Mr. Eliot M. Fried, who has served since December 1994, 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: Principal Occupation; Five-Year Employment History; Other Name and Age Directorships ------------ ------------------------------- O. Gordon Brewer, Jr., 59 Vice President-Finance, Alco Standard Corporation (distributor of office and paper products); Executive Officer, Alco Standard Corporation, 1970 to present; Director, Corporate Insurance and Reinsurance Limited. Norman V. Edmonson, 55 Executive Vice President of the Company since December 1994; Group Vice President of the Company prior to December 1994. Eliot M. Fried, 63 Managing Director, Lehman Brothers Inc.; Director, American Marketing Industries; Bridgeport Machines, Inc.; Energy Ventures, Inc.; Lear Seating Corporation; and Vernitron Corporation. Arnold S. Hoffman, 60 Senior Managing Director, Legg Mason Wood Walker, Incorporated, Jan. 1992 to present; Chairman, The Middle Market Group, L.P. (investment banking, mergers, acquisitions and divestitures), 1990 to January 1992. Donald T. Marshall, 62 Chairman and Chief Executive Officer of the Company. John P. McDonnell, 60 President of the Company since December 1994; Group Vice President of the Company prior to December 1994. Ernest L. Ransome, III, 69 Chairman, Giles & Ransome, Inc. (distributor of construction equipment), 1988 to present; Director, Mannington Mills, Inc. Donald A. Scott, 66 Senior Partner, Morgan, Lewis & Bockius; Director, Provident Mutual Life Insurance Company. Henri I. Talerman, 38 Managing Director, Lehman Brothers Inc.; Director, McBride plc; Financier Gerflor SA; Advisory Director, Europe Capital Partners. All directors hold office until the next annual meeting of the sole stockholder of Lehman/SDI, Inc., and until their successors are duly elected and qualified. 47 The executive officers of the Company 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: Positions with the Company; Name and Age Five-year Employment History ------------ ---------------------------- Richard J. Brus, 58 President, Sun Technology Services since 1995; President, Activation Division 1992 to 1995; and Vice President-Sales & Marketing, Activation Division, prior to 1992. Harold J. Cornelius, 47 Group Vice President. Joseph M. Corvino, 42 Vice President-Finance, Chief Financial Officer, Treasurer and Secretary since December 1995; Vice President and Controller prior to December 1995. Norman V. Edmonson, 55 Executive Vice President since December 1994; Group Vice President prior to December 1994. Max W. Hillman, Jr., 49 Group Vice President, since March 1991; President, Hillman Fastener Division, 1982 to February, 1991. Donald T. Marshall, 62 Chairman and Chief Executive Officer. John P. McDonnell, 60 President and Chief Operating Officer since December 1994; Group Vice President prior to December 1994. All executive officers hold office at the pleasure of the board of directors. 48 Item 11 - Executive Compensation. - -------------------------------- The following table sets forth all cash compensation paid and accrued by the Operating Partnership for services rendered during the three years ended December 31, 1995, by each of the Chief Executive Officer and the four other most highly compensated executive officers of the Company and the Operating Partnership whose remuneration exceeded $100,000.
Summary Compensation Table -------------------------- Annual Compensation Name and ------------------- All Other Principal Position Year Salary Bonus (1) Compensation - ------------------ -------- ------ -------- ------------ Donald T. Marshall 1995 $488,688 $ 4,347 $ 10,234 (2) Chairman and Chief 1994 454,043 221,144 8,185 (2) Executive Officer 1993 403,392 62,897 6,367 (2) John P. McDonnell 1995 374,451 32,812 2,500 (2) President and Chief 1994 295,354 96,915 2,135 (2) Operating Officer 1993 273,947 44,278 1,843 (2) Norman V. Edmonson 1995 333,849 82,200 1,638 (2) Executive Vice President 1994 300,477 94,400 1,418 (2) 1993 285,144 89,000 1,250 (2) Harold J. Cornelius 1995 291,609 27,400 -- Group Vice President 1994 275,375 102,729 90,128 (3) 1993 261,147 37,621 58,818 (3) Max W. Hillman, Jr. 1995 268,920 36,250 50,186 (3) Group Vice President 1994 294,793 104,898 107,632 (3) 1993 234,707 16,578 13,661 (3)
(1) Represents Earned Bonus for services rendered in each year. Does not include the management fee payable to the General Partner. See "Management Fee" under Item 13. (2) Represents primarily term life insurance premiums paid by the Operating Partnership for the benefit of the named executive officer. (3) Represents deferred compensation earned and awarded for services rendered in the year which unconditionally vests at the rate of 20% per year over the five-year period from the date earned. The above table excludes deferred compensation awards earned in 1995 and 1994 by the executive officers in accordance with the Company's Long-Term Performance Share Plan since the awards earned are subject to reduction or forfeiture through 1998 if performance goals are not achieved. The value of the awards credited for December 31, 1995 and December 31, 1994, respectively, for each executive officer are as follows: Donald T. Marshall $553,934 and $586,037; Norman V. Edmonson, $364,012 and $385,110; John P. McDonnell, $174,092 and $184,182; Harold J. Cornelius, $174,092 and $184,182 and Max W. Hillman, $174,092 and $184,182. Directors of Lehman/SDI, Inc., who are not employees of the Company or Lehman Brothers Inc. are paid an annual fee of $14,000 and a fee of $1,000 for each board or committee meeting attended. Such fees are paid by the General Partner. 49 CHANGE IN CONTROL ARRANGEMENTS ------------------------------ The executive officers named in Item 11 were participants in the Company's Deferred Compensation Plans (the "Plans") in certain years. Upon a change in control, the Plans provide for payment of all vested and non-vested amounts including accrued interest. The change in control provision is triggered upon a sale of all of the Operating Partnership's business, a change in the General Partner, or a change, other than due to death or retirement, in a majority of the directors of Lehman/SDI, Inc., during any one-year period. See Note 11 of Notes to Consolidated Financial Statements. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ----------------------------------------------------------- The Compensation Committee of the Board of Directors of Lehman/SDI, Inc., consisted of Arnold S. Hoffman, Director. Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which performed investment banking services for the Company during 1995. 50 Item 12 - Security Ownership of Certain Beneficial Owners and Management. ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners ----------------------------------------------- Since the Company is managed by its General Partner and has no Board of Directors, there are no "voting securities" of the Company outstanding within the meaning of Item 403(a) of Regulation S-K and Rule 12b-2 under the Securities Exchange Act of 1934. As set forth under Item 1 of this Annual Report on Form 10-K, the general partner of the General Partner is Lehman/SDI, Inc., an indirect, wholly owned subsidiary of Lehman Brothers Holdings, Inc., American Express Tower, World Financial Center, New York, NY 10285-1800. (b) Security Ownership of Management -------------------------------- The following table shows for each director, for each executive officer named in the Summary Compensation Table and for all officers and directors as a group, the beneficial ownership of Class A and Class B Interests of the Company as of January 31, 1996. None of the amounts equals more than 1% of the outstanding Class A Interests.
Name of Class A Class B Class B Beneficial Owner Amount(l) Amount(l) Percent of Class --------------- ------ ------- --------------- O. Gordon Brewer, Jr. 3,000 1,000 -- (5) Harold J. Cornelius 200 200 -- (5) Norman V. Edmonson 14,715 1,300,916 6.0% Eliot M. Fried -- (2) -- (2) -- (2) Max W. Hillman, Jr. 4,000 6,500 -- (5) Arnold S. Hoffman 13,000(2)(3) 13,000 (2)(3) -- (5) Donald T. Marshall 30,311 2,075,232 9.6% John P. McDonnell 7,711 623,071 2.9% Ernest L. Ransome, III 5,000 (4) 5,000 (4) -- (5) Donald A. Scott 9,000 9,000 -- (5) Henri I. Talerman -- (2) -- (2) -- (2) All directors and executive officers as a group 89,538 4,141,965 19.1%
______________________ 51 (1) In addition to the Interests listed, the Management Employees beneficially own limited partnership interests in the General Partner (the "GP Interests"). The GP Interests held by the Management Employees collectively represent 46.2% of the limited partnership interests in the General Partner. The General Partner owns 1% of the Company and the Operating Partnership. The table does not include the GP Interests owned by the Management Employees. (2) Does not include (i) 108,554 Class B Interests owned by Lehman LTD I, Inc., or (ii) 5,788,124 Class B Interests owned by Lehman Brothers Capital Partners I ("Capital Partners"), affiliates of Lehman Brothers Inc. Messrs. Hoffman and Fried, as limited partners of Capital Partners, derive economic benefit of approximately 1% from interests held by Capital Partners. An affiliate of Lehman Brothers Inc., of which Messrs. Fried and Talerman are officers, also owns all of the capital stock of Lehman/SDI, Inc., which is the general partner of the GP and holds the remaining interest in the GP not owned by the Management Employees. (3) 3,000 of these Class A and B Interests are owned by Hoffman Investment Co., of which Mr. Hoffman is Managing Partner. In addition, Mr. Hoffman's children own 4,000 Class A and B Interests with respect to which he disclaims beneficial ownership. (4) 2,500 of these Class A and B Interests are held in a trust, of which Mr. Ransome is a trustee. (5) Represents less than 1% of the outstanding Class B Interests. _______________________ (c) Changes In Control ------------------ Not applicable. 52 Item 13 - Certain Relationships and Related Transactions. - -------------------------------------------------------- MANAGEMENT FEE - -------------- The Operating Partnership pays a Management Fee to the General Partner. The Management Fee, payable annually on March 31 (with respect to the preceding year), is equal to 3% of the aggregate initial capital investment of $110,995,730 by the limited partners. The amount of the Management Fee payable on March 31, 1996, is $3,329,872. The amount of management fee paid in 1995 with respect to 1994 was $3,329,872. See footnotes (1) and (2) to "Security Ownership of Management" under Item 12 for ownership of the General Partner. The interests of Lehman/SDI, Inc., and the Management Employees, in the fee for 1995 were as follows: Lehman/SDI, Inc. $1,791,471; Harold J. Cornelius, $92,304; Joseph M. Corvino, $30,768; Norman V. Edmonson, $384,600; Max W. Hillman, Jr., $92,304; Donald T. Marshall, $599,977; and John P. McDonnell, $184,608. CERTAIN BUSINESS RELATIONSHIPS - ------------------------------ Mr. Scott is a partner in Morgan, Lewis & Bockius, a law firm that has performed services for the Company during the last fiscal year. Messrs. Fried and Talerman are officers of Lehman Brothers Inc., which performed investment banking services for the Company during 1995. Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which performed investment banking services for the Company during 1995. The Company proposes to have these firms perform similar services as needed during the current fiscal year. 53 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports - -------------------------------------------------------------- on Form 10-K ------------ (a) Documents Filed as a Part of the Report: --------------------------------------- 1. Financial Statements. -------------------- The information concerning financial statements called for by Item 14 of Form 10-K is set forth in Part II, Item 8 of this annual report on Form 10-K. 2. Financial Statement Schedules. ----------------------------- The information concerning financial statement schedules called for by Item 14 of Form 10-K is set forth in Part II, Item 8 of this annual report on Form 10-K. 3. Exhibits, Including Those Incorporated by ----------------------------------------- Reference. --------- The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 2.1 Asset Purchase Agreement for the Acquisition of the Assets of the Electrical Products Group Divisions of SDI Operating Partners, L.P. by Consolidated Electrical Distributors, Inc., dated as of October 4, 1994, as amended. (1) (Exhibit 2.1). 2.2 Asset Purchase Agreement for the Acquisition of the Assets of the Dorman Products Division of SDI Operating Partners, L.P. by R&B, Inc., dated as of October 5, 1994, as amended. (2) (Exhibit 2.1). 54 Articles of Incorporation and By-Laws 3.1 Amended and Restated Agreement of Limited Partnership of Sun Distributors L.P. (3) (Exhibit 3.2; included as Exhibit A to the Prospectus). Instruments Defining the Rights of Security Holders, Including Indentures 4.1 Deposit Agreement (with forms of Class A and Class B Depositary Receipts attached), dated as of February 1, 1987 (4) (Exhibit 4.1). 4.2 Amendment and Succession Agreement To Deposit Agreement, dated as of February 1, 1987 (5) (Exhibit 4.2) 4.3 (a) Note Purchase Agreement dated as of December 15, 1992, between SDI Operating Partners, L.P., and Teachers Insurance and Annuity Association of America, New York Life Insurance Company, New York Life Insurance and Annuity Corporation and Massachusetts Mutual Life Insurance Company. (6) (Exhibit 4.1) (b) Amendment No. 1 to Note Purchase Agreement (7) (Exhibit 4.1) (c) Amendment No. 2 to Note Purchase Agreement (7) (Exhibit 4.1) 4.4 Partner Guarantee dated as of December 15, 1992, by Sun Distributors L.P. (6) (Exhibit 4.2) Material Contracts 10.1 (a) Credit Agreement dated December 22, 1992, among CoreStates Bank, N.A., for itself and as agent, The Bank of Nova Scotia, for itself and as co-agent, The Fuji Bank, Limited, SDI Operating Partners, L.P., SDI Partners I, L.P., and Sun Distributors L.P. (6) (Exhibit 10.1) (b) Amendment No. 1 to Credit Agreement (9) (Exhibit 10.3(b)) (c) Amendment No. 2 to Credit Agreement (9) (Exhibit 10.3(c)) (d) Amendment No. 3 to Credit Agreement (9) (Exhibit 10.3(d)) (e) Amendment No. 4 to Credit Agreement (7) (Exhibit 10.1) **(f) Amendment No. 5 to Credit Agreement 10.2 *Sun Distributors Incentive Compensation Plan. (8) (Exhibit 10.5) 10.3 *Sun Distributors, Inc. Long-Term Performance Award Plan. (As Amended June 1985) (8) (Exhibit 10.6) 10.4 *SDI Operating Partners, L.P. Deferred Compensation Plan for Division Presidents (As amended September 13, 1993). (9) (Exhibit 10.7) 55 10.5 *SDI Operating Partners, L.P. Long-Term Performance Share Plan dated January 1, 1994. (9) (Exhibit 10.8) Subsidiaries of the Registrant **21.1 Subsidiaries Financial Data Schedules **27.1 Summary financial information as of and for the year ended December 31, 1995. - --------------------------- (1) Filed on December 20, 1994, as an exhibit to Form 8-K for events reportable as of December 5,1994. (2) Filed on January 18, 1995, as an exhibit to Form 8-K for events reportable as of January 3, 1995. (3) Filed on February 5, 1987, as an exhibit to Amendment No. 2 to Registration Statement No. 33-10613 on Form S-1 and incorporated herein by reference. (4) Filed on March 31, 1988, as an exhibit to Annual Report on Form 10-K for the year ended December 31, 1987. (5) Filed on March 30, 1992, as an exhibit to Annual Report on Form 10K for the year ended December 31, 1991. (6) Filed on January 4, 1993, as an exhibit to Form 8-K for events reportable as of December 22, 1992. (7) Filed on May 12, 1995, as an exhibit to Quarterly Report on Form 10Q for the quarterly period ended March 31, 1995. (8) Filed on March 31, 1993, as an exhibit to Annual Report on Form 10K for the year ended December 31, 1992. (9) Filed on March 31, 1994, as an exhibit to Annual Report on Form 10K for the year ended December 31, 1993. * Management contract or compensatory plan or arrangement required to be filed as an Exhibit pursuant to Item 14(c) of this report. ** Filed herewith (b) Reports on Form 8-K. ------------------- Not applicable. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUN DISTRIBUTORS L.P. By: SDI Partners I, L.P., General Partner By: Lehman/SDI, Inc., General Partner Date: March 28, 1996 By: /s/ Donald T. Marshall ----------------------------------- Title: Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person in so signing also makes, constitutes and appoints Donald T. Marshall and Joseph M. Corvino, and each of them, his true and lawful attorney-in-fact, in his name, place and stead to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report. Signature Capacity Date --------- -------- ---- /s/ O. Gordon Brewer, Jr. ____________________________ Director, Lehman/SDI, March 28, 1996 O. Gordon Brewer, Jr. Inc. /s/ Norman V. Edmonson ____________________________ Director, Lehman/SDI, March 28, 1996 Norman V. Edmonson Inc. 57 /s/ Eliot M. Fried _____________________________ Director, Lehman/SDI, March 28, 1996 Eliot M. Fried Inc. /s/ Arnold S. Hoffman _____________________________ Director, Lehman/SDI, March 28, 1996 Arnold S. Hoffman Inc. /s/ Donald T. Marshall _____________________________ Director, Lehman/SDI, March 28, 1996 Donald T. Marshall Inc. /s/ John P. McDonnell _____________________________ Director, Lehman/SDI, March 28, 1996 John P. McDonnell Inc. /s/ Ernest L. Ransome, III _____________________________ Director, Lehman/SDI, March 28, 1996 Ernest L. Ransome, III Inc. /s/ Donald A. Scott _____________________________ Director, Lehman/SDI, March 28, 1996 Donald A. Scott Inc. /s/ Henri I. Talerman _____________________________ Director, Lehman/SDI, March 28, 1996 Henri I. Talerman Inc. /s/ Joseph M. Corvino _____________________________ Principal Financial March 28, 1996 Joseph M. Corvino Officer /s/ John J. Dabrowski _____________________________ Principal Accounting March 28, 1996 John J. Dabrowski Officer 58 EX-21.1 2 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES SUBSIDIARIES * SDI Operating Partners, L.P.; Organized in the State of Delaware * J.N. Fauver (Canada) Limited; Incorporated in the Province of Ontario * A & H Holding Company, Inc.; Incorporated in the State of Michigan * A & H Bolt & Nut Company Limited; Incorporated in the Province of Nova Scotia * The Fastener Centre, Inc.; Incorporated in the State of Michigan * Hydra Power de Mexico; Incorporated in Bravos Judicial District, Juarez, Chihuahua, Mexico * Simco de Mexico; Incorporated in Ciudad de Mexico, Mexico * STM Systems de Mexico; Incorporated in Chihuahua, Mexico EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE RELATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 5,900 0 77,651 1,827 96,022 182,488 46,865 26,684 254,591 86,647 63,934 0 0 0 94,943 254,591 599,865 599,865 355,004 213,829 256 1,000 7,332 45,282 537 44,745 0 (629) 0 44,116 1.45 1.45 BONDS REPRESENTS ALL LONG-TERM DEBT FOR SENIOR NOTES. EPS REPRESENTS CLASS B LIMITED PARTNERSHIP INTEREST ONLY.
EX-99 4 AMENDMENT TO CREDIT AGREEMENT AMENDMENT NO. 5 TO CREDIT AGREEMENT THIS AMENDMENT NO. 5 TO CREDIT AGREEMENT ("Amendment No. 5") is made this 29th day of December, 1995 by and among SDI OPERATING PARTNERS, L.P. ("Borrower"), SUN DISTRIBUTORS, L.P., the sole limited partner of Borrower ("GUARANTOR"), each a Delaware limited partnership with offices at 2600 One Logan Square, Philadelphia, Pennsylvania 19103-6983, SDI PARTNERS I, L.P., a Delaware Limited Partnership with offices at 5 Great Valley Parkway, Malvern, Pennsylvania 19355-1426, the sole general partner of Borrower and Guarantor ("SDIPI"); CORESTATES BANK, N.A., a national banking association with offices at Broad and Chestnut Streets, Philadelphia, Pennsylvania 19109, for itself and as Agent for the Banks identified below ("Agent"); and THE BANK OF NOVA SCOTIA and THE FUJI BANK, LIMITED (together with Agent, collectively, the "Banks"). WITNESSETH: ---------- WHEREAS, Agent and Banks entered into a Credit Agreement dated December 22, 1992, an Amendment No. 1 to Credit Agreement dated April 22, 1993, and Amendment No. 2 to Credit Agreement dated January 14, 1994, and Amendment No. 3 to Credit Agreement dated March 2, 1994 and an Amendment No. 4 to Credit Agreement dated December 31, 1994 (as amended from time to time, including by this Amendment No. 5, the "Credit Agreement") with Borrower, in which SDIPI joined for purposes of making certain representations and covenants and Guarantor joined to guaranty the indebtedness of Borrower thereunder, and pursuant to which, the Banks agreed to provide to Borrower advances and letters of credit up to an aggregate principal amount outstanding at any time of Fifty Million Dollars ($50,000,000), subject to the terms and conditions set forth therein; WHEREAS, Agent, Banks, Borrower, SDIPI and Guarantor wish to enter into this Amendment No. 5 to extend the Termination Date, agree upon an exclusion to the term Distributions in determining Fixed Charges for purposes of calculating the Fixed Charge Coverage Ratio set forth in Paragraph 6.17 hereof, and amend the covenant set forth in Paragraph 6.21 of the Credit Agreement. NOW, THEREFORE, in consideration of the premises and the agreements herein set forth and intending to be legally bound hereby, the parties hereto agree as follows: 1. Definitions. Capitalized terms used but not defined in this Amendment ----------- No. 5 shall have the meanings given to them in the Credit Agreement. 2. Extension of Termination Date. ----------------------------- a. The Banks hereby agree to extend the Termination Date to December 31, 1997. All procedural requirements of Paragraph 2.1 (b) of the Credit Agreement are hereby waived by the Banks in connection with the foregoing extension, but are not waived in connection with any subsequent request of the Borrower to extend the Termination Date. b. The Borrowers hereby agree to pay Agent on behalf of Banks an extension fee of Ten Thousand Dollars ($10,000), which fee shall be shared by Banks on the basis of their respective Pro Rata Shares. 3. Fixed Charge Coverage Ratio. For purposes of Paragraph 6.17 hereof, -------------------------- in connection with calculating the Fixed Charge Coverage Ratio, Fixed Charges shall be calculated by subtracting for Distributions, Distributions to fund Tax Distributions (as defined in the Guarantor's Agreement of Limited Partnership) to Partners (as defined in Guarantor's Agreement of Limited Partnership) with respect to taxes on capital gains recognized by Borrower as a result of sales of capital or trade or business assets by Borrower to the extent of cash received by Borrower in respect of such sale and included in Operating Partnership Available Cash (as defined in Borrower's Agreement of Limited Partnership) for the Fiscal Year in which the Distribution is proposed to be made. 4. Distributions. paragraph 6.21 of the Credit Agreement is hereby ------------- amended and restated in its entirety as follows: Maintain, as of the last day of each fiscal quarter, a ratio of (a) Distributions paid in each Rolling Period less Distributions to fund Tax Distributions (as defined in the Guarantor's Agreement of Limited Partnership) to Partners (as defined in Guarantor's Agreement of Limited Partnership) with respect to taxes on capital gains recognized by Borrower as a result of sales of capital or trade or business assets by Borrower to the extent of cash received by Borrower in respect of such sale and included in Operating Partnership Available Cash (as defined in Borrower's Agreement of Limited Partnership) for the Fiscal Year in which the Distribution is proposed to be made, to (b) Consolidated EBITDA less Management Fees -2- expensed in the same Rolling Period, not to exceed .55 to 1.0 for any such Rolling Period ending on or before December 31, 1994; not to exceed .78 to 1.0 for any such Rolling Period ending on or before December 31, 1995; and not to exceed .60 to 1.0 for any Rolling Period ending any time after December 31, 1995; it being agreed that nothing in this Paragraph shall permit Borrower to make Distributions not otherwise permitted by Paragraph 7.6 hereof, or which are proposed to be made at a time when Borrower is not in compliance with, or which would cause Borrower to cease to comply with, all other covenants set forth in Articles 6 or 7 hereof. 5. Affirmation. Borrower, SDIPI and Guarantor (to the extent ----------- applicable) hereby affirm all of the provisions of the Credit Agreement, as amended, including by this Amendment No. 5, and agree that the terms and conditions of the Credit Agreement shall continue in full force and effect as supplemented and amended hereby. 6. Miscellaneous. ------------- a. This Amendment No. 5 and any other Amendment Document shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. b. Borrower agrees to reimburse Agent for all reasonable costs and expenses (including but not limited to, reasonable attorneys' fees and reasonable disbursements) which Agent may pay or incur in connection with the preparation of this Amendment No. 5 and the preparation or review of other documents executed or delivered in connection herewith. c. All terms and provisions of this Amendment No. 5 shall be for the benefit of and be binding upon and enforceable by the respective successors and assigns of the parties hereto. d. This Amendment No. 5 may be executed in any number of counterparts with the same effect as if all the signatures on such counterparts appeared on one document and each such counterpart shall be deemed an original. e. The execution, delivery and performance of this Amendment No. 5 shall not effect a waiver of any right, power or remedy of Banks under applicable law or under the Credit -3- Agreement and the agreements and documents executed in connection therewith or constitute a waiver of any provision thereof. IN WITNESS WHEREOF, the undersigned by their duly authorized officers, have executed this Amendment No. 5 the day and year first written above. SDI OPERATING PARTNERS, L.P., By: SDI Partners I, L.P., its general partner By: LEHMAN/SDI, INC., its general partner By: /s/ Joseph M. Corvino ----------------------------- Title: Vice President-Finance & CFO SUN DISTRIBUTORS L.P., as Guarantor By: SDI Partners I, L.P., its general partner By: LEHMAN/SDI, INC., its general partner By: /s/ Joseph M. Corvino ----------------------------- Title: Vice President-Finance & CFO SDI PARTNERS I, L.P., to the extent it is a party to the Credit Agreement By: LEHMAN/SDI, INC., its general partner By: /s/ Joseph M. Corvino --------------------------------- Title: Vice President - Finance & CFO CORESTATES BANK, N.A., individually and in its capacity as Agent hereunder By: ---------------------------------- Title: [EXECUTIONS CONTINUED] Agreement and the agreements and documents executed in connection therewith or constitute a waiver of any provision thereof. IN WITNESS WHEREOF, the undersigned by their duly authorized officers, have executed this Amendment No. 5 the day and year first written above. SDI OPERATING PARTNERS, L.P., By: SDI Partners I, L.P., its general partner By: LEHMAN/SDI, INC., its general partner By: ------------------------------ Title: SUN DISTRIBUTORS L.P., as Guarantor By: SDI Partners I, L.P., its general partner By: LEHMAN/SDI, INC., its general partner By: ------------------------------ Title: SDI PARTNERS I, L.P., to the extent it is a party to the Credit Agreement By: LEHMAN/SDI, INC., its general partner By: ---------------------------------- Title: CORESTATES BANK, N.A., individually and in its capacity as Agent hereunder By: /s/ Carol Williams --------------------------------- Title: Senior Vice President [EXECUTIONS CONTINUED] -4- THE BANK OF NOVA SCOTIA By: /s/ J. ALAN EDWARDS --------------------------------- Title: J. ALAN EDWARDS AUTHORIZED SIGNATORY THE FUJI BANK, LIMITED By: /s/ Teiji Teramoto --------------------------------- Title: Vice President and Manager -----END PRIVACY-ENHANCED MESSAGE-----