SunSource
Sun Distributors
Dear SunSource Limited Partner:
We are asking you to consider and vote on a proposal to convert the
Partnership to corporate form.
The Conversion Proposal is described in detail in the accompanying
Proxy Statement/Prospectus and summarized in the enclosed brochure, which we
urge you to read carefully. We have also included a copy of Form 10Q for the
quarter ended June 30, 1997, as filed with the Securities and Exchange
Commission on August 14, 1997, which provides you the most recent financial
results of the Partnership. After you have reviewed the enclosed information,
we urge you to vote "FOR" adoption of the Conversion
Proposal by marking, signing and dating the accompanying proxy card and
returning it to us in the enclosed postage-paid envelope.
The Special Meeting of the Limited Partners of SunSource LP will be
held at The Warwick, 1701 Locust Street, Philadelphia, Pennsylvania, on
September 18, 1997, at 10:00 a.m. local time. To assure that your vote on the
Conversion Proposal is counted, please return the enclosed proxy card as soon as
practicable. Failure to forward a proxy or vote in person at the special meeting
will have the same effect as voting against the Conversion Proposal.
If you have additional questions or need assistance with the completion
and return of your proxy card, please call D.F. King & Co., Inc., the
Information Agent for the Conversion, toll free at 1-800-488-8075.
Thank you for your prompt attention to this important matter.
Very truly yours,
Donald T. Marshall
Chairman and Chief Executive Officer
One Logan Square, Philadelphia, PA 19103 o Telephone: 215-665-3650 o
Facsimile: 215-665-3662
[LOGO]
SUNSOURCE
Selected Questions and Answers
This booklet answers key questions about the proposal
to convert the Partnership to corporate form
and related matters
August 18, 1997
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This booklet is neither an offer to sell nor a solicitation of an offer to buy
any securities. Such offer or solicitation may be made only by means of the
Proxy Statement/Prospectus. This booklet is accompanied by, should be read in
conjunction with, and is qualified by the more detailed information contained
in, the Proxy Statement/Prospectus relating to the Conversion.
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Voting Information
Meeting Date: September 25, 1997
Meeting Location: The Warwick,
1701 Locust Street
Philadelphia, PA 19103
Meeting Time: 10:00 a.m.
Vote Required: Approval of the Conversion will require the affirmative
votes of (1) a majority of the outstanding A Interests and B Interests, each
class voting separately; and (2) a majority of the outstanding unaffiliated A
Interests and unaffiliated B Interests (Interests held by holders not affiliated
with the General Partner), each class voting separately.
How to Vote: You may vote "For" or "Against" the proposal or you may
"Abstain" by so indicating on the enclosed Proxy Card, signing and dating it,
and returning it in the self-addressed envelope enclosed for that purpose. You
must sign the Proxy Card exactly as your name appears on your Proxy Card. Joint
owners should both sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give your full title. Abstentions and broker
non-votes will be treated as present for the purpose of determining a quorum but
will have the effect of votes against the Conversion Proposal.
Please return your Proxy Card as soon as possible, regardless of
whether you plan to attend the meeting. You may revoke your proxy at any time
prior to the meeting by giving written notice to the Partnership, by submitting
a later dated Proxy Card or by voting in person at the meeting.
If you wish to vote in person, you may do so at the meeting, regardless
of whether you have previously granted a proxy. The General Partner urges you to
consider the Conversion carefully and to vote FOR the Conversion by returning
the enclosed Proxy Card as soon as possible.
The General Partner urges you to consider the Conversion carefully and
to vote FOR the Conversion by returning the enclosed Proxy Card as soon as
possible.
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Key Terms
Partnership SunSource L.P., the existing publicly-owned limited
partnership.
Corporation SunSource Inc., the new corporation.
SunSource The Partnership before the Conversion or the
Corporation after the Conversion.
Conversion The conversion of the Partnership to corporate form
and related transactions as described in the Proxy
Statement dated August __, 1997.
A Interests Class A limited partnership interests in the Partnership.
B Interests Class B limited partnership interests in the Partnership.
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SUNSOURCE INC.
SUNSOURCE L.P.
Selected Questions and Answers
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1. What has been proposed for approval by holders of SunSource limited
partnership interests?
You are being asked to consider and vote on a proposal to convert the
Partnership to a publicly-traded corporation. After the Conversion, the
business currently conducted by the Partnership will be conducted by
the Corporation, with the same operating management as the Partnership.
2. What is the reason for the proposal?
The Conversion is being proposed in response to current tax law which
will reduce the benefit of being taxed as a partnership for years
beginning after December 31, 1997. Existing publicly traded
partnership, such as the Partnership, have the option after December
31, 1997 of being taxed as corporations or being taxed as partnerships
by electing to be subject to tax at the rate of 3.5% on their gross
income. The General Partner does not recommend adoption of this tax
election since it will result in a significant erosion of the
Partnership's cash flow. Also, there are two bills pending in Congress
which would eliminate the December 31, 1997 deadline, but we still
believe the Conversion is desirable for the reasons set forth in the
Answer to Question 7. See "Certain Federal Income Tax Consequences --
Partnership Status and Taxation of the Partnership."
3. If the Conversion occurs, what will be exchanged for each of my A
Interests?
Each A Interest will receive 0.38 of an 11.6% Trust Preferred Security
plus $1.30 in cash. The Trust Preferred Securities will represent
undivided beneficial interests in the assets of SunSource Capital
Trust, which will hold 11.6% Junior Subordinated Debentures of the
Corporation.
Since the annual distribution on the Trust Preferred Securities will be
$2.90 per share, the 0.38 exchange ratio means that you will receive
after the Conversion $1.10 per year per A Interest, the same as the
Priority Return you are presently receiving on your A Interest.
Distributions will be made monthly as is presently the case.
The Trust Preferred Securities will have a liquidation preference of
$25. Under the exchange ratio, the current A Interest liquidation
preference of $10.00 will be exchanged for 0.38 Trust Preferred
Securities, with a liquidation preference of $9.50, plus $1.30 in cash
at the time of the Conversion.
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Risk factors, conflicts of interest and other important considerations
In evaluating the Conversion, limited partners should take into account the
following risk factors and other special considerations which are discussed at
greater length in the answer to Question 6 in this booklet and under "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" in the Proxy
Statement:
o conflicts of interest between the General Partner and the
limited partners and between the A Interests and the B
Interests.
o no independent representation of the limited partners.
o a taxable transaction to the A Interests.
o no dissenters' rights for nonconsenting limited partners.
o uncertainty regarding market price for Trust Preferred
Securities and Common Stock, including the effect which the
possible sale of Common Stock by Lehman Brothers might have on
the market price of the Common Stock.
o terms of Trust Preferred Securities, including the ability of
the Corporation to defer payments for up to five years, the
subordination of underlying Junior Subordinated Debentures,
limited voting rights, and optional redemption after five
years.
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The vote of each SunSource limited partner is important. You are urged
to mark, date and sign the accompanying Proxy Card and return it in the enclosed
postage paid envelope as soon as possible. By returning the Proxy Card promptly,
you will save the Partnership additional solicitation expenses.
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4. If the Conversion occurs, what will be exchanged for each of my B
Interests?
Each B Interest will be exchanged for 0.25 share of Common Stock of the
Corporation. This is effectively a reverse stock split of one-for-four
which is intended to increase the price of a share of Common Stock. It
is believed that a higher share price should make the Corporation's
stock more attractive to investors and brokers who generally avoid, or
are not permitted to purchase, lower-priced stocks.
Each B Interest is currently allocated its share of Partnership taxable
income and receives a cash distribution with which to pay income taxes.
Since the Corporation will pay income taxes, no taxable income will be
allocated to the holders of Common Stock, thereby eliminating the need
for cash distributions to shareholders for income tax payments.
The Corporation has not yet established a dividend policy for its
Common Stock but may in the future decide to do so, subject to, among
other things, earnings, financial condition, capital requirements,
availability of acquisition candidates, level of indebtedness and
contractual restrictions with respect to the payment of dividends.
5. What do the partners of the General Partner receive in the Conversion?
The holders of interests in the General Partner will receive 1,000,000
shares of Common Stock in exchange for their General Partner Interests.
Thereafter, the management fee of $3,330,000 per year and the General
Partner's 1.99% share (approximately $400,000) of the Partnership's
distributions will be retained by wholly owned subsidiaries of the
Corporation. In addition, certain owners of the General Partner
Interests (Lehman Brothers and six senior members of management) have
agreed to certain restrictions with respect to voting and sale of
shares of Common Stock to be received by them. See "DESCRIPTION OF
CAPITAL STOCK -- Stockholders Agreement."
6. Are there any special factors I should consider in voting on the
Conversion?
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RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS
The proposed Conversion necessitates the allocation of The proposed Conversion necessitates the allocation of
the total value of the Partnership among the holders of the A the total value of the Partnership among the holders of the B
Interests, the holders of the B Interests and the General Interests, the holders of the A Interests and the General
Partner. It would be in the General Partner's interest to Partner. It would be in the General Partner's interest to have
have its partners receive maximum consideration, undertake its partners receive maximum consideration, undertake the
the least possible responsibilities and assume minimum risk, least possible responsibilities and assume minimum risk, all
all at the limited partners' expense. Also, it would be in the at the limited partners' expense. Also, it would be in the
interest of the holders of A Interests to receive the interest of the holders of B Interests to receive the maximum
maximum consideration for their A Interests, at the consideration for their B Interests, at the expense of the
expense of the General Partner and the holders of the B General Partner and the holders of the A Interests.
Interests.
o Holders of B Interests were not separately
o Holders of A Interests were not separately represented in establishing the terms of the
represented in establishing the terms of the Conversion. Such representation might have
Conversion. Such representation might have caused the terms of the Conversion to be different
caused the terms of the Conversion to be different in some material respects from those described
in some material respects from those described herein.
herein.
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RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS
o Unlike A Interests, which are not subject to o If the Conversion is approved, holders of B
mandatory or optional redemption by the Interests will no longer have the right to receive tax
Partnership, the Junior Subordinated Debentures distributions with respect to their allocable share of
held by the Trust may be redeemed by the the Partnership's taxable income since they will no
Corporation at 100% of the principal amount plus longer be taxed with respect to income of the
accrued and unpaid interest at any time after corporation.
September 30, 2002 or, if certain conditions are
met, earlier at 101% of the principal amount plus o The Board of Directors has not yet established a
accrued and unpaid interest upon the occurrence of policy regarding the payment of dividends on the
a Tax Event. See "DESCRIPTION OF JUNIOR Common Stock after the Effective Time of the
SUBORDINATED DEBENTURES -- Optional Conversion. The payment of dividends will be at
Redemption." This redemption will result in the the discretion of the Corporation's Board of
redemption of the Trust Preferred Securities. Directors and will depend, among other things, on
earnings, financial condition, capital requirements,
o Upon the occurrence of a Tax Event, if certain availability of acquisition candidates, level of
conditions are met, the Corporation shall have the indebtedness, contractual restrictions with respect
right under certain circumstances to shorten the to the payment of dividends and other factors that
maturity of the Junior Subordinated Debentures to the Corporation's Board of Directors deems
a date not earlier than September 30, 2002. See relevant. It should be noted that the Corporation's
"DESCRIPTION OF TRUST PREFERRED unaudited pro forma balance sheet for the three
SECURITIES -- Special Event Redemption or months ended March 31, 1997 reflects a
Distribution; Shortening of Stated Maturity." If stockholders' deficit of approximately $7.4 million
the Corporation exercises such right, there can be and a negative net book value per common share of
no assurance that the shortening of the maturity of $1.16. Counsel has advised the Partnership and the
the Junior Subordinated Debentures will not have Corporation that under Delaware law, dividends or
an effect on the market price of the Trust Preferred distributions on the stock of a Delaware
Securities or Junior Subordinated Debentures that corporation may be declared or paid out of surplus,
may be distributed in exchange for Trust Preferred so that the net assets of the corporation after such
Securities. payment shall at least equal the amount of its
capital. However, such a dividend or distribution is
o The liquidation preference for 0.38 of a Trust Preferred permissible under such provision only if the
Security will be $9.50 compared to a liquidation preference corporation's board of directors concludes that (a)
for an A Interest of $10.00. However, holders of A Interests immediately following payment of such dividend
will also receive a cash payment of $1.30. or distribution, the fair market value of the
corporation's assets will exceed its liabilities and
(b) the payment of such dividend or distribution is
o If the Conversion is approved, holders of A being made out of the corporation's surplus (net
Interests will no longer have their contractual right assets minus capital) and not out of capital in
under the Partnership Agreement to the Priority contravention of Delaware law. In case there shall
Return, although they will be entitled to be no surplus, dividends may also be paid out of
distributions on the Trust Preferred Securities net profits for the fiscal year and/or the preceding
in an amount equal to such fiscal year. fiscal year. In evaluating the fairness of the proposed
Priority Return before dividends, if any, are paid Conversion, the Special Committee did not consider the
on the Common Stock. The Board of Directors of pro forma stockholders' deficit and negative book value to
the Corporation will have discretion to defer be a significant negative factor, because the accounting
payments on the Junior Subordinated Debentures measures of stockholders' equity and net book value were
for up to five years. If such payments are deferred, not viewed by the Special Committee's financial advisor,
the Trust will be unable to make distributions on Smith Barney, as primary determinants of value for ongoing
the Trust Preferred Securities, and the Corporation industrial concerns like the Corporation or the
will be prohibited from paying dividends on the Partnership.
Common Stock.
o If distributions on the Trust Preferred Securities are
o Holders of Trust Preferred Securities will be in arrears, the Board of Directors will not be able to
required to accrue original issue discount income declare and pay dividends on the Common Stock.
with respect to any unpaid distributions on the
Trust Preferred Securities. o Holders of B Interests have no dissenters' or
appraisal rights in the Conversion. Therefore,
holders of B Interests will not be entitled to receive
cash payments from SunSource for the fair value of
their Interests if they dissent and the Conversion is
approved and consummated.
o Prior to the Conversion, there has been no public
market for the Common Stock. The Common
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RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS
o The obligations of the Corporation under the Junior Stock received by the holders of the B Interests
Subordinated Debentures will be unsecured may trade at prices below the historical trading
obligations and will be subordinate and junior in levels of the B Interests.
right of payment to senior indebtedness of the
Corporation and the Operating Partnership and will o If a large number of holders of Common Stock
be structurally subordinated to all liabilities and were to offer their securities for sale immediately
obligations of the Operating Partnership and the after consummation of the Conversion, the market
Corporation's other subsidiaries. As of March 31, could decline.
1997 (on a pro forma basis, assuming the Merger
had occurred on such date), the Corporation and o The Corporation has agreed to file a registration
the Operating Partnership would have had statement for the sale of shares of Common Stock
approximately $105.4 million principal amount of by Lehman Brothers and, subject to certain
senior indebtedness outstanding, and the Operating limitations, by management, after the Conversion.
Partnership and the Corporation's other Lehman Brothers and management have agreed to
subsidiaries would have had approximately $92.4 cooperate to execute an underwritten secondary
million of indebtedness and other liabilities. offering of all or some portion of their shares of
Common Stock as soon as practicable after the
o There are no terms in the Trust Preferred Securities effective date of the Conversion, subject to market
or the Junior Subordinated Debentures that limit conditions. The Corporation has agreed not to sell
the Corporation's or its subsidiaries' ability to any additional shares of Common Stock prior to the
incur additional indebtedness. earlier of such initial secondary offering and the
nine-month anniversary of the Conversion, except
o The receipt of Trust Preferred Securities and cash the issuance of unregistered shares in connection
by the holders of A Interests will be a taxable with acquisitions. In addition, Lehman Brothers
event. The receipt of Trust Preferred Securities, Capital Partners I, L.P., an affiliate of Lehman/SDI
Common Stock and cash by holders who hold both holding 5,788,124 B Interests, may distribute to its
A Interests and B Interests will be a taxable event. partners the shares of Common Stock it receives as
a result of the Conversion (a majority of which
o Holders of A Interests currently have the right to shares would be freely tradeable immediately after
vote as a class on mergers and together with the such distribution). See "RESALE OF SECURITIES
holders of B Interests on the sale of substantially -- Resales by Lehman Brothers and Management."
all the assets of the Partnership, amendment of the
Partnership Agreement, dissolution and removal of o Certain provisions of Delaware law and the
the General Partner. The Trust Preferred Securities Corporation's organizational documents, as well as
will not have these voting rights. provisions of the Stockholders Agreement dated as
of July 31, 1997 among the Corporation and
o Holders of A Interests have no dissenters' or certain of its stockholders (the "Stockholders
appraisal rights in the Conversion. Therefore, Agreement") and the stockholder rights plan,
holders of A Interests will not be entitled to receive contain provisions that may reduce the likelihood
cash payments from SunSource for the fair value of of a takeover of the Corporation that, if successful,
their Interests if they dissent and the Conversion is might permit stockholders to receive a premium
approved and consummated. over the market price for the Common Stock. See
"DESCRIPTION OF CAPITAL STOCK." Such
o Prior to the Conversion, there has been no public provisions could also have a negative effect on the
market for the Trust Preferred Securities. Because market price of the Common Stock.
the consideration received by the holders of A
Interests includes $1.30 in cash for each A Interest, o A benefit to the partners of the General Partner of
it is likely that .38 of a Trust Preferred Security the Conversion which is not shared by the limited
received in respect of each A Interest will trade at partners is the elimination of liability, if any, of the
prices below the market price of the A Interest partners of the General Partner for obligations and
immediately prior to the Conversion. liabilities of SunSource which occur after the
Conversion.
o The Corporation intends to list the Trust Preferred
Securities on the New York Stock Exchange o The fiduciary duties owed by the directors of the
("NYSE"). The Trust Preferred Securities may Corporation after the Conversion may be less than
trade at prices that do not fully reflect the value of those owed by the General Partner of the
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RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS
accrued but unpaid interest with respect to the Partnership before the Conversion, which may
underlying Junior Subordinated Debentures. A result in decreased potential liability of the
holder of Trust Preferred Securities that disposes of directors of the Corporation.
its Trust Preferred Securities between record dates
for payments of distributions (and consequently o Certain members of management will receive
does not receive a distribution from the Trust for accelerated payments under certain deferred
the period prior to such disposition) will compensation plans of the Operating Partnership as
nevertheless be required to include as ordinary a result of the Conversion. "See MANAGEMENT -- Change in
income, accrued but unpaid interest on the Junior Control Arrangements."
Subordinated Debentures through the date of
disposition. Such holder will recognize a capital o In addition to the factors noted above, an
loss to the extent the amount realized with respect investment in SunSource (whether in partnership or
to the Trust Preferred Securities is less than its corporate form) is subject to risks associated with
adjusted tax basis. Subject to certain limited operating conditions, competitive factors, economic
exceptions, capital losses cannot be applied to conditions, industry conditions and equity market
offset ordinary income for United States federal conditions.
income tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Certain Tax
Consequences of the Conversion to Holders of A
Interests."
o If a large number of holders of Trust Preferred
Securities were to offer their securities for sale
immediately after consummation of the Conversion, the
market price of the Trust Preferred Securities could
decline.
o A benefit to the partners of the General Partner of the
Conversion which is not shared by the limited partners is
the elimination of liability, if any, of the partners of
the General Partner for obligations and liabilities of
SunSource which occur after the Conversion.
o The General Partner currently owes fiduciary duties to the
limited partners. The directors of the Corporation will not
have fiduciary duties to the holders of Trust Preferred
Securities after the Conversion.
o Certain members of management will receive accelerated
payments under certain deferred compensation plans of the
Operating Partnership as a result of the Conversion. See
"MANAGEMENT -- Change in Control Arrangements."
o In addition to the factors noted above, an investment in
SunSource (whether in partnership or corporate form) is
subject to risks associated with operating conditions,
competitive factors, economic conditions, industry
conditions and market conditions.
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7. What are the reasons the General Partner believes the Conversion would
be beneficial?
The General Partner believes that the Conversion will provide SunSource
and the holders of B Interests the following benefits:
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o Expansion of Potential Investor Base. Expand the base of
potential investors in SunSource to include persons and
institutional entities who do not typically invest in limited
partnership securities. In addition, the General Partner
anticipates that the Common Stock (as compared to Interests)
will receive additional investor interest through increased
review and evaluation by research analysts.
o Conservation of Cash. The Corporation will conserve cash by
the retention of the annual management fee of $3,330,000 and
the retention of distributions on the General Partner's
ownership in the Partnership and the Operating Partnership
amounting to approximately $400,000 annually.
o Tax Consequences to the Corporation. Although the Corporation
will have to pay tax on its income, SunSource will conserve
additional cash (i) because the interest payable on the Junior
Subordinated Debentures, which will approximately equal the
Priority Return currently paid on the A Interests, will be
deductible for federal income tax purposes, resulting in a
corporate tax benefit of approximately $4,900,000 annually and
(ii) because of the difference in rates between the B Tax
Distribution, which will be eliminated, and the tax that will
become payable by the Corporation. If the Conversion is not
approved, the Priority Return would most likely be paid from
net income after corporate income taxes after December 31,
1997.
o Acquisition Currency. The Corporation will have greater
flexibility to consummate acquisitions due to conservation of
cash resources and the ability to use capital stock as
acquisition currency.
o Greater Access to Equity Markets. The Corporation will also
have greater access to public and private equity capital
markets at a potentially lower cost of capital.
o Tax Reporting. Simplify and reduce costs of tax reporting for
investors in SunSource.
The General Partner also believes that the Conversion will provide the
holders of A Interests with benefits in the form of the cash payment of
$1.30, the continuation of the $1.10 distribution and the continuation
of a tradeable security, and will simplify and reduce costs of tax
reporting for holders. In addition, to the extent the benefits
described above for the holders of B Interests strengthen the financial
condition of the Corporation, there is greater assurance that the $1.10
of annual distributions will continue to be paid.
8. What is the impact of the Conversion on earnings per B Interest?
If the Conversion is approved, net income available to the Common Stock
will be increased because the management fee of $3,330,000 and
distributions on the General Partner's ownership in the Partnership and
the Operating Partnership amounting to approximately $400,000 annually
will be retained within the corporate family. The Corporation would
also save approximately $4,900,000 per year in income taxes due to its
ability to deduct from taxable income the interest paid on the Junior
Subordinated Debentures. On the other hand, an additional 1,000,000
shares of Common Stock will be outstanding and held by the former
owners of the General Partner Interests (Lehman Brothers and its
affiliates, and management).
9. What is the impact on earnings per share if the Conversion is not
approved?
If the Conversion is not approved, the Partnership's present intention
is to continue to operate as a partnership, subject to tax as a
corporation after December 31, 1997. Based on pro forma results for the
twelve months ended December 31, 1996, SunSource would have generated
net income of $0.205 per B Interest (after the reverse stock split) if
the Partnership were
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to have converted to corporate form on January 1, 1996, but a net loss
of $0.075 per B Interest (after the reverse stock split) if the
Conversion were not approved and the Partnership were taxed as a
corporation effective January 1, 1996. Of the $0.280 increase in
earnings per B Interest in the pro forma results for the Conversion,
$0.233 is attributable to the exchange of A Interests for Trust
Preferred Securities and cash (and the tax benefits of the deduction of
the interest payments on the related Junior Subordinated Debentures)
and $0.047 is attributable to the retention of the General Partner's
management fee and respective 1% ownership interests in the Partnership
and the Operating Partnership in exchange for the issuance of 1,000,000
shares of Common Stock (after the reverse stock split). See"SPECIAL
FACTORS --- Consequences if the Conversion is Not Approved."
If the Conversion is not approved, tax distributions to B Interests
would be eliminated after December 31, 1997 because there would be no
taxable income allocated to the B Interests after that date.
10. How was the allocation of value determined among the A Interests, B
Interests, and the General Partner Interests?
On June 12, 1996, the Board of Directors of Lehman/SDI appointed a
Special Committee to review, evaluate and reach a determination with
respect to the fairness of the terms of the Conversion to the limited
partners, and to make a recommendation to the Board of Directors with
respect to the Conversion. The Special Committee was authorized to
retain its own legal counsel and financial advisor to assist them in
their work.
O. Gordon Brewer, Jr. and Ernest L. Ransome, III were appointed to
serve on the Special Committee. Except for their directorship in
Lehman/SDI, Inc. and membership on the Special Committee, the members
of the Special Committee are not otherwise affiliated with SunSource,
Lehman Brothers, or their affiliates. Their combined holdings of
limited partnership interests are 8,000 A Interests and 6,000 B
Interests.
The Special Committee selected Dechert Price & Rhoads as its
independent legal counsel and Smith Barney, Inc. to act as its
independent financial advisor. The Special Committee, its advisors, and
the General Partner had numerous meetings in the ensuing months for the
purpose of negotiating the terms of the Conversion. On December 11,
1996, the Special Committee recommended to the Board of Directors that
the terms of the Conversion were fair to the holders of the
Partnership's A Interests and B Interests. The Board of Directors voted
unanimously to accept the recommendation of the Special Committee. On
June 19, 1997, the Special Committee unanimously determined to reaffirm
its recommendation to the Board of Directors of Lehman/SDI based upon
Smith Barney's updated written fairness opinion as of such date, a copy
of which is included as Exhibit C to the Proxy Statement. See "SPECIAL
FACTORS -- Allocation of Interests in the Conversion;" "--
Determinations of the Special Committee."
11. Have any opinions as to the fairness of the Conversion been received?
Yes. Smith Barney, Inc. delivered its written opinion to the Special
Committee on December 10, 1996 to the effect that, as of such date
based upon and subject to certain matters as stated therein, (i) the
consideration to be received in the Conversion by the holders of A
Interests is fair, from a financial point of view, to such holders,
(ii) the consideration to be received in the Conversion by the holders
of B Interests is fair, from a financial point of view, to such
holders, and (iii) the General Partner consideration to be received in
the Conversion is fair, from a financial point of view, to the holders
of the A Interests and to the holders of the B Interests, respectively.
See "SPECIAL FACTORS - Opinion of Smith Barney." A similar opinion was
rendered by Smith Barney on June 19, 1997, a copy of which is included
as Exhibit C to the Proxy Statement.
PH02/170278.5
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12. Where will the Trust Preferred Securities and the Common Stock trade?
The Trust Preferred Securities and the Common Stock are expected to be
listed on the New York Stock Exchange.
13. What will be the market values of the Trust Preferred Securities and
the Common Stock?
Smith Barney has not expressed any opinion as to what the values of the
Trust Preferred Securities or Common Stock will actually be when issued
to holders of A Interests or B Interests, respectively, nor as to the
prices at which they will trade subsequent to the Conversion. There can
be no assurance that holders will be able to sell their securities at
favorable prices or that the trading prices for the securities will be
comparable to the trading prices prior to the consummation of the
Conversion. See "SPECIAL FACTORS - Opinion of Smith Barney."
(a) Trust Preferred Securities.
Prior to the Conversion, there has been no public market for the Trust
Preferred Securities. Because the consideration received by the holders
of A Interests includes $1.30 in cash for each A Interest, it is likely
that the Trust Preferred Securities received in respect of each A
Interest will trade at prices below the market price of the A Interests
immediately prior to the Merger. If a large number of holders of Trust
Preferred Securities were to offer their securities for sale
immediately after consummation of the Conversion, the market prices of
the Trust Preferred Securities could decline substantially absent a
corresponding demand for the securities from other investors.
(b) Common Stock.
Prior to the Conversion there has been no public market for the Common
Stock. The Common Stock received by the holders of B Interests could
trade at prices substantially below the historical trading level of the
B Interests (adjusted for the one-for-four reverse stock split) if a
large number of holders of Common Stock were to offer their shares for
sale shortly after the Conversion and there was an absence of
corresponding demand for the Common Stock from institutional and retail
investors.
The Corporation has agreed to file registration statements for the sale
of shares of Common Stock by Lehman/SDI, Inc. and certain of its
affiliates (collectively, "Lehman Brothers") and, subject to certain
limitations, by management, after the Conversion. Lehman Brothers and
management have agreed to cooperate to execute an underwritten
secondary offering of all or some portion of their shares of Common
Stock as soon as practicable after the effective date of the
Conversion, subject to market conditions. The Corporation has agreed
not to sell any additional shares of Common Stock prior to the earlier
of such initial secondary offering and the nine-month anniversary of
the Conversion, except in connection with certain acquisitions. In
addition, Lehman Brothers Capital Partners I, L.P., an affiliate of
Lehman/SDI, Inc. holding 5,788,124 B Interests, may distribute the
shares of Common Stock it receives in the Merger (a majority of which
shares would be freely tradeable immediately after such distribution)
to its partners. See"RESALE OF SECURITIES - Resales by Lehman Brothers
and Management."
Issuances of additional shares of Common Stock or Preferred Stock by
the Corporation could adversely affect the existing stockholders'
equity interest in the Corporation and the market price of the Common
Stock.
14. What are the significant tax aspects of the Conversion to holders of
limited partnership interests?
For investors who hold only A Interests, the Conversion will be a
taxable transaction. Gain or loss
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will be recognized in an amount equal to the difference between the sum
of cash and the fair market value of Trust Preferred Securities
received in the exchange and the exchanging holder's tax basis in the A
Interests exchanged. Such gain or loss will be long-term gain or loss
if the A Interests have been held for more than one year, except for a
portion of the gain attributable to inventory items that will result in
ordinary income. The General Partner believes that the distribution of
$1.30 in cash per A Interest will be adequate to fund the tax liability
for the great majority of holders of A Interests.
For investors who hold only B Interests, the exchange should be
tax-free under current tax law, except to the extent of any cash
received in lieu of fractional shares. Any such cash should result in
capital gain to the recipient, assuming the B Interests are held as
capital assets.
For investors who hold both A Interests and B Interests, the tax
treatment is somewhat more complex. Generally, gain will be recognized
on an aggregate basis in an amount equal to the lesser of (i) the
difference between the sum of cash and the fair market value of the
Trust Preferred Securities and Common Stock received in the exchange
and the exchanging holder's aggregate tax basis in the A Interests and
B Interests exchanged or (ii) the amount of cash and Trust Preferred
Securities received in the exchange. Such gain should be treated as
long-term capital gain provided that the A interests have been held for
more than one year, except for a portion of the gain attributable to
inventory items that will result in ordinary income. Losses generally
would not be recognized but apportioned as part of the tax basis in the
Trust Preferred Securities and Common Stock. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES - General Tax Treatment of the Conversion;
-Certain Tax Consequences of the Conversion to Holders of B Interests;
and Certain Tax Consequences of the Conversion to Holders of A
Interests."
15. Will dissenting holders of A Interests and B Interests be entitled to
appraisal rights?
No. If the limited partners approve the Conversion, all holders of
Interests will be bound by such approval even though they,
individually, may have voted against the Conversion.
16. What impact does the Conversion have on voting rights?
If the Conversion is approved, the A Interest holders will generally be
exchanging limited partnership voting rights for corporate creditors'
rights.
If the Conversion is approved, the B Interest holders will be
exchanging limited partnership voting rights for shareholder voting
rights.
The General Partner and its affiliates presently own 46.3% of the B
Interests. After the Conversion, this ownership percentage will
increase to 54.0% of the Common Stock. However, the General Partner and
its affiliates have entered into a Stockholders Agreement that will
effectively limit the voting power of Lehman Brothers and six senior
executives to the respective voting powers they had immediately prior
to the Conversion. See "DESCRIPTION OF CAPITAL STOCK - Stockholders
Agreement."
17. Who can I call for more information?
In order to respond to your questions, SunSource has appointed D.F.
King & Co., Inc. as the Information Agent for limited partners desiring
additional information. You may call them toll free at
1-800-488-8075.
Please have your Proxy Card available when you call.
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18. What should I do if my Interests are held by a broker or bank?
If your Interests are held for you by a broker or bank, only your
broker or banker can vote your Interests and only after receiving
specific voting instructions from you. Please sign and return the
accompanying voting instruction form in the enclosed return envelope as
soon as possible.
19. How should I vote on the Conversion?
You are urged to review the accompanying Proxy Statement/Prospectus
carefully and consult with your personal financial and tax advisor
before voting on the Conversion. In making your decision, you should
consider that the General Partner urges you to vote "FOR" the adoption
of the Conversion proposal.
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