SUNSOURCE INC, 424B1, 1998-03-20

SUNSOURCE INC
424B1, 1998-03-20
MACHINERY, EQUIPMENT & SUPPLIES

Previous: SUNSOURCE INC, POS462B, 1998-03-20

Next: ORION NETWORK SYSTEMS INC/NEW/, 10-K, 1998-03-20

<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-44733

PROSPECTUS
1,988,063 Shares

SUNSOURCE

Common Shares
------------------
Of the 1,988,063 shares of Common Stock, par value $.01 per share (the
"Common Shares"), of SunSource Inc. ("SunSource" or the "Company") offered
hereby, 500,000 shares are being issued and sold by the Company and 1,488,063
shares are being sold by the Selling Stockholders (collectively, the
"Offering"). The Selling Stockholders are affiliates of Lehman Brothers Inc.,
one of the Underwriters listed below. See "Security Ownership of Certain
Beneficial Owners, Management and Selling Stockholders." The Company will not
receive any of the proceeds from the shares being sold by the Selling
Stockholders.

The Company's Common Shares are listed on the New York Stock Exchange
under the symbol "SDP." On March 19, 1998, the reported last sale price of the
Common Shares on the New York Stock Exchange Composite Tape was $28.5625 per
share.
------------------
An investment in the Common Shares offered hereby involves various risks.
See "Risk Factors" beginning on page 8.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
<S> <C> <C> <C> <C>
Per Share ......... $ 28.25 $ 1.55 $ 26.70 $ 26.70
Total (3) ......... $ 56,162,779.75 $ 3,081,497.65 $ 13,350,000.00 $ 39,731,282.10
</TABLE>

- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting estimated expenses of the Offering of $375,000 payable by
the Company.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 296,408 Common Shares on the same terms and conditions as the
securities offered hereby solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be
$64,536,305.75, $3,540,930.05 and $21,264,093.60, respectively. The
Proceeds to the Selling Stockholders will not change if such option is
exercised. See "Underwriting" and "Security Ownership of Certain
Beneficial Owners, Management and Selling Stockholders."
------------------
The Common Shares offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the shares
will be made at the offices of Lehman Brothers Inc., New York, on or about
March 25, 1998.
------------------
LEHMAN BROTHERS

ROBERT W. BAIRD & CO.
INCORPORATED
FURMAN SELZ

LEGG MASON WOOD WALKER
INCORPORATED

March 19, 1998
<PAGE>

[GRAPHIC OMITTED]

[Organizational chart of the Company]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON SHARES PRIOR TO THE
PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON
SHARES AND THE PURCHASE OF COMMON SHARES FOLLOWING THE PRICING OF THE OFFERING
TO COVER A SYNDICATE SHORT POSITION IN THE COMMON SHARES OR FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE COMMON SHARES. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in all respects by the more detailed
information set forth elsewhere in this Prospectus and the documents
incorporated by reference herein. Unless the context suggests otherwise, (i)
SunSource or the Company refers to SunSource Inc. and its predecessors and (ii)
all information provided herein assumes no exercise of the Underwriters'
over-allotment option. This Prospectus contains forward-looking statements that
address, among other things, projected revenue, cash flow and income, the
implementation of new management information systems, cost savings, profit
growth and acquisition strategy. These statements may be found under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in this Prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation, those
discussed in "Risk Factors" and matters set forth in this Prospectus generally.
As used herein, (i) the term "Conversion" means the conversion of the Company
on September 30, 1997 from partnership to corporate form, (ii) the term
"Refinancing" means the refinancing of the Company's senior notes and bank
revolving credit which occurred on September 30, 1997 and (iii) the term
"Partnership" means SunSource L.P., the predecessor partnership to the Company.

The Company

SunSource is one of the largest providers of industrial products and
related value-added services in North America. Through its applications
engineers and technical support personnel, SunSource provides customized
solutions to complex problems encountered by its customers. The Company
believes that it differentiates itself from other industrial distributors by
providing superior technical and problem-solving capabilities in addition to an
extensive product offering and broad array of related services, such as
engineering design and integrated supply arrangements. The Company has more
than 188,000 customers, none of which represents more than 6% of annual net
sales. The Company's distribution and related services support more than 1,300
product lines, consisting of approximately 175,000 stock keeping units.

The Company has targeted three businesses within the distribution industry
which are characterized by a potential for value-added services, economies of
scale and opportunities for further consolidation.

Industrial Services. SunSource Industrial Services Company, with sales of
$502 million in 1997, provides a broad range of products and services
throughout North America through the sales and marketing activities of
SunSource Technology Services ("STS") and Sun Inventory Management Company
("SIMCO"). The Company believes that STS is a leading provider of systems and
parts and engineering services for hydraulic, pneumatic, electrical and related
systems to major industrial concerns, such as Ford Motor Company, Hill-Rom and
Vermeer Manufacturing, as well as small and medium-size businesses. STS
provides services, including engineering and design of both products and
processes and the assembly and repair of complex systems, which enable its
customers to outsource engineering and other functions which they previously
performed in-house. SIMCO provides inventory management services enabling its
customers to reduce inventory investment and the associated expenses of
purchasing, receiving, disbursing and accounting for parts and materials.

Hardware Merchandising Services. Hardware Merchandising Services, which
operates under the name Hillman ("Hillman"), with sales of $107 million in
1997, provides small hardware items and merchandising services to retail
hardware outlets through a nationwide sales and service organization. Hillman
offers a full range of fasteners, letters, numbers, signs, keys, rope and chain
accessories and many other inexpensive "specialty" goods, which are the
"must-have" items for hardware retailers that cannot be managed economically by
the retailer's own employees because of the large number of items and their low
prices. Hillman maintains a 265 person nationwide sales and service
organization which seeks to ensure that its customers' inventories are
maintained at appropriate levels with a minimum of administrative effort or
expense. Hillman also provides inventory management software that ties into
retailers' point-of-sale systems. Through its merchandising system, Hillman
assists retailers with rack positioning, store layout, new package design and
color coding systems to permit ease of shopping by consumers.

Glass Merchandising. Glass Merchandising, which operates under the name
Harding ("Harding"), with sales of $88 million in 1997, operates one of the
largest networks of full service retail glass shops in

3
<PAGE>

the United States. Harding is comprised of approximately 85 retail locations
throughout the Southwest and, to a lesser degree, along the East Coast. Harding
sells and installs automotive glass and also sells, fabricates and installs
flat glass. Customers include individual retail consumers, insurance companies
and commercial accounts.

The markets in which the Company participates are currently impacted by
the following trends:

o Manufacturers are increasing their reliance on distributors in order
to enhance their profitability and improve their returns on capital;

o Customers are increasing their reliance on value-added distributors
as their contacts with the manufacturers diminish or cease
altogether;

o Customers are outsourcing non-core functions to high-quality service
providers;

o Channels of distribution are in the process of consolidation; and

o Managerial skills required for success in industrial distribution
are changing dramatically.

The Company's growth has resulted from its ability to capitalize on these
trends due to its competitive strengths in the following areas:

o Acquisition Integration Capability -- The ability to integrate
acquired companies while improving operational efficiencies and
enhancing their effectiveness in the marketplace.

Since the organization of its predecessor in 1975 and through 1991,
the Company grew primarily through acquisitions of existing
distribution companies. During this period, a series of acquisitions
expanded the Company's operations both geographically and in the
number and types of products offered. Thirty-five of these
acquisitions had purchase prices in excess of $1 million and
approximately 40 more had purchase prices under $1 million. The
Company's ability to make acquisitions since 1991 was hindered by
its previous partnership structure and associated restrictions in
its credit agreement. As a result of the Conversion, the Refinancing
and this Offering, the Company expects to have the necessary
financial capacity to resume its acquisition program. The Company
intends to seek acquisition candidates that have developed
attractive market niches, have strong management and have
demonstrated their ability to achieve stable growth and high returns
on invested capital.

o Ability to Capitalize on Industry Trends -- The ability to execute
dynamic business strategies to capitalize on opportunities arising
from rapid structural changes in the marketplace.

The Company has established separate organizations for its three
businesses, each headed by a chief executive officer who is
supported by sales, marketing, financial, logistics and information
systems resources. This organizational structure enables the Company
to manage each of its businesses within the context of the varying
market opportunities, rates of change and competitive threats
affecting those businesses. The Company's small headquarters staff
shapes and guides the strategic decisions of its operating
companies. Performance benchmarks are established as part of this
process and progress is monitored to ensure that initiatives remain
on track.

o Technology for Competitive Advantage -- The ability to use
technology and technical expertise as competitive advantages to
build and defend attractive market niches.

For example, STS is implementing a new integrated information system
which will permit (i) the centralization of the purchasing function,
resulting in a smaller staff with a higher level of professional
skills; (ii) a reduction in the number of warehouses from 36 to
fewer than ten; (iii) higher customer order fill rates; and (iv)
lower exposure to obsolete or slow-moving inventory.

SunSource believes that each of its three operating businesses is well
positioned to capture opportunities in the markets in which it participates:

o SunSource Industrial Services Company's strategy is to capitalize on
the trends among industrial customers toward consolidation of
suppliers, outsourcing the procurement function for goods and
outsourcing in-plant services for which they lack expertise or
sufficient resources.

4
<PAGE>

o Hillman's strategy is to capitalize on the desire of its customers
to outsource the burden of maintaining a complex, low value
inventory as well as to continually expand its product line.

o Harding's strategy is to take advantage of the trend toward
consolidation in the retail glass business. Multiple acquisitions,
most of which are quite small, can be integrated because of
Harding's management information systems and the increased number of
management personnel dedicated to making acquisitions.

The Company traces its origins to 1975, when Sun Company, Inc. ("Sun")
decided to pursue a diversification strategy outside of its traditional energy
business. After an extensive analysis of strategic alternatives, Sun concluded
that the industrial distribution business offered substantial opportunities for
growth, high returns on invested capital and relatively low business risk. Sun
pursued this strategy through Sun Distributors, Inc., which became an industry
consolidator and acquired 16 companies between 1975 and 1985. In 1986, Sun
decided to refocus its efforts on its core energy business and sell its
non-energy businesses. The Company was purchased by a predecessor affiliate of
the Selling Stockholders in October 1986. In February 1987, the Company made an
initial public offering of its limited partnership interests and became a
publicly traded master limited partnership.

The Company continued to make acquisitions after its initial public
offering, but its ability to make acquisitions after 1991 was hindered by its
partnership structure and associated restrictions in the Company's credit
agreements. In 1994 and 1995, the Company divested three non-strategic
businesses with aggregate 1994 sales of $177.1 million.

The Company converted from partnership to corporate form on September 30,
1997.

The 950,063 Common Shares being offered by Lehman LTD I, Inc. and Lehman
Brothers Capital Partners I were received in the Conversion in exchange for
3,800,252 Class B limited partnership interests of the Partnership. The 538,000
Common Shares being offered by Lehman/SDI, Inc. were received in the Conversion
in exchange for the general partnership interest in SDI Partners I, L.P., the
general partner of the Partnership. The Class B limited partnership interests
and the general partnership interest were acquired in connection with the
organization of the Partnership in 1987.

The Offering

<TABLE>
<S> <C>
Common Shares being offered by the
Company .............................. 500,000
Common Shares being offered by the
Selling Stockholders ................. 1,488,063
Common Shares outstanding (before and
after the Offering) .................. 6,418,936 and 6,918,936, respectively
Selling Stockholders ................... Lehman LTD I, Inc., Lehman Brothers Capital Partners I
and Lehman/SDI, Inc., who are affiliates of Lehman Broth-
ers Inc.
Use of Proceeds by the Company ......... To repay borrowings under the Company's revolving credit
facility
New York Stock Exchange symbol ......... SDP
</TABLE>

Risk Factors

An investment in the Common Shares offered hereby involves various risks,
including the ability to successfully complete the restructuring of the STS
divisions, the changing environment and competition in the industrial
distribution industry, the implementation of the Company's acquisition
strategy, the seasonal and cyclical nature of the Company's businesses, the
Company's dependence on its information systems and the possible effect which
the Year 2000 issue may have. See "Risk Factors" beginning on page 8.

5
<PAGE>

SUMMARY HISTORICAL AND
PRO FORMA FINANCIAL INFORMATION
(In thousands except share amounts)

The following tables set forth summary consolidated historical and pro
forma financial data of the Company and the Partnership as of the dates and for
the periods indicated. The historical information as of December 31, 1997 and
for each of the three years in the period ended December 31, 1997 is derived
from audited financial statements included elsewhere herein. The historical
financial information for each of the two years in the period ended December
31, 1994 is derived from audited financial statements not included elsewhere
herein. The summary unaudited pro forma income statement information for the
year ended December 31, 1997 gives effect to the Conversion, the Refinancing,
the Offering and the elimination of other non-recurring charges and credits as
of the beginning of the year presented. The pro forma financial information
should be read in conjunction with the unaudited pro forma consolidated
statement of income and related notes thereto appearing elsewhere herein. See
"Index to Financial Statements," "Selected Historical and Pro Forma Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1997 1996 1995(1) 1994(1) 1993(1)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Historical Statement of Operations Data:
Net sales .............................. $698,131 $649,254 $628,935 $735,861 $655,707
EBITDA(2)(3) ........................... 41,957 29,979 36,959 44,901 36,835
EBITA(2)(3) ............................ 37,948 26,376 33,298 40,399 31,729
Income from operations (2) ............. 36,054 24,452 31,302 37,759 28,975
</TABLE>

PRO FORMA
------------
(unaudited)
Pro Forma Statement of Operations Data:
Net sales .................................. $ 698,131
EBITDA(3) .................................. 47,501
EBITA(3) ................................... 43,492
Amortization ............................... 2,284
Income from operations ..................... 41,208
Interest expense, net ...................... 6,877
Distribution on guaranteed preferred benefi-
cial interests ............................ (12,232)
Income before income taxes ................. 22,416
Provision for income taxes ................. 10,231
Net income ................................. $ 12,185
Net income per Common Share (basic and
diluted) .................................. $ 1.76
Weighted average number of outstanding
Common Shares ............................. 6,918,936

<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------------
Historical As Adjusted(4)
------------ ---------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Working capital ................................ $ 120,938 $ 120,938
Total assets ................................... 306,142 306,142
Long-term debt ................................. 93,728 80,753
Guaranteed preferred beneficial interests in
the Company's junior subordinated
debentures .................................... 115,903 115,903
Stockholders' (deficit) equity ................. (491) 12,484
Book value per Common Share .................... $ (0.08) $ 1.80
</TABLE>

6
<PAGE>

- -------------
(1) Includes results of operations from divisions sold as follows:

Years Ended December 31,
-----------------------------------------
1995 1994 1993
----------- ------------ ------------
Net sales $ 29,070 $ 177,107 $ 162,270
EBITDA(3) 608 10,338 8,539
EBITA(3) 305 9,085 6,989
Income from operations 270 8,588 6,637

(2) Includes $3,053 and $2,150 of Conversion-related transaction and other
costs for the years ended December 31, 1997 and 1996, respectively, $5,950
of restructuring charges for the year ended December 31, 1996 and $2,491
of management fee expense for the year ended December 31, 1997 and $3,330
of management fee expense in each year in the four year period ending
December 31, 1996.

(3) "EBITDA" is defined as income from operations before depreciation and
amortization; "EBITA" is defined as income from operations before
amortization. EBITDA and EBITA are not measures of performance under
Generally Accepted Accounting Principles ("GAAP"). While EBITDA and EBITA
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP, the Company believes that
EBITDA and EBITA are accepted within the business segments in which the
Company operates as generally recognized measures of performance.
Moreover, substantially all of the Company's financing agreements contain
covenants in which EBITDA and/or EBITA are used as measures of financial
performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of other measures of
performance determined in accordance with GAAP.

(4) Assumes the Offering closed on December 31, 1997 with net proceeds of
$12,975 to the Company for 500,000 Common Shares issued.

7
<PAGE>

RISK FACTORS

An investment in the Common Shares of the Company offered hereby involves
various risks. In addition to general investment risks and those factors set
forth elsewhere in this Prospectus, prospective investors should consider,
among other things, the following, which include all material risk factors:

Restructuring

In December 1996, the Company announced a restructuring plan to integrate
and consolidate its five domestic STS divisions. The Company expects the
restructuring plan to result in the elimination of approximately 175 employees
in the STS divisions and produce certain net annualized cost savings of
approximately $5.0 million per year upon its completion. The STS divisions
consist of hydraulic and pneumatic distributors that were acquired by the
Company between 1976 and 1991. Until the restructuring, each of the STS
divisions was operated on a decentralized basis. The announced restructuring
plan is a three-year project to consolidate all financial and other
administrative responsibilities for the STS divisions in one location, and
includes a migration to one management information system. The integration and
consolidation of the finance and administrative functions is expected to be
completed by mid-1999. The restructuring of the sales organization and
distribution network has begun; however, management's current estimate is that
completion of this phase will require approximately an additional 18 months
beyond the original three year project schedule due to the need for further
analysis of STS' customer base and logistics requirements. The failure to
complete the restructuring or successfully integrate the STS divisions would
have an adverse impact on the Company's ability to fully achieve the net cost
savings indicated above. There can be no assurance that the Company will be
able to complete the plan effectively or on a timely basis. See
"Business--Industrial Services--SunSource Technology Services."

Changing Industry Environment

The industrial distribution industry is undergoing significant change.
Historically, industrial distributors have served as suppliers of industrial
products and as extensions of manufacturers' sales forces, selling products
through the distribution channels to original equipment manufacturers,
retailers, end users and other customers. In recent years, both manufacturers
and customers have been increasingly relying on industrial distributors such as
the Company to reduce purchasing costs and provide a broad range of value-added
services, including inventory management programs, integrated supply
arrangements, electronic ordering capabilities, engineering design and
technical support services. In addition, customers' desire to consolidate their
supplier relationships has required industrial distributors to achieve
purchasing efficiencies, expand their geographic coverage and increase product
and service offerings through acquisitions of other distributors. These changes
in the industrial distribution industry could cause the industry to become more
competitive. There can be no assurance that the Company will be able to compete
effectively in or adapt to the changing industry environment. See "Business--
Industry Overview" and "Business--Business Strategy."

Risks Associated with Acquisitions

An element of the Company's future growth strategy is to pursue selected
acquisitions that either expand or complement its businesses in new or existing
markets. However, there can be no assurance that the Company will be able to
identify or acquire acceptable acquisition candidates on terms favorable to the
Company and in a timely manner to the extent necessary to fulfill the Company's
growth strategy. Future acquisitions may be financed through the issuance of
Common Shares, which may be dilutive to the Company's stockholders, or through
the incurrence of additional indebtedness. Furthermore, there can be no
assurance that competition for acquisition candidates will not escalate,
thereby increasing the costs of acquisitions. The process of integrating
acquired businesses into the Company's operations may result in unforeseen
difficulties and may require a disproportionate amount of resources and
management's attention, and there can be no assurance that the Company will be
able to successfully integrate acquired businesses into its operations. The
failure to complete or successfully integrate prospective acquisitions may have
an adverse impact on the Company's growth strategy. See "Business--Business
Strategy."

The Company is not currently a party to any agreement or understanding
regarding a material acquisition but is pursuing discussions with a number of
prospective sellers of businesses. The Board of Directors of the Company has
authorized the acquisition by Hillman of certain assets of a retail hardware
business which had sales in its last fiscal year of approximately $17.0
million. There can be no assurance whether such acquisition will occur.

8
<PAGE>

Competition

The distribution industry is highly competitive, with the principal
methods of competition being price, quality of service, quality of products,
product availability, credit terms 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 and offer a greater variety of products.
See "Business."

Seasonality and Industry Cycles

The Company has in the past experienced seasonal fluctuations in sales and
operating results from quarter to quarter. Typically, the first calendar
quarter is the weakest due to the effect of weather on construction activity
which produces a slowdown of sales of material and equipment in the
construction market. Fluctuations in the Company's quarterly operating results
could result in significant volatility in, and otherwise adversely affect, the
market price of the Common Shares.

Some of the principal markets for the products and services offered by the
Company are subject to cyclical fluctuations that generally affect demand for
industrial, commercial and consumer durable goods. Cyclical fluctuations can
affect a number of factors such as pricing, availability and demand for the
Company's products, growth rates in the markets served by the Company's
customers, the delivery and performance of vendors, and the availability of
suitable acquisition candidates. Changes in general economic conditions could
have a material adverse effect on the Company's business, results of operations
and financial condition.

Dependence on Information Systems; Year 2000 Issue

The Company believes that its proprietary computer software programs are
an integral part of its business and growth strategies. The Company depends on
its information systems generally to process orders, to manage inventory and
accounts receivable collections, to purchase, sell and ship products
efficiently and on a timely basis, to maintain cost-effective operations and to
provide superior service to its customers. There can be no assurance that the
precautions which the Company has taken against certain events that could
disrupt the operation of its information systems will prevent the occurrence of
such a disruption. Any such disruption could have a material adverse effect on
the Company's business and results of operations. See "Business."

The Company faces the "Year 2000" issue. The Year 2000 issue is the result
of computer programs being written using two digits (rather than four) to
define the applicable year, resulting in incorrect calculations for the year
2000 and beyond. The Company's issues relate not only to its own systems being
Year 2000 compliant, but also the systems of its suppliers and customers. The
Company presently believes that, with modifications to existing software and
converting to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems as so modified or converted.
However, if such modifications and conversions are not completed in a timely
manner, or if the Company's suppliers and customers fail to address the
problem, the Year 2000 issue could have a material adverse effect on the
operations of the Company.

Future Dilution of Common Stock

The Company is permitted to issue additional equity or debt securities,
including shares of Preferred Stock. Issuances of additional Common Shares or
shares of Preferred Stock could adversely affect stockholders' equity interest
in the Company and could adversely affect the market price of the Common
Shares, and the interests in the assets, liabilities, cash flow and results of
operations of the Company represented by Common Shares may be diluted. Holders
of Common Shares are not entitled to preemptive rights.

Provisions that May Discourage Changes of Control

The Company's Certificate of Incorporation and Bylaws and the Stockholders
Agreement and Stockholders Rights Plan described under "Description of Capital
Stock" contain certain provisions that may have the effect

9
<PAGE>

of encouraging persons considering an acquisition or takeover of the Company to
negotiate with the Board of Directors rather than to pursue non-negotiated
acquisitions or takeover attempts that a stockholder might consider to be in
the stockholders' best interests, including offers that might result in a
premium over the market price for the Common Shares.

In addition to the Stockholders Rights Plan, these provisions include
authorization for the Board of Directors to issue classes or series of
Preferred Stock and a requirement that stockholders notify the Company in
advance of any director nominees or items of business to be proposed at any
meeting of stockholders. In addition, the deferred compensation plans of the
Company provide that, upon the occurrence of a change in control as defined in
the plans, the vesting provisions of awards under the plans will be
accelerated. These provisions may reduce interest in the Company as a potential
acquisition target or reduce the likelihood of a change in the management or
voting control of the Company without the consent of the then incumbent Board
of Directors.

Limited Trading Market and Volatility of Common Shares

The Common Shares have traded on the New York Stock Exchange since the
effective date of the Conversion on October 1, 1997. Prior to that time the
Class B limited partnership interests of the Partnership had limited trading
volume because institutional and other investors do not typically invest in
limited partnership interests for various tax and administrative reasons. The
limited trading volume in the Common Shares has continued since October 1,
1997.

From time to time after the Offering, there may be significant volatility
in the market price for the Common Shares. Operating results of the Company or
of other companies participating in the industrial distribution industry,
changes in general economic conditions and the financial markets, or other
developments affecting the Company or its competitors could cause the market
price for the Common Shares to fluctuate substantially.

Reliance on Executive Officers

The Company is highly dependent upon the skills, experience and efforts of
its executive officers. Loss of the services of one or more of the Company's
executive officers could have a material adverse effect on the Company's
business and development. The Company's continued growth also depends in part
on its ability to attract and retain qualified managers, sales representatives
and other key employees and on its executive officers' ability to implement the
Company's strategy successfully. No assurance can be given that the Company
will be able to attract and retain such employees or that such executive
officers will be able to implement the Company's strategy successfully. See
"Management."

10
<PAGE>

THE COMPANY

SunSource Inc. is a Delaware corporation organized in 1996 to accomplish
the Conversion. The Conversion was effected by the merger of the Partnership
into the Company effective on September 30, 1997. In the Conversion, each Class
A limited partnership interest of the Partnership was exchanged for $1.30 in
cash and 0.38 of a Guaranteed Preferred Beneficial Interest in the Company's
Junior Subordinated Debentures (the "Trust Preferred Securities"); each Class B
limited partnership interest was exchanged for 0.25 Common Share of the
Company; and the general and limited partnership interests in the general
partner of the Partnership were exchanged for 1,000,000 Common Shares.

The Partnership was organized in 1986 under the name Sun Distributors L.P.
to conduct the business formerly conducted by Sun Distributors, Inc. when it
was a subsidiary of Sun. The name was changed to SunSource L.P. in April 1996.

The principal executive office of the Company is located at 3000 One Logan
Square, Philadelphia, PA 19103 and its telephone number is (215) 282-1290.

USE OF PROCEEDS

The net proceeds to the Company from the Offering will be used to repay
borrowings under the Company's revolving credit facility. As of December 31,
1997, the balance on the Company's revolving credit facility was approximately
$33.0 million. The funds borrowed by the Company under the revolving credit
facility were used to pay transaction costs and other payments related to the
Conversion and for working capital purposes. The interest rate on borrowings
under the revolving credit facility are based on London Interbank Offered Rate
("LIBOR") plus 1.0% to 1.5% or prime. At December 31, 1997, such interest rate
was approximately 7.27% per annum.

The Company will receive no proceeds from the sale of Common Shares in the
Offering by the Selling Stockholders.

DIVIDEND POLICY

The Company paid a cash dividend of $0.10 per Common Share on January 6,
1998. The Company expects to declare future quarterly dividends on the Common
Shares of $0.40 per Common Share annually, subject to the discretion of the
Board of Directors and dependent upon, among other things, the Company's future
earnings, financial condition, capital requirements, funds needed for
acquisitions, level of indebtedness, contractual restrictions and other factors
that the Board of Directors deems relevant.

11
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1997 and as adjusted to give effect to the Offering and repayment
of borrowings under the Company's revolving credit facility (assuming the
Offering closed on December 31, 1997 with net proceeds of $13.0 million to the
Company). The table should be read in conjunction with the historical and pro
forma consolidated financial statements of the Company and related notes
thereto included elsewhere herein and the unaudited pro forma financial
statements and related notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
As of December 31, 1997
---------------------------
Historical As Adjusted
------------ ------------
(In thousands)
<S> <C> <C>
Senior notes ......................................................... $ 60,000 $ 60,000
Bank revolving credit facility ....................................... 33,000 20,025
Capital lease obligations ............................................ 728 728
-------- --------
Total debt ..................................................... 93,728 80,753
-------- --------
Guaranteed preferred beneficial interests in the Company's junior sub-
ordinated debentures ................................................ 115,903 115,903
-------- --------
Stockholders' (deficit) equity:
Preferred Stock, $0.01 par, 1,000,000 shares authorized, none
issued ........................................................... -- --
Common Stock, $0.01 par, 20,000,000 shares authorized,
6,418,936 historical shares issued and outstanding; 6,918,936 as
adjusted shares issued and outstanding ........................... 64 69
Paid-in-capital ................................................... -- 12,970
Retained earnings ................................................. 1,735 1,735
Cumulative foreign currency translation adjustment ................ (2,290) (2,290)
-------- --------
Total stockholders' (deficit) equity(1) ........................ (491) 12,484
-------- --------
Total capitalization ........................................... $209,140 $209,140
======== ========

</TABLE>

- ------------
(1) The Company's stockholders' deficit is primarily a result of the exchange
of Class A limited partnership interests for cash and guaranteed preferred
beneficial interests in the Company's junior subordinated debentures. The
guaranteed preferred beneficial interests are classified between total
liabilities and stockholders' deficit on the Company's balance sheet and
were recorded at their fair value on September 30, 1997. (See page F-9 for
further information on Conversion-related adjustments).

12
<PAGE>

PRICE RANGE OF COMMON SHARES

As a result of the Conversion which was effective at the close of business
on September 30, 1997, the Common Shares began trading on the New York Stock
Exchange on October 1, 1997 under the symbol "SDP". The following table sets
forth the high and low closing sale prices on the New York Stock Exchange
Composite Tape for the Common Shares since that date:

High Low
---------- ----------
1998
First Quarter (to March 19) ......... $28 9/16 $23 5/16
1997
Fourth Quarter ...................... $25 13/16 $23 1/2

For a recent reported last sale price of the Common Shares on the New York
Stock Exchange Composite Tape see the cover page of this Prospectus. As of
March 19, 1998, there were approximately 756 holders of record of the Common
Shares.

As discussed above under "The Company," in the Conversion each Class B
limited partnership interest of the Partnership was exchanged on September 30,
1997 for 0.25 of a Common Share, effectively a one-for-four reverse split. The
following table shows the quarterly range of high and low closing sales prices
on the New York Stock Exchange Composite Tape for the Class B limited
partnership interests for the periods indicated, adjusted for the one-for-four
reverse split:

High Low
---------- ----------
1997
First Quarter .......... $18 $16 1/2
Second Quarter ......... 20 1/2 16
Third Quarter .......... 23 1/2 19
1996
First Quarter .......... $20 1/2 $16
Second Quarter ......... 18 16
Third Quarter .......... 18 17
Fourth Quarter ......... 18 1/2 16 1/2

13
<PAGE>

SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(In thousands, except for partnership interest and share data)

The following table sets forth selected consolidated historical and pro
forma financial data of the Company and the Partnership as of the dates and for
the periods indicated. The historical financial information as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 is derived from audited financial statements included elsewhere herein.
The historical financial information as of December 31, 1995, 1994 and 1993 and
for each of the two years in the period ended December 31, 1994 is derived from
financial statements not included elsewhere herein. The selected unaudited pro
forma income statement information for the year ended December 31, 1997 gives
effect to the Conversion, the Refinancing, the Offering and the elimination of
other non-recurring charges and credits as of the beginning of the year
presented. The pro forma financial information should be read in conjunction
with the unaudited consolidated pro forma statement of income and notes thereto
appearing elsewhere herein. See "Index to Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996
------------- --------------
<S> <C> <C>
Historical Statement of Operations Data:
Net sales ......................................... $ 698,131 $ 649,254
Cost of sales ..................................... 414,853 388,660
----------- ------------
Gross profit ...................................... 283,278 260,594
Selling, general and admin. exp. .................. 235,777 219,185
Management fee .................................... 2,491 3,330
Depreciation ...................................... 4,009 3,603
Amortization ...................................... 1,894 1,924
Restructuring charges ............................. -- 5,950
Transaction and other costs ....................... 3,053 2,150
----------- ------------
Income from operations ............................ 36,054 24,452
Interest expense, net ............................. 7,198 6,875
Other income (expense), net ....................... 54 550
Gain on sale of divisions ......................... -- --
Provision (benefit) for income taxes .............. (6,680) (1,140)
Extraordinary loss, net of tax .................... (3,392) --
Cumulative effect on prior years of change in
accounting principle ............................. -- --
Net income ........................................ $ 29,140 $ 19,267
Net income per limited partnership interest
- Class A ........................................ N/A 1.10
- Class B ........................................ N/A 0.32
Cash distributions declared per limited partnership
interest
- Class A ........................................ N/A 1.10
- Class B ........................................ N/A 0.33
Weighted average number of outstanding limited
partnership interests
- Class A ........................................ 11,099,573
- Class B ........................................ 21,675,746
Pro forma net income per Common Share (basic
and diluted)(2) .................................. $ 1.88 N/A
Weighted average number of outstanding Common
Shares ........................................... 6,418,936 N/A
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995(1) 1994(1) 1993(1)
-------------- -------------- --------------
<S> <C> <C> <C>
Historical Statement of Operations Data:
Net sales ......................................... $ 628,935 $ 735,861 $ 655,707
Cost of sales ..................................... 377,598 451,785 402,441
------------ ------------ ------------
Gross profit ...................................... 251,337 284,076 253,266
Selling, general and admin. exp. .................. 211,048 235,845 213,007
Management fee .................................... 3,330 3,330 3,330
Depreciation ...................................... 3,661 4,502 5,106
Amortization ...................................... 1,996 2,640 2,848
Restructuring charges ............................. -- -- --
Transaction and other costs ....................... -- -- --
------------ ------------ ------------
Income from operations ............................ 31,302 37,759 28,975
Interest expense, net ............................. 6,920 9,890 10,004
Other income (expense), net ....................... 256 (1,748) 404
Gain on sale of divisions ......................... 20,644 3,523 --
Provision (benefit) for income taxes .............. 537 100 869
Extraordinary loss, net of tax .................... (629) -- --
Cumulative effect on prior years of change in
accounting principle ............................. -- -- --
Net income ........................................ $ 44,116 $ 29,544 $ 18,506
Net income per limited partnership interest
- Class A ........................................ 1.10 1.10 1.10
- Class B ........................................ 1.45 0.79 0.28
Cash distributions declared per limited partnership
interest
- Class A ........................................ 1.10 1.10 1.10
- Class B ........................................ 0.67 0.49 0.27
Weighted average number of outstanding limited
partnership interests
- Class A ........................................ 11,099,573 11,099,573 11,099,573
- Class B ........................................ 21,675,746 21,675,746 21,675,746
Pro forma net income per Common Share (basic
and diluted)(2) .................................. N/A N/A N/A
Weighted average number of outstanding Common
Shares ........................................... N/A N/A N/A
</TABLE>

14
<PAGE>

<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ................................................. $120,938 $100,781 $ 95,841 $ 76,060 $ 92,091
Total assets .................................................... 306,142 262,555 254,591 266,186 273,493
Short-term debt financing ....................................... -- 6,395 6,395 18,970 5,700
Long-term debt and capitalized lease obligations ................ 93,728 69,150 63,934 75,168 104,185
Guaranteed preferred beneficial interests in the Company's junior
subordinated debentures ........................................ 115,903 N/A N/A N/A N/A
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
------------------
Year Ended
December 31, 1997
------------------
(unaudited)
Pro Forma Statement of Operations:
<S> <C>
Net sales ......................................................... $ 698,131
EBITDA(3) ......................................................... 47,501
EBITA(3) .......................................................... 43,492
Amortization ...................................................... 2,284
Income from operations ............................................ 41,208
Interest expense, net ............................................. 6,877
Distribution on guaranteed preferred beneficial interests ......... (12,232)
Income before income taxes ........................................ 22,416
Provision for income taxes ........................................ 10,231
Net income ........................................................ $ 12,185
Net income per Common Share (basic and diluted)(2) ................ $ 1.76
Weighted average number of outstanding Common Shares .............. 6,918,936
</TABLE>

- ------------
(1) Includes results of operations from divisions sold as follows:

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Net sales .................................. $29,070 $177,107 $162,270
Gross profit ............................... 8,649 56,931 52,707
Selling, general and administrative expense 8,041 46,593 44,168
Depreciation ............................... 303 1,253 1,550
Amortization ............................... 35 497 352
Income from operations ..................... 270 8,588 6,637

</TABLE>

(2) The pro forma net income per Common Share for the year ended December 31,
1997 in the Historical Statement of Operations Data gives effect to the
Conversion and Refinancing as of the beginning of the year presented and
excludes non-recurring charges and credits directly related to the
Conversion. The net income per Common Share in the Pro Forma Statement of
Operations in addition gives effect to the Offering by reflecting the
benefits of interest savings as a result of proceeds from the Offering
used to reduce debt, offset by the dilutive effects of the Offering's
primary shares.

15
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

General

The Company is one of the largest providers of industrial products and
related value-added services in North America. The Company is organized into
three businesses which are SunSource Industrial Services Company, Hillman and
Harding. SunSource Industrial Services Company is comprised of STS and SIMCO.

Conversion

The Conversion has resulted in the Company reporting a stockholders'
deficit due to the exchange of Trust Preferred Securities and cash for all of
the Class A limited partnership interests which was recorded at fair value
aggregating $130.4 million. Stockholders' deficit was $3.1 million upon the
Conversion at September 30, 1997 and $0.5 million at December 31, 1997. The
Trust Preferred Securities have both equity characteristics and certain
creditors' rights, and therefore are classified between total liabilities and
stockholders' deficit on the Company's balance sheet. The Trust Preferred
Securities bear interest at an annual rate of 11.6% and are cumulative and
callable, at the Company's option, after September 30, 2002. The interest
payments on the Junior Subordinated Debentures underlying the Trust Preferred
Securities of approximately $12.2 million annually are deductible for federal
income tax purposes under current law and will remain an obligation of the
Company until the Trust Preferred Securities are redeemed or upon their
maturity in 2027.

Restructuring

In December 1996, the Company recorded restructuring charges of $6.0
million (on a pre-tax basis) related to a restructuring and consolidation of
STS (approximately $4.4 million) and the one-time write-off of certain
non-performing assets of Harding (approximately $1.6 million). The
restructuring plan is expected to result in the elimination of approximately
175 employees in the STS divisions and result in net cost savings of
approximately $5.0 million annually upon its completion. The restructuring plan
will consolidate all financial and administrative responsibilities for STS in
Chicago by mid-1999. However, the Company has deferred completion of
restructuring of the STS sales organization and distribution network for an
additional 18 months beyond the original three year project schedule pending
further analysis of its customer base and logistics requirements. Of the $4.2
million of restructuring charges that will result in cash payments, $0.2
million was paid by the Company during the year ended December 31, 1996, and an
additional $1.9 million was paid during the year ended December 31, 1997.

Sale of Certain Divisions

The Company sold its Downey Glass division on October 27, 1995 and its
Dorman Products division on January 3, 1995, for an aggregate cash
consideration, net of expenses, of approximately $42.8 million and the
assumption of certain liabilities (subject to certain post-closing
adjustments). The proceeds from these divestitures were used to reduce debt and
for general Company purposes including acquisitions. The Company recorded a
gain on the sale of these divisions aggregating $20.6 million. See
"Business--Legal Proceedings" and Note 17 of the Notes to the Consolidated
Financial Statements of the Company for the three years ended December 31, 1997
regarding litigation pertaining to the sale of the Dorman Products division.

Sales and income from operations from Downey aggregated $29.1 million and
$0.3 million, respectively, for the year ended December 31, 1995.

Acquisitions

The Company recently resumed its strategy to acquire retail glass shops
for integration with Harding. Since August 31, 1997, Harding acquired the
assets of three retail glass shops for net cash consideration of $0.8 million.
Sales from the acquired shops aggregated approximately $2.5 million for the
twelve-month period prior to acquisition.

16
<PAGE>

On April 11, 1996, STS purchased certain assets of Hydraulic Depot, Inc.,
for an aggregate purchase price of $0.7 million. Sales of Hydraulic Depot were
$2.8 million for the year ended December 31, 1997 and $2.0 million from the
acquisition date through December 31, 1996.

On November 13, 1995, Hillman purchased certain assets of the retail
division of Curtis Industries ("Curtis") for an aggregate purchase price of
$8.0 million and the assumption of certain liabilities. Curtis was integrated
with the Hillman division and generated sales of approximately $16.4 million
for the twelve months ended December 31, 1997, $11.0 million for the twelve
months ended December 31, 1996 and $1.6 million from the acquisition date
through December 31, 1995.

Income Taxes

The Company's pro forma effective income tax rate for the year ended
December 31, 1997 was 45.6%. The Company incurs federal, state and local income
taxes on its domestic operations and foreign income taxes on its operations in
Canada and Mexico. In addition, the Company has recorded goodwill in connection
with acquisitions and the Conversion that is not deductible for federal income
tax purposes. Consequently, the Company expects that its consolidated effective
income tax rate will continue to be approximately 45.0%

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. The discussion pertains to the consolidated statements of
income and cash flows of the Company for the year ended December 31, 1997 (pro
forma) and for the years ended December 31, 1997, 1996 and 1995 (historical)
and the consolidated balance sheets dated December 31, 1997 and 1996
(historical) and should be read in conjunction with these consolidated
financial statements and notes thereto appearing elsewhere herein.

Segment Sales and Profitability for the Three Years Ended December 31,
1997

The table below reflects the results of ongoing operations of the Company
which excludes the sales, gross profit and operating expenses of Downey,
divested in October 1995. The management fee represents a payment made by the
Company to its general partner while operating as a master limited partnership.
Since the Company's conversion to corporate form, the management fee is
retained by a wholly-owned subsidiary of the Company and is eliminated in
consolidation.

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales % Total % Total % Total
SunSource Industrial Services Sales Sales Sales
------ ------ ------
STS ................................ $323,588 46.4% $299,068 46.1% $285,466 47.6%
SIMCO -- Expediter ................. 125,911 18.0% 121,389 18.7% 113,715 19.0%
SIMCO -- Integrated Supply ......... 52,979 7.6% 43,392 6.7% 31,860 5.3%
-------- ------- -------- ------- -------- -------
Industrial Services ............ 502,478 72.0% 463,849 71.5% 431,041 71.9%
Hillman .............................. 107,395 15.4% 95,036 14.6% 77,263 12.9%
Harding .............................. 88,258 12.6% 90,369 13.9% 91,561 15.2%
-------- ------- -------- ------- -------- -------
Consolidated Net Sales ............ $698,131 100.0% $649,254 100.0% $599,865 100.0%
======== ======= ======== ======= ======== =======
Gross Profit
SunSource Industrial Services % Sales % Sales % Sales
------- ------- -------
STS ................................ $ 85,902 26.5% $ 76,896 25.7% $ 75,527 26.5%
SIMCO -- Expediter ................. 90,171 71.6% 87,839 72.4% 83,122 73.1%
SIMCO -- Integrated Supply ......... 13,216 24.9% 11,436 26.4% 9,372 29.4%
-------- -------- --------
Industrial Services ............ 189,289 37.7% 176,171 38.0% 168,021 39.0%
Hillman .............................. 58,319 54.3% 48,878 51.4% 41,037 53.1%
Harding .............................. 35,670 40.4% 35,545 39.3% 33,630 36.7%
-------- -------- --------
Consolidated Gross Profit ......... $283,278 40.6% $260,594 40.1% $242,688 40.5%
======== ======== ========
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
EBITA (1) ...............................
SunSource Industrial Services % Sales % Sales % Sales
-- -- --
STS ................................... $ 14,784 4.6% $ 13,335 4.5% $ 15,743 5.5%
SIMCO -- Expediter .................... 21,160 16.8% 19,199 15.8% 15,478 13.6%
SIMCO -- Integrated Supply ............ 2,968 5.6% 1,892 4.4% 1,723 5.4%
-------- -------- --------
Industrial Services ............... 38,912 7.7% 34,426 7.4% 32,944 7.6%
Hillman ................................. 10,874 10.1% 7,130 7.5% 7,314 9.5%
Harding ................................. 2,131 2.4% 3,231 3.6% 3,405 3.7%
-------- -------- --------
Total operations before
corporate expenses .................. 51,917 7.4% 44,787 6.9% 43,663 7.3%
Corporate expenses ...................... (8,425) (6,981) (7,340)
-------- -------- --------
Total operations after
corporate expenses .................. 43,492 6.2% 37,806 5.8% 36,323 6.1%
Management fee .......................... (2,491) (3,330) (3,330)
Restructuring charge .................... -- (5,950) --
Transaction costs -- Conversion ......... (3,053) (2,150) --
-------- -------- --------
Consolidated EBITA ................... $ 37,948 5.4% $ 26,376 4.1% $ 32,993 5.5%
======== ======== ========
</TABLE>

- ---------------------
(1) "EBITA" (earnings before interest, taxes and amortization) is defined as
income from operations before amortization. See footnote (3) to Selected
Historical and Pro Forma Financial Information.

Years Ended December 31, 1997 and 1996

After giving effect to the Conversion, the Refinancing, the Offering and
non-recurring items, net income on a pro forma basis for the year ended
December 31, 1997 was $12.2 million or $1.76 per Common Share, an increase of
$3.1 million or 34.1% above comparable 1996 net income of $9.1 million. See
Notes to the Pro Forma Consolidated Statement of Income for the year ended
December 31, 1997 for adjustments that affect comparability to historical
results.

Net sales increased $48.9 million or 7.5% in 1997 to $698.1 million from
$649.3 million in 1996. Sales variances by segment are as follows:

<TABLE>
<CAPTION>
Sales Increase (Decrease)
-----------------------------
Amount %
--------------- -----------
(In thousands)
<S> <C> <C>
SunSource Industrial Services Company .........
STS ........................................ $ 24,520 8.2%
SIMCO - Expediter .......................... 4,522 3.7%
SIMCO - Integrated Supply .................. 9,587 22.1%
--------
Industrial Services ............................... 38,629 8.3%
Hillman ....................................... 12,359 13.0%
Harding ....................................... (2,111) (2.3)%
--------
Total Company ..................................... $ 48,877 7.5%
========
</TABLE>

STS sales increased $24.5 million or 8.2% in 1997 to $323.6 million from
$299.1 million in 1996 due to continued strength in existing product markets,
new product line additions and sales territory expansion. Expediter sales
increased $4.5 million or 3.7% in 1997 to $125.9 million from $121.4 million in
1996 due to sales growth of 3.0% in the U.S. marketplace and 8.3% in Canada as
a result of general economic strength. Integrated supply sales increased $9.6
million or 22.1% in 1997 to $53.0 million from $43.4 million in 1996 due
primarily to an increase in the number of in-plant inventory management
programs.

18
<PAGE>

Hillman's sales increased $12.4 million or 13.0% in 1997 to $107.4 million
from $95.0 million in 1996 due to contributions from the Curtis acquisition in
the amount of approximately $5.0 million and an increase of $7.4 million due to
growth in new accounts, expansion of existing product lines and increased
penetration of new product lines.

Harding's sales declined $2.1 million or 2.3% in 1997 to $88.3 million
from $90.4 million in 1996 due primarily to a decrease of $2.0 million in
wholesale glass, brokerage and other product line sales. In addition, the
discontinuation of certain low margin product lines and markets served resulted
in reduced sales of $0.4 million, offset by an increase in retail glass and
contract sales of $0.3 million from 1996. In recent years, Harding has
discontinued certain low-margin product lines and has withdrawn from
non-strategic markets. Growth in Harding's retail glass shops is expected to
continue as a result of internal sales programs and acquisitions.

Total Company cost of sales increased $26.2 million or 6.7% in 1997 to
$414.9 million from $388.7 million in 1996 due primarily to increased sales
levels in the comparison period.

The Company's consolidated gross margin was 40.6% in 1997 compared with
40.1% in 1996. SunSource Industrial Services Company's gross margin was 37.7%
in 1997 compared with 38.0% in 1996, a decrease of 0.3%. STS's gross margin
increased 0.8% in 1997 due to labor efficiencies in its service and repair
business and lower freight costs. The SIMCO Expediter activity's gross margin
declined 0.8% in 1997 due to competitive pricing pressures. The SIMCO
Integrated Supply activity's gross margin declined 1.5% in 1997 due to changes
in sales mix as a result of new in-plant inventory management programs.

Hillman's gross margin increased 2.9% due primarily to reduced packaging
costs in 1997 which were much higher in 1996 as a result of costs associated
with the integration of the Curtis acquisition and for other business expansion
programs. Harding's gross margin increased 1.1% due to improved purchasing
management and the discontinuation of lower margin product lines.

The Company's selling, general and administrative ("S,G&A") expenses
increased by $16.6 million or 7.6% to $235.8 million in 1997 from $219.2
million in 1996. Selling expenses increased $7.1 million supporting increased
1997 sales levels in the SunSource Industrial Services Company and increased
marketing efforts at Harding. Warehouse and delivery expenses increased $2.8
million due to expansion programs by certain operating units and the addition
of several large in-plant accounts by SIMCO. General and administrative
expenses increased $6.7 million consisting of: (i) an increase of $5.3 million
to support the overall increase in 1997 sales levels and the increased number
of systems accounts in the Industrial Services business, and (ii) an increase
of $1.6 million in corporate expenses compared to 1996 which included an
expense reduction of $1.5 million as a result of incentive-based compensation
plans and a non-recurring reduction in insurance reserves of $0.2 million.

The Company's consolidated operating profit margin (EBITA, as a percentage
of sales) after corporate expenses improved in 1997 to 6.2% from 5.8% in 1996.
SunSource Industrial Services Company improved its operating profit margin to
7.7% in 1997 from 7.4% in 1996 primarily as a result of expense efficiencies.
Hillman improved its operating profit margin significantly in 1997 to 10.1%
from 7.5% in 1996 due to improved packaging productivity in 1997 as previously
discussed. Harding's operating profit margin declined in 1997 to 2.4% from 3.6%
in 1996 due to significant investments in sales and marketing efforts in 1997
and reduced sales as a result of discontinuation of certain low margin product
lines and markets served.

Other income decreased $0.5 million in 1997 due primarily to favorable
non-recurring legal settlements and post-closing adjustments related to
divisions sold which were recorded in 1996.

The Company is subject to federal, state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
operations as accounted for in accordance with Statement of Financial
Accounting Standard ("SFAS") 109, "Accounting for Income Taxes." Deferred
income taxes represent differences between the financial statement and tax
bases of assets and liabilities as classified on the Company's balance sheet.
The Company's provision for income taxes on a pro forma basis in 1997 increased
$2.2 million from 1996 due to higher income levels in 1997. The Company's
effective income tax rate decreased from 47.0% in 1996 to 45.6% in 1997 as a
result of certain expenses such as goodwill which are non-deductible for tax
purposes, and are constant in relation to the higher income levels in 1997.

19
<PAGE>

Years Ended December 31, 1996 and 1995

Net income for the year ended December 31, 1996 was $19.3 million compared
with $44.1 million in 1995. As previously discussed, 1996 net income included a
$4.9 million charge (net of $1.1 million in deferred tax benefits), related to
the restructuring of STS and Harding and a $2.1 million charge for transaction
costs associated with the Conversion. The 1995 net income included a gain of
$20.6 million from the sale of the Downey Glass division in October 1995 and
the Dorman Products division in January 1995. Net income for 1995 also included
a $0.6 million charge related to the early retirement of debt and $0.3 million
of operating income from the Downey Glass division. Excluding these
non-recurring items, net income for 1996 amounted to $26.3 million or 10.5%
above the comparable 1995 net income of $23.8 million.

After giving effect to the Conversion, the Refinancing, the Offering and
the elimination of gains and results of operations from divisions sold as well
as non-recurring items, net income for the year ended December 31, 1996 was
$9.1 million, an increase of $0.9 million or 10.2% above comparable 1995 net
income of $8.2 million. See Notes to the Pro forma Consolidated Statement of
Income for the year ended December 31, 1997 for adjustments that affect
comparability to historical results.

Net sales increased $49.4 million or 8.2% in 1996 to $649.3 million from
$599.9 million in 1995. Sales variance by segment are as follows:

<TABLE>
<CAPTION>
Sales Increase (Decrease)
-----------------------------
Amount %
--------------- -----------
(In thousands)
<S> <C> <C>
SunSource Industrial Services Company .........
STS ........................................ $ 13,602 4.8%
SIMCO - Expediter .......................... 7,674 6.7%
SIMCO - Integrated Supply .................. 11,532 36.2%
--------
Industrial Services ............................... 32,808 7.6%
Hillman ....................................... 17,773 23.0%
Harding ....................................... (1,192) (1.3)%
--------
Total Company ..................................... $ 49,389 8.2%
========

</TABLE>

Sales of STS increased $13.6 million or 4.8% in 1996 to $299.1 million
from $285.5 million in 1995 due to continued strength in existing product
markets. Expediter sales increased $7.7 million or 6.7% in 1996 to $121.4
million from $113.7 million in 1995 due to strong sales growth of 8.6% in the
U.S. marketplace offset by a sales decline of 4.3% in Canada due principally to
weak economic conditions in 1996. Integrated supply sales increased $11.5
million or 36.2% in 1996 to $43.4 million from $31.9 million in 1995 due
primarily to an increase in the number of in-plant inventory management
programs.

Hillman's sales increased $17.8 million or 23.0% in 1996 to $95.0 million
from $77.3 million in 1995 due to contributions from the Curtis acquisition in
the amount of approximately $9.4 million and the balance of $8.4 million in
growth from new accounts, expansion of existing product lines and market
penetration of new product lines.

Harding's sales declined $1.2 million or 1.3% in 1996 to $90.4 million
from $91.6 million in 1995 due to a decrease in wholesale glass, brokerage and
other product line sales of $2.8 million and the discontinuation of certain low
margin product lines and markets served aggregating $0.2 million, offset by an
increase in retail glass and contract sales of $1.8 million or 4.2% from the
prior year.

Total Company cost of sales increased $31.5 million or 8.8% in 1996 to
$388.7 million from $357.2 million in 1995 due primarily to increased sales
levels.

The Company's consolidated gross margin was 40.1% in 1996 compared with
40.5% in 1995. The decline in SunSource Industrial Services Company's gross
margin was due mainly to competitive pricing pressures and changes in sales
mix. Hillman's gross margin decreased 1.7% due to reduced packaging
productivity levels and costs associated with integration of the Curtis
acquisition and for other business expansion programs. Harding's gross margin
increased 2.6% due to improved purchasing management and increased sales of
retail glass which carries higher gross margins than Harding's other product
lines.

20
<PAGE>

The Company's S,G&A expenses increased by $16.2 million or 8.0% to $219.2
million in 1996 from $203.0 million in 1995 excluding Downey Glass, comprised
as follows: increased selling expenses of $5.5 million supporting increased
1996 sales levels; increased warehouse and delivery expenses of $7.4 million
due to the integration of the Curtis acquisition, expansion programs by certain
operating units and the addition of seven large in-plant accounts by SIMCO; and
increased general and administrative expenses of $3.3 million.

The Company's consolidated operating profit margin (EBITA, as a percentage
of sales) after corporate expenses declined from 6.1% in 1995 to 5.8% in 1996
due principally to reductions in profitability from SunSource Industrial
Services Company and Hillman. The operating profit margin declined in the
SunSource Industrial Services Company from 7.6% in 1995 to 7.4% in 1996 as a
result of competitive pricing pressures and changes in sales mix which reduced
the gross profit margin. Hillman's operating profit margin declined from 9.5%
in 1995 to 7.5% in 1996 as a result of reduced packaging productivity levels
and costs associated with the integration of the Curtis acquisition and other
business expansion programs. Harding's operating profit margin remained
consistent in 1996 with the prior year at approximately 3.6%.

Liquidity and Capital Resources

On a historical basis, net cash provided by operations was $27.9 million
for 1997, compared with $23.3 million for 1996, an increase of $4.6 million.
This increase was due primarily to increased net income of $9.9 million and
decreased working capital investment in operations in the comparison period of
approximately $3.2 million offset by a decrease in non-cash charges of $6.9
million and other items of $1.6 million. The Company's net interest coverage
ratio on a pro forma basis including the Offering (earnings before interest,
distributions on Trust Preferred Securities and income taxes over net interest
expense and distributions on Trust Preferred Securities) for the year ended
December 31, 1997 was 2.17x.

The Company's cash position of $5.6 million as of December 31, 1997,
increased $4.0 million from the balance at December 31, 1996. Cash was provided
during this period primarily from operations ($27.9 million), net borrowing
activities ($17.3 million) and proceeds from the sale of property and equipment
($0.8 million). Cash was used during this period predominantly for partnership
cash distributions ($28.3 million), capital expenditures ($4.9 million),
pre-payment penalties on senior notes ($4.3 million), investment in corporate
life insurance ($3.3 million) and certain other items ($1.2 million).

The Company's working capital position of $120.9 million at December 31,
1997 represented an increase of $20.1 million from the December 31, 1996 level
of $100.8 million. The Company's current ratio improved to 2.41x at December
31, 1997 from 2.16x at December 31, 1996, principally due to an increase in the
deferred tax asset of $10.8 million related to the Conversion.

On September 30, 1997, the Company issued a $60.0 million 7.66% Senior
Note due 2002 and amended its credit agreement to increase the aggregate
availability under the existing revolving line of credit to $90.0 million at
variable borrowing rates of LIBOR plus 1.0% to 1.5% or prime. The Company
anticipates interest cost savings of approximately 100 basis points through its
new debt facilities compared to its previous debt structure. The Company's
current borrowing capacity along with proceeds from the Offering is expected to
provide the Company with sufficient working capital for reinvestment in its
businesses and acquisition capital in the near future.

As of December 31, 1997, the Company had $54.8 million available under its
new credit facilities. As of December 31, 1997, the Company had $95.9 million
of outstanding indebtedness consisting of the aforementioned $60.0 million
Senior Note, bank borrowings totaling $33.0 million, letter of credit
commitments aggregating $2.2 million and capitalized lease obligations of $0.7
million. In addition, an indirect, wholly-owned Canadian subsidiary of the
Company had a $2.5 million Canadian dollar line of credit for working capital
purposes, of which no amount was outstanding at December 31, 1997.

As of December 31, 1997, the Company's total debt (including distributions
payable) as a percentage of its consolidated capitalization (total debt, Trust
Preferred Securities and stockholders' deficit) was 45.6% compared with 44.7%
as of December 31, 1996. The Company's consolidated capitalization (including
distributions payable) as of December 31, 1997, was $212.1 million compared to
$173.0 million at December 31, 1996.

Proceeds from the Offering will be used to repay borrowings under the
Company's revolving credit facility. As a result of the Offering, the Company's
net worth would be approximately $12.5 million on an adjusted

21
<PAGE>

basis as of December 31, 1997, resulting in total debt as a percentage of
consolidated capitalization of 39.3% as defined above.

The Company spent $4.9 million for capital expenditures in 1997, primarily
for warehouse improvements, machinery, equipment, computer hardware and
software.

As a result of the Conversion, the Company's cash flow is expected to
improve due to the following: (i) retention of the management fee payable to
the general partner of SDI Operating Partners, L.P. in the amount of $3.3
million per year, (ii) retention of distributions on the general partner's
ownership in the Partnership and SDI Operating Partners, L.P. amounting to
approximately $0.4 million annually and (iii) a reduction in income tax rates.

The Company has recorded an estimated liability of $2.1 million at
December 31, 1997, for remaining tax distributions due to Class B interest
holders of the Partnership, related to taxable income for the nine months ended
September 30, 1997. These distributions are expected to be paid by March 31,
1998.

The Board of Directors of the Company declared on December 10, 1997 a cash
dividend of $0.10 per Common Share which was paid on January 6, 1998 to holders
of record as of December 22, 1997. The Company expects to declare future
quarterly dividends on the Common Shares to aggregate $0.40 per Common Share
annually, subject to the discretion of its Board of Directors and dependent
upon, among other things, the Company's future earnings, financial condition,
capital requirements, funds needed for acquisitions, level of indebtedness,
contractual restrictions and other factors that the Board of Directors deems
relevant.

The Company has deferred tax assets aggregating $15.8 million as of
December 31, 1997 as determined in accordance with SFAS 109. Management
believes that the Company's deferred tax assets will be realized through the
reversal of existing temporary differences between the financial statement and
tax bases.

Year 2000 Issue

The Company faces the "Year 2000" issue. The Year 2000 issue is the result
of computer programs being written using two digits (rather than four) to
define the applicable year, resulting in incorrect calculations for the year
2000 and beyond. The Company's issues relate not only to its own systems being
Year 2000 compliant, but also the systems of its suppliers and customers. The
Company presently believes that, with modifications to existing software and
converting to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems as so modified or converted.
However, if such modification and conversions are not completed in a timely
manner, or if the Company's suppliers and customers fail to address the
problem, the Year 2000 issue could have a material adverse effect on the
Company's future operating results and financial condition.

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 130, "Reporting Comprehensive Income," which requires changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. Additionally, the FASB
issued SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," which requires disclosures in financial statements based on
management's approach to segment reporting and industry requirements to report
selected segment information, disclosures about products and services and major
customers, on a quarterly basis. Adoption of SFAS 130 and 131 is required in
1998. The Company has elected to comply with SFAS 131 for 1997 reporting. The
Company does not anticipate a significant impact on its financial disclosure
requirements due to the adoption of SFAS 130.

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 on competitive
market conditions.

22
<PAGE>

BUSINESS

General

The Company traces its origins to 1975, when Sun decided to pursue a
diversification strategy outside of its traditional energy business. After an
extensive analysis of strategic alternatives, Sun concluded that the industrial
distribution business offered substantial opportunities for growth, high
returns on invested capital and relatively low business risk. Sun pursued this
strategy through Sun Distributors, Inc., which became an industry consolidator
and acquired 16 companies between 1975 and 1985. In 1986, Sun decided to
refocus its efforts on its core energy business and sell its non-energy
businesses. The Company was purchased by a predecessor affiliate of the Selling
Stockholders in October 1986. In February 1987, the Company made an initial
public offering of its limited partnership interests and became a publicly
traded master limited partnership.

The Company continued to make acquisitions after its initial public
offering, but its ability to make acquisitions after 1991 was hindered by its
partnership structure and associated restrictions in its credit agreements. In
1994 and 1995, the Company divested three non-strategic businesses with
aggregate 1994 sales of $177.1 million. The Company converted from partnership
to corporate form on September 30, 1997.

Industrial Services. SunSource Industrial Services Company, with sales of
$502 million in 1997, provides a broad range of products and services
throughout North America through the sales and marketing activities of STS and
SIMCO. The Company believes that STS is a leading provider of systems, parts
and engineering services for hydraulic, pneumatic, electrical and related
systems to major industrial concerns, such as Ford Motor Company, Hill-Rom and
Vermeer Manufacturing, as well as small and medium-size businesses. STS
provides services, including engineering and design of both products and
processes and the assembly and repair of complex systems, which enable its
customers to outsource engineering and other functions which they previously
performed in-house. SIMCO provides inventory management services enabling its
customers to reduce inventory investment and the associated expenses of
purchasing, receiving, disbursing and accounting for parts and materials.

Hardware Merchandising Services. Hillman, with sales of $107 million in
1997, provides small hardware items and merchandising services to retail
hardware outlets through a nationwide sales and service organization. Hillman
offers a full range of fasteners, letters, numbers, signs, keys, rope and chain
accessories and many other inexpensive "specialty" goods, which are "must-have"
items for retailers that cannot be managed economically by the retailer's own
employees because of the large number of items and their low prices. Hillman
maintains a 265 person nationwide sales and service organization which seeks to
ensure that its customers' inventories are maintained at appropriate levels
with a minimum of administrative effort or expense. Hillman also provides
inventory management software that ties into retailers' point-of-sale systems.
Through its merchandising system, Hillman assists retailers with rack
positioning, store layout, new package design and color coding systems to
permit ease of shopping by consumers.

Glass Merchandising. Harding, with sales of $88 million in 1997, operates
one of the largest networks of full service retail glass shops in the United
States. Harding is comprised of approximately 85 retail locations throughout
the Southwest and, to a lesser degree, along the East Coast. Harding sells and
installs automotive glass and also sells, fabricates and installs flat glass.
Customers include individual retail consumers, insurance companies and
commercial accounts.

23
<PAGE>

Industry Overview

The Company operates in large, fragmented industries characterized by
multiple channels of supply. These channels of supply are currently
experiencing significant changes driven by the higher quality and widespread
availability of management information systems. With better information,
manufacturers, distributors and customers are all able to track their expenses,
investments and returns on investments more accurately. The distribution
industry is driven by the following trends which are rendering the traditional
producer-controlled channels obsolete and subject to being replaced by new
channels organized around customer requirements and value-added services.

Manufacturers are increasing their reliance on distributors. In order to
enhance their profitability and improve their returns on capital, manufacturers
are attempting to (i) reduce their logistics expense by making less frequent,
larger shipments to fewer locations; (ii) reduce their sales expense by
shrinking their direct sales forces; (iii) lower their marketing expense by
trimming or eliminating technical support of their product lines; (iv) control
their inventory investment with computer systems that enable them to track the
inventory held by their distributors; and (v) improve their credit exposure by
dealing with fewer, better capitalized distributors.

Customers are increasing their reliance on value-added distributors. As
their contacts with the manufacturers diminish or cease altogether, customers
are beginning to rely on their distributors for technical support, engineering,
repair and other services no longer available from the downsized manufacturers.
The Company believes that the percentage of products sold through distributors
will continue to increase as customers move to consolidate supply sources to
streamline operations and reduce administrative costs. Customers can monitor
their inventory requirements through the distributor's information system and
avoid stocking such inventory until necessary. In addition, current information
systems enable customers to measure precisely the economic benefits provided by
their distributors.

Customers are outsourcing non-core functions to high quality service
providers. Many companies have chosen to outsource primary supply chain
functions including procurement, delivery and inventory management functions to
high-quality service providers. Others have outsourced primary engineering,
maintenance and repair functions. The Company expects this trend to continue as
customers increasingly concentrate resources on developing their core
capabilities.

Channels of distribution are in the process of consolidation. The
increasing demands upon distributors from both vendors and customers are
forcing them to make substantial investments in technology, training and
logistics systems. Many smaller distributors that cannot afford to make these
investments are being acquired by larger competitors that can provide the
requisite services. The surviving, larger distributors enjoy multiple benefits,
such as greater purchasing power with vendors, a larger revenue base over which
to spread substantial fixed costs and lower costs of capital.

Managerial skills required for success in industrial distribution are
changing dramatically. Management today must deal with complex and
sophisticated national distribution channels while remaining responsive to
increasingly individualized customer demands. Future success will require
management to adapt to changing technology and develop sophisticated
organizations that are comfortable with change and can react quickly.

Business Strategy

While each of the Company's three businesses has its roots in traditional
wholesale distributor activities, the evolution of each business has been
affected in significantly different ways by the trends discussed above.
However, commonalities among the businesses have enabled the Company to build a
record of strong, profitable growth on the basis of three core competencies:

o Acquisition Integration Capability -- The ability to integrate acquired
companies while improving operational efficiencies and enhancing their
effectiveness in the marketplace.

24
<PAGE>

of these acquisitions had purchase prices in excess of $1 million and
approximately 40 more had purchase prices under $1 million. The Company's
ability to make acquisitions since 1991 was hindered by its previous
partnership structure and associated restrictions in its credit agreement.
As a result of the Conversion, the Refinancing and this Offering, the
Company expects to have the necessary financial capacity to resume its
acquisition program. The Company intends to seek acquisition candidates
that have developed attractive market niches, have strong management and
have demonstrated their ability to achieve stable growth and high returns
on invested capital.

o Ability to Capitalize on Industry Trends -- The ability to execute
dynamic business strategies to capitalize on opportunities arising from
rapid structural changes in the marketplace.

The Company has established separate organizations for its three
businesses, each headed by a chief executive officer who is supported by
sales, marketing, financial, logistics and information systems resources.
This organizational structure enables the Company to manage each of its
businesses within the context of the varying market opportunities, rates
of change, and competitive threats affecting those businesses. The
Company's small headquarters staff shapes and guides the strategic
decisions of its operating companies. Performance benchmarks are
established as part of this process and progress is monitored to ensure
that initiatives remain on track.

o Technology for Competitive Advantage -- The ability to use technology and
technical expertise as competitive advantages to build and defend
attractive market niches.

Technology offers significant opportunities for improving both the
Company's internal operations and its product and service offerings to its
customers. For example, STS is implementing a new integrated information
system which will permit (i) the centralization of the purchasing
function, resulting in a smaller staff with a higher level of professional
skills; (ii) a reduction in the number of warehouses from 36 to fewer than
ten; (iii) higher customer order fill rates; and (iv) lower exposure to
obsolete or slow-moving inventory. Hillman has developed a new sales
tracking program that will enable it to closely monitor the performance of
its sales representatives with respect to increasing product line
penetration within their accounts. Harding's new management information
system improves its ability to manage operations and fully utilize its
purchasing power. It also permits Harding to integrate acquisitions
substantially faster than was previously possible.

Growth Opportunities

SunSource believes that each of its three operating businesses is well
positioned to capture opportunities in the markets in which it participates.

SunSource Industrial Services Company's strategy is to capitalize on the
trends among industrial customers toward consolidation of suppliers,
outsourcing the procurement function for goods and outsourcing in-plant
services for which they lack expertise or sufficient resources.

STS believes that it can significantly increase its revenues by expanding
its relationships with large industrial customers to provide them with the full
range of available products and services which STS can provide. To this end,
STS is currently enhancing its sales organization to include industry
specialists to augment the effectiveness of individual sales representatives.
For example, a sales representative could call upon STS' technology specialists
to assist in solving a paper mill's production problem. A successful solution
would be communicated to STS' industry specialist, who would check for similar
opportunities at the customer's other mills and would ensure the information
was made available to all STS representatives who call on paper mills.

STS plans to continue its successful program of establishing service
centers for the repair and overhaul of hydraulic equipment in major industrial
markets around the country. In addition, STS intends to resume its acquisition
program later in 1998 when its restructuring project is closer to completion.
STS' acquisition strategy is to acquire technology-driven distributors on the
West Coast, New England, and Florida to solidify its geographic coverage in
those areas. STS' objective is also to acquire companies with complementary
services, such as vibration monitoring or preventive maintenance programs to
industrial facilities.

25
<PAGE>

Hillman's strategy is to capitalize on the desire of its customers to
shift the burden of maintaining a complex, low value inventory as well as to
continually expand its product line. Hillman currently services approximately
8,500 retail hardware locations, an estimated 69% of the retail hardware
outlets that are large enough to benefit from the Hillman merchandising system.
Management believes that growth is most likely to come from: (i) further
penetration of the retail hardware outlet markets; (ii) an increase in the
average number of Hillman product lines sold to each retail hardware outlet;
(iii) expanded participation in the home center and regional lumber yard
businesses in the United States; and (iv) expansion in the Caribbean, Mexico
and Central America under a newly-hired Director of International Sales.
Hillman targets companies for acquisition that offer a significant extension of
its already broad product line, companies with substantial selling
relationships with very large outlets, such as home centers and nationwide
building supply operations, and companies which offer management services which
would be of value to Hillman's customer base (such as companies that specialize
in providing set up and layout design services for new store locations).

Harding believes that it has an excellent opportunity to build its network
of retail glass shops through further acquisitions in the highly fragmented
retail glass industry that consists of more than 9,000 independent and small
regional glass shops.

Industrial Services (STS and SIMCO)

SunSource Industrial Services Company provides a single nationwide source
for a broad array of industrial products and supporting technical services.
SunSource Industrial Services Company is comprised of two sales and marketing
activities--STS and SIMCO. Their common strategy is to capitalize on the
increasing awareness of many industrial companies of their inefficiencies in
performing activities that are ancillary to their principal business. These
activities include repairing equipment, running preventive maintenance
programs, maintaining in-house engineering capabilities and inventory
management. In most instances, the only alternative available to many
industrial companies for such services has been small, local firms, many of
which lack the resources necessary to assure the quality of services that they
provide. SunSource Industrial Services Company's customers are located
throughout the United States, Mexico and Canada and include major industrial
concerns, as well as small and medium-size businesses.

SunSource Technology Services (STS)

STS, with sales of approximately $324 million in 1997, offers a full range
of technology-based products and services to its customers. Its product lines
include hydraulic, pneumatic, electronic and filtration parts and equipment.
Services include engineering design, equipment repair and product upgrades.

STS seeks to build strong relationships with its customers by providing
technological/problem-solving capabilities along with quality products. STS
relies on its engineering and fabricating capabilities to provide customized
solutions for specific applications requiring product engineering, assembly or
fabrication. To help a customer better understand how it is performing relative
to best industry practices, STS can perform a technology review of the
customer's facilities covering areas such as electronic systems, hydraulics,
pneumatics, repair activities and inventory management. STS can demonstrate to
its customers those areas in which they meet best industry practices and, when
they do not, offer detailed, cost-efficient steps to improve their performance
to meet those standards. STS also conducts multiple-day training programs to
help customers stay current with evolving technologies relevant to their
operations.

STS has benefited from the trend for manufacturers to move towards
increased standardization of products. The result is that many such products
have to be modified and used in combination with other components in order to
meet customers' performance requirements. STS recognized this trend as an
opportunity to set up a formal system to customize standardized products to
meet the more specialized needs of its customers. One example of this type of
customized solution is a hydraulic integrated circuit ("HIC"), which is more
compact and less prone to leakage than a generic circuit. Customized solutions
like HICs make STS a more valuable resource to its customers, thereby allowing
STS greater pricing flexibility. Management believes that there is a growing
market for such customized solutions among medium and smaller original
equipment manufacturers ("OEM") who do not have the capabilities to develop
such products.

26
<PAGE>

Since 1991, STS has opened 26 repair centers throughout the United States
to provide customers with convenient and reliable sources for the repair of
worn-out hydraulic power equipment. Repair centers have been useful in gaining
market share as they have helped STS achieve an expanded relationship with many
of its customers. They also provide STS with an opportunity to win new
customers because many of the local distributors do not have the resources to
provide comparable repair services. STS plans to continue its successful
program of establishing service centers for the repair and overhaul of
hydraulic equipment in major industrial markets around the country.

The six distribution companies which today comprise STS were acquired by
the Company between 1976 and 1991. The acquired companies typically enjoyed
profitable market niches created either through exclusive territories granted
by their vendors or the unique services they offered. Until recently, STS
operated each of its divisions on a decentralized basis with each division
having its own president and vice president of sales. In December 1996, STS
announced a three-year project to consolidate financial and administrative
activities in its Chicago headquarters. STS is in the first stage of installing
a new information system that should be fully operational by mid-1999. In
addition, STS is in the process of consolidating 36 inventory stocking
locations into fewer than ten facilities which the Company believes will result
in significantly lower operating costs and better product availability.
Centralized purchasing and inventory management is expected to result in
improved fill rates for customers while at the same time reducing STS'
inventory investment, leveraging its purchasing power with many suppliers and
reducing suppliers' operating costs. As an important part of this
restructuring, the focus of the sales organization will increasingly be on
specific technologies and market segments instead of geography.

Products and Suppliers. STS believes that it carries the most diverse
selection of fluid power and related technical products of any distributor in
the United States, totaling an estimated 100,000 items in five major product
categories. Typically, hydraulic systems are employed for dealing with heavy
loads in applications such as mining, manufacturing, construction or
agriculture. An example of a hydraulic application is the system that controls
the positioning of the scraping blade of a road grader - an integrated system
of motors, pumps, valves, tubing, sensors and electronic controls. Pneumatic
systems are similar to hydraulic systems except that air or some other gas is
substituted for hydraulic fluid. Pneumatic systems are preferred for lighter
weight applications such as light manufacturing and packaging lines. Hydraulic
and pneumatic products represented approximately 60% and 21%, respectively, of
STS' 1997 sales.

STS distributes products in five major product categories. A
representative list of products by category is shown below:

<TABLE>
<CAPTION>
Product Category Representative Products
- -------------------- -------------------------------------------------------------------------
<S> <C> <C> <C>
Hydraulic Products Accumulators Heat Exchangers Power Units
Contamination Controls Hoses Pumps
Control Valves Hydrostatic Drives Regulators
Coolers Hydrostatic Transmissions Servos
Cylinders Manifold Systems Swivels
Fittings Motors Tubing
Gauges Oil Filters Valves
Gear Boxes Power Steering Units Winches
Pneumatic Products Actuators Control Valves Lube Systems
Air Cylinders Coolers Lubricators
Air Dryers Couplings Plastic Tubing
Air Filters Cylinders Pressure Switches
Air Lubricators Dryers Regulators
Air Regulators Filters Slides
Air Springs Fittings Switches
Booster Pumps Gauges Vacuum Generators
Cable Cylinders Grippers Vacuum Pumps
Connector Products Lube Panels Valves
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
Product Category Representative Products
- ---------------------- ------------------------------------------------------------
<S> <C> <C> <C>
Electronic Controls AC Converters Electric Controls Starters
Contractors Encoders Switches
Controls Motion Control Systems Tachometers
Counters Sensors Timers
Electric Actuators Software
Filtration Products Filtration Media Pump Systems Regulators
Meters Pumps
Lubrication Products Air Lubricators Lubricators
</TABLE>

STS has a broad supply base which includes almost all major manufacturers
of fluid power and related technical products in the United States. STS' top
ten suppliers account for less than 30% of its 1997 sales. Because of the
fragmented nature of the industry, manufacturers of this type of equipment
historically have awarded their franchises on a limited geographical basis. STS
has secured exclusive franchises within certain geographic areas from
significant suppliers such as Vickers, Hydroline, Trabon, Versa, SMC, Denison,
Norgren, Mosier and Hansen. Two of STS' larger suppliers are Sauer-Sundstrand
and Commercial, whose products are distributed in most of STS' territories.

In recent years there has been considerable consolidation among suppliers,
a trend which management believes will continue and benefit STS. In addition,
STS seeks to provide valuable market and product information that enhances its
relationships with its key suppliers by helping them improve their product
offering in response to changing market demands.

Markets and Customers. STS currently serves over 35,000 customers, the top
ten of which accounted for approximately 11% of its 1997 sales. Approximately
60% of sales are to OEM customers who incorporate the equipment or system
purchased from STS into their final products. An example of an OEM customer is
a manufacturer of back-hoes who incorporates a STS hydraulic system to operate
the hoe. The remaining 40% of sales are to maintenance, repair and operation
("MRO") customers who use STS products as part of their production process. An
example of an MRO customer is an automobile manufacturer whose heavy metal
presses are powered by large hydraulic systems designed and installed by STS.

Within the MRO and OEM markets, STS sells to construction and mining
equipment manufacturers, industrial wholesale distributors, metalworking
equipment manufacturers, farm and garden equipment manufacturers, industrial
specialized machinery manufacturers and automobile and auto parts
manufacturers.

Sales and Marketing. STS markets its products nationwide, principally
through a network of outside sales representatives supported by inside sales
representatives and a telemarketing operation. In order to become more
responsive to the increasing demands of customers, STS has devoted substantial
resources to make its sales force more specialized both in terms of technical
training and industry knowledge.

STS employs approximately 315 outside sales representatives. Each customer
has a primary sales representative who might be assisted by technology
specialists or industry specialists. Technology specialists are available in
the fields of hydraulics, pneumatics, mobile equipment, lubrication,
filtration, automation and other specialties while industry specialists bring
particular expertise in industries such as pulp and paper, construction
equipment, injection molding or heavy metal working. STS is in the process of
adding additional industry specialists to its sales organization.

To support the outside sales representatives, STS employs approximately
235 inside sales representatives who collectively function as a customer
service department, taking orders from customers on the telephone, answering
questions and solving problems. STS also employs approximately 20 people in its
telemarketing group which is responsible for customers with sales potential not
large enough to justify the cost of service by an outside sales representative.
STS has established an electronic data interchange ("EDI") capability for use
with selected customers and vendors and is in the early stages of establishing
a presence on the Internet.

Competition. The great majority of STS' competitors are relatively small
companies with sales of less than $10 million from one or two facilities. Many
of these companies offer considerable depth in certain product lines, together
with related technical support. STS competes with these companies on price, the
strength of

28
<PAGE>

its product offering and an extensive range of ancillary technical services.
The largest national competitor is Motion Industries which competes on the
basis of price and product availability. Another national competitor is Applied
Industrial Technologies, Inc., formerly known as Bearings, Inc.

Sun Inventory Management Company (SIMCO)

SIMCO provides inventory management services resulting in the delivery of
required material to the customer's point of use at the lowest total cost.
SIMCO's customers range from small machine shops with two or three employees to
major manufacturing facilities with thousands of employees.

SIMCO serves its small and medium-size accounts through its "expediter"
activity. The expediter activity, with sales of $126 million in 1997, offers
personalized, small parts inventory management service to the low volume
customer. The expediter sales force relieves the customer of the inconvenience
and expense of purchasing numerous, small, inexpensive maintenance parts and
provides assurance against the expense and inconvenience of stock outs. Sales
in this market segment tend to be of relatively small dollar value items with
limited technology content but high service demands. The Company believes that
SIMCO has a competitive advantage in this market segment due to its large sales
force, a broad inventory of parts for diverse applications, a reputation for
high-quality products, a responsive physical distribution system and a
computerized material management system which permits 98% of all orders to be
shipped within 24 hours. In 1997, the expediter activity of SIMCO sold more
than 25,000 products to over 50,000 customers in the United States and Canada.

SIMCO's "integrated supply" activity, with sales of $53 million in 1997,
is focused on major industrial manufacturing customers. In some instances,
SIMCO will take over complete responsibility for a customer's purchases of
maintenance, repair and operating supplies. In those cases, SIMCO places the
purchase orders, receives the material and dispenses it to the customer's
employees from the customer's tool cribs. The advantage to the customer is
substantial reduction in the total cost of procuring and handling the thousands
of items which are routinely used by a large facility, while at the same time
improving the availability of these materials.

Products and Suppliers. SIMCO's expediter activity packages and
inventories over 25,000 items in nine major product categories. The largest
category is fasteners, which accounted for approximately 30% of SIMCO's 1997
expediter sales. A representative list of products of SIMCO's expediter
activity by category is shown below:

<TABLE>
<CAPTION>
Product Category Representative Products
- ------------------------- ------------------------------------------------------------
<S> <C> <C> <C>
Fasteners Bolts Nuts Socket Products
Cotter Pins Screws Washers
Electrical Products Clamps Plugs/Clips Terminals
Connectors Fuses/Switches Wire/Cable
Fluid Power Connectors Hydraulic Hose Unions
Fittings Tubing Valves
Cutting Tools Abrasives Drill Bits Reamers
Cutoff Blades Hacksaw Blades Taps and Dies
Chemicals Adhesives Coolants Paints
Brake Cleaner Lubricants Penetrating Fluid
Transportation Hardware Air Brake Parts Filters Ignition Parts
Body Hardware Gaskets Wheel Hardware
Assortments Cutting Tools Electrical Products Fasteners
Shop Supplies Brooms Hand Cleaners Towels
Welding and Other Regulators Solder Welding Rods
</TABLE>

SIMCO purchases the parts it needs for its expediter activity from over
600 regular vendors, none of which account for greater than 2% of SIMCO's
annual purchases. SIMCO has long-standing relationships with a

29
<PAGE>

majority of its suppliers and continually seeks to upgrade vendor performance
by measuring it and educating vendors on SIMCO's quality and service standards.
A majority of the products sold by SIMCO's expediter activity are packaged by
vendors under SIMCO's private brand labels.

To maintain its reputation for leading product lines and "one-stop
shopping," SIMCO's expediter activity emphasizes new product innovation and is
an active participant in trade shows and trade publications. SIMCO works with
its vendors to introduce more than 500 new products per year.

The products and suppliers used by SIMCO's integrated supply activity vary
considerably depending on the nature of the customer's manufacturing activity.
SIMCO seeks to maximize its purchasing power by aggregating purchases of common
items used by multiple SIMCO customers and also by purchasing through the other
SunSource businesses. SIMCO often obtains lower prices and provides improved
availability for many products without changing the customer's vendors.

Markets and Customers. Customers of the expediter activity tend to be
smaller companies that make frequent small purchases. A typical expediter
customer purchases less than $2,400 per year from SIMCO and includes truck
fleet operators, construction and mining operations, industrial plants, paper
plants, welding shops, hospitals, schools, government facilities and automobile
dealerships.

SIMCO's integrated supply customers tend to be large industrial facilities
which purchase in excess of $1 million per year from SIMCO. SIMCO's major
industrial customers include Colgate Palmolive, Mercedes Benz and Marley
Cooling Tower.

Sales and Marketing. SIMCO's expediter sales representatives serve their
customers by providing merchandising systems, helping control inventory and
physically stocking and organizing products. For example, a sales
representative might maintain an inventory of 100 to 150 small items for an
automobile repair center. Items typically include nuts, bolts, small cutting
tools, lubricants and related items. The service provided to the customer is to
insure that all of these small consumables remain in stock, thereby enabling
the customer to avoid the expense of maintaining inventories, placing purchase
orders and receiving materials. Even more importantly, the customer's highly
trained technicians do not have to waste time and money tracking down missing
parts of nominal dollar value. Larger accounts are offered programmed inventory
maintenance service ("PIMS") to ensure that inventory is maintained at
appropriate levels. PIMS sales account for approximately 20% of total expediter
sales. SIMCO also offers customized product literature which is targeted to
selected niche markets.

SIMCO's expediter sales force consists of approximately 750 sales
representatives, each of whom sells the entire product line and serves an
average of 65 customer accounts. Ten to twelve sales representatives in a
geographical area report to a district manager, who in turn reports to one of
ten regional vice presidents. Sales management support includes training on new
product applications and technical information to assist customers in solving
operational and maintenance problems. The marketing department provides support
in the form of product line management, promotional programs, catalogs and
related materials. Logistics support is provided by seven strategically located
distribution centers and a computerized material management system which
assures fast, accurate and complete shipments.

SIMCO approaches its larger integrated supply customers by offering to
perform a survey of their existing procurement practices. The goal of the study
is to determine whether the customer's total costs can be reduced by utilizing
the outsourcing services offered by SIMCO. Typically, savings occur in the
customer's purchasing department, in its tool cribs or other dispensing
locations within its facility and in lower inventory carrying costs. The net
result of a decision to outsource to SIMCO is typically lower total costs,
substantial reduction in inventory investment and improved product
availability.

Competition. SIMCO's expediter activity competes primarily with other
national expediters that similarly provide a high level of service, and to a
lesser extent with more narrowly focused regional or small local distributors
competing mainly on the basis of low price with minimal service. The four
largest national expediters are Premier Industrial, Bowman Products, Curtis
Industries and Lawson Products, none of which has a significant market share.
SIMCO's expediter business serves all segments of the highly fragmented MRO
market and has less than 1% market share. The Company believes that SIMCO can
capture additional market share by increasing the number of its qualified sales
representatives and has recently undertaken a program to improve the quality
and training of its sales representatives.

30
<PAGE>

The competition for SIMCO's integrated supply activity comes from a large
number of companies following a variety of strategies. Some competitors seek to
be perceived as an integrated supplier by continually increasing the number of
product lines offered. Other competitors provide staff to dispense product in a
customer's plant. SIMCO also competes with "strategic alliances" among
established distributors of traditional product lines.

Hardware Merchandising Services (Hillman)

The Company believes that Hillman, with sales of $107 million in 1997, is
the leading supplier of merchandising services, fasteners and related small
hardware repair items to retail outlets in the United States. Through its sales
and service force, Hillman provides hardware retailers in all 50 states and in
Mexico, Central and South America with an extensive line of fasteners and other
small hardware items. More importantly, Hillman complements its extensive
product selection with value-added services for the retailer.

Fasteners and other small hardware items typically account for
approximately 25% of a hardware store's traffic, but less than 5% of its
revenues. A typical hardware store maintains in inventory thousands of
different items, many of which generate only small profits. It is difficult for
a retailer to monitor economically all stock levels and to reorder the products
from multiple vendors. The problem is compounded by the necessity of receiving
small shipments of inventory at different times and having to stock the goods.
However, failure to have these small items consistently available will have an
adverse effect on store traffic, thereby denying the retailer the opportunity
to sell items that generate higher profits.

Hillman's sales representatives regularly visit retail outlets to review
stock levels and to reorder those items in need of replacement. Thousands of
items can thus be actively managed with the retailer experiencing a substantial
reduction in paperwork and labor costs. Hillman's sales representatives also
assist in organizing the products in a user-friendly manner. Hillman
complements its broad range of products with value-added merchandising services
such as displays, product identification stickers, retail price stickers, store
rack and drawer systems, assistance in rack positioning and store layout and
inventory and restocking services. Hillman periodically introduces new package
designs and color-coding for ease of shopping by hardware store customers, and
also modifies rack designs to improve attractiveness of individual store
displays. Furthermore, Hillman provides the retailer with inventory management
software that ties to the retailer's point-of-sale system. In effect, Hillman
functions as a merchandising manager for the hardware store. Hillman supports
these services with high order fill rates and rapid delivery from its nine
distribution centers across the United States. Orders are shipped within 24
hours with a 96% order fill rate.

Products and Suppliers. Hillman buys its products from approximately 500
vendors, the largest of which accounted for 12.8% of Hillman's 1997 purchases
and the top ten of which accounted for less than 47% of Hillman's 1997 total
purchases. Hillman's wide variety of products includes standard and specialty
nuts, bolts, screws, washers and anchors, plus brass, stainless steel, plastic
and miscellaneous fasteners. Management believes that Hillman's selection of
over 20,000 fastener items is the largest in the industry. Non-fastener
products include locks, keys, letters, numbers, signs, rope and chain
accessories and an extensive list of special-purpose items having a relatively
limited product line such as corks, electrical connectors, flashlight bulbs,
specialty fuses, and picture hangers.

Hillman buys approximately half of its purchases directly from foreign
suppliers and coordinates its overseas purchasing with SIMCO. The balance of
purchases are made from domestic manufacturers and master distributors. To
assure quality from its vendors, Hillman conducts annual on-site evaluations
and random sampling of products and communicates the results to vendors.
Hillman also tracks the performance of its vendors based on delivery time and
accuracy of shipments.

Markets and Customers. Hillman services approximately 8,500 full service
retail outlets. Hillman historically has serviced individual dealers of some of
the larger cooperatives, such as Cotter (Tru-Serv), Ace and HWI. Hillman sells
directly to the cooperative's retail locations and also supplies many fastener
items to the cooperative's central warehouses. These central warehouses
continue to distribute to their smaller members that do not have the purchase
volume to justify direct service from Hillman. These arrangements with the
cooperatives reduce credit risk and logistics for Hillman and reduce central
warehouse inventory and delivery costs for the cooperatives.

31
<PAGE>

Hillman is also increasing its focus on regional and national lumber yards
and home centers, particularly companies with three to fifteen locations.
Management believes that the dynamics which make its services attractive to
hardware retailers are present with these larger customers as well. At the
present time, Hillman sells approximately $17 million to this market segment.
Management has established a special sales and service force to further
penetrate this market segment.

Hillman also sells to approximately 6,000 smaller hardware outlets who are
not large enough to qualify for Hillman's full service program, and has four
sales representatives dedicated to serving industrial customers. Hillman can
offer such industrial customers very attractive prices because of Hillman's
purchasing power and low freight costs.

Sales and Marketing. Hillman believes that it is more responsive to
customers' needs than its competitors because it operates the largest direct
national sales force selling fasteners and small hardware repair items and
providing related value-added services to hardware stores. The sales force is
comprised of a vice president of sales, two regional managers, 17 field sales
managers and approximately 175 sales representatives. Each sales representative
is responsible for approximately 50 full service accounts, each of which is
generally called on an average of every three weeks. Several specialists call
on cooperative warehouses and others focus on home centers and regional lumber
yards. The sales effort to home centers and lumber yards is supported by a 60
person service organization that is devoted to maintaining the customers'
inventory levels and ensuring that the Hillman displays are properly
maintained. Hillman has an EDI system which is used by a number of larger
customers. Hillman's sales force is supported by a 15 person customer support
staff which is responsible for quoting special items and bulk quantity orders,
expediting orders, issuing credits and providing sales representatives with
customer feedback.

Competition. The principal competitors for Hillman's core business are
Midwest Fasteners, Serv-A-Lite, Elco and Sharon Bolt & Screw, the latter two of
which carry mainly fastener products. Hillman competes primarily on the
strength of the merchandising services it provides, as well as product
availability, price and breadth of product line. Management estimates that
Hillman sells to approximately 65% of the full service retail outlets that
comprise its core market. The smaller hardware outlets who purchase products
but not services from Hillman also purchase products from local and regional
distributors and cooperatives. Competition in this segment is primarily on the
basis of price and availability.

The principal competitors in the home center, regional and national
lumberyard markets are Crown Bolt with an estimated 50% market share and Elco
and Newell Industries. Hillman estimates its share in this market to be less
than 10%. Competition is based primarily on in-store service and price. Other
competitors are local and regional distributors.

Glass Merchandising (Harding)

Harding, with sales of approximately $88 million in 1997, is one of the
largest networks of full service retail glass shops in the United States.
Harding operates in the following businesses: retail automotive and flat glass,
insulating glass, small contract glazing and the wholesale distribution of
automotive and flat glass.

Harding provides retail glass products and related services through a
network of approximately 85 retail locations throughout the Southwestern United
States and, to a lesser degree, along the East Coast. Customers include
individuals, insurance companies and commercial accounts. The retail glass
market is highly fragmented within the U.S. market, consisting primarily of
small, privately owned companies with one or two locations. The industry is in
the early stages of consolidation and Harding believes that it is well
positioned to capitalize on this opportunity due to its substantial purchasing
power and its comprehensive management information systems.

As a result of emphasizing the higher margin retail business and
deemphasizing lower margin businesses, such as glass tempering and large
contract glazing, Harding has increased its overall gross margins from 34.9% in
1994 to 40.4% in 1997. Harding is positioned as a full-service glass retailer
offering one of the broadest product lines in the retail glass industry as well
as installation services for automotive glass, windows and commercial store
fronts. The role of the fabrication and wholesale activities is to ensure that
the full service shops receive the products they require at the lowest total
cost.

32
<PAGE>

Harding's new management information system links all of its formerly
independent locations and improves its ability to manage operations. The system
also allows Harding to centralize its purchasing function, thereby enabling it
to take advantage of its significant purchasing power. Another important
benefit is that acquired businesses can immediately begin following Harding's
standardized business practices. The Company believes that this will allow
Harding to integrate acquisitions substantially faster than previously and
reduce the dependence on key employees at any location.

Products and Suppliers. Harding maintains in inventory over 8,000 items
and many more products can be fabricated to meet customer requirements. The
following are major products carried by Harding:

Adhesives/Sealants Glass Units Solariums
Automotive Glass Commercial Glass Store Fronts Storm Doors
Beveled Mirror Strips Mirrors/Mirrored Walls Fire Resistant Glass

Shower/Bath Wardrobe Doors Patio Doors
Enclosures Glass Blocks Wire Glass
Framed Mirrors Replacement Insulating Glass

Harding purchases both automotive and flat glass from four leading
national manufacturers, as well as from regional glass companies and local
distributors. These four manufacturers account for approximately 25% of
Harding's purchases. In addition to flat and automotive glass, Harding
purchases a number of other items, including sheet mirror, framed mirror,
shower door frames and accessories from a variety of manufacturers and
distributors. Harding has in inventory over 90% of the products ordered by its
customers.

Markets and Customers. Approximately 37% of retail autoglass sales are
attributable to insurance companies while the remaining sales are divided among
individuals, autobody shops, rental car agencies and car dealerships. Retail
flat glass sales are split fairly evenly between individual consumers and small
contract jobs under $5,000. Wholesale autoglass sales are primarily to glass
shops, while wholesale flat glass sales are divided among independent retail
glass shops, window manufacturers and large contract glaziers. Harding's top
ten customers accounted for approximately 10% of 1997 sales.

Sales and Marketing. The majority of Harding's retail customers are
located within ten miles of a store and typically order in person or via phone.
The retail marketing effort relies on the strategic location of the stores as
well as advertising in the local media. Harding's retail organization also
maintains a 24 person sales force of whom 19 sell both flat and automotive
glass and five focus exclusively on flat glass.

The retail sales force calls on replacement automotive glass users such as
auto body shops, rental car agencies, automotive dealerships and insurance
agents who direct insured claims to approved suppliers. Sales management calls
on regional and national fleet accounts, insurance companies and network
providers in order to become an approved or preferred supplier. Network
providers are companies that handle the entire glass replacement process for
many insurance companies.

Harding's wholesale operation has a nine person sales force, all of whom
sell both flat and automotive glass. Sales representatives call on flat glass
customers such as window manufacturers, glass shops, and other large users of
glass such as contract glaziers.

Competition. Because of the diversity of markets and geographic locations
it serves, Harding has numerous competitors at the retail level. Harding's
retail competitors can be categorized as follows: national automotive chains,
large regional glass retailers and local independent glass shops. Harding, with
its broad offering of both automotive and flat glass, has positioned itself as
the largest comprehensive glass retailer in its region. At the wholesale level,
Harding faces competition from national, regional and local competitors. In
addition, in recent years, the major manufacturers of automotive and flat glass
have been taking steps to integrate vertically into wholesale distribution,
thereby assuring themselves of greater control over the sale of their products.

The Company believes that Harding is currently the largest full service
retail glass shop business in the United States with approximately 85 retail
locations. Although a number of chains are larger than Harding, they deal
primarily in auto glass replacement and are not full service shops. Competition
for Harding's full service shops comes mainly from single location operations
or small chains. Harding's purchasing power and recently

33
<PAGE>

installed comprehensive information system give it significant advantages over
these competitors. The changing industry structure and emerging economies of
scale are causing many of these smaller, independent retail glass companies to
look favorably upon the sale of their businesses to a larger competitor.

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 worker'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 17 of Notes to
Consolidated Financial Statements of the Company as of and for the three years
ended December 31, 1997.

Employees

As of December 31, 1997, the Company employed approximately 3,900
employees, of which approximately 1,750 were sales personnel, approximately
1,200 were employed as warehouse and delivery personnel and approximately 950
held administrative positions. The Company has collective bargaining agreements
with five unions representing a total of approximately 80 employees. In the
opinion of management, employee relations are good.

Backlog

The Company's sales backlog was $68.3 million as of December 31, 1997, and
$59.5 million as of December 31, 1996. On average, the Company's backlog is
less than one month's sales.

Properties

The Company currently has 193 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 the following warehouse
facilities:

Business Location Description
- ---------- ------------------ -------------------------
Hillman Cincinnati, Ohio 250,000 sq. ft. (leased)
Harding Denver, Colorado 184,000 sq. ft. (owned)
SIMCO Itasca, Illinois 80,000 sq. ft. (owned)

In the opinion of management, the Company's existing facilities are in
good condition.

Legal Proceedings

Litigation originally instituted on February 27, 1996 is pending in the
Court of Common Pleas of Montgomery County, Pennsylvania in which Dorman
Products of America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege
that misrepresentations of certain facts were made by the Company's subsidiary
operating partnership, upon which R&B allegedly based its offer to purchase the
assets of the Dorman Products division of such subsidiary operating
partnership. Dorman and R&B seek 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.

34
<PAGE>

MANAGEMENT

The following table sets forth certain information regarding the Company's
directors and executive officers.

<TABLE>
<CAPTION>
Name Age Position
- --------------------------------- ----- -----------------------------------------------------------
<S> <C> <C>
Donald T. Marshall .............. 64 Chairman of the Board and Chief Executive Officer
John P. McDonnell ............... 63 President and Chief Operating Officer; Chief Executive
Officer, SunSource Industrial Services Company; Director
Norman V. Edmonson .............. 57 Executive Vice President; Director
Joseph M. Corvino ............... 43 Vice President-Finance, Chief Financial Officer, Treasurer
and Secretary
Max W. Hillman, Jr. ............. 51 Chief Executive Officer, Hillman
Harold J. Cornelius ............. 49 Chief Executive Officer, Harding
O. Gordon Brewer, Jr. ........... 61 Director
Eliot M. Fried .................. 65 Director
Arnold S. Hoffman ............... 62 Director
Robert E. Keith, Jr. ............ 56 Director
Ernest L. Ransome, III .......... 71 Director
Donald A. Scott ................. 68 Director
Henri I. Talerman ............... 40 Director
</TABLE>

Donald T. Marshall has been the Chairman and Chief Executive Officer since
December 1988 and a director since February 1987. Mr. Marshall served as
President and Chief Executive Officer from February 1987 to December 1988. Mr.
Marshall started with the Company in 1977 as Vice President-Operations.

John P. McDonnell has been the President and Chief Operating Officer since
December 1994 and a director since May 1995. Mr. McDonnell served as Group Vice
President from December 1987 to December 1994 and President of the Walter
Norris division from December 1981 to December 1987.

Norman V. Edmonson has been the Executive Vice President since December
1994 and a director since February 1987. Mr. Edmonson served as Group Vice
President from December 1980 to December 1994. Mr. Edmonson plans to retire as
an executive officer in May 1998 but will continue after that time as a
director and consultant to the Company. Mr. Edmonson started with the Company
in 1977 as Vice President-Acquisitions.

Joseph M. Corvino has been Vice President-Finance, Chief Financial
Officer, Treasurer and Secretary since December 1995. Mr. Corvino served as
Vice President and Controller from May 1993 to December 1995 and as Controller
from December 1985 to May 1993. Mr. Corvino started with the Company as
Assistant Controller in June 1980.

Max W. Hillman, Jr. has been the Chief Executive Officer of Hillman since
December 1996. Mr. Hillman served as Group Vice President from December 1991 to
December 1996. Mr. Hillman started with the Company in operations in 1982.

Harold J. Cornelius has been the Chief Executive Officer of Harding since
December 1996. Mr. Cornelius served as Group Vice President from December 1988
to December 1996. Mr. Cornelius started with the Company in the sales
organization in 1979.

O. Gordon Brewer, Jr. has been a director of the Company since February
1987. Mr. Brewer has served as Vice President-Finance of Ikon Office Solutions
(formerly Alco Standard Corporation) for more than the past five years. Mr.
Brewer serves as a director of Corporate Insurance and Reinsurance Limited.

35
<PAGE>

Eliot M. Fried has been a director of the Company since December 1994. Mr.
Fried has been a Managing Director of Lehman Brothers Inc. since 1987. Mr.
Fried serves as a director of Axsys Technologies, Inc., Bridgeport Machines,
Inc., EVI, Inc., L3 Communications, Inc. and Walter Industries.

Arnold S. Hoffman has been a director of the Company since February 1987.
Mr. Hoffman has been a Senior Managing Director in Corporate Finance at Legg
Mason Wood Walker, Incorporated since April 1995 and a Managing Director at
Legg Mason Wood Walker, Incorporated prior thereto. Mr. Hoffman serves as a
director of Intelligent Electronics Incorporated.

Robert E. Keith, Jr. has been a director of the Company since December 10,
1997. Mr. Keith has been the Managing Director and Chief Executive Officer of
TL Ventures (a venture capital firm) for more than the past five years. Mr.
Keith served as President and Chief Operating Officer of Technology Leaders
Management, Inc. from 1991 until February 1996, when he was promoted to
President and Chief Executive Officer. Mr. Keith serves as a director of
Cambridge Technology Partners, National Media Corporation, Navigator, Safeguard
Scientifics, Inc. and Wave Technologies International.

Ernest L. Ransome, III has been a director of the Company since February
1987. Mr. Ransome has been the Chairman of Giles & Ransome, Inc. (a distributor
of construction equipment) for more than the past five years.

Donald A. Scott has been a director of the Company since February 1987.
Mr. Scott has been a partner of Morgan, Lewis & Bockius LLP from July 1964 to
present. Mr. Scott serves as a director of Provident Mutual Life Insurance
Company.

Henri I. Talerman has been a director of the Company since March 1995. Mr.
Talerman has been a Managing Director of Lehman Brothers Inc. from June 1992 to
present and Senior Vice President of Lehman Brothers Inc. prior to 1992. Mr.
Talerman serves as a director of McBride plc. and Financier Gerflor SA and as
an advisory director of Europe Capital Partners.

All directors will hold office until the next annual meeting of
stockholders and until their successors are duly elected and qualified. All
executive officers hold office at the pleasure of the Board of Directors.

Messrs. Fried and Talerman intend to resign as directors upon completion
of the Offering.

36
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND
SELLING STOCKHOLDERS

Except for the 500,000 shares being offered by the Company, all of the
Common Shares being offered hereby are being sold by the Selling Stockholders
named below.

The following table shows for (i) each director, (ii) each executive
officer, (iii) certain persons known to the Company to own beneficially more
than 5% of the outstanding interests, (iv) the Selling Stockholders and (v) all
officers and directors as a group, the beneficial ownership of Common Shares
before and after the Offering. Percentage amounts represent less than 1% of the
outstanding Common Shares unless otherwise indicated.

<TABLE>
<CAPTION>
Ownership Before Offering Ownership After Offering
----------------------------------- ------------------------------
Percent of Common Percent of
Common Common Shares Common Common
Name of Beneficial Owner Shares Shares Held Being Sold Shares Shares Held
- -------------------------------------------- -------------------- ------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers:
O. Gordon Brewer, Jr. ...................... 250 -- -- 250 --
Harold J. Cornelius ........................ 27,770 -- -- 27,770 --
Joseph M. Corvino .......................... 35,626 -- -- 35,626 --
Norman V. Edmonson ......................... 440,729 6.9% --(1) 440,729 6.4%
Eliot M. Fried ............................. --(2) -- -- -- --
Max W. Hillman, Jr. ........................ 30,220 -- -- 30,220 --
Arnold S. Hoffman .......................... 3,250(2)(3) -- -- 3,250 --
Robert E. Keith, Jr. ....................... 2,000 -- -- 2,000 --
Donald T. Marshall ......................... 698,988 10.9% -- 698,988 10.1%
John P. McDonnell .......................... 211,208 3.3% -- 211,208 3.1%
Ernest L. Ransome, III ..................... 1,250(4) -- -- 1,250 --
Donald A. Scott ............................ 2,250 -- -- 2,250 --
Henri I. Talerman .......................... --(2) -- -- -- --
All directors and executive officers as a
group (13 persons) ........................ 1,453,541(2) 22.6% -- 1,453,541 21.0%
Selling Stockholders:
Lehman LTD I, Inc. ......................... 27,138 -- 27,138 -- --
Lehman Brothers Capital Partners I ......... 1,447,031 22.5% 922,925 524,106(5) 7.6%
Lehman/SDI, Inc. ........................... 538,000 8.4% 538,000 -- --
</TABLE>

- ------------
(1) Mr. Edmonson intends to sell 20,000 Common Shares after completion of the
Offering.

(2) Does not include any Common Shares owned by the Selling Stockholders.
Messrs. Hoffman and Fried, as limited partners of Lehman Brothers Capital
Partners I, together derive economic benefit of approximately 1% from
Common Shares held by Lehman Brothers Capital Partners I. An affiliate of
Lehman Brothers Inc., of which Messrs. Fried and Talerman are officers,
also owns all of the capital stock of Lehman Ltd. I, Inc. and Lehman/SDI,
Inc.

(3) 750 of these Common Shares are owned by Hoffman Investment Co., of which
Mr. Hoffman is Managing Partner. In addition, Mr. Hoffman's children own
1,000 Common Shares with respect to which he disclaims beneficial
ownership.

(4) 625 of these Common Shares are held in a trust, of which Mr. Ransome is a
trustee.

(5) These Common Shares will be distributed to the individual limited partners
of Lehman Brothers Capital Partners I 90 days after completion of the
Offering.

The address of Lehman LTD I, Inc., Lehman Brothers Capital Partners I and
Lehman/SDI is 3 World Financial Center, New York, NY 10285.

See "Description of Capital Stock -- Stockholders Agreement" for a
description of certain restrictions with respect to voting and sale of Common
Shares held by affiliates of Lehman Brothers and certain officers of the
Company.

The Company has under consideration the adoption of an employee stock
option plan.

37
<PAGE>

In connection with the Conversion, the Company entered into a Registration
Rights Agreement with affiliates of Lehman Brothers (collectively referred to
as "Lehman Brothers") and Messrs. Marshall, McDonnell and Edmonson. The
agreement provides that at any time after the Conversion Lehman Brothers may
require the Company to file a registration statement with the Securities and
Exchange Commission for the sale of Common Shares held by them. Messrs.
Marshall, McDonnell and Edmonson are entitled to include up to 20% of the
Common Shares held by them in the registration statement. The registration
statement of which this Prospectus is a part has been filed pursuant to that
demand. The parties have agreed that they will not sell any Common Shares
(other than pursuant to the Offering) during such period prior to and after the
effective date of the registration statement as may be reasonably requested by
the managing underwriters. The Company has also agreed not to sell any Common
Shares (other than pursuant to the Offering) prior to the earlier of the
closing of this Offering and nine months following the Conversion, except for
the issuance of Common Shares in connection with acquisitions where the person
receiving the Common Shares agrees to abide by this restriction.

The Company has agreed to pay all expenses incident to the Company's
compliance with the Registration Rights Agreement, including registration and
filing fees, blue sky expenses, printing expenses and fees and expenses of
Company counsel and accountants. The parties have agreed to indemnify each
other for certain liabilities including liabilities under the Securities Act of
1933, as amended.

DESCRIPTION OF CAPITAL STOCK

Preferred Stock

The Certificate of Incorporation of the Company authorizes the issuance of
1,000,000 shares of Preferred Stock, par value $0.01 per share, by the Board of
Directors in one or more classes or series and with such voting powers,
designations, preferences and relative participating, optional or other special
rights and such qualifications, limitations, or restrictions thereof as shall
be set forth in the resolutions of the Board of Directors authorizing such
issuance. There are no shares of Preferred Stock outstanding. There are
reserved for issuance 64,189 shares of Series A Junior Participating Preferred
Shares pursuant to the Company's Stockholder Rights Plan. See "-- Stockholder
Rights Plan."

Common Stock

The Certificate of Incorporation of the Company authorizes the issuance of
20,000,000 Common Shares, of which 6,418,936 Common Shares are outstanding.

Holders of Common Shares are entitled to one vote per share on all matters
to be voted upon by the stockholders. There are no cumulative voting rights
with respect to the election of directors. Subject to preferences that may be
applicable to any outstanding Preferred Stock, holders of Common Shares are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available therefor.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Common Shares are entitled to share ratably in all assets after
satisfaction of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. Common Shares have no preemptive, conversion
or other subscription rights and there are no redemption or sinking fund
provisions applicable to the Common Shares.

Stockholders Agreement

The Company and certain stockholders have entered into a Stockholders
Agreement dated as of July 31, 1997 (the "Stockholders Agreement"), that
contains certain restrictions with respect to voting and sale of Common Shares.
The Stockholders Agreement provides that Lehman Brothers and each of the
following members of management, Donald T. Marshall, John P. McDonnell, Norman
V. Edmonson, Harold J. Cornelius, Max W. Hillman and Joseph M. Corvino (the
"Senior Executives"), agree with the Company not to sell any Common Shares that
they beneficially own, in a single transaction or series of related
transactions, to any third person(s) which, to the knowledge of Lehman Brothers
and the Senior Executives, after reasonable inquiry, would beneficially

38
<PAGE>

own after such transactions more than 10% of the outstanding Common Shares (or
more than 15% of the outstanding Common Shares if such third person(s) are
eligible to report the acquisition of such shares on Schedule 13G pursuant to
clauses (i), (ii) and (iii) of Rule 13d-1(b)(1) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as such rule is currently in
effect.) The Stockholders Agreement also contains provisions that restrict the
respective voting power of Lehman Brothers and the Senior Executives. Under the
terms of such restriction, such persons agree to vote, in the same proportion
as the "Unaffiliated Shares" that are voted on any such matter, that percentage
of Excess Voting Shares held by them at such time that equals the percentage of
outstanding Unaffiliated Shares that are voted on such matter. "Excess Voting
Shares" means the Common Shares beneficially owned by Lehman Brothers and its
affiliates and the Senior Executives, at any time, that represents voting power
in excess of the respective voting powers immediately prior to the Conversion
that they would have had in a vote of the holders of A Interests and B
Interests of the Partnership voting together as a single class. See also "--
Anti-takeover Provisions - Bylaw Provisions" below.

The Stockholders Agreement contains a provision regarding nomination of
the Board of Directors of the Company. The Board of Directors of the Company
will consist of up to nine members, of whom three will be nominated by
management, four will be independent and either one or two will be appointed by
Lehman Brothers, depending upon the percentage of Common Shares held by Lehman
Brothers.

Anti-takeover Provisions

Certain provisions of the Company's Bylaws and the Stockholder Rights Plan
could have an anti-takeover effect. These provisions are intended to enhance
the likelihood of continuity and stability in the composition of the Company's
Board of Directors and management and in the policies formulated by the Board
of Directors and to discourage an unsolicited takeover of the Company if the
Board of Directors determines that the takeover is not in the best interests of
the Company and its stockholders. However, these provisions could have the
effect of discouraging certain attempts to acquire the Company or remove
incumbent management even if some or a majority of stockholders deemed such an
attempt to be in their best interests.

Bylaws Provisions. The Bylaws provide that stockholders are permitted to
call a special meeting or to require that the Board of Directors call a special
meeting of stockholders if such meeting is called by holders of at least 25% of
outstanding Common Stock. In addition, the stockholders may act by written
consent in lieu of a meeting with a number of votes sufficient for such action.

The Bylaws establish an advance notice procedure for the nomination of
candidates for election as directors, other than by or at the direction of the
Board of Directors, as well as for other stockholder proposals to be considered
at annual meetings of stockholders. In general, notice of intent to nominate a
director or raise business at such meetings must be received at least 60 days
prior to any annual meeting and must contain certain specified information
concerning the persons to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.

Pursuant to the terms of the Stockholders Agreement, the Bylaws provide
that prior to the third anniversary of the date of the Conversion, the approval
of at least a majority of the Company's Independent Directors is required to
approve and authorize (i) amendments to the Company's Certificate of
Incorporation or Bylaws or any stockholder rights plan of the Company
(including the redemption of the rights thereunder or waiver of any provision
thereof) or any waiver of, or "opt-out" from, the benefit or effect of any
anti-takeover statute or other provision applicable to the Company or (ii) any
agreement binding the Company in respect of the sale, in a single transaction
or a series of related transactions, of all or a substantial part of the
Company. In addition, the approval of at least a majority of the Company's
Independent Directors is required to approve and authorize (i) any transaction
or series of related transactions between the Company or any of its
subsidiaries, on the one hand, and SDI Partners I, L.P., Lehman Brothers
Capital Partners I, L.P., Lehman Ltd. I, Inc., LB I Group, Inc., Lehman/SDI,
Lehman Brothers Holdings Inc. or any affiliate of these entities on the other,
so long as any of such entities and its affiliates own, in the aggregate, at
least 10% of the outstanding Common Shares, (ii) any amendment to, or waiver
of, any provision of the Stockholders Agreement, or (iii) any amendment to the
Certificate of Incorporation or Bylaws that would amend these restrictive
provisions.

Stockholder Rights Plan. The Company has adopted a Stockholder Rights Plan
pursuant to a Rights Agreement between the Company and Registrar and Transfer
Company. The Plan is designed to insure that all

39
<PAGE>

stockholders of the Company receive fair value for their Common Shares in the
event of any proposed takeover of the Company and to guard against the use of
partial tender offers or other coercive tactics to gain control of the Company
without offering fair value to the Company's stockholders. Under the Rights
Plan, each Common Share has attached thereto a Right. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.01 per share, of the
Company (the "Preferred Shares"), or a combination of securities and assets of
equivalent value, at a Purchase Price of $75, subject to adjustment. The
Purchase Price may be paid, at the option of the holder, in cash or Common
Shares having a value at the time of exercise equal to the Purchase Price.

Until the Distribution Date, ownership of the Rights will be evidenced by
and will be transferred with and only with the certificates representing the
Common Shares, and no separate Rights Certificates will be distributed. The
Distribution Date will occur upon the earlier of (i) ten days following a
public announcement that a person or group has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding Common
Shares, or (ii) the close of business on a date fixed by the Board of Directors
following the commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 20% or more of the outstanding
Common Shares. The Rights are not exercisable until the Distribution Date and
will expire at the close of business on September 30, 2007, unless earlier
redeemed by the Corporation as described below. The percentage ownership of
Common Shares held by Lehman Brothers after the Conversion will not cause a
Distribution Date to occur.

Except in the circumstances described below, after the Distribution Date
each Right will be exercisable for one-hundredth of a Preferred Share (a
"Preferred Share Fraction"). Each Preferred Share Fraction carries voting and
dividend rights that are intended to produce the equivalent of one Common
Share. Each Preferred Share Fraction will entitle the holder to receive
dividends each calendar quarter in an amount equal to the aggregate per share
amount in cash of all dividends or other distributions (other than dividends
payable in Common Shares) declared on the Common Shares during the preceding
quarter. Each Preferred Share Fraction will entitle the holder to one vote on
all matters submitted to a vote of the stockholders of the Company. Each
Preferred Share Fraction will have a liquidation preference equal to the
greater of $1.00 per share, plus accrued dividends, or an amount per share
equal to the aggregate amount to be distributed per share to holders of Common
Shares. The Preferred Share Fractions are not redeemable.

It is unlikely that a holder of a Right will ever exercise the Right to
receive Preferred Shares. The Rights may be exercised if a "Flip-in" or
"Flip-over" event occurs.

If a "Flip-in" event occurs and the Distribution Date has passed, the
holder of each Right, with the exception of the Acquiror, is entitled to
purchase $75 worth of Common Shares for $37.50. The Rights will no longer be
exercisable into Preferred Shares at that time. A "Flip-in" event takes place
if one of the following happens:

o A person or group acquires 20% or more of the outstanding Common Shares.

o A 20% stockholder merges with or acquires the Company and an equity
security of the Company remains outstanding.

o A 20% stockholder engages in "self-dealing" transactions with the
Company, defined as (i) the receipt of securities from the Company; (ii)
the sale of assets by the 20% stockholder to, from or with the Company
having a value of more than $5,000,000 or on terms and conditions less
favorable to the Company than the Company would be able to obtain in an
arm's length negotiation with an unaffiliated third party; (iii) the
receipt by the 20% stockholder of compensation other than for full time
employment at regular rates; and (iv) the receipt by the 20% stockholder
of the benefit of any loans, guarantees or other financial assistance or
tax credits from the Company. The Board of Directors of the Company has
the power to administer and interpret the Plan.

If a "Flip-over" event occurs, the holder of Rights is entitled to
purchase $75 worth of the Acquiror's stock for $37.50 for each Right held. A
"Flip-over" event occurs if the Company is acquired or merged and no
outstanding shares remain or if 50% of the Company's assets or earning power is
sold or transferred. The Rights Plan prohibits the Company from entering into
this sort of transaction unless the Acquiror agrees to comply with the
"Flip-over" provisions of the Plan.

40
<PAGE>

The Rights can be redeemed by the Company for $.005 per right until up to
ten days after the public announcement that someone has acquired 20% or more of
the Company's Common Shares or the Board can extend the redemption period for
as long as it determines appropriate. If the Rights are not redeemed or
substituted by the Company, they will expire on September 30, 2007.

Limitation of Liability

As permitted by the Delaware General Corporation Law (the "DGCL"), the
Company's Certificate of Incorporation provides that directors of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, relating to prohibited dividends or distributions or the
repurchase or redemption of stock or (iv) for any transaction from which the
director derives an improper personal benefit.

Transfer Agent and Registrar

The transfer agent and registrar for the Common Shares is Registrar and
Transfer Company.

UNDERWRITING

Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which the Prospectus forms a part, each of the
Underwriters named below, for whom Lehman Brothers Inc., Robert W. Baird & Co.
Incorporated, Furman Selz LLC and Legg Mason Wood Walker, Incorporated are
acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and the
Selling Stockholders have agreed to sell to each Underwriter, the aggregate
number of Common Shares set forth opposite the name of each such Underwriter
below:

<TABLE>
<CAPTION>
Number
Underwriters of Shares
- ------------------------------------------------------------------ ------------
<S> <C>
Lehman Brothers Inc. ........................................ 360,768
Robert W. Baird & Co. Incorporated .......................... 360,765
Furman Selz LLC ............................................. 360,765
Legg Mason Wood Walker, Incorporated ........................ 360,765
Donaldson, Lufkin & Jenrette Securities Corporation ......... 75,000
A.G. Edwards & Sons, Inc. ................................... 75,000
Goldman, Sachs & Co. ........................................ 75,000
Smith Barney Inc. ........................................... 75,000
Chapin, Davis ............................................... 35,000
Janney Montgomery Scott Inc. ................................ 35,000
Edward D. Jones & Co., L.P. ................................. 35,000
C. L. King & Associates, Inc. ............................... 35,000
Pryor, McClendon, Counts & Co., Inc. ........................ 35,000
Raymond James & Associates, Inc. ............................ 35,000
Robotti & Company, Incorporated ............................. 35,000
-------
Total .................................................... 1,988,063
=========
</TABLE>

The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the Common Shares
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain selected dealers (who may include the
Underwriters) at such public offering price less a concession not in excess of
$0.90 per share. The selected dealers may reallow a concession not in excess of
$0.10 per share to certain other brokers and dealers. After commencement of the
public offering, the offering price and other selling terms may be changed by
the Representatives.

41
<PAGE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Shares are subject to
certain conditions precedent, including the conditions that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending before or threatened by the
Commission, and that there has been no material adverse change in the condition
of the Company. The Underwriters will be obligated to purchase all of the
Common Shares if any are purchased.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments that may be required to be made in
respect thereof.

The Company has granted the Underwriters an option to purchase up to an
aggregate of 296,408 additional Common Shares at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. Such option may be exercised at any time until 30 days after the
date of the Underwriting Agreement. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment,
subject to certain conditions, to purchase a number of the additional Common
Shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table. The Company will be obligated, pursuant to such option, to
sell such shares to the Underwriters to the extent such option is exercised.
The Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Shares offered hereby.

Prior to the Offering, Lehman Ltd. I, Inc., Lehman Brothers Capital
Partners I and Lehman/SDI, Inc., each an affiliate of Lehman Brothers Inc.,
beneficially own, in the aggregate, approximately 2,012,169 of the outstanding
Common Shares. Because Lehman Brothers Inc. is a member of the National
Association of Securities Dealers, Inc. ("NASD") and will act as an underwriter
in the Offering, the Offering is subject to the provisions of Rule 2720 of the
Conduct Rules of the NASD (formerly Schedule E to the Bylaws of the NASD)
("Rule 2720"). Although not required by Rule 2720 in this instance, the
Representatives have determined that Robert W. Baird & Co. Incorporated will
serve as a "qualified independent underwriter" and will recommend the public
offering price of the Common Shares in accordance with the standard
requirements of Rule 2720. Robert W. Baird & Co. Incorporated, in its role as
qualified independent underwriter, is assuming the responsibilities of acting
as a qualified independent underwriter and has performed due diligence
investigation and participated in the preparation of this Prospectus and the
Registration Statement of which this Prospectus is a part. In addition, in
accordance with Rule 2720, the Underwriters will not make sales of Common
Shares offered hereby to customer's discretionary accounts without the prior
specific written approval of such customer.

Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase Common Shares. As an exception to these rules,
the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions may consist of bids
or purchases for the purposes of pegging, fixing or maintaining the price of
the Common Shares.

In addition, if the Representatives over-allot (i.e., if they sell more
Common Shares than are set forth on the cover page of this Prospectus), and
thereby create a short position in the Common Shares in connection with the
Offering, the Representatives may reduce that short position by purchasing
Common Shares in the open market. The Representatives also may elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.

In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchase.

Neither the Company nor any of the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition,
neither the Company nor any of the Underwriters make any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.

42
<PAGE>

The Company, its officers and directors and certain of its stockholders
have agreed that they will not, subject to certain exceptions, for a period of
90 days from the date of this Prospectus, directly or indirectly, offer, sell
or otherwise dispose of any Common Shares or any securities convertible into or
exchangeable or exercisable for any such Common Shares, without the prior
written consent of Lehman Brothers Inc.

Affiliates of Lehman Brothers Inc. will receive a substantial portion of
the proceeds from the Offering. In addition, two of the ten members of the
Company's Board of Directors are presently employed by Lehman Brothers Inc. and
a third is employed by Legg Mason Wood Walker, Incorporated. Lehman Brothers
Inc. and Legg Mason Wood Walker, Incorporated have from time to time provided
investment banking, financial advisory and other services to the Company, for
which services they have received fees.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Donald A.
Scott, a partner in Morgan, Lewis & Bockius LLP, is a director of the Company.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Simpson Thacher & Bartlett, New York, New York.

EXPERTS

The consolidated balance sheets of the Company at December 31, 1997 and
1996 and the consolidated statements of income and cash flows for the three
years in the period ended December 31, 1997 and changes in partners' capital
for the years ended December 31, 1996 and 1995 and changes in stockholders'
deficit for the year ended December 31, 1997, included and incorporated by
reference in this Prospectus, and the consolidated balance sheet of the
partnership at December 31, 1995 and the consolidated statements of income,
changes in partners' capital and cash flows for the year ended December 31,
1994 incorporated by reference in this Prospectus, have been included and
incorporated herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Such reports
and other information may be inspected and copied at the public reference
facilities maintained by the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, New York, New York 10048, and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this material
should also be available on-line through EDGAR and may be obtained at the
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports and other information regarding the
Company. Such reports and other information concerning the Company can also be
inspected at the office of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005, the exchange on which the Common Shares are listed.

This Prospectus constitutes a part of a Registration Statement on Form S-2
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus omits certain of the information contained
in the Registration Statement in accordance with the rules and regulations of
the Commission. Reference is hereby made to the Registration Statement and
related exhibits for further information with respect to the Company and the
securities offered hereby. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and, in such instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.

43
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

This Prospectus incorporates documents by reference which are not
presented herewith. These documents (without exhibits, unless such exhibits are
specifically incorporated by reference herein) are available without charge to
each person to whom a copy of this Prospectus is delivered, upon written or
oral request addressed to SunSource Inc., 3000 One Logan Square, Philadelphia,
Pennsylvania 19103, Attention: Joseph M. Corvino, Secretary, telephone number
(215) 282-1290.

The following documents of the Partnership (Commission file no. 1-09375)
and the Company (Commission file no. 1-13293) have been filed with the
Commission and are incorporated herein by reference:

(a) Annual Report on Form 10-K for the Partnership for the fiscal year
ended December 31, 1996;

(b) Quarterly Reports on Form 10-Q for the Partnership for the quarterly
periods ended March 31 and June 30, 1997;

(d) Current Report on Form 8-K for the Company dated February 27, 1998.

44
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Statement of Income Page
----
SunSource Inc. and Subsidiaries
Introduction to Unaudited Pro Forma Consolidated Statement of Income .................... F-2
Unaudited Pro Forma Consolidated Statement of Income
for the twelve months ended December 31, 1997 ......................................... F-3
Notes to Unaudited Pro Forma Consolidated Statement of Income ........................... F-4
Audited Historical Consolidated Financial Statements
SunSource Inc. and Subsidiaries
Report of Independent Accountants ....................................................... F-5
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............................ F-6
Consolidated Statements of Income for the Years ended December 31, 1997, 1996 and 1995 F-7
Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996 and
1995 .................................................................................. F-8
Consolidated Statements of Changes in Partners' Capital for the Years ended December 31,
1996 and 1995 and Changes in Stockholders' Deficit for the Year ended December 31,
1997 .................................................................................. F-9
Notes to Consolidated Financial Statements .............................................. F-10
</TABLE>

F-1
<PAGE>

SunSource Inc. and Subsidiaries
Pro Forma Consolidated Statement of Income (Unaudited)

The following unaudited pro forma consolidated statement of income of
SunSource Inc. (the "Company"), gives effect to the closing of the offering of
Common Shares of the Company (the "Offering"), the conversion of its
predecessor, SunSource L.P. (the "Partnership") to corporate form, including
the elimination of non-recurring charges and credits (the "Conversion") and the
refinancing of debt in conjunction with the Conversion (the "Refinancing"). The
pro forma consolidated statement of income includes the accounts of the Company
and its indirect wholly-owned subsidiary partnership, SDI Operating Partners,
L.P. (the "Operating Partnership").

The pro forma consolidated statement of income assumes the Offering and
the Refinancing closed and the Conversion occurred at the beginning of the year
presented. The pro forma consolidated income statement is not necessarily
indicative of operating results that would have been achieved had the Offering,
the Conversion, and the Refinancing occurred on the date indicated and should
not be construed as representative of future operating results.

This pro forma consolidated statement of income should be read in
conjunction with the audited consolidated financial statements for the twelve
months ended December 31, 1997 filed by the Company on Form 8-K and included
elsewhere herein.

F-2
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(dollars in thousands, except for per share data)

<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1997
-----------------------------------------------------
Pro Forma
Adjustments
Historical Amount Note* Pro Forma
------------ ------------- ------- ------------
<S> <C> <C> <C> <C>
Net sales ................................................... $698,131 $ -- $ 698,131
Cost of sales ............................................... 414,853 -- 414,853
-------- --------- ---------
Gross profit .............................................. 283,278 -- 283,278
-------- --------- ---------
Operating expenses:
Selling, general and administrative expenses ............... 235,777 -- 235,777
Management fee to general partner .......................... 2,491 (2,491) 1A --
Depreciation ............................................... 4,009 -- 4,009
Amortization ............................................... 1,894 390 1B 2,284
-------- --------- ---------
Total operating expenses .................................. 244,171 (2,101) 242,070
-------- --------- ---------
Transaction and other costs related to Conversion ........... 3,053 (3,053) 1C --
-------- --------- ---------
Income from operations .................................... 36,054 5,154 41,208
Interest expense, net ....................................... 7,198 (321) 1D 6,877
Other income, net ........................................... 54 263 1E 317
Distributions on guaranteed preferred beneficial interests in
the Company's junior subordinated debentures ............... (3,058) (9,174) 1F (12,232)
-------- --------- ---------
Income before income taxes ................................ 25,852 (3,436) 22,416
Provision (benefit) for income taxes ........................ (6,680) 16,911 1G 10,231
-------- --------- ---------
Income before extraordinary loss .......................... 32,532 (20,347) 12,185
Extraordinary loss from early extinguishment of debt, net
of deferred income tax benefit of $951 ..................... (3,392) 3,392 1H --
-------- --------- ---------
Net income ................................................ $ 29,140 $ (16,955) $ 12,185
======== ========= =========
Net income per Common Share (basic and diluted) ............. $ 1.76
Weighted average number of outstanding Common Shares 6,918,936
</TABLE>

*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME

F-3
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(dollars in thousands)

1. Pro Forma Adjustments to Consolidated Statement of Income:

A. To eliminate, in consolidation, the management fee paid to SDI Partners
I, L.P., the "General Partner" or "GP" of the Operating Partnership.

B. To record amortization of goodwill associated with the exchange of the
GP's Minority Interest in the Operating Partnership, using the
Partnership's current estimated useful life of goodwill.

C. To eliminate transaction and other costs related entirely to the
Conversion which have been recorded by the Company for the period
presented.

D. To adjust 1997 interest expense utilizing, (i) an interest rate of 6.98%
(equal to current LIBOR rates of 5.73% plus 125 basis points, which
reflects interest rates under the new revolving credit facility), and
(ii) the estimated net proceeds from the offering.

<TABLE>
<CAPTION>
1997
----------
<S> <C>
Interest expense reduction as a result of proceeds from the Offering used to repay
the Company's bank revolving credit ............................................. $ (740)
Interest expense reduction as a result of the Company's Refinancing ............... (582)
Interest expense related to incremental debt used to pay distributions, transaction
costs and other items as a result of the Conversion ............................. 1,001
------
Net reduction in interest expense ................................................. $ (321)
======
Increase or decrease in pro forma interest expense adjustment due to each 1/8 per-
cent (.00125) change in interest rate ........................................... $ 13

</TABLE>

E. Eliminate minority interest expense as a result of the Conversion.

F. Record an expense for the monthly distributions on Trust Preferred
Securities; the annual yield is 11.6% on the liquidation amount of the
securities of $105,446, resulting in an approximate charge of $1,019 per
month.

G. Adjust the partnership basis state and foreign provision or benefit for
income taxes to reflect a total provision for federal, state and foreign
income taxes under corporate form.

H. Eliminate extraordinary loss from early extinguishment of debt as a
non-recurring charge.

F-4
<PAGE>

Report of Independent Accountants

The Board of Directors
SunSource Inc.

We have audited the accompanying consolidated balance sheets of SunSource Inc.
and subsidiaries as of December 31, 1997 and 1996, the related consolidated
statements of income and cash flows for each of the three years in the period
ended December 31, 1997, the related consolidated statement of changes in
stockholders' deficit for the year ended December 31, 1997 and the related
consolidated statement of changes in partners' capital for the years ended
December 31, 1996 and 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SunSource Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 29, 1998, except
for Note 22 as to which
the date is February 5, 1998

F-5
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 5,638 $ 1,666
Accounts receivable, net of allowance for doubtful accounts of $2,195 and $2,208, 82,501 78,578
respectively .
Inventories ............................................................................. 103,369 102,396
Deferred income taxes ................................................................... 10,791 --
Other current assets .................................................................... 4,559 4,672
--------- ---------
Total current assets .................................................................. 206,858 187,312
Property and equipment, net .............................................................. 21,939 21,409
Goodwill (net of accumulated amortization of $14,367 and $12,879, respectively) .......... 62,588 43,036
Other intangibles (net of accumulated amortization of $14,910 and $14,372, respectively) . 784 667
Deferred income taxes .................................................................... 5,014 5,007
Cash surrender value of life insurance policies .......................................... 8,407 4,566
Other assets ............................................................................. 552 558
--------- ---------
Total assets .......................................................................... $ 306,142 $ 262,555
========= =========
LIABILITIES, PARTNERS' CAPITAL AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ........................................................................ $ 50,125 $ 48,557
Notes payable ........................................................................... 2,080 2,670
Current portion of senior notes ......................................................... -- 6,395
Current portion of capitalized lease obligations ........................................ 156 107
Distributions payable to partners ....................................................... 2,353 1,857
Deferred tax liability .................................................................. 935 --
Accrued expenses:
Salaries and wages ..................................................................... 6,891 5,696
Management fee due the general partner ................................................. -- 3,330
Income and other taxes ................................................................. 4,286 2,695
Other accrued expenses ................................................................. 19,094 15,224
--------- ---------
Total current liabilities ............................................................. 85,920 86,531
Senior notes ............................................................................. 60,000 57,539
Bank revolving credit .................................................................... 33,000 11,000
Capitalized lease obligations ............................................................ 572 504
Deferred compensation .................................................................... 10,451 8,644
Other liabilities ........................................................................ 787 3,718
--------- ---------
Total liabilities ..................................................................... 190,730 167,936
--------- ---------
Guaranteed preferred beneficial interests in the Company's junior subordinated debentures 115,903 --
--------- ---------
Commitments and contingencies
Partners' capital:
General partner ......................................................................... -- 960
Limited partners:
Class A interests ...................................................................... -- 67,642
Class B interests ...................................................................... -- 29,040
Class B interests held in treasury ..................................................... -- (1,514)
Cumulative foreign translation adjustment .............................................. -- (1,509)
--------- ---------
Total partners' capital ............................................................... -- 94,619
--------- ---------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000 shares authorized, none issued ..................... -- --
Common stock, $.01 par, 20,000,000 shares authorized, 6,418,936 shares issued and 64 --
outstanding
Retained earnings ....................................................................... 1,735 --
Cumulative foreign translation adjustment ............................................... (2,290) --
--------- ---------
Total stockholders' deficit ........................................................... (491) --
--------- ---------
Total liabilities, partners' capital and stockholders' deficit ........................ $ 306,142 $ 262,555
========= =========

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-6
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands, except for partnership interest and share amounts)

<TABLE>
<CAPTION>
1997 1996 1995
------------ -------------- --------------
<S> <C> <C> <C>
Net sales .......................................................... $ 698,131 $ 649,254 $ 628,935
Cost of sales ...................................................... 414,853 388,660 377,598
--------- ----------- ----------
Gross profit .................................................... 283,278 260,594 251,337
--------- ----------- ----------
Operating expenses:
Selling, general and administrative expenses ...................... 235,777 219,185 211,048
Management fee to general partner ................................. 2,491 3,330 3,330
Depreciation ...................................................... 4,009 3,603 3,661
Amortization ...................................................... 1,894 1,924 1,996
--------- ----------- ----------
Total operating expenses ........................................ 244,171 228,042 220,035
--------- ----------- ----------
Restructuring charges .............................................. -- 5,950 --
Transaction and other related costs ................................ 3,053 2,150 --
--------- ----------- ----------
Income from operations .......................................... 36,054 24,452 31,302
Interest expense, net .............................................. 7,198 6,875 6,920
Distributions on guaranteed preferred beneficial interests ......... 3,058 -- --
Other income ....................................................... 54 550 256
Gain on sale of divisions (note 3) ................................. -- -- 20,644
--------- ----------- ----------
Income before provision for income taxes .......................... 25,852 18,127 45,282
Provision (benefit) for income taxes ............................... (6,680) (1,140) 537
--------- ----------- ----------
Income before extraordinary loss .................................. 32,532 19,267 44,745
Extraordinary loss from early extinguishment of debt (note 6) ...... (3,392) -- (629)
--------- ----------- ----------
Net income ...................................................... $ 29,140 $ 19,267 $ 44,116
========= =========== ==========
Net income allocated to partners:
General partner ................................................... N/A $ 193 $ 441
----------- ----------
Class A limited partners .......................................... N/A $ 12,210 $ 12,210
----------- ----------
Class B limited partners .......................................... N/A $ 6,864 $ 31,465
----------- ----------
Earnings per limited partnership interest:
Income before extraordinary loss
-- Class A interest ............................................. N/A $ 1.10 $ 1.10
-- Class B interest ............................................. N/A $ 0.32 $ 1.48
Extraordinary loss
-- Class A interest ............................................. N/A -- --
-- Class B interest ............................................. N/A -- ($ 0.03)
Net income
-- Class A interest ............................................. N/A $ 1.10 $ 1.10
-- Class B interest ............................................. N/A $ 0.32 $ 1.45
Pro forma net income per common share (note 1) ..................... $ 1.88 N/A N/A
Pro forma weighted average number of outstanding common
shares ............................................................ 6,418,936 N/A N/A
Weighted average number of outstanding limited partnership
interests:
-- Class A interests ............................................ N/A 11,099,573 11,099,573
-- Class B interests ............................................ N/A 21,675,746 21,675,746

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-7
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands)

<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 29,140 $ 19,267 $ 44,116
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................ 5,903 5,547 5,657
Decrease (increase) in cash value of life insurance ...... (525) (157) 58
Gain on sale of divisions ................................ -- -- (20,644)
Extraordinary loss ....................................... 3,392 -- 629
Restructuring charges .................................... -- 5,950 --
Transaction costs ........................................ 3,053 2,150 --
Provision for deferred compensation ...................... 2,649 1,071 2,340
Deferred income tax benefit .............................. (8,912) (2,163) (700)
Changes in current operating items:
Increase in accounts receivable ......................... (3,627) (2,465) (3,666)
Increase in inventories ................................. (848) (7,572) (8,209)
Decrease in other current assets ........................ 175 70 857
Increase in accounts payable ............................ 1,325 6,062 2,531
Decrease in accrued interest ............................ (473) (47) (141)
Decrease in accrued restructuring charges and
transaction costs ..................................... (4,569) (1,899) --
Increase (decrease) in other accrued liabilities ........ 2,595 (2,769) (6,062)
Other items, net ......................................... (1,365) 253 284
--------- --------- ---------
Net cash provided by operating activities .................. 27,913 23,298 17,050
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of divisions ............................ -- -- 44,873
Proceeds from sale of property and equipment ............... 802 62 757
Payments for acquired businesses ........................... (793) (683) (7,385)
Capital expenditures ....................................... (4,933) (4,341) (4,299)
Investment in life insurance policies ...................... (3,316) (1,400) (3,067)
Other, net ................................................. 144 (39) (93)
--------- --------- ---------
Net cash (used for) provided by investing activities ..... (8,096) (6,401) 30,786
--------- --------- ---------
Cash flows from financing activities:
Prepayment of senior notes ................................. (63,934) -- --
Proceeds from issuance of senior notes ..................... 60,000 -- --
Cash distributions to partners ............................. (13,901) (25,641) (27,218)
Cash distributions paid on Class A exchange ................ (14,429) -- --
Repayment of senior notes .................................. -- (6,395) (18,971)
Borrowings under the bank credit agreement, net ............ 22,000 11,000 --
Prepayment penalties and related costs ..................... (4,278) -- (629)
Borrowings (repayments) under other credit facilities,
net ...................................................... (590) (83) 44
Principal payments under capitalized lease obligations ..... (140) (12) (65)
Other, net ................................................. (573) -- ---
--------- --------- ---------
Net cash used for financing activities ................... (15,845) (21,131) (46,839)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........ 3,972 (4,234) 997
Cash and cash equivalents at beginning of period ............ 1,666 5,900 4,903
--------- --------- ---------
Cash and cash equivalents at end of period .................. $ 5,638 $ 1,666 $ 5,900
========= ========= =========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-8
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995 AND CHANGES IN STOCKHOLDERS'
DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1997
(dollars in thousands)

<TABLE>
<CAPTION>
PARTNERS' CAPITAL
------------------------------------------------------------------
Cumulative
Foreign
General Class A Class B Class B Translation
Partner Limited Limited Treasury Adjustment
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Partners' Capital -- December 31, 1994 .................... $ 791 $ 67,642 $ 12,300 $ (1,514) $ (1,338)
Net income ............................................... 441 12,210 31,465 -- --
Cash distributions paid and/or declared to partners ...... (269) (12,210) (14,513) -- --
Change in cumulative foreign translation adjustment ...... -- -- -- -- (62)
--------- --------- --------- --------- ---------
Partners' Capital -- December 31, 1995 .................... 963 67,642 29,252 (1,514) (1,400)
Net income ............................................... 193 12,210 6,864 -- --
Cash distributions paid and/or declared to partners ...... (196) (12,210) (7,076) -- --
Change in cumulative foreign translation adjustment ...... -- -- -- -- (109)
--------- --------- --------- --------- ---------
Partners' Capital -- December 31, 1996 .................... 960 67,642 29,040 (1,514) (1,509)
Net income ............................................... 260 9,157 16,633
Cash distributions paid and/or declared to partners ...... (150) (8,140) (6,730)
Change in cumulative foreign translation adjustment ...... -- -- -- -- (167)
--------- --------- --------- --------- ---------
Partners' Capital -- September 30, 1997 ................... 1,070 68,659 38,943 (1,514) (1,676)
Conversion adjustments:
Common stock ............................................. (64)
Paid-in capital .......................................... (1,070) (68,659)
Cumulative foreign translation adjustment ................ 1,676
Retained earnings ........................................ (38,879) 1,514
Minority interest (a) ....................................
Class A exchange (b) .....................................
Goodwill -- Minority interest (c) ........................
Stockholders' Deficit -- September 30, 1997 ............... $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Net income ...............................................
Change in cumulative foreign translation adjustment ......
Adjustment to cash distributions declared to partners ....
Dividends declared on common stock .......................
Stockholders' Deficit -- December 31, 1997 ................
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
STOCKHOLDERS
S' DEFICIT
-------------
Retained Cumulative Total Partners'
Earnings / Foreign Capital /
Common Paid-in (Accumulated Translation Stockholders'
Stock Capital Deficit) Adjustment Deficit
-------- ------------ -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Partners' Capital -- December 31, 1994 .................... $ 77,881
Net income ............................................... 44,116
Cash distributions paid and/or declared to partners ...... (26,992)
Change in cumulative foreign translation adjustment ...... (62)
-----------
Partners' Capital -- December 31, 1995 .................... 94,943
Net income ............................................... 19,267
Cash distributions paid and/or declared to partners ...... (19,482)
Change in cumulative foreign translation adjustment ...... (109)
-----------
Partners' Capital -- December 31, 1996 .................... 94,619
Net income ............................................... 26,050
Cash distributions paid and/or declared to partners ...... (15,020)
Change in cumulative foreign translation adjustment ...... -- -- -- -- (167)
-- -- -- -- -----------
Partners' Capital -- September 30, 1997 ................... -- -- -- -- 105,482
Conversion adjustments:
Common stock ............................................. 64 --
Paid-in capital .......................................... 68,659 1,070 --
Cumulative foreign translation adjustment ................ (1,676) --
Retained earnings ........................................ 37,365 --
Minority interest (a) .................................... 1,082 1,082
Class A exchange (b) ..................................... (68,659) (61,761) (130,420)
Goodwill -- Minority interest (c) ........................ 20,759 20,759
------- -----------
Stockholders' Deficit -- September 30, 1997 ............... 64 -- (1,485) (1,676) (3,097)
Net income ...............................................
Change in cumulative foreign translation adjustment ...... 3,090 3,090
Adjustment to cash distributions declared to partners .... (614) (614)
Dividends declared on common stock ....................... 772 772
(642) (642)
Stockholders' Deficit -- December 31, 1997 ................ ------- -----------
$ 64 $ -- $ 1,735 $ (2,290) $ (491)
==== ========== ========== ========= ===========
</TABLE>

- --------
(a) Minority interest included as other liabilities by the Partnership.

(b) Each Class A limited partnership interest was exchanged for $1.30 in cash
plus 0.38 share of Trust Preferred Securities recorded at fair value based
on the price of the Class A interests upon close of trading on the New
York Stock Exchange on September 30, 1997 of $11.75. This fair value of
$115,991 is recorded by the Company as Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Debentures.

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-9

<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

1. Basis of Presentation:

The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company"), its predecessor, SunSource L.P. (the
"Partnership"), and its wholly-owned subsidiaries including SDI Operating
Partners, L.P. (the "Operating Partnership") and SunSource Capital Trust (the
"Trust"). All significant intercompany balances and transactions have been
eliminated.

Nature of Operations:

The Company is one of the leading providers of industrial products and
related value-added services in North America. The Company is organized into
three businesses which are SunSource Industrial Services Company, Hillman and
Harding.

SunSource Industrial Services Company operates in three business segments:
(1) Technology Services, operating as SunSource Technology Services ("STS");
(2) Inventory Management -- Expediter and (3) Inventory Management --
Integrated Supply, operating as SunSource Inventory Management Company
("SIMCO"). STS offers a full range of technology-based products and services to
small, medium and large manufacturers. SIMCO provides small parts inventory
management to low volume customers through its expediter activity and
integrated inventory management to large industrial manufacturing customers
through its integrated supply activity.

Hillman operates in the Hardware Merchandising Services Segment, providing
small hardware related items and merchandising services, to retail outlets,
primarily hardware stores, home centers and lumberyards.

Harding operates in the Glass Merchandising Segment, selling retail and
wholesale automotive and flat glass and providing auto glass installation and
small contract glazing services to individual consumers, insurance companies,
autobody shops, and other customers through a large network of retail glass
shops.

STS, SIMCO -- Expediter and SIMCO -- Integrated Supply accounted for 46%,
18% and 8%, respectively, of the Company's consolidated 1997 net sales and
Hillman and Harding accounted for 15% and 13%, respectively. On a consolidated
basis, the Company has over 188,000 customers, the largest of which accounted
for less than 6% of 1997 net sales. The Company's foreign sales in Canada and
Mexico accounted for less than 10% of its consolidated 1997 net sales. The
average single sale in 1997 was less than three hundred and fifty 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.

Conversion to Corporate Form:

On September 25, 1997, the limited partners of the Partnership approved
the conversion of the Partnership to a corporation effective at the close of
business on September 30, 1997 (the "Conversion"). As a result of the
Conversion, each Class A limited partnership interest in the Partnership was
converted into $1.30 of cash and 0.38 share of 11.6% Guaranteed Preferred
Beneficial Interests in the Company's Junior Subordinated Debentures (the
"Trust Preferred Securities", which were issued by the Trust), each Class B
limited partnership interest in the Partnership was converted into 0.25 share
of common stock of the Company and the general and limited partnership
interests in SDI Partners I, L.P., the General Partner of the Partnership and
the Operating Partnership (the "GP"), were exchanged with the Company for
1,000,000 shares of its common stock (the "GP Exchange"). In conjunction with
the Conversion, the Company also refinanced all of its outstanding bank
revolving credit and senior note debt (the "Refinancing").

The exchange represented by the GP's 1% ownership interest in the Company
(the "Minority Ownership") is subject to purchase accounting in accordance with
Accounting Principles Bulletin ("APB") No. 16. Accordingly, the excess of fair
value of the consideration received for the Minority Ownership over its book
value was

F-10
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

1. Basis of Presentation: -- (continued)

recorded by the Corporation as goodwill at September 30, 1997, calculated as
follows:

Fair value of the GP Minority Ownership (i) $21,841
Less book value of the GP Minority Ownership (ii) 1,082
-------
Excess over book value recorded as goodwill $20,759
=======

(i) Represents 92.9% of the GP Exchange (the portion allocable to the
Minority Ownership) valued at $23,500 in the aggregate for 1,000,000
common shares, based on the closing price of the Class B interest on
the New York Stock Exchange at September 30, 1997 of $5.875.

(ii) As reported on the pre-Conversion balance sheet of the Partnership
at September 30, 1997.

The Company incurred transaction and other costs related to the Conversion
of $5,203, of which $4,700 represents transaction costs and $503 a charge for
deferred compensation accelerated as a result of the Conversion. Cash payments
in 1997 and 1996 were $2,698 and $1,732, respectively, and $773 was accrued as
of December 31, 1997.

Net Income per Common Share:

In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share".
As a result, the Company is required to disclose basic and diluted Earnings Per
Share ("EPS") information for all periods presented. In accordance with SFAS
128, dilutive EPS is to include the dilutive effects of options, warrants and
convertible securities; however, there are no potentially dilutive securities
outstanding. Accordingly, only basic EPS amounts have been presented. Due to
the fact that the Company was not a corporation for the full year ended
December 31, 1997, a pro forma net income per common share has been presented.
Pro forma net income per common share assumes the Conversion and Refinancing
occurred at the beginning of the year and accordingly excludes the
extraordinary loss of $0.53 per common share.

The computation of pro forma net income per common share is as follows:

<PAGE>

<TABLE>
<CAPTION>
Year
Ended
December 31, 1997
------------------
<S> <C>
Numerator:
- ----------
Net income .............................................................................. $ 29,140
Eliminate extraordinary loss from early extinguishment of debt ........................ 3,392
Eliminate historical income tax benefit ............................................... (6,680)
Eliminate income of Minority Ownership ................................................ 263
Distributions on guaranteed preferred beneficial interests ............................ (9,174)
Incremental interest expense to reflect the Conversion and Refinancing ................ (419)
Eliminate transaction and other costs related to the Conversion ....................... 3,053
Incremental amortization on goodwill associated with the GP Exchange .................. (390)
Eliminate management fee .............................................................. 2,491
Pro forma provision for income taxes .................................................. (9,607)
-----------
Pro forma net income .................................................................... $ 12,069
===========
Denominator:
- ------------
Actual weighted average number of outstanding Partnership Class B interests during the
period
before the Conversion ................................................................... 21,675,746
Conversion ratio -- reverse split of one common share for four Class B interests. ........ X.25
-----------
Sub-total -- pro forma outstanding common shares ....................................... 5,418,936
Common shares received by the general and limited partners of the GP ..................... 1,000,000
-----------
Pro forma weighted average number of common shares ..................................... 6,418,936
===========
Pro forma net income per common share .................................................... $ 1.88
===========
</TABLE>

F-11
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

1. Basis of Presentation: -- (continued)

Restructuring Charges:

In December 1996, the Company recorded a provision for restructuring
charges in the amount of $5,950 for STS and Harding in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity." Restructuring charges for STS in the amount of $4,400 included
termination benefits for 175 employees and other exit costs. Restructuring
charges for Harding in the amount of $1,550 represent primarily the write-off
of assets in connection with the Company's decision to withdraw from certain
geographic markets which was completed in 1997. The following table summarizes
activity in the restructuring liability for STS by balance sheet classification
for the twelve months ended December 31, 1997:

<TABLE>
<CAPTION>
Termination Other
Benefits Exit Costs Total
------------- ------------ ----------
<S> <C> <C> <C>
Current -- other accrued expenses:
- ----------------------------------
Balance at December 31, 1996: ................. $ 829 $ 817 $ 1,646
Reduction for payments ....................... (1,156) (668) (1,824)
Reclassified from long-term .................. 1,605 335 1,940
-------- ------ --------
Balance at December 31, 1997: ................. $ 1,278 $ 484 $ 1,762
======== ====== ========
Long-term -- other liabilities:
- -------------------------------
Balance at December 31, 1996: ................. $ 2,014 $ 573 $ 2,587
Long-term -- reclassified to current ......... (1,605) (335) (1,940)
-------- ------ --------
Balance at December 31, 1997: ................. $ 409 $ 238 $ 647
======== ====== ========
</TABLE>

Termination payments represent severance payments and other support costs
for 50 employees; other exit costs include legal and consulting costs to
execute termination activities and facility shut-down costs.

2. Summary of Significant Accounting Policies:

Cash Equivalents:

Cash equivalents consist of commercial paper, U.S. Treasury obligations
and other liquid securities purchased with initial maturities less than 90 days
and are stated at cost which approximates market value.

Inventories:

Inventories, which consist of products purchased for resale, are valued at
the lower of cost or market, cost being determined principally on the first-in,
first-out method.

Property and Equipment:

Property and equipment, including assets acquired under capital leases, is
carried at cost and includes expenditures for new facilities and major
renewals. Maintenance and repairs are charged to expense as incurred. When
assets are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from their respective accounts, and the resulting gain
or loss is reflected in current operations.

Depreciation:

For financial accounting purposes, depreciation, including that related to
plant and equipment acquired under capital leases, is computed on the
straight-line method over the estimated useful lives of the assets, generally
three to twenty-five years, or, if shorter, over the terms of the related
leases.

F-12
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

2. Summary of Significant Accounting Policies: -- (continued)

Goodwill and Other Intangible Assets:

Goodwill related to the excess of acquisition cost over the fair value of
net assets acquired and the goodwill associated with the GP Exchange discussed
in Note 1 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.

Long-Lived Assets:

Under the provisions of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company has
evaluated its long-lived assets for financial impairment, and will continue to
evaluate them as events or changes in circumstances indicate that the carrying
amount of such assets may not be fully recoverable.

The Company evaluates the recoverability of long-lived assets not held for
sale by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 1997. See Note 1, "Restructuring Charges" for information on the
write-down of assets at Harding in 1996.

Income Taxes:

Deferred income taxes are computed using the liability method. Under this
method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. As a
result of the Conversion, the Company recognized additional deferred income tax
benefits which were not previously available to the Partnership due to its
partnership status.

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.

Fair Value of Financial Instruments:

Cash, accounts receivable, short-term borrowings, accounts payable,
accrued liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value because of the short-term maturity or
revolving nature of these instruments. The fair values of the Company's debt
instruments are disclosed in Note 10. The fair value of the Trust Preferred
Securities are disclosed in Note 13.

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

F-13
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

2. Summary of Significant Accounting Policies: -- (continued)

accounts using an average exchange rate during the period. The changes in the
cumulative foreign translation adjustment for each period relate to translation
adjustments in their entirety.

Exchange adjustments resulting from foreign currency transactions are
recognized in net income and were immaterial for the three years ended December
31, 1997.

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.

Recent Accounting Pronouncements:

In 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which
requires changes in comprehensive income be shown in a financial statement that
is displayed with the same prominence as other financial statements. Adoption
of SFAS 130 is required in 1998, however, the Company does not anticipate a
significant impact on its financial disclosure requirements due to the adoption
of SFAS 130.

3. Acquisitions/Divestitures:

Since August 31, 1997, Harding has purchased the assets of three retail
glass shops for an aggregate purchase price of $793 and the assumption of
certain liabilities. The aggregate purchase price includes goodwill of $429.

On April 11, 1996, STS purchased certain assets of Hydraulic Depot, Inc.,
of Reno, Nevada, for an aggregate purchase price of $700, including goodwill of
$141.

In November 1995, Hillman purchased certain assets of the Retail division
of Curtis Industries of Eastlake, Ohio, for an aggregate purchase price of
$8,011 and the assumption of certain liabilities. The aggregate purchase price
includes goodwill of $3,442. The purchase price and goodwill amounts include
post-closing adjustments recorded in 1996.

These acquisitions have been accounted for as purchases and, accordingly,
the results of operations have been included in the accompanying consolidated
financial statements from the date of acquisition.

On October 27, 1995, the Operating Partnership sold certain assets of its
Downey Glass division for a cash consideration, net of expenses, of
approximately $6,237 and the assumption of certain liabilities. The Operating
Partnership recorded a gain on the sale in the amount of $4,144 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 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.

4. Related Party Transactions:

Previously under partnership form, the GP earned 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).

F-14
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

4. Related Party Transactions: -- (continued)

Management fees earned in each of years 1997, 1996 and 1995 were $2,491, $3,330
and $3,330, respectively. The 1997 management fee was pro-rated through the
Conversion and paid in full on September 30, 1997. The management fees for the
years 1996 and 1995 were paid in full in March 1997 and 1996, respectively.

A member of the Company's Board of Directors is a partner in a law firm
which represents the Company in various matters and with which the Company had
a leasing arrangement for office space. Payments to this law firm were $811,
$407 and $260 in 1997, 1996 and 1995 respectively.

Two members of the Company's Board of Directors are officers of a firm
which performed investment banking services for the Company in 1996 and 1995.
Payments for these services were $125 and $1,509 in 1996 and 1995,
respectively.

A member of the Company's Board of Directors is an officer of a firm which
performed investment banking services for the Company in 1996 and 1995.
Payments for these services were $2 and $34 in 1996 and 1995, respectively.

5. Income Taxes:

The components of the provision (benefit) for income taxes are as follows
for the three years ended:

<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal ........................................ $ 770 $ -- $ --
State and local ................................ 457 418 608
Foreign ........................................ 1,005 605 629
--------- -------- -------
Total current ....................... ......... 2,232 1,023 1,237
--------- -------- -------
Deferred:
Federal ........................................ 183 (1,919) $ (621)
State and local ................................ 42 (244) (79)
Foreign ........................................ 428 -- --
--------- -------- -------
Total deferred ................................ 653 (2,163) (700)
--------- -------- -------
Deferred tax benefit upon conversion ............ (9,565) -- --
--------- -------- -------
Provision (benefit) for income taxes ......... $ (6,680) $ (1,140) $ 537
========= ======== =======

</TABLE>

F-15
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

5. Income Taxes: -- (continued)

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Upon the Conversion, the
Company recorded additional deferred tax assets of $9,565 not previously
available under partnership form. The table below reflects the significant
components of the company's net deferred tax assets:

December 31,
------------------------
1997 1996
---------- -----------
Deferred tax assets:
Inventory ............................. $ 5,180 $ --
Deferred compensation ................. 3,827 3,292
Casualty loss liability ............... 1,560 548
Prepayment penalty .................... 1,059 304
Bad debt reserve ...................... 936 --
Vacation pay liability ................ 998 --
Restructuring reserve ................. 780 1,034
Net operating loss -- Mexico .......... 489 --
Transaction costs ..................... 777 --
All other ............................. 199 --
------- -------
Gross deferred tax assets ........... 15,805 5,178
Valuation allowance ................... -- (171)
------- -------
Net deferred tax assets ............. 15,805 5,007
------- -------
Deferred tax liabilities:
Costs of goods sold -- Mexico ......... (935) --
------- -------
Net deferred tax assets ............ $14,870 $ 5,007
======= =======

Below is a reconciliation of U.S. Federal income tax rates to the
effective tax rates for the period from the Conversion through December 31,
1997:

<TABLE>
<CAPTION>
Three Months
Ended December 31, 1997
------------------------
<S> <C>
U.S. federal income tax rate ..................... 35.0%
Foreign income tax rates in excess of U.S. federal
income tax rates ............................... 8.9%
State and local income taxes, net of U.S. federal
income tax benefit ............................. 4.2%
Non-deductible expenses .......................... 4.3%
Recognition of deferred tax benefits relating to
cumulative temporary differences ............... (10.2%)
-----
Effective income tax rate ........................ 42.2%
=====

</TABLE>

6. Extraordinary Losses:

In connection with the Refinancing, the Company paid prepayment penalties
of $4,343 and recorded an extraordinary loss of $3,392 (net of deferred tax
benefits of $951) due to the early extinguishment of all of the Operating
Partnership's previously outstanding Series A 9.08% and Series B 8.44% Senior
Notes. Funding for these prepayment penalties was provided by the Company's
revolving credit facility.

F-16
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

6. Extraordinary Losses: -- (continued)

In 1995, the Company recorded an extraordinary loss of $629 due to early
extinguishment of a portion of the Operating Partnership's Series A 9.08% and
Series B 8.44% Senior Notes. Funding for these prepayment penalties was
provided by the Company's operating cash.

7. Property and Equipment:

Property and equipment consist of the following at December 31, 1997 and
1996:

1997 1996
---------- ----------
Land .......................................... $ 3,196 $ 3,289
Buildings and leasehold improvements .......... 18,367 18,642
Machinery and equipment ....................... 20,493 18,680
Furniture and fixtures ........................ 10,592 10,368
------- -------
52,648 50,979
Less accumulated depreciation ................. 30,709 29,570
------- -------
$21,939 $21,409
======= =======

8. Notes Payable:

Notes payable consisted of the following at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Short-term bank borrowings drawn on working capital
lines of credit ................................... $ -- $ 557
Trade notes payable in accordance with glass
inventory financing arrangements .................. 1,099 1,193
Notes payable in accordance with insurance financing
arrangements ...................................... 981 920
------ ------
$2,080 $2,670
====== ======

</TABLE>

The weighted average interest rate on the outstanding notes payable
borrowings at December 31, 1997 and 1996 was 2.83% and 3.05%, respectively.

9. Lines of Credit:

On September 30, 1997, the Operating Partnership entered into a $90,000
five-year bank credit agreement with five lenders (the "Credit Agreement"). The
Credit Agreement provides borrowings on a revolving credit basis at interest
rates based on the London Interbank Offered Rate ("LIBOR") plus a margin of
between 1.00% and 1.50% (the "LIBOR Margin") based on certain leverage ratios
as stated in the Credit Agreement, or prime. Letters of credit commitment fees
are based on the LIBOR Margin when issued. As of December 31, 1997, the LIBOR
rate was 5.77%, the LIBOR Margin was 1.50% and the prime rate was 8.50%. As of
December 31, 1997, the Operating Partnership had $54,808 available under this
Credit Agreement. The $35,192 outstanding consists of bank borrowings at LIBOR
amounting to $33,000 as reflected on the Company's consolidated balance sheet
at December 31, 1997, and letter of credit commitments aggregating $2,192.
Amounts outstanding under the Credit Agreement are due upon its termination on
September 30, 2002.

The Credit Agreement, among other provisions, contains financial covenants
requiring the maintenance of specific coverage ratios and levels of financial
position and restricts incurrence of additional debt and the sale of assets.

F-17
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

9. Lines of Credit: -- (continued)

The Company is able to utilize any unused capacity under the revolving
credit line for acquisitions. If the Company sells a significant amount of
assets as defined in the Credit Agreement, it must make an offer of prepayment
of note principal to the lenders determined on an applicable share basis with
the senior noteholder under the Noteholder Agreement (see Note 10).

The Company has another credit facility available in the amount of $500
for letters of credit of which no amount was outstanding at December 31, 1997.
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 Company has a $2,500
Canadian dollar line of credit with a local lender for working capital purposes
of which no amount was outstanding at December 31, 1997. This facility, which
is renewable annually, provides bank borrowings at an interest rate of prime
plus 1/4 of 1%.

10. Long-Term Debt:

On September 30, 1997, the Company issued $60,000 of senior notes through
a private placement with an institutional investor. The senior notes are
payable in full on September 30, 2002 and were issued at a fixed rate of 7.66%.
A surcharge rate of 7.91% was in effect from September 30, 1997 through
December 31, 1997, as provided in the noteholder agreement (the "Noteholder
Agreement"). Interest is required to be paid quarterly on March 30, June 30,
September 30 and December 30 on the outstanding principal of the senior notes.
Optional prepayments, in multiples of $100, may be made at anytime, as a whole
or in part, with accrued interest thereon plus a penalty (the "Make-Whole
Amount"), if any, as defined in the Noteholder Agreement.

The Noteholder Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific coverage ratios and levels of
financial position and restricts incurrence of additional debt and the sale of
assets.

If the Company sells a significant amount of assets as defined in the
Noteholder Agreement, it must make an offer of prepayment of note principal to
the senior noteholder determined on an applicable share basis with the lenders
under the Credit Agreement. The prepayment offer must also include accrued
interest thereon as defined in the Noteholder Agreement. A Make Whole Amount is
not required to be paid on the first $15,000 of net cash proceeds from certain
dispositions accepted as a prepayment by the senior noteholder or upon a change
in control as defined in the Noteholder Agreement.

As of December 31, 1997, the estimated fair value of the Company's senior
notes is approximately $62,900 as determined in accordance with SFAS 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.

F-18
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

11. 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,
1997:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
1998 ....................................... $ 180 7,562
1999 ....................................... 180 5,691
2000 ....................................... 180 4,301
2001 ....................................... 180 2,718
2002 ....................................... 116 1,695
Later years ................................ -- 10,083
------ ------
Total minimum lease payments .............. $ 836 $32,050
=======
Less amounts representing interest ......... (108)
------
Present value of Net Minimum Lease payments
(including $156 currently payable)......... $ 728
======

</TABLE>

Total rental expenses for all operating leases amounted to $15,921 in
1997, $15,239 in 1996, and $14,232 in 1995.

12. Deferred Compensation Plans:

Certain officers and employees earn performance-based compensation,
payment of which is deferred until future periods. All of the deferred
compensation plans contain change in control provisions which are triggered
upon a sale of all of the Operating Partnership's business, a change in the GP
(including its reorganization) or a change, other than due to death or
retirement, in a majority of the directors of Lehman/SDI, Inc., the general
partner of the GP during any one-year period. A change of control occurred at
September 30, 1997 as a result of the Conversion because a majority of the
directors of Lehman/SDI, Inc. did not continue as directors of Lehman/SDI, Inc.
after the Conversion.

The Company adopted a deferred compensation plan effective December 1,
1996, to offer key employees an opportunity to defer a portion of their
compensation including bonuses and any amounts credited to the accounts of such
employees which otherwise may become payable to such employees under other
incentive compensation programs maintained by the Company. This plan allows
participants eligible for accelerated payments under the change in control
provision of the deferred compensation plans an election to continue to defer
their balances. Certain deferrals were made when participants were entitled to
payment of accelerated awards upon the change in control as a result of the
Conversion.

Under the Company's Long-Term Performance Share Plan, adopted January 1,
1994, and amended thereafter, certain officers earn awards 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 as defined in the plan, participants are
entitled to payment of awards earned through completion of the most recent plan
year. The initial three years of this plan became complete as of December 31,
1996, as a result of the Conversion at September 30, 1997, which triggered the
change of control provision in the plan. The plan was amended to include a
two-year performance cycle, January 1, 1997 through December 31, 1998, to
complete the initial five-year program of the plan.

For the Company's Deferred Compensation for Division Presidents Plan,
adopted in 1987 and amended thereafter, certain employees earned awards which
vest at the rate of 20% per year over the 5-year period following the year in
which the award was earned. The awards will be paid at age 60, if elected by
the employee, or upon death, disability or retirement and accrue investment
earnings until paid. Upon a change in control, as

F-19
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

12. Deferred Compensation Plans: -- (continued)

defined in the plan, participants are entitled to payment of all vested and
non-vested amounts including accrued interest. The change in control provision
was triggered as a result of the Conversion and all account balances became
fully vested and eligible for distribution at September 30, 1997. The full
award is charged to operations in the year earned.

Under a former plan, the Long-Term Performance Award 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, as defined in the plan,
participants are entitled to payment of their total account balance including
accrued interest. The change in control provision was triggered as a result of
the Conversion and all account balances were eligible for distribution at
September 30, 1997.

The Operating Partnership has established a Rabbi Trust (the "Rabbi
Trust") to assist in funding the liabilities of all deferred compensation
plans. The Rabbi Trust holds insurance policies purchased by the Company on the
lives of certain participants in the deferred compensation plans. The Rabbi
Trust is the sole beneficiary of these insurance policies of which the cash
surrender value aggregated $8,407 at December 31, 1997. Prior to a change in
control and upon direction from the Company in writing, the Rabbi Trust shall
pay to the Company all or a portion of the proceeds of any death benefits
payable under any insurance policy held by the Rabbi Trust in excess of any
benefits payable under the Company's deferred compensation plans with respect
to the insured participant.

The amounts charged to income under the Company's deferred compensation
plans were $3,152, $1,071 and $2,340 in 1997, 1996 and 1995, respectively. The
1997 charge includes $503 which is classified in transaction and other related
costs on the accompanying statement of income for the year ended December 31,
1997, since this charge would not have been incurred had the Conversion not
been consummated. During the three years ended December 31, 1997, distributions
from the deferred compensation plans aggregated $2,876 in 1997, $1,160 in 1996
and $1,422 in 1995. The Company's deferred compensation liabilities amounted to
$10,451 as of December 31, 1997 and $9,208 as of December 31, 1996.

13. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated
Debentures:

In connection with the Conversion, Class A interests of the Partnership
were exchanged for Trust Preferred Securities of the Trust, as discussed in
Note 1. The Trust was organized in connection with the Conversion for the
purpose of (a) issuing its Trust Preferred Securities to the Company in
consideration of the deposit by the Company of Junior Subordinated Debentures
in the Trust as trust assets, and its Trust Common Securities to the Company in
exchange for cash and investing the proceeds thereof in an equivalent amount of
Junior Subordinated Debentures and (b) engaging in such other activities as are
necessary or incidental thereto. The Trust had no operating history prior to
the issuance of the Trust Preferred Securities. The terms of the Junior
Subordinated Debentures include those stated in the Indenture (the "Indenture")
between the Company and the indenture trustee, and those made part of the
Indenture by the Trust Indenture Act.

The Company has guaranteed on a subordinated basis the payment of
distributions on the Trust Preferred Securities and payments on liquidation of
the Trust and redemption of Trust Preferred Securities (the "Preferred
Securities Guarantee"). The sole assets of the Trust are the Junior
Subordinated Debentures and the obligations of the Company under the Indenture,
the Preferred Securities Guarantee and the Junior Subordinated Debentures in
the aggregate constitute a full and unconditional guarantee by the Company of
the Trust's obligations under the Trust Preferred Securities.

F-20
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

13. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures: -- (continued)

The Trust Preferred Securities have equity characteristics but creditor's
rights and are therefore classified between liabilities and stockholders'
deficit on the balance sheet. On September 30, 1997, the Trust Preferred
Securities were recorded at fair value of $115,991 based on the price of the
Class A interests of $11.75 upon close of trading on the New York Stock
Exchange on that date. The Trust Preferred Securities have a liquidation value
of $25.00 per security. The excess of fair value of the Trust Preferred
Securities on September 30, 1997 over their liquidation value of $105,446, or
$10,545 is amortized over the life of the Trust Preferred Securities. The fair
value of the Trust Preferred Securities on December 31, 1997 was $127,853,
based on the closing price on the New York Stock Exchange of $30.3125 per
security on that date.

The interest payments on the Junior Subordinated Debentures underlying the
Trust Preferred Securities, aggregating $12,232 per year, are deductible for
federal income tax purposes under current law and will remain an obligation of
the Company until the Trust Preferred Securities are redeemed or upon their
maturity in 2027.

14. Dividend on Common Shares:

The Board of Directors of the Company declared on December 10, 1997 a cash
dividend of $0.10 per common share which was paid on January 6, 1998 to holders
of record as of December 22, 1997.

15. Allocation of Partnership Taxable Income:

Prior to the Conversion, for the shortened Partnership tax year from
January 1, 1997 through September 30, 1997, the Partnership earned federal
taxable income of $0.5605 per Class B limited partnership interest. For 1996
and 1995 federal taxable income amounted to $0.70, and $1.6923 per B interest,
respectively. In 1997 and 1996, federal taxable income consisted of ordinary
income only. Federal taxable income in 1995 consisted of ordinary income of
$0.5326 per B interest and a combined capital gain of $1.1597 per B interest
related to the sale of the Dorman Products and Downey Glass divisions (see Note
3, Acquisitions/Divestitures).

Under the Partnership Agreement, holders of B interests were entitled to
receive annual cash distributions sufficient to cover their tax liabilities on
taxable income allocated to the B interests. For 1997, 1996 and 1995 these cash
distributions amounted to $6,136 or $0.2775 per B interest, $7,663 or $0.3465
per B interest and $14,807 or $0.6695 per B interest, respectively.

16. Retirement Benefits:

The following tables reflect net periodic pension cost (income) for
non-contributory defined benefit plans and significant assumptions used in the
determination:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost during the period ............................ $ 920 $ 879 $ 675
Interest cost on projected benefit obligations ............ 1,702 1,656 1,578
Actual return on assets ................................... (4,708) (3,432) (3,503)
Net amortization and deferral ............................. 2,059 917 1,509
-------- -------- --------
Net periodic pension cost (income) ...................... $ (27) $ 20 $ 259
======== ======== ========
Discount rate ............................................. 7.25% 7.25% 8.25%
Rates of increase in compensation levels .................. 6.50% 6.50% 6.50%
Expected long-term rate of return on plan assets .......... 9.75% 9.75% 8.50%
</TABLE>

F-21
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

16. Retirement Benefits: -- (continued)

The following table sets forth the defined benefit plans' funded status
and amounts recognized in the Company's balance sheets:

<TABLE>
<CAPTION>
Assets Exceed Accumulated
Benefit Obligations
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of beneficial obligations:
Vested benefit obligation ................................................. $ 16,756 $ 19,019
======== ========
Accumulated benefit obligation ............................................ $ 17,209 $ 19,290
======== ========
Projected benefit obligation .............................................. $ 22,225 $ 23,716
Plan assets at fair value ................................................. 26,642 26,519
-------- --------
Projected benefit obligation less than plan assets ........................ 4,417 2,803
Unrecognized net loss ..................................................... (3,039) (1,247)
Prior service cost not yet recognized in net periodic pension cost ........ (303) (328)
Unamortized balance of unrecognized net transition asset established at
January 1, 1987 .......................................................... (1,136) (1,648)
-------- --------
Prepaid pension liability recognized in the balance sheet ................. $ (61) $ (420)
======== ========
</TABLE>

None of the Company's defined benefit plans had accumulated benefit
obligations which exceeded assets.

The discount rate assumptions used in determining actuarial present value
of benefit obligations at December 31, 1997 and 1996 was 7.25%.

Certain employees of the Company's Kar Products, J.N. Fauver Co., and its
divested Dorman Products and American Electric Co. divisions are covered by
these defined benefit retirement plans. Assets of the defined benefit plans
consist of insurance contracts and assets managed under a commingled trust
agreement. The trust assets are invested primarily in equity and fixed income
holdings.

Costs (income) charged to operations under all retirement benefit plans
are as follows:

1997 1996 1995
--------- --------- ---------
Defined contribution plans ............ $1,154 $1,327 $2,693
Multi-employer pension plans .......... 253 189 374
Defined benefit plans ................. (27) 20 259
------ ------ ------
Total ............................... $1,380 $1,536 $3,326
====== ====== ======

Management estimates that its share of unfunded vested liabilities under
multi-employer pension plans is not material.

For the years ended December 31, 1997, 1996 and 1995, the costs of
post-retirement benefits charged to income were $94, $87, and $81,
respectively. The charges were determined in accordance with SFAS 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, 1997, 1996 and 1995 was
$454, $472 and $516, respectively.

17. 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, 1997, the Company had outstanding
performance and bid bonds aggregating $541.

F-22
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

17. 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, 1997, the
Company had outstanding letters of credit in the aggregate amount of $442
related to these activities.

As of December 31, 1997, the Company has guaranteed approximately $839
worth of lease obligations, principally relating to businesses previously
divested. 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 worker'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, 1997, the Company has provided
insurers letters of credit aggregating $1,750 related to certain insurance
programs.

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.

F-23
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

18. Statements of Cash Flows:

Supplemental disclosures of cash flow information are presented below:

<TABLE>
<CAPTION>
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the period for:
Interest ..................................................... $ 7,357 $ 6,769 $ 7,304
========= ======= =======
Income taxes ................................................. $ 1,433 $ 1,189 $ 1,190
========= ======= =======
Non-cash investing activities:
Acquisitions (see Note 3):
Fair value of assets acquired .............................. $ 1,029 $ 758 $ 8,515
Less liabilities assumed ................................... (236) (58) (504)
Post-closing adjustments ................................... -- (17) (626)
--------- ------- -------
Cash paid for acquired businesses ............... ......... $ 793 $ 683 $ 7,385
========= ======= =======
Non-cash financing activities:
Accrued and unpaid dividends on common shares ................ $ 642 $ -- $ --
Accrued and unpaid partnership distributions ................. $ 2,353 $ 1,857 $ 7,819
Exchange of 11,099,573 Class A limited partnership
interests for 4,217,837 Trust Preferred Securities ......... $ 115,991 $ -- $ --
Exchange of 21,675,246 Class B limited partnership
interests for 5,418,936 common shares ...................... $ 38,943 $ -- $ --
Exchange of GP's Minority Interest for 1,000,000
common shares .............................................. $ 21,841 $ -- $ --
</TABLE>
19. Quarterly Data (unaudited):

<TABLE>
<CAPTION>
1997 Fourth Third Second First
- -------------------------------------------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales ........................................ $168,932 $178,540 $ 181,643 $ 169,016
Gross profit ..................................... 69,079 72,791 73,808 67,600
Income before extraordinary loss (1) ............. 3,090 15,673 9,193 4,576
Extraordinary loss (Note 6) ...................... -- (3,392) -- --
Net income (1) ................................... 3,090 12,281 9,193 4,576
Net income (loss) per limited partnership interest
-- Class A ................................. N/A N/A $ .28 $ .27
-- Class B ................................. N/A N/A $ .28 $ .07
Pro forma net income per common share ............ N/A $ .58 N/A N/A
Net income per common share ...................... $ .48 N/A N/A N/A
1996
- ----
Net sales ........................................ $159,737 $167,125 $ 167,500 $ 154,892
Gross profit (2) ................................. 64,826 67,469 66,399 61,900
Net income (3) ................................... (1,342) 8,286 8,313 4,010
Net income (loss) per limited partnership interest
-- Class A ................................. $ .28 $ .27 $ .28 $ .27
-- Class B ................................. $ (.20) $ .24 $ .24 $ .04
</TABLE>
- ------------
(1) Includes $2,428, $275 and $350 of non-recurring transaction and other
related costs recorded in the third, second and first quarters,
respectively.

(2) Includes amounts reclassified to conform to current accounting.

(3) Includes $5,950 and $2,150 of non-recurring restructuring charges and
transaction costs, respectively, recorded in the fourth quarter.

F-24
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

20. 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. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral.

21. Segment Information:

In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which replaces previous generally accepted
accounting principles on segment reporting. Although adoption of SFAS 131 is
not required until 1998 reporting, the Company has elected to apply the
provisions of this SFAS beginning with its 1997 reporting, as contained herein.
Previously reported information has been restated to conform to reporting under
SFAS 131.

The Company has five reportable segments (see Note 1 "Nature of
Operations") which are disaggregated based on the products and services
provided, markets served, marketing strategies and delivery methods.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment sales are
immaterial. The Company measures segment profitability and allocates corporate
resources based on each segment's Earnings Before Interest, Taxes and
Amortization ("EBITA"), which is defined as income from operations before
amortization. The Company also measures the segments on performance on their
tangible asset base. The table below provides the Company's segment disclosures
and is followed by reconciliations of the segment amounts to the consolidated
amounts where appropriate:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales
Technology Services ............................... $ 323,588 $ 299,068 $ 285,466
Inventory Management -- Expediter ................. 125,911 121,389 113,715
Inventory Management -- Integrated Supply ......... 52,979 43,392 31,860
Hardware Merchandising Services ................... 107,395 95,036 77,263
Glass Merchandising ............................... 88,258 90,369 120,631
--------- --------- ---------
Consolidated net sales ............................ $ 698,131 $ 649,254 $ 628,935
- ----------------------------------------------------------------------------------------------
Gross Profit
Technology Services ............................... $ 85,902 $ 76,896 $ 75,527
Inventory Management -- Expediter ................. 90,171 87,839 83,122
Inventory Management -- Integrated Supply ......... 13,216 11,436 9,372
Hardware Merchandising Services ................... 58,319 48,878 41,037
Glass Merchandising ............................... 35,670 35,545 42,279
--------- --------- ---------
Segment gross profit .............................. $ 283,278 $ 260,594 $ 251,337
- ----------------------------------------------------------------------------------------------
EBITA
Technology Services ............................... $ 14,784 $ 13,335 $ 15,743
Inventory Management -- Expediter ................. 21,160 19,199 15,478
Inventory Management -- Integrated Supply ......... 2,968 1,892 1,723
Hardware Merchandising Services ................... 10,874 7,130 7,314
Glass Merchandising ............................... 2,131 3,231 3,710
--------- --------- ---------
Segment profit .................................... $ 51,917 $ 44,787 $ 43,968
- ----------------------------------------------------------------------------------------------
</TABLE>

F-25
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

21. Segment Information: -- (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Tangible Assets
- ---------------
Technology Services ................................................ $ 90,597 $ 81,720 $ 77,215
Inventory Management -- Expediter .................................. 41,991 42,274 40,606
Inventory Management -- Integrated Supply .......................... 13,138 13,813 10,204
Hardware Merchandising Services .................................... 40,579 41,322 32,544
Glass Merchandising ................................................ 23,879 24,427 24,858
--------- --------- ---------
Segment tangible assets ............................................ $ 210,184 $ 203,556 $ 185,427
- ------------------------------------------------------------------------------------------------------------------
Capital Expenditures
- --------------------
Technology Services ................................................ $ 2,045 $ 1,112 $ 1,470
Inventory Management -- Expediter .................................. 622 786 782
Inventory Management -- Integrated Supply .......................... 266 282 63
Hardware Merchandising Services .................................... 1,754 1,985 539
Glass Merchandising ................................................ 373 640 1,254
--------- --------- ---------
Segment capital expenditures ....................................... $ 5,060 $ 4,805 $ 4,108
- --------------------------------------------------------------------- --------- --------- ---------
Depreciation
- ------------
Technology Services ................................................ $ 1,438 $ 1,323 $ 1,239
Inventory Management -- Expediter .................................. 886 897 865
Inventory Management -- Integrated Supply .......................... 107 72 67
Hardware Merchandising Services .................................... 747 451 292
Glass Merchandising ................................................ 730 775 1120
--------- --------- ---------
Segment depreciation ............................................... $ 3,908 $ 3,518 $ 3,583
- ------------------------------------------------------------------------------------------------------------------
Geographic Segment Data:
- ---------------------------------------------------------------------
Net Sales
- ---------
United States ...................................................... $ 644,299 $ 609,485 $ 598,741
Canada ............................................................. 34,022 30,888 29,127
Mexico ............................................................. 19,810 8,881 1,067
--------- --------- ---------
Consolidated net sales ............................................. $ 698,131 $ 649,254 $ 628,935
- ------------------------------------------------------------------------------------------------------------------
Reconciliation of Segment Profit to Income Before Income
- ---------------------------------------------------------
Taxes and Extraordinary Loss:
- ------------------------------
Segment profit -- EBITA ............................................ $ 51,917 $ 44,787 $ 43,968
Amortization ....................................................... (1,894) (1,924) (1,996)
Corporate expenses ................................................. (8,425) (6,981) (7,340)
Non-recurring charges:
Restructuring ..................................................... -- (5,950) --
Transaction and other costs ....................................... (3,053) (2,150) --
Management fee .................................................... (2,491) (3,330) (3,330)
--------- --------- ---------
Income from operations ............................................. 36,054 24,452 31,302
Interest expense, net .............................................. (7,198) (6,875) (6,920)
Distributions on guaranteed preferred beneficial interests ......... (3,058) -- --
Other income ....................................................... 54 550 256
Gain on sale of divisions .......................................... -- -- 20,644
--------- --------- ---------
Income before income taxes and extraordinary items ................. $ 25,852 $ 18,127 $ 45,282
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

F-26
<PAGE>

SUNSOURCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

(dollars in thousands)

21. Segment Information: -- (continued)

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of Segment Tangible Assets to Total Assets:
- -----------------------------------------------------------
Segment tangible assets .................................. $ 210,917 $ 203,556 $ 185,427
Goodwill ................................................. 62,588 43,036 44,250
Other intangible assets .................................. 170 503 1,015
Deferred income taxes .................................... 15,805 5,007 2,844
Cash value of life insurance ............................. 8,407 4,566 3,009
Other corporate assets ................................... 8,255 5,887 18,046
--------- --------- ---------
Total assets ............................................. $ 306,142 $ 262,555 $ 254,591
- -----------------------------------------------------------------------------------------------------
Reconciliation of Segment Capital Expenditures to
- -------------------------------------------------
Total Capital Expenditures:
- ----------------------------
Segment capital expenditures (1) ......................... $ 5,060 $ 4,805 $ 4,108
Corporate capital expenditures ........................... 130 159 191
--------- --------- ---------
Total capital expenditures ............................... $ 5,190 $ 4,964 $ 4,299
- -----------------------------------------------------------------------------------------------------
</TABLE>

- ------------
(1) Includes $257 and $623 of assets acquired under capital leases in 1997 and
1996, respectively.

<TABLE>
<S> <C> <C> <C>
Reconciliation of Segment Depreciation to Total
- ------------------------------------------------
Depreciation:
- --------------
Segment depreciation .......................... $ 3,908 $ 3,498 $ 3,583
Corporate depreciation ........................ 101 105 78
------- ------- -------
Total depreciation ............................ $ 4,009 $ 3,603 $ 3,661
- -----------------------------------------------------------------------------------------------------
</TABLE>

22. Subsequent Events:

On January 22, 1998, the Company filed a registration statement on Form
S-2 with the United States Securities and Exchange Commission, which was
amended thereafter, for an offering of common shares of the Company (the
"Offering"). Of the 1,976,059 common shares included in the Offering, 500,000
shares are being issued and sold by the Company and 1,476,059 shares are being
sold by selling stockholders. The Company will not receive any of the proceeds
for the shares being sold by the selling stockholders. The Company will use the
net proceeds from its shares sold in the Offering to repay borrowings under its
revolving credit facility.

The Board of Directors of the Company has authorized the acquisition by
Hillman of certain assets of a retail hardware business which had sales in its
last fiscal year of approximately $17.0 million.

F-27
<PAGE>

[Photograph of STS technician servicing equipment]

[Photograph of SIMCO's operations]

[Photograph of Hillman display racks]

[Photograph of Harding glass operations]
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other individual has been authorized to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, the Selling
Stockholders or any of the Underwriters. This Prospectus does not constitute an
offer of any securities other than those to which it relates or an offer to
sell, or a solicitation of an offer to buy, to any person in any jurisdiction
where such offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof.

-----------------------------------
TABLE OF CONTENTS

Page
--------
Prospectus Summary ............................. 3
Risk Factors ................................... 8
The Company .................................... 11
Use of Proceeds ................................ 11
Dividend Policy ................................ 11
Capitalization ................................. 12
Price Range of Common Shares ................... 13
Selected Historical and Pro Forma Financial
Information ................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Business ....................................... 23
Management ..................................... 35
Security Ownership of Certain Beneficial
Owners, Management and Selling
Stockholders ................................ 37
Description of Capital Stock ................... 38
Underwriting ................................... 41
Legal Matters .................................. 43
Experts ........................................ 43
Available Information .......................... 43
Incorporation of Certain Documents by
Reference ................................... 44
Index to Financial Statements .................. F-1

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

1,988,063 Shares

SUNSOURCE

Common Shares

--------------
PROSPECTUS
March 19, 1998
--------------

LEHMAN BROTHERS

ROBERT W. BAIRD & CO.
INCORPORATED

FURMAN SELZ

LEGG MASON WOOD WALKER
INCORPORATED

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------