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ANALYSTS/INVESTORS
QUESTIONS & ANSWERS
1. What was the basis upon which the Company was sued with respect to
the proposed Conversion?
The complaints alleged that the terms of the Conversion unfairly
transfer substantial equity to the General Partner to the detriment
of the B Interests and constitutes a breach of fiduciary duty.
Management believes the complaints are without merit and that the
Conversion is fair to both the limited partners and the General
Partner.
2. What is the current outlook for the lawsuit and its probable effect
on the transaction?
The Company has filed a motion to dismiss the complaint. At the
moment, nothing is happening. Management doesn't expect this will
have any effect on the transaction.
3. The financial statements have been describing a lawsuit with R&B
regarding the Dorman divestiture for a long time. What is going on?
Discovery is continuing with respect to the lawsuit. Also, we expect
to begin arbitration proceedings with respect to the closing balance
sheet later this year. 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.
4. What is the outlook for earnings? A. Current quarter B. For 1997
C. For 1998
It is SunSource's policy not to make earnings projections. With
respect to the projections included in this Proxy, "the projections
were not intended for use by public investors and should not be
relied upon by them." See page 6 to Exhibit D of the Proxy for more
caveats to the projections contained therein.
5. What will the Company do if the Conversion is not approved?
If the Conversion is not approved, the Company presently intends to
continue to operate the business in its current form subject to
corporate taxation after December 31, 1997. The Company would most
likely explore other alternatives to the Conversion again, including
liquidation.
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6. I understand part of the gain on the exchange of A Interests is
subject to tax as ordinary income. Why is this and how much gain will
there be?
Yes, the portion of the consideration to be received on the exchange
of A interests that is attributable to the Company's inventory items
will be subject to tax as ordinary income. Management currently
estimates that the ordinary income component will range from
approximately $.20 to $.40 per A interest and will be finalized once
the Conversion is consummated and the fair market value of the Class
A consideration is known. If the Conversion is approved, the Company
intends to distribute with its final K-1 package for partial year
1997, a complete guide regarding tax matters as a result of the
Conversion to assist investors in the preparation of their 1997
income tax returns.
7. I am confused about the tax treatment for the gain for investors who
own both A and B Interests.
Taxes vary with each individual's circumstances and I don't think it
is practical to discuss them in this forum. The tax treatment is
spelled out in great detail beginning on page 79 of the Proxy.
8. What is OID income? How does it affect owners of Trust Preferred
Securities?
OID income is a complex issue that is discussed in detail on page 81
of the Proxy.
9. The Conversion looks like a really good deal for the General Partner.
How does the issuance of all that Common Stock affect the other
holders of Common Stock?
The General Partner will receive 1,000,000 shares of Common Stock and
the Company will retain the rights to the management fee and GP
distributions which together aggregate about $3.7 million annually.
The net effect on the Company's earnings per Common Stock after
corporate income taxes is anti-dilutive as a result of the GP
exchange based on the Company's current annual earnings.
10. There is mention of potential acquisitions in the Prospectus. Is
anything imminent?
The Company is pursuing discussions with a number of prospective
sellers of businesses, particularly in glass merchandising. These
discussions may lead to acquisitions, one of which may be material.
The Company is currently not a party to any agreement or
understanding regarding a material acquisition.
11. Why did you decide to pursue Conversion rather than remain a master
limited partnership as permitted under the new tax legislation?
Management analyzed the impact of the new 3.5% tax on gross income
that would be imposed if we elected to remain an MLP and concluded
that it was not advantageous relative to the alternative of
conversion. The reasons to convert to corporate form are set forth
beginning on page 41 of the Proxy.
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12. Is Lehman going to sell its entire investment in Sun Source?
Lehman has made an agreement with the Company to sell some or all of
their shares following conversion. Whether they actually do so is up
to them and will depend, at least in part, upon market conditions.
13. How many shares will management be selling as part of the secondary
offering? Who is selling and why?
I don't intend to sell any of my shares even though the agreement
permits management to sell up to 20% of its shares.
14. Why aren't there dissenters' rights for partners opposed to the
Conversion?
Dissenters' rights are not required for this transaction. The
dissenters' rights process is cumbersome, and we believe that the
provision requiring a vote of the unaffiliated partners provides
ample protection for investors.
15. Why is the Conversion fair to the A limited partners when they can no
be redeemed at par after five years? and at $9.50 instead of $10?
Smith Barney determined that the terms of the Conversion were fair to
holders of A interests since the additional yield to be paid (11.6%
vs. 11%) compensates the holders of A interests for the change in
call protection and the cash payment of $1.30 per A interest
compensates the A holders for the reduction in par value from $10.00
to $9.50 per A interest. The A holders will continue to receive their
same monthly distribution aggregating $1.10 annually per A interest
on a reduced investment of $9.50 par value which will yield 11.6% per
annum.
16. Why is the Conversion fair to the A limited partners when interest
payments can be deferred for five years?
Deferral of interest payments is unlikely since it would adversely
affect the Company's credit rating, prevent payments of dividends (if
any) on the common stock, and have a depressing effect on the price
of the common stock.
17. What are your intentions with respect to dividends on the common
stock? will the negative book value affect the ability to pay
dividends?
The Board of Directors has not yet established a policy regarding the
payment of dividends on the Common Stock after the Conversion. The
payment of Dividends will be at the discretion of the Board and will
depend upon earnings, financial condition, acquisition activities and
other factors. The negative book value upon Conversion will not
prevent the Corporation from paying dividends provided the
Corporation pays dividends from net profits earned after Conversion.
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18. What are your plans for stock options for executives? Will the stock
option plans be submitted to stockholders for their approval?
The Company intends to examine stock option plans in conjunction with
its current deferred compensation plans for its executives. Of
course, any stock option plans recommended by the Corporation's Board
of Directors will be submitted to the common stockholders for their
approval.
19. Now that the management fee will be eliminated, do you plan to
increase officers salaries?
The Company has no current plans to increase officers' salaries due
to elimination of the management fee since the officers currently
entitled to a portion of this fee will have received consideration in
the form of Common Stock as part of the GP exchange package.
20. Who are the members of management who will receive accelerated
payments under the deferred compensation plans?
Mr. Corvino, CFO of the Company, in addition to certain Presidents of
the Company's Operating Divisions will receive accelerated payments
under the Company's deferred compensation plans. Messrs' Marshall,
McDonnell and Edmonson have waived their rights to accelerate
payments.
21. Why does the corporation have a poison pill?
The poison pill encourages persons considering an acquisition or
takeover of the Corporation to negotiate with the Board of Directors
rather than to pursue non-negotiated acquisitions or takeover
attempts. This provision should provide greater value to
stockholders.
22. How could Smith Barney give an opinion on fairness to the A's and
fairness to the B's--isn't there a conflict between them (PS p.61)?
The Special Committee viewed the A Interests as securities with
attributes generally like preferred stock, and therefore principally
as yield-oriented securities. On the other hand, the Special
Committee viewed the B Interests as securities with attributes
generally like common stock, and therefore principally as
growth-oriented securities. Consequently, the Special Committee
considered the two instruments as sufficiently different vis-a-vis
their competing claims on the Partnership's resources to accommodate
a single committee review and engagement of one financial advisor to
render fairness opinions for both classes of securities. In addition,
the Special Committee noted the requirement that the Conversion be
approved by a majority of the outstanding unaffiliated A Interests
and B Interests, voting as separate classes.
23. Why is the management fee being kept after the Conversion when the
General Partner will be owned by the corporation?
After conversion, the management fee will be retained within the
corporation. There will be no payments to any party who currently
receives the management fee. We are doing this to avoid the expense
of eliminating the underlying partnership structure (reorganization
of twelve operating divisions).
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24. Why is the transaction so complicated? Why didn't you write the proxy
statement in plain English like the SEC now requires?
The transaction is complicated due to tax considerations and the
various ownership constituencies (Class A holders, Class B holders
and the General Partner). The Company does have available a Question
and Answer brochure for its investors to answer key questions about
its proposal.
25. On page 12 of the proxy statement, how did you come up with a value
of $26,640,000 for the General Partner interest? Why did you use 8.0X
when you use 5.0, 6.0 and 7.0 for liquidation values?
The value of the management fee of $26,640,000 was calculated by the
General Partner by applying a proposed capitalization factor of 8.0X
the annual management fee of $3,330,000 based on an analysis of the
multiples of EBITA of comparable industrial distribution companies.
Liquidation values reflect lower multiples of EBITA due to the risks
and uncertainties involved in pursuing a strategy of complete
liquidation for all of the Partnership's businesses.
26. In the table on page 37, how did you come up with a value for the A
Interests when continuing as a partnership of $11 when the A's'
market price now is $12 1/2?
The reference price of $11.00 in 1997 and 1998 per A interest when
continuing as a partnership does not reflect the $1.30 cash payment
to A holders as part of the A exchange package which is likely
included in the current A market price of $12.50.
27. In the table on page 38, how did you come up with a value for the B
Interests when continuing as a partnership of $2.40 when the B's'
market price is now $5 1/2?
The reference price of $2.40 in 1997 per B interest when continuing
as a partnership reflects the impact of paying corporate income
taxes, the payment of A distributions from net income after taxes and
the Partnership's historical P/E multiple of 12.04 net income
after-tax. The current B market price most likely assumes approval of
the Conversion and elimination of a portion of the Partnership's p/E
ratio discount of 18% to 25% to comparable industrial companies
28. Why didn't the special committee consider alternatives?
The Board of Directors of Lehman/SDI undertook the responsibility of
considering the alternatives to the Conversion including continuation
as a MLP and liquidation. The Special Committee was appointed to
review, evaluate and reach a determination with respect to the
fairness of the terms of the Conversion. This is discussed in detail
on page 49 of the Proxy.
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29. Why was Smith Barney instructed not to consider the projections given
to lenders (PS p. D-5)?
The projections given to lenders were developed by management to
determine sufficient financial capacity to support a broad range of
future corporate possibilities including acquisitions and a dividend
policy; therefore, these projections were not representative of
existing operations only that Smith Barney was evaluating. See page 5
of Exhibit D to the Proxy for a discussion of the caveats to the
projections.
30. For Mr. Marshall: What are your plans for retiring? What procedures
are in place for naming your successor?
I have no current plans for retirement but intend to discuss
succession plans with the Board of Directors post Conversion.
31. How is the restructuring going? Do you have plans for making other
changes?
Restructuring of the Technology Services Group is going according to
plan and is still scheduled for substantial completion by December
31, 1998. There are no other major restructuring plans on the
horizon.
32. Are the distributions on the Trust Preferred Securities guaranteed?
No, the distributions on the Trust Preferred Securities can be
deferred for up to five years by the Corporation but are cumulative
and interest compounds at 11.6% per annum until paid. The Company has
paid monthly distributions to its A holders every month since its
inception in February 1987.
33. I understand that the Trust Preferred Securities are callable after
five years. Is it likely that the Company will call the Securities at
that time?
The Company will consider a call on all or a portion of the Trust
Preferred Securities after five years dependent upon its financial
position, internal growth of its core businesses, acquisition
strategy, interest rates and other factors.
34. The current market price of a Class A interest is about $11.375. Can
you explain why this is so when the Trust Preferred Security to be
exchanged for it carries a $9.50 par value and the cash to be
received in the Conversion is only $1.30 per A interest?
The current market price of an A interest most likely reflects the
cash portion of the A exchange package of $1.30 per A interest plus a
premium to the $9.50 par value due to the current interest rate
environment.
35. What is the Company's current earnings per common share on a pro
forma basis assuming the conversion is approved?
Earnings per common share on a pro forma basis for the three months
ended March 31, 1997, were $0.176. Pro forma earnings for the twelve
months ended December 31, 1996 were $0.816. I can't give you pro
forma results through June 1997 because that is non-public
information.
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36. You noted that the Company's Class B interest has traded at discount
to its peer group of about 25%. Given the recent run up in value of a
Class B interest to $5.50 to $5.75, is there still a discount in the
price earnings ratio on the B interest?
Our earnings have increased in the last two quarters, as well as the
overall valuation levels in the stock market. Our price appreciation
since the conversion terms were announced seems to be greater than
can be explained by these factors. It appears that the discount to
our P/E multiple is narrowing in anticipation of the conversion.
37. What is the advantage for a Class A holder to vote for the Conversion
if he would continue to receive his monthly distributions in
perpetuity if the Company remained in partnership form that is
allowed under current tax law?
If the Conversion is not approved, it is likely that the General
Partner will explore alternatives to the Conversion including
liquidation which would result in A holders receiving a liquidation
value of d$10.00 per A interest. The probability of A holders
continuing to receive monthly distributions in perpetuity, if the
Company remained in partnership form, is unknown.
