Hillman Companies Inc – ‘PREM14A’ on 7/10/01

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Preliminary Proxy Solicitation Material — Merger or Acquisition   —   Schedule 14A
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: PREM14A     Sunsource Inc. Preliminary Proxy Statement           225   1.10M 

Document Table of Contents

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SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT 

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES 
EXCHANGE ACT OF 1934 (AMENDMENT NO.  )

                                                        [Enlarge/Download Table]
                                                                                                      
FILED BY THE REGISTRANT [X]                                                                           

Filed by a Party other than the Registrant [ ]                                                        

Check the appropriate box:                                                                            

[X] Preliminary Proxy Statement                       [ ] Confidential, for Use of the Commission Only
                                                      (as permitted by Rule 14a-6(e)(2))              

[ ] Definitive Proxy Statement                                                                        

[ ] Definitive Additional Materials                                                                   

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12                                     

SUNSOURCE INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant) 

Payment of Filing Fee (Check the appropriate box):                              

[ ] No fee required.                                                  

[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.                                                                           

(1) Title of each class of securities to which transaction applies:   

Common Stock, par value, $.01 per share 
--------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:      

6,900,280 
--------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed  
       pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):    

$10.375 per share 
--------------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:                  

$71,590,405 
--------------------------------------------------------------------------------

(5) Total fee paid:                                                   

$14,318.08
--------------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.                   

    [ ] Check box if any part of the fee is offset as provided by Exchange Act
      Rule 0-11(a)(2) and identify the filing for which the offsetting fee
   was paid previously. Identify the previous filing by registration
       statement number, or the form or schedule and the date of its filing.

(1) Amount previously paid:                                           

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

(2) Form, schedule or registration statement no.:                     

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

(3) Filing party:                                                     

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

(4) Date filed:                                                       

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

This proxy statement is first being sent to stockholders on or about     , 2001.

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[SunSource, Inc. Logo]

3000 One Logan Square 
Philadelphia, PA 19103
Phone: (215) 282-1290 

A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT

To the stockholders of SunSource Inc.:                                          

Allied Capital Corporation and SunSource Inc. have entered into a merger
agreement where Allied Capital has agreed to acquire SunSource in a merger. If  
the merger is completed, SunSource common stockholders will receive $10.375 in  
cash for each share they own or an aggregate of approximately $72 million and   
SunSource will become an independently managed, private Allied Capital portfolio
company, referred to as New SunSource.                                          

If the merger is completed, certain SunSource officers, directors and   
stockholders have agreed to continue as stockholders of New SunSource to ensure 
continuity. Allied Capital will own approximately 94% of New SunSource, and the 
continuing stockholders will own approximately 6% of New SunSource, on a fully  
diluted basis, taking into account the rollover options as discussed in the     
accompanying proxy statement.                                                   

   SunSource will hold a special meeting of stockholders at 10:00 a.m. Eastern
time, on              , 2001 at the law offices of Morgan Lewis & Bockius LLP,  
1701 Market Street, Room 18A and B (18th Floor), Philadelphia, Pennsylvania     
19103, to consider and vote upon the merger. The holders of a majority of the   
outstanding shares of SunSource common stock must approve the merger at the     
SunSource special meeting. SunSource stockholders representing approximately 20%
of the outstanding shares of SunSource common stock as of the record date for   
the special meeting have agreed to vote the shares of SunSource common stock    
owned by them in favor of the merger. In addition, the merger is subject to     
various other conditions. The terms and conditions of the merger and related    
transactions are more fully described in the proxy statement.                   

    A special committee of disinterested, independent directors of SunSource has
evaluated the merits, and negotiated the terms, of the merger. The special      
committee has received a written opinion of Janney Montgomery Scott LLC, the    
special committee's financial advisor, that, subject to the qualifications      
contained in the opinion, as of the date of the merger agreement the cash price 
of $10.375 per share was fair to the holders of SunSource common stock from a   
financial point of view. The price of $10.375 represents a 109% premium to the  
closing price of the common stock on June 18, 2001 (the last full trading day   
before the public announcement of the merger). The closing price of SunSource   
common stock, which trades on the American Stock Exchange under the symbol      
"SDP", on              , 2001 was $    per share. Please read carefully the     
opinion of Janney Montgomery Scott LLC, which is attached as Appendix B to the  
accompanying proxy statement. In addition, more detailed information about the  
analysis of Janney Montgomery Scott LLC is given in the section entitled        
"Opinion of SunSource's Financial Advisor" in the accompanying proxy statement. 

   The special committee has unanimously recommended that SunSource's board of
directors adopt the merger agreement and approve the merger and believes that   
the proposed merger is both substantively and procedurally fair to the          
unaffiliated holders of SunSource's common stock. SunSource's board of directors
believes that the proposed merger is both substantively and procedurally fair to
the holders of SunSource common stock, including those unaffiliated holders of  
common stock. The board of directors has approved the merger and determined the 
merger to be advisable and in the best interests of SunSource stockholders and  
recommends that you vote "FOR" the adoption of the merger agreement and the     
approval of the merger.                                                         

  YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please take time to vote on the proposal by completing and mailing the 
enclosed proxy card, or voting over the telephone or via the internet.          

          Sincerely,

                       Maurice P. Andrien, Jr.
                                     President and Chief Executive Officer

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES         
COMMISSION HAS: APPROVED OR DISAPPROVED OF THE MERGER; PASSED UPON THE MERITS OR
FAIRNESS OF THE TRANSACTION; OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE     
DISCLOSURES IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL  
OFFENSE.                                                                        

The proxy statement is dated        , 2001, and was mailed to you on or about 
       , 2001.

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[SunSource, Inc. Logo]

3000 ONE LOGAN SQUARE 
PHILADELPHIA, PA 19103
------------------------

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS 
------------------------

To Our Stockholders:                                                            

   A special meeting of stockholders of SunSource Inc. will be held at
10:00 a.m., Eastern time, on                 , 2001, at the law offices of      
Morgan Lewis & Bockius LLP, 1701 Market Street, Room 18A and B (18th Floor),    
Philadelphia, Pennsylvania 19103, for the following purposes:                   

       1. To consider and vote upon a proposal to approve and adopt the merger
       agreement by and among Allied Capital Corporation, Allied Capital
       Lock Acquisition Corporation, a wholly owned subsidiary of Allied
Capital, and SunSource and approve the merger; and        

      2. To grant discretionary authority to vote in favor of an adjournment
of the meeting, if necessary.                             

 This proposal is more fully described in the proxy statement that
accompanies this notice, which you should read carefully.                       

    We have fixed the close of business on                 , 2001 as the
record date for the determination of our stockholders entitled to vote at this  
meeting, and any and all adjournments or postponements thereof.                 

       WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE YOUR SHARES.
YOU MAY COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT IN THE      
POSTAGE-PAID ENVELOPE OR YOU MAY VOTE OVER THE TELEPHONE OR VIA THE INTERNET. IT
IS IMPORTANT THAT YOUR INTERESTS BE REPRESENTED AT THE SPECIAL MEETING. YOU CAN 
REVOKE YOUR PROXY AT ANY TIME BY DELIVERING TO THE SECRETARY OF SUNSOURCE A     
WRITTEN REVOCATION PRIOR TO THE SPECIAL MEETING, BY SUBMITTING A NEW PROXY CARD 
OR BY VOTING IN PERSON AT THE SPECIAL MEETING.                                  

                                      By Order of the Board of Directors
                     of SunSource Inc.

                     Joseph M. Corvino
             Secretary

Philadelphia, Pennsylvania                                                      
, 2001                                          

PLEASE DO NOT SEND ANY SUNSOURCE INC. STOCK CERTIFICATES AT THIS TIME.

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QUESTIONS AND ANSWERS ABOUT THE MERGER

Q:  WHEN AND WHERE IS THE SUNSOURCE SPECIAL MEETING?                            

A:  The SunSource special meeting of stockholders will be held at 10:00 a.m.,   
Eastern time, on                , 2001 at the law offices of Morgan Lewis &     
Bockius LLP, 1701 Market Street, Room 18A and B (18th Floor), Philadelphia, PA  
19103.                                                                          

Q:  WHAT IS HAPPENING?                                                          

A:  You are being asked to vote on a merger proposal to permit Allied Capital to
acquire SunSource in a cash merger.                                             

    To ensure continuity and continued financial risk, Allied Capital required
certain members of SunSource's management team and certain stockholders to      
continue as stockholders of New SunSource.                                      

Allied Capital will own approximately 94% of New SunSource, and the   
continuing stockholders will own approximately 6% of New SunSource, on a fully  
diluted basis taking into account the rollover options described in this proxy  
statement. If the merger agreement is approved and the merger is consummated,   
you would no longer be a stockholder of SunSource.                              

Q:  WHY ARE ALLIED CAPITAL AND SUNSOURCE PROPOSING TO MERGE?                    

A:  SunSource will become an independently managed, private portfolio company of
Allied Capital.                                                                 

SunSource's board of directors believes that the merger is in the best
interest of stockholders. SunSource approved the merger because:                

- SunSource's board of directors determined that the purchase price   
      represents a substantial premium to the market price of SunSource common
stock;                                                            

 - SunSource's highly leveraged capital structure limited its ability to
     access the equity markets and to maintain and grow its various business
segments;                                                         

     - SunSource will have access to a funding source with significant financial
resources to support its future growth.                           

Q:  WHAT WILL I RECEIVE IN THE MERGER?                                          

A:  You will receive $10.375 in cash for each share of SunSource common stock   
that you own.                                                                   

 On                , 2001, the most recent practicable date prior to the
printing of this proxy statement, the closing price of SunSource common stock on
the American Stock Exchange was $     per share.                                

Q:  ARE SUNSOURCE STOCKHOLDERS ENTITLED TO APPRAISAL RIGHTS?                    

A:  Yes. Stockholders of SunSource will be entitled to appraisal rights under   
Section 262 of the Delaware General Corporation Law. Please see the section     
entitled "Dissenters' Rights of Appraisal" for a more detailed description of   
your appraisal rights.                                                          

Q:  WHEN DO YOU EXPECT TO COMPLETE THE MERGER OF ALLIED CAPITAL AND SUNSOURCE?  

A:  We are working to complete the merger by September 30, 2001. We currently   
expect to complete the merger promptly following the SunSource special meeting. 
If necessary or desirable, Allied Capital and SunSource may agree to complete   
the merger at a later date.                                                     

Q:  WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?                 

A:  The cash you receive for your shares generally will be taxable for U.S.     
federal income tax purposes as a capital gain or capital loss (depending on the 
tax basis of your shares and your specific holding period).                     

Q:  WHO MUST APPROVE THE MERGER?                                                

A:  In addition to the approvals by the Allied Capital board of directors and   
the SunSource board of directors, each of which has already been obtained, the  
merger must be approved by the SunSource stockholders.                          
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Q:  WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER PROPOSAL?           

A:  The affirmative vote of the holders of the majority of the outstanding      
shares of SunSource common stock as of the record date is required to approve   
the merger proposal.                                                            

Q:  WHO ARE THE MEMBERS OF THE SPECIAL COMMITTEE?                               

A:  The special committee consists of O. Gordon Brewer, Norman V. Edmonson, and 
Arnold S. Hoffman. All the members of the special committee are non-employee    
members of SunSource's board of directors. The special committee was appointed  
to review, consider and make recommendations to the board of directors regarding
potential sales transactions of SunSource.                                      

Q:  WHAT IS THE SIGNIFICANCE OF THIS MERGER BEING A "GOING-PRIVATE" TRANSACTION?

A:  The parties engaging in this merger are required to provide to all SunSource
stockholders certain information about the transaction and to make certain      
filings with the Securities and Exchange Commission. Specifically, because of   
the participation by certain SunSource stockholders and certain members of      
SunSource management as continuing stockholders after the merger, additional    
disclosures are required.                                                       

Q:  DOES THE SUNSOURCE BOARD OF DIRECTORS RECOMMEND APPROVAL OF THE MERGER      
PROPOSAL?                                                                       

A:  Yes. After careful consideration, the SunSource board of directors          
unanimously recommends that you vote "FOR" the merger proposal on the enclosed  
proxy card, or over the telephone or via the internet. For a more complete      
description of the recommendation of the SunSource board of directors, see the  
sections entitled "Reasons for the Recommendation of SunSource's Board of       
Directors" and "Recommendation of the SunSource Board of Directors."            

Q:  HAS THE MERGER BEEN DETERMINED TO BE FAIR TO THE UNAFFILIATED SUNSOURCE     
STOCKHOLDERS?                                                                   

A:  After careful consideration, the SunSource board of directors and the Allied
Capital board of directors believe that the merger and the related transactions 
are fair to the unaffiliated stockholders of SunSource. In addition, the        
continuing stockholders, including Maurice Andrien, Joseph Corvino, Max Hillman,
Stephen Miller, Richard Hillman, George Heredia, Gary Seeds, Terry Rowe, Jim    
Waters, Dennis Blake, Rick Buller, Ken Foskey, Michael Mueller, Mark Yeary, John
McDonnell and John Marshall, believe that the merger and related transactions   
are fair to the unaffiliated stockholders of SunSource. Those parties based     
their belief on the information provided for under "Reasons for the             
Recommendation of SunSource's Board of Directors", "Allied Capital's Reasons for
the Merger," "Belief of the Filing Persons in the Fairness of the Merger" and   
"Fairness Opinion of SunSource's Financial Advisor."                            

Q:  WHAT WILL HAPPEN TO SUNSOURCE'S TRUST PREFERRED SECURITIES?                 

A:  The SunSource trust preferred securities will remain outstanding and will   
continue to trade on the American Stock Exchange under the symbol SDP.PR upon   
the consummation of the merger.                                                 

Q:  WHAT DO I NEED TO DO NOW?                                                   

A:  We urge you to read this proxy statement, including its appendices,         
carefully, and to consider how the merger proposal will affect you as a         
stockholder. You also may want to review the documents referenced under "Where  
You Can Find More Information" and consult with your accounting, legal and tax  
advisors.                                                                       

Q:  HOW DO I VOTE MY SHARES?                                                    

A:  You may indicate how you want to vote on your proxy card and then sign and  
mail your proxy card in the enclosed return envelope as soon as possible so that
your shares may be represented at the SunSource                                 

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special meeting. You may also vote over the telephone or via the internet by    
following the instructions with your proxy card. You may also attend the        
SunSource special meeting in person instead of submitting a proxy.              

   If you fail to return your proxy card, vote over the telephone or via the
internet, vote in person at the SunSource special meeting, or if you mark your  
proxy "abstain," the effect will be a vote "against" the merger proposal. IF YOU
SIGN AND SEND IN YOUR PROXY WITHOUT INDICATING HOW YOU WANT TO VOTE, YOUR PROXY 
WILL BE COUNTED AS A VOTE FOR THE MERGER PROPOSAL UNLESS YOUR SHARES ARE HELD IN
A BROKERAGE ACCOUNT.                                                            

Q:  IF MY SHARES ARE HELD IN A BROKERAGE ACCOUNT, WILL MY BROKER VOTE MY SHARES 
FOR ME?                                                                         

A:  Your broker will NOT be able to vote your shares without instructions from  
you on how to vote. Therefore, it is important that you follow the directions   
provided by your broker regarding how to instruct your broker to vote your      
shares. If you fail to provide your broker with instructions, it will have the  
same effect as a vote "against" the merger proposal.                            

Q:  MAY I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?           

A:  You may change your vote at any time before the vote takes place at the     
SunSource special meeting. To do so, you may either complete and submit a new   
proxy card or send a written notice stating that you would like to revoke your  
proxy. You may also change your vote if you voted over the telephone or via the 
internet simply by revoting. The last recorded vote will be what is counted at  
the meeting. In addition, you may attend the SunSource special meeting and vote 
in person. However, if you elect to vote in person at the SunSource special     
meeting and your shares are held by a broker, bank or other nominee, you must   
bring to the SunSource special meeting a letter from the broker, bank or other  
nominee confirming your beneficial ownership of the shares.                     

Q:  SHOULD I SEND IN MY STOCK CERTIFICATES NOW?                                 

A:  NO. After the completion of the merger, Allied Capital will send you        
instructions explaining how to exchange SunSource common stock certificates for 
the appropriate amount of cash.                                                 

Q:  WHO MAY I CONTACT WITH ANY ADDITIONAL QUESTIONS?                            

A:  You may call Investor Relations of SunSource at (215) 282-1290, or Investor 
Relations of Allied Capital at (888) 818-5298.                                  

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TABLE OF CONTENTS 

                                                                [Download Table]

                                   PAGE
                                   ----
                                       
SUMMARY........................       1
THE SUNSOURCE SPECIAL                  
  MEETING......................      12
  General......................      12
  Purpose of the SunSource             
     Special Meeting...........      12
  Voting Information...........      12
  Stockholder and Board                
     Approvals.................      12
  Quorum and Adjournments......      13
THE MERGER PROPOSAL............      13
  General......................      13
  Equity Purchase..............      15
  The Exchange.................      15
  Background of the Merger.....      16
  Reasons for the                      
     Recommendation of the             
     SunSource Board of                
     Directors.................      22
  Recommendation of SunSource's        
     Board of Directors........      24
  Allied Capital's Reasons for         
     the Merger................      25
  Belief of the Filing Persons         
     in the Fairness of the            
     Merger....................      25
  Fairness Opinion of                  
     SunSource's Financial             
     Advisor...................      26
  Interests of Certain Persons         
     in the Merger.............      34
  Related Transactions.........      39
  Change of Control Benefits...      40
  Financing for the Merger.....      41
  Dissenters' Rights of                
     Appraisal.................      42
THE MERGER AGREEMENT...........      45
  Terms of the Merger..........      45
  Representations and                  
     Warranties................      46
  Certain Covenants............      47
  No Shopping..................      48
  Expenses and Fees............      49
  Indemnification..............      49
  Conditions...................      49
  Termination; Fees............      51
  Material Federal Income Tax          
     Consequences..............      52

                                                                [Download Table]

                                   PAGE
                                   ----
                                       
  Delisting and Deregistration         
     of SunSource Common               
     Stock.....................      53
  Trust Preferred Securities...      53
INFORMATION RELATING TO                
  SUNSOURCE....................      54
  Business.....................      54
  SunSource Summary Historical         
     Consolidated Financial            
     Information...............      66
  Management's Discussion and          
     Analysis of Financial             
     Condition and Results of          
     Operations................      67
PRICE RANGE OF COMMON STOCK....      80
MANAGEMENT OF SUNSOURCE........      81
MANAGEMENT OF ALLIED CAPITAL...      85
SECURITY OWNERSHIP OF CERTAIN          
  BENEFICIAL OWNERS AND                
  MANAGEMENT OF SUNSOURCE......      89
TRANSACTIONS IN COMMON STOCK BY        
  CERTAIN PERSONS..............      93
FORWARD-LOOKING STATEMENTS.....      97
STOCKHOLDER PROPOSALS FOR              
  SUNSOURCE 2002 ANNUAL                
  MEETING......................      98
OTHER MATTERS..................      98
INDEPENDENT ACCOUNTANTS........      98
WHERE YOU CAN FIND MORE                
  INFORMATION..................      98
INDEX TO FINANCIAL                     
  STATEMENTS...................     100
APPENDIX A: AGREEMENT AND PLAN         
  OF MERGER....................     A-1
APPENDIX B: JANNEY MONTGOMERY          
  SCOTT LLC FAIRNESS OPINION...     B-1
APPENDIX C: SECTION 262 OF THE         
  DELAWARE GENERAL CORPORATION         
  LAW..........................     C-1

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SUMMARY 

    This summary highlights selected information from this proxy statement and
may not contain all of the information that is important to you. To understand  
the merger proposal fully and for a more complete description of the legal terms
of the merger, you should read carefully this entire document and the documents 
to which we have referred you. See "Where You Can Find More Information" on page
98. Each item in this summary includes a page reference directing you to a more 
complete description of that item.                                              

THE SUNSOURCE SPECIAL MEETING (PAGE 12)                                         

    A special meeting of stockholders of SunSource will be held at 10:00 a.m.,
Eastern time, on              , 2001, at the law offices of Morgan Lewis &      
Bockius LLP, 1701 Market Street, Room 18A and B (18th Floor), Philadelphia,     
Pennsylvania 19103, to consider and vote upon the proposal to approve and adopt 
the merger agreement with Allied Capital and approve the merger.                

   The stockholders will also be asked to consider and vote on a proposal to
grant discretionary authority to vote in favor of an adjournment of the meeting,
if necessary.                                                                   

   You can vote at the SunSource special meeting only if you owned shares of
SunSource common stock at the close of business on              , 2001, which is
the record date.                                                                

   Allied Capital and SunSource intend to complete the merger promptly after
the SunSource special meeting, if regulatory approvals and other required       
matters are completed by that time. It is expected that the merger will be      
completed by September 30, 2001.                                                

THE PARTIES TO THE MERGER                                                       

SunSource Inc.  SunSource, a Delaware corporation, is a provider of   
value-added services and products to retail and industrial markets in North     
America. SunSource currently operates in two business segments through indirect 
wholly owned subsidiaries: (1) The Hillman Group, Inc.; and (2) SunSource       
Technology Services, LLC, or STS. These subsidiaries represent businesses within
the distribution industry which are characterized by a potential for value-added
services, economies of scale and opportunities for further consolidation. Also, 
SunSource has a minority investment in an affiliate, G-C Sun Holdings, L.P.,    
which owns Kar Products.                                                        

SunSource's principal executive offices are located at 3000 One Logan 
Square, Philadelphia, Pennsylvania 19103, and its telephone number is (215)     
282-1290.                                                                       

     Allied Capital Corporation.  Allied Capital, a Maryland corporation, is the
nation's largest business development company. As a business development        
company, Allied Capital provides private investment capital to private companies
and undervalued public companies in a variety of different industries and in    
diverse geographic locations throughout the United States. Allied Capital has   
been investing in growing businesses for over 40 years and has financed         
thousands of private companies nationwide.                                      
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Allied Capital's principal executive offices are located at 1919      
Pennsylvania Ave., N.W., Washington, D.C. 20006, and its phone number is (202)  
331-1112.                                                                       

Allied Capital Lock Acquisition Corporation.  Allied Capital Lock     
Acquisition Corporation, referred to as merger sub, is a newly formed Delaware  
corporation and a wholly owned subsidiary of Allied Capital. Merger sub was     
formed for the sole purpose of effecting the merger.                            

   Merger sub's principal executive offices are located at 1919 Pennsylvania
Ave., N.W., Washington, D.C. 20006, and its phone number is (202) 331-1112.     

THE MERGER PROPOSAL (PAGE 13)                                                   

    Allied Capital plans to acquire SunSource in a cash merger. As a result of
the merger, SunSource will become an independently managed, privately held      
portfolio company of Allied Capital referred to as New SunSource. New SunSource 
will continue in one or more of the lines of business in which SunSource now    
operates.                                                                       

The merger and related transactions will be accomplished as follows:  

   - Allied Capital will exercise its existing warrant to purchase
   284,725 shares of SunSource common stock through a cashless
           exercise. Following the exercise of the warrant, certain continuing
           stockholders will purchase 163,202 shares of SunSource common stock
       from Allied Capital for $10.375 per share in cash. In addition,
          Allied Capital will sell to SunSource the remaining 121,523 shares
            of SunSource common stock that were acquired through exercise of its
warrant for $10.375 per share in cash.                  

        - In order to ensure continuity and continued financial risk, Allied
         Capital required that certain members of the SunSource management
     team and certain stockholders continue as stockholders of New
        SunSource. To provide a mechanism for continued ownership in New
            SunSource by the continuing stockholders SunSource will create a new
Series B preferred stock.                               

          - Certain SunSource officers, directors and stockholders will exchange
        244,188 of their shares of SunSource common stock (including the
           shares purchased from Allied Capital) for an equal number of shares
        of Series B preferred stock. Holders of Series B preferred stock
will not exchange their shares in the merger for cash.  

         - After the recapitalization described above, each share of SunSource
            common stock will be converted into the right to receive $10.375 per
share in cash in the merger.                            

   - The shares of Series B preferred stock held by the continuing
            stockholders will be converted into an equal number of shares of New
SunSource common stock following the merger.            

          - The continuing stockholders will roll over their existing options to
         purchase 443,000 shares of SunSource common stock into options to
         purchase shares of New SunSource common stock which will continue
    with the same terms and conditions as the original SunSource
options.                                                
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        - Following the merger, Allied Capital will own approximately 94% of
            New SunSource common stock, and the continuing stockholders will own
      approximately 6% of the New SunSource common stock, on a fully
      diluted basis. As used in connection with the ownership of the
            stockholders of New SunSource, the term "fully diluted" includes the
     dilution resulting from the cashless exercise of the rollover
          options and any additional "in-the-money" options and excludes the
dilution from any new option grants.                    

 The merger agreement is attached at the back of this proxy statement as
Appendix A. We encourage you to read the merger agreement, as it is the legal   
document that governs the merger.                                               
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The following diagrams depict in summary form the structure of the    
recapitalization and merger assuming the SunSource stockholders approve the     
merger and all other conditions are satisfied.                                  

[Current Structure Flow Chart]
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YOU WILL RECEIVE CASH IN THE MERGER (PAGE 15)                                   

     If the merger is completed, you will receive $10.375 in cash for each share
of SunSource common stock that you own. Fractional shares of SunSource common   
stock will be converted into cash in the same proportion.                       

 Please do not send in your stock certificates. You will receive written
instructions to do so after the merger.                                         

THE SUNSOURCE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE MERGER (PAGE 24)   

    The SunSource board of directors believes that the merger is advisable and
in the best interests of SunSource and its affiliated and unaffiliated          
stockholders. The SunSource board of directors unanimously recommends that you  
vote "FOR" approval of the merger proposal.                                     

SUNSOURCE'S REASONS FOR THE MERGER (PAGE 22)                                    

The SunSource board of directors approved the merger for the following
reasons:                                                                        

- PURCHASE PRICE -- SunSource's board of directors determined that the
    purchase price represents a substantial premium to the market price of
       SunSource common stock. In making that determination, the SunSource board
       of directors considered that the current market price of SunSource common
   stock was $4.96 per share on June 18, 2001, the day before the public
       announcement of the merger; thus, $10.375 represented a 109% premium over
      the $4.96 price. Also, during the 52-week period ended June 15, 2001 the
       highest closing market price for SunSource stock was $5.38 and the lowest
closing market price was $2.88.                                   

   - HIGHLY LEVERAGED CAPITAL STRUCTURE -- The board of directors considered
    SunSource's highly leveraged capital structure. The board of directors
    determined that SunSource's current financial position would limit its
       access to equity markets in the future and hinder its ability to maintain
       and grow its business segments. By becoming a portfolio company of Allied
      Capital, SunSource will have access to a funding source with significant
financial resources to support its future growth.                 

  - RECOMMENDATION OF SPECIAL COMMITTEE -- After extensive discussions and
negotiations with Allied Capital, and discussions with the board's
   financial advisors and certain members of SunSource's management, the
      special committee concluded that the merger and the related transactions
   are fair to the unaffiliated and affiliated stockholders. The special
committee has unanimously recommended the merger and the related  
transactions to the board of directors.                           

FAIRNESS OPINION OF SUNSOURCE'S FINANCIAL ADVISOR (PAGE 26)                     

 The SunSource board of directors has received an opinion of SunSource's
financial advisor, Janney Montgomery Scott LLC, as to the fairness to the       
affiliated and unaffiliated stockholders, from a financial point of view, of the
consideration to be received in the merger. Janney's opinion is directed to the 
SunSource board of directors and does not constitute a recommendation to any    
stockholder as to how to                                                        
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vote with respect to matters relating to the proposed merger. Janney's opinion  
is based on analyses that contain estimates and valuation ranges which are not  
necessarily indicative of actual values or predictive of future results or      
values. Janney's fees were $325,000 plus out-of-pocket expenses.                

INTERESTS OF SUNSOURCE'S OFFICERS AND DIRECTORS IN THE MERGER (PAGE 34)         

    When considering the recommendation by the SunSource board of directors to
vote "FOR" the merger proposal, you should be aware that, as described below,   
specific officers, directors and stockholders of SunSource have interests in the
merger that are different from, and may conflict with, your interests. The      
continuing stockholders will not exchange all of their shares of SunSource      
common stock for cash in the merger, and will continue as officers, directors   
and stockholders of New SunSource and may benefit from such continued ownership.
In addition, senior officers of SunSource will benefit from compensation and    
employment arrangements in the ordinary course of business. If the merger is    
completed, Allied Capital will continue indemnification arrangements for        
officers and directors of SunSource. The SunSource board of directors was aware 
of these interests and considered them in approving the merger.                 

More specifically, these interests include the following:             

- In order to assure continuity and continued financial risk, Allied  
    Capital required that certain members of the SunSource management team
     and certain stockholders continue as stockholders of New SunSource. The
   continuing stockholders will collectively own approximately 6% of New
 SunSource common stock on a fully diluted basis after the merger is
consummated.                                                      

- The members of management who are continuing stockholders will also 
continue as management of New SunSource.                          

The following table sets forth the positions that the continuing    
     stockholders will have with New SunSource and the percentage ownership in
      New SunSource of each of the continuing stockholders after the merger on a
fully diluted basis:                                                

                                                                [Download Table]

                                                                      PERCENTAGE  
                                                                     OWNERSHIP IN 
           NAME                             POSITION                 NEW SUNSOURCE
           ----                             --------                 -------------
                                                                                  

Maurice P. Andrien, Jr. ... Chairman of the Board of SunSource Inc.      1.3%     

Joseph M. Corvino.......... Senior Vice President of SunSource Inc.     *         

Max W. Hillman, Jr. ....... Chief Executive Officer of The Hillman        1.3     
                              Group, Inc.                                         

Stephen W. Miller.......... Vice Chairman of The Hillman Group, Inc.    *         

Richard P. Hillman......... President of The Hillman Group, Inc.        *         

George L. Heredia.......... Senior Vice President of Marketing for      *         
                            The Hillman Group, Inc.                               

Gary L. Seeds.............. Senior Vice President of Sales for The      *         
                              Hillman Group, Inc.                                 

Terry R. Rowe.............. Senior Vice President of National           *         
                            Accounts for The Hillman Group, Inc.                  

James P. Waters............ Vice President and Chief Financial          *         
                            Officer of The Hillman Group, Inc.                    

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                                                                [Download Table]


                                                                            
Dennis G. Blake............  Vice President of Marketing for The           *
                               Hillman Group, Inc.                          

Richard A. Buller..........  Vice President of Materials Management        *
                               for The Hillman Group, Inc.                  

Kenneth H. Foskey..........  Vice President of Information Systems and     *
                               New Business Development for The             
                               Hillman Group, Inc.                          

Michael A. Mueller.........  Vice President of Engineering for The         *
                               Hillman Group, Inc.                          

Mark Yeary.................  Vice President of Manufacturing for The       *
                               Hillman Group, Inc.                          

John H. Marshall, III......  Regional Vice President of Sales for The      *
                               Hillman Group, Inc.                          

John P. McDonnell..........  Consultant to SunSource Inc.                  *

---------------                                                                 
* Less than 1%.                                                                 

   - Messrs. Andrien, Corvino, Max Hillman and Miller have each entered into
new employment agreements, which will become effective upon the   
  consummation of the merger and will supersede any previous agreement
      between the parties. Messrs. Andrien, Corvino and Hillman will each have
       four-year employment agreements with New SunSource, under which they will
   receive $343,000, $250,000 and $350,000, respectively, in annual base
salary, and a performance bonus to be determined by the board of  
 directors. Mr. Miller has a one-year agreement, under which he will
  receive $350,000 in annual base salary and a performance bonus to be
determined by the board of directors.                             

  - A new stock option plan will become effective upon the consummation of
   the merger, under which options to purchase approximately 1.3 million
      shares of New SunSource common stock, or 15% of the fully diluted shares
     outstanding at the time of the merger, will be authorized for issuance.
      The new option plan will be in addition to the existing SunSource option
       plan that will continue in effect after the merger. All of the continuing
       stockholders except John P. McDonnell will be granted options, which will
       have a ten-year term, generally vest over four years and have an exercise
   price approximately equal to the per share value of New SunSource, as
    determined by the New SunSource board of directors, at the time of the
   grant. The per share amount of any distributions made after the grant
      date in connection with the related transactions described in this proxy
     statement will reduce the exercise price. Upon a change of control, all
    unvested options will immediately vest. Specifically, Mr. Andrien will
    receive 3.75%; Mr. Corvino will receive 1.00%; Mr. Miller will receive
 1.50%; Mr. Max Hillman will receive 3.00%; Mr. Richard Hillman will
      receive 0.75%; Messrs. Heredia, Seeds, Rowe, Waters and Foskey will each
       receive 0.50%; Messrs. Blake, Buller, Mueller and Yeary will each receive
   0.33%; and Mr. Marshall will receive 0.18%. The balance of 1% will be
reserved for future issuances.                                    

   - At the closing, the continuing stockholders have agreed to enter into a
stockholders agreement with Allied Capital and New SunSource. The 
stockholders agreement imposes certain requirements on the parties
       related to the voting of New SunSource common stock, the sale or transfer
of New SunSource common stock and other matters. Under certain    
 circumstances a continuing stockholder can require New SunSource to
  purchase his shares upon a termination of employment. Similarly, New
SunSource can require that                                        
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a continuing stockholder sell his shares to New SunSource upon a termination of 
employment.                                                                     

RELATED TRANSACTIONS (PAGE 39)                                                  

   In connection with the merger, Allied Capital and SunSource have taken or
intend to take the following actions:                                           

- On June 29, 2001, Allied Capital purchased an unsecured subordinated
note, with an outstanding principal balance of approximately $12.5
      million, from a SunSource creditor for $8.5 million. Upon the consent of
     SunSource's senior lenders, Allied Capital intends to exchange the note
for $8.5 million of SunSource subordinated debt.                  

    - In consideration for the structuring of certain post-merger transactions
and the restructuring of the post-merger capital structure of New 
SunSource, Allied Capital will receive from SunSource a fee of    
approximately $2 million at the effective time of the merger.     

- In order to raise capital and separate unrelated businesses, it is  
expected that New SunSource will sell certain assets of STS in a  
management buyout transaction for approximately $25 million. It is
      anticipated that the transaction will be structured so that a portion of
     the debt financing will be provided by New SunSource and an independent
    lender, and that a portion of the equity financing will be provided by
  Allied Capital and STS management, including Maurice Andrien, Joseph
     Corvino and Justin Jacobi, President of STS, as well as certain of STS'
       regional managers and other employees. The management team is expected to
invest approximately $1 million.                                  

CHANGE OF CONTROL BENEFITS (PAGE 40)                                            

SunSource will have obligations under certain severance and employment
agreements as a result of the merger. Among other things:                       

   - outstanding options to purchase shares of SunSource common stock, other
       than rollover options, will be required after notice to be surrendered in
       exchange for the issuance by SunSource of a number of shares of SunSource
    common stock for each option surrendered equal to the quotient of: (i)
      the amount, if any, by which $10.375 exceeds the exercise price for such
option divided by (ii) $10.375;                                   

     - amounts accrued and vested in SunSource's deferred compensation plan will
    be eligible to be paid out pursuant to the terms and conditions of the
plan;                                                             

     - pursuant to his current employment agreement, Maurice Andrien has a right
      to receive a $1 million payment upon the consummation of the merger, and
 the restrictions on Mr. Andrien's restricted stock grant of 100,000
shares will lapse; and                                            

     - SunSource may trigger obligations under severance agreements with certain
     employees, including Joseph Corvino, Justin Jacobi and the employees in
the Philadelphia office.                                          
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VOTE REQUIRED TO APPROVE THE MERGER                                             

     The merger proposal requires the approval of the holders of the majority of
the outstanding shares of SunSource common stock. If you do not return your     
proxy, vote over the telephone or via the internet, or vote in person, it will  
have the effect of a vote "against" the merger proposal. Brokers who hold your  
shares of SunSource common stock as nominees cannot vote those shares unless you
instruct them to, following the procedure they give you.                        

VOTING POWER; VOTING BY MANAGEMENT (PAGE 12)                                    

On the record date,              shares of SunSource common stock were
outstanding, of which              shares, or      % of the shares were owned by
directors and executive officers of SunSource. Each share of SunSource common   
stock entitles the holder to one vote.                                          

  Certain SunSource officers, directors and stockholders, who collectively
owned approximately 1.4 million shares, or approximately 20%, of SunSource's    
outstanding shares as of the record date, have executed voting agreements in    
which they have agreed to vote the SunSource common stock owned by them in favor
of the merger proposal.                                                         

REVOKING PROXIES (PAGE 12)                                                      

    You can revoke a proxy previously given by you by giving written notice to
the Secretary of SunSource at the address on the proxy card, by filing another  
proxy, by revoting your shares over the telephone or via the internet, or by    
attending the SunSource special meeting and voting in person.                   

FEDERAL INCOME TAX CONSEQUENCES (PAGE 52)                                       

The cash received by holders of SunSource common stock in the merger  
generally will be taxable for U.S. federal income tax purposes (depending on the
tax basis of your shares and your specific holding period).                     

CONSENTS AND REGULATORY APPROVALS (PAGE 49)                                     

On June 19, 2001 SunSource received a written consent to the change of
control of SunSource that would result from the merger from SunSource's senior  
lenders.                                                                        

Under the Hart-Scott-Rodino Act the merger may not be completed unless
certain filings are made with the Antitrust Division of the U.S. Department of  
Justice and the U.S. Federal Trade Commission and certain waiting periods expire
or are terminated. On July 11, 2001, Allied Capital and SunSource submitted the 
required filings to the FTC and the Antitrust Division.                         

     A prediction cannot be made as to whether all required regulatory approvals
for the merger will be obtained, or whether any approvals will include          
conditions that may be detrimental to Allied Capital or SunSource.              
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CONDITIONS TO COMPLETION OF THE MERGER (PAGE 49)                                

    The merger will be completed only if specific conditions, including, among
other things, the following, are met or waived:                                 

- the SunSource stockholders approve the merger;                      

- no court orders prevent the merger or impose limitations on the     
operations of New SunSource after the merger, and no governmental 
  proceedings are pending or threatened that would prevent the merger;

    - the issuance of the shares upon exercise of Allied Capital's warrant and
    the purchase by SunSource of 121,523 shares acquired by Allied Capital
upon the exercise of the warrant has been consummated;            

   - the recapitalization of SunSource, including the equity purchase by the
      continuing stockholders of 163,202 shares of SunSource common stock from
Allied Capital, has been consummated;                             

 - from the date of the merger agreement through the closing date, there
      shall not have been any change, event, occurrence or state of facts that
      has caused, or would reasonably be expected to cause, a material adverse
 effect on the business, properties, assets, condition (financial or
      otherwise), liabilities or operations of SunSource and its subsidiaries,
taken as a whole, or The Hillman Group, individually, or on Allied
Capital and its subsidiaries taken as a whole;                    

   - the representations and warranties made by Allied Capital and SunSource
     continue to be accurate except for inaccuracies that would not have and
would not reasonably be expected to have, individually or in the  
     aggregate, a material adverse effect and covenants of the parties shall
have been performed in all material respects;                     

 - holders of not more than ten percent (10%) of SunSource's outstanding
       shares have exercised dissenters' rights in accordance with Delaware law;
and                                                               

 - the new employment agreements of Maurice Andrien, Joseph Corvino, Max
 Hillman and Stephen Miller are in full force and effect without any
 changes from the form delivered to Allied Capital, and none of such
   employees shall have expressed an intention not to perform under such
employment agreements.                                            

TERMINATION OF THE MERGER AGREEMENT (PAGE 51)                                   

   Even if the SunSource stockholders approve the merger, Allied Capital and
SunSource can agree at any time to terminate the merger agreement without       
completing the merger. The merger agreement can also be terminated if, among    
other things, any of the following occurs:                                      

- the merger is not completed by December 31, 2001;                   

- a court or other governmental authority prohibits the merger;       

   - the covenants contained in the merger agreement or the voting agreement
shall have been breached in any material respect; or              

- the closing conditions contained in the merger agreement are not    
satisfied.                                                        
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    SunSource can also terminate the merger agreement if, prior to stockholder
approval of the merger, SunSource's board of directors authorizes the acceptance
of a more favorable acquisition proposal.                                       

SUNSOURCE CANNOT SOLICIT OTHER OFFERS (PAGE 48)                                 

   SunSource has agreed not to encourage, solicit, discuss or negotiate with
anyone other than Allied Capital regarding a merger or sale of SunSource, unless
SunSource receives an unsolicited acquisition proposal and SunSource's board of 
directors determines that it is consistent with its fiduciary obligations to the
SunSource stockholders under applicable law to pursue such proposal and, in the 
case of any such discussions or negotiations, SunSource's board of directors    
determines that such proposal is superior to the merger.                        

     If the merger agreement is terminated as a result of SunSource's acceptance
of a superior acquisition proposal, SunSource will pay Allied Capital a         
termination fee of $2,270,000. The termination fee is intended to compensate    
Allied Capital for the loss of opportunities, and for its efforts and expenses  
incurred to structure the merger if SunSource accepts a superior acquisition    
proposal.                                                                       

SUNSOURCE COMMON STOCK AND TRUST PREFERRED SECURITIES (PAGE 53)                 

   Following the merger, SunSource common stock will be delisted and will no
longer trade on the American Stock Exchange or any other exchange. SunSource    
intends to terminate its registration with regard to its common stock pursuant  
to Section 12(g)(4) of the Securities Exchange Act of 1934.                     

   The SunSource trust preferred securities will remain outstanding and will
continue to trade on the American Stock Exchange under the symbol SDP.PR upon   
consummation of the merger.                                                     

DISSENTERS' RIGHTS OF APPRAISAL (PAGE 42)                                       

    SunSource stockholders will be entitled to dissenters' rights of appraisal
under Section 262 of the Delaware General Corporation Law, a copy of which is   
attached to this proxy statement as Appendix C. Dissenters' rights of appraisal 
allow stockholders to dissent from the merger and receive a fair cash payment   
for their shares. Certain procedural steps, including not voting in favor of the
merger, must be followed by stockholders wishing to perfect and exercise their  
dissenters' rights under Delaware law. Failure to comply with those procedures  
will result in the forfeiture of dissenters' rights.                            
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THE SUNSOURCE SPECIAL MEETING 

GENERAL                                                                         

  This proxy statement is accompanied by the Notice of Special Meeting and
proxy cards solicited by the SunSource board of directors for use at the special
meeting of SunSource stockholders to be held on                , 2001 at        
     , at the law offices of Morgan Lewis & Bockius LLP, 1701 Market Street,
Room 18A and B (18th Floor), Philadelphia, Pennsylvania 19103.                  

PURPOSE OF THE SUNSOURCE SPECIAL MEETING                                        

   At the SunSource special meeting, holders of SunSource common stock as of
the record date will consider and vote upon the proposal to approve and adopt   
the merger agreement and the merger with Allied Capital.                        

The SunSource board of directors has unanimously approved the merger  
agreement and the merger and recommends a vote "FOR" approval and adoption of   
the merger proposal.                                                            

VOTING INFORMATION                                                              

     This proxy statement is being furnished in connection with the solicitation
of proxies by the SunSource board of directors for use at the SunSource special 
meeting. The cost of the solicitation of proxies will be borne by SunSource.    
SunSource will pay brokers, nominees, fiduciaries or other custodians their     
reasonable expenses for sending proxy material to, and obtaining information    
from, persons for whom they hold shares of common stock of SunSource. SunSource 
expects the solicitation of proxies will be primarily by mail, but directors,   
officers and other employees of SunSource may also solicit in person, by        
telephone or by mail. SunSource has engaged a proxy solicitation firm to solicit
proxies from stockholders and has agreed to pay a fee of approximately $7,500   
plus expenses for its services.                                                 

  Only stockholders of record at the close of business on                ,
2001 will be entitled to vote at the SunSource special meeting. The total number
of shares of stock outstanding and entitled to vote at the meeting as of the    
record date was              shares of SunSource common stock. Each share of    
SunSource common stock is entitled to one vote.                                 

If the accompanying proxy is executed and returned in time for the    
SunSource special meeting, your shares will be voted in accordance with the     
instructions. Any proxy may be revoked at any time before it is voted by written
notice, mailed or delivered to the Secretary of SunSource, by submission of a   
new proxy card, or, if you voted over the telephone or via the Internet, by     
revoting; but if not so revoked, the shares represented by such proxy will be   
voted in the manner directed by the stockholder. If no direction is made,       
proxies received from stockholders will be voted "for" the merger proposal set  
forth in the notice of the special meeting.                                     

STOCKHOLDER AND BOARD APPROVALS                                                 

     The merger proposal is being submitted at the SunSource special meeting for
approval by the stockholders of SunSource. The approval of a majority of the    
outstanding                                                                     

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shares of common stock of SunSource is required for the approval of the merger  
proposal. Abstentions will have the same effect as casting a vote "against" the 
merger proposal.                                                                

Pursuant to a voting agreement, specific officers, directors and      
stockholders of SunSource have agreed to vote their shares of SunSource common  
stock held as of the record date in favor of the merger proposal. A total of    
approximately 1.4 million shares of SunSource common stock, representing        
approximately 20% of the outstanding SunSource common stock, is represented by  
the voting agreement.                                                           

QUORUM AND ADJOURNMENTS                                                         

     Under Delaware law, not less than a quorum of stockholders as of the record
date must be present in order to conduct business at the special meeting. A     
quorum is constituted by the presence in person or by proxy of the holders of a 
majority of the outstanding shares of SunSource common stock. Votes cast by     
proxy or in person at the SunSource special meeting will be tabulated by the    
inspector of election appointed for the meeting who will determine whether or   
not a quorum is present. Proxies properly executed and marked with a negative   
vote or an abstention, or broker non-votes, will be considered to be present at 
the SunSource special meeting for the purposes of determining the existence of a
quorum for the transaction of business. Broker non-votes exist where a broker   
proxy indicates that the broker is not authorized to vote on a particular       
proposal.                                                                       

   The stockholders will also be asked to consider and vote on a proposal to
grant discretionary authority to vote in favor of an adjournment of the meeting,
if necessary.                                                                   

     Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval of
the holders of shares representing a majority of the votes present in person or 
by proxy at the meeting, whether or not a quorum exists, without further notice 
other than by an announcement made at the meeting. SunSource does not currently 
intend to seek an adjournment of the meeting. Abstentions and broker non-votes  
will be treated for purposes of the adjournment as votes "against" the          
adjournment.                                                                    

THE MERGER PROPOSAL 

This section of the proxy statement describes the proposed merger and 
related transactions. While this section summarizes the material terms of the   
merger and related transactions, this summary may not contain all of the        
information that is important to each stockholder. Stockholders should carefully
read this entire document and the merger agreement attached as Appendix A for a 
more complete understanding of the merger.                                      

GENERAL                                                                         

   The merger agreement provided Allied Capital the option to pay the merger
consideration in cash or Allied Capital stock. On June 29, 2001, Allied Capital 
informed SunSource of its election to pay the merger consideration in cash.     

   Allied Capital plans to acquire SunSource in a cash merger, where a newly
created acquisition subsidiary of Allied Capital will merge with and into       
SunSource. At the SunSource special meeting, you will be asked to vote to       
approve and adopt the merger agreement and the merger with Allied Capital. The  
merger agreement                                                                

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provides that the merger will be completed if approved by the SunSource         
stockholders and all other conditions of the merger agreement are satisfied or  
waived.                                                                         

 The effect of the merger is to create an independently managed, private
portfolio company of Allied Capital, New SunSource, that will operate in one or 
more of the lines of business in which SunSource now operates as described in   
this proxy statement.                                                           

    In order to ensure continuity and continued financial risk, Allied Capital
required that certain members of the SunSource management team and certain      
stockholders continue as stockholders of New SunSource. To provide a mechanism  
for the continued ownership of New SunSource by the continuing stockholders,    
SunSource will create a new Series B preferred stock that will not be exchanged 
in the merger for cash. The rights, preferences and privileges of the new Series
B preferred stock shall be identical to the rights, preferences and privileges  
of the existing SunSource common stock.                                         

     Assuming stockholder approval and all other required approvals are received
and all other conditions are met or waived, the merger and related transactions 
will be accomplished as follows:                                                

  - Immediately prior to the recapitalization of SunSource, Allied Capital
will exercise its existing warrant to purchase 284,725 shares of  
SunSource common stock through a cashless exercise. Following the 
    exercise of the warrant, certain continuing stockholders will purchase
      163,202 shares of SunSource common stock from Allied Capital for $10.375
       per share in cash. In addition, Allied Capital will sell to SunSource the
   remaining 121,523 shares of SunSource common stock that were acquired
through exercise of its warrant for $10.375 per share in cash.    

- SunSource will create a new Series B preferred stock. The continuing
 stockholders will exchange 244,188 shares of SunSource common stock
       (including the 163,202 shares purchased from Allied Capital) for an equal
number of shares of Series B preferred stock.                     

 - Allied Capital has created an acquisition subsidiary, the merger sub,
  that will merge with and into SunSource, and each share of SunSource
       common stock will be converted into the right to receive $10.375 in cash.

  - The Series B preferred stockholders will not exchange their shares for
   cash in the merger, but will continue as owners of New SunSource. The
    shares of Series B preferred stock held by the continuing stockholders
     will be converted into an equal number of shares of common stock of New
SunSource following the merger.                                   

- Certain stockholders will also roll over their existing options to  
     purchase 443,000 shares of SunSource common stock. The rollover options
    will remain in effect pursuant to the same terms and conditions as the
 original option except that the options will become fully vested in
connection with the merger.                                       

- The value of the continuing stockholders' investment, including the 
rollover options, will be approximately $5.3 million.             

    - Allied Capital will own approximately 94% of New SunSource common stock,
  and the continuing stockholders will own approximately 6% of the New
    SunSource common stock on a fully diluted basis. As used in connection
with                                                              
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the ownership of the shareholders of New SunSource, the term "fully diluted"    
includes the dilution resulting from the cashless exercise of the rollover      
options and any additional "in the money" options and excludes any dilution from
the new option grants.                                              

EQUITY PURCHASE                                                                 

  The continuing stockholders have agreed, pursuant to the terms of equity
purchase agreements entered into with Allied Capital, to acquire or maintain    
investments in the equity of SunSource immediately prior to the effective time  
of the merger. The equity purchase arrangement is a part of the recapitalization
which is a condition to closing the merger. The investment of the continuing    
stockholders will consist of the following:                                     

  - 163,202 shares of SunSource common stock purchased from Allied Capital
      for cash equal to $10.375 per share or approximately $1.7 million in the
       aggregate following Allied Capital's exercise of the common stock warrant
  dated as of December 28, 2000 issued by SunSource to Allied Capital;

    - 80,986 shares of SunSource common stock owned by continuing shareholders
prior to the effective time; or                                   

  - the rollover of 443,000 outstanding stock options issued to management
pursuant to SunSource's existing stock option plan.               

 Certain continuing stockholders have placed approximately $1.5 million,
representing the purchase price of the shares of SunSource common stock to be   
purchased by them from Allied Capital, in an escrow account pursuant to an      
escrow agreement dated June 18, 2001 by and among such stockholders, Allied     
Capital and Citibank, N.A., acting in its capacity as escrow agent. The         
remainder of the purchase price will be contributed by the remaining continuing 
stockholders prior to the closing of the merger.                                

   The aggregate value of the continuing stockholders' investment, including
the value of the rollover options (calculated for each rollover option by       
multiplying the number of shares of common stock such rollover option is        
exercisable into by the difference between $10.375 and the exercise price       
applicable to such rollover option), is approximately $5.3 million which will   
provide management with approximately 6% of the outstanding shares of New       
SunSource common stock on a fully-diluted basis at the effective time.          

THE EXCHANGE                                                                    

     If the merger is completed, you will receive $10.375 in cash for each share
of SunSource common stock that you own. Fractional shares of SunSource common   
stock will be exchanged for a proportionate, fractional amount of the per share 
consideration described above.                                                  

 As soon as practicable after the effective time of the merger, American
Stock Transfer & Trust Company, as the exchange agent for the merger, will mail 
to each holder of record of SunSource common stock as of the effective time a   
transmittal letter to be used in forwarding such stockholder's certificates     
representing such shares for surrender to AST. Upon such surrender, AST will    
forward such holder a check for the amount such stockholder is entitled to      
receive.                                                                        

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   SUNSOURCE STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO AST UNTIL
THEY HAVE RECEIVED TRANSMITTAL LETTERS, NOR SHOULD THEY RETURN STOCK            
CERTIFICATES WITH THE ENCLOSED PROXY.                                           

    Until surrendered to AST, outstanding stock certificates previously issued
by SunSource will, from the effective time of the merger, represent the right to
receive $10.375 per share that such certificate represents. Therefore, in order 
to receive cash, SunSource stockholders should surrender all outstanding        
certificates previously issued by SunSource as soon as possible after receiving 
a transmittal letter.                                                           

BACKGROUND OF THE MERGER                                                        

     In October of 2000, Maurice P. Andrien, Jr., the chief executive officer of
SunSource, was contacted by the First Party regarding a possible acquisition of 
SunSource. Mr. Andrien briefly discussed a possible acquisition with the First  
Party, but did not discuss a proposed price or detail regarding the structure of
a possible transaction. Following his initial contact with the First Party, Mr. 
Andrien contacted the Second Party regarding the possible acquisition of        
SunSource. Mr. Andrien advised both the First Party and the Second Party that he
would be unable to pursue more detailed discussions until first obtaining the   
approval of the board of directors of SunSource, or the board, to proceed with  
discussions regarding a potential acquisition of SunSource.                     

At the regular meeting of the board on October 31, 2000, Mr. Andrien  
advised the board of his contact with the First Party and the Second Party      
regarding a possible acquisition of SunSource. At this meeting, the board       
discussed at length the advisability of pursuing a potential sale transaction at
the present time. This included a general discussion of the current financial   
position of SunSource, the results of operations and the business of SunSource  
on both an historical and prospective basis, and current industry, economic and 
market conditions affecting SunSource. The board also discussed SunSource's     
continuing need for additional capital, as well as the financial performance and
operations of STS. After discussion of these factors, the board determined that 
it was advisable at the present time to further evaluate the possibility of a   
sale transaction. The board then authorized Mr. Andrien to proceed with further 
meetings with each of the parties to obtain information regarding a possible    
acquisition of SunSource.                                                       

    At the October 31, 2000 meeting of the board, Joseph M. Corvino, the chief
financial officer of SunSource, also presented a proposal for a debt            
restructuring involving an unsecured subordinated debt investment by Allied     
Capital. After the discussion, the board authorized SunSource management to     
proceed with the negotiation of the subordinated debt investment by Allied      
Capital.                                                                        

 At a special meeting of the board on November 17, 2000, the board again
discussed the advisability of pursuing a possible sale transaction, including   
SunSource's continuing need for additional capital and the performance of STS.  
Mr. Andrien then summarized a meeting which had taken place with representatives
of the First Party on November 10, 2000. At the meeting with the First Party,   
representatives of the First Party indicated that any proposal for the          
acquisition of SunSource would be subject to due diligence and that the First   
Party would require a 30 day exclusivity period during which due diligence was  
to be completed. Mr. Andrien also updated the board with regard to the status of
the proposed subordinated debt investment by Allied Capital.                    

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    At the November 17, 2000 board meeting, the board carefully considered the
advisability of granting the First Party an exclusivity period during which it  
would conduct due diligence. After discussion and consultation with legal       
advisors present at the meeting, the board determined that it did not have      
sufficient information to approve a grant of exclusivity in favor of the First  
Party. The board again discussed the advisability of pursuing a possible sale   
transaction at the present time. After the discussion, and based upon the       
financial position and capitalization of SunSource, the results of operations   
and the business of SunSource, on both an historical and prospective basis, and 
the current industry, economic and market conditions affecting SunSource, as    
well as the performance of STS, the board determined that it was advisable to   
undertake careful consideration of strategic alternatives available to          
SunSource. The board then appointed a special committee consisting of three     
independent directors, including O. Gordon Brewer, Norman V. Edmonson and Arnold
S. Hoffman, to review, consider and make recommendations regarding a potential  
sale transaction. The special committee was also authorized to approve an       
exclusivity arrangement with the First Party of up to 30 days if the special    
committee determined that such an arrangement was in the best interests of      
SunSource and its stockholders.                                                 

On November 21, 2000, Allied Capital sent to SunSource a written      
preliminary expression of interest regarding an acquisition of SunSource to be  
structured as a stock for stock merger.                                         

 At a meeting of the special committee on November 21, 2000, Mr. Andrien
reported that the First Party continued to insist on an exclusivity period prior
to commencing further due diligence with respect to a sale transaction, but that
the First Party was significantly advanced over the Second Party in terms of its
analysis and public due diligence review of a potential sale transaction. The   
special committee then discussed in detail each of the parties, including the   
desire and ability each might have to complete a sale transaction from a        
financial perspective and otherwise. After the discussion, the special committee
determined that a transaction with Allied Capital was less desirable because a  
cash transaction was preferred at the present time. The Special Committee also  
determined that transaction with the First Party had the greatest probability of
success given the advanced nature of the First Party's analysis and due         
diligence review. Based upon this determination, and after consultation with    
legal advisors present at the meeting, the special committee determined that it 
was advisable for SunSource to enter into a 30 day exclusivity arrangement with 
the First Party.                                                                

 At a meeting of the special committee on November 27, 2000, the special
committee again discussed the exclusivity arrangement with the First Party.     
After the discussion, the special committee confirmed its prior determination   
that entering into such an agreement with the First Party was advisable to      
SunSource. Later in the day on November 27, 2000, SunSource entered into a 30   
day exclusivity arrangement with the First Party which also contained mutual    
confidentiality provisions. This exclusivity arrangement was subject to         
termination by SunSource in the event SunSource were to receive a superior      
offer. Following execution of the exclusivity arrangement, the First Party began
to conduct its due diligence investigation from non-public sources.             

 At a meeting of the special committee on November 30, 2000, Mr. Andrien
informed the special committee that the Second Party continued to express       
interest in                                                                     

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making a proposal for the acquisition of SunSource. The special committee       
discussed possible alternatives for responding to the Second Party in light of  
the exclusivity arrangement with the First Party. After discussion and          
consultation with legal advisors present at the meeting, the special committee  
directed Mr. Andrien not to respond to the Second Party due to the exclusivity  
arrangement with the First Party. On December 4, 2000, the Second Party         
submitted a written expression of interest with respect to the acquisition of   
SunSource. The written expression of interest submitted by the Second Party was 
subject to satisfactory completion of due diligence by the Second Party.        

At a meeting of the special committee on December 5, 2000, the special
committee carefully considered the possibility of terminating the exclusivity   
arrangement with the First Party in response to the written expression of       
interest submitted by the Second Party. The special committee then discussed    
factors affecting a decision to terminate the exclusivity arrangement with the  
First Party, including the fact that meaningful due diligence had not been      
completed by the Second Party and the special committee's perception that       
completion of due diligence by the Second Party was likely to result in a       
reduction of the suggested price and the fact that due diligence with the First 
Party was nearly complete. Based upon these factors, and after further          
discussion and consultation with legal advisors present at the meeting, the     
special committee determined that such expression of interest was not           
sufficiently likely to lead to the completion of a transaction at the suggested 
price to warrant termination of the exclusivity arrangement with the First      
Party. Accordingly, the special committee elected not to terminate the          
exclusivity arrangement with the First Party at the present time.               

 At a meeting of the special committee on December 11, 2000, the special
committee again considered the expression of interest submitted by the Second   
Party. After discussion, the special committee directed Mr. Andrien to attempt  
to negotiate an amendment to the exclusivity arrangement with the First Party to
permit a discussion with the Second Party for the limited purpose of evaluating 
whether such expression of interest was reasonably likely to lead to the        
completion of a transaction at the suggested price. On December 13, 2000, the   
First Party agreed to amend the exclusivity arrangement to permit a discussion  
with the Second Party for such limited purpose. On December 14, 2000, Norman V. 
Edmonson, a member of the special committee, contacted the Second Party and,    
following his discussion with the Second Party, reported to the special         
committee that he did not receive any information which would change the special
committee's prior determination that the expression of interest was not         
sufficiently likely to lead to the completion of a transaction at the suggested 
price to warrant termination of the exclusivity arrangement with the First      
Party.                                                                          

On December 15, 2000, following a discussion of proposals from various
investment banks, the special committee engaged Janney Montgomery Scott LLC to  
act as financial advisor, and to provide a fairness opinion, to the board in    
connection with a possible sale transaction involving SunSource.                

On December 27, 2000, the special committee received a letter from the
First Party with respect to a sale transaction. The letter from the First Party 
conditioned the closing of the proposed transaction upon a sale of STS and upon 
the continuation of financing provided by SunSource's current lenders.          

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 At a meeting of the special committee on December 28, 2000, the special
committee discussed the letter from the First Party. At this meeting, the       
special committee reviewed the performance of STS and discussed at length the   
implications of the condition requiring a sale of STS. After lengthy discussion 
and consultation with legal advisors present at the meeting, the special        
committee determined that the condition regarding the sale of STS was           
unacceptable because of the uncertainty such a condition would introduce as to  
whether the sale transaction would close and the potential damage to SunSource  
if such a transaction were not to close after being publicly announced. The     
special committee directed its legal advisors to draft a response letter to the 
First Party advising the First Party of this decision.                          

On December 28, 2000, SunSource completed a $30 million unsecured     
subordinated debt facility with Allied Capital. Prior to that time, Allied      
Capital had been focused on the completion of the debt facility and had not     
actively pursued a possible acquisition of SunSource.                           

  At meetings of the special committee on January 15, 2001 and January 24,
2001, representatives of the First Party made presentations to the special      
committee outlining a proposed plan for the disposition of STS. However, the    
First Party continued to require the sale of STS as a condition to closing. This
condition continued to remain unacceptable to the special committee for the     
reasons discussed by the special committee at its December 28, 2000 meeting. As 
a result, after early February of 2001, no further discussions took place       
regarding a sale transaction with the First Party.                              

Following the expiration of the exclusivity arrangement with the First
Party in late December of 2000, the Second Party continued to express interest  
in acquiring SunSource. The special committee authorized the Second Party to    
begin its due diligence investigation in early January of 2001. During the      
course of its due diligence investigation, the Second Party raised concerns over
certain rights in favor of a third party which would be triggered upon a change 
in control of SunSource. The Second Party indicated that, unless such rights    
were waived, it would only be willing to make an offer for the acquisition of   
SunSource at a price below the special committee's expectations. The special    
committee directed Mr. Andrien to discuss a possible waiver of such right with  
such third party, but the parties were unable to reach agreement on an          
acceptable waiver. Discussions regarding a sale transaction with the Second     
Party continued through February and late March of 2001 but did not result in a 
proposal for the acquisition of SunSource by the Second Party.                  

   In mid-February of 2001, Allied Capital contacted Mr. Andrien regarding a
possible acquisition of SunSource by Allied Capital. At the time, Allied Capital
was familiar with SunSource and its operations as the result of the completion  
of the $30 million subordinated debt facility in late December of 2000 and the  
due diligence investigation related to such transaction.                        

At a meeting of the special committee on March 6, 2001, Mr. Andrien   
reported to the special committee that Allied Capital had expressed an interest 
in acquiring SunSource. At this meeting, the special committee discussed a      
possible acquisition of SunSource by Allied Capital, including strategy for     
conducting negotiations with Allied Capital. In particular, the special         
committee determined to advise Allied Capital that the special committee would  
not consider any sale transaction conditioned upon a sale of STS.               

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     At a regular meeting of the Board on March 28, 2001, Arnold S. Hoffman, the
Chairman of the special committee, updated the Board as to the status of        
discussions with the First Party, the Second Party and Allied Capital. Mr.      
Hoffman also summarized the terms orally outlined by Allied Capital for a sale  
transaction, including Allied Capital's indication that a sale of STS would not 
be a condition to closing in a sale transaction. Mr. Andrien and Mr. Corvino    
then gave a presentation of SunSource's operations and financial performance,   
including the performance of STS. Following this presentation, the Board        
discussed at length the performance of STS. After discussion, the board         
determined that it was advisable to pursue a sale transaction with Allied       
Capital which would not be conditioned upon a sale of STS. The board then       
authorized the special committee to review, consider and make recommendations to
the board regarding a potential sale transaction with Allied Capital.           

On April 4, 2001, SunSource and Allied Capital executed a Mutual      
Nondisclosure Agreement, and Allied Capital began its due diligence             
investigation. On April 6, 2001, Allied Capital presented preliminary terms to  
SunSource wherein Allied Capital offered to purchase all of the outstanding     
stock of SunSource in a stock for stock merger, subject to completion of due    
diligence. Allied Capital proposed an exchange ratio to be based on a share     
price for SunSource common stock of $10.25 per share, and a share price for     
Allied Capital stock to be based on a 20-day average market price for the 20    
trading days ending 2 days prior to the date of signing a definitive merger     
agreement. Allied Capital also conditioned its proposal on the continued        
employment of, and equity participation by, certain key employees of SunSource. 
The Allied Capital proposal was not conditioned on a sale of STS or the         
continued financing provided by SunSource's current lenders.                    

   During early April of 2001, Mr. Hoffman discussed with representatives of
Janney the status of Janney's valuation of SunSource and the preliminary results
of Janney's valuation analysis.                                                 

     On April 13, 2001, the special committee met with representatives of Allied
Capital to continue to discuss terms of a potential sale transaction. At this   
meeting, the special committee reviewed the proposed $10.25 per share price and 
based upon the valuation analysis performed to date by Janney, attempted to     
negotiate an increase in the price. Following the discussion, Allied Capital    
indicated its intention to increase the price to $10.50 per share, subject to   
completion of additional due diligence. Allied Capital indicated, however, that 
it would not increase the price to more than $10.50 per share.                  

  At a special meeting of the Board on April 19, 2001, the Chairman of the
special committee summarized the status of negotiations with Allied Capital. A  
representative of Janney and SunSource's legal advisors attended the meeting.   
The board discussed the terms proposed by Allied Capital and reviewed the status
of negotiations. Janney then gave a presentation to the board regarding the     
proposal from Allied Capital, including a review of the valuation methodologies 
and analyses used by Janney to arrive at a range for the equity value of        
SunSource. The board discussed the presentation made by Janney and asked        
questions regarding Janney's valuation methodologies and analysis. Mr. Hoffman  
also stated that Allied Capital had indicated an intention to increase the price
to $10.50 per share, but that this price remained subject to additional due     
diligence.                                                                      

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   At the April 19, 2001 meeting of the board, the board discussed at length
the advisability of conducting an open auction or further soliciting other      
potential buyers. The board then discussed the impediments to the transaction   
with the First Party caused by the condition requiring a sale of STS as well as 
the impediments to a transaction with the Second Party caused by the third party
rights triggered by a change in control. The board reviewed the fact that, as a 
result of these impediments, both the First Party and the Second Party had      
suggested a price below the special committee's and the board's expectations.   
The board also discussed Allied Capital's proposal, including the fact that it  
was not conditioned upon the sale of STS, and discussed the possible adverse    
impact an open auction or further solicitation was likely to have on the        
proposed transaction with Allied Capital. The board also discussed the          
possibility that an open auction or further solicitation would have an adverse  
impact on STS's customer base, potentially resulting in a lower price than the  
price proposed by Allied Capital. The board then confirmed with Janney that     
Janney would be willing to render a fairness opinion at the price proposed by   
Allied Capital. After general discussion, the board determined that, based upon 
the foregoing, an open auction or further solicitation was not advisable at the 
present time. The board then determined that it was necessary to move forward   
with Allied Capital as expeditiously as possible and authorized the special     
committee to negotiate a definitive merger agreement with Allied Capital on the 
terms proposed.                                                                 

     Throughout April and early May of 2001, Allied Capital continued to conduct
its due diligence investigation, and representatives of Allied Capital and      
SunSource continued to discuss an appropriate structure and other terms that    
would be necessary to complete a merger transaction.                            

  In early May of 2001, Allied Capital advised the special committee that,
while its implied enterprise value of SunSource would not change, based upon    
receipt of additional due diligence regarding the number of outstanding shares  
and options, the per share price would be reduced to $10.375 per share.         

On May 30, 2001, Allied Capital presented a draft merger agreement to 
SunSource and its legal advisors. At a meeting of the special committee on June 
4, 2001, the special committee discussed the initial draft of the Merger        
Agreement with its legal advisors. In particular, the special committee reviewed
and discussed the exchange ratio, the terms of the required management          
participation, the establishment of a collar on the Allied Capital stock        
consideration, the termination fee, the definition of material adverse effect,  
the conditions to closing and the option for Allied Capital to pay the merger   
consideration in cash rather than Allied Capital stock. Following this meeting, 
the special committee and its financial and legal advisors continued to meet    
regularly to discuss the status of negotiations with Allied Capital and the     
issues arising during negotiations.                                             

  At a special meeting of the Board on June 7, 2001, the special committee
reviewed the status of negotiations and summarized unresolved issues for the    
board. At this meeting, the board discussed at length the proposed price, as    
well as the other terms and conditions of the proposed sale transaction with    
Allied Capital. Mr. Hoffman reported to the board that the special committee    
continued to support the proposed sale transaction with Allied Capital, and     
that, based on conversations with Janney, believed the proposed price to be fair
to SunSource and its stockholders, both affiliated and unaffiliated. After      
discussion, the board confirmed that the special                                

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committee should continue the negotiation of the definitive merger agreement    
with Allied Capital on the terms presented to the board.                        

On June 13, 2001, for purposes of evaluating an investment in Allied  
Capital in the event Allied Capital elected to pay the merger consideration in  
Allied Capital stock, the special committee met with representatives of         
PricewaterhouseCoopers to discuss a due diligence report on Allied Capital      
prepared by PricewaterhouseCoopers at the request of the special committee.     

  On June 17, 2001, the special committee met to review the final terms of
the merger agreement prior to making its recommendation to the board. At this   
meeting, the special committee reviewed the proposed price and other terms and  
conditions of the proposed sale transaction with Allied Capital. Following      
discussion, the special committee determined to recommend approval of the merger
agreement to the board.                                                         

   At a special meeting of the board on June 18, 2000 called for the purpose
of considering approval of the definitive merger agreement and related          
transactions, Mr. Andrien reviewed the key terms of the merger agreement and    
summarized the status of negotiations with Allied Capital. At the meeting,      
Janney reviewed the financial terms of the merger and rendered its oral opinion,
subsequently confirmed by a written opinion dated as of June 18, 2001, to the   
effect that as of that date, based upon and subject to the assumptions,         
limitations and qualifications set forth in its written opinion, both the       
proposed exchange ratio and the proposed cash consideration, if Allied Capital  
elected to pay the merger consideration in cash, were fair to SunSource and the 
affiliated and unaffiliated stockholders of SunSource from a financial point of 
view. Following Janney's presentation, the board considered the terms and       
provisions of the draft merger agreement. The special committee then recommended
that the board approve the draft merger agreement and related transactions.     
After general discussion, and consideration of the factors described under      
"-- Recommendation of the SunSource Board of Directors and "Reasons for the     
Recommendation of the SunSource Board of Directors," the board concluded that   
the merger was in the best interests of SunSource and its stockholders and      
unanimously approved the merger agreement and the transactions contemplated by  
the merger agreement.                                                           

    The parties agreed to enter into a definitive agreement and plan of merger
as of June 18, 2001 subject to finalizing the transaction documents. The merger 
agreement was executed by the parties on June 19, 2001.                         

Following the execution of the definitive merger agreement and other  
ancillary documents, a joint press release announcing the merger agreement was  
issued on June 19, 2001.                                                        

    On July 2, 2001, SunSource and Allied Capital issued a joint press release
announcing that Allied Capital had elected to pay the consideration in the      
merger in cash and not Allied Capital common stock.                             

REASONS FOR THE RECOMMENDATION OF THE SUNSOURCE BOARD OF DIRECTORS              

   The SunSource board of directors and the special committee consulted with
senior management, as well as the board's financial advisor and legal counsel,  
and approved the merger after determining that it was fair to and in the best   
interests of SunSource's affiliated and unaffiliated stockholders. In reaching  
its conclusion to                                                               

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approve the merger, the board of directors considered the following information 
and factors:                                                                    

- PURCHASE PRICE PREMIUM.  The board of directors determined, with the
advice of its financial advisor, that the $10.375 per share price 
 represents a substantial premium to the market price of SunSource's
    common stock and, with the advice of its legal counsel, that the other
material terms of the merger agreement, taken as a whole, were as 
  favorable as those found in comparable acquisition transactions. The
       closing price per share of SunSource's common stock on the New York Stock
     Exchange was $4.96 per share on the day the board of directors approved
     the merger; thus, $10.375 represented a 109% premium over the $4.96 per
     share market price. Also, during the 52-week period ended June 15, 2001
    the highest closing market price of SunSource's common stock was $5.38
per share and the lowest was $2.88 per share.                     

  - HIGHLY LEVERAGED CAPITAL STRUCTURE.  The board of directors considered
       SunSource's highly leveraged capital structure including its senior debt,
       subordinated debt and trust preferred securities which, in the aggregate,
     represent a total debt of approximately 96% of SunSource's consolidated
capitalization as of March 31, 2001. SunSource's current financial
 position would limit its access to the equity markets in the future
    thereby limiting its ability to support and maintain the growth of its
  various business segments. The board of directors considered that by
      becoming a portfolio company of Allied Capital, New SunSource would have
  access to a funding source with significant financial resources. See
       "-- Fairness Opinion of SunSource's Financial Advisors" and "-- SunSource
Inc. and Subsidiaries Consolidated Financial Statements";         

- PERFORMANCE OF STS.  SunSource's board of directors considered the  
       performance of the STS business including its operating losses since 1998
      and its impact on the overall valuation of SunSource. Also, the board of
       directors decided that the risks of potential losses of STS customers did
not warrant conducting an open auction or further soliciting other
       potential buyers to acquire STS in lieu of the Allied Capital transaction
      to acquire all business segments of SunSource. See "-- Background of the
 Merger" and "-- Fairness Opinion of SunSource's Financial Advisor."

  - CONSUMMATION OF THE MERGER.  SunSource's board of directors considered
   the likelihood of consummation of the merger, including the terms and
  conditions of the merger agreement and the limited conditions to the
consummation of the merger.                                       

    - FAIRNESS OPINION.  The opinion of Janney Montgomery Scott states that as
   of its date, and based on and subject to the matters described in the
    opinion, the consideration provided for in the merger was fair, from a
financial point of view, to SunSource's stockholders, including   
     unaffiliated stockholders, and describes the related financial analyses
      performed by Janney Montgomery Scott in connection with its opinion. See
"-- Fairness Opinion of SunSource's Financial Advisor"; and       

     - RECOMMENDATION OF SPECIAL COMMITTEE.  In December 2000, SunSource's board
   of directors appointed a special committee comprising independent and
  disinterested directors to review, consider and make recommendations

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 regarding a potential sale transaction of SunSource. Upon extensive
 discussions and negotiations with Allied Capital, in particular the
consideration to be paid, the terms of the required management    
      participation, the establishment of a collar on the Allied Capital stock
    consideration, the termination fee, the definition of material adverse
   effect and the conditions to closing, the special committee concluded
     that the merger and the related transactions are both substantively and
  procedurally fair to the affiliated and unaffiliated stockholders of
     SunSource. The special committee has unanimously recommended the merger
     with Allied Capital and the related transactions to the SunSource board
of directors.                                                     

  The board of directors and the special committee also considered certain
potentially negative factors and risks in its deliberations concerning the      
merger, including, without limitation, the following:                           

  - The possibility that the merger would not be consummated following the
execution of the merger agreement;                                

- The possible disruption of SunSource's business operations pending  
completion of the merger; and                                     

 - The structure and amount of the termination fee and its effect on the
financial condition of SunSource. See "The Merger Agreement --    
Termination; Fees."                                               

  SunSource's board of directors and the special committee considered that
specified officers, directors and stockholders of the company would continue as 
officers, directors and stockholders of New SunSource, and as a result such     
officers and directors would benefit from compensation and employment           
arrangements in the ordinary course of business, and that all such persons will 
be entitled to any benefits that may arise from continued ownership of New      
SunSource.                                                                      

In view of the variety of factors considered in connection with its   
evaluation of the merger agreement, SunSource's board of directors and the      
special committee found it impracticable to, and did not, quantify, rank or     
otherwise assign relative weights to the factors considered or determine that   
any factor was of particular importance in reaching its determination that the  
merger agreement and the transactions contemplated by the merger agreement are  
fair to, and in the best interests of, SunSource's affiliated and unaffiliated  
stockholders. Rather, the members of SunSource's board of directors and the     
special committee each viewed their respective recommendations as being based   
upon their own judgment, in light of the totality of the information presented  
and considered, of the overall effect of the merger agreement and the           
transactions contemplated by the merger agreement, including the merger, on     
SunSource's stockholders compared to any alternative transaction. The above     
discussion of the information and factors considered by SunSource's board of    
directors and the special committee is not all-inclusive but is believed to     
include all material factors considered by SunSource's board of directors and   
the special committee.                                                          

RECOMMENDATION OF SUNSOURCE'S BOARD OF DIRECTORS                                

SunSource's board of directors believes that the merger is in the best
interest of SunSource and its stockholders. Accordingly, SunSource's board of   
directors has, by a unanimous vote of the directors, approved the merger        
agreement and the transactions contemplated by the merger agreement.            

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     THE SUNSOURCE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
THE COMMON STOCK OF THE COMPANY VOTE "FOR" THE MERGER PROPOSAL.                 

ALLIED CAPITAL'S REASONS FOR THE MERGER                                         

Allied Capital's board of directors believes its investment in New    
SunSource will enhance Allied Capital's investment portfolio, both with respect 
to current investment return and potential future capital gain. Allied Capital's
investment in New SunSource is expected to include subordinated debt and common 
stock. Allied Capital will control directly approximately 94% of the voting     
common stock of New SunSource (on a fully diluted basis). In addition to        
receiving a current investment return through interest, dividends and fee       
income, Allied Capital believes there is opportunity to add value to New        
SunSource and to position its investment for future capital gain.               

  Allied Capital believes that the merger is the most appropriate means of
acquiring New SunSource as a portfolio company. The Allied Capital board of     
directors believes that the expected investment return from its investment in   
New SunSource is consistent with Allied Capital's overall portfolio return      
objectives.                                                                     

BELIEF OF THE FILING PERSONS IN THE FAIRNESS OF THE MERGER                      

  The rules of the Securities and Exchange Commission require that each of
SunSource, Maurice Andrien, Joseph Corvino, Max Hillman, Stephen Miller, Richard
Hillman, George Heredia, Gary Seeds, Terry Rowe, Jim Waters, Dennis Blake, Rick 
Buller, Ken Foskey, Michael Mueller, Mark Yeary, John McDonnell, John Marshall, 
and Allied Capital express its or his belief as to the fairness of the merger to
the holders of SunSource common stock.                                          

The special committee of SunSource did not retain an independent      
representative to act solely on behalf of the unaffiliated holders of SunSource 
common stock for purposes of negotiating the merger or advising such            
stockholders as to the fairness of the merger. The special committee, however,  
which consisted entirely of independent and disinterested directors, has worked 
with Janney Montgomery Scott LLC to ensure the fairness of the transaction to   
the unaffiliated holders of SunSource common stock. None of the individuals     
listed above has undertaken any formal evaluation of the fairness of the        
transaction to the unaffiliated holders of SunSource common stock and did not   
find it practicable to quantify or assign relative weights to the various       
factors considered by them.                                                     

Each of the individuals listed above believes that the merger is both 
procedurally and substantively fair to the unaffiliated holders of SunSource    
common stock. In reaching that conclusion the individuals listed above          
considered, among other things, the factors contained in the analysis presented 
under "-- Reasons for the Recommendation of SunSources Board of Directors" and  
"-- Fairness Opinion of SunSource's Financial Advisor."                         

The board of directors of SunSource and the special committee have    
unanimously concluded that the merger is both substantively and procedurally    
fair to the unaffiliated holders of SunSource common stock and has approved the 
merger agreement for the reasons referred to above and for the reasons set forth
in "Reasons for the Recommendation of SunSource's Board of Directors."          

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     The merger is not structured so that the approval of at least a majority of
the unaffiliated shares is required, and each of the individuals listed above   
was aware of this fact in arriving at his or its belief that the merger is      
procedurally and substantively fair to the unaffiliated holders of SunSource    
common stock. As of June 18, 2001, affiliated stockholders held approximately   
23% of SunSource's common stock.                                                

FAIRNESS OPINION OF SUNSOURCE'S FINANCIAL ADVISOR                               

  The board of directors retained Janney in December 2000 as its financial
advisor to review possible merger transactions and to render an opinion as to   
the fairness, from a financial point of view, of the consideration to be        
received by the stockholders of SunSource common stock. As described herein,    
Janney's opinion, dated June 18, 2001, together with the related presentation to
the board of directors, was only one of many factors taken into consideration by
the board of directors in making its determination to approve the merger.       

At the June 18, 2001 meeting of SunSource's board of directors,       
representatives of Janney made a presentation with respect to the merger and    
rendered to the board of directors its oral opinion, subsequently confirmed in  
writing as of the same date, that as of such date, and based on the assumptions 
made, matters considered and limits of the review undertaken by Janney, the     
consideration to be received in the merger was fair to the stockholders,        
including unaffiliated stockholders, of SunSource, from a financial point of    
view.                                                                           

    THE FULL TEXT OF JANNEY'S WRITTEN OPINION, DATED JUNE 18, 2001, WHICH SETS
FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON REVIEW        
UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX B AND IS            
INCORPORATED HEREIN BY REFERENCE. JANNEY'S OPINION IS DIRECTED TO THE BOARD OF  
DIRECTORS OF SUNSOURCE AND ADDRESSES THE FAIRNESS OF THE CONSIDERATION TO BE    
RECEIVED IN THE MERGER BY SUNSOURCE'S STOCKHOLDERS FROM A FINANCIAL POINT OF    
VIEW. JANNEY'S OPINION DOES NOT ADDRESS THE UNDERLYING DECISION OF SUNSOURCE TO 
ENGAGE IN THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER
AS TO HOW SUCH STOCKHOLDER SHOULD VOTE OR AS TO ANY OTHER ACTION SUCH           
STOCKHOLDER SHOULD TAKE IN CONNECTION WITH THE TRANSACTION. THE DISCUSSION OF   
THE JANNEY OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS        
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.                         

In connection with its opinion, Janney reviewed:                      

   - annual reports on Form 10-K of SunSource for the years 1997, 1998, 1999
and 2000;                                                         

    - quarterly reports on Form 10-Q of SunSource for the quarters ended March
31, 2000 and March 31, 2001;                                      

 - financial projections prepared by the management of SunSource for the
years ending December 31, 2001 through December 31, 2005;         

   - audited financial results for Kar for the years ended December 31, 1997
    through December 31, 2000; unaudited financial results for Kar for the
quarters ended March 31, 2000 and March 31, 2001; and projections 
      prepared by the management of Kar for the year ending December 31, 2001;

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- the stock prices, operating results, financial conditions and future
earnings estimates of publicly traded companies that Janney deemed
comparable to SunSource, Hillman, STS and Kar;                    

    - the financial terms of mergers and acquisitions of companies that Janney
deemed comparable to SunSource, Hillman, STS and Kar;             

  - the terms of the merger agreement and related documents in draft form;

     - such other studies and analyses and considered such other information and
factors, as it deemed appropriate.                                

 Janney assumed that the final terms of the merger agreement and related
documents reviewed by it in draft form would not vary materially from the drafts
reviewed by it. Janney also held discussions with certain members of the        
management of SunSource regarding its business, operating results, financial    
condition and prospects. Janney did not independently verify any of the         
information described above and for purposes of its opinion assumed the         
accuracy, completeness and fairness of all such information. Janney did not make
and it was not provided with an independent evaluation or appraisal of the      
assets of SunSource. With respect to the financial forecast information         
furnished by or discussed with SunSource, Janney assumed that such information  
was prepared on the basis of reasonable assumptions and reflected the best      
currently available judgments and estimates of the management of SunSource as to
the likely future financial performance of SunSource. Janney's opinion is       
necessarily based on the market, economic and other conditions as they existed  
and should be evaluated as of the date of such opinion.                         

In arriving at its opinion, Janney did not ascribe a specific value to
SunSource, but made its determination as to the fairness, from a financial point
of view, of the consideration to be received by the stockholders of SunSource   
common stock in the merger on the basis of a variety of financial and           
comparative analyses, including those described below. The summary of analyses  
performed by Janney as set forth below does not purport to be a complete        
description of the analyses underlying Janney's opinion. The presentation of a  
fairness opinion is a complex analytic process involving various determinations 
as to the most appropriate and relevant methods of financial analysis and the   
application of those methods to the particular circumstances and therefore, such
an opinion is not readily susceptible to partial or summary description. The    
estimates contained in such analyses and the ranges of valuations resulting from
any particular analysis are not necessarily indicative of actual values or      
predictive of future results or values, which may be significantly more or less 
favorable than those suggested by such analyses. In addition, analyses relating 
to the value of the business or securities do not purport to be appraisals and  
estimates are inherently subject to substantial uncertainty. In arriving at its 
opinion, Janney made qualitative judgments as to the significance and relevance 
of each analysis and factor considered by it. Accordingly, Janney believes that 
its analyses must be considered as a whole and that selecting portions of its   
analyses and factors, without considering all analyses and factors, could create
an incomplete view of all the processes underlying such analyses and its        
opinions.                                                                       

In rendering its opinion, Janney considered, the condition of the U.S.
stock markets and the current level of economic activity, particularly in the   
distribution industry. No company used in the analysis of certain other publicly
traded companies nor any transaction used in the analysis of selected mergers   
and                                                                             

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acquisitions summarized above are identical to SunSource, Hillman, STS and Kar  
or the merger. In addition, Janney believes that both the analysis of certain   
other publicly traded companies and the analysis of selected mergers and        
acquisitions are not simply mathematical. Rather, such analyses must take into  
account differences in the financial and operating characteristics of these     
companies and other factors, such as general economic conditions, conditions in 
the markets in which such companies compete and strategies and operating plans  
for such companies, that could affect the public trading value and acquisition  
value of these companies.                                                       

Background                                                                      

Janney noted to the board of directors that for analytical purposes   
SunSource was compromised of three separate businesses:                         

- The Hillman Group, a wholly-owned subsidiary;                       

   - SunSource Technology Services, LLC, also a wholly-owned subsidiary; and

- Kar Products, Inc., in which SunSource holds a 44% minority interest

Janney indicated that due to the differences between the operations,            
profitability and financial condition of Hillman, STS and Kar, it was           
appropriate to value each on an independent basis.                              

   Janney also noted that SunSource's recent reported financial results were
affected by various acquisitions and divestitures during 2000, and that for     
analytical purposes it was appropriate to review SunSource's financial results  
on a pro forma basis, i.e., as if the following acquisitions and divestitures   
were effective as of January 1, 2000:                                           

 - on March 2, 2000, SunSource contributed its Kar operations to a newly
formed partnership, G-C Sun Holdings LP ("G-C");                  

- on April 7, 2000, SunSource acquired Axxess Technologies, Inc.;     

    - on April 13, 2000, SunSource sold substantially all of the assets of its
Harding Glass, Inc. subsidiary;                                   

     - on October 4, 2000, G-C acquired all of the outstanding stock of Brampton
Fastener Company Limited;                                         

     - on November 3, 2000, Hillman purchased inventory and certain other assets
of the Sharon-Philstone division of Pawtucket Fasteners, LP; and  

- in December 2000, SunSource's board of directors approved a plan to 
liquidate SunSource Integrated Services de Mexico, S.A. de C.V.   

   Further, Janney noted that SunSource's outstanding bank revolving credit,
senior bank debt, unsecured subordinated notes and guaranteed preferred         
beneficial interests in junior subordinated debentures were obligations of      
SunSource, and that Janney did not believe it was appropriate to, and therefore 
did not, allocate such debt among Hillman, STS and Kar. Janney noted that G-C   
had outstanding indebtedness in addition to the SunSource debt. Because         
SunSource holds a minority interest in Kar, accounts for its investment in Kar  
under the equity method, and is not a direct borrower or guarantor of the Kar   
debt, it is not included as part of the SunSource debt.                         

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 The following is a brief summary of the material factors considered and
analyses performed by Janney and presented to the board of directors at its     
meeting on June 18, 2001.                                                       

Historical Stock Price                                                

    Janney reviewed the trading volume and price history of SunSource's common
stock for the period from June 7, 1999 through June 15, 2001. Janney also       
reviewed for the same period the relationship between movements in the closing  
prices of SunSource's common stock, the S&P 500 Index, and an index of the      
following six comparable public companies:                                      

Applied Industrial Technologies                                                 
Barnes Group                                                                    
Genuine Parts Company                                                           
Handleman Company                                                               
Industrial Distribution Group                                                   
Source Information Management Company                                           

 Janney noted that SunSource's common stock under-performed the index of
comparable public companies for the period from October 5, 2000 through June 15,
2001, and under-performed the S&P 500 Index from August 31, 2000 through January
25, 2001. Janney observed that SunSource's stock price decreased 65.5% from     
$14.50 on June 7, 1999 to $5.00 on June 15, 2001, and ranged from $2.88 to $5.38
in the 52 week period ending June 15, 2001.                                     

Premiums Paid                                                         

Janney reviewed certain publicly available information regarding the  
premiums paid since December 1, 2000, by acquirors of publicly traded companies 
with market capitalizations from between $50 to $200 million. Janney's review   
calculated the price paid as a multiple of the price of the target's stock price
four weeks prior to the announcement of the acquisition. Janney noted that the  
median and average premiums paid for the 52 transactions reviewed were 44.4% and
56.1%, respectively, and that the premium to be paid in the merger as a multiple
of SunSource's stock price four weeks prior to the announcement of the merger   
was 159%.                                                                       

  The reviews of historical stock price performance and premiums paid were
presented to the board of directors to provide background information and to add
context to the other analyses performed by Janney, as described below.          

The Hillman Group                                                               

Analysis of Selected Publicly Traded Comparable Companies             

Using publicly available information, Janney compared the operating   
performance, financial performance and capitalization of Hillman with           
corresponding data and ratios for certain similar publicly traded companies.    
Janney selected these companies from the universe of possible companies based   
upon Janney's view as to the comparability of financial and operating           
characteristics of these companies to                                           

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Hillman. With respect to each such analysis, Janney made such comparisons among 
the following companies:                                                        

                                                                [Download Table]
                                                                             
Applied Industrial Technologies, Inc.       Central Garden & Pet Company     
Genuine Parts Company                       Handleman Company                
W.W. Grainger, Inc.                         Source Information Management Co.
WESCO International, Inc.                   TBC Corporation                  

   Among the multiples calculated and reviewed by Janney were the comparable
companies' enterprise value, defined as market capitalization, adjusted for debt
and cash, as a multiple of EBITDA (earnings before interest, taxes, depreciation
and amortization) and EBIT (earnings before interest and taxes). The financial  
information used in connection with these multiples was based on the latest     
reported 12 month period (LTM) as derived from publicly available information.  

   The comparable companies were found to have the following trading ranges:

                                                                [Download Table]

                       ENTERPRISE                             ENTERPRISE  
                         VALUE/                                 VALUE/    
                     ---------------                        --------------
                      LTM      LTM                           LTM      LTM 
                     EBITDA    EBIT                         EBITDA   EBIT 
                     ------   ------                        ------   -----
                                                                          
Applied Ind. Tech.    5.5x      7.5x  Central Garden & Pet   7.9x    15.8x
Genuine Parts         8.0x      9.2x  Handleman              4.2x     6.2x
W.W. Grainger         9.5x     12.3x  Source Info. Mgt.      7.4x    10.4x
WESCO International   5.7x      7.0x  TBC Corporation        5.9x     7.5x

    Janney noted that: (i) the enterprise value of the comparable companies as
a multiple of the latest reported 12 month period EBITDA ranged from 4.2x to    
9.5x, with a median of 6.6x; applying these multiples to Hillman's latest 12    
month EBITDA of $39.9 million resulted in low, high and median enterprise values
of $169.1 million, $378.5 million and $263.8 million, respectively; and (ii) the
enterprise value of the comparable companies as a multiple of the latest        
reported 12 month period EBIT ranged from 6.2x to 15.8x, with a median of 8.4x; 
applying these multiples to Hillman's latest 12 month EBIT of $27.3 million     
resulted in low, high and median values of $169.2 million, $432.0 million and   
$228.2 million, respectively.                                                   

Analysis of Selected Comparable Transactions                          

   Janney reviewed publicly available information relating to six merger and
acquisition transactions in respect of companies that it deemed in industries   
most comparable to Hillman's business. These selected comparable transactions   
included:                                                                       

                                                                [Download Table]

                ACQUIRER                                   TARGET                 
----------------------------------------  ----------------------------------------
                                                                                  
SunSource Inc.                            Axxess Technologies                     
Honeywell International, Inc.             TriStar Aerospace Co.                   
The Fairchild Corporation                 Kaynar Technologies                     
TriStar Aerospace Co.                     Standard Parts and Equipment Co.        
Pentacon                                  ASI Aerospace Group                     
Pentacon                                  Texas Instrument Aviation               

Janney examined multiples of the enterprise value in each of the      
transactions to such acquired companies' EBIT and EBITDA. For each measure, EBIT
and EBITDA consisted of the latest twelve months of publicly available financial
information on the respective date of each transaction. All multiples for the   
comparable transactions                                                         

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were based on information available at the time of announcement of such         
transaction, without taking into account differing market and other conditions  
during the period during which such transactions occurred.                      

    Janney noted that: (i) the enterprise value of the comparable transactions
as a multiple of the latest reported 12 month period EBITDA ranged from 6.1x to 
7.8x, with a median of 6.5x; applying these multiples to Hillman's latest 12    
month EBITDA of $39.9 million resulted in low, high and median enterprise values
of $244.9 million, $312.3 million and $258.4 million, respectively; and (ii) the
enterprise value of the comparable transactions as a multiple of the latest     
reported 12 month period EBIT ranged from 6.3x to 19.4x, with a median of 7.8x; 
applying these multiples to Hillman's latest 12 month EBIT of $27.3 million     
resulted in low, high and median enterprise values of $171.9 million, $528.8    
million and $213.2 million, respectively.                                       

Discounted Cash Flow Analysis                                         

   Janney prepared a discounted cash flow analysis of the future unleveraged
free cash flows that Hillman's operations could be expected to generate during  
various periods using projections provided to Janney by SunSource. Unleveraged  
free cash flows of Hillman were projected over a period ending December 31,     
2005. A terminal value was calculated utilizing an exit multiple between 5.5x   
and 7.5x projected EBITDA in fiscal 2005. The estimated future unleveraged free 
cash flows and the terminal value were discounted to present values using a     
range of discount rates from between 15.0% and 19.0%. Janney arrived at a range 
of estimated enterprise value of Hillman of between $241.8 million and $345.2   
million. Based on a midpoint exit multiple of 6.5x EBITDA in the fiscal year    
2005, and a midpoint discount rate of 17.0%, this analysis produced a midpoint  
enterprise value of Hillman of $290.1 million.                                  

Janney noted to the board of directors that the median values of the  
aforementioned analyses were $263.8 million, $228.2 million, $258.4 million,    
$213.2 million and $290.2 million, and that these median values, together with  
the other data reviewed, supported a determination of an enterprise value range 
of Hillman of from between $230 million to $270 million.                        

SunSource Technology Services                                                   

    Because STS's EBIT, EBITDA and net income were negative for 1999, 2000 and
for the latest twelve months ended March 31, 2001, and were projected by        
SunSource to be negative for 2001 and 2002, Janney noted that any analysis of   
multiples thereof would not be meaningful. Janney noted, however, that          
notwithstanding its historical and projected losses, STS's balance sheet had a  
positive net tangible book value of $31.4 million as of March 31, 2001. Janney  
did not estimate the costs that would be incurred in winding up operations in an
orderly liquidation of STS's assets.                                            

Discounted Cash Flow Analysis                                         

   Janney prepared a discounted cash flow analysis of the future unleveraged
free cash flows that STS's operations could be expected to generate during      
various periods using projections provided to Janney by SunSource. Unleveraged  
free cash flows of STS were projected over a period ending December 31, 2005. A 
terminal value was calculated utilizing an exit multiple between 5.5x and 7.5x  
projected EBITDA in fiscal 2005. The estimated future unleveraged free cash     
flows and the                                                                   

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terminal value were discounted to present values using a range of discount rates
from between 15.0% and 19.0%. Janney arrived at a range of estimated enterprise 
values of STS of between $10.7 million and $19.8 million. Based on a midpoint   
exit multiple of 6.5x EBITDA in the fiscal year 2005, and a midpoint discount   
rate of 17.0%, this analysis produced a midpoint enterprise value of STS of     
$14.9 million.                                                                  

   In light of STS's net tangible book value, as well as the discounted cash
flow analysis described above, Janney indicated to the board of directors that  
the foregoing comparisons supported a determination of an enterprise value range
of STS of from between $20 million to $25 million.                              

Kar Products, Inc.                                                              

Analysis of Selected Publicly Traded Comparable Companies             

Using publicly available information, Janney compared the operating   
performance, financial performance and capitalization of Kar with respective    
corresponding data and ratios for certain similar publicly traded companies.    
Janney selected these companies from the universe of possible companies based   
upon Janney's view as to the comparability of financial and operating           
characteristics of these companies to Kar. With respect to each such analysis,  
Janney made such comparison among the following companies:                      

Barnes Group                                                                    
Hughes Supply                                                                   
Industrial Distribution Group                                                   
Lawson Products                                                                 

Among multiples calculated and reviewed by Janney were the comparable 
companies' (i) enterprise value to the latest reported 12 month period EBIT and 
EBITDA and (ii) equity value, defined as common stock equity market value to the
latest reported 12 month period and estimated net income. The financial         
information used in connection with the multiples set forth below assumed Kar   
debt, net of cash, of $99.2 million, and was based on the latest reported 12    
month period as derived from publicly available information and on estimated EPS
for calendar year 2001 for the Kar comparable companies as reported as the      
consensus estimates by I/B/E/S.                                                 

   The comparable companies were found to have the following trading ranges:

                                                                [Download Table]

                                        ENTERPRISE                            
                                          VALUE/            EQUITY VALUE/     
                                       -------------   -----------------------
                                        LTM     LTM       LTM        2001(P)  
                                       EBITDA   EBIT   NET INCOME   NET INCOME
                                       ------   ----   ----------   ----------
                                                                              
Barnes Group.........................  6.4x     10.4x     12.8x         N/A   
Hughes Supply........................  7.9x     10.8x     15.3x        11.3x  
Industrial Distribution Group........  6.8x     12.5x       NM          N/A   
Lawson Products......................  6.4x     7.6x      11.5x         N/A   

    Janney noted that: (i) the enterprise value of the comparable companies as
a multiple of the latest reported 12 month period EBITDA ranged from 6.4x to    
7.9x, with a median of 6.6x; applying these multiples to Kar's latest 12 month  
EBITDA of $24.1 million, and adjusting for debt and cash, resulted in equity    
values of $55.0 million, $91.2 million and $59.9 million, respectively; (ii) the
enterprise value of the Kar comparable companies as a multiple of the latest    
reported 12 month period EBIT ranged from 7.6x to 12.5x, with a median of 10.6x;
applying these multiples to                                                     

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Kar's latest 12 month EBIT of $16.7 million, and adjusting for debt and cash,   
resulted in equity values of $27.9 million, $109.9 million and $78.1 million,   
respectively; and (iii) the equity value of the Kar comparable companies as a   
multiple of the latest reported 12 month period net income ranged from 11.5x to 
15.3x, with a median of 12.8x; applying these multiples to Kar's latest twelve  
month net income of $3.6 million resulted in equity values of $41.8 million,    
$55.7 million and $46.6 million, respectively. Because only one of the Kar      
comparable companies had reported consensus estimates for 2001 net income,      
Janney did not rely on the quantitative results of Kar equity value as a        
multiple of Kar's estimated 2001 net income.                                    

    Janney indicated to the board of directors that applying the median values
of the aforementioned analyses to Kar's latest 12 month EBITDA, latest 12 month 
EBIT and latest 12 month net income resulted in equity values of $59.9 million, 
$78.1 million and $46.6 million, and that these median values, together with the
other data reviewed, supported a total equity value range of Kar of from between
$45 million to $70 million. Applying SunSource's 44% ownership percentage in Kar
to the total equity value range supported an equity value range of SunSource's  
ownership interest in Kar of approximately $20 million to $30 million, before   
application of the discount described below.                                    

Janney noted that (i) SunSource's 44% interest in Kar was a minority  
interest and (ii) the G-C limited partnership agreement governing Kar provides  
the majority owner of Kar a "call" on SunSource's interest in Kar, i.e., a right
to purchase SunSource's interest in Kar, in the event of a change of control of 
SunSource. Janney indicated that the terms of the call provision reduced the    
marketability of Kar to a third party, and that an interest in a business is    
generally worth less if it is a minority interest and/or if it is not readily   
marketable. In addition, Janney noted that the G-C partnership agreement        
contains certain shareholder preference provisions that could reduce the        
distributions to SunSource in the event of a sale of Kar to an amount less than 
its ownership percentage would otherwise indicate. As a result, Janney noted    
that an illiquidity discount of 30% to 35% from the equity value range to       
SunSource derived from public company multiples was appropriate.                

 Based on the above, Janney indicated to the board of directors that the
foregoing comparisons supported a determination of an equity value range of     
SunSource's 44% ownership interest in Kar of from between $15 million to $20    
million.                                                                        

SunSource Inc.                                                                  

 Based on the above, Janney indicated to the board of directors that the
foregoing comparisons supported a determination of an enterprise value range of 
SunSource of from between $265 million to $315 million, equaling the sum of the 
ranges of Hillman, STS and Kar. After subtracting the value of the SunSource    
debt, net of cash, assumed to be $220.3 million, the resulting equity value     
range of SunSource equaled from between $44.7 million to $94.7 million, or,     
based on an assumed 7.529 million diluted shares outstanding, from between $5.94
per share to $12.58 per share. Janney noted that the percentage differences     
between the high end and the low end of the equity value and the per share value
ranges was significantly wider than the percentage difference between the high  
end and the low end of the enterprise value range because of the substantial    
amount of SunSource debt outstanding.                                           

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   Janney is a nationally recognized investment banking firm and, as part of
its investment banking activities is regularly engaged in the valuation of      
businesses and securities in connection with mergers and acquisitions,          
negotiated underwritings, secondary distributions of securities, private        
placements and valuations for corporate and other purposes. The board of        
directors retained Janney to act as its financial advisor based on Janney's     
qualifications, reputation and experience. Pursuant to the terms of Janney's    
engagement, the fee payable to Janney consists of (i) $25,000 which was paid    
upon Janney's retention by the board of directors, (ii) $150,000 upon the       
delivery of Janney's opinion and (iii) $150,000 upon the closing of the merger. 
In addition, SunSource has agreed to reimburse Janney for its reasonable        
out-of-pocket expenses and to indemnify Janney for certain costs, expenses and  
liabilities related to or arising out of Janney's rendering of services under   
its engagement as financial advisor, or to contribute to payments Janney may be 
required to make in respect thereof.                                            

INTERESTS OF CERTAIN PERSONS IN THE MERGER                                      

    In considering the recommendation of the SunSource board of directors with
respect to the merger, SunSource stockholders should be aware that certain      
members of SunSource's management, one of whom is a member of the SunSource     
board of directors, have certain interests in the merger in addition to those of
the stockholders generally. The members of the special committee of the board of
directors and members of the SunSource board of directors were aware of these   
interests when they considered and approved the merger agreement. See           
"-- Related Transactions" and "Security Ownership of Certain Beneficial Owners  
and Management of SunSource."                                                   

Continuing Ownership in New SunSource                                           

     As described above in "The Merger Proposal," Allied Capital conditioned its
offer for SunSource on the continued ownership by certain stockholders and      
members of management. Allied Capital wanted to assure that the key members of  
New SunSource's management team and other key stockholders had continuing       
ownership and continued financial risk in New SunSource. Maurice Andrien, Joseph
Corvino, Max Hillman, Stephen Miller, Richard Hillman, George Heredia, Gary     
Seeds, Terry Rowe, Jim Waters, Dennis Blake, Rick Buller, Ken Foskey, Michael   
Mueller, Mark Yeary, John McDonnell, and John Marshall, the continuing          
stockholders, will continue to own an aggregate of approximately 6% of New      
SunSource common stock after the merger on a fully diluted basis.               

Prior to the merger, certain continuing stockholders collectively will
purchase 163,202 shares of SunSource common stock from Allied Capital for a cash
price of $10.375 per share. These shares, together with 80,986 shares of        
SunSource common stock held by certain of the continuing stockholders, will be  
exchanged in the SunSource recapitalization for an equal number of shares of    
Series B preferred stock. Such Series B preferred stock will be converted to New
SunSource common stock following the merger. In addition, certain stockholders  
will rollover their existing options to purchase 443,000 shares of common stock 
of SunSource into options to purchase an equal number of shares of common stock 
of New SunSource. The continuing stockholders have entered into an equity       
purchase agreement committing                                                   

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to these arrangements. The SunSource shares and options covered by the equity   
purchase agreement are summarized in the following table:                       

                                                                [Download Table]

                                                    SUNSOURCE              
                                                  COMMON STOCK             
                               CURRENTLY OWNED   TO BE PURCHASED           
                                  SUNSOURCE           FROM         ROLLOVER
NAME                            COMMON STOCK     ALLIED CAPITAL    OPTIONS 
----                           ---------------   ---------------   --------
                                                                           
Maurice P. Andrien, Jr. .....      19,880                 --       130,000 
Joseph M. Corvino............       8,711                 --        65,000 
Max W. Hillman, Jr. .........      32,220             23,202        67,500 
Stephen W. Miller............      20,000                 --        50,000 
Richard P. Hillman...........          --             41,205        20,000 
George L. Heredia............          --                 --        10,000 
Gary L. Seeds................          --              3,855        12,500 
Terry R. Rowe................          --              2,410         9,000 
James P. Waters..............          --              2,410         9,000 
Dennis G. Blake..............          --             24,096         9,000 
Richard A. Buller............         175              2,410         8,000 
Kenneth H. Foskey............          --              2,410         9,000 
Michael A. Mueller...........          --                 --        10,000 
Mark Yeary...................          --                 --        10,000 
John H. Marshall III.........          --              3,373         4,000 
John P. McDonnell............          --             57,831        20,000 
                                   ======            =======       ======= 
  Total......................      80,986            163,202       443,000 

Management of New SunSource                                                     

     Upon consummation of the merger, Maurice Andrien will be appointed Chairman
of the board of directors of New SunSource and Joseph Corvino will be appointed 
Senior Vice President of New SunSource pursuant to the terms of their new       
employment agreements.                                                          

   The board of directors of New SunSource will be composed of five members,
four of which will be nominated by Allied Capital. Allied Capital intends to    
appoint William L. Walton, Joan M. Sweeney, G. Cabell Williams III and Daniel L.
Russell to the New SunSource board of directors. Pursuant to the stockholders   
agreement, Mr. Andrien will also be appointed to the board of directors of New  
SunSource. Mr. Andrien will continue as a director until he ceases to be        
employed by New SunSource for any reason or resigns from the board. If Mr.      
Andrien ceases to be a director for any reason, the resulting vacancy will be   
filled by Max Hillman, Stephen Miller, Joseph Corvino or Richard Hillman in that
order, so long as such person is still employed by New SunSource. At such time  
as the persons named above are no longer employed by New SunSource, there will  
not be a director named by such stockholders and the number of board members    
will be reduced to four.                                                        

  In addition to the minority director, two of the continuing stockholders
will have the right to attend meetings of the board as non-voting observers. The
two initial observers will be Max Hillman, and Stephen Miller. If such          
stockholders cease to be employed by New SunSource or otherwise resign as board 
observers, the vacancy will be filled by Joseph Corvino and Richard Hillman, in 
that order. If the above                                                        

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stockholders are not employed by New SunSource, there will be no non-voting     
board observers.                                                                

    The members of management who are continuing stockholders will continue as
management of New SunSource as follows:                                         

                                                                [Download Table]

           NAME                                POSITION                       
           ----                                --------                       
                                                                              
Maurice P. Andrien, Jr. ..  Chairman of the Board of SunSource Inc.           
Joseph M. Corvino.........  Senior Vice President of SunSource Inc.           
Max W. Hillman, Jr. ......  Chief Executive Officer of The Hillman Group, Inc.
Stephen W. Miller.........  Vice Chairman of The Hillman Group, Inc.          
Richard P. Hillman........  President of The Hillman Group, Inc.              
George L. Heredia.........  Senior Vice President of Marketing of The         
                              Hillman Group, Inc.                             
Gary L. Seeds.............  Senior Vice President of Sales for The Hillman    
                              Group, Inc.                                     
Terry R. Rowe.............  Senior Vice President of National Accounts for    
                              The Hillman Group, Inc.                         
James P. Waters...........  Vice President and Chief Financial Officer of     
                              The Hillman Group, Inc.                         
Dennis G. Blake...........  Vice President of Marketing for The Hillman       
                              Group, Inc.                                     
Richard A. Buller.........  Vice President of Materials Management for The    
                              Hillman Group, Inc.                             
Kenneth H. Foskey.........  Vice President of Information Systems and New     
                              Business Development for The Hillman Group, Inc.
Michael A. Mueller........  Vice President of Engineering for The Hillman     
                              Group, Inc.                                     
Mark Yeary................  Vice President of Manufacturing for The Hillman   
                              Group, Inc.                                     
John H. Marshall III .....  Regional Vice President of Sales for The          
                              Hillman Group, Inc.                             

New Employment Agreements                                                       

  Concurrently with the signing of the merger agreement, SunSource entered
into employment agreements with each of Maurice Andrien, Joseph Corvino, Max    
Hillman and Stephen Miller. These agreements will become effective upon the     
consummation of the merger and will supersede any previous agreement between the
parties. Each agreement, with the exception of Mr. Miller's, provides for a     
four-year term, with annual renewals thereafter, and specifies each executive's 
compensation during the term of the agreement, in accordance with the           
achievement of established performance standards. Mr. Miller's agreement        
provides for a one-year term of employment with annual renewals thereafter. Mr. 
Andrien will serve as Chairman of the Board of New SunSource, Mr. Corvino will  
serve as Senior Vice President of New SunSource, Mr. Hillman will serve as Chief
Executive Officer of the Hillman Group and Mr. Miller will serve as the Vice    
Chairman of the Hillman Group.                                                  

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   The annual base salaries for Messrs. Andrien, Corvino, Hillman and Miller
will be $343,000, $250,000, $350,000 and $350,000, respectively. The board of   
directors has the right to increase the base salary during the term of the      
agreements. In addition, the board of directors may provide, in its sole        
discretion, an annual incentive cash bonus. This bonus will be determined with  
reference to each executive's performance in accordance with performance        
criteria to be established by the New SunSource board of directors in its sole  
discretion.                                                                     

    If during the term of employment New SunSource terminates their employment
without cause or they resign with good cause, Messrs. Andrien, Corvino, and     
Hillman are each entitled to payments equal to two times such individual's      
annual salary and bonus, and Mr. Andrien is guaranteed payments of not less than
$1 million. If Mr. Miller is terminated without cause or resigns with good cause
during the term of his employment, or his employment is terminated by the       
expiration of his one year term, he is entitled to his salary and bonus that he 
was entitled to during his one year employment term until the second anniversary
of the effective time of the merger.                                            

     In addition, in the event of a termination without cause following a change
of control that occurs on or after the third anniversary of the effective time  
of the merger or if they cease to be employed by SunSource for certain reasons  
at any time following the expiration of their four year employment term, Messrs.
Andrien, Corvino and Hillman are each entitled to a payment equal to one year's 
salary and bonus, and each agreement also prohibits the hiring or solicitation  
for hire of any SunSource employees for a period of two years following         
termination of their employment with SunSource. Mr. Miller and Mr. Max Hillman  
are also subject to a one year non-competition period subject to certain        
extensions.                                                                     

Stockholders Agreement                                                          

The continuing stockholders have agreed to enter into a stockholders  
agreement with Allied Capital and New SunSource at the closing of the merger.   
The stockholders agreement imposes certain requirements on the parties relating 
to the voting of New SunSource common stock, the sale or transfer of New        
SunSource common stock and certain other matters.                               

     The stockholders agreement provides, among other things, for the following:

- The continuing stockholders will only transfer their shares of New  
SunSource common stock to certain family members or trusts or     
    corporations created for the benefit of certain family members, unless
Allied Capital consents in writing;                               

    - The continuing stockholders will have tag along rights to participate in
a sale if Allied Capital proposes to sell 30% or more of its New  
   SunSource common stock to a third party, and Allied Capital will have
     take along rights to require the continuing stockholders to participate
in a sale or other business combination involving New SunSource;  

     - New SunSource has a call right and certain of the continuing stockholders
   have a put right with respect to their shares of New SunSource common
    stock if their employment with New SunSource is terminated for certain
reasons;                                                          

   - Allied Capital and the continuing stockholders have certain pre-emptive
      rights in the event that New SunSource issues any new equity securities;
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- The stockholders agreement provides for approval by the continuing  
      stockholders of certain proposed transactions between Allied Capital and
New SunSource;                                                    

- The stockholders agreement provides the continuing stockholders with
     certain registration rights in the event that New SunSource completes a
public offering.                                                  

Stock Options of New SunSource                                                  

     Upon consummation of the merger, a new stock option plan will be adopted by
New SunSource. The new plan will be in addition to the existing SunSource option
plan that will continue in effect after the merger; provided, however, the only 
options outstanding under the existing plan will be the rollover options.       
Pursuant to the new plan, approximately 1.3 million shares, or 15% of New       
SunSource's fully diluted common shares, will be reserved for issuance. Options 
granted pursuant to the plan will have a ten-year term, and an exercise price   
approximately equal to the per share value of New SunSource, as determined by   
the New SunSource board of directors, at the time of grant. The per share amount
of any distributions made after the grant date in connection with the related   
transactions described in this proxy statement will reduce the exercise price.  
Options will generally vest over four years, with 25% of the options granted on 
each anniversary of the grant date through the end of the fourth year, except   
that options granted to Mr. Miller will vest 100% on the first anniversary date 
of the grant date, unless, on the anniversary of the grant date, he is a member 
of the board of directors of New SunSource, in which case his options shall vest
over two years, with 50% vesting on each anniversary of the grant date through  
the end of the second year.                                                     

     In the event of the death or total disability of an optionee, vesting shall
accelerate to include any options that would vest during the one-year period    
after the event, and shall be exercisable for the one-year period. In addition, 
if an optionee is terminated without cause, or resigns for good reason (as      
defined in the employment agreements), all unvested options shall immediately   
vest in full.                                                                   

Vested options will be exercisable at any time until 90 days after    
termination of employment, except in the case of termination of an optionee's   
employment without cause or for good reason, or the non-renewal of an employment
agreement at the end of its stated term, in which case the vested options will  
be exercisable until the later of five years from the closing of the merger or  
one year from employment termination.                                           

    Upon a change of control (as defined in the employment agreements), unless
New SunSource is the surviving entity (except for a change of control resulting 
from the sale of substantially all of the assets of New SunSource), all unvested
options shall immediately vest, cashless exercises shall be permitted, and any  
options not exercised at or prior to the change of control shall terminate.     

Options representing 14% of New SunSource's fully diluted shares      
outstanding will be granted to the continuing stockholders after the            
consummation of the merger. Specifically, Mr. Andrien will receive 3.75%; Mr.   
Corvino will receive 1.00%; Mr. Miller will receive 1.50%; Mr. Max Hillman will 
receive 3.00%; Mr. Richard Hillman will receive 0.75%; Messrs. Heredia, Seeds,  
Rowe, Waters and Foskey will each receive 0.50%; Messrs. Blake, Buller and      
Muller and Yeary will each receive                                              

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0.33%; and Mr. Marshall will receive 0.18%. The remaining 1% will be reserved   
for future issuances.                                                           

Voting and Support Agreement                                                    

     Allied Capital has entered into a voting and support agreement with Maurice
Andrien, Joseph Corvino, Max Hillman, Stephen Miller, Richard Hillman, Stewart  
Bliss, Gordon Brewer, Norman Edmonson, Arnold Hoffman, Robert Keith, Donald     
Marshall, Geoffrey Shepard and Francis Ziegler, each of whom is a stockholder of
SunSource. The parties to the voting and support agreement represent            
approximately 20% of the outstanding shares of SunSource. Pursuant to this      
agreement, the stockholders of SunSource listed above agreed to vote for the    
merger proposal and for matters designed to facilitate the merger and against   
any action that would cause a breach of the merger agreement or otherwise hinder
the completion and consummation of the merger. Should the SunSource board of    
directors have a fiduciary duty to accept a superior acquisition proposal and as
a result the merger agreement is terminated, obligations under the voting and   
support agreement will be terminated.                                           

RELATED TRANSACTIONS                                                            

Note Purchase                                                                   

    On June 29, 2001, Allied Capital purchased an unsecured subordinated note,
with an original principal balance of $11 million, from a SunSource creditor for
$8.5 million. SunSource, through its Hillman Group subsidiary, had entered into 
the note on April 7, 2000 in connection with its acquisition of Axxess          
Technologies, Inc. The note had a balance of approximately $12.5 million on June
30, 2001, and is currently accruing interest at a rate equal to the prime rate  
plus 3%, in accordance with the existing terms of the note.                     

 To induce Allied Capital to purchase the note, SunSource entered into a
letter agreement in which SunSource agreed to conditions that would during such 
time that Allied Capital owns the note: 1) limit additional debt that SunSource 
can incur, 2) restrict prepayment of the junior trust preferred notes, 3)       
require SunSource to use its best efforts to obtain the consent of its senior   
lenders to allow the repurchase of this note and allow a concurrent investment  
by Allied Capital in SunSource, and 4) prohibit the Hillman Group from          
transferring or assigning its obligation under the note.                        

   Upon consent of SunSource's senior lenders, it is anticipated that Allied
Capital will exchange the note for $8.5 million of SunSource subordinated debt. 
The terms of this additional subordinated debt investment will be on            
substantially similar terms as Allied Capital's $30 million subordinated debt   
investment in SunSource that was completed in December 2000.                    

Fee                                                                             

Allied Capital has provided certain services to SunSource relating to 
actions it will implement or may consider implementing after the effective time,
including analysis of SunSource's capital structure and alternatives for        
restructuring its outstanding indebtedness, recapitalization or restructuring of
certain of its subsidiaries and investments, and negotiation of new employment  
agreements with key                                                             

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employees. In consideration for such services, Allied Capital will receive from 
SunSource a fee of approximately $2 million at the effective time of the merger.

Subordinated Debt                                                               

 In connection with the closing of the merger, Allied Capital intends to
invest $1.5 million in additional subordinated debt, on terms substantially     
similar to Allied Capital's $30 million subordinated debt investment that was   
completed in December 2000. In aggregate, Allied Capital will have approximately
$40 million invested in the subordinated debt of SunSource (the $30 million from
December 28, 2000, the $8.5 million in connection with the note purchase and    
$1.5 million in connection with the closing).                                   

STS Sale of Assets                                                              

     In order to raise capital and separate unrelated businesses, it is expected
that New SunSource will sell certain assets of STS in a management buyout       
transaction for approximately $25 million.                                      

    It is anticipated that a portion of the debt financing will be provided by
New SunSource, and an independent lender, and that a portion of the equity      
financing will be provided by Allied Capital and STS management including       
Maurice Andrien, Joseph Corvino and Justin Jacobi, President of STS, as well as 
certain of STS' regional managers and other employees. The management team is   
expected to invest approximately $1 million. The sale of STS is expected to     
close shortly after the merger is consummated.                                  

   The value of STS, as contemplated in this transaction, is consistent with
the value of STS as determined by Janney Montgomery Scott. See "Fairness Opinion
of SunSource's Financial Advisor -- SunSource Technology Services."             

Amendment to Rights Agreement                                                   

   SunSource is a party to a rights agreement that establishes a poison pill
mechanism as a defense against hostile takeovers. Even though Allied Capital's  
offer to acquire SunSource was not hostile, SunSource amended the rights        
agreement to provide that the provisions of the agreement would not be triggered
by a merger transaction with Allied Capital.                                    

Termination of Stockholders Agreement                                           

  In connection with SunSource's conversion to corporate form in September
1997, certain members of management and certain other stockholders of SunSource 
entered into a stockholders agreement pursuant to which the parties agreed to   
certain restrictions on the voting and transfer of their shares of SunSource    
common stock. In connection with the merger, the stockholders agreement was     
terminated by an agreement executed by each of the parties to the stockholders  
agreement.                                                                      

CHANGE OF CONTROL BENEFITS                                                      

Options                                                                         

  Prior to the effective time, SunSource will take all action necessary in
accordance with the terms of SunSource's existing stock option plan to provide  
notice to each optionee of the merger and to require that all optionees         
surrender their outstanding                                                     

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SunSource stock options, other than rollover options, in exchange for the       
issuance by SunSource of a number of shares of SunSource common stock for each  
option surrendered equal to the quotient of (i) the amount, if any, by which    
$10.375 exceeds the exercise price for such option divided by (ii) $10.375. As  
of June 18, 2001, there are 773,495 options to purchase SunSource common stock  
with an exercise price above $10.375 and 591,000 options to purchase SunSource  
common stock with an exercise price below $10.375. After providing notice to the
optionees of their right to exercise, the stock options with an exercise price  
above $10.375 that remain outstanding will be cancelled without any             
consideration, pursuant to the terms of the existing stock option plan.         

Deferred Compensation                                                           

  As a result of the merger, the amounts accrued and vested in SunSource's
deferred compensation plan will be eligible to be paid out pursuant to the terms
and conditions of the plan.                                                     

Employment and Severance Agreements                                             

SunSource will have the following obligations under severance and     
employment agreements as a result of the merger:                                

    - SunSource must pay Maurice P. Andrien, Jr. $1 million under the terms of
    Mr. Andrien's employment agreement with SunSource upon consummation of
the merger;                                                       

- Upon consummation of the merger, the restrictions will lapse on Mr. 
      Andrien's SunSource common stock under the terms of the restricted stock
     grant of 100,000 shares from SunSource to Mr. Andrien dated January 26,
2000;                                                             

   - Under the terms of Joseph M. Corvino's current severance agreement with
       SunSource, SunSource must pay Mr. Corvino his salary for 24 months in the
      event he is involuntarily terminated within one year of the consummation
      of the merger, 24 months in the event Mr. Corvino voluntarily terminates
  his employment after providing written notice within 275 days of the
   consummation of the merger and 24 months if Mr. Corvino is terminated
prior to or after the first anniversary of the consummation of the
       merger. This agreement will be superseded by Mr. Corvino's new employment
 agreement, which will become effective upon the consummation of the
merger;                                                           

     - Under the terms of Justin M. Jacobi's severance agreement with SunSource,
     SunSource must pay Mr. Jacobi's salary for 30 months in the event he is
 terminated involuntarily within one year of the consummation of the
merger; and                                                       

   - Each of Edward L. Tofani, Ken Gerland, John P. Drummy, Sharon E. Abney,
      Diane P. Karaoulis, Elizabeth Waters, Vincenzo Battaglia and Geoffrey D.
 Marsh have severance agreements with SunSource that entitle them to
      salary and benefits for periods ranging from 3 to 12 months in the event
   of involuntary termination within one year of the consummation of the
merger.                                                           

FINANCING OF MERGER                                                             

  Based on the      shares of SunSource common stock outstanding as of the
record date, the total cash consideration payable to holders of outstanding     
common                                                                          

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stock immediately prior to the merger will be $     . These funds are expected  
to be borrowed under Allied Capital's unsecured $417.5 million revolving credit 
facility that expires in May 2002. At Allied Capital's option, the facility     
bears interest at a rate equal to (i) LIBOR plus 1.25% for the applicable       
interest period or (ii) the higher of (a) the Bank of America, N.A. prime rate  
or (b) the Federal Funds rate plus 0.50%. The interest rate adjusts at the      
beginning of each new interest period, usually every thirty days. The interest  
rate was 6.7% at March 31, 2001, and the facility requires an annual commitment 
fee equal to 0.25% of the committed amount. The credit facility requires monthly
interest payments and all principal is due upon its expiration. At March 31,    
2001, the amount outstanding on the credit facility was $168.5 million. The     
amount available under Allied Capital's credit facility is adequate to enable   
Allied Capital to pay the total cash consideration.                             

DISSENTERS' RIGHTS OF APPRAISAL                                                 

    Under Delaware law, if you do not wish to accept the cash payment provided
for in the merger agreement, you have the right to dissent from the merger and  
to receive payment in cash for the fair value of your SunSource common stock as 
determined by the Delaware Court of Chancery. SunSource stockholders electing to
exercise appraisal rights must comply with the provisions of Section 262 of the 
Delaware General Corporation Law in order to perfect their rights. SunSource    
will require strict compliance with the statutory procedures.                   

    The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to be followed by a stockholder in   
order to dissent from the merger and perfect appraisal rights. This summary,    
however, is not a complete statement of all applicable requirements and is      
qualified in its entirety by reference to Section 262 of the Delaware General   
Corporation Law, the full text of which appears in Appendix C of this proxy     
statement.                                                                      

   Section 262 requires that stockholders be notified not fewer than 20 days
before the special meeting to vote on the merger that appraisal rights will be  
available. A copy of Section 262 must be included with such notice. This proxy  
statement constitutes SunSource's notice to its stockholders of the availability
of appraisal rights in connection with the merger in compliance with the        
requirements of Section 262. If you wish to consider exercising your appraisal  
rights, you should carefully review the text of Section 262 because failure to  
timely and properly comply with the requirements of Section 262 will result in  
the loss of your appraisal rights under Delaware law.                           

   If you elect to demand appraisal of your shares, you must satisfy each of
the following conditions:                                                       

- You must deliver to SunSource a written demand for appraisal of your
     shares before the vote with respect to the merger is take. This written
     demand for appraisal must be in addition to and separate from any proxy
     or vote abstaining from or voting against the merger. Voting against or
       failing to vote for the merger by itself does not constitute a demand for
appraisal within the meaning of Section 262.                      

- You must not vote in favor of the merger.                           

 If you fail to comply with either of these conditions and the merger is
completed, you will be entitled to receive the cash payment for your shares of  

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SunSource common stock as provided for in the merger agreement, but you will    
have no appraisal rights with respect to your shares of SunSource common stock. 

    All demands for appraisal should be addressed to Joseph Corvino, Secretary
of SunSource at the company address, before the vote on the merger is taken at  
the special meeting and should be executed by, or on behalf of, the record      
holder of the shares of SunSource common stock. The demand must reasonably      
inform SunSource of the identity of the stockholder and the intention of the    
stockholder to demand appraisal of his or her shares.                           

 To be effective, a demand for appraisal by a holder of SunSource common
stock must be made by, or on behalf of the recordholder made by the beneficial  
owner if he or she does not also hold the shares of record. The beneficial      
holder must, in such cases, have the registered owner submit the required demand
in respect of such shares.                                                      

   A person having a beneficial interest in shares of SunSource common stock
that are held of record in the name of another person, such as a broker,        
fiduciary, depositary or other nominee, must act promptly to cause the record   
holder to follow the steps summarized herein properly and in a timely manner to 
perfect appraisal rights. If the shares of SunSource common stock are owned of  
record by a person other than the beneficial owner, including a broker,         
fiduciary (such as a trustee, guardian or custodian), depositary or other       
nominee, such demand must be executed by or for the record owner. If the shares 
of SunSource common stock are owned of record by more than one person, as in a  
joint tenancy or tenancy in common, such demand must be executed by or for all  
joint owners. An authorized agent, including an agent for two or more joint     
owners, may execute the demand for appraisal for a stockholder of record;       
however, the agent must identify the record owner and expressly disclose the    
fact that, in exercising the demand, such person is acting as agent for the     
record owner. If a stockholder holds shares of SunSource common stock through a 
broker who in turn holds the shares through a central securities depository     
nominee such as Cede & Co., a demand for appraisal of such shares must be made  
by or on behalf of the depository nominee and must identify the depository      
nominee as record holder.                                                       

    A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds shares of SunSource common stock as a nominee for others, may exercise
appraisal rights with respect to the shares held for all or less than all       
beneficial owners of shares as to which such person is the record owner. In such
case, the written demand must set forth the number of shares covered by such    
demand. Where the number of shares is not expressly stated, the demand will be  
presumed to cover all of SunSource common stock outstanding is the name of such 
record owner.                                                                   

  Within 10 days after the effective date of the merger, SunSource, as the
surviving corporation, must give written notice that the merger has become      
effective to each SunSource stockholder who has properly filed a written demand 
for appraisal and who did not vote in favor of the merger. Within 120 days after
the effective date, either the surviving corporation or any stockholder who has 
complied with the requirements of Section 262 may file a petition in the        
Delaware Court of Chancery, with a copy served on SunSource in the case of a    
petition filed by a stockholder demanding a determination of the fair value of  
the shares held by all stockholders entitled to appraisal. The surviving        
corporation has no obligation to file such a petition in the event there are    
dissenting stockholders. Accordingly, the failure of a                          

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stockholder to file such a petition within the period specified could nullify   
such stockholder's previously written demand for appraisal. Within 120 days     
after the effective time, any stockholder who has theretofore complied with the 
applicable provisions of Section 262 will be entitled, upon written request, to 
receive from the surviving corporation a statement setting forth the aggregate  
number of shares of SunSource common stock not voting in favor of the merger and
with respect to which demands for appraisal were received by the surviving      
corporation and the number of holders of such shares. Such statement must be    
mailed (i) within 10 days after the written request therefor has been received  
by the surviving corporation or (ii) within 10 days after the expiration of the 
period for the delivery of demands as described above, whichever is later.      

  If a petition for appraisal is duly filed by a stockholder and a copy of
the petition is delivered to the surviving corporation, the surviving           
corporation will then be obligated within 20 days after receiving service of a  
copy of the petition to provide the Chancery Court with a duly verified list    
containing the names and addresses of all stockholders who have demanded an     
appraisal of their shares. After notice to dissenting stockholders, the Chancery
Court is empowered to conduct a hearing upon the petition, to determine those   
stockholders who have complied with Section 262 and who have become entitled to 
the appraisal rights provided thereby. The Chancery Court may require the       
stockholders who have demanded payment for their shares to submit their stock   
certificates to the Register in Chancery for notation thereon of the pendency of
the appraisal proceedings; and if any stockholder fails to comply with such     
direction, the Chancery Court may dismiss the proceedings as to such            
stockholder.                                                                    

After determination of the stockholders entitled to appraisal of their
shares of SunSource common stock, the Chancery Court will appraise the shares,  
determining their fair value exclusive of any element of value arising from the 
accomplishment or expectation of the merger, together with a fair rate of       
interest, if any, to be paid upon the amount determined to be the fair value.   
When the value is determined, the Chancery Court will direct the payment of such
value, with interest thereon accrued during the pendency of the proceeding, if  
the Chancery Court so determines, to the stockholders in exchange for           
certificates representing such shares. Moreover, SunSource does not anticipate  
offering more than the merger consideration to any stockholder exercising       
appraisal rights and reserves the right to assert, in any appraisal proceeding, 
that, for purposes of Section 262, the "fair value" of a share of SunSource     
common stock is less than the merger consideration. In determining "fair value",
the Delaware Court is required to take into account all relevant factors. In    
Weinberger v. UOP, Inc. the Delaware Supreme Court discussed the factors that   
could be considered in determining fair value in an appraisal proceeding,       
stating that "proof of value by any techniques or methods which are generally   
considered acceptable in the financial community and otherwise admissible in    
court" should be considered and that "[f]air price obviously requires           
consideration of all relevant factors involving the value of a company." The    
Delaware Supreme Court has stated that in making this determination of fair     
value that court must consider market value, asset value, dividends, earnings   
prospectus, the nature of the enterprise and any other factors which could be   
ascertained as of the date of the merger which throw any light on future        
prospects of the merged corporation. Section 262 provides that fair value is to 
be "exclusive of any element of value arising from the accomplishment or        
expectation of the merger." In Cede & Co. v. Technicolor, Inc., the Delaware    

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Supreme Court stated that such exclusion is a "narrow exclusion [that] does not 
encompass known elements of value," but which rather applies only to the        
speculative elements of value rising for such accomplishment, or expectation. In
Weinberger, the Delaware Supreme Court construed Section 262 to mean that       
"elements of future value, including the nature of the enterprise, which are    
known or susceptible of proof as of the date of the merger and not the product  
of speculation, may be considered."                                             

    You should be aware that the fair value of your shares as determined under
Section 262 could be more, the same, or less than the value that you are        
entitled to receive pursuant to the merger agreement.                           

Costs of the appraisal proceeding may be imposed upon the surviving   
corporation and/or the stockholders participating in the appraisal proceeding by
the Chancery Court as the Chancery Court deems equitable in the circumstances.  
However, costs do not include attorneys' and expert witness fees. Each          
dissenting stockholder is responsible for his or her attorneys' and expert      
witness expenses, although, upon the application of a stockholder, the Chancery 
Court may order all or a portion of the expenses incurred by any stockholder in 
connection with the appraisal proceeding, including, without limitation,        
reasonable attorneys' fees and the fees and expenses of experts, to be charged  
pro rata against the value of all shares entitled to appraisal. Any stockholder 
who had demanded appraisal rights will not, after the effective date, be        
entitled to vote shares subject to such demand for any purpose or to receive    
payments of dividends or any other distribution with respect to such shares     
(other than with respect to payment as of a record date prior to the effective  
date).At any time within 60 days after the effective date, any stockholder who  
has demanded an appraisal has the right to withdraw the demand and to accept the
cash payment specified in the merger agreement for his or her shares of         
SunSource common stock. If no petition for appraisal is filed within 120 days   
after the effective date of the merger, or if such stockholder delivers a       
written withdrawal of his or her demand for appraisal and an acceptance of the  
merger within 60 days after the effective date of the merger, then the right of 
such stockholder to appraisal will cease and such stockholder will be entitled  
to receive the cash payment for shares of his or her SunSource common stock     
pursuant to the merger agreement. Any withdrawal of a demand for appraisal made 
more than 60 days after the effective date of the merger may only be made with  
the written approval of the surviving corporation and no appraisal proceeding in
the Delaware Court of Chancery shall be dismissed as to any stockholder without 
the approval of the Court of Chancery, and such approval may be conditional upon
such terms as the Court of Chancery deems just.                                 

THE MERGER AGREEMENT

TERMS OF THE MERGER                                                             

   The merger agreement provided Allied Capital the option to pay the merger
consideration in cash or Allied Capital stock. On June 29, 2001, Allied Capital 
informed SunSource of its election to pay the merger consideration in cash.     

     Pursuant to the terms of the merger agreement, at the effective time of the
merger:                                                                         

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         (i) each share of SunSource common stock issued and outstanding as of
     the closing date will be converted into the right to receive for $10.375 in
 cash and all outstanding shares of SunSource common stock will cease to
exist and each certificate representing such shares will represent the
right to receive such amount;                                         

    (ii) each share of SunSource Series B preferred stock issued and
  outstanding as of the closing date will be converted into one fully paid
and nonassessable share of New SunSource common stock;                

      (iii) all shares of SunSource common stock held in the treasury of
SunSource will be canceled and will cease to exist;                   

         (iv) present holders of SunSource common stock will cease to have any
rights as holders of such shares, but will have the right to the cash 
consideration to be paid; and                                         

(v) each share of common stock of the merger sub issued and 
    outstanding immediately prior to the effective time will be converted into
    that number of fully paid and nonassessable shares of New SunSource common
stock that will result in Allied Capital's ownership being equal to   
     approximately 94% on a fully diluted basis of the total number of shares of
New SunSource common stock.                                           

The shares of SunSource trust preferred securities issued by SunSource
Capital Trust will remain outstanding.                                          

REPRESENTATIONS AND WARRANTIES                                                  

The merger agreement contains various representations and warranties  
relating to, among other things:                                                

    - the due organization, power and standing of SunSource and Allied Capital
and similar corporate matters;                                    

   - the authorization, execution, delivery and enforceability of the merger
agreement;                                                        

- the absence of conflicts under charters or bylaws, the absence of   
       violations of any instruments or law, and required consents or approvals;

- the capital structure of SunSource;                                 

- outstanding options and other stock rights of SunSource;            

- subsidiaries of SunSource;                                          

- amendment or termination of certain agreements of SunSource;        

- SunSource's corporate records;                                      

    - certain documents filed by each of SunSource and Allied Capital with the
      Commission and the accuracy of financial and other information contained
therein;                                                          

- SunSource's real property;                                          

- SunSource's intellectual property;                                  

- title to SunSource's assets and any liens on such assets;           

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- litigation against SunSource;                                       

- retirement and other employee benefit plans of SunSource;           

- employee matters involving SunSource;                               

- status of certain employment agreements of SunSource;               

- SunSource's insurance coverage;                                     

- status of certain of SunSource's customer relationships;            

- corporate action approving the merger agreement;                    

- transactions with directors, officers, consultants and affiliates of
SunSource;                                                        

- conduct of business by SunSource since December 31, 2000;           

- brokers' and finders' fees with respect to the merger;              

- compliance by SunSource with applicable laws;                       

- governmental permits of SunSource;                                  

- inventory of SunSource;                                             

- material liabilities of SunSource;                                  

- receivables of SunSource;                                           

- taxes and tax returns of SunSource;                                 

- SunSource's compliance with environmental laws;                     

- material agreements and contracts of SunSource;                     

- opinion of financial advisor to SunSource; and                      

- the absence of material adverse changes.                            

CERTAIN COVENANTS                                                               

    SunSource has agreed, among other things, prior to the consummation of the
merger, unless Allied Capital agrees in writing or as otherwise required or     
permitted by the merger agreement, to carry on its business in the usual,       
regular and ordinary course in substantially the same manner as conducted prior 
to the date of the merger agreement. In addition, SunSource has agreed that,    
among other things, prior to the consummation of the merger, unless Allied      
Capital agrees in writing or as otherwise required or permitted by the merger   
agreement, it shall not (and shall cause its subsidiaries not to):              

- amend its certificate of incorporation or bylaws;                   

     - issue or purchase any shares of capital stock or any of its indebtedness,
effect any stock split or otherwise change its capitalization;    

   - issue any option or other right to acquire shares of its capital stock;

- enter into or amend any commitments, contracts or other agreements  
    involving the payment or receipt of an amount in excess of $150,000 in
 any one year or $300,000 in the aggregate for any current or former
     officer, director or employee of SunSource or increase any compensation
of any such person so                                             

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     that such person's compensation is in excess of $150,000 in any year or
$300,000 in the aggregate;                                        

  - change its accounting practices except as required by law or generally
accepted accounting principles;                                   

   - enter into any lease or grant any lien except in the ordinary course of
business consistent with past practice;                           

- make any loan or advance to any stockholder, officer, director, or  
       employee of SunSource or, except in the ordinary course of business, make
any other loan or advance;                                        

- terminate or fail to renew any material contract or agreement;      

 - enter into any contract obligating SunSource to pay more than $50,000
unless such contract is terminable by SunSource within 30 days;   

 - declare or make any dividend or other payment on its capital stock or
      redeem, retire purchase or otherwise acquire shares of its capital stock
      except in the ordinary course of business consistent with past practice;

- acquire or dispose of any assets, subject to certain exceptions;    

     - pay any liabilities before they come due except in the ordinary course of
business;                                                         

     - revalue any assets or write-down the value of any loans or receivables of
   SunSource or its subsidiaries in excess of $50,000 unless required by
generally accepted accounting principles;                         

- accelerate the collection or make any sales to third parties of any 
receivables or delay the payment of any payables;                 

  - change any tax accounting practices or elections, file any amended tax
return or settle any tax claim in excess of $50,000; or           

    - make or commit to make any reduction in the prices charged to customers,
   or increase the rate of rebates payable to customers or slotting fees
payable to distributors except in the ordinary course of business.

In addition, SunSource and Allied Capital have agreed to operate their
respective businesses so that the representations and warranties of each company
shall continue to be true up to and including the closing date.                 

NO SHOPPING                                                                     

  SunSource has agreed that it will not, directly or indirectly, initiate,
solicit or encourage inquiries or submissions of proposals or offers from any   
person relating to any merger, reorganization, share exchange, consolidation or 
similar transaction or any sale of all or more than ten percent (10%) of the    
assets or any equity securities of SunSource. SunSource has further agreed not  
to, directly or indirectly engage in negotiations concerning, or provide        
confidential information to or have discussions with any person relating to, an 
acquisition proposal. Notwithstanding the foregoing, the SunSource board of     
directors may furnish information to, or enter into                             

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discussions or negotiations with, any person or entity that makes an unsolicited
bona fide acquisition proposal or recommend such an acquisition proposal to the 
SunSource stockholders, if, and only to the extent that, (i) the SunSource board
of directors determines in good faith after consultation with outside legal     
counsel that such action is consistent with its fiduciary duties under          
applicable law and (ii) in the case of engaging in negotiations or discussions  
with any person or recommending an acquisition proposal to stockholders, the    
SunSource board of directors determines in good faith (after consultation with  
its financial advisor) that the acquisition proposal in question would, if      
accepted, be reasonably likely to be consummated and would, if consummated,     
result in a transaction more favorable to the SunSource stockholders from a     
financial point of view than the merger with Allied Capital. SunSource has      
agreed to promptly notify Allied Capital if any such inquiries or proposals are 
received by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with SunSource, such notice 
to include the material terms of any such proposal.                             

EXPENSES AND FEES                                                               

Allied Capital, merger sub and SunSource shall bear their respective  
expenses incurred in connection with the merger, including fees of investment   
bankers, agents, representatives, counsel and accountants. The expenses incurred
by SunSource in connection with the merger are estimated to be approximately    
$       million.                                                                

INDEMNIFICATION                                                                 

 As provided in the merger agreement, Allied Capital has agreed that all
rights to indemnification existing in favor of the directors, officers or       
employees of SunSource as provided in SunSource's certificate of incorporation  
or bylaws shall survive the merger and continue in full force and effect for a  
period of not less than six years from the closing date. Further, Allied Capital
has agreed for six years after the closing date to maintain the current level of
directors' and officers' insurance and indemnification policies.                

CONDITIONS                                                                      

  The respective obligations of SunSource and Allied Capital to consummate
the merger are subject to the fulfillment of the following conditions, among    
others:                                                                         

    - the merger agreement and the transactions contemplated thereby will have
   been approved and adopted by the requisite vote of the holders of the
     issued and outstanding shares of capital stock of SunSource entitled to
vote thereon;                                                     

 - all applicable waiting periods with respect to filings made under the
 Hart-Scott-Rodino Act, or in connection with the merger and related
  transactions shall have passed, or early termination of such waiting
periods shall have been granted; and                              

 - no court order or other legal or regulatory restraint shall have been
      issued preventing the merger or restricting the operation of SunSource's
      business after the merger, and no proceedings by any governmental entity
are pending or threatened to prevent or modify the merger.        

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    The obligations of Allied Capital to effect the merger are also subject to
the satisfaction or waiver prior to the closing date of the following           
conditions, among others:                                                       

  - SunSource and the holders of SunSource common stock who are parties to
       the voting agreement shall have performed in all material respects all of
     their respective obligations required to be performed by them under the
    merger agreement and the voting agreement, and the representations and
     warranties of SunSource set forth in the merger agreement shall be true
  as of the closing date except for failures to be true that would not
    have, and would not reasonably be expected to have, individually or in
the aggregate, a material adverse effect on SunSource and its     
    subsidiaries, taken as a whole, or on The Hillman Group, individually;

 - from the date of the merger agreement through the closing date, there
   shall not have occurred any change or event that has caused, or would
     reasonably be expected to cause, a material adverse effect on SunSource
and its subsidiaries, taken as a whole, or on The Hillman Group,  
individually;                                                     

     - The employment agreements of Maurice Andrien, Joseph Corvino, Max Hillman
     and Stephen Miller shall be in full force and effect without any change
 from the form delivered to Allied Capital on the date of the merger
     agreement, and no such individual shall have expressed an intention not
to perform such employment agreement;                             

- The SunSource recapitalization, including the equity purchase by the
continuing stockholders shall have been consummated;              

     - The holders of not more than ten percent (10%) of SunSource's outstanding
   shares of common stock exercise dissenters' rights in accordance with
Delaware law; and                                                 

  - SunSource shall have delivered the shares of common stock of SunSource
       issued in connection with the exercise of the Allied Capital warrant, and
SunSource shall have purchased 121,523 shares of common stock of  
SunSource from Allied Capital.                                    

   The obligations of SunSource to effect the merger are also subject to the
satisfaction or waiver prior to the closing date of the following conditions,   
among others:                                                                   

- Allied Capital and merger sub shall have performed in all material  
 respects all obligations required to be performed by them under the
merger agreement, and the representations and warranties of Allied
       Capital and merger sub set forth in the merger agreement shall be true as
      of the closing date, except for failures to be true that would not have,
  and could not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on Allied Capital and its    
subsidiaries, taken as a whole; and                               

 - from the date of the merger agreement through the closing date, there
   shall not have occurred any change or event that has caused, or would
  reasonably be expected to cause, a material adverse effect on Allied
Capital and its subsidiaries, taken as a whole.                   

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TERMINATION; FEES                                                               

   The merger agreement may be terminated and the merger may be abandoned at
any time prior to the closing date, before or after the approval by the         
stockholders of SunSource:                                                      

- by the mutual consent of SunSource and Allied Capital;              

   - by action of either SunSource or Allied Capital if the merger shall not
have been consummated by December 31, 2001; provided that such    
  termination right shall not be available to a party whose failure to
     fulfill any obligation under the merger agreement caused the merger not
to have been consummated by such date;                            

 - by action of the SunSource board of directors if at any time prior to
       approval of the Merger by the SunSource stockholders, the SunSource board
  of directors determines in good faith, on the basis of advice of its
       financial advisors and outside counsel, that an acquisition proposal made
     in compliance with the requirements described under "No Shopping" above
      is a superior acquisition proposal, if and only if SunSource enters into
     a definitive agreement containing the terms of the superior acquisition
       proposal, provided that SunSource may not exercise such termination right
       until three business days after notifying Allied Capital of such superior
   acquisition proposal and SunSource's intention (subject to any action
Allied Capital may take) to accept it;                            

- by action of SunSource's board of directors if (i) the conditions   
      precedent to SunSource's obligations under the merger agreement have not
      been met or waived by SunSource at such time as any such condition is no
       longer capable of satisfaction or (ii) Allied Capital materially breaches
      its obligations under the merger agreement and such breach continues for
10 days after receipt of notice of such breach from SunSource;    

  - by action of the Allied Capital board of directors if (i) SunSource or
       holders of SunSource common stock who are parties to the voting agreement
       shall have breached any of their respective covenants or agreements under
   the merger agreement or obligations under the voting agreement in any
       material respect and such breach continues for a period of ten days after
     the receipt of notice of such breach from Allied Capital or (ii) any of
       the conditions precedent to Allied Capital's obligations under the merger
     agreement have not been met or waived by Allied Capital at such time as
any such condition is no longer capable of satisfaction; or       

- by action of either SunSource or Allied Capital if a court or other 
     governmental authority has issued a final and non-appealable order that
permanently restrains, enjoins or otherwise prohibits the merger. 

In the event that the merger agreement is terminated as a result of   
SunSource's acceptance of another acquisition proposal, then SunSource must pay 
Allied Capital a termination fee of $2,270,000.                                 

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MATERIAL FEDERAL INCOME TAX CONSEQUENCES                                        

This section discusses the material United States federal income tax  
consequences of the merger to SunSource stockholders whose shares of SunSource  
common stock will be surrendered in the merger in exchange for the right to     
receive cash consideration of $10.375 per share, without interest. The          
discussion below applies only to stockholders that hold SunSource shares as     
capital assets at the time of the merger, and the discussion may not apply to   
stockholders that are subject to special tax rules, such as financial           
institutions, insurance companies, dealers in securities, persons that          
mark-to-market their securities, persons that hold SunSource shares as part of a
"straddle," "hedge" or "synthetic security transaction" (including a            
"conversion" transaction), persons with a "functional currency" other than the  
U.S. dollar, retirement plans and tax-exempt organizations, stockholders who    
acquired SunSource shares pursuant to the exercise of stock options, pursuant to
participation in an employee stock purchase plan or otherwise as compensation or
stockholders that are nonresident alien individuals, foreign corporations,      
foreign partnerships, foreign trusts or foreign estates. Furthermore, the       
discussion below does not address the federal income tax consequences of the    
continuing stockholders who are exchanging shares of SunSource common stock for 
shares of Series B preferred stock. The discussion below is based upon federal  
income tax laws as now in effect and interpreted and does not take into account 
possible changes in these tax laws or interpretations, any of which may be      
applied retroactively. The discussion does not include any description of the   
tax laws of any state, local or foreign government that may be applicable to our
stockholders.                                                                   

   This section does not discuss all aspects of federal income taxation that
may be relevant to a specific stockholder in light of such stockholder's        
particular circumstances and income tax situation. Each stockholder should      
consult his, her or its own tax advisor as to the specific tax consequences of  
the merger, including the application and effect of federal, state, local,      
foreign and other tax laws or changes to those laws.                            

For federal income tax purposes, SunSource stockholders generally will
recognize capital gain or capital loss equal to the difference between the cash 
received by the stockholder pursuant to the merger agreement and the            
stockholder's adjusted tax basis in the shares surrendered pursuant to the      
merger. If, at the time of the merger, a noncorporate stockholder's holding     
period for SunSource shares is more than one year, any gain recognized generally
will be subject to federal income tax at a maximum rate of 20%.                 

Consideration received by SunSource stockholders in the merger may be 
subject to backup withholding at a 30.5% rate (31% for payments occurring before
August 7, 2001). Backup withholding generally will apply only if the stockholder
fails to furnish a correct social security number or other taxpayer             
identification number or otherwise fails to comply with applicable backup       
withholding rules and certification requirements. A corporation may be exempt   
from backup withholding. Any amounts withheld under the backup withholding rules
will be allowed as a credit against the stockholder's federal income tax        
liability and may entitle the stockholder to a refund, provided the stockholder 
furnishes specified required information to the Internal Revenue Service.       

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DELISTING AND DEREGISTRATION OF SUNSOURCE COMMON STOCK                          

  Following the consummation of the merger, SunSource common stock will be
delisted from the American Stock Exchange and will become eligible for          
termination of registration pursuant to Section 12(g)(4) of the Exchange Act.   
SunSource intends to terminate the registration of SunSource common stock under 
the Exchange Act as soon as practicable following the consummation of the       
merger.                                                                         

TRUST PREFERRED SECURITIES                                                      

 In connection with the conversion of SunSource to corporate form, 11.6%
trust preferred securities of SunSource Capital Trust were issued. On March 31, 
2001, the trust preferred securities were valued at $67.5 million. See Note 14  
to the SunSource consolidated financial statements as of and for the three years
ended December 31, 2000.                                                        

   The SunSource trust preferred securities will remain outstanding and will
continue to trade on the American Stock Exchange under the symbol SDP.PR        
following consummation of the merger. As a result, SunSource will continue to be
subject to the reporting requirements of the securities laws as long as the     
trust preferred securities remain outstanding.                                  

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INFORMATION RELATING TO SUNSOURCE 

BUSINESS                                                                        

    SunSource Inc. is one of the largest providers of value-added services and
products to retail and industrial markets in North America. SunSource currently 
operates in two business segments through indirect wholly owned subsidiaries:   
(1) The Hillman Group, Inc.; and (2) SunSource Technology Services, LLC, or STS.
These subsidiaries represent businesses within the distribution industry that   
are characterized by a potential for value-added services, economies of scale   
and opportunities for further consolidation. Also, SunSource has an investment  
in an affiliate, G-C Sun Holdings, L.P., operating as Kar Products.             

In December 2000, the board of directors approved a plan to liquidate 
SunSource's Integrated Supply -- Mexico business segment. The Mexican segment   
has been accounted for as a discontinued operation and, accordingly, its results
of operations were segregated from the results of SunSource's ongoing businesses
including restatement of prior periods presented. The liquidation process has   
been substantially completed as of June 30, 2001.                               

  On March 2, 2000, SunSource contributed its Kar Products operations to a
newly formed partnership, G-C Sun Holdings, L.P., which is affiliated with      
Glencoe Capital L.L.C. Glencoe contributed cash equity to the new partnership in
exchange for a 51% controlling interest while SunSource retained the remaining  
49% interest. SunSource received $105 million in cash proceeds from the         
transaction through repayment of assumed debt by G-C. On October 4, 2000, G-C   
acquired all of the outstanding stock of Brampton Fastener Co. Limited (d/b/a   
Brafasco). As a result of this transaction, SunSource holds a 44% ownership in  
G-C. SunSource accounts for its investment in G-C in accordance with the equity 
method. Kar Products distributes maintenance, repair and operating parts and    
supplies and offers customized inventory management services to commercial and  
industrial customers of all sizes in the U.S. and Canada.                       

  On April 7, 2000, SunSource acquired Axxess Technologies, Inc. of Tempe,
Arizona through a stock merger transaction. Axxess manufactured and distributed 
key duplication and identification systems. The transaction was structured as a 
purchase of 100% of the stock of the privately held company and repayment of    
outstanding Axxess debt in exchange for $87 million in cash and $23 million in  
subordinated notes. Axxess' sales aggregated $20.0 million for the three months 
ended March 31, 2000, and $82.1 million for the year ended December 31, 1999.   
The results of operations for Axxess are included in the results of The Hillman 
Group from the date of acquisition.                                             

  On April 13, 2000, SunSource sold substantially all of the assets of its
Harding Glass, Inc. subsidiary to VVP America for a cash purchase price of $30.6
million plus the assumption by VVP of certain liabilities aggregating $12.6     
million, subject to certain post-closing adjustments. Proceeds from the sale of 
Harding were used to repay SunSource's outstanding debt. Harding sales          
aggregated $28.0 million from January 1, 2000 through April 12, 2000, and $118.3
million for the year ended December 31, 1999.                                   

     A plan to dispose of SunSource's Harding Glass business was approved by the
Board of Directors in December 1999. From December 1999 through the date of     
sale, Harding was accounted for as a discontinued operation and, accordingly,   
its results of                                                                  

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operations were segregated from results of SunSource's ongoing businesses       
including restatement of prior periods presented.                               

    On May 16, 2001, the board of directors approved a plan of reorganization.
In execution of the plan of reorganization, the following steps were taken:     
First, on May 31, 2001, The Hillman Group formed STS as a single member limited 
liability company and a wholly owned subsidiary. Second, on June 1, 2001,       
SunSource and certain of its subsidiaries undertook the majority of the         
remaining steps of the corporate restructuring whereby: (i) Axxess Technologies 
and SunSource Corporate Group, Inc. merged with and into The Hillman Group, (ii)
SunSource Industrial Services, Inc. merged with and into SunSub A Inc., (iii)   
SunSub A merged with and into SunSource Investment Company, Inc., (iv) all of   
the outstanding capital stock of A&H Holding Company, Inc., SunSource Inventory 
Management Company, Inc. and SunSource Technology Services Inc. was contributed 
by Investment Company to The Hillman Group, (v) A&H merged with and into        
Inventory Management Company, (vi) Inventory Management Company and Technology  
Services merged with and into STS and (vii) Investment Company contributed all  
of it interest in SunSub C Inc. to The Hillman Group and STS distributed all of 
its interest in SunSub C to The Hillman Group. Third and finally, J.N. Fauver   
(Canada) Limited organized under the laws of the Providence of Nova Scotia and  
changed its name to SunSource Technology Services Canada, Ltd. on June 26, 2001.

 THE HILLMAN GROUP INC.  The Hillman Group, with pro forma sales of $232
million in 2000, sells to hardware stores, home centers, mass merchants, pet    
suppliers, and other retail outlets principally in the U.S., Canada, Mexico and 
South America. Their product line includes thousands of small parts, such as    
fasteners and related hardware items, keys and accessories, and identification  
items, such as tags and letters, numbers, and signs. Services offered include   
design and installation of merchandising systems and maintenance of appropriate 
in-store inventory levels.                                                      

SUNSOURCE TECHNOLOGY SERVICES, LLC.  STS with sales of $225 million in
2000, is a leading provider of systems and parts and engineering services for   
hydraulic, pneumatic, electronic and related systems to major industrial        
concerns as well as to small and medium-size businesses throughout the U.S. and 
Canada. STS provides 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 previously performed in-house.        

    SunSource's current organization, including its principal subsidiaries and
affiliate, is as follows:                                                       

                                                                [Download Table]

                                                               YEAR    
                                            PRINCIPAL       ACQUIRED/  
             SUBSIDIARIES:                   LOCATION       ORGANIZED  
             -------------               ----------------  ------------
                                                                       
-- The Hillman Group, Inc. ............  Cincinnati, OH        1982    
-- SunSource Technology Services, LLC..  Addison, IL           2001    

AFFILIATE:                                                             
---------------------------------------                                
-- G-C Sun Holdings, L.P. .............  Chicago, IL           2000    

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Industry Overview                                                               

SunSource operates in large, fragmented industries characterized by   
multiple channels of supply. These channels of supply currently are experiencing
significant changes driven by the 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 vulnerable 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. 

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

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

- Channels of distribution are in the process of consolidation.       

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

    The Hillman Group focuses on the retail sector by delivering merchandising
systems, point-of-sale displays and product support and sales installation      
services through its nationwide field service work force. STS, through its      
applications engineers and technical support personnel, provides customized     
solutions to complex problems encountered by its customers. STS differentiates  
itself from other industrial distributors with its technical and problem-solving
capabilities, product offerings and related services, such as engineering design
and integrated supply arrangements.                                             

As a result of the impact of e-commerce, the industrial distribution  
industry will experience changing channels of distribution. It is SunSource's   
opinion that distributors will capture the vast majority of industrial supply   
sales transacted through the internet as a result of their market and product   
knowledge and services, including fulfillment capabilities. A number of new     
business-to-business companies forming electronic marketplaces have emerged as  
intermediaries in the industrial channel. However, most new business to business
companies are dependent on existing distributors for fulfillment of transactions
negotiated through these exchanges. To survive and prosper in this evolving     
channel, SunSource believes that the critical requirements for success among    
existing distributors will be market knowledge and value-added services,        
including superior support and fulfillment capabilities.                        

Risk Factors                                                                    

Restructuring                                                     

  In December 1996, SunSource announced a three-year restructuring plan to
integrate and consolidate the sales, distribution, finance and administrative   
operations of its six domestic divisions of Technology Services, a predecessor  
of STS, (hydraulic                                                              

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and pneumatic distributors that were acquired by SunSource between 1976 and     
1991).                                                                          

     STS and its predecessor have experienced a reduction of nearly $100 million
in revenues since 1998 principally as a result of implementation problems with  
its integration plan resulting in a loss of $11.8 million in 1999 and $5.6      
million in 2000 from earnings before interest, taxes, depreciation and          
amortization and non-recurring items.                                           

 In June 1999, as a result of existing business conditions in Technology
Services, SunSource announced additional steps to further reduce Technology     
Services' workforce, reduce inventories and implement corrective actions.       

     In December 2000, Technology Services enacted plans to lower its break-even
point to a $225 million annual sales level as a result of soft market conditions
in the industrial sector during the last six months of 2000 and the expectation 
of economic instability continuing into 2001.                                   

  The restructuring activities have resulted in consolidation of the sales
organizations, finance, information systems, distribution networks and          
administrative responsibilities for STS.                                        

Integration of the STS divisions could have an adverse impact on      
SunSource's ability to restore profitability in STS. There can be no assurance  
that SunSource's restructuring plans will be successful or that profitability in
STS will be restored to historical levels.                                      

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 by 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 reliant on suppliers such as SunSource 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 the suppliers 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 business are causing the industry to become more competitive. There
can be no assurance that SunSource will be able to compete effectively in or    
adapt to the changing industry environment.                                     

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. SunSource       
encounters competition from a large number of regional and local distributors   
and from several national distributors, some of which have greater financial    
resources than SunSource and offer a greater variety of products.               

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Seasonality and Industry Cycles                                   

   In the past, SunSource has 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 SunSource'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
SunSource 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        
SunSource's products, growth rates in the markets served by SunSource's         
customers, the delivery and performance of vendors, and the availability of     
suitable acquisition candidates. Changes in general economic conditions also    
could have a material adverse effect on SunSource's business, results of        
operations and financial condition.                                             

Dependence on Information Systems                                 

   SunSource believes that its proprietary computer software programs are an
integral part of its business and growth strategies. SunSource 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 SunSource has taken against certain events that could disrupt
the operations of its information systems, will prevent the occurrence of such a
disruption. Any such disruption could have a material adverse effect on         
SunSource's business and results of operations.                                 

The Hillman Group, Inc.                                                         

    The Hillman Group, with annualized sales of $232 million, includes Axxess,
which was acquired by SunSource on April 7, 2000 and merged into The Hillman    
Group on June 1, 2001. The results of Axxess are included in the results of the 
Hillman Group from the date of acquisition.                                     

     The Hillman Group believes that it is the leading provider of fasteners and
related small hardware items, including keys and related accessories, and       
identification items, such as, tags and letters, numbers and signs, or LNS, to  
retail outlets in North America. Retail outlets served by The Hillman Group are 
hardware stores, home centers, mass merchants, pet suppliers, grocery stores and
drug stores. Through its field sales and service organization, The Hillman Group
complements its extensive product selection with value-added services for the   
retailer.                                                                       

    Sales and service representatives regularly visit retail outlets to review
stock levels, reorder items in need of replacement and interact with the store  
owner to offer new product and merchandising ideas. Thus, thousands of items can
be actively managed with the retailer experiencing a substantial reduction in   
paperwork and labor costs. Service representatives also assist in organizing the
products in a consumer-friendly manner. The Hillman Group 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. Periodically, The                                          
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Hillman Group introduces new products and package designs with color-coding for 
ease of shopping by consumers, and modifies rack designs to improve the         
attractiveness of individual store displays. In effect, The Hillman Group       
functions as a merchandising manager for retailers, supporting these services   
with high order fill rates and rapid delivery from its eight distribution       
centers across the United States. In 2000, The Hillman Group typically shipped  
orders within an average of 48 hours and achieved a 96% order fill rate.        

As a result of the Axxess acquisition, the The Hillman Group also     
manufactures and markets a value-added mix of high-tech and conventional        
products in two core product categories: key duplication systems and            
identification systems. For example, the patent-protected Axxess Precision Key  
Duplication System(TM), which had been placed in over 10,000 retail locations as
of December 31, 2000, has proven to be a profitable revenue source within the   
Big Box retailer market (defined as mass merchants, home centers and            
large-format grocery/drug centers).                                             

In addition, the Axxess acquisition provided the Hillman Group with a 
commercialized, innovative, consumer-operated vending system, Quick-Tag(TM),    
which provides custom engraved specialty items, such as pet identification tags,
luggage tags and other engraved identification tags. Axxess initially targeted  
the pet identification market with its Quick-Tag system, and has facilitated the
process of obtaining a pet tag by providing pet owners with a quick and highly  
convenient means to custom engrave tags while shopping at large format retail   
stores, such as Wal-Mart and PETsMART. Axxess had developed other applications  
for its Quick-Tag(TM) interactive engraving technology, including luggage tags, 
key chains and military-style identification tags. As of December 31, 2000, more
than 2,800 Quick-Tag(TM) machines had been placed in retail locations, which are
currently being supported by the Hillman Group's sales and service              
representatives.                                                                

PRODUCTS AND SUPPLIERS.  The Hillman Group buys its products from     
approximately 1,000 vendors, the largest of which accounted for 13% of the      
group's annual purchases in 2000 and the top five of which accounted for 33% of 
its purchases in 2000. About half of its purchases are from overseas suppliers, 
with the balance from domestic manufacturers and master distributors. The       
Hillman Group's fastener product line includes both standard and specialty nuts,
bolts, washers, screws and anchors. The line also includes brass, plastic,      
stainless steel and other miscellaneous fasteners. The depth of the line, over  
35,000 products, is believed to be the largest among suppliers servicing the    
hardware retail segment. Non-fastener products feature picture hanging items and
accessories, keys and accessories, LNS, rope and chain accessories, and an      
extensive list of specialty items. To assure quality from its vendors, The      
Hillman Group conducts periodic on-site evaluations and random sampling of      
products and communicates the results of such evaluations and samples to        
vendors. The Hillman Group also tracks the performance of its vendors based on  
delivery time and accuracy of shipments.                                        

     The Hillman Group provides a line of metal key products for major retailers
and the automotive sector. The Hillman Group manufactures two metal key         
duplication systems that are niche-marketed to retail outlets (primarily mass   
merchants and home centers) and a code cutting system for use in automotive     
dealerships and in vehicle fleet environments.                                  

   The Axxess Precision Key Duplication System(TM) creates precise duplicate
keys while minimizing the technical skill required by operators of the system.  
The system                                                                      

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was developed in response to retailers' needs for reducing the miscut rate on   
keys. The keys provide retailers with a greater gross profit per square foot    
than the average of all products sold in grocery and mass merchant channels. The
Hillman Group also markets a conventional key cutting system. Key styles        
marketed include standard brass keys, Color Plus(TM) keys, rubber head keys and 
high security vehicle anti-theft key blanks. The conventional system is marketed
to retailers who do not experience high employee turnover and therefore do not  
have the same labor constraints as mass merchants, home centers or grocery and  
drug retailers.                                                                 

The key cutting system developed for the automotive industry, PC+ Code
Cutter, produces automobile keys using alphanumeric codes based on a vehicles   
identification number. Utilizing a proprietary computer program, the PC+ Code   
Cutter identifies and then cuts keys based on the automobiles original key      
pattern. The PC+ Code Cutter is distributed through Barnes Distribution, a      
distribution company serving vehicular and industrial markets. Since its        
introduction in February 1996, more than 5,000 PC+ Code Cutter systems have been
sold and/or leased.                                                             

    The Hillman Group also markets key accessories in conjunction with its key
duplication systems. Popular accessories include the Key Light(TM), Valet       
KeyChain(TM), key identifiers, key coils and key clips. The Key Mates(TM) line  
of key accessories includes a broad range of products such as key chains, tags, 
lights, floats, holders, whistles and a host of other miscellaneous items that  
complement the use of keys.                                                     

 Quick-Tag(TM) is a patented, state-of-the-art consumer-operated vending
system that custom engraves specialty products such as pet identification tags, 
military-style I.D. tags, holiday ornaments and luggage tags. Using an          
interactive touch screen, customers input information, such as a pet name and   
telephone number, and the system's proprietary technology engraves the tag in   
less than two minutes. The Quick-Tag system does not require incremental labor  
and generates high levels of customer satisfaction and attractive margins for   
the retailer. The Quick-Tag custom engraving systems generate retail profit per 
square foot in excess of the typical retail average.                            

Letters, numbers and signs include packaged self-adhesive letters and 
numbers, mailbox numbers and accessories, house numbers and letters, contractor 
safety program signs, and driveway markers and reflectors. Typical retailers    
dedicate approximately eight linear feet of retail space for this product and   
view it as a significant contributor to their retail offerings.                 

   The Hillman Group purchases a wide variety of materials and components to
manufacture the Axxess Key Duplication and Quick-Tag engraving machines, many of
which are manufactured to its specifications. Management does not believe that  
it is overly dependent on any one supplier because the components do not        
generally require proprietary technology and The Hillman Group has identified or
used alternate suppliers for its primary sourcing needs.                        

 MARKETS AND CUSTOMERS.  The Hillman Group services approximately 15,000
franchise and independent, or F&I retail outlets. These individual dealers are  
typically members of the larger cooperatives, such as TruServ, Ace and          
Do-it-Best. The Hillman Group sells directly to the cooperative's retail        
locations and also supply many fastener items to the cooperative's central      
warehouses. These central warehouses distribute to their members that do not    
have a requirement for The Hillman                                              

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Group's in-store service. These arrangements with the cooperatives reduce credit
risk and logistic expense for The Hillman Group and reduce central warehouse    
inventory and delivery costs for the cooperatives.                              

   In 2000, The Hillman Group's products sold to the F&I retailers typically
account for approximately 7% of the retailer's revenues and over 25% of a       
hardware store's traffic. A typical hardware store maintains in inventory       
thousands of different items, many of which generate small dollar sales, but    
large 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 
dollar sales.                                                                   

     In addition, the Hillman Group sells its products to national accounts such
as Wal-Mart, Home Depot, Lowes, K-Mart, PETsMART and PetCo. The Hillman Group's 
status as a national supplier of unique, proprietary products to rapidly growing
Big Box retailers allowed it to develop a formidable market position and high   
barriers to entry within its product categories. Management believes that the   
dynamics, which make its services attractive to hardware retailers, are present 
with these larger customers as well.                                            

The Hillman Group serves over 21,000 customers, the top five of which 
accounted for approximately 32% of its annualized sales as of December 31, 2000.
The Hillman Group's telemarketing activity also sells to approximately 5,000    
smaller hardware outlets and over 6,000 non-hardware accounts through its       
telemarketing operation. New business is also being cultivated internationally  
in such places as Canada, Mexico, South and Central America, and the Caribbean. 

    SALES AND MARKETING.  Hillman's direct sales organization consists of over
230 people, managed by 20 field managers. Each sales representative is          
responsible for approximately 50 full service accounts that they call on        
approximately every two weeks. Coupled with the efforts of the marketing        
department, the sales force not only sells products, but can sell merchandising 
and technological support capabilities as well. The marketing department        
provides support through the development of new products, sales collateral,     
promotional items, merchandising aids and marketing services, such as           
advertising and trade show management. Its electronic data exchange, or EDI,    
system is used by a number of its large customers.                              

  With the acquisition of Axxess, the respective field service groups were
integrated to produce a national sales and service organization. Currently over 
200 service people and 15 field managers focus on Big Box retailers, pet super  
stores, large national discount chains and grocery stores. This organization    
reorders products, details store shelves and sets up in-store promotions.       

 The Hillman Group believes that a significant source of its competitive
advantage rests in its ability to provide a greater level of customer service   
than its competitors. The Hillman Group's products are covered directly by the  
field service organization, which provides service support through field visits.
These field visits provide The Hillman Group with critical information relating 
to consumer buying patterns and retailing trends, and complement their new      
product development efforts. Field service representatives also help retail     
customers to improve the efficiency and                                         

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profitability of The Hillman Group's on-site merchandising systems by consulting
with customers in the areas of EDI, product planning, inventory control, systems
interface and store operations.                                                 

   COMPETITION.  The principal competitors in the hardware store marketplace
for the Hillman Group's F&I business are Midwest Fasteners, Serv-A-Lite, Elco   
and Hyko. The first three competitors carry mainly fastener products, while the 
latter is the major competitor in letters numbers and signs. The Hillman Group  
competes primarily on field service, merchandising, product availability, price 
and breadth of product line.                                                    

     Management estimates that as of December 31, 2000 The Hillman Group sold to
approximately 65% of the full service hardware stores in the F&I marketplace.   
The hardware outlets that purchase products, but not services, from The Hillman 
Group also purchase products from local and regional distributors and           
cooperatives. Competition in this segment is based primarily on price and       
availability.                                                                   

    The primary competitors in the national accounts marketplace for fasteners
are Crown-Bolt, with an estimated 50% market share in 2000, Elco and the Newell 
Group. The Hillman Group estimates its share of fasteners in this market as of  
December 31, 2000 to be less than 10%. Competition is based primarily on        
in-store service and price. Other competitors are local and regional            
distributors.                                                                   

     The total domestic market for keys was estimated to be 600 million units at
the retail level with year 2000 sales of over $900 million. The key duplication 
market can be segmented into three primary retail categories: hardware stores,  
locksmiths and Big Box retailers. The Hillman Group maintains the leading market
position with an approximate 28% market share on a unit basis in the overall key
duplication market, including an estimated 67% market share in the home         
center/mass merchant retail segment. To displace the Hillman Group's market     
position, a competitor would have to develop a full range of products with      
demonstrably better technology without infringing on patents and buyback        
existing inventory from retailers. Management believes that these substantial   
competitive barriers help preserve its unique position within the key           
duplication market segment.                                                     

    Hyko is the primary competitor in LNS in hardware stores, home centers and
mass merchants. Management estimates that Hillman has the leading market        
position in LNS at an approximate 48% market share.                             

  In the engraving market segment, management estimates that the Quick-Tag
engraving system has a 17% market share in the pet tag market. Competitors in   
this market are specialty retailers, direct mail order and retailers with       
in-store mail order capability. The Hillman Group has patent protected          
proprietary technology that is a major barrier to entry and preserves this      
market segment.                                                                 

SunSource Technology Services, LLC                                              

STS, with sales of $225 million in 2000, 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, product upgrades, and    
assembly of subsystems.                                                         

 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                                                                   
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specific applications requiring product engineering, assembly or fabrication. To
help a customer better understand how it is performing relative to industry best
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 industry best 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 toward increased
standardization of products. As a result of this trend, 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. SunSource believes that there is a growing  
market for such customized solutions among medium and smaller original equipment
manufacturers, or OEM, who do not have the capabilities to develop such         
products.                                                                       

     STS has 20 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. Repair  
centers 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 program of establishing service centers for 
the repair and overhaul of hydraulic equipment in major industrial markets      
around the country.                                                             

     PRODUCTS AND SUPPLIERS.  STS carries a diverse selection of fluid power and
related technical products. STS has an estimated 23,000 items products, in the  
following four product categories: hydraulics, pneumatics, electronics and      
filtration. 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.           

STS has a broad supply base which includes most major manufacturers of
fluid power and related technical products in the United States. STS' top five  
suppliers accounted for approximately 37% of its 2000 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. One 
of STS' larger suppliers is Sauer-Sunstrand, whose products are distributed in  
most of STS' territories.                                                       

In 1999, STS lost certain vendor relationships in limited geographic  
regions, which for the most part have been replaced with other vendor product   
lines. 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                                                 

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its key suppliers by helping them improve their product offering in response to 
changing market demands.                                                        

 MARKETS AND CUSTOMERS.  As of December 31, 2000, STS served over 28,000
customers, the top five of which accounted for approximately 15% of its 2000    
sales. Approximately 60% of sales are to OEM customers who incorporate the      
equipment or systems purchased into their final products. The remaining 40% of  
sales in 2000 are to the construction industry (5%) and to                      
replacement/maintenance markets (35%).                                          

Within the MRO and OEM markets, STS sells to construction 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 account managers supported by application engineers
and customer service representatives. 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 230 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.                                       

     To support the outside sales representatives, STS employs approximately 150
customer service representatives, who collectively function to take orders from 
customers on the telephone, answer questions and solve problems. In addition,   
EDI capability has been established for use with selected customers and vendors,
and STS is in the early stages of designing a presence on the Internet.         

OPERATIONS.  STS has six regional distribution centers with over $30  
million of inventory logistically supporting the local needs of its customers.  
Its Trend computer system provides a common information technology platform for 
the entire company, promoting more efficient transactional functionality and    
increasing information flow and knowledge sharing within STS and between its    
customers and its suppliers.                                                    

    COMPETITION.  Most of STS' competitors are relatively small companies with
sales of less than $20 million and 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, product  
offering and range of ancillary technical services. The largest national        
competitors of STS are Motion Industries, Sophus Berendsen, and Applied         
Industrial Technologies.                                                        

Insurance Arrangements                                                          

    Under SunSource's current insurance programs, commercial umbrella coverage
is obtained for catastrophic exposure and aggregate losses in excess of expected
claims. Since October 1991, SunSource has retained the exposure on certain      
expected losses related to worker's compensation, general liability and         
automobile. SunSource also retains the exposure on expected losses related to   
health benefits of certain employees. SunSource believes that its present       
insurance is adequate for its                                                   
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businesses. See Note 17 of Notes to Consolidated Financial Statements of        
SunSource as of and for the three years ended December 31, 2000.                

Employees                                                                       

As of December 31, 2000, SunSource's total operations employed        
approximately 2,100 employees, of which approximately 1,015 were sales          
personnel, approximately 780 were employed as warehouse and delivery personnel, 
and approximately 305 were administrative positions. In the opinion of          
management, employee relations are good.                                        

Backlog                                                                         

   SunSource's sales backlog on a consolidated basis from ongoing operations
was $48.6 million as of December 31, 2000, and $50.1 million as of December 31, 
1999, mostly in STS.                                                            

Properties                                                                      

     SunSource currently has approximately forty-eight (48) leased warehouse and
stocking facilities located throughout the United States and Canada. Most of    
these include sales offices. SunSources principal properties are as follows:    

                                                                [Download Table]

           DIVISION               LOCATION        DESCRIPTION  
           --------           ----------------  ---------------
                                                               
Hillman Division              Cincinnati, Ohio  250,000 sq. ft.
Axxess Technologies Division  Tempe, Arizona    161,000 sq. ft.
Technology Services           Addison,          153,000 sq. ft.
                              Illinois                         

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

DIVIDENDS                                                                       

On June 30, 1999, the board of directors of SunSource suspended       
indefinitely the quarterly cash dividend of $0.10 per common share.             

LEGAL PROCEEDINGS                                                               

SunSource is a party to certain lawsuits in the normal course of its  
business. While the outcome of these legal proceedings cannot at this time be   
predicted with certainty, SunSource does not expect that these proceedings will 
have a material effect on SunSource's financial condition or results of         
operations.                                                                     

 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, and its parent, R&B, Inc., allege that                
misrepresentations of certain facts were made by SunSource, upon which R&B      
allegedly based its offer to purchase the assets of SunSource's Dorman Products 
division. 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 SunSource.                                          

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SUNSOURCE SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION                 

    The following table sets forth selected consolidated financial information
of SunSource and the predecessor partnership as of and for the five years ended 
December 31, 2000 and for the three month period ended March 31, 2001 and 2000. 
SunSource's audited historical financial statements for all periods shown except
the quarterly periods are derived from SunSource's financial statements which   
have been audited by PricewaterhouseCoopers LLP, independent accountants, as    
indicated in their reports thereon. The financial information should be read in 
conjunction with financial statements including the notes thereto and           
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations". Quarterly financial information is derived from unaudited financial
data, but in the opinion of SunSource's management reflects all adjustments     
(consisting only of normal recurring adjustments) which are necessary to present
fairly the results for such interim periods. Interim results at and for the     
three months ended March 31, 2001 are not necessarily indicative of the results 
that may be expected for the fiscal year ending December 31, 2001.              

                                                        [Enlarge/Download Table]

                                    THREE MONTHS                                                          
                                   ENDED MARCH 31,                  YEAR ENDED DECEMBER 31,               
(DOLLARS IN THOUSANDS,           -------------------  ----------------------------------------------------
EXCEPT FOR PARTNERSHIP INTEREST    2001       2000      2000       1999       1998       1997     1996(1) 
AND SHARE DATA)                  --------   --------  --------   --------   --------   --------   --------
                                                                                                          
INCOME STATEMENT DATA:                                                                                    
Continuing Operations                                                                                     
    Net sales................... $109,929   $119,612  $459,826   $541,250   $600,293   $586,411   $550,004
    Gross profit................   44,969     48,834   187,144    226,154    252,168    241,003    223,628
    Gain on contribution of                                                                               
      subsidiaries..............       --         --    49,115         --         --         --         --
    Income (loss) before                                                                                  
      discontinued operations...   (2,629)    41,617    27,290    (11,321)    11,517     30,507     16,381
Income (loss) from discontinued                                                                           
  operations....................       --      2,907    (2,610)   (25,815)     2,300      2,025      2,886
Extraordinary loss..............       --         --        --       (235)        --     (3,392)        --
Net income (loss)...............   (2,629)    44,524  $ 24,680   $(37,371)  $ 13,817   $ 29,140   $ 19,267
BASIC AND DILUTED NET INCOME                                                                              
  (LOSS) PER COMMON SHARE(2):                                                                             
Gain on contribution of                                                                                   
  subsidiaries..................       --         --  $   7.14         --         --         --         --
Income (loss) before                                                                                      
  discontinued operations....... $  (0.38)  $   6.10  $   3.97   $  (1.68)  $   1.67        n/a        n/a
Income (loss) from discontinued                                                                           
  operations....................       --   $   0.42  $  (0.38)  $  (3.83)  $   0.33        n/a        n/a
Extraordinary loss..............       --         --  $     --   $  (0.03)  $     --        n/a        n/a
Net income (loss)............... $  (0.38)  $   6.52  $   3.59   $  (5.54)  $   2.00        n/a        n/a
Pro forma net income per common                                                                           
  share.........................      n/a        n/a       n/a        n/a        n/a   $   1.88        n/a
Dividends declared per common                                                                             
  share.........................       --         --        --   $   0.10   $   0.40   $   0.10        n/a
BALANCE SHEET DATA:                                                                                       
Total assets.................... $322,693   $257,127  $322,141   $321,626   $327,523   $292,945   $253,408
Long-term debt and capitalized                                                                            
  lease obligations(3).......... $115,216   $ 30,743  $102,790   $126,723   $ 95,842   $ 93,728   $ 75,545

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

(1) Prior to the Conversion, the Partnership had Class A and Class B limited    
 partnership interests ("interests"). The earnings per interest for income
from continuing operations in 1996 were $1.10 and $0.19 for Class A and 
   Class B interests, respectively. For income from discontinued segments, the
   earnings per interest were $0.13 for Class B interests in 1996. The Class A
 interests had no earnings per interest for discontinued segments in 1996.
 The earnings per interest for net income were $1.10 and $0.32 for Class A
    and Class B interests, respectively in 1996. The cash distributions declared
   per interest in 1996 were $1.10 for Class A interests and $0.33 for Class B
interests.                                                              

(2) All years represent basic and diluted net income (loss) per common share    
  except for 2000 which represents diluted only. The basic income per common
    share for gain on contribution of subsidiaries in 2000 was $7.16. For income
   before discontinued operations, the basic income per common share was $3.98
    in 2000. The loss from discontinued operations in 2000 had a loss per common
share of $0.38. The basic net income per common share in 2000 was $3.60.

(3) Includes current portion of long-term debt.                                 

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

General                                                                         

     The following discussion for the three months ended March 31, 2001 and 2000
and the fiscal years ended December 31, 2000, 1999 and 1998 provides information
which management believes is relevant to an assessment and understanding of     
SunSource's operations and financial condition. This discussion should be read  
in conjunction with the consolidated financial statements and notes thereto     
appearing elsewhere herein.                                                     

SunSource is one of the largest providers of value-added services and 
products to retail and industrial markets in North America. SunSource is        
organized into two business segments which are The Hillman Group and STS. Also, 
SunSource has an investment in an affiliate, G-C Sun Holdings, L.P., operating  
as Kar Products.                                                                

  The Hillman Group provides merchandising services and products, such as,
fasteners and related hardware items, keys and accessories and identification   
items to retail outlets, primarily hardware stores, home centers and mass       
merchants. STS offers a full range of technology-based products and services to 
small, medium and large manufacturers. Kar Products offers personalized         
inventory management systems of maintenance, repair and operations products to  
industrial manufacturing customers and maintenance and repair facilities.       

    In December 1999, the Board of Directors approved a plan to dispose of the
SunSource's Harding Glass, Inc. subsidiary which was completed through its sale 
on April 13, 2000. Harding was accounted for as a discontinued operation and,   
accordingly, its results of operations were segregated from results of the      
SunSource's ongoing businesses including restatement of prior periods presented.
In 1999, SunSource recorded a loss of $2.2 million after-tax from Harding's     
operations and an estimated loss on its expected disposal of $23.8 million or   
$3.53 per common share unadjusted for any potential future tax benefits. In     
2000, SunSource recorded an additional loss on disposal of the discontinued     
Harding segment of $5.3 million less an income tax benefit of $7.2 million      
resulting in income from discontinued operations of $1.9 million or $.27 per    
common share on a basic and diluted basis. Through December 31, 2000, SunSource 
recorded a loss on the discontinued Harding segment of $22.0 million in the     
aggregate or $3.20 and $3.19 per basic and diluted common share, respectively,  
net of tax benefits. No additional loss on disposal has been recorded for the   
three months ended March 31, 2001.                                              

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In December 2000, the board of directors approved a plan to liquidate 
SunSource's Integrated Supply - Mexico business. The Mexican business has been  
accounted for as a discontinued operation and, accordingly, its results of      
operations were segregated from the results of SunSource's ongoing businesses   
including restatement of prior periods presented. In 2000, SunSource recorded an
after-tax loss of $0.1 million or $0.02 per common share on a basic and diluted 
basis from its Mexican operations and an estimated after-tax loss on its        
expected liquidation of $4.4 million or $0.64 per common share on a basic and   
diluted basis. No additional loss on disposal was recorded for the three months 
ended March 31, 2001. The liquidation process has been substantially completed  
as of June 30, 2001.                                                            

Financing Arrangements                                                          

   On December 15, 1999, SunSource refinanced its $90 million bank revolving
credit and $60 million senior notes with $155 million in senior secured credit  
facilities. On April 7, 2000, SunSource amended the credit agreement to reduce  
the senior secured credit facility to $136.5 million consisting of a $21.5      
million term loan and a $115 million revolving credit line. The amended senior  
debt arrangement expires December 15, 2004. The availability of the revolving   
credit line is based on SunSource's balances in receivables and inventories,    
evaluated on a monthly basis.                                                   

On December 28, 2000, SunSource issued $30 million of unsecured       
subordinated notes. The cash proceeds generated from this issuance were used to 
reduce SunSource's senior secured term loan and improve SunSource's overall     
credit availability.                                                            

    As a result of the refinancing on December 15, 1999, SunSource incurred an
extraordinary loss of $0.2 million (net of $0.1 million in deferred tax         
benefits)in 1999 due to the write-off of capitalized financing costs as a result
of the early extinguishment of the former credit facilities.                    

Corporate Reorganization                                                        

  After the close of business, on December 31, 1998, SunSource reorganized
its primary operating subsidiary, SDI Operating Partners, L.P., by contributing 
its assets and liabilities to newly-formed corporate subsidiaries organized     
according to SunSource's current operating structure. The reorganization allowed
SunSource to implement certain state and local tax planning strategies, to offer
its key employees incentive stock options and align its operating businesses in 
corporate form. As a result of the reorganization, SDI Operating Partners, L.P. 
and its general partner, SDI Partners I, L.P. ceased to exist.                  

Restructuring Charges and Asset Write-downs                           

     In the second quarter of 1999, SunSource recorded restructuring charges and
asset write-downs aggregating $10.2 million. These non-recurring charges and    
write-downs were a result of SunSource's plan to reposition STS and Kar         
Products, write-down key machines at The Hillman Group, and realign corporate   
overhead expenses. SunSource completed this restructuring during the fourth     
quarter of 1999.                                                                

   STS charges and write-downs aggregated $5.4 million including termination
benefits of $2.8 million, an inventory write-down of $2.1 million, and other    
exit costs of $0.5 million. STS terminated 94 employees as a result of the 1999 
restructuring.                                                                  

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The Kar Products charge amounted to $1.0 million, comprised solely of 
termination benefits. Kar Products terminated 10 employees as a result of the   
1999 restructuring.                                                             

   The Hillman Group's asset write-down was $3.3 million which was primarily
the result of The Hillman Group's decision not to seek recovery of key machines 
from retailers. The write-down represented the remaining net book value of key  
machine capitalized costs as of June 30, 1999.                                  

  See Note 1 of "Notes to Consolidated Financial Statements" for the three
years ended December 31, 2000 for the accounting recognition of the             
restructuring charges.                                                          

Results of Operations                                                           

SEGMENT SALES AND PROFITABILITY FROM ONGOING OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2001 & 2000 
(DOLLARS IN THOUSANDS)

                                                                [Download Table]

                                                  FOR THE THREE MONTHS ENDED,     
                                              ----------------------------------- 
                                               MARCH 31, 2001     MARCH 31, 2000  
                                              ----------------   ---------------- 
                                                         % OF               % OF  
                    SALES                      AMOUNT    TOTAL    AMOUNT    TOTAL 
                    -----                     --------   -----   --------   ----- 
                                                                                  
Hillman Group (a)............................ $ 57,001    51.9%  $ 35,585    36.9%
Technology Services..........................   52,928    48.1%    60,857    63.1%
                                              --------   -----   --------   ----- 
  Consolidated net sales -- ongoing                                               
     operations..............................  109,929   100.0%    96,442   100.0%
Expediter Segment (b)........................       --             22,122         
Integrated Supply -- terminated contract                                          
  (c)........................................       --              1,048         
                                              --------           --------         
  Consolidated Net Sales..................... $109,929           $119,612         
                                              ========           ========         

                                                                [Download Table]

                                                           % OF              % OF  
                  GROSS PROFIT                             SALES             SALES 
                  ------------                             -----             ----- 
                                                                                   
Hillman Group (a)............................... $32,185   56.5%   $19,228   54.0% 
Technology Services.............................  12,784   24.2%    14,554   23.9% 
                                                 -------           -------         
  Consolidated gross profit -- ongoing                                             
     operations.................................  44,969   40.9%    33,782   35.0% 
Expediter Segment (b)...........................      --            15,052         
                                                 -------           -------         
  Consolidated Gross Profit..................... $44,969           $48,834         
                                                 =======           =======         
EBITDA FROM ONGOING OPERATIONS (E)                                                 
Hillman Group (a)............................... $ 8,597   15.1%   $ 3,504   9.8%  
Technology Services.............................    (422)  (0.8)%     (190)  (0.3)%
Equity in Earnings of Expediter Segment (d).....     501               449         
Corporate expenses..............................  (1,275)  (1.2)%   (1,922)  (2.0)%
                                                 -------           -------         
  Consolidated EBITDA -- ongoing operations.....   7,401   6.7%      1,841   1.9%  
Expediter Segment (b)...........................      --             2,823         
                                                 -------           -------         
  Consolidated EBITDA........................... $ 7,401           $ 4,664         
                                                 =======           =======         

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

(a) Includes sales, gross profit and EBITDA from Axxess Technologies, Inc. which
was acquired on April 7, 2000 through a stock merger transaction.               

(b) Represents sales, gross profit and EBITDA from Kar Products, Inc. and A & H 
Bolt & Nut Company Limited business (collectively, the "Expediter Segment")     
which was contributed on March 2, 2000 to a newly formed partnership affiliated 
with Glencoe Capital L.L.C.                                                     

(c) Represents sales from an Integrated Supply contract that was terminated in  
2000. A loss from termination of this contract was recorded in the fourth       
quarter of 1999.                                                                

(d) Represents Equity in Earnings from the contributed Expediter Segment.       

(e) "EBITDA" (earnings before interest, taxes, depreciation and amortization) is
defined as income (loss) from ongoing operations before depreciation and        
amortization.                                                                   

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SEGMENT SALES AND PROFITABILITY FROM CONTINUING OPERATIONS FOR EACH OF THE THREE
YEARS ENDED DECEMBER 31, 2000 
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                               DECEMBER 31,         DECEMBER 31,         DECEMBER 31,    
                                                   2000                 1999                 1998        
                                            -------------------  -------------------  -------------------
                                                         % OF                 % OF                 % OF  
                   SALES                     AMOUNT     TOTAL     AMOUNT     TOTAL     AMOUNT     TOTAL  
                   -----                    --------   --------  --------   --------  --------   --------
                                                                                                         
Hillman Group (a).......................... $212,118     48.6%   $151,884     37.9%   $125,830     28.0% 
Technology Services........................  224,538     51.4%    248,367     62.1%    324,075     72.0% 
                                            --------    -----    --------    -----    --------    -----  
  Consolidated net sales -- ongoing                                                                      
    operations.............................  436,656    100.0%    400,251    100.0%    449,905    100.0% 
Expediter Segment (b)......................   22,122              124,724              124,536           
Integrated Supply -- sold business and                                                                   
  terminated contracts (c).................    1,048               16,275               25,852           
                                            --------             --------             --------           
Consolidated Net Sales..................... $459,826             $541,250             $600,293           
                                            ========             ========             ========           

                                                        [Enlarge/Download Table]

                                                         % OF                 % OF                 % OF  
               GROSS PROFIT                             SALES                SALES                SALES  
               ------------                            --------             --------             --------
                                                                                                         
Hillman Group (a).......................... $119,779     56.5%   $ 81,045     53.4%   $ 66,485     52.8% 
Technology Services........................   52,313     23.3%     58,551     23.6%     89,336     27.6% 
                                            --------    -----    --------    -----    --------    -----  
    Consolidated gross profit -- ongoing                                                                 
      operations...........................  172,092     39.4%    139,596     34.9%    155,821     34.6% 
Expediter Segment (b)......................   15,052               86,204               88,175           
Integrated Supply -- sold business and                                                                   
  terminated contracts (c).................       --                2,484                8,172           
                                            --------             --------             --------           
  Consolidated Gross Profit before                                                                       
    inventory write-down...................  187,144              228,284              252,168           
Inventory write-down.......................       --               (2,130)                               
                                            --------             --------             --------           
  Consolidated Gross Profit................ $187,144             $226,154             $252,168           
                                            ========             ========             ========           
EBITDA (i)                                                                                               
Hillman Group (a).......................... $ 34,053     16.1%   $ 15,816     10.4%   $ 13,477     10.7% 
Technology Services (e)....................   (5,620)    (2.5)%   (11,800)    (4.8)%    15,538      4.8% 
Equity in Earnings of Expediter Segment                                                                  
  (d)......................................    2,438                   --                   --           
Corporate expenses (f).....................   (8,151)    (1.9)%    (9,161)    (2.3)%    (6,740)    (1.5)%
                                            --------    -----    --------    -----    --------    -----  
    Consolidated EBITDA -- ongoing                                                                       
      operations...........................   22,720      5.2%     (5,145)    (1.3)%    22,275      5.0% 
Expediter Segment (b)......................    2,823               18,965               21,196           
Integrated Supply -- sold business and                                                                   
  terminated contracts (c).................       --               (2,125)               1,274           
Gain (loss) on curtailment/termination of                                                                
  pension plans (g)........................   (4,279)               5,608                   --           
Severance and other termination costs                                                                    
  (h)......................................   (1,837)                  --                   --           
Restructuring charges......................       --              (10,248)                  --           
Provision for litigation                                                                                 
  matters -- divested operations                  --                   --               (1,600)          
                                            --------             --------             --------           
  Consolidated EBITDA...................... $ 19,427             $  7,055             $ 43,145           
                                            ========             ========             ========           

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

(a) Includes sales, gross profit and EBITDA from Axxess Technologies, Inc. which
was acquired on April 7, 2000 through a stock merger transaction.               

(b) Represents sales, gross profit and EBITDA from Kar Products, Inc. and A & H 
Bolt & Nut Company Limited business (collectively, the "Expediter Segment")     
which was contributed on March 2, 2000 to a newly formed partnership affiliated 
with Glencoe Capital L.L.C.                                                     

(c) Represents sales, gross profit and EBITDA from the OEM Fastener Business,   
which was sold on July 1, 1999 and contracts terminated in 1998, 1999 and 2000. 

(d) Represents Equity in Earnings from the Contributed Expediter Segment since  
March 2, 2000.                                                                  

(e) Excludes $1,032 of nonrecurring charges to realign operations with current  
sales levels for the three and twelve months ended December 31, 2000.           

(f) Excludes $805 of nonrecurring charges for the three and twelve months ended 
December 31, 2000.                                                              

(g) In December 1999, the SunSource board of directors approved a proposal to   
freeze the benefit accruals under Technology Services' J. N. Fauver Pension Plan
(the "Fauver Plan"). As a result, SunSource recorded a curtailment gain of      
$5,608 in December 1999. In December 2000, the                                  

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SunSource board of directors approved a proposal to merge the Fauver Plan with  
another SunSource owned plan and terminate the merged plans as of December 31,  
2000. As a result SunSource recorded a loss on termination of the merged pension
plans of $4,279 in December 2000.                                               

(h) As shown in notes (e) and (f).                                              

(i) "EBITDA" (earnings before interest, taxes, depreciation and amortization) is
defined as income (loss) from ongoing operations before depreciation and        
amortization.                                                                   

Three Months Ended March 31, 2001 and 2000                            

   Net sales from ongoing operations increased $13.5 million or 14.0% in the
first quarter of 2001 to $109.9 million from $96.4 million in 2000. Sales       
variances by business segment are as follows:                                   

                                                                [Download Table]

                                                              SALES INCREASE      
                                                                (DECREASE)        
                                                          ----------------------  
                                                              AMOUNT         %    
                                                          --------------   -----  
                                                          (IN THOUSANDS)          
                                                                                  
The Hillman Group........................................    $21,416        60.2% 
STS......................................................     (7,929)      (13.0)%
                                                             -------       -----  
  Total SunSource -- Ongoing Operations..................    $13,487        14.0% 
                                                             =======       =====  

   The Hillman Group's sales increased $21.4 million in the first quarter of
2001 to $57.0 million from $35.6 million in the first quarter of 2000 primarily 
as a result of the acquisition of Axxess. On a pro forma basis including Axxess,
The Hillman Group's sales increased 3.7% in the first quarter of 2001 over the  
same prior-year quarter. STS' sales decreased $7.9 million or 13.0% in the first
quarter of 2001 to $52.9 million from $60.8 million in 2000 mainly as a result  
of soft market conditions experienced by original equipment manufacturers in    
certain industrial sectors in the first quarter of 2001.                        

   SunSource's sales backlog on a consolidated basis from ongoing operations
was $48.2 million as of March 31, 2001, compared with $48.6 million at December 
31, 2000, representing a decrease of 0.8%.                                      

    SunSource's consolidated gross margin from ongoing operations was 40.9% in
the first quarter of 2001 compared with 35.0% in the first quarter of 2000. On a
comparable basis, excluding Axxess, the consolidated gross margin from ongoing  
operations was 36.7% for the three months ended March 31, 2001. The Hillman     
Group's gross margin improved 2.5% in the comparison period as a result of      
higher margin sales of keys and identification items related to the acquisition 
of Axxess and productivity gains in the various manufacturing operations. STS'  
gross margin of 24.2% in the first quarter of 2001 increased slightly from 23.9%
in the first quarter of 2000 primarily as a result of a change in sales mix.    

SunSource's selling, general and administrative expenses from ongoing 
operations on a comparable basis, excluding Axxess, decreased $0.1 million from 
$32.4 million in the first quarter of 2000 to $32.3 million in the first quarter
of 2001. Selling expenses on a comparable basis, excluding Axxess, increased    
$1.1 million primarily as a result of conversion costs associated with The      
Hillman Group's purchase of inventory and other assets of Sharon-Philstone      
offset by headcount and travel expense reductions at STS. Warehouse and delivery
expenses on a comparable basis, excluding Axxess, were comparable to the first  
quarter of 2000. General and administrative expenses on a comparable basis,     
excluding Axxess, decreased by                                                  

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$1.2 million primarily as a result of headcount reductions which occurred in the
fourth quarter of 2000 at STS and reduced expenses at corporate headquarters.   

    Total selling, general and administrative expenses from ongoing operations
on a comparable basis, excluding Axxess, as a percentage of sales compared with 
the first quarter of 2000 are as follows:                                       

                                                                [Download Table]

                                                                THREE MONTHS    
                                                               ENDED MARCH 31,  
                                                              ----------------- 
                     AS OF A % OF SALES                       2001         2000 
                     ------------------                       ----         ---- 
                                                                                
Selling Expenses............................................  20.6%        17.9%
Warehouse and Delivery Expenses.............................   8.1%         7.5%
General and Administrative Expenses.........................   7.4%         8.2%
                                                              ----         ---- 
  Total Selling, General and Administrative Expenses........  36.1%        33.6%
                                                              ====         ==== 

EBITDA from ongoing operations after corporate expenses for the first 
quarter of 2001 was $7.4 million compared with $1.8 million for the same        
prior-year period.                                                              

     SunSource's consolidated operating profit margin (EBITDA as a percentage of
sales) after corporate expenses increased to 6.7% in the first quarter of 2001  
compared with 1.9% in the first quarter of 2000. The Hillman Group's operating  
profit margin increased to 15.1% in the first quarter of 2001 compared with 9.8%
primarily as a result of the acquisition of Axxess and operational efficiencies.
STS had an operating loss of 0.8% compared with an operating loss of 0.3% in the
first quarter of 2000 as a result of reduced sales.                             

    Depreciation expense for ongoing operations increased $2.2 million to $3.0
million in the first quarter of 2001 from $0.8 million in the same quarter of   
2000 primarily as a result of the acquisition of Axxess.                        

     Amortization expenses for ongoing operations increased $0.6 million to $0.9
million as a result of the acquisition of Axxess.                               

    Interest expense, net for ongoing operations increased $0.8 million in the
first quarter of 2001 from $2.4 million in the first quarter of 2000. Interest  
expense in the first quarter of 2000 was lower as a result of cash proceeds from
the contribution of Kar Products on March 2, 2000, which resulted in a          
significant decrease in the bank revolver balance and related interest.         
SunSource also incurred additional amortization of deferred financing fees in   
the first quarter of 2001 as a result of an amendment to SunSource's December   
1999 debt refinancing in connection with the Axxess acquisition on April 7,     
2000.                                                                           

    SunSource pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on     
their face amount of $105.4 million, or $12.2 million per annum in the          
aggregate. The Trust distributes an equivalent amount to the holders of the     
Trust Preferred Securities. For the three months ended March 31, 2001 and 2000, 
SunSource paid $3.1 million in interest on the Junior Subordinated Debentures,  
equivalent to the amounts distributed by the Trust on the Trust Preferred       
Securities.                                                                     

SunSource is subject to federal, state and local income taxes on its  
domestic operations and foreign income taxes on its Canadian operation as       
accounted for in accordance with Statement of Financial Accounting Standard 109,
"Accounting for Income Taxes". Deferred income taxes represent differences      
between the financial                                                           

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statement and tax bases of assets and liabilities as classified on SunSource's  
balance sheet. The effective income tax rate for the first quarter of 2001 was  
6.8% compared with 11.3% in the first quarter of 2000. The effective tax rate in
the in the first quarter of 2001 was significantly below SunSource's combined   
statutory tax rate of about 40% primarily as a result of non-deductible goodwill
and other items related to acquisition and divestiture activities. The effective
tax rate in the first quarter of 2000 was primarily the result of a significant 
portion of the gain from the contribution of Kar being non-taxable as a result  
of SunSource's remaining ownership in G-C Sun Holdings.                         

Years Ended December 31, 2000 and 1999                                

   Net sales from ongoing operations increased $36.4 million or 9.1% in 2000
to $436.7 million from $400.3 million in 1999. Sales variances by business      
segment are as follows:                                                         

                                                                [Download Table]

                                                              SALES INCREASE      
                                                                (DECREASE)        
                                                           ---------------------  
                                                               AMOUNT        %    
                                                           --------------   ----  
                                                           (IN THOUSANDS)         
                                                                                  
The Hillman Group.........................................    $60,234       39.7% 
STS.......................................................    (23,829)      (9.6)%
                                                              -------       ----  
  Total SunSource.........................................    $36,405        9.1% 
                                                              =======       ====  

The Hillman Group's sales increased $60.2 million or 39.7% in 2000 to 
$212.1 million from $151.9 million in 1999 primarily due to the acquisition of  
Axxess in early April 2000. STS' sales decreased $23.8 million or 9.6% in 2000  
to $224.5 million from $248.4 million in 1999 primarily as a result of the      
restructuring of its sales force in early 1999 and soft market conditions       
experienced in the second half of 2000.                                         

   SunSource's sales backlog on a consolidated basis was $48.6 million as of
December 31, 2000, compared with $50.1 million at December 31, 1999, a decrease 
of 3.0%, primarily in STS.                                                      

    SunSource's consolidated gross margin from ongoing operations was 39.4% in
2000 compared with 34.9% in 1999 before the inventory write-down in 1999 related
to restructuring of $2.1 million. On a comparable basis, excluding Axxess, the  
consolidated gross margin from ongoing operations was 35.8% for the twelve      
months ended December 31, 2000. The Hillman Group's gross margin increased 3.1% 
in the comparison period as a result of higher margin sales of keys, and        
identification items related to the acquisition of Axxess. STS' gross margin was
23.3% in 2000 compared with 23.6% in 1999 before the aforementioned inventory   
write-down primarily as a result of a change in sales mix.                      

SunSource recorded non-recurring charges related to ongoing operations
which aggregated $6.1 million in 2000. These non-recurring charges were composed
of $4.3 million related to the merger and termination of SunSource's defined    
benefit plans, and $1.8 million related to severance and other termination costs
incurred in STS and its corporate headquarters, of which $1.7 million is        
reflected in selling, general and administrative expenses. In 1999, SunSource   
recorded a $5.6 million gain on curtailment of a defined benefit plan and       
restructuring charges and asset write-downs of $8.1 million as previously       
discussed.                                                                      

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SunSource's selling, general and administrative expenses from ongoing 
operations on a comparable basis (excluding Axxess and the aforementioned       
charges) decreased $15.1 million from $145.2 million in 1999 to $130.1 million  
in 2000. Selling expenses on a comparable basis, decreased $6.9 million         
primarily as a result of reduced sales commissions The Hillman Group's business 
and cost savings at STS associated with the 1999 restructuring. Warehouse and   
delivery expenses, decreased $1.8 million as a result primarily of facility     
reorganizations at STS. General and administrative expenses on a comparable     
basis decreased by $6.4 million as a result of headcount reductions associated  
with the 1999 restructuring at STS and reduced corporate overhead expenses.     

   Selling, general and administrative expenses from ongoing operations as a
percentage of sales excluding Axxess, and the previously mentioned non-recurring
items compared with 1999 are as follows:                                        

                                                                [Download Table]

                                                                TWELVE MONTHS   
                                                                    ENDED       
                                                                DECEMBER 31,    
                                                              ----------------- 
                                                              2000         1999 
                                                              ----         ---- 
                                                                                
Selling Expenses............................................  18.4%        18.9%
Warehouse and Delivery Expenses.............................   7.8%         7.8%
General and Administrative Expenses.........................   8.6%         9.6%
                                                              ----         ---- 
  Total Selling, General and Administrative Expenses........  34.8%        36.3%
                                                              ====         ==== 

     EBITDA from ongoing operations for the year ended December 31, 2000, before
the aforementioned non-recurring charges of $6.1 million was $22.7 million      
compared with an EBITDA loss from ongoing operations of $5.1 million in 1999    
excluding the aforementioned 1999 non-recurring items. See Segment Sales and    
Profitability schedule for the components of EBITDA from ongoing operations for 
years 2000 and 1999.                                                            

     SunSource's consolidated operating profit margin (EBITDA as a percentage of
sales) from ongoing operations increased to 5.2% in 2000 compared with a 1.3%   
operating loss in 1999, excluding the aforementioned items. The Hillman Group's 
operating profit margin increased to 16.1% in 2000 compared with 10.4% in 1999  
primarily as a result of the acquisition of Axxess and operational efficiencies.
Excluding the Axxess acquisition, The Hillman Group's operating profit margin   
was 12.0% in 2000. STS had an operating loss of 2.5% in 2000 compared with an   
operating loss of 4.8% before the 1999 restructuring charges related to         
integration and consolidation activities in the STS operation.                  

   Interest expense, net increased $1.4 million in 2000 from $9.9 million in
1999 due primarily to the acquisition of Axxess and amortization of deferred    
financing fees related to SunSource's December 1999 refinancing, the April 2000 
amendment to the credit agreement and the December 2000 subordinated debt       
issuance.                                                                       

For the years ended December 31, 2000 and 1999, SunSource paid $12.2  
million in interest on the Junior Subordinated Debentures, equivalent to the    
amounts distributed by the trust on the Trust Preferred Securities.             

   See Note 6 of Notes to Consolidated Financial Statements of SunSource for
the three years ended December 31, 2000, for income taxes and disclosures       
related to 2000 and 1999 income tax events.                                     

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Years Ended December 31, 1999 and 1998                                

    Net sales from ongoing operations decreased $49.7 million or 11.0% in 1999
to $400.2 million from $449.9 million in 1998. Sales variances by business      
segment                                                                         

are as follows:                                                       

                                                                [Download Table]

                                                              SALES INCREASE      
                                                                (DECREASE)        
                                                          ----------------------  
                                                              AMOUNT         %    
                                                          --------------   -----  
                                                          (IN THOUSANDS)          
                                                                                  
The Hillman Group........................................    $ 26,054       20.7% 
STS......................................................     (75,708)     (23.4)%
                                                             --------      -----  
  Total SunSource........................................    $(49,654)     (11.0)%
                                                             ========      =====  

The Hillman Group's sales increased $26.1 million or 20.7% in 1999 to 
$151.9 million from $125.8 million in 1998 as a result of growth from new       
accounts and expansion of new and existing product lines. STS sales decreased   
$75.7 million or 23.4% in 1999 to $248.4 million from $324.1 million in 1998 as 
a result of the restructuring of the sales force in 1999 as well as the effects 
of the global economy.                                                          

    SunSource's consolidated gross margin from ongoing operations was 34.9% in
1999 (before the inventory write-down of $2.1 million related to the 1999       
restructuring) compared with 34.6% in 1998. The Hillman Group's gross margin    
increased 0.6% in the comparison period as a result of substantial increases in 
sales of keys to major U.S. hardware chains and home centers carrying higher    
margins than hardware and related products. STS' gross margin before the        
aforementioned inventory charge decreased 4.0% in 1999 as a result of the       
decrease in sales levels in relation to the fixed cost component of cost of     
goods sold for service and repair facilities and changes in sales mix.          

  SunSource's selling, general and administrative expenses from continuing
operations, before a gain on curtailment of a defined benefit plan of $5.6      
million and restructuring charges of $8.1 million increased by $11.0 million to 
$145.2 million in 1999 from $134.2 million in 1998. Selling expenses increased  
$2.4 million primarily as a result of 1998 acquisition activity in The Hillman  
Group. Warehouse and delivery expenses increased $4.9 million as a result of    
integration costs for the 1998 acquisitions in The Hillman Group and facility   
reorganization costs at STS offset slightly by decreases from cost savings      
associated with the 1999 restructuring. The increase in general and             
administrative expenses of $3.7 million is attributable to the integration of   
the newly acquired businesses in The Hillman Group in 1998 and increased        
facilities costs in the STS division offset by cost savings associated with the 
1999 restructuring.                                                             

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   Selling, general and administrative expenses from ongoing operations as a
percentage of sales compared with 1998 excluding the previously mentioned non-  
recurring items in 1999 are as follows:                                         

                                                                [Download Table]

                                                                TWELVE MONTHS   
                                                                    ENDED       
                                                                DECEMBER 31,    
                                                              ----------------- 
                                                              1999         1998 
                                                              ----         ---- 
                                                                                
Selling Expenses............................................  18.9%        16.3%
Warehouse and Delivery Expenses.............................   7.8%         5.8%
General and Administrative Expenses.........................   9.6%         7.7%
                                                              ----         ---- 
  Total Selling, General and Administrative Expenses........  36.3%        29.8%
                                                              ====         ==== 

Overall, as a percentage of sales, total selling, general and         
administrative expenses increased due mainly to the decrease in sales levels in 
relation to the fixed cost component of selling, general and administrative     
expenses.                                                                       

EBITDA from ongoing operations was a loss of $5.1 million for the year
ended December 31, 1999 excluding the aforementioned 1999 non-recurring items   
compared with $22.3 million earned in the prior year. The 1998 period excludes a
charge of $1.6 million for outstanding litigation matters related to divested   
businesses. See Segment Sales and Profitability Schedule for the components of  
EBITDA from ongoing operations for years 1999 and 1998.                         

SunSource's consolidated operating profit margin (EBITDA from ongoing 
operations, as a percentage of sales) and before the aforementioned             
non-recurring items declined to a loss of 1.3% in 1999 compared with an         
operating profit margin of 5.0% in the prior year. The Hillman Group's operating
profit margin excluding the 1999 restructuring charges decreased to 10.4% in    
1999 from 10.7% in 1998 as a result of sales discounts and allowances to attract
new accounts and increased selling expenses for new field staff related         
primarily to 1998 acquisition activities. STS had an operating loss of 4.8% in  
1999 compared with an operating profit margin of 4.8% in 1998, primarily        
reflecting reduced 1999 sales and increased expenses related to the             
reorganization of sales and administrative functions.                           

   Interest expense, net increased $2.9 million in 1999 from $7.0 million in
1998 due primarily to increased borrowings on SunSource's revolving credit      
facility as a result of cash requirements to fund SunSource's acquisition       
activities and working capital requirements.                                    

For the years ended December 31, 1999 and 1998, SunSource paid $12.2  
million in interest on the Junior Subordinated Debentures, equivalent to the    
amounts distributed by the trust on the Trust Preferred Securities.             

   See Note 6 of Notes to Consolidated Financial Statements of SunSource for
the three years ended December 31, 2000, for income taxes and disclosures       
related to 1999 and 1998 income tax events.                                     

Liquidity and Capital Resources                                                 

   SunSource's cash position of $2.4 million as of March 31, 2001, decreased
$0.4 million from the balance at December 31, 2000. Cash was provided during    
this period primarily from net borrowings under the bank revolver ($12.2        
million) and proceeds from the liquidation of the Mexico segment ($1.0 million).
Cash was used                                                                   

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during this period predominantly for net working capital investments in         
operations ($8.6 million), capital expenditures ($3.3 million), deferred        
compensation funding ($0.9 million) and other items, net ($0.8 million).        

SunSource's cash position of $2.8 million as of December 31, 2000,    
decreased $2.5 million from the balance at December 31, 1999. Cash was provided 
during this period primarily from proceeds from the Kar Products and Harding    
transactions previously discussed ($105.0 million and $30.6 million,            
respectively), proceeds from the subordinated debt issuance of $30.0 million,   
and cash provided by operating activities of $10.3 million. Cash was used during
this period predominantly for the acquisition of Axxess ($87.0 million),        
repayments under the bank credit agreements (Revolver repayments of $47.7       
million; term loan repayments of $19.0 million), repayment of a portion of the  
subordinated notes issued in conjunction with the acquisition of Axxess ($9.6   
million), capital expenditures ($8.4 million), financing fees and related debt  
issuance costs ($3.3 million), capital lease repayments ($1.0 million) and      
various items that aggregated a net cash outflow of $2.4 million.               

    SunSource's net interest coverage ratio from continuing operations for the
three months ended March 31, 2001 declined to .55X (earnings before interest,   
distributions on trust preferred securities and income taxes, excluding         
non-recurring events, over net interest expense and distributions on trust      
preferred securities), from 1.13X in the 2000 comparison period (including Kar  
Products for the first two months of 2000) and was 0.62x in the year 2000 and   
0.91x in the year 1999.                                                         

  SunSource's working capital position of $85.2 million at March 31, 2001,
represents an increase of $8.2 million from the December 31, 2000 level of $77.0
million as a result of working capital reinvestments of $13.0 million, offset by
a decrease in restricted cash used for deferred compensation funding of $3.6    
million, a decrease in net assets held for sale due to collection of liquidation
proceeds of $1.0 million and other items, net of $.2 million. SunSource's       
current ratio increased to 2.1x at March 31, 2001 from 1.91x at December 31,    
2000.                                                                           

     SunSource's working capital position of $78.1 million at December 31, 2000,
represents a decrease of $58.2 million from the December 31, 1999 level of      
$136.3 million. SunSource's current ratio decreased to 1.93x at December 31,    
2000 from 2.60x at December 31, 1999.                                           

As of March 31, 2001, SunSource had $20.6 million available under its 
secured credit facilities. SunSource had approximately $71.1 million of         
outstanding debt at March 31, 2001, consisting of a $2.5 million senior secured 
term loan currently at 8.0%, bank revolver borrowings totaling $67.3 million at 
an effective interest rate of 8.05%, and capitalized lease obligations of $1.3  
million at various interest rates.                                              

As of March 31, 2001, SunSource's total debt (including distributions 
payable) as a percentage of its consolidated capitalization (total debt, trust  
preferred securities and stockholders' equity) was approximately 48.3% compared 
with 45.0% at December 31, 2000, 17.8% as of March 31, 2000,and 56.7% at        
December 31, 1999. SunSource's consolidated capitalization (including           
distributions payable) as of March 31, 2001, was approximately $241.5 million   
compared to $231.9 million at December 31, 2000, $174.6 million at March 31,    
2000, and $226.1 million at December 31, 1999.                                  

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     SunSource has spent $3.3 million for capital expenditures through March 31,
2001, primarily for key machines and machinery and equipment. SunSource expects 
to spend an additional $11.9 million by December 31, 2001, for a total of $15.2 
million in 2001 primarily for The Hillman Group. The total anticipated spending 
in 2001 represents an increase of $6.8 million compared to total year 2000 as a 
result of the acquisition of Axxess and growth in national accounts for key     
machines. SunSource spent $8.4 million for capital expenditures in 2000,        
primarily for the building of key machines and related replacement components,  
plant equipment and computer hardware and software.                             

On June 30, 1999, the Board of Directors of SunSource suspended       
indefinitely the quarterly cash dividend of $.10 per common share.              

    On August 6, 1998, SunSource's Board of Directors authorized $15.0 million
for management to repurchase up to 10% of SunSource's outstanding common shares 
through open market transactions and private block trades dependent upon market 
conditions. SunSource subsequently suspended the repurchase program on March 16,
1999. SunSource has acquired and placed into treasury 479,100 common shares     
through December 31, 1999, at an average cost of $18.17 per common share.       

     SunSource has deferred tax assets aggregating $30.0 million as of March 31,
2001, and had deferred tax assets aggregating $29.6 million and deferred tax    
liabilities of $2.2 million as of December 31, 2000, as determined in accordance
with Statement of Financial Accounting Standards 109. Management believes that  
SunSource's deferred tax assets will be realized through the reversal of        
existing temporary differences between the financial statement and tax bases, as
well as through future taxable income.                                          

Inflation                                                                       

Inflation in recent years has had a modest impact on the operations of
SunSource. 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     
SunSource's operating divisions to raise prices is dependent on competitive     
market conditions.                                                              

Recent Accounting Pronouncements                                                

    In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, or SFAS 133, "Accounting for Derivative     
Instruments and Hedging Activities." SFAS 133 established accounting and        
reporting standards for derivative financial instruments and hedging activities,
and requires SunSource to recognize all derivatives as either assets or         
liabilities on the balance sheet and measure them at fair value. Gains and      
losses resulting from changes in fair value are accounted for depending on the  
use of the derivative and whether it is designated and qualifies for hedge      
accounting. In June 1999, the Financial Accounting Standards Board issued SFAS  
137, which deferred the implementation of SFAS 133. SunSource adopted SFAS 133  
during the first quarter of 2001. The adoption of SFAS 133 has not had a        
material impact on SunSource's financial position and results of operations.    

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On June 26, 2000 the Securities and Exchange Commission issued Staff  
Accounting Bulletin No. 101B which extended the implementation date of Staff    
Accounting Bulletin 101, or SAB 101, "Revenue Recognition" to the three-month   
period ending December 31, 2000. SAB 101 provides guidance on the recognition,  
presentation, and disclosure of revenue in financial statements. The adoption of
SAB 101 has not had a material impact on SunSource's financial position and     
results of operations.                                                          

PRICE RANGE OF COMMON STOCK 

   As a result of SunSource's September 30, 1997 conversion from partnership
to corporate form, SunSource's common shares began trading on the New York Stock
Exchange on October 1, 1997, under the symbol "SDP". On June 19, 2001, the      
shares began trading on the American Stock Exchange 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:                            

                                                                [Download Table]

                                                       HIGH       LOW   
                                                     --------   --------
                                                                        
2001                                                                    
----                                                                    
First Quarter......................................  $ 9.5000   $ 3.8200
2000                                                                    
----                                                                    
First Quarter......................................  $ 6.2500   $ 4.5000
Second Quarter.....................................    5.0625     4.2500
Third Quarter......................................    5.3750     3.7500
Fourth Quarter.....................................    3.9375     2.8750
1999                                                                    
----                                                                    
First Quarter......................................  $18.9375   $13.8750
Second Quarter.....................................   16.3125    12.6875
Third Quarter......................................   11.0000     4.8750
Fourth Quarter.....................................    7.2500     3.5000

As of March 26, 2001 there were approximately 433 holders of record of
SunSource's common shares. The total number of common shares outstanding as of  
March 26, 2001 was 6,889,844.                                                   

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MANAGEMENT OF SUNSOURCE 

EXECUTIVE OFFICERS OF THE COMPANY                                               

  The following table sets forth certain information regarding SunSource's
executive officers:                                                             

                                                                [Download Table]

           NAME              AGE                    POSITION                 
           ----              ---                    --------                 
                                                                             
Maurice P. Andrien, Jr. ...  59    President and Chief Executive Officer,    
                                   SunSource Inc.; CEO, SunSource Technology 
                                   Services, LLC                             
Joseph M. Corvino..........  47    Vice President -- Finance; Chief Financial
                                   Officer; Treasurer and Secretary,         
                                   SunSource Inc.                            
Max W. Hillman, Jr. .......  54    Co-CEO, The Hillman Group, Inc.           
Justin M. Jacobi...........  40    President and Chief Operating Officer,    
                                   SunSource Technology Services, LLC        
Donald T. Marshall.........  67    Chairman, SunSource Inc.                  
Stephen W. Miller..........  55    Co-CEO, The Hillman Group, Inc.           

All executive officers serve at the pleasure of SunSource's board of  
directors. There are no family relationships between any of SunSource's         
executive officers and directors.                                               

The following is a summary of the business experience of the executive
officers listed above during at least the last five years. Periods prior to the 
conversion on September 30, 1997 relate to SunSource's predecessor, SunSource   
L.P.                                                                            

Maurice P. Andrien, Jr. See information contained under "Biographical 
Information -- Continuing Stockholders."                                        

Joseph M. Corvino See information contained under "Biographical       
Information -- Continuing Stockholders."                                        

Max W. Hillman, Jr. See information contained under "Biographical     
Information -- Continuing Stockholders."                                        

 Justin M. Jacobi has been the President and COO of SunSource Technology
Services, LLC since November 2000. Mr. Jacobi held various positions with       
Applied Industrial Technologies, Inc., since July 1994 including Unit President 
of the Fluid Power Products division from February 2000 to November 2000.       

  Donald T. Marshall has been the Chairman since April, 1999. Mr. Marshall
served as Chairman and CEO from December 1988 to April 1999.                    

Stephen W. Miller See information contained under "Biographical       
Information -- Continuing Stockholders."                                        

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DIRECTORS                                                                       

  The following table sets forth certain information regarding SunSource's
directors:                                                                      

                                                                [Download Table]

      NAME, AGE AND YEAR                                                    
     FIRST BECAME DIRECTOR  AGE    EMPLOYMENT HISTORY; OTHER DIRECTORSHIPS  
     ---------------------  ---    ---------------------------------------  
                                                                            
CLASS I DIRECTORS                                                           
Stewart A. Bliss 2000       67   Consultant and former Interim Chairman and 
                                 CEO of KN Energy during a portion of 1999; 
                                 Senior Business Advisor from 1994 to 1999  
                                 for Parcel, Mauro, Hultin and Spaanstra,   
                                 P.C.                                       
O. Gordon Brewer, Jr. 1987  64   Consultant and former Vice                 
                                 President-Finance of Ikon Office Solutions 
                                 (successor company to Alco Standard        
                                 Corporation) for more than the past five   
                                 years.                                     
Arnold S. Hoffman 1987      65   Senior Managing Director in Corporate      
                                 Finance of Legg Mason Wood Walker,         
                                 Incorporated since April 1995, and Managing
                                 Director prior thereto.                    
CLASS II DIRECTORS                                                          
Robert E. Keith, Jr. 1997   59   Managing Director and Chief Executive      
                                 Officer of TL Ventures (a venture capital  
                                 firm) for more than the past five years;   
                                 President and Chief Executive Officer of   
                                 Technology Leaders Management, Inc. from   
                                 February 1996 to the present, and President
                                 and Chief Operating Officer prior thereto; 
                                 Vice Chairman of Safeguard Scientifics,    
                                 Inc.; Director of Cambridge Technology     
                                 Partners; Chairman of the Board of Internet
                                 Capital Group, Inc.; Director of American  
                                 Education Centers, Inc.; Director of       
                                 Naviano Inc.; Director of Circles Inc.; and
                                 Director of Surency Inc.                   
Geoffrey C. Shepard 1998    56   President of Corporate Division of Karr    
                                 Barth Associates, Inc. for more than the   
                                 past five years.                           
Francis G. Ziegler 1998     60   President and Chief Executive Officer of   
                                 Claneil Enterprises, Inc. for more than the
                                 past five years; Chairman of the Board of  
                                 Scott Chemical Co., Inc.; Director of Wawa,
                                 Inc.; Director of S&H GreenPoints Inc.; and
                                 Director of America'sDoctor.com.           

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                                                                [Download Table]

      NAME, AGE AND YEAR                                                      
     FIRST BECAME DIRECTOR    AGE    EMPLOYMENT HISTORY; OTHER DIRECTORSHIPS  
     ---------------------    ---    ---------------------------------------  
                                                                              

CLASS III DIRECTORS                                                           
Maurice P. Andrien, Jr. 1999  59   See information contained under            
                                   "Biographical Information -- Continuing    
                                   Stockholders."                             
Norman V. Edmonson 1987       60   Vice President, SunSource Corporate Group, 
                                   Inc. from December 1999 to May 2000;       
                                   Executive Vice President of the Company    
                                   from December 1994 to May 1998; Group Vice 
                                   President prior thereto.                   
Donald T. Marshall 1987       67   Chairman of the Company since April 1999;  
                                   Chairman and Chief Executive Officer of the
                                   Company prior thereto.                     

BIOGRAPHICAL INFORMATION -- CONTINUING STOCKHOLDERS                             

The following is a summary of the biographies of the continuing       
stockholders, for at least the last five years. Unless otherwise indicated      
below, all of the continuing stockholders are United States citizens and none   
were convicted in a criminal proceeding or party to a judicial or administrative
proceeding that resulted in an injunction, prohibition or finding of a violation
of federal or state securities laws.                                            

    Maurice P. Andrien, Jr. is currently President and Chief Executive Officer
of SunSource Inc., One Logan Square, Suite 3000, Philadelphia, Pennsylvania     
19103, whose principal business is distribution of value-added services and     
products to retail and industrial markets in North America. Mr. Andrien has held
such position since April 1999. From June 1998 to April 1999, Mr. Andrien was   
President and Chief Operating Officer of Unican Security Systems, Ltd., Decarie 
Boulevard, Montreal, Quebec, Canada. From April 1992 to June 1998, Mr. Andrien  
was President and Chief Executive Officer of Curtis Industries, Inc., 6140      
Parkland Boulevard, Mayfield Heights, Ohio.                                     

  Dennis G. Blake is currently Vice President of Marketing for The Hillman
Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose principal     
business is the sale and service of fasteners and related small hardware items, 
and the manufacture and marketing of key duplication and identification systems.
Mr. Blake has held such position for the last five years.                       

   Richard A. Buller is currently the Vice President of Materials Management
for The Hillman Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231,     
whose principal business is the sale and service of fasteners and related small 
hardware items, and the manufacture and marketing of key duplication and        
identification systems. Mr. Buller has held such position since 1998. From 1996 
to 1998, Mr. Buller was Director of Materials Management for The Hillman Group, 
Inc. at the Cincinnati, Ohio address, above.                                    

Joseph M. Corvino is currently Vice President of Finance, Secretary,  
Treasurer and Chief Financial Officer of SunSource Inc., whose principal        
business is distribution of value-added services and products to retail and     
industrial markets in North America. Mr. Corvino has held such positions for the
last five years.                                                                

  Kenneth H. Foskey is currently Vice President of Information Systems and
New Business Development for The Hillman Group, Inc., 10590 Hamilton Avenue,    

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Cincinnati, Ohio 45231, whose principal business is the sale and service of     
fasteners and related small hardware items, and the manufacture and marketing of
key duplication and identification systems. Mr. Foskey has held such position   
since 1997. From 1996 to 1997, Mr. Foskey held the position of Vice President of
Information Systems for The Hillman Group, Inc. at the Cincinnati, Ohio address,
above.                                                                          

   George L. Heredia is currently Senior Vice President of Marketing for The
Hillman Group, Inc., 9185 South Farmer Avenue, Tempe, Arizona 85284, whose      
principal business is the sale and service of fasteners and related small       
hardware items, and the manufacture and marketing of key duplicating and        
identification systems. Mr. Heredia has held such position since April 2000.    
During the five years prior to April 2000, Mr. Heredia has held the positions of
Senior Vice President of Marketing and Senior Vice President of Operations for  
Axxess Technologies Inc., 9185 South Farmer Avenue, Tempe, Arizona 85284.       

    Max W. Hillman, Jr. is currently Co-Chief Executive Officer of The Hillman
Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose principal     
business is the sale and service of fasteners and related small hardware items, 
and the manufacture and marketing of key duplication and identification systems.
Mr. Hillman has held the position of Co-Chief Executive Officer of The Hillman  
Group, Inc. since April 2000. From 1999 to April 2000 Mr. Hillman held the      
position of Chief Executive Officer of The Hillman Group, Inc. at the           
Cincinnati, Ohio address, above. From 1991 to 1999, Mr Hillman was a Group Vice 
President for The Hillman Group, Inc. at the Cincinnati, Ohio address, above.   

   Richard P. Hillman is currently the President of The Hillman Group, Inc.,
10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose principal business is the  
sale and service of fasteners and related small hardware items, and the         
manufacture and marketing of key duplication and identification systems. Mr.    
Hillman has held such position since 1991.                                      

    John H. Marshall III is currently Regional Vice President of Sales for The
Hillman Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose       
principal business is the sale and service of fasteners and related small       
hardware items, and the manufacture and marketing of key duplication and        
identification systems. Mr. Marshall has held the position of Regional Vice     
President of Sales for The Hillman Group, Inc. since April 1998. From January   
1997 to April 1998, Mr. Marshall held the position of Regional Sales Manager    
and, form May 1995 to January 1997, Mr. Marshall held the position of District  
Manager for The Hillman Group, Inc. at the Cincinnati, Ohio address, above.     

John P. McDonnell is currently employed as a consultant to SunSource  
Technology Services, LLC. Mr. McDonnell has been employed as a consultant for   
SunSource Technology Services since January 2000. During the five years prior to
January 2000, Mr. McDonnell has held various management positions with several  
of SunSource's subsidiaries.                                                    

Stephen W. Miller is currently the Co-Chief Executive Officer of The  
Hillman Group, Inc., 9185 South Farmer Avenue, Tempe, Arizona 85284, whose      
principal business is the sale and service of fasteners and related small       
hardware items, and the manufacture and marketing of key duplication and        
identification systems. Mr. Miller has held the position of Co-Chief Executive  
Officer of The Hillman Group, Inc. since April 2000. From January 1994 to April 
2000, Mr. Miller held the positions                                             

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of Chief Executive Officer, Chairman of the Board and President of Axxess       
Technologies, Inc., 8990 South Kyrene Road, Tempe, Arizona 85284.               

   Michael A. Mueller is currently the Vice President of Engineering for The
Hillman Group, Inc., 8990 South Kyrene Road, Tempe, Arizona 85284, whose        
principal business is the sale and service of fasteners and related small       
hardware items, and the manufacture and marketing of key duplication and        
identification systems. Mr. Mueller has held such position since April 2000.    
Prior to April 2000, Mr. Mueller was Vice President of Engineering for Axxess   
Technologies, Inc., 8990 South Kyrene Road, Tempe, Arizona 85284.               

   Terry R. Rowe is currently the Senior Vice President of National Accounts
for The Hillman Group, Inc., 9185 South Farmer Avenue, Tempe, Arizona 85284,    
whose principal business is the sale and service of fasteners and related small 
hardware items, and the manufacture and marketing of key duplication and        
identification systems. Mr. Rowe has held such position with The Hillman Group  
since 1992.                                                                     

Gary L. Seeds is currently Executive Vice President of Sales for The  
Hillman Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose       
principal business is the sale and service of fasteners and related small       
hardware items, and the manufacture and marketing of key duplication and        
identification systems. Mr. Seeds has held such position for the last five      
years.                                                                          

    James P. Waters is currently Vice President and Chief Financial Officer of
The Hillman Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose   
principal business is the sale and service of fasteners and related small       
hardware items, and the manufacture and marketing of key duplication and        
identification systems. Mr. Waters has held such position since September 1999. 
From November 1997 to September 1999, Mr. Waters was Vice President of Finance  
for Curtis Industries, Inc., 6140 Parkland Boulevard, Mayfield Heights, Ohio.   
From May 1993 to November 1997, Mr. Waters was Director of Finance for Curtis   
Industries, Inc., 6140 Parkland Boulevard, Mayfield Heights, Ohio.              

 Mark Yeary is currently Vice President of Manufacturing for The Hillman
Group, Inc., 8990 South Kyrene Road, Tempe, Arizona 85284, whose principal      
business is the sale and service of fasteners and related small hardware items, 
and the manufacture and marketing of key duplication and identification systems.
Mr. Yeary has held such position since April, 2000. Prior to April, 2000, Mr.   
Yeary held the position of Vice President, Manufacturing for Axxess             
Technologies, Inc. at the Tempe, Arizona address, above.                        

MANAGEMENT OF ALLIED CAPITAL

    Allied Capital's board of directors is classified into three approximately
equal classes with three-year terms, with only one of the three classes expiring
each year. Directors serve until their successors are elected and qualified.    

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DIRECTORS                                                                       

  Information regarding Allied Capital's board of directors is as follows:

                                                                [Download Table]

                                                            DIRECTOR  EXPIRATION
NAME                        AGE  POSITION                   SINCE(1)   OF TERM  
----                        ---  --------                   --------  ----------
                                                                                
William L. Walton*......... 51   Chairman, Chief Executive                      
                                 Officer and President        1986       2001   
George C. Williams, Jr.*... 75   Chairman Emeritus            1964       2001   
Brooks H. Browne........... 51   Director                     1990       2001   
John D. Firestone.......... 57   Director                     1993       2002   
Anthony T. Garcia.......... 44   Director                     1991       2002   
Lawrence I. Hebert......... 54   Director                     1989       2002   
John I. Leahy.............. 70   Director                     1994       2003   
Robert E. Long............. 70   Director                     1972       2001   
Warren K. Montouri......... 72   Director                     1986       2003   
Guy T. Steuart II.......... 70   Director                     1984       2003   
T. Murray Toomey, Esq...... 77   Director                     1959       2003   
Laura W. van Roijen........ 49   Director                     1992       2002   

---------------                                                                 
*  Interested persons of Allied Capital, as defined in the 1940 Act.          

(1) Includes service as a director of any of Allied Capital's predecessor       
companies.                                                                      

EXECUTIVE OFFICERS                                                              

  Information regarding Allied Capital's executive officers is as follows:

                                                                [Download Table]

             NAME              AGE  POSITION                                       
             ----              ---  --------                                       
                                                                                   
William L. Walton............. 51   Chairman, Chief Executive Officer and President
Joan M. Sweeney............... 41   Managing Director and Chief Operating Officer  
Scott S. Binder............... 46   Managing Director                              
Samuel B. Guren............... 54   Managing Director                              
Philip A. McNeill............. 41   Managing Director                              
John M. Scheurer.............. 49   Managing Director                              
Thomas H. Westbrook........... 38   Managing Director                              
G. Cabell Williams III. ...... 47   Managing Director                              
Penni F. Roll................. 35   Executive Vice President and Chief Financial   
                                    Officer                                        

BIOGRAPHICAL INFORMATION                                                        

Directors                                                                       

William L. Walton has been the Chairman, Chief Executive Officer and  
President of Allied Capital since 1997. He has served on the Allied Capital     
Board of Directors since 1986, and was named Chairman and CEO in February 1997. 
Mr. Walton has an extensive background in general management, marketing,        
strategic planning, mergers and acquisitions and financial analysis. Mr. Walton 
previously served as Managing Director of New York-based Butler Capital         
Corporation (1987-1991) and was the personal venture capital advisor for William
S. Paley, founder and Chairman of CBS. In addition, he was a Senior Vice        
President in Lehman Brothers Kuhn Loeb's Investment Banking Group. Mr. Walton   
also founded and managed two start-up businesses in the emerging education      
industry (1992-1996). Mr. Walton is a director                                  

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of Nobel Learning Communities, Inc., Riggs National Corporation and the National
Venture Capital Association. He received both a B.A. and a M.B.A. from Indiana  
University.                                                                     

George C. Williams, Jr. is Chairman Emeritus of Allied Capital. Mr.   
Williams was an officer of Allied Capital's predecessor companies from the later
of 1959 or the inception of the relevant entity and President or Chairman and   
Chief Executive Officer of the predecessor companies from the later of 1964 or  
each entity's inception until 1991. Mr. Williams is the father of G. Cabell     
Williams III, an executive officer of Allied Capital.                           

Brooks H. Browne has been the President of Environmental Enterprises  
Assistance Fund since 1993. Mr. Browne is a director of SEAF, Corporation       
Financiera Ambiental (Panama), Empresas Ambientales de Centro America (Costa    
Rica) Renewable Energy and Energy Efficiency Fund, Terra Capital Investors      
Limited, the Solar Development Foundation and Yayasan Bina Usaha Lingkungan     
(Indonesia) (environmental nonprofit or investment funds).                      

     John D. Firestone has been a Partner of Secor Group (venture capital) since
1978. Mr. Firestone is a director of Security Storage Company of Washington, DC,
Bryn Mawr Bank Corporation and the National Organization on Disability. Mr.     
Firestone is a Senior Advisor to GeoPortals.com, and a Trustee of the Washington
Ballet.                                                                         

   Anthony T. Garcia is currently a private investor. Mr. Garcia was General
Manager of Breen Capital Group (investor in tax liens) from 1997 to 2000. Mr.   
Garcia was a Senior Vice President of Lehman Brothers Inc. from 1985 to 1996.   

    Lawrence I. Hebert is a director and President and Chief Executive Officer
of Riggs Bank N.A. (a subsidiary of Riggs National Corporation) since February  
2001; Director of Riggs National Corporation since 1988. He also serves as a    
director of Riggs Investment Management Corporation and Riggs Bank Europe       
Limited (indirect subsidiaries of Riggs National Corporation). Mr. Hebert is the
President and a director of Perpetual Corporation (owner of Allbritton          
Communications Company and ALLNEWSCO, Inc.). Mr. Hebert is a director of        
ALLNEWSCO, Inc. (news programming service), the President of Westfield News     
Advertiser, Inc. (owner of a television station and newspapers), trustee of The 
Allbritton Foundation and Vice Chairman of Allbritton Communications Company.   
Mr. Hebert previously served as Vice Chairman (1983 to 1998), President (1984 to
1998) and Chairman and Chief Executive Officer (1998 to 2001) of Allbritton     
Communications Company.                                                         

     John I. Leahy has been the President of Management and Marketing Associates
(a management consulting firm) since 1986. Mr. Leahy was the President and Group
Executive Officer, Western Hemisphere of Black & Decker Corporation from 1982 to
1985. Mr. Leahy is a director of Kar Kraft Systems, Inc., Cavanaugh Capital,    
Inc., Acorn Products, Inc., The Wills Group Thulman-Eastern Company and         
Gallagher Fluid Seals, Inc.                                                     

    Robert E. Long is the CEO and Director of Goodwyn, Long & Black Investment
Management, Inc. and has been the Chairman and Chief Executive Officer of       
Emerald City Radio Partners, LLC since 1997. Mr. Long was the President of      
Business News Network, Inc. from 1995 to 1998, was the Chairman and Chief       
Executive Officer of Southern Starr Broadcasting Group, Inc. from 1991 to 1995, 
and a director and the President of Potomac Asset Management, Inc. from 1983 to 
1991. Mr. Long is                                                               

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a director of AmBase Corporation, CSC Scientific, Inc., and Advanced Solutions  
International, Inc.                                                             

   Warren K. Montouri has been a Partner of Montouri & Roberson (real estate
investment firm) since 1980. Mr. Montouri was a director of C&S/Sovran Bank from
1970 to 1990, a director of Sovran Financial Corporation from 1989 to 1990, a   
director of NationsBank, N.A. from 1990 to 1996, a director of BB&T Bank        
(formerly Franklin National Bank) from 1996 to 2000, a trustee of Suburban      
Hospital from 1991 to 1994, and a trustee of The Audubon Naturalist Society from
1979 to 1985.                                                                   

   Guy T. Steuart II has been a director and President of Steuart Investment
Company (manages, operates, and leases real and personal property and holds     
stock in operating subsidiaries engaged in various businesses) since 1960. Mr.  
Steuart is Trustee Emeritus of Washington and Lee University.                   

   T. Murray Toomey, Esq. has been an attorney at law since 1949. Mr. Toomey
is a director of The National Capital Bank of Washington and Federal Center     
Plaza Corporation. He is also a trustee of The Catholic University of America.  

     Laura W. van Roijen has been a private real estate investor since 1992. Ms.
van Roijen was the Chairman of CWV & Associates (RTC qualified contracting firm)
from 1991 to 1994, a director and the Treasurer of Black Possum Inc. (retail    
concern) from 1994 to 1996, the President of Volta Place, Inc. (real estate     
advisory firm) from 1991 to 1994, and Vice President (from 1986 to 1991) and    
Market Director (from 1989 to 1991) of Citicorp Real Estate, Inc.               

Executive Officers who are not Directors                                        

  Joan M. Sweeney, Managing Director and Chief Operating Officer, has been
employed by Allied Capital since 1993. Ms. Sweeney oversees all company         
operations and is responsible for strategic planning, financial management,     
information technology, marketing, investor relations, and all regulatory       
compliance. Prior to joining Allied Capital, Ms. Sweeney spent ten years of her 
career consulting with private and small public companies at both Ernst & Young 
and Coopers & Lybrand. Ms. Sweeney was a member of the Commission Division of   
Enforcement in the late 1980s.                                                  

  Scott S. Binder, Managing Director, has worked with Allied Capital since
1991 and is responsible for the telecommunications and broadcasting/cable       
investments within the private finance group. Prior to joining Allied Capital,  
Mr. Binder formed and was President of Overland Communications Group, which     
owned and operated cable television systems and radio stations. He also has     
worked in the specialty finance and leasing industry.                           

Samuel B. Guren, Managing Director, joined Allied Capital in 1999 to  
develop Allied Capital's private equity investment business. Mr. Guren has more 
than 26 years of venture capital investing experience. Prior to joining Allied  
Capital, Mr. Guren was the Senior Managing Partner at Baird Capital. He also    
served as a Senior Managing Partner at William Blair Venture Partners for 15    
years.                                                                          

   Philip A. McNeill, Managing Director, has been employed by Allied Capital
since 1993 and is responsible for co-managing the private finance group. Before 
joining Allied Capital, he served as a vice president of M&T Capital            
Corporation. Prior to entering the private finance industry, he was founding    
director of Western Oklahoma                                                    

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National Bank, and structured and managed numerous privately negotiated         
investments.                                                                    

  John M. Scheurer, Managing Director, has been employed by Allied Capital
since 1991 and manages the real estate finance group. He has more than 22 years 
of experience in commercial finance and real estate lending and management.     
Prior to joining Allied Capital, Mr. Scheurer worked in various capacities with 
Capital Recovery Advisors, Inc. and First American Bank. He also started his own
company, The Scheurer Company, and co-founded Hunter & Associates, a major      
leasing and consulting real estate firm in the Washington, DC area.             

    Thomas H. Westbrook, Managing Director, has been with Allied Capital since
1991 and is responsible for the business services investments within the private
finance group. Prior to joining Allied Capital, Mr. Westbrook worked with North 
Carolina Enterprise Fund and was a lending officer in NationsBank's corporate   
lending unit. He is the former president of the southern RASBIC and has served  
on the NASBIC Board of Governors.                                               

 G. Cabell Williams, III, Managing Director, has been employed by Allied
Capital since 1981 and is responsible for co-managing the operations of the     
private finance group. He has over 19 years of private finance experience, and  
has structured numerous types of private debt and equity finance transactions.  
Mr. Williams has served in many capacities during his tenure at Allied Capital. 

  Penni F. Roll, Executive Vice President and Chief Financial Officer, has
been employed by Allied Capital since 1995. Ms. Roll is responsible for         
financial management and reporting, accounting, loan servicing, special         
servicing, portfolio monitoring and regulatory compliance activities. Prior to  
joining Allied Capital, she spent seven years in the financial services practice
at KPMG Peat Marwick, including serving as a Manager from 1993 to 1995.         

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SUNSOURCE 

On July 3, 2001, the name, address, and share ownership of persons who
beneficially owned 5% or more of the outstanding SunSource common stock,        
SunSource's executive officers and the members of the SunSource board of        
directors, and the percentage of shares of SunSource common stock, and the      
percentage of New SunSource common stock that would be owned by such persons    
upon consummation of the merger based upon their holdings and outstanding shares
at July 3, 2001, are as follows:                                                

                                                        [Enlarge/Download Table]

                                                                                     PERCENTAGE OF
                                                                                          NEW     
                                                                                       SUNSOURCE  
                                                                  SHARES OF NEW       THAT WOULD  
                                      SHARES       PERCENT        SUNSOURCE THAT       BE OWNED   
                                   OF SUNSOURCE   OWNERSHIP       WOULD BE OWNED       AFTER THE  
               NAME                   OWNED      OF SUNSOURCE  AFTER THE MERGER (1)    MERGER(1)  
               ----                ------------  ------------  --------------------  -------------
                                                                                                  
Wynnefield Partners/Channel                                                                       
  Partnership.....................    843,300        12.2%                --               --     
  450 Seventh Avenue, Suite 509                                                                   
  New York, NY 10123                                                                              
Cramer, Rosenthall, McGlynn, LLC..    397,300         5.8%                --               --     
  707 Winchester Avenue                                                                           
  White Plains, NY 10604                                                                          

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                                                        [Enlarge/Download Table]

                                                                                     PERCENTAGE OF
                                                                                          NEW     
                                                                                       SUNSOURCE  
                                                                  SHARES OF NEW       THAT WOULD  
                                      SHARES       PERCENT        SUNSOURCE THAT       BE OWNED   
                                   OF SUNSOURCE   OWNERSHIP       WOULD BE OWNED       AFTER THE  
               NAME                   OWNED      OF SUNSOURCE  AFTER THE MERGER (1)    MERGER(1)  
               ----                ------------  ------------  --------------------  -------------
                                                                                                  
Benson Associates, LLC............    420,100         6.1%                --               --     
  11 SW Fifth Avenue, Suite 2130                                                                  
  Portland, OR 97204                                                                              
J.B. Capital Partners, LP.........    518,975         7.5%                --               --     
  23 Berkley Lane                                                                                 
  Rye Brook, NY 10573                                                                             
Maurice P. Andrien, Jr. (2).......    287,000         4.2%           149,880              2.0%    
  36 Harrison Drive                                                                               
  Newtown Square, PA 19073                                                                        
Joseph M. Corvino (3).............    134,626         2.0%            73,711              1.0%    
  1420 Ardleigh Circle                                                                            
  West Chester, PA 19380                                                                          
Max W. Hillman, Jr. (4)...........    137,220         2.0%           122,922              1.6%    
  3257 Bridgestone Court                                                                          
  Cincinnati, OH 45248                                                                            
John P. McDonnell (5).............    283,208         4.1%            77,831              1.0%    
  23600 Edgeview Court                                                                            
  Barrington, IL 60010                                                                            
Donald T. Marshall (6)............    923,988        13.4%                --               --     
  228 W. Washington Square                                                                        
  Philadelphia, PA 19106                                                                          
Stephen W. Miller (7).............     70,000         1.0%            70,000                 *    
  8601 N. 61st Place                                                                              
  Paradise Valley, AZ 85253                                                                       
Norman Edmonson (8)...............    421,753         6.1%                --               --     
  607 North Chester Road                                                                          
  Swarthmore, PA 19081                                                                            
O. Gordon Brewer (9)..............      9,619            *                --               --     
  Braeview (East Atlantic Avenue)                                                                 
  Pine Valley, NJ 08021-0600                                                                      
Stewart Bliss (10)................      6,660            *                --               --     
  251 Monroe St                                                                                   
  Denver, CO 80206                                                                                
Arnold Hoffman (11)...............     21,774            *                --               --     
  1464 Hunter Road                                                                                
  Rydal, PA 19046                                                                                 
Robert Keith (12).................     26,551            *                --               --     
  975 Garrett Mill Road                                                                           
  Newtown Square, PA 19073                                                                        
Geoffrey Shepard (13).............     11,741            *                --               --     
  105 Wisteria Lane                                                                               
  Media, PA 19063                                                                                 
Francis Ziegler (14)..............     14,339            *                --               --     
  100 Roebling Road                                                                               
  Bernardsville, NJ 07924                                                                         
Richard P. Hillman (15)...........     36,000            *            61,205                 *    
  10590 Hamilton Avenue                                                                           
  Cincinnati, OH 45231                                                                            
George L. Heredia (16)............     10,000            *            10,000                 *    
  9185 S. Farmer Avenue                                                                           
  Tempe, AZ 85284                                                                                 

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                                                        [Enlarge/Download Table]

                                                                                     PERCENTAGE OF
                                                                                          NEW     
                                                                                       SUNSOURCE  
                                                                  SHARES OF NEW       THAT WOULD  
                                      SHARES       PERCENT        SUNSOURCE THAT       BE OWNED   
                                   OF SUNSOURCE   OWNERSHIP       WOULD BE OWNED       AFTER THE  
               NAME                   OWNED      OF SUNSOURCE  AFTER THE MERGER (1)    MERGER(1)  
               ----                ------------  ------------  --------------------  -------------
                                                                                                  
Gary L. Seeds (17)................     24,500            *            16,355                 *    
  10590 Hamilton Avenue                                                                           
  Cincinnati, OH 45231                                                                            
Terry R. Rowe (18)................     15,000            *            11,410                 *    
  9185 S. Farmer Avenue                                                                           
  Tempe, AZ 85284                                                                                 
James P. Waters (19)..............      9,000            *            11,410                 *    
  10590 Hamilton Avenue                                                                           
  Cincinnati, OH 45231                                                                            
Dennis G. Blake (20)..............     15,000            *            33,096                 *    
  10590 Hamilton Avenue                                                                           
  Cincinnati, OH 45231                                                                            
Richard A. Buller (12)............     13,175            *            10,585                 *    
  10590 Hamilton Avenue                                                                           
  Cincinnati, OH 45231                                                                            
Kenneth H. Foskey (22)............     15,000            *            11,410                 *    
  10590 Hamilton Avenue                                                                           
  Cincinnati, OH 45231                                                                            
Michael A. Mueller (23)...........     10,000            *            10,000                 *    
  8990 S. Kyrene Rd.                                                                              
  Tempe, AZ 85284                                                                                 
Mark Yeary (24)...................     10,000            *            10,000                 *    
  8990 S. Kyrene Rd.                                                                              
  Tempe, AZ 85284                                                                                 
John H. Marshall III (25).........      7,500            *             7,373                 *    
  10590 Hamilton Avenue                                                                           
  Cincinnati, OH 45231                                                                            

---------------                                                                 
*  less than 1%                                                             
(1) Includes rollover options.                                                
(2) Includes (a) 107,000 shares owned directly of which 100,000 are restricted
shares, and (b) 180,000 shares underlying options of which 50,000 are 
 currently vested and 130,000 will vest upon consummation of the merger.
 (3) Includes (a) 39,626 shares owned directly, and (b) 95,000 shares underlying
options of which 12,000 are currently vested and 83,000 will vest upon
consummation of the merger.                                           
(4) Includes (a) 32,220 shares owned directly, and (b) 105,000 shares         
 underlying options of which 49,166 are currently vested and 55,834 will
vest upon consummation of the merger.                                 
(5) Includes (a) 203,208 shares owned directly, and (b) 80,000 shares         
    underlying options all of which will vest upon consummation of the merger.
(6) Includes (a) 703,988 shares owned directly, and (b) 220,000 shares        
  underlying options of which 142,000 are currently vested and 78,000 will
vest upon consummation of the merger.                                 
 (7) Includes (a) 20,000 shares owned directly, and (b) 50,000 shares underlying
options of which 6,250 are currently vested and 43,750 will vest upon 
consummation of the merger.                                           
(8) Includes 421,753 shares owned directly.                                   
(9) Includes 9,619 shares owned directly.                                     
(10) Includes 6,660 shares owned directly.                                      
(11) Includes (a) 2,000 shares owned by Hoffman Investment Co., of which Mr.    
Hoffman is Managing Partner, (b) 1,000 shares owned by Mr. Hoffman's  
children with respect to which he disclaims beneficial ownership.     
(12) Includes 26,551 shares owned directly.                                     
(13) Includes 11,741 shares owned directly.                                     
(14) Includes 14,339 shares owned directly.                                     
(15) Represents 36,000 shares underlying options of which 15,833 are currently  
vested and 20,167 will vest upon consummation of the merger.          

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(16) Represents 10,000 shares underlying options of which 1,250 are currently   
vested and 8,750 will vest upon consummation of the merger.           
(17) Represents 24,500 shares underlying options of which 11,875 are currently  
vested and 12,625 will vest upon consummation of the merger.          
(18) Represents 15,000 shares underlying options of which 6,000 are currently   
vested and 9,000 will vest upon consummation of the merger.           
(19) Represents 9,000 shares underlying options of which 1,000 are currently    
vested and 8,000 will vest upon consummation of the merger.           
(20) Represents 15,000 shares underlying options of which 6,000 are currently   
vested and 9,000 will vest upon consummation of the merger.           
(21) Includes (a) 175 shares owned directly and (b) 13,000 shares underlying    
options of which 4,917 are currently vested and 8,083 will vest upon  
consummation of the merger.                                           
(22) Represents 15,000 shares underlying options of which 6,000 are currently   
vested and 9,000 will vest upon consummation of the merger.           
(23) Represents 10,000 shares underlying options of which 1,250 are currently   
vested and 8,750 will vest upon consummation of the merger.           
(24) Represents 10,000 shares underlying options of which 1,250 are currently   
vested and 8,750 will vest upon consummation of the merger.           
(25) Represents 7,500 shares underlying options of which 3,333 are currently    
vested and 4,167 will vest upon consummation of the merger.           

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TRANSACTIONS IN COMMON STOCK BY CERTAIN PERSONS 

SUNSOURCE COMMON STOCK PURCHASE PRICE INFORMATION                               

The following tables set forth information regarding acquisitions of  
SunSource common stock by affiliates of SunSource, showing the number of shares 
of SunSource common stock purchased by each affiliate, the range of prices paid 
for those shares and the average price paid per quarter for the past two years. 
Allied Capital and its executive officers and directors have not purchased any  
shares of SunSource common stock in the past two years. Transactions made on    
behalf of participants in the SunSource 401(k) plan are included in their       
respective beneficial ownership. See "Security Ownership of Certain Beneficial  
Owners and Management of SunSource."                                            

                                                        [Enlarge/Download Table]

                                                     QUARTER ENDED                            
                          --------------------------------------------------------------------
                                      9/31/99                             12/31/99            
                          --------------------------------    --------------------------------
                          RANGE OF    AVERAGE    NUMBER OF    RANGE OF    AVERAGE    NUMBER OF
                           PRICE       PRICE      SHARES       PRICE       PRICE      SHARES  
                          --------    -------    ---------    --------    -------    ---------
                                                                                              
Maurice P. Andrien,                                                                           
  Jr..................... $    --     $    --        --       $    --     $    --         --  
Joseph M. Corvino........ $    --     $    --        --       $    --     $    --         --  
Max W. Hillman........... $    --     $    --        --       $    --     $    --         --  
John P. McDonnell........ $    --     $    --        --       $    --     $    --         --  
Donald T. Marshall....... $    --     $    --        --       $    --     $    --         --  
Stephen W. Miller........ $    --     $    --        --       $    --     $    --         --  
Norman Edmonson.......... $5.3125     $5.3125       470       $4.3438     $4.3438        575  
O. Gordon Brewer......... $5.3125     $5.3125       941       $    --     $    --         --  
Stewart Bliss............ $    --     $    --        --       $    --     $    --         --  
Arnold Hoffman........... $5.3125     $5.3125       470       $4.3438     $4.3438        575  
Robert Keith............. $5.3125     $5.3125       941       $4.3438     $4.3438      1,151  
Geoffrey Shepard......... $5.3125     $5.3125       470       $4.3438     $4.3438        575  
Francis Ziegler.......... $5.3125     $5.3125       941       $4.3438     $4.3438      1,151  
Richard Hillman.......... $    --     $    --        --       $    --     $    --         --  
George Heredia........... $    --     $    --        --       $    --     $    --         --  
Gary Seeds............... $    --     $    --        --       $    --     $    --         --  
Terry Rowe............... $    --     $    --        --       $    --     $    --         --  
James Waters............. $    --     $    --        --       $    --     $    --         --  
Dennis Blake............. $    --     $    --        --       $    --     $    --         --  
Richard Buller........... $    --     $    --        --       $    --     $    --         --  
Ken Fosky................ $    --     $    --        --       $    --     $    --         --  
Michael Mueller.......... $    --     $    --        --       $    --     $    --         --  
Mark Yeary............... $    --     $    --        --       $    --     $    --         --  
John Marshall............ $    --     $    --        --       $    --     $    --         --  
John McDonnell........... $    --     $    --        --       $    --     $    --         --  

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                                                     QUARTER ENDED                            
                          --------------------------------------------------------------------
                                      3/31/00                             6/30/00             
                          --------------------------------    --------------------------------
                          RANGE OF    AVERAGE    NUMBER OF    RANGE OF    AVERAGE    NUMBER OF
                           PRICE       PRICE      SHARES       PRICE       PRICE      SHARES  
                          --------    -------    ---------    --------    -------    ---------
                                                                                              
Maurice P. Andrien,                                                                           
  Jr..................... $4.5000     $4.5000     100,000     $    --     $    --         --  
Joseph M. Corvino........ $    --     $    --          --     $    --     $    --         --  
Max W. Hillman........... $    --     $    --          --     $    --     $    --         --  
John P. McDonnell........ $    --     $    --          --     $    --     $    --         --  
Donald T. Marshall....... $    --     $    --          --     $    --     $    --         --  
Stephen W. Miller........ $    --     $    --          --     $    --     $    --         --  
Norman Edmonson.......... $    --     $    --                 $5.0625     $5.0625        164  
O. Gordon Brewer......... $4.6875     $4.6875         853     $5.0625     $5.0625        790  
Stewart Bliss............ $    --     $    --          --     $5.0625     $5.0625        493  
Arnold Hoffman........... $4.6785     $4.6785         533     $5.0625     $5.0625        493  
Robert Keith............. $4.6785     $4.6785       1,066     $5.0625     $5.0625        987  
Geoffrey Shepard......... $4.6785     $4.6785       1,066     $5.0625     $5.0625        987  
Francis Ziegler.......... $4.6785     $4.6785       1,066     $5.0625     $5.0625        987  
Richard Hillman.......... $    --     $    --          --     $    --     $    --         --  
George Heredia........... $    --     $    --          --     $    --     $    --         --  
Gary Seeds............... $    --     $    --          --     $    --     $    --         --  
Terry Rowe............... $    --     $    --          --     $    --     $    --         --  
James Waters............. $    --     $    --          --     $    --     $    --         --  
Dennis Blake............. $    --     $    --          --     $    --     $    --         --  
Richard Buller........... $    --     $    --          --     $    --     $    --         --  
Ken Fosky................ $    --     $    --          --     $    --     $    --         --  
Michael Mueller.......... $    --     $    --          --     $    --     $    --         --  
Mark Yeary............... $    --     $    --          --     $    --     $    --         --  
John Marshall............ $    --     $    --          --     $    --     $    --         --  
John McDonnell........... $    --     $    --          --     $    --     $    --         --  

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                                                     QUARTER ENDED                            
                          --------------------------------------------------------------------
                                      9/30/00                             12/31/00            
                          --------------------------------    --------------------------------
                          RANGE OF    AVERAGE    NUMBER OF    RANGE OF    AVERAGE    NUMBER OF
                           PRICE       PRICE      SHARES       PRICE       PRICE      SHARES  
                          --------    -------    ---------    --------    -------    ---------
                                                                                              
Maurice P. Andrien,                                                                           
  Jr.....................      --     $    --         --           --     $    --         --  
Joseph M. Corvino........      --     $    --         --           --     $    --         --  
Max W. Hillman...........      --     $    --         --           --     $    --         --  
John P. McDonnell........      --     $    --         --           --     $    --         --  
Donald T. Marshall.......      --     $    --         --           --     $    --         --  
Stephen W. Miller........      --     $    --         --           --     $    --         --  
Norman Edmonson.......... $3.9375     $3.9375        634      $3.0938     $3.0938        808  
O. Gordon Brewer......... $3.9375     $3.9375      1,015      $3.0938     $3.0938      1,293  
Stewart Bliss............ $3.9375     $3.9375      1,269      $3.0938     $3.0938      1,616  
Arnold Hoffman........... $3.9375     $3.9375        634      $3.0938     $3.0938        808  
Robert Keith............. $3.9375     $3.9375      1,269      $3.0938     $3.0938      1,616  
Geoffrey Shepard......... $3.9375     $3.9375      1,269      $3.0938     $3.0938      1,616  
Francis Ziegler.......... $3.9375     $3.9375      1,269      $3.0938     $3.0938      1,616  
Richard Hillman.......... $    --     $    --         --      $    --     $    --         --  
George Heredia........... $    --     $    --         --      $    --     $    --         --  
Gary Seeds............... $    --     $    --         --      $    --     $    --         --  
Terry Rowe............... $    --     $    --         --      $    --     $    --         --  
James Waters............. $    --     $    --         --      $    --     $    --         --  
Dennis Blake............. $    --     $    --         --      $    --     $    --         --  
Richard Buller........... $    --     $    --         --      $    --     $    --         --  
Ken Fosky................ $    --     $    --         --      $    --     $    --         --  
Michael Mueller.......... $    --     $    --         --      $    --     $    --         --  
Mark Yeary............... $    --     $    --         --      $    --     $    --         --  
John Marshall............ $    --     $    --         --      $    --     $    --         --  
John McDonnell........... $    --     $    --         --      $    --     $    --         --  

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                                                        [Enlarge/Download Table]

                                                      QUARTER ENDED                            
                           --------------------------------------------------------------------
                                       3/31/01                             6/30/01             
                           --------------------------------    --------------------------------
                           RANGE OF    AVERAGE    NUMBER OF    RANGE OF    AVERAGE    NUMBER OF
                            PRICE       PRICE      SHARES       PRICE       PRICE      SHARES  
                           --------    -------    ---------    --------    -------    ---------
                                                                                               
Maurice P. Andrien, Jr....      --     $    --         --      $     --    $    --       --    
Joseph M. Corvino.........      --     $    --         --      $     --    $    --       --    
Max W. Hillman............      --     $    --         --      $     --    $    --       --    
John P. McDonnell.........      --     $    --         --      $     --    $    --       --    
Donald T. Marshall........      --     $    --         --      $     --    $    --       --    
Stephen W. Miller.........      --     $    --         --      $     --    $    --       --    
Norman Edmonson........... $3.9000     $3.9000        641      $     --    $    --       --    
O. Gordon Brewer.......... $3.9000     $3.9000      1,025      $     --    $    --       --    
Stewart Bliss............. $3.9000     $3.9000      1,282      $     --    $    --       --    
Arnold Hoffman............ $3.9000     $3.9000        641      $     --    $    --       --    
Robert Keith.............. $3.9000     $3.9000      1,282      $     --    $    --       --    
Geoffrey Shepard.......... $3.9000     $3.9000      1,282      $     --    $    --       --    
Francis Ziegler........... $3.9000     $3.9000      1,282      $     --    $    --       --    
Richard Hillman........... $    --     $    --         --      $     --    $    --       --    
George Heredia............ $    --     $    --         --      $     --    $    --       --    
Gary Seeds................ $    --     $    --         --      $     --    $    --       --    
Terry Rowe................ $    --     $    --         --      $     --    $    --       --    
James Waters.............. $    --     $    --         --      $     --    $    --       --    
Dennis Blake.............. $    --     $    --         --      $     --    $    --       --    
Richard Buller............ $    --     $    --         --      $     --    $    --       --    
Ken Fosky................. $    --     $    --         --      $     --    $    --       --    
Michael Mueller........... $    --     $    --         --      $     --    $    --       --    
Mark Yeary................ $    --     $    --         --      $     --    $    --       --    
John Marshall............. $    --     $    --         --      $     --    $    --       --    
John McDonnell............ $    --     $    --         --      $     --    $    --       --    

Certain 5% stockholders may have engaged in transactions in SunSource 
common stock during the past 60 days.                                           

No officers, directors or affiliates of SunSource have engaged in any 
transactions in SunSource common stock during the past 60 days.                 

TRANSACTIONS AND ARRANGEMENTS CONCERNING SUNSOURCE COMMON STOCK                 

     To SunSource's knowledge, no transactions in SunSource's common stock other
than (i) ordinary purchases under SunSource's 401(k) plan or (ii) those         
transactions disclosed in "SunSource Common Stock Purchase Price Information",  
have been effected during the past 60 days by SunSource or its executive        
officers, directors, affiliates or subsidiaries, by Allied Capital or its       
executive officers, directors, affiliates or subsidiaries or by its executive   
officers, directors, affiliates or subsidiaries or by any of the continuing     
stockholders.                                                                   

   In the past two fiscal years, no purchases of SunSource common stock were
made by SunSource or Allied Capital (except as disclosed in periodic reports    
filed by SunSource with the SEC) other than as set forth in this proxy          
statement.                                                                      

Except as set forth in this proxy statement, neither SunSource, Allied
Capital or any of their affiliates, executive officers or directors or any      
person controlling SunSource or Allied Capital is a party to any contract,      
arrangement or understanding or relationship with any other person relating     
directly, or indirectly, to, or in connection with respect to any securities of 
SunSource (including, without limitation, any contract, arrangement,            
understanding or relationship concerning the transfer or                        

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the voting of any such securities, joint ventures, loan or option arrangement,  
puts or calls, guarantees of loans, guarantees against loss or the giving of    
withholding of proxies, consents or authorizations). Except as described in this
proxy statement, in the past two fiscal years, no contracts or negotiations     
concerning a merger, consolidation, or acquisition, a tender offer for or other 
acquisition of any securities of SunSource, an election of directors to the     
SunSource board, or a sale or other transfer of a material amount of assets of  
SunSource, has been entered into or has occurred between any affiliates of      
SunSource or between SunSource or any of its affiliates and any unaffiliated    
person or between Maurice Andrien, Joseph Corvino, Max Hillman, Stephen Miller, 
Richard Hillman, George Heredia, Gary Seeds, Terry Rowe, Jim Waters, Dennis     
Blake, Rick Buller, Ken Foskey, Michael Mueller, Mark Yeary, John McDonnell or  
John Marshall and SunSource and its affiliates, or between Allied Capital or its
executive officers, directors, affiliates or subsidiaries and SunSource and its 
affiliates. Except as described in this proxy statement, in the past three      
years, SunSource has not made any underwritten public offering of its stock that
was (i) registered under the Securities Act of 1933, (ii) exempt from           
registration under the Securities Act of 1933 pursuant to Regulation A.         

    None of the executive officers and directors of Allied Capital, SunSource,
Maurice Andrien, Joseph Corvino, Max Hillman, Stephen Miller, Richard Hillman,  
George Heredia, Gary Seeds, Terry Rowe, Jim Waters, Dennis Blake, Rick Buller,  
Ken Foskey, Michael Mueller, Mark Yeary, John McDonnell or John Marshall or     
Allied Capital or SunSource have been a party to any judicial or administrative 
proceeding during the past five years that resulted in a judgment, decree or    
final order enjoining the person from future violations of, or prohibiting      
activities subject to, federal or state securities laws, or a finding of any    
violation of federal or state securities laws.                                  

1998 PUBLIC OFFERING                                                            

On March 25, 1998, SunSource closed in a public offering of 1,988,063 
shares of its common stock at an offering price to the public of $28.25 per     
share. Of the 1,988,063 shares offered, 1,488,063 of the shares were sold by    
selling stockholders and 500,000 share were sold by SunSource for aggregate     
proceeds to SunSource of $14,125,000. The underwriters subsequently exercised   
their over allotment option for 296,408 shares yielding an additional $8,373,526
in proceeds to SunSource.                                                       

FORWARD-LOOKING STATEMENTS

    This document and documents to which we refer you in this document include
various forward-looking statements about Allied Capital, SunSource and New      
SunSource that are subject to risks and uncertainties. Forward-looking          
statements include information concerning future results of operations of Allied
Capital, SunSource and New SunSource. Also, statements that use the words       
"anticipate," "believe," "could," "estimate," "expect," "forecast," "intend,"   
"may," "plan," "possible," "project," "should," "will," or similar expressions  
are forward-looking statements. Many factors, some of which are discussed       
elsewhere in this document and in documents to which we have referred you, could
affect the future financial results of Allied Capital, SunSource and New        
SunSource. These factors could cause actual results to differ materially from   
those expressed in forward-looking statements contained in this document or     
related documents. These factors include adverse                                

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changes in economic conditions and in the markets served by Allied Capital and  
SunSource and a significant delay in the completion of the merger.              

STOCKHOLDER PROPOSALS FOR 
SUNSOURCE 2002 ANNUAL MEETING 

    The 2002 annual meeting of the stockholders of SunSource will be held only
if the merger transaction discussed in this proxy statement is not approved. An 
eligible stockholder who wants to have a qualified proposal considered for      
inclusion in the proxy statement for the 2002 annual meeting must notify the    
Secretary of SunSource. The proposal must be received at SunSource's offices no 
later than December 1, 2001. A stockholder must have been a record or beneficial
owner of at least one percent of the outstanding shares of common stock of      
SunSource or shares of common stock of SunSource with a market value of $1,000  
for at least one year prior to submitting the proposal and must continue to own 
such shares through the date on which the meeting is held.                      

OTHER MATTERS 

It is not expected that any matters other than those described in this
proxy statement will be brought before the SunSource special meeting. If any    
other matters are presented, however, it is the intention of the persons named  
in the SunSource proxy to vote the proxy in accordance with the discretion of   
the persons named in such proxy.                                                

INDEPENDENT ACCOUNTANTS 

    The financial statements as of December 31, 2000 and December 31, 1999 and
for each of the three years in the period ended December 31, 2000, including in 
this proxy statement, have been audited by PricewaterhouseCoopers LLP,          
independent accountants, as stated in their report appearing herein.            

WHERE YOU CAN FIND MORE INFORMATION 

     SunSource files annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any reports,       
statements, or other information filed by SunSource at the Commission's public  
reference rooms at 450 5th Street, N.W., Washington, D.C. 20549. Please call the
Commission at 1-202-942-8090 for more information on the public reference rooms.
The Commission also maintains an Internet site at "http://www.sec.gov" that     
contains reports, proxy and information statements, and other information       
regarding issuers, like SunSource, that file electronically with the Commission.
Copies may also be obtained, after paying a duplicating fee, by electronic      
request to publicinfo@sec.gov or by written request to Public Reference Section,
Washington, D.C. 20549-0102.                                                    

You can inspect reports, proxy statements, and other information about
SunSource at the offices of The American Stock Exchange, 86 Trinity Place, New  
York, New York 10006.                                                           

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We have not authorized anyone to provide you with information that is 
different from, or in addition to, what is contained or referred to in this     
proxy statement. SunSource has supplied all information contained in this proxy 
statement relating to SunSource, and Allied Capital has supplied all information
contained in this proxy statement relating to Allied Capital. If you are in a   
jurisdiction where the solicitation of proxies is unlawful, or if you are a     
person to whom it is unlawful to direct these types of activities, then the     
offer presented in this document does not extend to you. The information        
contained in this document speaks only as of the date of this document unless   
the information specifically indicates that another date applies.               

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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED FINANCIAL STATEMENTS 
INDEX TO FINANCIAL STATEMENTS 

                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
QUARTERLY FINANCIAL STATEMENTS                                    

Consolidated Balance Sheets -- March 31, 2001 (Unaudited),        
  December 31, 2000 and March 31, 2000 (Unaudited)..........   F-1
Consolidated Statement of Operations -- For the Three Months      
  Ended March 31, 2001 and 2000 (Unaudited).................   F-2
Consolidated Statement of Cash Flows -- For the Three Months      
  Ended March 31, 2001 and 2000 (Unaudited).................   F-3
Consolidated Statement of Changes in Stockholders' Equity         
  For the Three Months ended March 31, 2001 (Unaudited).....   F-4
Notes to Consolidated Financial Statements (Unaudited)......   F-5

ANNUAL FINANCIAL STATEMENTS                                       

Report of Independent Accountants...........................  F-13
Consolidated Balance Sheets -- December 31, 2000 and 1999...  F-14
Consolidated Statements of Operations -- Years ended              
  December 31, 2000, 1999 and 1998..........................  F-15
Consolidated Statements of Cash Flows -- Years ended              
  December 31, 2000, 1999 and 1998..........................  F-16
Consolidated Statements of Changes in Stockholders' Equity        
  (Deficit) for the Years ended December 31, 2000 and             
  1999......................................................  F-17
Valuation Accounts..........................................  F-18
Notes to Consolidated Financial Statements..................  F-19

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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS 

(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                              MARCH 31,   DECEMBER 31,   MARCH 31, 
                                                                2001          2000         2000    
                                                             -----------  ------------  -----------
                                                             (UNAUDITED)                (UNAUDITED)
                                                                                                   
                           ASSETS                                                                  
Current assets:                                                                                    
    Cash and cash equivalents...............................  $  2,378      $  2,811     $  2,641  
    Restricted cash.........................................        --        10,955           --  
    Marketable securities...................................     7,349            --           --  
    Accounts receivable, net................................    53,574        46,912       52,446  
    Inventories.............................................    78,239        78,658       69,991  
    Deferred income taxes...................................    14,483        14,483        8,621  
    Net assets held for sale and liquidation................       507         1,767       35,152  
    Income taxes receivable.................................        --            27       11,147  
    Other current assets....................................     5,891         6,167        4,050  
                                                              --------      --------     --------  
        Total current assets................................   162,421       161,780      184,048  
Property and equipment, net.................................    58,121        58,314       11,182  
Goodwill and other intangibles..............................    77,511        77,949       31,469  
Deferred financing fees.....................................     5,485         5,835        3,317  
Deferred income taxes.......................................    15,474        15,118        4,432  
Cash surrender value of life insurance policies.............        --            --       14,842  
Other assets................................................     3,681         3,145        7,837  
                                                              --------      --------     --------  
        Total assets........................................  $322,693      $322,141     $257,127  
                                                              ========      ========     ========  
            LIABILITIES AND STOCKHOLDERS' EQUITY                                                   
Current liabilities:                                                                               
    Accounts payable........................................  $ 39,848      $ 39,785     $ 42,393  
    Notes payable...........................................       420           624          253  
    Current portion of capitalized lease obligations........       812           915          919  
    Dividends / distributions payable.......................     1,019         1,019           --  
    Deferred tax liability..................................       594           594           --  
    Current portion of unsecured subordinated notes.........     2,780         2,677           --  
    Current portion of long term senior bank debt...........       500           375        5,000  
    Accrued expenses:                                                                              
        Salaries and wages..................................     2,331         4,307        1,890  
        Income and other taxes..............................     6,468         6,605        3,487  
        Accrued liabilities on discontinued operations......     1,711         2,407        3,203  
        Other accrued expenses..............................    20,913        25,520       16,566  
                                                              --------      --------     --------  
        Total current liabilities...........................    77,396        84,828       73,711  
Long term unsecured subordinated notes......................    41,317        40,960           --  
Long term senior bank debt..................................     2,000         2,125       16,500  
Bank revolving credit.......................................    67,284        55,111        7,065  
Capitalized lease obligations...............................       523           627        1,259  
Deferred compensation.......................................     6,162         7,868       14,796  
Deferred tax liability......................................     1,629         1,629           --  
Other liabilities...........................................     1,574         1,541          194  
                                                              --------      --------     --------  
        Total liabilities...................................   197,885       194,689      113,525  
                                                              --------      --------     --------  
Guaranteed preferred beneficial interests in the                                                   
  Company's junior subordinated debentures..................   114,760       114,848      115,112  
                                                              --------      --------     --------  
Commitments and contingencies                                                                      
Stockholders' equity:                                                                              
    Preferred stock, $.01 par, 1,000,000 shares authorized,                                        
      none issued...........................................        --            --           --  
    Common stock, $.01 par, 20,000,000 shares authorized,                                          
      7,361,509 issued and 6,882,409 outstanding at March                                          
      31, 2001, 7,352,137 issued and 6,873,037 outstanding                                         
      at December 31, 2000 and 7,333,734 issued and                                                
      6,854,634 outstanding at March 31, 2000...............        74            74           73  
    Additional paid-in capital..............................    22,837        22,808       21,813  
    Retained earnings (accumulated deficit).................    (3,246)         (617)      19,227  
    Unearned compensation...................................      (384)         (428)        (647) 
    Accumulated other comprehensive income..................      (528)         (528)      (3,271) 
    Treasury stock, at cost, 479,100 shares.................    (8,705)       (8,705)      (8,705) 
                                                              --------      --------     --------  
        Total stockholders' equity..........................    10,048        12,604       28,490  
                                                              --------      --------     --------  
        Total liabilities and stockholders' equity..........  $322,693      $322,141     $257,127  
                                                              ========      ========     ========  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 
FOR THE THREE MONTHS ENDED, 
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

                                                                [Download Table]

                                                         MARCH 31,    MARCH 31, 
                                                            2001         2000   
                                                         ----------   ----------
                                                                                
Net sales............................................... $  109,929   $  119,612
Cost of sales...........................................     64,960       70,778
                                                         ----------   ----------
       Gross profit.....................................     44,969       48,834
                                                         ----------   ----------
Operating expenses:                                                             
  Selling, general and administrative expenses..........     37,700       44,703
  Depreciation..........................................      3,045        1,014
  Amortization..........................................        903          405
                                                         ----------   ----------
       Total operating expenses.........................     41,648       46,122
                                                         ----------   ----------
Other income (expense)..................................       (369)          84
                                                         ----------   ----------
       Income from operations...........................      2,952        2,796
Interest expense, net...................................      3,215        2,399
Distributions on guaranteed preferred beneficial                                
  interests.............................................      3,058        3,058
Gain on contribution of subsidiaries (Note 3)...........         --       49,115
Equity in earnings of affiliate (Note 3)................        501          449
                                                         ----------   ----------
       Income (loss) before provision for income                                
          taxes.........................................     (2,820)      46,903
Provision (benefit) for income taxes....................       (191)       5,286
                                                         ----------   ----------
       Income (loss) from continuing operations.........     (2,629)      41,617
                                                         ----------   ----------
Discontinued operations (Note 1)                                                
  Income from operations of discontinued segments of                            
     $141, net of an income tax expense of $70..........         --           71
  Gain on disposal of discontinued segments of $3,372,                          
     net of income tax benefit of $6,208................         --        2,836
                                                         ----------   ----------
       Income from discontinued operations..............         --        2,907
                                                         ----------   ----------
       Net income (loss)................................ $   (2,629)  $   44,524
                                                         ==========   ==========
Basic and diluted income (loss) per common share:                               
  Income (loss) from continuing operations.............. $    (0.38)  $     6.10
  Income from operations of discontinued segments, net                          
     of taxes...........................................         --         0.01
  Gain on disposal of discontinued segments, net of                             
     taxes..............................................         --         0.41
                                                         ----------   ----------
  Net income (loss)..................................... $    (0.38)  $     6.52
                                                         ==========   ==========
Weighted average number of outstanding common shares....  6,882,409    6,827,161

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 
FOR THE THREE MONTHS ENDED, 

(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                      MARCH 31, 2001     MARCH 31, 2000  
                                                     -----------------  -----------------
                                                                                         
Cash flows from operating activities:                                                    
  Net income (loss)................................       $(2,629)          $ 44,524     
  Adjustments to reconcile net income (loss) to net                                      
     cash used for operating activities:                                                 
       Depreciation and amortization...............         3,948              1,419     
       Loss from discontinued segments before                                            
          taxes....................................            --              3,231     
       Gain on contribution from subsidiaries......            --            (49,115)    
       Equity in earnings of affiliate.............          (501)              (449)    
       Deferred income tax benefit.................          (356)                --     
       Changes in current operating items:                                               
          Increase in accounts receivable..........        (6,662)            (7,374)    
          Decrease in inventories..................           419              1,043     
          Decrease in income taxes receivable......            27                511     
          (Increase) decrease in other current                                           
            assets.................................          (299)               320     
          Increase in accounts payable.............            63              4,948     
          Decrease in other accrued liabilities....        (3,458)            (6,875)    
       Other items, net............................           828               (921)    
                                                          -------           --------     
     Net cash used for operating activities........        (8,620)            (8,738)    
                                                          -------           --------     
Cash flows from investing activities:                                                    
  Proceeds from contribution of subsidiaries.......            --            105,000     
  Costs associated with contribution of                                                  
     subsidiaries..................................            --               (655)    
  Proceeds from liquidation of discontinued                                              
     operation.....................................         1,000                 --     
  Costs associated with sale/liquidation of                                              
     discontinued operations.......................          (696)                --     
  Proceeds from sale of property and equipment.....           444                 71     
  Decrease (increase) in net assets held for                                             
     sale..........................................           260               (804)    
  Capital expenditures.............................        (3,342)              (425)    
  Other, net.......................................        (1,207)              (980)    
                                                          -------           --------     
     Net cash (used for) provided by investing                                           
       activities..................................        (3,541)           102,207     
                                                          -------           --------     
Cash flows from financing activities:                                                    
  Borrowings (repayments) under bank credit                                              
     agreements, net...............................        12,173            (95,726)    
  Repayments under other credit facilities, net....          (204)              (123)    
  Principal payments under capitalized lease                                             
     obligations...................................          (241)              (254)    
                                                          -------           --------     
     Net cash provided by (used for) financing                                           
       activities..................................        11,728            (96,103)    
                                                          -------           --------     
Net decrease in cash and cash equivalents..........          (433)            (2,634)    
Cash and cash equivalents at beginning of period...         2,811              5,275     
                                                          -------           --------     
Cash and cash equivalents at end of period.........       $ 2,378           $  2,641     
                                                          =======           ========     

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                      ACCUMULATED                          
                                              ADDITIONAL                                 OTHER                    TOTAL    
                                      COMMON   PAID-IN    ACCUMULATED    UNEARNED    COMPREHENSIVE  TREASURY  STOCKHOLDERS'
                                      STOCK    CAPITAL    DEFICIT (2)  COMPENSATION   INCOME (1)     STOCK       EQUITY    
                                      ------  ----------  -----------  ------------  -------------  --------  -------------
                                                                                                                           
Beginning Balance -- December 31,                                                                                          
  2000..............................   $74     $22,808      $  (617)      $(428)         $(528)     $(8,705)     $12,604   
  Net loss..........................                         (2,629)                                              (2,629)  
  Issuance of 9,372 shares of common                                                                                       
    stock to certain non-employee                                                                                          
    directors.......................                29                                                                29   
  Amortization of stock option                                                                                             
    discount........................                                         20                                       20   
  Amortization of vested portion of                                                                                        
    restricted stock................                                         24                                       24   
                                       ---     -------      -------       -----          -----      -------      -------   
Ending Balance -- March 31, 2001....   $74     $22,837      $(3,246)      $(384)         $(528)     $(8,705)     $10,048   
                                       ===     =======      =======       =====          =====      =======      =======   

---------------                                                                 
(1) Cumulative foreign translation adjustment represents the only item of other 
comprehensive income.                                                   

(2) Ending accumulated deficit includes $1,063 in undistributed earnings related
to the Company's investment in G-C Sun Holdings, L.P. which the Company 
accounts for under the equity method.                                   

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
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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" or "SunSource") and its wholly-owned subsidiaries,
principally The Hillman Group, Inc. (the "Hillman Group"), and SunSource        
Technology Services Company, Inc. ("Technology Services" or "STS"), and includes
an investment trust, SunSource Capital Trust (the "Trust"). The Company also has
an investment in an affiliate, G-C Sun Holdings, L.P., operating as Kar         
Products. All significant intercompany balances and transactions have been      
eliminated. The Company is one of the leading providers of value-added services 
and products to retail and industrial markets in North America.                 

  The accompanying consolidated financial statements and related notes are
unaudited; however, in management's opinion all adjustments (consisting of      
normal recurring accruals) considered necessary for the fair presentation of    
financial position, income and cash flows for the periods shown have been       
reflected. Results for the interim period are not necessarily indicative of     
those to be expected for the full year.                                         

Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles 
has been condensed or omitted pursuant to Form 10-Q requirements although the   
Company believes that disclosures are adequate to make the information presented
not misleading. It is suggested that these financial statements be read in      
conjunction with the consolidated financial statements and notes thereto        
included in the Company's report on Form 10-K for the year ended December 31,   
2000.                                                                           

DISCONTINUED OPERATIONS:                                                        

  In December 1999, the Company's Board of Directors approved management's
plan to dispose of the Harding Glass, Inc. ("Harding") business. In December    
2000, the Company's Board of Directors also approved management's plan to       
liquidate the Company's Integrated Supply -- Mexico business (the "Mexican      
segment"). Accordingly, Harding and the Mexican segment have been accounted for 
as discontinued operations with results of operations segregated from results of
the Company's ongoing businesses including restatement of the prior periods     
presented. On April 13, 2000, the Company consummated the sale of Harding.      
SunSource expects to complete the liquidation of the Mexican Segment by June 30,
2001. See Note 3, Contribution of Subsidiaries/Acquisitions/Divestitures.       

   Following is summary financial information for the Company's discontinued
Harding and Mexican operations:                                                 

                                                                [Download Table]

                                                          THREE MONTHS 
                                                          ENDED 3/31/00
                                                          -------------
                                                                       
Net Sales:                                                             
     Harding............................................    $  25,625  
     Mexican segment....................................        4,227  
                                                            ---------  
Consolidated net sales..................................    $  29,852  

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
(DOLLARS IN THOUSANDS)

1.  BASIS OF PRESENTATION: -- (CONTINUED)                                       

DISCONTINUED OPERATIONS: -- (CONTINUED)                                         

                                                                [Download Table]

                                                          THREE MONTHS 
                                                          ENDED 3/31/00
                                                          -------------
                                                                       
INCOME FROM DISCONTINUED OPERATIONS:                                   
  Before income taxes                                                  
     Harding............................................    $      --  
     Mexican segment....................................          141  
                                                            ---------  
  Total income from discontinued operations before                     
     income taxes.......................................    $     141  
  Income tax expense:                                                  
     Harding............................................           --  
     Mexican segment....................................          (70) 
                                                            ---------  
  Total income tax                                                     
     expense............................................    $     (70) 
                                                            ---------  
  Net income from discontinued operations:                             
     Harding............................................    $      --  
     Mexican segment....................................           71  
                                                            ---------  
  Total net income from discontinued operations.........    $      71  
                                                            ---------  
LOSS ON DISPOSAL:                                                      
     Harding............................................    $  (3,372) 
     Mexican segment....................................           --  
                                                            ---------  
Total loss on disposal..................................    $  (3,372) 
                                                            ---------  
INCOME TAX BENEFIT ON DISPOSAL:                                        
     Harding............................................    $   6,208  
     Mexican segment....................................           --  
                                                            ---------  
  Total tax benefit on disposal.........................    $   6,208  
                                                            ---------  
TOTAL INCOME FROM DISCONTINUED OPERATIONS:                             
     HARDING............................................    $   2,836  
     MEXICAN SEGMENT....................................           71  
                                                            ---------  
TOTAL INCOME FROM DISCONTINUED OPERATIONS...............    $   2,907  
                                                            =========  

     For the three months ended March 31, 2000, the Company recorded a loss from
operations of $699 and an additional loss on disposal of the discontinued       
Harding segment of $2,673, net of an income tax benefit of $6,208. Through      
December 31, 2000, the Company had recorded a loss on disposal of the           
discontinued Harding segment of $21,965 in the aggregate, net of tax benefits.  

   For the three months ended March 31, 2000, the Company recorded after-tax
income of $71 from the Mexican segment's operations.                            

No additional loss on disposal of the discontinued segments has been  
recorded during the quarter ended March 31, 2001.                               

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
(DOLLARS IN THOUSANDS)

1.  BASIS OF PRESENTATION: -- (CONTINUED)                                       

DISCONTINUED OPERATIONS: -- (CONTINUED)                                         

As of March 31, 2001, the Company had net assets held for sale of the 
discontinued operations of $507 consisting of receivables, inventories, prepaid 
assets, and property and equipment, and accrued liabilities of $1,711, reserved 
for the loss on disposal of the discontinued segments.                          

INVENTORIES                                                                     

  Inventories consisting predominantly of finished goods are valued at the
lower of cost or market, cost being determined principally on the first-in,     
first-out method.                                                               

2.  RECENT ACCOUNTING PRONOUNCEMENTS:                                           

    In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for       
Derivative Instruments and Hedging Activities." SFAS 133 established accounting 
and reporting standards for derivative financial instruments and hedging        
activities, and requires the Company to recognize all derivatives as either     
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value are accounted for depending on  
the use of the derivative and whether it is designated and qualifies for hedge  
accounting. In June 1999, the FASB issued SFAS 137, which deferred the          
implementation of SFAS 133. The Company adopted SFAS 133 during the first       
quarter of 2001. The adoption of SFAS 133 has not had a material impact on the  
Company's financial position and results of operations.                         

3.  CONTRIBUTION OF SUBSIDIARIES/ACQUISITIONS/DIVESTITURES:                     

On March 2, 2000, the Company contributed the interests in its Kar    
Products, Inc. and A & H Bolt & Nut Company Limited operations (collectively,   
the "Kar" or "Kar Products" business) to a newly-formed partnership affiliated  
with Glencoe Capital, L.L.C. ("Glencoe"). Glencoe contributed cash equity to the
new partnership, G-C Sun Holdings, L.P. ("G-C"). The Company received $105,000  
in cash proceeds from the transaction through repayment of assumed debt by G-C  
and retained a minority ownership in G-C. Affiliates of Glencoe hold a          
controlling interest in G-C. SunSource recorded a pre-tax gain on the           
transaction of approximately $49,115 in the first quarter of 2000. Sales from   
Kar aggregated $22,122 from January 1, 2000 to March 2, 2000. The Company       
accounts for its investment in the partnership under the equity method. As of   
March 31, 2001, SunSource's consolidated balance sheet includes $1,531 in other 
assets which represents the Company's investment in G-C.                        

     On April 7, 2000, the Company's Hillman Group acquired Axxess Technologies,
Inc. ("Axxess" or "Axxess Technologies") of Tempe, Arizona through a stock      
merger transaction. Axxess is a manufacturer of key duplication and             
identification systems. The transaction was structured as a purchase of 100% of 
the stock of the privately held company and repayment of outstanding Axxess debt
in exchange for $87,000 in cash and $23,000 in subordinated notes. In connection
with the sale of Harding on                                                     

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
(DOLLARS IN THOUSANDS)

3.  CONTRIBUTION OF SUBSIDIARIES/ACQUISITIONS/DIVESTITURES: -- (CONTINUED)      

April 13, 2000, the Company repaid $9,600 of these subordinated notes leaving a 
balance of $13,400 comprised as follows: 1) a $2,400 15% note which was paid on 
April 7, 2001 and 2) an $11,000 note which is payable in seven equal quarterly  
installments commencing the earlier of i) the first calendar quarter after      
payment in full of the Term Loan extended by the Company's senior lenders or ii)
March 31, 2004. Interest on the $11,000 subordinated note ranges from prime plus
1% to prime plus 5% with a maximum rate at any time of 15%. The aggregate       
consideration for the transaction was $111,537, including $87,000 in cash,      
$23,000 in subordinated notes and transaction costs of $1,537, plus the         
assumption of certain liabilities aggregating $14,018. Axxess recorded goodwill 
and other intangible assets of $48,259 related to this acquisition. Axxess'     
sales aggregated $19,364 for the three months ended March 31, 2000. Axxess'     
results of operations are included in the results of the Hillman Group from the 
date of acquisition.                                                            

On April l3, 2000, the Company sold substantially all of the assets of
Harding for a cash purchase price of $30,592 plus the assumption by the buyer of
certain liabilities aggregating $12,693, subject to certain post-closing        
adjustments.                                                                    

On October 4, 2000, the Company's Kar Products affiliate through the  
partnership formed with Glencoe Capital acquired all of the outstanding stock of
Brampton Fastener Co. Limited, d/b/a Brafasco, based in Toronto, Canada. G-C    
purchased the outstanding stock of Brafasco for cash and notes. Brafasco is a   
supplier of maintenance and repair products serving primarily industrial        
customers. Brafasco had sales of $28,534 ($CDN) for the year ended December 31, 
2000. As a result of this transaction, the Company holds a 44% ownership in the 
Kar Products affiliate.                                                         

On November 3, 2000, the Company's Hillman Group subsidiary purchased 
inventory and other assets of the Sharon-Philstone division of Pawtucket        
Fasteners, L.P. of Rhode Island. The Hillman Group assumed the sales and        
servicing of the Sharon-Philstone division, distributors of fasteners to the    
retail hardware marketplace with annual sales of approximately $14,000 for the  
twelve-month period prior to acquisition. The purchase price was $1,870 for     
inventory and other assets acquired at closing and a commitment to purchase     
additional inventory and other assets in the amount of approximately $3,572 over
the fourteen months following closing, subject to certain post-closing          
adjustments. As of March 31, 2001, the Hillman Group has paid $3,153 for the    
acquisition of the Sharon-Philstone division.                                   

In December 2000, the Board approved a plan to liquidate the Mexican  
segment which provided comprehensive inventory management services of           
maintenance, repair and operating materials to large manufacturing plants in    
Mexico. The Company recorded a pre-tax loss on liquidation of approximately     
$4,572 representing non-cash charges for accumulated translation losses, the    
write-down of inventories and other assets, and other liquidation costs. The    
Company expects to complete the liquidation process during the first half of    
2001.                                                                           

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
(DOLLARS IN THOUSANDS)

3.  CONTRIBUTION OF SUBSIDIARIES/ACQUISITIONS/DIVESTITURES: -- (CONTINUED)      

The following disclosures indicate the Company's estimate of pro forma
financial results for the quarter ended March 31, 2000, had the Axxess          
acquisition been consummated on January 1, 2000:                                

                                                                [Download Table]
                                                                      
Net sales...................................................  $138,976
Income before discontinued operations.......................    41,039
Net income..................................................    43,939
Basic and diluted earnings per share:                                 
  Before discontinued operations............................     $6.01
  Net income................................................     $6.44

4.  LINES OF CREDIT/NOTES PAYABLE/LONG-TERM DEBT:                               

   On December 15, 1999, the Company refinanced its $60,000 senior notes and
$90,000 bank revolving credit with $155,000 in senior credit facilities (the    
"Credit Agreement") consisting of $130,000 in revolving bank credit (the        
"Revolver") and a $25,000 term loan (the "Term Loan"). The Credit Agreement has 
a five-year term whose revolver availability is based on the Company's          
receivables and inventory balances (the "Borrowing Base") evaluated on a monthly
basis. On April 7, 2000, the Company amended the Credit Agreement to reduce the 
Revolver to $115,000.                                                           

   As of March 31, 2001, the Company's Borrowing Base was $87,905 consisting
of receivables and inventory balances totaling $94,781 less letter of credit    
commitments outstanding of $6,876. As of March 31, 2001, the Company had $20,621
available under the Revolver. The Company had $71,119 of outstanding debt at    
March 31, 2001, consisting of bank revolver borrowings of $67,284, an           
outstanding Term Loan of $2,500 and capital lease obligations of $1,335. The    
Company and its domestic and foreign corporate subsidiaries are borrowers and   
guarantors ("Credit Parties") under the Credit Agreement. Each credit party     
assigned, pledged and granted a security interest in and to all its assets as   
collateral.                                                                     

     Accounts payable includes $8,037 representing checks issued and outstanding
as of March 31, 2001, for which funds would have been drawn against the         
Company's revolving credit facility if they had been presented on that date.    

     On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued a $12,000 unsecured subordinated note. In connection with the sale of    
Harding on April 13, 2000, the Company repaid $9,600 of this unsecured          
subordinated note leaving a balance of $2,400. As of March 31, 2001, the        
Company's consolidated balance sheet included $2,780 in the current portion of  
unsecured subordinated notes related to the Axxess acquisition of which $380    
represents accrued interest. This note was repaid on April 6, 2001 in the amount
of $2,785, consisting of $2,400 in principal and $385 in account interest.      

     On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued an $11,000 unsecured subordinated note. The note is payable in seven     
equal quarterly installments commencing the earlier of i) the first calendar    
quarter after                                                                   

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
(DOLLARS IN THOUSANDS)

4.  LINES OF CREDIT/NOTES PAYABLE/LONG-TERM DEBT: -- (CONTINUED)                

payment in full of the Term Loan or ii) March 31, 2004. Interest on the         
subordinated note ranges from prime plus 1% to prime plus 5% with a maximum rate
at any time of 15%. Interest is payable upon maturity and compounds annually. As
of March 31, 2001, the Company's consolidated balance sheet included $12,177 in 
long-term unsecured subordinated notes related to the Axxess acquisition of     
which $1,177 represents accrued interest.                                       

    On December 28, 2000, the Company issued $30,000 of unsecured subordinated
notes (the "Subordinated Debt Issuance") which mature December 28, 2006.        
Interest on the Subordinated Debt Issuance is 12.5%, and interest payments are  
required quarterly commencing January 1, 2001. The Company issued the holder of 
the subordinated notes the right to purchase 285,000 shares of the Company's    
common stock at a nominal value. As of March 31, 2001, the Company's            
consolidated balance sheet included the subordinated debt of $29,140. The       
$29,140 balance reflects a discount of $860 which represents the fair market    
value of stock purchase rights issued to the holders of the subordinated debt.  
The $860 discount is being amortized over the life of the debt issuance.        

5.  CONTINGENCIES:                                                              

    On February 27, 1996, a lawsuit was filed against the Company by the buyer
of its Dorman Products division for alleged misrepresentation of certain facts  
by the Company upon which the buyer allegedly based its offer to purchase       
Dorman. The complaint seeks damages of approximately $21,000.                   

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 the pending  
litigation matters will not have a material effect on the consolidated financial
position, operations or cash flows of the Company.                              

6.  STOCKHOLDERS' EQUITY:                                                       

EARNINGS PER SHARE                                                              

The Company computes earnings per share in accordance with SFAS 128,  
"Earnings per Share". SFAS 128 requires the presentation of basic and diluted   
earnings per share for companies with complex capital structures. For the three 
months ended March 31, 2001, the Company recorded a net loss. Therefore, basic  
and diluted earnings per share are equal, as potential common shares are not    
included as inclusion of such shares would have an anti-dilutive effect. Under  
the Company's Equity Compensation Plan, certain executives and key employees    
were granted a total of 669,495 options through March 31, 2000 to purchase the  
Company's Common Shares having a potentially dilutive effect on earnings per    
share. Due to                                                                   

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
(DOLLARS IN THOUSANDS)

6.  STOCKHOLDERS' EQUITY: -- (CONTINUED)                                        

market conditions, the shares granted under this plan did not have a material   
dilutive effect on earnings per share for the three months ended March 31, 2000.

COMMON SHARES ISSUED TO CERTAIN NON-EMPLOYEE DIRECTORS                          

 Under the Company's Stock Compensation Plan for Non-Employee Directors,
certain non-employee directors were issued 9,372 Common shares in the first     
three months of 2001, which results in a compensation charge of $29.            

7.  SEGMENT INFORMATION:                                                        

 The Company has two reportable segments which are the Hillman Group and
Technology Services. The two segments are disaggregated based on the products   
and services provided, markets served, marketing strategies and delivery        
methods. The Company measures segment profitability and allocates corporate     
resources based on each segment's Earnings Before Interest, Taxes, Depreciation 
and Amortization ("EBITDA") which is defined as income from operations before   
depreciation and amortization. The Company also measures the segments on        
performance of their tangible asset base.                                       

     Following is a tabulation of segment information for the three months ended
March 31, 2001 and 2000. Corporate information is included to reconcile segment 
data to the consolidated financial statements.                                  

                                                                [Download Table]

                                                     FOR THE THREE MONTHS ENDED,  
                                                   -------------------------------
                                                   MARCH 31, 2001   MARCH 31, 2000
                                                   --------------   --------------
                                                                                  
NET SALES                                                                         
Hillman Group.....................................    $ 57,001         $35,585    
Technology Services...............................      52,928          60,857    
                                                      --------         -------    
     Consolidated net sales -- business                                           
       segments...................................    $109,929         $96,442    
                                                      ========         =======    
EBITDA                                                                            
Hillman Group.....................................    $  8,597         $ 3,504    
Technology Services...............................        (422)           (190)   
                                                      --------         -------    
  EBITDA -- business segments.....................    $  8,175         $ 3,314    
                                                      ========         =======    
RECONCILIATION OF SEGMENT PROFIT TO INCOME (LOSS)                                 
  BEFORE INCOME TAXES                                                             
EBITDA -- Business segments.......................    $  8,175         $ 3,314    
Equity in earnings of affiliate...................         501             449    
Corporate Expenses................................      (1,275)         (1,922)   
EBITDA from contributed subsidiaries, sold                                        
  business, and terminated contracts..............          --           2,823    
                                                      --------         -------    
Consolidated EBITDA...............................       7,401           4,664    
Depreciation......................................      (3,045)         (1,014)   
Amortization......................................        (903)           (405)   

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
(DOLLARS IN THOUSANDS)

7.  SEGMENT INFORMATION: -- (CONTINUED)                                         

                                                                [Download Table]

                                                     FOR THE THREE MONTHS ENDED,  
                                                   -------------------------------
                                                   MARCH 31, 2001   MARCH 31, 2000
                                                   --------------   --------------
                                                                                  
Interest expense, net.............................      (3,215)         (2,399)   
Distributions on guaranteed preferred beneficial                                  
  interests.......................................      (3,058)         (3,058)   
Gain on contribution of subsidiaries..............          --          49,115    
                                                      --------         -------    
Income(loss) before income taxes..................    $ (2,820)        $46,903    
                                                      ========         =======    

  Following is a supplemental table of segment tangible assets for ongoing
operations as of March 31, 2001.                                                

                                                                [Download Table]

                                                               $          %    
                                      3/31/01    12/31/00   INC(DEC)   INC(DEC)
                                      --------   --------   --------   --------
                                                                               
Hillman Group.......................  $135,142   $128,198   $ 6,944       5.4% 
Technology Services.................    61,129     62,132    (1,003)     (1.6)%
                                      --------   --------   -------            
          Total.....................  $196,271   $190,330   $ 5,941       3.1% 
                                      ========   ========   =======            

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REPORT OF INDEPENDENT ACCOUNTANTS 

The Board of Directors                                                          
SunSource Inc.                                                              

In our opinion, the consolidated financial statements listed in the   
accompanying index present fairly, in all material respects, the financial      
position of SunSource Inc. and its subsidiaries at December 31, 2000 and 1999   
and the results of their operations and their cash flows for each of the three  
years in the period ending December 31, 2000, in conformity with accounting     
principles generally accepted in the United States of America. In addition, in  
our opinion, the financial statement schedule listed in the accompanying index  
presents fairly, in all material respects, the information set forth therein    
when read in conjunction with the related consolidated financial statements.    
These financial statements and financial statement schedule are the             
responsibility of the Company's management; our responsibility is to express an 
opinion on these financial statements and financial statement schedule based on 
our audits. We conducted our audits of these statements in accordance with      
auditing standards generally accepted in the United States of America which     
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, assessing the accounting principles    
used and the significant estimates made by management, and evaluating the       
overall financial statement presentation. We believe that our audits provide a  
reasonable basis for the opinion expressed above.                               

/s/ PricewaterhouseCoopers LLP                                                  

February 8, 2001                                                                

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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS 

(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                              DECEMBER 31,  DECEMBER 31,
                                                                  2000          1999    
                                                              ------------  ------------
                                                                                        
                           ASSETS                                                       
Current assets:                                                                         
    Cash and cash equivalents...............................    $  2,811      $  5,275  
    Restricted cash.........................................      10,955            --  
    Accounts receivable, net of allowance for doubtful                                  
     accounts of $1,400 and $2,064, respectively............      46,912        63,319  
    Inventories.............................................      78,658        90,113  
    Deferred income taxes...................................      14,483         9,706  
    Net assets held for sale and liquidation................       1,767        37,079  
    Income taxes receivable.................................          27        11,022  
    Other current assets....................................       6,167         5,123  
                                                                --------      --------  
        Total current assets................................     161,780       221,637  
Property and equipment, net.................................      58,314        17,199  
Goodwill and other intangibles (net of accumulated                                      
  amortization of $14,228 and $19,786, respectively)........      77,949        52,154  
Deferred financing fees.....................................       5,835         3,493  
Deferred income taxes.......................................      15,118         5,865  
Cash surrender value of life insurance policies.............          --        14,190  
Other assets................................................       3,145         7,088  
                                                                --------      --------  
        Total assets........................................    $322,141      $321,626  
                                                                ========      ========  
       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                   
Current liabilities:                                                                    
    Accounts payable........................................    $ 39,785      $ 42,531  
    Notes payable...........................................         624           376  
    Current portion of capitalized lease obligations........         915           923  
    Dividends/distributions payable.........................       1,019         1,019  
    Deferred tax liability..................................         594            --  
    Current portion of unsecured subordinated notes.........       2,677            --  
    Current portion of long term senior bank debt...........         375         3,750  
    Accrued expenses:                                                                   
      Salaries and wages....................................       4,307         5,337  
      Income and other taxes................................       6,605         4,891  
      Accrued liabilities on discontinued operations........       2,407         2,703  
      Other accrued expenses................................      25,520        23,740  
                                                                --------      --------  
        Total current liabilities...........................      84,828        85,270  
Long term unsecured subordinated notes......................      40,960            --  
Long term senior bank debt..................................       2,125        17,750  
Bank revolving credit.......................................      55,111       102,791  
Capitalized lease obligations...............................         627         1,509  
Deferred compensation.......................................       7,868        14,173  
Deferred tax liability......................................       1,629            --  
Other liabilities...........................................       1,541         2,148  
                                                                --------      --------  
        Total liabilities...................................     194,689       223,641  
                                                                --------      --------  
Guaranteed preferred beneficial interests in the Company's                              
  junior subordinated debentures............................     114,848       115,200  
                                                                --------      --------  
Commitments and contingencies                                                           
Stockholders' equity (deficit):                                                         
    Preferred stock, $.01 par, 1,000,000 shares authorized,                             
     none issued............................................          --            --  
    Common stock, $.01 par, 20,000,000 shares authorized,                               
     7,352,137 issued and 6,873,037 outstanding at December                             
     31, 2000, 7,228,556 issued and 6,749,456 outstanding at                            
     December 31, 1999,.....................................          74            72  
    Additional paid-in capital..............................      22,808        21,342  
    Accumulated deficit.....................................        (617)      (25,297) 
    Unearned compensation...................................        (428)         (283) 
    Accumulated other comprehensive loss....................        (528)       (4,344) 
    Treasury stock, at cost, 479,100 shares.................      (8,705)       (8,705) 
                                                                --------      --------  
        Total stockholders' equity (deficit)................      12,604       (17,215) 
                                                                --------      --------  
        Total liabilities and stockholders' equity                                      
        (deficit)...........................................    $322,141      $321,626  
                                                                ========      ========  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS 
FOR THE YEARS ENDED DECEMBER 31,

(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

                                                        [Enlarge/Download Table]

                                                                2000         1999         1998   
                                                             ----------   ----------   ----------
                                                                                                 
Net sales................................................... $  459,826   $  541,250   $  600,293
Cost of sales...............................................    272,682      312,966      348,125
Cost of sales -- Inventory write-down related to                                                 
  restructuring (Note 1)....................................         --        2,130           --
                                                             ----------   ----------   ----------
      Gross profit..........................................    187,144      226,154      252,168
                                                             ----------   ----------   ----------
Operating expenses:                                                                              
    Selling, general and administrative expenses............    166,057      217,271      207,628
    Depreciation............................................      9,455        4,244        4,169
    Amortization............................................      3,369        1,840        1,669
                                                             ----------   ----------   ----------
        Total operating expenses............................    178,881      223,355      213,466
                                                             ----------   ----------   ----------
Restructuring charges and asset write-down (Note 1).........         --        8,118           --
Gain (loss) on curtailment/termination of defined benefit                                        
  pension plan (Note 16)....................................     (5,204)       5,608           --
Contribution to defined contribution plan (Note 16).........        925           --           --
Provision for litigation matters -- divested operations.....         --           --        1,600
Other income................................................        181          682          205
                                                             ----------   ----------   ----------
    Income from operations..................................      4,165          971       37,307
Interest expense, net.......................................     11,286        9,875        6,981
Distributions on guaranteed preferred beneficial                                                 
  interests.................................................     12,232       12,232       12,232
Gain on contributions of subsidiaries (Note 4)..............     49,115           --           --
Equity in earnings of affiliate (Note 4)....................      2,438           --           --
                                                             ----------   ----------   ----------
    Income (loss) from continuing operations before                                              
     provision (benefit) for income taxes...................     32,200      (21,136)      18,094
Provision (benefit) for income taxes........................      4,910       (9,815)       6,577
                                                             ----------   ----------   ----------
    Income (loss) from continuing operations................     27,290      (11,321)      11,517
                                                             ----------   ----------   ----------
Discontinued operations (Note 1) Income (loss) from                                              
  operations of discontinued segments, less applicable                                           
  income taxes of ($110), ($873) and $2,172, respectively...       (109)      (1,981)       2,300
    Loss on disposal of discontinued segments, less                                              
     applicable income taxes of ($7,393) in 2000............     (2,501)     (23,834)          --
                                                             ----------   ----------   ----------
        Income (loss) from discontinued operations..........     (2,610)     (25,815)       2,300
                                                             ----------   ----------   ----------
Income (loss) before extraordinary item.....................     24,680      (37,136)      13,817
Extraordinary loss from early extinguishment of debt, less                                       
  applicable income taxes of ($126) (Note 7)................         --         (235)          --
                                                             ----------   ----------   ----------
        Net income (loss)................................... $   24,680   $  (37,371)  $   13,817
                                                             ==========   ==========   ==========
Income (loss) per common share -- basic:                                                         
    Income (loss) from continuing operations................ $     3.98   $    (1.68)  $     1.67
    Income (loss) from operations of discontinued segments,                                      
     net of taxes...........................................      (0.02)       (0.30)        0.33
    Loss on disposal of discontinued segments, net of                                            
     taxes..................................................      (0.36)       (3.53)          --
                                                             ----------   ----------   ----------
    Income (loss) before extraordinary item.................       3.60        (5.51)        2.00
    Extraordinary loss from early extinguishment of debt,                                        
     net of taxes...........................................         --        (0.03)          --
                                                             ----------   ----------   ----------
    Net income (loss) per common share -- basic............. $     3.60   $    (5.54)  $     2.00
                                                             ==========   ==========   ==========
Weighted average number of outstanding common shares (Note                                       
  15).......................................................  6,856,549    6,747,142    6,907,318
Income (loss) per common share -- assuming dilution:                                             
    Income (loss) from continuing operations................ $     3.97   $    (1.68)  $     1.67
    Income (loss) from operations of discontinued segments,                                      
     net of taxes...........................................      (0.02)       (0.30)        0.33
    Loss on disposal of discontinued segments, net of                                            
     taxes..................................................      (0.36)       (3.53)          --
                                                             ----------   ----------   ----------
    Income (loss) before extraordinary item.................       3.59        (5.51)        2.00
    Extraordinary loss from early extinguishment of debt,                                        
     net of taxes...........................................         --        (0.03)          --
                                                             ----------   ----------   ----------
    Net income (loss) per common share -- assuming                                               
     dilution............................................... $     3.59   $    (5.54)  $     2.00
                                                             ==========   ==========   ==========
Weighted average number of outstanding common shares for                                         
  purposes of computing dilution (Note 15)..................  6,880,613    6,747,142    6,907,318

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE YEARS ENDED DECEMBER 31,

(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                               2000       1999       1998   
                                                             --------   --------   -------- 
                                                                                            
Cash flows from operating activities:                                                       
  Net income (loss)......................................... $ 24,680   $(37,371)  $ 13,817 
  Adjustments to reconcile net income (loss) to net cash                                    
    provided by (used for) operating activities:                                            
      Depreciation and amortization.........................   12,824      6,084      5,838 
      Restructuring charges and asset write-down............       --     10,248         -- 
      Extraordinary loss....................................       --        235         -- 
      Loss (income) from discontinued operations before                                     
       taxes................................................   10,113     26,688     (4,472)
      Gain on contribution from subsidiaries................  (49,115)        --         -- 
      Gain on sale of division..............................       --       (365)        -- 
      Deferred income tax (benefit) provision...............   (8,938)    (2,759)     1,025 
      Loss (gain) on termination/curtailment of pension                                     
       plans................................................    5,204     (5,608)        -- 
      Gain on termination of pension plan contributed to                                    
       defined contribution plan............................     (925)        --         -- 
      Equity in earnings of affiliate.......................   (2,438)        --         -- 
      Changes in current operating items:                                                   
        Decrease (increase) in accounts receivable..........    8,455      9,599     (4,155)
        Decrease (increase) in inventories..................    5,225      1,791     (9,569)
        Decrease (increase) in income taxes receivable......   10,995    (11,022)        -- 
        Decrease (increase) in other current assets.........    2,222       (720)      (932)
        (Decrease) increase in accounts payable.............   (4,866)    (6,701)     8,168 
        (Decrease) increase) in other accrued liabilities...   (4,507)       730      3,386 
      Other items, net......................................    1,340       (777)    (2,180)
                                                             --------   --------   -------- 
    Net cash provided by (used for) operating activities....   10,269     (9,948)    10,926 
                                                             --------   --------   -------- 
Cash flows from investing activities:                                                       
  Proceeds from contribution of subsidiaries................  105,000         --         -- 
  Costs associated with contribution of subsidiaries........     (655)        --         -- 
  Proceeds from sale of discontinued operations.............   30,592         --         -- 
  Costs associated with sale of discontinued operations.....   (2,023)        --         -- 
  Proceeds from sale of property and equipment..............    1,523      5,064         69 
  Proceeds from sale of division............................       --      8,827         -- 
  Increase in net assets held for sale and liquidation......     (949)   (17,459)    (5,248)
  Payments for acquired businesses, net of cash.............  (87,000)        --    (10,839)
  Capital expenditures......................................   (8,445)    (4,730)    (6,200)
  Investment in life insurance policies.....................       --     (1,300)      (903)
  Other investing activities, net...........................     (467)    (1,349)       163 
                                                             --------   --------   -------- 
    Net cash provided by (used for) investing activities....   37,576    (10,947)   (22,958)
                                                             --------   --------   -------- 
Cash flows from financing activities:                                                       
  Proceeds from issuance of unsecured subordinated notes....   30,000         --         -- 
  Proceeds from issuance of long term debt..................       --     25,000         -- 
  Net proceeds from issuance of common stock................       --         --     20,813 
  Borrowings (repayments) under bank credit agreements,                                     
    net.....................................................  (47,680)    67,791      2,000 
  Repayment of long term debt...............................  (19,000)   (63,500)        -- 
  Repayment of subordinated notes...........................   (9,600)        --         -- 
  Purchase of treasury stock at cost........................       --       (325)    (8,380)
  Cash distributions/dividends to investors.................       --     (1,350)    (4,848)
  Borrowings (repayments) under other credit facilities,                                    
    net.....................................................      248       (420)      (185)
  Principal payments under capitalized lease obligations....     (974)      (300)      (210)
  Other financing activities................................   (3,303)    (3,522)        -- 
                                                             --------   --------   -------- 
    Net cash (used for) provided by financing activities....  (50,309)    23,374      9,190 
                                                             --------   --------   -------- 
Net (decrease) increase in cash and cash equivalents........   (2,464)     2,479     (2,842)
Cash and cash equivalents at beginning of period............    5,275      2,796      5,638 
                                                             --------   --------   -------- 
Cash and cash equivalents at end of period.................. $  2,811   $  5,275   $  2,796 
                                                             ========   ========   ======== 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
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SUNSOURCE INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) 
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                           RETAINED                   ACCUMULATED                 TOTAL    
                                             ADDITIONAL   EARNINGS/                      OTHER                STOCKHOLDERS'
                                     COMMON   PAID-IN    (ACCUMULATED    UNEARNED    COMPREHENSIVE  TREASURY    (DEFICIT)  
                                     STOCK    CAPITAL    DEFICIT) (2)  COMPENSATION    LOSS (1)      STOCK       EQUITY    
                                     ------  ----------  ------------  ------------  -------------  --------  -------------
                                                                                                                           
Beginning Balance -- December 31,                                                                                          
  1998.............................   $72     $21,099      $ 12,748       $(229)        $(4,596)    $(8,380)    $ 20,714   
  Net loss.........................                         (37,371)                                             (37,371)  
  Change in cumulative foreign                                                                                             
    translation adjustment.........                                                         252                      252   
                                                                                                                --------   
  Comprehensive income.............                                                                              (37,119)  
                                                                                                                --------   
  Issuance of 11,293 shares of                                                                                             
    common stock to certain                                                                                                
    non-employee directors.........               119                                                                119   
  Dividends declared on common                                                                                             
    stock..........................                            (674)                                                (674)  
  Repurchase of 18,000 shares of                                                                                           
    common stock...................                                                                    (325)        (325)  
  Stock options granted at a                                                                                               
    discount.......................               124                      (124)                                      --   
  Amortization of stock option                                                                                             
    discount.......................                                          70                                       70   
                                      ---     -------      --------       -----         -------     -------     --------   
Ending Balance -- December 31,                                                                                             
  1999.............................    72      21,342       (25,297)       (283)         (4,344)     (8,705)     (17,215)  
  Net income.......................                          24,680                                               24,680   
  Change in cumulative foreign                                                                                             
    translation adjustment.........                                                        (396)                    (396)  
  Contribution of subsidiaries.....                                                       1,495                    1,495   
  Write-off for discontinued                                                                                               
    operations.....................                                                       2,717                    2,717   
                                                                                                                --------   
  Comprehensive income.............                                                                               28,496   
                                                                                                                --------   
  Issuance of 23,581 shares of                                                                                             
    common stock to certain                                                                                                
    non-employee directors.........     1         105                                                                106   
  Grant of 100,000 shares of                                                                                               
    restricted stock...............     1         464                      (465)                                      --   
  Grant of warrants on financing                                                                                           
    agreement......................               897                                                                897   
  Amortization of stock option                                                                                             
    discount.......................                                          80                                       80   
  Amortization of vested portion of                                                                                        
    restricted stock...............                                         240                                      240   
                                      ---     -------      --------       -----         -------     -------     --------   
Ending Balance -- December 31,                                                                                             
  2000.............................   $74     $22,808      $   (617)      $(428)        $  (528)    $(8,705)    $ 12,604   
                                      ===     =======      ========       =====         =======     =======     ========   

---------------                                                                 
(1) Cumulative foreign translation adjustment represents the only item of other 
comprehensive income.                                                   
(2) Accumulated deficit in 2000 includes $709 in undistributed earnings related 
to the Company's investment in G-C Sun Holdings, L.P. which the Company 
accounts for under the equity method.                                   

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
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SUNSOURCE INC. AND SUBSIDIARIES 
SCHEDULE II -- VALUATION ACCOUNTS 

(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                          DEDUCTED FROM ASSETS IN BALANCE SHEET              
                             ----------------------------------------------------------------
                                                               ACCUMULATED      ACCUMULATED  
                             ALLOWANCE FOR   ALLOWANCE FOR    AMORTIZATION      AMORTIZATION 
                               DOUBTFUL        OBSOLETE        OF GOODWILL      OF DEFERRED  
                               ACCOUNTS       INVENTORIES    AND INTANGIBLES   FINANCING FEES
                             -------------   -------------   ---------------   --------------
                                                                                             
Balance, December 31,                                                                        
  1997......................     1,814           3,616            17,153              32     
     Additions charged to                                                                    
       cost and expenses....     1,557           1,143             1,669             129     
     Deductions.............     1,219(A)        1,360(A)             --              --     
                                ------          ------           -------            ----     
Balance, December 31,                                                                        
  1998......................     2,152           3,399            18,822             161     
     Additions charged to                                                                    
       cost and expenses....     1,453           4,938             1,840             153     
     Deductions due to:                                                                      
          Sale of                                                                            
            division........       209             429               876              --     
          Others............     1,332(A)        1,140(A)             --             285(B)  
                                ------          ------           -------            ----     
Balance, December 31,                                                                        
  1999......................     2,064           6,768            19,786              29     
     Additions charged to                                                                    
       cost and expenses....       756           2,132             3,369             961     
     Additions for Axxess                                                                    
       acquisition..........       212           1,201                --              --     
     Deductions due to:                                                                      
          Contribution of                                                                    
            subsidiaries....       368             657             8,927              --     
          Others............     1,264(A)        3,086(A)             --              --     
                                ------          ------           -------            ----     
Balance, December 31,                                                                        
  2000......................    $1,400          $6,358           $14,228            $990     
                                ======          ======           =======            ====     

---------------                                                                 
Notes:                                                                          

(A) Includes write-off of accounts receivable (net of bad debt recoveries) and  
inventories.                                                            

(B) Write-off of deferred financing fee as a result of early extinguishment of  
debt related to the Company's bank revolving credit.                    

  F-18

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1.  BASIS OF PRESENTATION:                                                      

    The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company" or "SunSource") and its indirect wholly-owned     
subsidiaries including The Hillman Group, Inc. (the "Hillman Group"), SunSource 
Technology Services, Inc. ("Technology Services"or "STS"), SunSub C, formerly   
Harding Glass, Inc. ("Harding") and SunSource Capital Trust (the "Trust"). For  
1998 the accompanying financial statements include the consolidated accounts of 
the Company, its predecessor, SunSource L.P. (the "Partnership"), and its       
wholly-owned subsidiaries including SDI Operating Partners, L.P. (the "Operating
Partnership") and the Trust. All significant inter-company balances and         
transactions have been eliminated.                                              

Effective with the close of business on December 31, 1998, the Company
reorganized the Operating Partnership by contributing its assets and liabilities
to newly-formed, indirect, wholly-owned corporate subsidiaries organized        
according to the Company's current operating structure (the "Reorganization").  
As a result of the Reorganization, the Operating Partnership and its general    
partner, SDI Partners I, L.P.(the "G.P.") cease to exist. In connection with the
Reorganization, the Company amended its debt financing agreements (see Notes 10 
and 11).                                                                        

NATURE OF OPERATIONS:                                                           

 The Company is one of the leading providers of value-added services and
products to retail and industrial markets in North America. The Company         
currently operates through two segments: (1) the Hillman Group and (2)          
Technology Services. The Company also has an investment in an affiliate, G-C Sun
Holdings, L.P., operating as Kar Products.                                      

The Hillman Group provides small hardware-related products, keys and  
accessories and identification items including merchandising services to retail 
outlets, primarily hardware stores, home centers, lumberyards and mass          
merchants. STS provides engineering, repair and fabrication services as well as 
parts and equipment to manufacturers throughout the U.S. and Canada. Kar        
Products distributes maintenance and repair parts and offers customized         
inventory management services to commercial and industrial customers of all     
sizes in the U.S. and Canada.                                                   

   The Hillman Group and STS accounted for 49%, and 51% respectively, of the
Company's consolidated 2000 net sales from ongoing operations. On a consolidated
basis, the Company has over 50,000 customers, the largest of which accounted for
less than 10% of net sales. The Company's foreign sales in Canada accounted for 
less than 5% of its consolidated 2000 net sales. The average single sale was    
less than four hundred dollars. Sales performance is tied closely to the overall
performance of the non-defense-goods producing sector of Gross Domestic Product 
in the United States.                                                           

DISCONTINUED OPERATIONS:                                                        

  In December 1999, the Company's Board of Directors approved management's
plan to dispose of the Company's Harding business. In December 2000, the        

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1.  BASIS OF PRESENTATION: -- (CONTINUED)                                       

DISCONTINUED OPERATIONS: -- (CONTINUED)                                         

Company's Board of Directors also approved management's plan to liquidate the   
Company's Integrated Supply - Mexico business (the "Mexican segment").          
Accordingly, Harding and the Mexican segment have been accounted for as         
discontinued operations with results of operations segregated from results of   
the Company's ongoing businesses including restatement of the prior periods     
presented. On April 13, 2000, the Company consummated the sale of Harding.      
SunSource expects to complete the liquidation of the Mexican Segment by June 30,
2001. See Note 4, Acquisitions and Divestitures.                                

 For the year ended December 31, 1999, the Company recorded an after-tax
loss of $2,188 from Harding's operations and an estimated loss on its expected  
disposal of $23,834 unadjusted for any potential future tax benefits. For the   
year ended December 31, 2000, the Company recorded an additional loss on        
disposal of the discontinued Harding segment of $5,322 less an income tax       
benefit of $7,191. Through December 31, 2000, the Company has recorded a loss on
disposal of the discontinued Harding segment of $21,965 in the aggregate, net of
tax benefits.                                                                   

    The estimated loss recorded during the year ended December 31, 2000 on the
liquidation of the Mexican segment was $4,370 net of an income tax benefit of   
$202.                                                                           

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1.  BASIS OF PRESENTATION: -- (CONTINUED)                                       

DISCONTINUED OPERATIONS: -- (CONTINUED)                                         

   Following is summary financial information for the Company's discontinued
Harding and Mexican operations:                                                 

                                                                [Download Table]

                                                2000       1999       1998   
                                               -------   --------   -------- 
                                                                             
Net Sales:                                                                   
     Harding.................................  $27,966   $118,282   $ 94,952 
     Mexican segment.........................   16,889     14,402     17,225 
                                               -------   --------   -------- 
Consolidated net sales.......................  $44,855   $132,684   $112,177 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:                                  
  Before income taxes                                                        
     Harding.................................  $    --   $ (3,268)  $  3,522 
     Mexican segment.........................     (219)       414        950 
                                               -------   --------   -------- 
  Total income (loss) from discontinued                                      
     operations before income taxes..........  $  (219)  $ (2,854)  $  4,472 
  Income tax benefit (expense):                                              
     Harding.................................       --      1,080     (1,562)
     Mexican segment.........................      110       (207)      (610)
                                               -------   --------   -------- 
  Total income tax...........................  $   110   $    873   $ (2,172)
                                               -------   --------   -------- 
  Net income (loss) from discontinued                                        
     operations:                                                             
     Harding.................................  $    --   $ (2,188)  $  1,960 
     Mexican segment.........................     (109)       207        340 
                                               -------   --------   -------- 
  Total net income (loss) from discontinued                                  
     operations..............................  $  (109)  $ (1,981)  $  2,300 
                                               -------   --------   -------- 
LOSS ON DISPOSAL:                                                            
     Harding.................................  $(5,322)  $(23,834)  $     -- 
     Mexican segment.........................   (4,572)        --         -- 
                                               -------   --------   -------- 
  Total loss on disposal.....................  $(9,894)  $(23,834)  $     -- 
                                               -------   --------   -------- 
INCOME TAX BENEFIT ON DISPOSAL:                                              
     Harding.................................  $ 7,191   $     --   $     -- 
     Mexican segment.........................      202         --         -- 
                                               -------   --------   -------- 
  Total tax benefit on disposal..............  $ 7,393   $     --   $     -- 
                                               -------   --------   -------- 
  TOTAL INCOME (LOSS) FROM DISCONTINUED                                      
     OPERATIONS:                                                             
     HARDING.................................  $ 1,869   $(26,022)  $  1,960 
     MEXICAN SEGMENT.........................   (4,479)       207        340 
                                               -------   --------   -------- 
  TOTAL INCOME (LOSS) FROM DISCONTINUED                                      
     OPERATIONS..............................  $(2,610)  $(25,815)  $  2,300 
                                               =======   ========   ======== 

    As of December 31, 2000 and 1999, the Company had net assets held for sale
of the discontinued operations of $1,767 and $37,079, respectively, consisting  
of receivables, inventories, prepaid assets, and property and equipment, and    
accrued                                                                         

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1.  BASIS OF PRESENTATION: -- (CONTINUED)                                       

DISCONTINUED OPERATIONS: -- (CONTINUED)                                         

liabilities of $2,407 and $2,703, respectively, reserved for the loss on        
disposal of the discontinued segments.                                          

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, the Class A limited partnership interests in the Partnership were   
converted into cash and Guaranteed Preferred Beneficial Interests in the        
Company's Junior Subordinated Debentures (the "Trust Preferred Securities",     
which were issued by the Trust), and the Class B limited partnership interests  
in the Partnership were converted into common stock of the Company and the      
general and limited partnership interests in the GP, which was also the general 
partner of the Partnership, were exchanged with the Company for 1,000,000 shares
of its common stock.                                                            

1999 RESTRUCTURING CHARGES AND ASSET WRITE-DOWNS:                               

 On June 29, 1999, the Board of Directors of SunSource Inc. approved the
Company's restructuring plan to reposition Technology Services and Kar Products,
write-down impaired assets at the Hillman Group, and realign corporate overhead 
expenses. As a result of this plan, the Company recorded a restructuring charge 
of $10,248.                                                                     

    The Technology Services charge and write-downs aggregated $5,392 including
termination benefits of $2,744, an inventory write-down of $2,130, other exit   
costs of $415 and a write-down of unamortized leasehold improvements of $103.   
The termination benefits of $2,744 covered approximately 94 employees. The other
exit costs and write-down of unamortized leasehold improvements were related to 
lease buyouts and losses on the sale of owned facilities as a result of         
Technology Services' facilities consolidation. The inventory write-down of      
$2,130 was the result of a reduction in vendor lines resulting principally from 
the facility consolidation process.                                             

    The Kar Products charge amounted to $1,020 comprised solely of termination
benefits for about 10 employees.                                                

The Hillman Group's asset write-down was $3,300 and was primarily the 
result of the Hillman Group's decision not to seek recovery of key machines from
retailers. The write-down represented the total net book value of key machines  
that had been capitalized as of June 30, 1999.                                  

     The Corporate Headquarters component of the restructuring charge aggregated
$536 comprised of other exit costs of $434 and termination benefits of $102 for 
two employees. The other exit costs included lease termination costs of $101 and
unamortized leasehold improvements of $333 on certain assets.                   

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1.  BASIS OF PRESENTATION: -- (CONTINUED)                                       

1999 RESTRUCTURING CHARGES AND ASSET WRITE-DOWNS: -- (CONTINUED)                

The following table summarizes the restructuring costs and asset      
write-downs charged, the balance sheet classification, and payments or          
adjustments made during 2000.                                                   

                                                                [Download Table]

                                                              OTHER           
                                                TERMINATION   EXIT            
                                                 BENEFITS     COSTS    TOTAL  
                                                -----------   -----   ------- 
                                                                              
OPENING BALANCE JANUARY 1, 2000:                                              
Current -- other accrued expense..............    $ 1,722     $ 111     1,833 
Long-term -- other liabilities................        494        --       494 
                                                  -------     -----   ------- 
     Totals...................................    $ 2,216     $ 111   $ 2,327 
                                                  -------     -----   ------- 
PAYMENTS/CHARGES DURING YEAR-ENDED DECEMBER                                   
  31, 2000:                                                                   
Current-other accrued expense payments........    $(1,921)    $(111)  $(2,032)
                                                  -------     -----   ------- 
ENDING BALANCE DEC. 31, 2000:                                                 
Current -- other accrued expense..............    $   295     $  --   $   295 
Long-term -- other liabilities................         --        --        -- 
                                                  -------     -----   ------- 
     Totals...................................    $   295     $  --   $   295 
                                                  -------     -----   ------- 

The Board's approval of the restructuring plan provided the Company's 
management with the authority to involuntarily terminate employees. The Company 
established the levels of benefits that the terminated employees received and   
informed the employees of their termination benefits prior to the close of      
business on June 30, 1999. Termination payments to date represent severance     
payments for approximately 106 employees. The remaining $295 in other accrued   
expense at December 31, 2000, is primarily associated with termination benefits.

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.                             

RESTRICTED CASH:                                                                

  Restricted cash represents cash received as a result of the surrender of
life insurance policies by the Company on December 29, 2000 and held in a Rabbi 
Trust to fund deferred compensation liabilities due to the Company's employees. 
(See Note 13.)                                                                  

INVENTORIES:                                                                    

  Inventories consisting predominantly of finished goods are valued at the
lower of cost or market, cost being determined principally on the first-in,     
first-out method.                                                               

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)                  

PROPERTY AND EQUIPMENT:                                                         

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

DEPRECIATION:                                                                   

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

GOODWILL AND OTHER INTANGIBLE ASSETS:                                           

   Goodwill related to the excess of acquisition cost over the fair value of
net assets acquired in the acquisition of Axxess Technologies, Inc. ("Axxess")  
and the purchase of inventory and other assets of the Sharon-Philstone division 
of Pawtucket Fasteners, L.P. ("Sharon-Philstone") discussed in Note 4 is        
amortized on a straight-line basis over twenty-five years. All other goodwill   
related to the excess of acquisition cost over the fair value of net assets     
acquired is amortized on a straight-line basis over forty years. Other          
intangible assets arising principally from acquisitions are amortized on a      
straight-line basis over periods ranging from three to ten years.               

LONG-LIVED ASSETS:                                                              

     Under the provisions of Statement of Financial Accounting Standard ("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 and  
certain identifiable intangibles including goodwill for financial impairment,   
and will continue to evaluate them, based on the estimated undiscounted future  
cash flows, as events or changes in circumstances indicate that the carrying    
amount of such assets may not be fully recoverable. See Note 1, "Restructuring  
Charges" for information on the write-down of assets related to the Hillman     
Group's key machines.                                                           

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.            

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)                  

RETIREMENT BENEFITS:                                                            

Certain employees are covered under profit-sharing retirement plans   
("defined contribution plans") for which contributions are determined on an     
annual basis in accordance with the requirements of each plan.                  

     Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan.       

REVENUE RECOGNITION:                                                            

  Revenue from sales of products is recorded upon the passing of title and
risks of ownership which usually occurs upon the shipment of goods.             

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 due to short-term maturity or revolving      
nature of these instruments. The fair values of the Company's debt instruments  
are disclosed in Note 11. The fair value of the Trust Preferred Securities is   
disclosed in Note 14.                                                           

TRANSLATION OF FOREIGN CURRENCIES:                                              

   The translation of applicable foreign-currency-based financial statements
into U.S. dollars is performed for balance sheet accounts using exchange rates  
in effect at the balance sheet date and for revenue and expense accounts using  
an average exchange rate during the period.                                     

Exchange adjustments resulting from foreign currency transactions are 
recognized in net income and were immaterial for the three years ended December 
31, 2000.                                                                       

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:                    

The preparation of financial statements in conformity with accounting 
principles generally accepted in the United States 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.  

3.  RECENT ACCOUNTING PRONOUNCEMENTS:                                           

    In June 1998, the Financial Accounting Standards Board ("the FASB") issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS  
133 establishes accounting and reporting standards for derivative financial     
instruments and hedging activities, and requires the Company to recognize all   
derivatives as either assets or liabilities on the balance sheet and measure    
them at fair value. Gains and losses resulting from changes in fair value would 
be accounted for depending on                                                   

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

3.  RECENT ACCOUNTING PRONOUNCEMENTS: -- (CONTINUED)                            

the use of the derivative and whether it is designated and qualifies for hedge  
accounting. In June 1999, the FASB issued SFAS 137, which defers the            
implementation of SFAS 133. The Company will be required to implement SFAS 133  
in fiscal year 2001. The adoption of SFAS 133 has not had a material impact on  
the Company's financial statements.                                             

On June 26, 2000 the Securities and Exchange Commission issued Staff  
Accounting Bulletin ("SAB") No. 101B which extended the implementation date of  
SAB 101, "Revenue Recognition" to the three-month period ending December 31,    
2000. SAB 101 provides guidance on the recognition, presentation, and disclosure
of revenue in financial statements. Management has determined that the adoption 
of SAB 101 has not had a material impact on the Company's financial position and
results of operations.                                                          

4.  ACQUISITIONS AND DIVESTITURES:                                              

 During 1998, Hillman acquired the assets of three companies that supply
keys, letters, numbers and signs and other products to retail hardware stores,  
which were integrated into its existing operations. Net cash consideration paid 
for the acquired businesses, including transaction costs, was $10,839, including
goodwill of $7,009, and the assumption of certain liabilities of $1,132.        

On July 1, 1999, the Company sold the assets of Industrial Services'  
Fastener Business serving original equipment manufacturers ("OEM") for a cash   
consideration, net of expenses, of approximately $9,160 (subject to certain     
post-closing adjustments) plus the assumption of certain liabilities. The       
Company recorded an after-tax gain on the sale in the amount of $365 or $0.05   
per common share. Sales from the OEM Fastener Business aggregated $10,954 for   
the six months ended June 30, 1999 and $23,006 for the year ended December 31,  
1998.                                                                           

On March 2, 2000, the Company contributed the interests in its Kar    
Products, Inc. and A & H Bolt & Nut Company Limited operations (collectively,   
the "Kar" or "Kar Products" business) to a newly-formed partnership affiliated  
with Glencoe Capital, L.L.C. ("Glencoe"). Glencoe contributed cash equity to the
new partnership, G-C Sun Holdings L.P. ("G-C"). The Company received $105,000 in
cash proceeds from the transaction through repayment of assumed debt by G-C and 
retained a 49% minority ownership in G-C. Affiliates of Glencoe hold a          
controlling interest in G-C. SunSource recorded a pre-tax gain on the           
transaction of approximately $49,115 in the first quarter of 2000. Sales from   
Kar aggregated $22,122 from January 1, 2000 to March 2, 2000, and $124,724 for  
the year ended December 31, 1999. The Company accounts for its investment in the
partnership under the equity method. As of December 31, 2000, SunSource's       
consolidated balance sheet includes $1,030 in other assets which represents the 
Company's investment in G-C.                                                    

    On April 7, 2000, the Company acquired Axxess Technologies, Inc. ("Axxess"
or "Axxess Technologies") of Tempe, Arizona through a stock merger transaction. 
Axxess is a manufacturer of key duplication and identification systems. The     
transaction was structured as a purchase of 100% of the stock of the privately  
held                                                                            
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

4.  ACQUISITIONS AND DIVESTITURES: -- (CONTINUED)                               

company and repayment of outstanding Axxess debt in exchange for $87,000 in cash
and $23,000 in subordinated notes. In connection with the sale of Harding on    
April 13, 2000, the Company repaid $9,600 of these subordinated notes leaving a 
balance of $13,400 comprised as follows: 1) a $2,400 15% note due April 7, 2001 
and 2) an $11,000 note which is payable in seven equal quarterly installments   
commencing the earlier of i) the first calendar quarter after payment in full of
the Term Loan extended by the Company's senior lenders or ii) March 31, 2004.   
Interest on the $11,000 subordinated note ranges from prime plus 1% to prime    
plus 5% with a maximum rate at any time of 15%. The aggregate consideration for 
the transaction was $111,537, including $87,000 in cash, $23,000 in subordinated
notes and transaction costs of $1,537, plus the assumption of certain           
liabilities aggregating $13,924. Axxess recorded goodwill and other intangible  
assets of $48,085 related to this acquisition. Axxess sales aggregated $20,012  
for the three months ended March 31, 2000, and $82,132 for the year ended       
December 31, 1999. Axxess' results of operations are included in the results of 
the Hillman Group from the date of acquisition.                                 

On April 13, 2000, the Company sold substantially all of the assets of
Harding for a cash purchase price of $30,592 plus the assumption by the buyer of
certain liabilities aggregating $12,693, subject to certain post-closing        
adjustments.                                                                    

On October 4, 2000, the Company's Kar Products affiliate through the  
partnership formed with Glencoe Capital acquired all of the outstanding stock of
Brampton Fastener Co. Limited, d/b/a Brafasco, based in Toronto, Canada. G-C    
purchased the outstanding stock of Brafasco for cash and notes. Brafasco is a   
supplier of maintenance and repair products serving primarily industrial        
customers. Brafasco had sales of $26,623 ($CDN) for the year ended December 31, 
1999. As a result of this transaction, the Company holds a 44% ownership in the 
Kar Products affiliate.                                                         

On November 3, 2000, the Company's Hillman Group subsidiary purchased 
inventory and other assets of the Sharon-Philstone division of Pawtucket        
Fasteners, L.P. of Rhode Island. The Hillman Group assumed the sales and        
servicing of the Sharon-Philstone division, distributors of fasteners to the    
retail hardware marketplace with current annual sales of approximately $14,000. 
The purchase price was $1,870 for inventory and other assets acquired at closing
and a commitment to purchase additional inventory and other assets in the amount
of approximately $3,928 over the next fourteen months, subject to certain       
post-closing adjustments.                                                       

In December 2000, the Board approved a plan to liquidate the Mexican  
segment which provided comprehensive inventory management services of           
maintenance, repair and operating materials to large manufacturing plants in    
Mexico. The Company recorded a pre-tax loss on liquidation of approximately $4.6
million representing non-cash charges for accumulated translation losses, the   
write-down of inventories and other assets, and other liquidation costs. The    
Company expects to complete the liquidation process during the first half of    
2001.                                                                           

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

4.  ACQUISITIONS AND DIVESTITURES: -- (CONTINUED)                               

The following disclosures indicate the Company's estimate of financial
results had the 2000 acquisitions been consummated on January 1, 1999:          

                                                                [Download Table]

                                                             PRO FORMA      
                                                        ------------------- 
                                                          2000       1999   
                                                        --------   -------- 
                                                                            
Net sales.............................................  $479,838   $623,382 
Income (loss) before discontinued operations and                            
  extraordinary loss..................................    27,736    (13,185)
Net income (loss).....................................    25,126    (39,235)
Basic earnings per share:                                                   
     Before discontinued operations and extraordinary                       
       loss...........................................  $   4.04   $  (1.95)
     Net income (loss)................................  $   3.66   $  (5.82)
Diluted earnings per share:                                                 
     Before discontinued operations and extraordinary                       
       loss...........................................  $   4.03   $  (1.95)
     Net income (loss)................................  $   3.65   $  (5.82)

5.  RELATED PARTY TRANSACTIONS:                                                 

 From January 1, 1997 through September 30, 1998, a former member of the
Company's Board of Directors was a partner in a law firm which represented the  
Company in various matters. Payments to this law firm were $389 in 1998. Amounts
payable to this law firm were $109 at December 31, 1998.                        

An affiliate of a firm which owned beneficially more than 5% of the   
Company's Common Shares during 1998 performed investment banking services for   
the Company in 1998. Payments for these services were $361 in 1998.             

    A member of the Company's Board of Directors is an officer of a firm which
performed investment banking services for the Company in 1998. Payments for     
these services were $361 in 1998.                                               

6.  INCOME TAXES:                                                               

    The total income tax provision (benefit) was allocated for the three years
ended December 31, of 2000 as follows:                                          

                                                                [Download Table]

                                                  2000       1999      1998 
                                                 -------   --------   ------
                                                                            
Continuing operations..........................  $ 4,910   $ (9,815)  $6,577
Discontinued operations........................   (7,503)      (873)   2,172
Extraordinary item--early extinguishment of                                 
  debt.........................................       --       (126)      --
                                                 -------   --------   ------
Total tax provision (benefit)..................  $(2,593)  $(10,814)  $8,749
                                                 =======   ========   ======

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

6.  INCOME TAXES: -- (CONTINUED)                                                

   The components of the Company's provision (benefit) for income taxes from
continuing operations are as follows for the three years ended December 31:     

                                                                [Download Table]

                                                    2000     1999      1998  
                                                   ------   -------   ------ 
                                                                             
CURRENT:                                                                     
     Federal & State.............................  $2,522   $(6,826)  $3,799 
     Foreign.....................................    (159)      206    1,121 
                                                   ------   -------   ------ 
          Total current..........................   2,363    (6,620)   4,920 
                                                   ------   -------   ------ 
DEFERRED:                                                                    
     Federal & State.............................     317    (3,404)   1,822 
     Foreign.....................................      --       209     (165)
                                                   ------   -------   ------ 
          Total deferred.........................     317    (3,195)   1,657 
                                                   ------   -------   ------ 
Valuation allowance..............................   2,230        --       -- 
                                                   ------   -------   ------ 
          Provision (benefit) for income taxes...  $4,910   $(9,815)  $6,577 
                                                   ======   =======   ====== 

   The Company has U.S. federal net operating loss ("NOL") carryforwards for
tax purposes, totaling $29,600 as of December 31, 2000, that are available to   
offset future taxable income. These carryforwards expire in 2019.               

  The Company has state net operating loss carryforwards with an aggregate
tax benefit of $6,317 which expire from 2001 to 2018. A valuation allowance of  
$6,140 has been established for these deferred tax assets.                      

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of the assets and liabilities for financial        
reporting purposes and the amounts used for income tax purposes.                

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

6.  INCOME TAXES: -- (CONTINUED)                                                

  The table below reflects the significant components of the Company's net
deferred tax assets and liabilities at December 31, 2000 and 1999:              

                                                                [Download Table]

                                          2000                    1999         
                                  ---------------------   ---------------------
                                  CURRENT   NON CURRENT   CURRENT   NON CURRENT
                                  -------   -----------   -------   -----------
                                                                               
DEFERRED TAX ASSETS:                                                           
  Inventory.....................  $ 6,254     $    --     $ 5,441     $    --  
  Bad debt reserve..............    1,018          --         757          --  
  Deferred Compensation.........    2,407       2,433          --       3,494  
  Federal net operating loss....       --      10,064       3,108          --  
  State net operating loss......       --       6,317          --          --  
  Tax credit carryforwards......       --         986          --          --  
  Transaction costs.............       --         882          --         706  
  Property, Plant and                                                          
     equipment..................       --          --          --       1,030  
  Federal Capital loss                                                         
     carryforwards..............       --          --       6,857          --  
  Miscellaneous.................    4,804         575       1,923       1,846  
                                  -------     -------     -------     -------  
  Total gross deferred assets...   14,483      21,258      18,086       7,076  
Valuation Allowance for deferred                                               
  tax assets....................       --      (6,140)     (8,380)     (1,211) 
                                  -------     -------     -------     -------  
Net deferred tax asset..........  $14,483     $15,118     $ 9,706     $ 5,865  
                                  =======     =======     =======     =======  
DEFERRED TAX LIABILITY:                                                        
  Property, Plant and                                                          
     equipment..................  $    --     $ 1,376     $    --     $    --  
  All other.....................      594         253          --          --  
                                  -------     -------     -------     -------  
                                  $   594     $ 1,629     $    --     $    --  
                                  =======     =======     =======     =======  

Realization of the net deferred tax assets is dependent on generating 
sufficient taxable income prior to their expiration. Although realization is not
assured, management believes it is more likely than not that the net deferred   
tax assets will be realized. The amount of net deferred tax assets considered   
realizable, however, could be reduced in the near term if estimates of future   
taxable income during the carryforward periods are reduced.                     

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

6.  INCOME TAXES: -- (CONTINUED)                                                

Below is a reconciliation of statutory federal income tax rates to the
effective tax rates for the twelve months ended December 31, 2000, December 31, 
1999 and December 31, 1998:                                                     

                                                                [Download Table]

                                             12 MONTHS   12 MONTHS   12 MONTHS
                                               ENDED       ENDED       ENDED  
                                             12/31/00    12/31/99    12/31/98 
                                             ---------   ---------   ---------
                                                                              
Statutory federal income tax rate..........     34.0%       35.0%      35.0%  
Foreign income tax rates in excess of U.S.                                    
  federal income tax rates.................     (0.7)%       0.9%       1.7%  
State and local income taxes, net of U.S.                                     
  federal income tax benefit...............      2.7%       (1.7)%      4.0%  
Non-deductible expenses....................     13.3%      (10.6)%      5.3%  
Tax benefits associated with the                                              
  conversion, net..........................       --          --       (9.7)% 
Non taxable income - Kar transaction.......    (34.1)%        --         --   
                                               -----       -----       ----   
Effective income tax rate..................     15.2%      (46.4)%     36.3%  
                                               =====       =====       ====   

7.  EXTRAORDINARY LOSSES:                                                       

   In 1999, in connection with the early extinguishment of debt, the Company
expensed capitalized financing costs of $361 and recorded an extraordinary loss 
of $235 (net of deferred tax benefits of $126). (See Note 10.)                  

8.  PROPERTY AND EQUIPMENT:                                                     

  Property and equipment consist of the following at December 31, 2000 and
1999:                                                                           

                                                                [Download Table]

                                                 ESTIMATED      DECEMBER 31,   
                                                USEFUL LIFE   -----------------
                                                  (YEARS)      2000      1999  
                                                -----------   -------   -------
                                                                               
Land..........................................       N/A      $    --   $   853
Buildings and leasehold improvements..........     10-30(1)     6,394     7,406
Machinery and equipment.......................      3-10       65,368    21,784
Furniture and fixtures........................       3-5        8,731     9,955
                                                              -------   -------
                                                               80,493    39,998
Less accumulated depreciation.................                 22,179    22,799
                                                              -------   -------
                                                              $58,314   $17,199
                                                              =======   =======

---------------                                                                 
(1) Buildings owned in 1999 were sold in 2000.                                  

9.  NOTES PAYABLE:                                                              

     Notes payable consisted of casualty insurance financing of $624 at December
31, 2000 and $376 at December 31, 1999. The interest rate on the outstanding    
notes payable borrowings at December 31, 2000 and 1999 was 7.47% and 6.18%,     
respectively.                                                                   

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

9.  NOTES PAYABLE: -- (CONTINUED)                                               

     On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued a $12,000 unsecured subordinated note. In connection with the sale of    
Harding on April 13, 2000, the Company repaid $9,600 of this unsecured          
subordinated note leaving a balance of $2,400. The note is payable on April 7,  
2001. Interest on the unsecured subordinated note is payable upon maturity at   
15% and compounds quarterly. As of December 31, 2000, the Company's consolidated
balance sheet included $2,677 in the current portion of unsecured subordinated  
notes related to the Axxess acquisition of which $277 represents accrued        
interest.                                                                       

10.  REVOLVING CREDIT LINE:                                                     

   On December 15, 1999, the Company refinanced its $60,000 senior notes and
$90,000 bank revolving credit with $155,000 in senior secured credit facilities 
(the "Refinancing") consisting of $130,000 in revolving bank credit (the        
"Revolver") and a $25,000 term loan (the "Term Loan", see Note 11). The new     
credit agreement has a five-year term (the "Credit Agreement") whose Revolver   
availability is based on the Company's receivables and inventory balances (the  
"Borrowing Base") evaluated on a monthly basis. The Company and its domestic and
foreign corporate subsidiaries are borrowers and guarantors ("Credit Parties")  
under the Credit Agreement. Each credit party assigned, pledged and granted a   
security interest in and to all its assets as collateral. The Credit Agreement  
provided borrowings at interest rates based on the London Interbank Offered     
Rates ("LIBOR") plus a margin of between 2.50% and 3.00% (the "LIBOR Margin") in
accordance with debt covenants as stated in the Credit Agreement, or prime.     
Letters of Credit commitment fees are based on the average daily face amount of 
each outstanding Letter of Credit multiplied by one and one half percent (1.50%)
per annum. On April 7, 2000, the Company amended the Credit Agreement to reduce 
the Revolver to $115,000. On December 28, 2000, the Company further amended the 
Credit Agreement in connection with the Subordinated Debt Issuance (see Note 11)
and as a result the LIBOR Margin on the Revolver was amended to between 2.25%   
and 3.25% in accordance with the Company's fixed charge coverage ratio.         

As of December 31, 2000, the Company's Borrowing Base was $80,451     
consisting of receivables and inventory balances totaling $87,301 less letter of
credit commitments outstanding of $6,850. The Revolver balance was $55,111 as   
reflected on the Company's consolidated balance sheet at December 31, 2000. As  
of December 31, 2000, the Company had $26,344 available under the revolver.     
Amounts outstanding under the Credit Agreement are due upon its termination on  
December 14, 2004.                                                              

    The Credit Agreement, among other provisions, contains financial covenants
requiring the maintenance of specific coverage ratios, levels of undrawn        
availability and restricts the incurrence of additional debt, the sale of assets
and dividends on the Company's common stock. If the Company sells any assets    
other than inventory, it must repay the advances under the Credit Agreement in  
an amount equal to the net proceeds of such sale. Such repayments shall be      
applied first to the outstanding                                                

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

10.  REVOLVING CREDIT LINE: -- (CONTINUED)                                      

principal installments of the Term Loan (see Note 11) and second, to the        
remaining advances in such order as the lenders may determine.                  

 As of December 31, 2000, the LIBOR rate was 6.57%, the LIBOR Margin was
2.75% and the prime rate was 9.50%. The Company's weighted-average interest rate
for borrowings under its revolving credit facilities was 9.23%, 7.11%, and 7.05%
for the years ended December 31, 2000, 1999, and 1998, respectively.            

11.  LONG-TERM DEBT:                                                            

   On December 15, 1999, the Company as part of the Credit Agreement entered
into a five-year $25,000 Term Loan. Upon closing of the Credit Agreement, the   
Company made a principal payment of $3,500 on the Term Loan. The Term Loan is   
collateralized in accordance with the provisions of the Credit Agreement (See   
Note 10). The Term Loan provides borrowings at interest rates based on LIBOR    
plus the LIBOR Margin in accordance with certain leverage ratios as stated in   
the Credit Agreement, or prime. During 2000, the Company repaid $19,000 of the  
Term Loan, reducing the balance to $2,500 of which $375 is reflected in the     
current portion of long-term senior bank debt and $2,125 is reflected in        
long-term senior bank debt on the Company's consolidated balance sheet at       
December 31, 2000.                                                              

     On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued an $11,000 unsecured subordinated note. The note is payable in seven     
equal quarterly installments commencing the earlier of i) the first calendar    
quarter after payment in full of the Term Loan or ii) March 31, 2004. Interest  
on the subordinated note ranges from prime plus 1% to prime plus 5% with a      
maximum rate at any time of 15%. Interest is payable upon maturity and compounds
annually. The Company can repay interest and principal on this note at any time.
As of December 31, 2000, the Company's consolidated balance sheet included      
$11,857 in long term unsecured subordinated notes related to the Axxess         
acquisition of which $857 represents accrued interest.                          

    On December 28, 2000, the Company issued $30,000 of unsecured subordinated
notes (the "Subordinated Debt Issuance") which matures December 28, 2006.       
Interest on the Subordinated Debt Issuance is 12.5%, and interest payments are  
required quarterly commencing January 1, 2001. The Company issued the holder of 
the subordinated notes the right to purchase 285,000 shares of the Company's    
common stock at a nominal value. In accordance with APB 14 - Accounting for     
Convertible Debt and Debt Issued with Stock Purchased Warrants, the Company     
recorded the Subordinated Debt Issuance and stock purchase rights issued to the 
holders at a fair market value of $29,103 which is included in long term        
unsecured subordinated notes as of December 31, 2000. The fair market value of  
the Subordinated Debt Issuance reflects a discount of $897 from its face value  
which will be amortized over the six-year life of the issuance.                 

   As of December 31, 2000, the Company's weighted-average interest rate for
the Term Loan was 9.50%. Interest is required to be paid monthly on the daily   
outstanding principal of the Term Loan. Principal payments of $125 are required 
to                                                                              
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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

11.  LONG-TERM DEBT: -- (CONTINUED)                                             

be paid quarterly commencing on April 1, 2001, and on the first day of each     
July, October, January and April thereafter until December 14, 2004 when the    
entire unpaid principal balance of the Term Loan shall be due and payable.      

 As of December 31, 2000, the estimated fair value of the Company's Term
Loan is approximately $2,179 as determined in accordance with SFAS 107. The     
Company discounted the future cash flows of its Term Loan 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.                                                                   

12.  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, 
2000:                                                                           

                                                                [Download Table]

                                                          CAPITAL   OPERATING
                                                          LEASES     LEASES  
                                                          -------   ---------
                                                                             
2001....................................................  $1,043     $ 8,363 
2002....................................................     448       6,744 
2003....................................................     197       5,320 
2004....................................................      50       4,624 
2005....................................................      16       4,369 
Later years.............................................      --       9,919 
                                                          ------     ------- 
     Total minimum lease payments.......................  $1,754     $39,339 
                                                                     ======= 
  Less amounts representing interest....................    (212)            
                                                          ------             
     Present value of Net Minimum Lease payments                             
       (including $923 currently payable)...............  $1,542             
                                                          ======             

  Total rental expense for all operating leases from continuing operations
amounted to $11,407 in 2000, $12,562 in 1999, and $11,035 in 1998. Certain      
leases are subject to terms of renewal, and escalation clauses.                 

13.  DEFERRED COMPENSATION PLANS:                                               

 SunSource maintains a deferred compensation plan for key employees (the
"Nonqualified Deferred Compensation Plan") which allows for deferral of cash    
compensation from salary and annual bonuses. The Nonqualified Deferred          
Compensation Plan also includes awards that were made under previous long-term  
incentive plans of the Company. Executive deferrals can grow at mutual fund     
investment rates.                                                               

  The Company had established a Rabbi Trust (the "Rabbi Trust") which held
insurance policies to assist in funding the liabilities of the deferred         
compensation plan. On December 29, 2000, the Company surrendered the insurance  
policies and switched all investments to mutual fund investment accounts. Upon  
termination of                                                                  

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

13.  DEFERRED COMPENSATION PLANS: -- (CONTINUED)                                

the insurance policies, the Company incurred a cash surrender charge of $506 in 
December 2000. The insurance policies had a net cash surrender value which      
aggregated $11,530 at December 29, 2000. As of December 31, 2000, the Company's 
consolidated balance sheet included $10,955 of the cash surrender value of the  
insurance policies in restricted cash and $575 in other current assets.         

    Except for the cash surrender charge in December 2000, there were no other
amounts charged to income under the Company's deferred compensation plans in    
2000, 1999 and 1998. During the three years ended December 31, 2000,            
distributions from the deferred compensation plans aggregated $2,714 in 2000,   
$252 in 1999, and $26 in 1998. The Company's deferred compensation liabilities  
amounted to $12,411 as of December 31, 2000 and $14,728 as of December 31, 1999.
The current portion of these deferred compensation liabilities were $4,543 and  
$555 as of December 31, 2000 and 1999, respectively, and were included in other 
accrued expenses on the consolidated balance sheets.                            

14.  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.                               

   The Trust Preferred Securities have equity characteristics but creditor's
rights and are therefore classified between liabilities and stockholders' equity
(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                                               
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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

14.  GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR          
SUBORDINATED DEBENTURES: -- (CONTINUED)                                         

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, 2000 was $62,739, based on the closing price on the New York Stock 
Exchange of $14.875 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.                                                               

15.  STOCKHOLDERS' EQUITY (DEFICIT):                                            

TREASURY STOCK:                                                                 

    On August 6, 1998, the Company's Board of Directors authorized $15,000 for
management to repurchase up to 10% of the Company's outstanding common shares   
through open market transactions and private block trades dependent upon market 
conditions. The Company subsequently suspended the repurchase program on March  
16, 1999. The Company has acquired and placed into treasury 479,100 common      
shares through December 31, 2000, at an average cost of $18.17 per common share.

COMMON SHARES ISSUED TO CERTAIN NON-EMPLOYEE DIRECTORS:                         

 Under the Company's Stock Compensation Plan for Non-Employee Directors,
certain non-employee directors were issued 23,581 and 11,293 Common Shares for  
the years ended December 31, 2000 and 1999, respectively. Under the terms of the
plan, non-employee directors are issued Common Shares on a quarterly basis to   
cover at least 50% and up to 100% of their annual retainer fee. The number of   
shares to be issued is dependent upon the market price of the Common Shares, the
number of directors receiving shares, and the percentage of their annual        
retainer that each director elects to receive in Common Shares. The Company     
recognized an expense of $105 and $119 with respect to the issuance of Common   
Shares to non-employee directors in 2000 and 1999, respectively.                

STOCK OPTIONS:                                                                  

  On April 28, 1998, the Company adopted the Equity Compensation Plan (the
"Plan"), after approval by stockholders at the 1998 Annual Meeting. Grants under
the Plan may consist of options intended to qualify as incentive stock options  
("ISO"), or non-qualified stock options that are not intended to so qualify     
("NQSO"). In addition, grants may also consist of grants of restricted stock,   
stock appreciation rights (SAR's), or performance units. The option price of any
ISO will not be less than the fair market value on the date the option is       
granted (110% of fair                                                           

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

15.  STOCKHOLDERS' EQUITY (DEFICIT): -- (CONTINUED)                             

STOCK OPTIONS: -- (CONTINUED)                                                   

value in certain instances). The option price of a NQSO may be greater than,    
equal to, or less than the fair market value on the date the option is granted  
(but not less than 85% of the fair market value). The number of options         
available for the Plan (the "Applicable Percentage") is calculated annually and 
cumulatively at the rate of 5% of shares outstanding per year. Prior to April   
27, 1999, the maximum number of shares available under the Plan was 25% of the  
total outstanding shares or 2,000,000 Common Shares. On April 27, 1999, the     
stockholders of the Company approved a proposal to amend the 1998 Equity        
Compensation Plan to increase the aggregate number of shares that may be issued 
or transferred under the Plan to 2,150,000 shares. However, no more than the    
Applicable Percentage of the number of shares issued and outstanding on the     
effective date of the Plan and at any time thereafter may be issued or          
transferred under the Plan; provided, however, that up to 150,000 shares were   
issued under the Plan without reference to the Applicable Percentage in         
connection with the hiring of a new chief executive officer of the Company.     

The Plan is administered by a committee of the Board of Directors. The
Committee determines the term of each option, provided, however, that the       
exercise period may not exceed ten years from the date of grant, and for ISO's, 
in certain instances, may not exceed five years. The options granted under the  
Plan vest based on the results of financial performance. If threshold financial 
performance targets are not met, 100% of the options vest on the ninth          
anniversary of the grant. If threshold performance targets are met, stock       
options become fully vested within 3 to 5 years from the date of grant,         
depending on performance.                                                       

  A summary of the Company's stock option plan for the twelve months ended
December 31, 2000 is presented below:                                           

                                                        [Enlarge/Download Table]

                                                    WEIGHTED-               WEIGHTED-
                                                     AVERAGE                 AVERAGE 
                                           NUMBER   EXERCISE     NUMBER     EXERCISE 
                                             OF       PRICE     OF SHARES     PRICE  
                                           OPTIONS  PER SHARE  EXERCISABLE  PER SHARE
                                           -------  ---------  -----------  ---------
                                                                                     
Outstanding at January 1, 1998............      --       --           --         --  
Granted................................... 211,495   $17.62           --     $17.62  
Exercised.................................      --       --           --         --  
Expired/Canceled..........................      --       --           --         --  
                                           -------               -------             
Outstanding at December 31, 1998.......... 211,495   $17.62           --     $17.62  
Granted................................... 562,000   $15.49      204,399     $16.20  
Exercised.................................      --       --           --         --  
Expired/Canceled..........................   4,000   $17.86           --         --  
                                           -------               -------             
Outstanding at December 31, 1999.......... 769,495   $16.06      204,399     $16.20  
Granted................................... 356,000   $ 4.29      161,567     $12.58  
Exercised.................................      --       --           --         --  
Expired/Canceled.......................... 198,995   $15.77           --         --  
                                           -------               -------             
Outstanding at December 31, 2000.......... 926,500   $11.60      161,567     $12.58  
                                           =======               =======             

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

15.  STOCKHOLDERS' EQUITY (DEFICIT): -- (CONTINUED)                             

STOCK OPTIONS: -- (CONTINUED)                                                   

 As of December 31, 2000, the 926,500 options outstanding under the Plan
have exercise prices between $3.00 and $18.88 and a weighted-average remaining  
contractual life of 8.56 years.                                                 

     During 2000, 1999 and 1998, the Company issued certain options at and below
the fair market price of the common stock on the grant date. For those options  
issued with an exercise price equal to the fair market value, the               
weighted-average exercise price was $4.50, $15.79 and $18.82 and the average    
fair market value was $4.50, $16.00 and $18.84 in 2000, 1999 and 1998,          
respectively. For options issued with an exercise price below fair market value 
for the stock on their grant date, the weighted average exercise price was      
$3.83, $12.75 and $15.99 and the average fair market value was $4.50, $15.00 and
$18.81 in 2000, 1999 and 1998, respectively.                                    

     Compensation expense of approximately $393 is being recognized over vesting
periods for certain options which were granted at below fair market value in    
2000, 1999 and 1998 of which $79 was recognized in 2000, $70 was recognized in  
1999 and $25 was recognized in 1998. If compensation cost had been based on the 
fair value of the options at the grant dates, consistent with the method        
required under SFAS 123, "Accounting for Stock-Based Compensation", the         
Company's net income and net income per Common Share would have been:           

                                                                [Download Table]

                                                   2000      1999     1998  
                                                  -------  --------  -------
                                                                            
Net Income (Loss)                    As reported  $24,680  $(37,371) $13,817
                                     Pro forma    $24,265  $(38,013) $13,769
BASIC NET INCOME PER COMMON SHARE    As reported  $3.60    $(5.54)   $2.00  
                                     Pro forma    $3.54    $(5.63)   $1.99  
DILUTED NET INCOME PER COMMON SHARE  As reported  $3.59    $(5.54)   $2.00  
                                     Pro forma    $3.53    $(5.63)   $1.99  

     Such pro forma disclosures may not be representative of future compensation
expense because options vest over several years and additional grants are made  
each year.                                                                      

     The estimated weighted-average grant-date fair value of the options granted
during the year ended December 31, 2000 was $4.33 and the weighted-average      
remaining contractual life of options outstanding at December 31, 2000 was 8.56 
years.                                                                          

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average     
assumptions used for grants in 2000, 1999 and 1998: expected volatility of 22.0%
for 2000, 23.1% for 1999 and 28.7% for 1998; risk free interest rates of 5.1% to
6.5% and expected lives of 5 and 9.5 years, based on differing vesting          
schedules.                                                                      

    On April 27, 1999, a grant of 150,000 non-qualified stock options was made
to attract and retain a new Chief Executive Officer, (the "CEO Grant"). On      
January 26, 2000, the Compensation Committee of the Board of Directors amended  
the New CEO                                                                     

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

15.  STOCKHOLDERS' EQUITY (DEFICIT): -- (CONTINUED)                             

STOCK OPTIONS: -- (CONTINUED)                                                   

Grant by reducing the number of options from 150,000 to 50,000 and issued a     
grant of 100,000 shares of restricted stock. One-third of the restricted shares 
vested six months from the date of grant. Vesting of the remaining two-thirds of
the restricted shares will be based on achievement of certain performance goals.
In the event that all or some of the performance goals are not achieved within a
three-year period from the date of grant, the then remaining shares will vest on
the third anniversary from their date of grant. The Company incurred a          
compensation charge of $240 in 2000 in connection with the issuance of the      
restricted stock.                                                               

EARNINGS PER SHARE:                                                             

The Company computes earnings per share in accordance with SFAS 128,  
"Earnings per Share". SFAS 128 requires the presentation of basic and diluted   
earnings per share for companies with complex capital structures. As noted above
under "Stock Options", certain executives and key employees were granted a total
of 926,500 options through December 31, 2000 to purchase the Company's Common   
Shares having a potentially dilutive effect on earnings per share. Due to market
conditions, the shares granted under the Plan did not have a material dilutive  
effect on earnings per share for the twelve months ended December 31, 2000, 1999
and 1998.                                                                       

The number of outstanding Common Shares as of December 31, 2000 was   
6,873,037. The weighted-average number of Common Shares outstanding for the     
twelve months ended December 31, 2000 was 6,856,549 for purposes of computing   
basic net income (loss) per share and 6,880,613 for purposes of computing       
diluted net income (loss) per share, including shares issued to non-employee    
directors, net of the 479,100 shares repurchased and held in treasury.          

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

15.  STOCKHOLDERS' EQUITY (DEFICIT): -- (CONTINUED)                             

EARNINGS PER SHARE: -- (CONTINUED)                                              

 Following is a reconciliation of net income and weighted-average common
shares outstanding for purposes of calculating basic and diluted net income     
(loss) per share, in thousands (except share and per share amounts):            

                                                                [Download Table]

                                             2000         1999         1998   
                                          ----------   ----------   ----------
                                                                              
   BASIC NET INCOME (LOSS) PER SHARE                                          
Net income (loss) applicable to common                                        
  stockholders..........................  $   24,680   $  (37,371)  $   13,817
Weighted-average common shares                                                
  outstanding...........................   6,856,549    6,747,142    6,907,318
Basic net income (loss) per share.......  $     3.60   $    (5.54)  $     2.00
  DILUTIVE NET INCOME (LOSS) PER SHARE                                        
Income (loss) for purposes of computing                                       
  diluted net income (loss) per share...  $   24,680   $  (37,371)  $   13,817
Weighted-average common shares                                                
  outstanding...........................   6,856,549    6,747,142    6,907,318
Dilutive stock options and warrants.....      24,064           --           --
Weighted-average common shares                                                
  outstanding for purposes of computing                                       
  diluted net income per share..........   6,880,613    6,747,142    6,907,318
Diluted net income (loss) per share.....  $     3.59   $    (5.54)  $     2.00

  In 2000 and 1998, the Company applied the if-converted method to compute
dilutive stock options, warrants and convertible debentures. The stock options, 
warrants and convertible debentures were assumed to have been converted at the  
beginning of the period, and the resulting common shares were included in the   
calculation, as long as the effects were not anti-dilutive. The weighted-average
diluted common shares outstanding for 2000 and 1998 excludes the dilutive effect
of approximately 904,833 and 211,495 options, respectively, since such options  
have an exercise price in excess of the average market value of the Company's   
common stock during the year.                                                   

COMMON STOCK DIVIDEND:                                                          

On June 30, 1999, the Board of Directors of the Company suspended     
indefinitely the quarterly cash dividend of $0.10 per Common Share.             

16.  RETIREMENT BENEFITS:                                                       

    Certain employees of STS and the Company's divested operations are covered
by defined benefit pension plans and post-retirement benefit plans. In December 
1999, the Board of Directors of the Company approved a proposal to freeze the   
benefit accruals under the Technology Services defined benefit retirement plan  
(the "STS Plan"). As a result, the Company recorded a curtailment gain of $5,608
in accordance with Statement of Financial Accounting Standards No. 88,          
Employers'                                                                      

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

16.  RETIREMENT BENEFITS: -- (CONTINUED)                                        

Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits.                                                       

   In December 2000, the Board of Directors approved a proposal to merge the
STS Plan with another Company owned plan which was held for certain divested    
operations, and terminate the merged plans as of December 31, 2000. As a result,
the Company recorded a pre-tax loss on termination of the merged pension plans  
of $4,279 in December 2000.                                                     

The $4,279 loss on termination of the defined benefit pension plans   
represents an estimated surplus upon termination of the defined benefit pension 
plans of $3,700, less a write-off of a prepaid pension asset of $7,424, and a   
charge for estimated excise taxes of $555. The approved proposal also provides  
for a contribution of 25% or $925 of the $3,700 estimated surplus upon          
termination to the STS deferred contribution plan. During 2000, the Company     
recorded a net periodic benefit of $1,500 related to expected investment returns
on the surplus assets of the STS Plan. As of December 31, 2000, the Company's   
consolidated balance sheet included a prepaid pension asset of $3,700 of which  
$2,775 was included in other current assets and $925 was in other assets. The   
Company expects the termination process to be completed during the second half  
of 2001.                                                                        

The following provides a reconciliation of benefit obligations, plan  
assets, and funded status of the Company's post-retirement benefit plan in the  
STS division:                                                                   

                                                                [Download Table]

                                                             POST-RETIREMENT
                                                                BENEFITS    
                                                             ---------------
                                                              2000     1999 
                                                             ------   ------
                                                                            
BENEFIT OBLIGATION:                                                         
Benefit obligation -- beginning of year....................  $ 879    $ 951 
Service cost...............................................     --       -- 
Interest cost..............................................     69       65 
Plan participant contributions.............................     --       -- 
Amendments.................................................     --       -- 
Curtailment Gain...........................................     --       -- 
Actuarial (gain) loss......................................     20      (46)
Benefits paid..............................................    (84)     (90)
                                                             -----    ----- 
Benefit obligation -- end of year..........................  $ 884    $ 880 
                                                             =====    ===== 
FAIR VALUE OF PLAN ASSETS:                                                  
Fair value of plan assets -- beginning of year.............  $  --    $  -- 
Actual return on plan assets...............................     --       -- 
Expenses...................................................     --       -- 
Employer contributions.....................................     84       90 
Plan participant contributions.............................     --       -- 
Benefits paid..............................................    (84)     (90)
                                                             -----    ----- 
Fair value of plan assets -- end of year...................  $  --    $  -- 
                                                             =====    ===== 

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

16.  RETIREMENT BENEFITS: -- (CONTINUED)                                        

                                                                [Download Table]

                                                             POST-RETIREMENT
                                                                BENEFITS    
                                                             ---------------
                                                              2000     1999 
                                                             ------   ------
                                                                            
FUNDED STATUS OF PLANS:                                                     
Funded status of the plans.................................  $(884)   $(880)
Unrecognized actuarial (gain) loss.........................     (7)     (27)
Unrecognized prior service cost............................    324      357 
Unrecognized net transition asset..........................    419      454 
                                                             -----    ----- 
Accrued benefit cost recognized in the balance sheet.......  $(148)   $ (96)
                                                             =====    ===== 

Net post-retirement costs include the following components:           

                                                                [Download Table]

                                                      2000    1999    1998 
                                                      -----   -----   -----
                                                                           
NET PERIODIC POST-RETIREMENT COST:                                         
Service cost........................................  $  --   $  --   $  --
Interest Cost.......................................     69      65      66
Amortization of Transition obligation...............     35      35      35
Amortization of prior service cost..................     32      32      32
                                                      -----   -----   -----
Net post-retirement cost............................  $ 136   $ 132   $ 133
                                                      =====   =====   =====

                                                                [Download Table]

                                                      2000    1999    1998 
                                                      -----   -----   -----
                                                                           
ASSUMPTIONS:                                                               
Discount rate.......................................  8.00%   8.00%   7.00%
Rates of increase in compensation levels............  6.50%   6.50%   6.50%
Health care cost trend rate on covered charges......  8.50%   8.50%   9.50%

The health care cost trend rate, or the expected rate of increase in  
health-care costs, is assumed to gradually decrease to 4.5% by 2010.            

The impact of a 1% change in health care inflation on post-retirement 
benefits is as follows:                                                         

                                                                [Download Table]

                                                       TREND +1%   TREND -1%
                                                       ---------   ---------
                                                                            
December 31, 2000 projected benefit obligation.......  $     72    $    (65)
2000 service and interest cost.......................  $      5    $     (5)

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

                                                                [Download Table]

                                                    2000     1999      1998  
                                                   ------   -------   ------ 
                                                                             
Defined contribution plans.......................  $1,787   $ 2,154   $3,052 
Defined benefit plans............................   2,293    (6,818)    (181)
                                                   ------   -------   ------ 
          Total..................................  $4,080   $(4,664)  $2,871 
                                                   ======   =======   ====== 

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

17.  COMMITMENTS AND CONTINGENCIES:                                             

   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, 2000, the      
Company had outstanding letters of credit in the aggregate amount of $3,800     
related to these activities.                                                    

  As of December 31, 1999, the Company has guaranteed lease obligations of
approximately $520, 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, 2000, the Company has provided        
insurers letters of credit aggregating $3,050 related to certain insurance      
programs.                                                                       

 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, upon which   
R&B allegedly based its offer to purchase the assets of the Dorman Products     
division of the Company.                                                        

Certain other legal proceedings are pending which are either in the   
ordinary course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered 
by insurance or other indemnity. In the opinion of management, the ultimate     
resolution of the pending litigation matters will not have a material effect on 
the consolidated financial position, operations or cash flows of the Company.   

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

18.  STATEMENTS OF CASH FLOWS:                                                  

Supplemental disclosures of cash flow information are presented below:

                                                        [Enlarge/Download Table]

                                                          2000       1999      1998  
                                                        --------   --------  --------
                                                                                     
Cash paid (refunded)during the period for:                                           
  Interest............................................. $  9,186    $9,694   $ 7,695 
                                                        ========    ======   ======= 
  Income taxes......................................... $ (4,174)   $1,687   $ 8,266 
                                                        ========    ======   ======= 
Non-cash operating activities:                                                       
  Issuance of shares of common stock to certain non-                                 
     employee directors................................ $    105    $  119   $    39 
                                                        --------    ------   ------- 
Non-cash investing activities:                                                       
  Acquisitions (see Note 4):                                                         
     Fair value of assets acquired, including                                        
       goodwill........................................ $125,461    $   --   $11,971 
     Less unsecured subordinated notes issued..........   23,000        --        -- 
     Less liabilities assumed..........................   15,461        --     1,132 
                                                        --------    ------   ------- 
          Cash paid for acquired businesses............ $ 87,000    $   --   $10,839 
                                                        ========    ======   ======= 
Non-cash financing activities:                                                       
  Accrued and unpaid distributions on trust preferred                                
     securities and common shares...................... $  1,019    $1,019   $   676 
                                                        --------    ------   ------- 

19.  QUARTERLY DATA (UNAUDITED):                                                

                                                        [Enlarge/Download Table]

                   2000                      FOURTH     THIRD      SECOND     FIRST  
                   ----                     --------   --------   --------   --------
                                                                                     
Net sales (1).............................  $102,043   $115,524   $123,857   $118,402
Gross profit (1)..........................    40,348     48,189     49,773     48,834
Income (loss) from continuing operations                                             
  (1).....................................   (12,948)      (470)      (909)    41,617
Income (loss) from discontinued operations                                           
  (1).....................................    (4,962)      (478)       (77)     2,907
Net income (loss).........................   (17,910)      (948)      (986)    44,524
Basic income (loss) per common share:                                                
  Income (loss) from continuing                                                      
     operations...........................  $  (1.88)  $  (0.07)  $  (0.13)  $   6.09
  Income(loss) from dis-continued                                                    
     operations...........................  $  (0.72)  $  (0.07)  $  (0.01)  $   0.43
  Net income (loss).......................  $  (2.60)  $  (0.14)  $  (0.14)  $   6.52
Diluted income (loss) per common share:                                              
  Income (loss) from continuing                                                      
     operations...........................  $  (1.87)  $  (0.07)  $  (0.13)  $   6.09
  Income(loss) from dis-continued                                                    
     operations...........................  $  (0.71)  $  (0.07)  $  (0.01)  $   0.43
  Net income (loss).......................  $  (2.58)  $  (0.14)  $  (0.14)  $   6.52

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

19.  QUARTERLY DATA (UNAUDITED): -- (CONTINUED)                                 

                                                        [Enlarge/Download Table]

                   1999                      FOURTH     THIRD      SECOND     FIRST   
                   ----                     --------   --------   --------   -------- 
                                                                                      
Net sales (1).............................  $119,579   $134,452   $145,142   $142,077 
Gross profit (1)..........................    48,770     58,373     57,610     61,401 
Income (loss) from continuing operations                                              
  (1).....................................    (2,496)       (25)    (9,937)     1,137 
Income (loss) from discontinued operations                                            
  (1).....................................   (25,916)       101        232       (232)
Extraordinary loss........................      (235)        --         --         -- 
Net income (loss).........................   (28,647)        76     (9,705)       905 
Basic and diluted income (loss) per common                                            
  share:                                                                              
  Income (loss) from continuing                                                       
     operations...........................  $  (0.37)  $   0.00   $  (1.47)  $   0.17 
  Income(loss) from dis-continued                                                     
     operations...........................  $  (3.84)  $   0.01   $   0.03   $  (0.04)
  Extraordinary loss......................  $  (0.03)  $     --   $     --   $     -- 
  Net income (loss).......................  $  (4.24)  $   0.01   $  (1.44)  $   0.13 

---------------                                                                 
(1) Differences from amounts reported in Quarterly Reports on Form 10-Q filed in
2000 and the Annual Report on Form 10-K filed in 1999 are primarily the 
result of accounting for the results of the Mexican segment as a        
  discontinued operation. Also includes certain amounts reclassified in 1999
to conform to current accounting.                                       

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.                                                                     

   Concentration of credit risk with respect to purchases and trade payables
are limited due to the large number of vendors comprising the Company's vendor  
base, with dispersion across many different industries and geographic areas. One
vendor accounted for 16% of the Company's total purchases and 9% of the         
Company's total trade payables on December 31, 2000. No other vendors accounted 
for more than 10% of the Company's total purchases in 2000.                     

21.  SEGMENT INFORMATION:                                                       

     The Company has two 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                                                              

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

21.  SEGMENT INFORMATION: -- (CONTINUED)                                        

each segment's Earnings Before Interest, Taxes, Depreciation and Amortization   
("EBITDA") which is defined as income from operations before depreciation and   
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:                                                      

                                                                [Download Table]

                                                        YEAR ENDED DECEMBER 31,    
                                                     ------------------------------
                                                       2000       1999       1998  
                                                     --------   --------   --------
                                                                                   
NET SALES                                                                          
Technology Services (STS)........................... $224,538   $248,367   $324,075
Hillman Group.......................................  212,118    151,884    125,830
                                                     --------   --------   --------
  Segment net sales................................. $436,656   $400,251   $449,905
                                                     ========   ========   ========
GROSS PROFIT                                                                       
Technology Services (STS)........................... $ 52,313   $ 56,421   $ 89,336
Hillman Group.......................................  119,779     81,045     66,485
                                                     --------   --------   --------
  Segment gross profit.............................. $172,092   $137,466   $155,821
                                                     ========   ========   ========
EBITDA                                                                             
Technology Services (STS)........................... $ (5,620)  $(11,800)  $ 15,538
Hillman Group.......................................   34,053     15,816     13,477
                                                     --------   --------   --------
  Segment EBITDA.................................... $ 28,433   $  4,016   $ 29,015
                                                     ========   ========   ========
TANGIBLE ASSETS                                                                    
Technology Services (STS)........................... $ 62,132   $ 81,812   $ 85,731
Hillman Group.......................................  128,198     56,963     59,487
                                                     --------   --------   --------
  Segment tangible assets........................... $190,330   $138,775   $145,218
                                                     ========   ========   ========
CAPITAL EXPENDITURES                                                               
Technology Services (STS)........................... $    937   $  1,097   $  2,067
Hillman Group.......................................    7,476      2,271      2,072
                                                     --------   --------   --------
  Segment capital expenditures...................... $  8,413   $  3,368   $  4,139
                                                     ========   ========   ========
DEPRECIATION                                                                       
Technology Services (STS)........................... $  2,070   $  1,607   $  1,603
Hillman Group.......................................    7,161      1,408      1,347
                                                     --------   --------   --------
  Segment depreciation.............................. $  9,231   $  3,015   $  2,950
                                                     ========   ========   ========
GEOGRAPHIC SEGMENT DATA:                                                           
Net Sales                                                                          
United States....................................... $441,024   $508,835   $567,325
Canada..............................................   18,802     32,415     32,968
                                                     --------   --------   --------
     Consolidated net sales......................... $459,826   $541,250   $600,293
                                                     ========   ========   ========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

21.  SEGMENT INFORMATION: -- (CONTINUED)                                        

                                                        [Enlarge/Download Table]

                                                         YEAR ENDED DECEMBER 31,     
                                                      ------------------------------ 
                                                        2000       1999       1998   
                                                      --------   --------   -------- 
                                                                                     
RECONCILIATION OF SEGMENT NET SALES TO TOTAL NET                                     
  SALES:                                                                             
Segment net sales...................................  $436,656   $400,251   $449,905 
Net sales from contributed subsidiaries, sold                                        
  businesses and terminated contracts...............    23,170    140,999    150,388 
                                                      --------   --------   -------- 
  Total net sales...................................  $459,826   $541,250   $600,293 
                                                      ========   ========   ======== 
RECONCILIATION OF SEGMENT GROSS PROFIT TO TOTAL                                      
  GROSS PROFIT:                                                                      
Segment gross profit................................  $172,092   $137,466   $155,821 
Gross profit from contributed subsidiaries, sold                                     
  businesses and terminated contracts...............    15,052     88,688     96,347 
                                                      --------   --------   -------- 
  Total gross profit................................  $187,144   $226,154   $252,168 
                                                      ========   ========   ======== 
RECONCILIATION OF SEGMENT PROFIT TO INCOME (LOSS)                                    
  FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND                                 
  EXTRAORDINARY LOSS:                                                                
Segment profit -- EBITDA............................  $ 28,433   $  4,016   $ 29,015 
EBITDA from contributed subsidiaries, sold                                           
  businesses and terminated contracts...............     2,823     16,840     22,470 
Depreciation........................................    (9,455)    (4,244)    (4,169)
Amortization........................................    (3,369)    (1,840)    (1,669)
Corporate expenses..................................    (8,151)    (9,161)    (6,740)
                                                      --------   --------   -------- 
Income before non-recurring charges.................    10,281      5,611     38,907 
Non-recurring charges:                                                               
Gain on curtailment/termination of pension plan.....    (4,279)     5,608         -- 
Severance and other termination costs...............    (1,837)        --         -- 
Restructuring charges and asset write-off...........        --    (10,248)        -- 
Provision for litigation matters -- divested                                         
  operations........................................        --         --     (1,600)
                                                      --------   --------   -------- 
Income from operations..............................     4,165        971     37,307 
Equity in earnings of affiliate.....................     2,438         --         -- 
Interest expense, net...............................   (11,286)    (9,875)    (6,981)
Distribution on guaranteed preferred beneficial                                      
  interests.........................................   (12,232)   (12,232)   (12,232)
Gain on contribution of subsidiaries................    49,115         --         -- 
                                                      --------   --------   -------- 
Income(loss)from continuing operations before income                                 
  taxes and extraordinary loss......................  $ 32,200   $(21,136)  $ 18,094 

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SUNSOURCE INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

21.  SEGMENT INFORMATION: -- (CONTINUED)                                        

                                                                [Download Table]

                                                        YEAR ENDED DECEMBER 31,    
                                                     ------------------------------
                                                       2000       1999       1998  
                                                     --------   --------   --------
                                                                                   
RECONCILIATION OF SEGMENT TANGIBLE ASSETS TO TOTAL                                 
  ASSETS:                                                                          
Segment tangible assets............................. $190,330   $138,775   $145,218
Tangible assets from contributed subsidiaries, sold                                
  businesses and terminated contracts...............       --     46,428     53,814
Goodwill............................................   63,914     51,392     54,997
Other intangible assets.............................   14,035        762        960
Deferred income taxes...............................   29,601     15,571     12,812
Cash value of life insurance........................       --     14,190     10,262
Assets held for sale................................    1,767     37,079     42,592
Other corporate assets..............................   22,494     17,429      6,868
                                                     --------   --------   --------
  Total assets...................................... $322,141   $321,626   $327,523
                                                     ========   ========   ========
RECONCILIATION OF SEGMENT CAPITAL EXPENDITURES TO                                  
  TOTAL CAPITAL EXPENDITURES:                                                      
Segment capital expenditures........................ $  8,413   $  3,368   $  4,139
Capital expenditures from contributed subsidiaries,                                
  sold businesses and terminated contracts..........       27      1,179      1,865
Corporate capital expenditures......................        5        183        196
                                                     --------   --------   --------
  Total capital expenditures........................ $  8,445   $  4,730   $  6,200
                                                     ========   ========   ========
RECONCILIATION OF SEGMENT DEPRECIATION TO TOTAL                                    
  DEPRECIATION:                                                                    
Segment depreciation................................ $  9,231   $  3,015   $  2,950
Depreciation from contributed subsidiaries, sold                                   
  businesses and terminated contracts...............      181      1,127      1,116
Corporate depreciation..............................       43        102        103
                                                     --------   --------   --------
  Total depreciation................................ $  9,455   $  4,244   $  4,169
                                                     ========   ========   ========

22.  SALE LEASEBACK TRANSACTION:                                                

  On September 30, 1999, the Company sold certain real property of its Kar
Products business for $5,025 which were leased back from the same purchaser     
under two separate lease agreements over periods of five and seven years,       
respectively. The related leases were being accounted for as operating leases,  
and the resulting gains aggregating $2,132 were being amortized over the        
respective lives of the leases. As of December 31, 1999, the Company had        
outstanding $2,027 of deferred gains relating to the sale leaseback transaction 
of which $372 was included in other accrued expenses and $1,655 was included in 
other liabilities. On March 2, 2000, the Company contributed the interests in   
its Kar Products business to a newly-formed partnership affiliated with Glencoe.
(See Footnote 4 -- Acquisitions and Divestitures).                              

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                                                                      APPENDIX A

AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 18, 2001 
BY AND AMONG
ALLIED CAPITAL CORPORATION, 
ALLIED CAPITAL LOCK ACQUISITION CORPORATION,
AND 
SUNSOURCE INC.

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TABLE OF CONTENTS 

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                                                                             PAGE
                                                                             ----
                                                                                 
ARTICLE I          THE MERGER; EFFECT OF MERGER.............................  A-1
     Section 1.1   The Merger...............................................  A-1
     Section 1.2   Closing..................................................  A-2
     Section 1.3   Effective Time of the Merger.............................  A-2
     Section 1.4   Effects of Merger........................................  A-2
ARTICLE II         THE SURVIVING CORPORATION................................  A-2
     Section 2.1   Certificate of Incorporation.............................  A-2
     Section 2.2   By-Laws..................................................  A-2
     Section 2.3   Officers and Directors...................................  A-2
ARTICLE IIIA       CONVERSION OF SHARES INTO PARENT COMMON STOCK............  A-2
     Section 3.1A  Conversion of Shares.....................................  A-2
     Section 3.2A  Surrender................................................  A-4
     Section 3.3A  Dividends; Transfer Taxes................................  A-5
     Section 3.4A  Fractional Securities....................................  A-5
     Section 3.5A  Closing of Company Transfer Books........................  A-6
     Section 3.6A  Stockholder Approval.....................................  A-6
     Section 3.7A  Tax Treatment, etc.......................................  A-6
     Section 3.8A  Rollover Options.........................................  A-6
ARTICLE IIIB       CONVERSION OF SHARES FOR CASH............................  A-6
     Section 3.1B  Conversion of Shares.....................................  A-6
     Section 3.2B  Payment for Shares in the Merger.........................  A-7
     Section 3.3B  Dissenting Shares........................................  A-8
     Section 3.4B  Closing of Company Transfer Books........................  A-8
     Section 3.5B  No Further Ownership Rights in Company Common Stock......  A-9
     Section 3.6B  Stockholder Approval.....................................  A-9
     Section 3.7B  Rollover Options.........................................  A-9
ARTICLE IV         REPRESENTATIONS AND WARRANTIES OF THE COMPANY............  A-9
     Section 4.1   Execution and Delivery...................................  A-9
     Section 4.2   Consents and Approvals................................... A-10
     Section 4.3   No Breach................................................ A-10
     Section 4.4   Organization, Standing and Authority..................... A-11
     Section 4.5   Capitalization of the Company............................ A-11
     Section 4.6   Options and Other Stock Rights........................... A-11
     Section 4.7   Subsidiaries............................................. A-12
     Section 4.8   Corporate Records........................................ A-12
     Section 4.9   Information in Disclosure Documents...................... A-13
     Section 4.10  SEC Documents; Financial Statements...................... A-13
     Section 4.11  Liabilities.............................................. A-14
     Section 4.12  No Company Material Adverse Effect....................... A-14
     Section 4.13  Compliance with Laws..................................... A-14
     Section 4.14  Permits.................................................. A-14
     Section 4.15  Actions and Proceedings.................................. A-15
     Section 4.16  Contracts and Other Agreements........................... A-15
     Section 4.17  Real Property............................................ A-17
     Section 4.18  Intellectual Property.................................... A-19
     Section 4.19  Receivables.............................................. A-21
     Section 4.20  Banking.................................................. A-21

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                                                                              PAGE
                                                                              ----
                                                                                  
     Section 4.21  Liens....................................................  A-21
     Section 4.22  Employee Benefit Plans...................................  A-21
     Section 4.23  Employee Relations.......................................  A-23
     Section 4.24  Insurance................................................  A-23
     Section 4.25  Officers, Directors, Employees, Consultants..............  A-23
     Section 4.26  Transactions with Directors, Officers and Affiliates.....  A-24
     Section 4.27  Operations of the Company................................  A-24
     Section 4.28  Brokerage................................................  A-26
     Section 4.29  Taxes....................................................  A-26
     Section 4.30  Environmental Laws.......................................  A-27
     Section 4.31  Company Action...........................................  A-29
     Section 4.32  Opinion of Financial Advisor.............................  A-29
     Section 4.33  Status of Certain Employment Agreements..................  A-29
     Section 4.34  Rights Agreement.........................................  A-29
     Section 4.35  Stockholders Agreement...................................  A-29
     Section 4.36  Customer Relationship....................................  A-30
     Section 4.37  Inventory................................................  A-30
ARTICLE V          REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.........  A-30
     Section 5.1   Execution and Delivery...................................  A-30
     Section 5.2   Consents and Approvals...................................  A-31
     Section 5.3   No Breach................................................  A-31
     Section 5.4   SEC Documents; Financial Statements......................  A-32
     Section 5.5   Shares of Parent Common Stock............................  A-32
     Section 5.6   Organization, Standing and Authority of Parent and Sub...  A-32
     Section 5.7   Capitalization...........................................  A-33
     Section 5.8   Brokerage................................................  A-33
     Section 5.9   Information in Disclosure Documents......................  A-33
     Section 5.10  No Material Adverse Change...............................  A-33
     Section 5.11  Sub Action...............................................  A-33
     Section 5.12  Options and Other Stock Rights...........................  A-33
     Section 5.13  Liabilities..............................................  A-34
     Section 5.14  Compliance with Laws.....................................  A-34
     Section 5.15  Permits..................................................  A-34
     Section 5.16  Actions and Proceedings..................................  A-34
     Section 5.17  No Prior Activities......................................  A-34
     Section 5.18  Taxes....................................................  A-35
ARTICLE VI         COVENANTS AND AGREEMENTS.................................  A-35
     Section 6.1   Conduct of Business......................................  A-35
     Section 6.2   Litigation Involving the Company.........................  A-36
     Section 6.3   Continued Effectiveness of Representations and Warranties      
                   of the Parties...........................................  A-36
     Section 6.4   Corporate Examinations and Investigations;                     
                   Confidentiality..........................................  A-37
     Section 6.5   Indemnification of Company Officers and Directors........  A-37
     Section 6.6   Registration Statement/Proxy Statement...................  A-38
     Section 6.7   Compliance with the Securities Act.......................  A-38
     Section 6.8   NYSE Listing.............................................  A-38
     Section 6.9   Acquisition Proposals....................................  A-39
     Section 6.10  Parent and Sub Approvals.................................  A-40
     Section 6.11  Company Approvals........................................  A-40
     Section 6.12  Expenses.................................................  A-41

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     Section 6.13  Further Assurances.......................................  A-41
     Section 6.14  Hart-Scott-Rodino........................................  A-41
     Section 6.15  Updating Schedules.......................................  A-41
     Section 6.16  Stock Options............................................  A-42
     Section 6.17  Voting Agreement.........................................  A-42
     Section 6.18  Company Recapitalization.................................  A-42
     Section 6.19  Subordinated Debt........................................  A-42
     Section 6.20  Warrant..................................................  A-42
     Section 6.21  Tax-Free Reorganization..................................  A-43
ARTICLE VII        CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATION TO EFFECT      
                   THE MERGER...............................................  A-43
     Section 7.1   Company Stockholder Approval.............................  A-43
     Section 7.2   Listing of Shares........................................  A-43
     Section 7.3   Hart-Scott-Rodino........................................  A-43
     Section 7.4   Effectiveness of Registration Statement..................  A-43
     Section 7.5   No Injunctions or Restraints, Illegality.................  A-43
ARTICLE VIII       CONDITIONS PRECEDENT TO THE OBLIGATION OF PARENT AND SUB       
                   TO EFFECT THE MERGER.....................................  A-44
     Section 8.1   Representations and Covenants............................  A-44
     Section 8.2   Absence of Material Adverse Change.......................  A-44
     Section 8.3   Effectiveness of Employment Agreements...................  A-44
     Section 8.4   Receipt of Certificates..................................  A-44
     Section 8.5   Company Recapitalization.................................  A-44
     Section 8.6   Section 1445 Certification...............................  A-44
     Section 8.7   Purchase of Warrant Shares...............................  A-45
     Section 8.8   Dissenters...............................................  A-45
ARTICLE IX         CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO       
                   EFFECT THE MERGER........................................  A-45
     Section 9.1   Representations and Covenants............................  A-45
     Section 9.2   Absence of Material Adverse Change.......................  A-45
     Section 9.3   Tax Opinion..............................................  A-45
ARTICLE X          CLOSING..................................................  A-46
ARTICLE XI         NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES COVENANTS AND      
                   AGREEMENTS...............................................  A-46
     Section 11.1  Non-Survival of Representations, Warranties, Covenants         
                   and Agreements...........................................  A-46
ARTICLE XII        TERMINATION OF AGREEMENT.................................  A-46
     Section 12.1  Termination..............................................  A-46
     Section 12.2  Effect of Termination....................................  A-47
ARTICLE XIII       DEFINITIONS..............................................  A-47
     Section 13.1  Definitions..............................................  A-47
ARTICLE XIV        MISCELLANEOUS............................................  A-54
     Section 14.1  Publicity................................................  A-54
     Section 14.2  Notices..................................................  A-54
     Section 14.3  Entire Agreement.........................................  A-55
     Section 14.4  Waivers and Amendments; Non Contractual Remedies;              
                   Preservation of Remedies; Liability......................  A-55
     Section 14.5  GOVERNING LAW............................................  A-55
     Section 14.6  Binding Effect; No Assignment............................  A-55
     Section 14.7  Third Party Beneficiaries................................  A-56
     Section 14.8  Counterparts.............................................  A-56

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Section 14.9   Exhibits and Schedules................................... A-56
Section 14.10  Headings................................................. A-56
Section 14.11  Submission to Jurisdiction; Venue........................ A-56
Section 14.12  Specific Performance..................................... A-56
Section 14.13  Severability............................................. A-57

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AGREEMENT AND PLAN OF MERGER

    THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of June 18,
2001, is made by and among Allied Capital Corporation, a Maryland corporation   
("Parent"), Allied Capital Lock Acquisition Corporation, a Delaware corporation 
and a wholly owned subsidiary of Parent ("Sub"), and SunSource Inc., a Delaware 
corporation (the "Company"). Certain terms used in this Agreement are defined in
Article XIII.                                                                   

WITNESSETH: 

WHEREAS, Parent, Sub and the Company desire to effect a business      
combination by means of the merger of Sub with and into the Company;            

  WHEREAS, the Board of Directors of Parent and Sub and the stockholder of
Sub and the Board of Directors of the Company have approved the merger of Sub   
with and into the Company (the "Merger"), upon the terms and subject to the     
conditions set forth herein;                                                    

  WHEREAS, simultaneously with the execution of this Agreement, certain of
the Named Persons, the current members of the Board of Directors of the Company 
and Parent are entering into a Voting Agreement in the form attached hereto as  
Exhibit A1 (the "Voting Agreement"), the current members of the Board of        
Directors of the Company, certain of the Named Persons and Parent are entering  
into Resale Agreements in the form attached hereto as Exhibit A2 (the "Resale   
Agreements"), and the Named Persons, Parent and the Company have agreed to enter
into a Stockholders Agreement at Closing in the form attached hereto as Exhibit 
A3 (the "Stockholders Agreement").                                              

   WHEREAS, for federal income tax purposes, it is intended that the Merger,
if it is effected for stock consideration pursuant to the provisions of Article 
IIIA hereof, qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code");                     

  WHEREAS, simultaneously with the execution of this Agreement, certain of
the individuals listed on Exhibit F and Parent are entering into an Escrow      
Agreement in the form attached hereto as Exhibit B (the "Escrow Agreement"), and
the individuals listed on Exhibit F and Parent are entering into Equity Purchase
Agreements in the form attached hereto as Exhibit C (collectively, the "Equity  
Purchase Agreements");                                                          

   NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained, the parties hereto agree 
as follows:                                                                     

ARTICLE I 
THE MERGER; EFFECT OF MERGER

  SECTION 1.1 THE MERGER.  Upon the terms and subject to the conditions of
this Agreement and in accordance with the applicable provisions of the Delaware 
General Corporation Law, as amended, and any rules and regulations thereunder   
(the "Delaware Corporation Law"), Sub shall be merged with and into the Company 
and the separate existence of Sub shall thereupon cease. The name of the        
Company, as the surviving corporation in the Merger (the "Surviving             
Corporation"), may by virtue of the Merger be changed to such name as Parent, in
its sole discretion, may choose.                                                

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SECTION 1.2 CLOSING.  Subject to the terms and conditions hereof, the 
closing of the Merger and the transaction contemplated by this Agreement (the   
"Closing") will take place on the second Business Day after the satisfaction or 
waiver (subject to applicable law) of the conditions set forth in Articles VII, 
VIII and IX (other than any such conditions which by their terms cannot be      
satisfied until the Closing Date, which shall be required to be so satisfied or 
waived on the Closing Date, unless another date and time is agreed to by the    
parties hereto (the actual date of the Closing being referred to herein as the  
"Closing Date")). The Closing shall take place at the offices of Sutherland     
Asbill & Brennan LLP, 1275 Pennsylvania Avenue, N.W., Washington, D.C. 20004, or
at such other place as the parties may mutually agree.                          

SECTION 1.3 EFFECTIVE TIME OF THE MERGER.  At the Closing, the parties
shall (i) file a certificate of merger (the "Certificate of Merger") in such    
form as is required by and executed in accordance with the relevant provisions  
of the Delaware Corporation Law and (ii) make such other filings or recordings  
as required under the Delaware Corporation Law. The Merger shall become         
effective at such time as the Certificate of Merger is duly filed with the      
Secretary of State of Delaware, or such later time as the parties shall agree   
and as shall be specified in such filing (the "Effective Time").                

     SECTION 1.4 EFFECTS OF MERGER.  The Merger shall have the effects set forth
in Section 259 of the Delaware Corporation Law.                                 

ARTICLE II
THE SURVIVING CORPORATION 

     SECTION 2.1 CERTIFICATE OF INCORPORATION.  The Certificate of Incorporation
of the Company as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, and thereafter may be
amended in accordance with its terms and as provided by the Delaware Corporation
Law.                                                                            

   SECTION 2.2 BY-LAWS.  The by-laws of the Company as in effect immediately
prior to the Effective Time shall be the by-laws of the Surviving Corporation,  
and thereafter may be amended in accordance with their terms and as provided by 
the Delaware Corporation Law.                                                   

SECTION 2.3 OFFICERS AND DIRECTORS.  The officers of the Company      
immediately prior to the Effective Time shall be the officers of the Surviving  
Corporation after the Effective Time and the directors of Sub immediately prior 
to the Effective Time shall be the directors of the Surviving Corporation after 
the Effective Time, in each case until their respective successors are duly     
elected and qualified.                                                          

ARTICLE IIIA
CONVERSION OF SHARES INTO PARENT COMMON STOCK 

   The terms of this Article IIIA are subject to Parent's option pursuant to
Article IIIB to effect the Merger for cash consideration in lieu of stock       
consideration.                                                                  

     SECTION 3.1A CONVERSION OF SHARES.  (a) At the Effective Time, by virtue of
the Merger and without any action on the part of any Company stockholder:       

    (1) Conversion of Company Common Stock. Each share of Company Common Stock
     outstanding after giving effect to the Company Recapitalization but
        immediately prior to the Effective Time (the "Canceled Company Stock")

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shall, subject to adjustment pursuant to this Section 3.1A, be
    converted into .4195 fully paid and nonassessable shares of Parent
       Common Stock (the "Exchange Ratio"). The Exchange Ratio is calculated
     by dividing $10.375 by the Base Stock Price of $24.73. The Exchange
 Ratio shall be adjusted ("Adjusted Exchange Ratio") as follows:

         (i)  If the Average Parent Common Stock Price is not less than $22.26
     and not more than $27.20, then there shall be no adjustment to the Exchange
Ratio.                                                                

          (ii)  If the Average Parent Common Stock Price is greater than $27.20,
     but not greater than $29.68, or if the Average Parent Common Stock Price is
less than $22.26, but not less than $19.78, then the Adjusted Exchange
     Ratio shall be $10.375 divided by the Revised Base Stock Price. The Revised
Base Stock Price shall be one-half (1/2) of the sum of $24.73 and the 
Average Parent Common Stock Price.                                    

          (iii) If the Average Parent Common Stock Price is less than $19.78, or
  greater than $29.68, then Parent shall effect the Merger by means of the
  conversion of the Company Common Stock into the right to receive cash in
  the amount of $10.375 for each share of Company Common Stock outstanding
     immediately prior to the Effective Time, after giving effect to the Company
Recapitalization, in lieu of the right to receive Parent Common Stock,
   which shall be treated for purposes of this Agreement as if Parent made a
Cash Election under Article IIIB.                                     

         (iv)  The Adjusted Exchange Ratio, if applicable, shall be rounded to
the nearest ten-thousandth decimal place (rounding upward from the    
mid-point between the ten-thousandth decimal place).                  

(2) New Preferred Stock. Each share of Company New Preferred Stock    
        outstanding upon consummation of the Company Recapitalization shall be
       converted into one validly issued, fully paid and nonassessable share
of Company Common Stock.                                      

  (3) Cancellation of Company Treasury Stock. All shares of Company Common
       Stock which are held in the treasury of the Company upon consummation
      of the Company Recapitalization shall be canceled and shall cease to
exist without any conversion thereof.                         

   (4) Conversion of Sub Common Stock. Each share of common stock, par value
        $.01 per share, of Sub issued and outstanding immediately prior to the
       Effective Time shall be converted into that number of validly issued,
       fully paid and non-assessable shares of Company Common Stock equal to
       96.58% (subject to adjustment to reflect any adjustment to the number
       of shares of Company Common Stock to be purchased for cash as part of
        the Company Recapitalization and the number of shares of Company Stock
         to be issued if the provisions of Article IIIA are applicable, pursuant
        to Section 6.16) of the total number of shares of Company Common Stock
    issued pursuant to Section 3.1A(a)(2) and this Section 3.1A(a)(4).

      (b) The shares of Company Trust Preferred Securities issued by the
 SunSource Capital Trust shall remain outstanding at the Effective Time.

    (c) If, at any time prior to the Effective Time, the outstanding
   shares of Parent Common Stock shall be changed into a different number of
shares or a                                                           

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different class by reason of any reclassification, recapitalization,  
  split-up, combination, exchange of shares or readjustment, or if a stock
   dividend thereon shall be declared with a record date within such period,
     the Exchange Ratio or, if applicable, the Adjusted Exchange Ratio, shall be
 correspondingly adjusted. The issuance of shares of Parent Common Stock
pursuant to Parent's dividend reinvestment plan consistent with past  
practices shall not constitute a stock dividend for this purpose.     

       (d) At the Effective Time the Canceled Company Stock shall cease to
   exist, and each certificate previously representing such Canceled Company
Stock shall (subject to Section 3.3A) thereafter represent for all    
     corporate purposes the shares of Parent Common Stock into which such shares
of Canceled Company Stock have been converted pursuant to the Merger. 
    Certificates previously representing such shares of Canceled Company Stock
   shall be exchanged for a confirmation of ownership of Parent Common Stock
    issued in consideration therefor upon surrender in accordance with Section
3.2A, without interest.                                               

         (e) The Parent shall issue shares of Parent Common Stock to be issued
   in the Merger in uncertificated form, and in accordance with Section 3.2A
   shall send to each person entitled to receive such shares the information
 required under Section 2-210(c) of the Maryland General Corporation Law
with respect to such shares (a "Confirmation").                       

  SECTION 3.2A SURRENDER.  (a) Prior to the Closing, Parent shall select a
person or persons to act as exchange agent for the Merger (the "Exchange        
Agent"), which person or persons shall be reasonably acceptable to the Company, 
for the purpose of exchanging certificates representing Canceled Company Stock  
for Confirmations as to the Share Consideration (as defined below). On the      
Closing Date, Parent shall deliver to the Exchange Agent, in trust for the      
benefit of the holders of Canceled Company Stock immediately prior to the       
Effective Time (the "Converting Stockholders"), the Share Consideration and     
related information. As soon as reasonably practicable after the Effective Time 
but in no event more than five Business Days after the Effective Time, Parent   
shall cause the Exchange Agent to send a notice and a letter of transmittal to  
each Converting Stockholder advising such holder of the effectiveness of the    
Merger and the procedure for surrendering to the Exchange Agent for cancellation
such holder's certificates representing Canceled Company Stock ("Certificates"),
in exchange for the Share Consideration. Each Converting Stockholder will be    
entitled to receive, upon surrender to the Exchange Agent for cancellation of   
one or more Certificates, a Confirmation representing the number of shares of   
Parent Common Stock into which the shares of Canceled Company Stock represented 
by such Certificates are converted in the Merger. Parent Common Stock into which
Canceled Company Stock shall be converted in the Merger shall be deemed to have 
been issued at the Effective Time (the "Share Consideration"). In the event that
any Converting Stockholder's Certificates have been lost, stolen or destroyed,  
such Converting Stockholder will be entitled to receive the Share Consideration 
only after providing an affidavit of loss and indemnity bond, in form           
satisfactory to the Exchange Agent.                                             

   (b) Converting Stockholders shall be entitled, at and after the Effective
Time, to vote the number of shares of Parent Common Stock into which their      
shares of Canceled Company Stock shall have been converted so long as they      
remain record holders of such shares of Parent Common Stock, regardless of      
whether the                                                                     

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Certificates formerly representing the Canceled Company Stock shall have been   
surrendered in accordance with this Section 3.2A or a Confirmation with respect 
to such shares of Parent Common Stock shall have been issued.                   

   (c) Any Converting Stockholder who has not exchanged his Certificates for
Parent Common Stock in accordance with subsection (a) within six months after   
the Effective Time shall have no further claim upon the Exchange Agent, and     
shall thereafter look only to Parent and the Surviving Corporation for payment  
in respect of his shares of Canceled Company Stock. Until so surrendered,       
Certificates shall represent solely the right to receive the Share              
Consideration. If any Certificates entitled to payment pursuant to Section 3.1A 
shall not have been surrendered for such payment prior to such date on which any
payment in respect thereof would otherwise escheat to or become the property of 
any Governmental Entity, the shares of Canceled Company Stock represented       
thereby shall, to the extent permitted by applicable law, be deemed to be       
canceled and no money or other property will be due to the holder thereof.      

    SECTION 3.3A DIVIDENDS; TRANSFER TAXES.  No dividends that are declared or
made with respect to Parent Common Stock will be paid to persons entitled to    
receive Confirmations representing Parent Common Stock pursuant to this         
Agreement until such persons surrender their Certificates, together with a      
properly completed letter of transmittal. Such dividends shall instead be paid  
to the Exchange Agent on behalf of, and as nominee for, such person, and held by
the Exchange Agent in a non-interest bearing account. Such persons shall not be 
entitled to participate in Parent's dividend reinvestment plan until such       
persons surrender their Certificates. Upon such surrender, there shall be paid  
to the person in whose name the Confirmation representing such Parent Common    
Stock shall be issued dividends which shall have become payable with respect to 
such Parent Common Stock in respect of any record date occurring after the      
Effective Time. In no event shall the person entitled to receive such dividends 
be entitled to receive interest on such dividends. Dividends paid to the        
Exchange Agent pursuant to this Section 3.3A that remain unclaimed by the       
holders of Canceled Company Stock shall not revert or be returned to the Parent,
and the Parent hereby waives any rights it may have to such assets. In the event
that any portion of the Share Consideration for any shares of Parent Common     
Stock is to be delivered to a person other than that in which the Certificates  
surrendered in exchange therefor are registered, it shall be a condition of such
delivery that the Certificate or Certificates so surrendered shall be properly  
endorsed or be otherwise in proper form for transfer (including signature       
guarantee) and that the person requesting such delivery shall pay to the        
Exchange Agent any transfer or other Taxes required by reason of such delivery  
to a person other than that of the registered holder of the Certificate         
surrendered, or shall establish to the satisfaction of the Exchange Agent that  
such Tax has been paid or is not applicable. Notwithstanding the foregoing,     
neither the Exchange Agent nor any party hereto shall be liable to a holder of  
shares of Canceled Company Stock for any shares of Parent Common Stock or       
dividends thereon delivered to a public official pursuant to any applicable     
escheat laws.                                                                   

   SECTION 3.4A FRACTIONAL SECURITIES.  Parent shall issue fractional shares
of Parent Common Stock to the extent the conversion results in a fraction of a  
share, in which case such fraction shall be rounded to the nearest              
one-thousandth of a share (rounding upward from the mid-point between           
thousandths of a share).                                                        

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   SECTION 3.5A CLOSING OF COMPANY TRANSFER BOOKS.  Immediately prior to the
Effective Time, the Company Common Stock transfer books shall be closed and no  
transfer of Canceled Company Stock shall thereafter be made.                    

SECTION 3.6A STOCKHOLDER APPROVAL.  The Company shall take all action 
necessary, in accordance with applicable law and its Certificate of             
Incorporation and By-Laws, to convene a special meeting of the holders of       
Company Common Stock (the "Company Meeting") as promptly as practicable for the 
purpose of considering and taking action upon this Agreement and the Company    
Recapitalization. The Board of Directors of the Company has approved the Merger 
and the Company Recapitalization and adopted this Agreement and recommended that
holders of Company Common Stock vote in favor of and approve the Merger and the 
Company Recapitalization and the adoption of this Agreement at the Company      
Meeting. Notwithstanding the foregoing, nothing in this Section 3.6A shall      
preclude or limit the Board of Directors of the Company from complying with its 
fiduciary duties under applicable law.                                          

SECTION 3.7A TAX TREATMENT, ETC.  The Merger is intended, for federal 
income tax purposes, to constitute a reorganization under Section 368(a) of the 
Code, unless the Cash Election is made pursuant to Article IIIB of this         
Agreement. Neither Parent, Sub, nor the Company shall have any liability for    
transfer or other Taxes payable by any Company stockholder as a consequence of  
the Merger.                                                                     

     SECTION 3.8A ROLLOVER OPTIONS.  Each Rollover Option shall remain in effect
at the Effective Time without any change in the terms and conditions of such    
Rollover Option as in effect prior to the Effective Time, except that the       
Rollover Options shall vest in accordance with the terms of the Stock Option    
Plan at the Effective Time and shall not be adjusted as a result of the         
consummation by the Company of the transactions contemplated hereby.            

ARTICLE IIIB
CONVERSION OF SHARES FOR CASH 

    Parent may elect, at its sole option, to effect the Merger by means of the
conversion of the Company Common Stock into the right to receive cash in lieu of
the right to receive Parent Common Stock (the "Cash Election"). The Cash        
Election, if made by Parent, shall be irrevocable. Parent may elect the Cash    
Election at any time but no later than 11:59 pm local time on June 29, 2001. The
Cash Election shall be made by notice from Parent to the Company in the manner  
provided by Section 14.2 of this Agreement. If the Cash Election is made by     
Parent, or deemed to be made pursuant to Section 3.1A(a)(1)(iii), then the      
provisions of Article IIIA of this Agreement shall have no force or effect, and 
the provisions of this Article IIIB shall be effective. If the Cash Election is 
not made by the Parent, and not deemed to be made pursuant to Section           
3.1A(a)(1)(iii), then the following provisions of this Article IIIB shall have  
no force or effect.                                                             

     SECTION 3.1B CONVERSION OF SHARES.  (a) At the Effective Time, by virtue of
the Merger and without any action on the part of any Company stockholder:       

    (1) Conversion of Company Common Stock. Each share of Company Common Stock
   outstanding immediately prior to the Effective Time, after giving
       effect to the Company Recapitalization (the "Canceled Company Stock")
         shall be converted into the right to receive, without interest thereon,
from Parent an                                                

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        amount in cash equal to $10.375. The total number of shares of Company
 Common Stock which will be outstanding immediately prior to the
     Effective Time, after giving effect to the Company Recapitalization
       shall be no less than 6,900,280 (subject to increase for the exercise
 of up to 148,000 In-the-Money Company Stock Options) (the "Cash
Consideration").                                              

(2) New Preferred Stock. Each share of Company New Preferred Stock    
        outstanding upon consummation of the Company Recapitalization shall be
       converted into one validly issued, fully paid and nonassessable share
of Company Common Stock.                                      

  (3) Cancellation of Company Treasury Stock. All shares of Company Common
       Stock which are held in the treasury of the Company upon consummation
      of the Company Recapitalization shall be canceled and shall cease to
exist without any conversion thereof.                         

   (4) Conversion of Sub Common Stock. Each share of common stock, par value
        $.01 per share, of Sub issued and outstanding immediately prior to the
       Effective Time shall be converted into that number of validly issued,
       fully paid and non-assessable shares of Company Common Stock equal to
96.58% (subject to increase for the exercise of up to 148,000 
      In-the-Money Company Stock Options) of the total number of shares of
     Company Common Stock issued pursuant to Section 3.1B(a)(2) and this
Section 3.1B(a)(4).                                           

      (b) The shares of Company Trust Preferred Securities issued by the
 SunSource Capital Trust shall remain outstanding at the Effective Time.

SECTION 3.2B PAYMENT FOR SHARES IN THE MERGER.  The manner of making  
payment for and conversion of shares of the Company Common Stock in the Merger  
shall be as follows:                                                            

          (a) As soon as practicable after the Effective Time, Parent shall send
    or cause to be sent a notice announcing the consummation of the Merger and
  summarizing the provisions of Sections 3.1B and 3.2B to each holder of a
    Certificate which immediately prior to the Effective Time evidenced shares
    of the Company Common Stock and which was not previously surrendered. Such
 notice shall be accompanied by the form of transmittal letter and stock
power referred to in Section 3.2B(b).                                 

        (b) After the Effective Time, each holder of record of a certificate
    representing Canceled Company Stock (a "Certificate") (other than a holder
 of Dissenting Shares) shall surrender such Certificate to Parent or its
    transfer agent (as specified in the notice from Parent), together with (i)
separate stock transfer powers duly endorsed by such holder and (ii) a
letter of transmittal from such holder.                               

        (c) Upon surrender of a Certificate or Certificates representing the
shares of the Company Common Stock in the manner provided in Section  
   3.2B(b), each holder shall be entitled to receive from Parent in exchange
   therefor a check for the amount of cash into which the holder's shares of
  the Company Common Stock previously evidenced by such Certificate(s) was
  converted in the Merger pursuant to Section 3.1B. Parent or its transfer
agent shall issue such checks as soon as practicable following such   
     surrender. In the event that any such holder's Certificates have been lost,
stolen or destroyed, such holder will be entitled to                  

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  receive the Cash Consideration only after providing an affidavit of loss
    and indemnity bond, in form satisfactory to Parent and its transfer agent.

      (d) Each Certificate which immediately prior to the Effective Time
     evidenced shares of the Company Common Stock (other than Dissenting Shares)
shall, from and after the Effective Time until such Certificate is    
   surrendered to Parent or its transfer agent, be deemed, for all corporate
     purposes, to evidence the right to receive that amount of cash described in
  Section 3.1B. Upon receipt of such Certificate by Parent or its transfer
    agent, there shall be paid to such holder, without interest, the amount of
any cash payable to such holder pursuant to Section 3.1B.             

        (e) Any holder of the Company Common Stock who has not exchanged his
  Certificates for Cash Consideration in accordance with this Section 3.2B
     within six months after the Effective Time shall have no further claim upon
Parent's transfer agent, and shall thereafter look only to Parent for 
payment in respect of his shares of Company Common Stock. Until so    
   surrendered, Certificates shall represent solely the right to receive the
 Cash Consideration. If any Certificates entitled to payment pursuant to
     Section 3.1B shall not have been surrendered for such payment prior to such
    date on which any payment in respect thereof would otherwise escheat to or
   become the property of any Governmental Entity, the right to receive Cash
Consideration represented thereby shall, to the extent permitted by   
 applicable law, be deemed to be canceled and no money or other property
will be due to the holder thereof.                                    

    SECTION 3.3B DISSENTING SHARES.  Notwithstanding anything in Sections 3.1B
through and including 3.7B to the contrary, each share of Company Common Stock  
that is issued and outstanding immediately prior to the Effective Time and that 
is held by a stockholder who has properly exercised and perfected appraisal     
rights under the provisions of the Delaware Corporation Law ("Dissenting        
Shares"), shall not be converted into or exchangeable for the right to receive  
the Cash Consideration, but shall entitle the holder thereof to receive payment 
therefor as shall be determined pursuant to the provisions of the Delaware      
Corporation Law; provided, however, that if such holder shall have failed to    
perfect or shall have effectively withdrawn or lost his right to appraisal and  
payment under the Delaware Corporation Law, each share of Company Common Stock  
of such holder shall thereupon be deemed to have been converted into and to have
become exchangeable for, as of the Effective Time, the right to receive the Cash
Consideration, in accordance with Section 3.1B, and such shares shall no longer 
be Dissenting Shares.                                                           

   SECTION 3.4B CLOSING OF COMPANY TRANSFER BOOKS.  Immediately prior to the
Effective Time, the Company Common Stock transfer books shall be closed and no  
transfer of Company Common Stock shall thereafter be made. In the event of a    
transfer of ownership of Company Common Stock which is not registered in the    
transfer records of the Company, the Cash Consideration to be distributed       
pursuant to this Agreement may be delivered to a transferee, if a Certificate is
presented to Parent or its transfer agent, accompanied by all documents required
to evidence and effect such transfer and by payment of any applicable stock     
transfer taxes. Parent shall be entitled to rely upon the stock transfer books  
of the Company to establish the identity of those persons entitled to receive   
the Cash Consideration specified in this Agreement for their shares of Company  
Common Stock, which books shall be conclusive with respect to the ownership of  
such shares. In the event of a dispute                                          

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with respect to the ownership of any such shares, Parent shall be entitled to   
deposit any Cash Consideration represented thereby in escrow with an independent
party and thereafter be relieved with respect to any claims to such Cash        
Consideration.                                                                  

     SECTION 3.5B NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK.  All Cash
Consideration issued upon surrender of a Certificate in accordance with the     
terms hereof shall be deemed to have been issued in full satisfaction of all    
rights pertaining to such shares of Company Common Stock represented thereby.   
If, after the Effective Time, Certificates are presented to Parent for any      
reason, they shall be cancelled and exchanged as provided in this Article IIIB. 

SECTION 3.6B STOCKHOLDER APPROVAL.  The Company shall take all action 
necessary, in accordance with applicable law and its Certificate of             
Incorporation and By-Laws, to convene a special meeting of the holders of       
Company Common Stock (the "Company Meeting") as promptly as practicable for the 
purpose of considering and taking action upon this Agreement and the Company    
Recapitalization. The Board of Directors of the Company has approved the Merger 
and the Company Recapitalization and adopted this Agreement and recommended that
holders of Company Common Stock vote in favor of and approve the Merger and the 
Company Recapitalization and the adoption of this Agreement at the Company      
Meeting. Notwithstanding the foregoing, nothing in this Section 3.6B shall      
preclude or limit the Board of Directors of the Company from complying with its 
fiduciary duties under applicable law.                                          

     SECTION 3.7B ROLLOVER OPTIONS.  Each Rollover Option shall remain in effect
at the Effective Time without any change in the terms and conditions of such    
Rollover Option as in effect prior to the Effective Time, except that the       
Rollover Options shall vest in accordance with the terms of the Stock Option    
Plan at the Effective Time and shall not be adjusted as a result of the         
consummation by the Company of the transactions contemplated hereby.            

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY 

   The Company represents and warrants to Parent and Sub that, except as set
forth in the disclosure schedule attached hereto (the "Company Disclosure       
Schedule"), which Company Disclosure Schedule shall be arranged in paragraphs   
corresponding to the numbered and lettered paragraphs contained in this Article 
IV and may be amended from time to time pursuant to the provisions hereof:      

  SECTION 4.1 EXECUTION AND DELIVERY.  The Company has the corporate power
and authority to enter into this Agreement and each other agreement, document or
instrument contemplated hereby or to be executed in connection herewith to which
the Company is a party (the "Company Documents") and, subject to approval of    
this Agreement by the holders of the Company Common Stock, to carry out its     
obligations hereunder and thereunder. The execution, delivery and performance of
this Agreement and the Company Documents and the consummation of the            
transactions contemplated hereby and thereby have been recommended to the Board 
of Directors by a special committee thereof consisting solely of directors who  
are not officers or employees of the Company or any of its Subsidiaries, and    
have been duly and validly authorized by the Company's entire Board of          
Directors. In connection with the foregoing, the Company's Board of Directors   
has taken such actions as are                                                   

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necessary on its part to render the provisions of Section 203 of the Delaware   
Corporation Law and all other applicable takeover statutes inapplicable to this 
Agreement, the Merger, the transactions required or contemplated by this        
Agreement, and the Voting Agreement. This Agreement constitutes the valid and   
binding obligation of the Company and the Company Documents, when executed and  
delivered, will constitute the valid and binding obligations of the Company, in 
each case enforceable in accordance with their respective terms, except as      
enforcement may be limited by bankruptcy, insolvency or other similar laws      
affecting the enforcement of creditors' rights generally and except that the    
availability of equitable remedies, including specific performance, is subject  
to the discretion of the court before which any proceeding therefor may be      
brought. Except for the approval of the holders of a majority of the outstanding
shares of Company Common Stock, no other corporate proceedings on the part of   
the Company are necessary after the date of this Agreement to authorize this    
Agreement and the Company Documents and the transactions contemplated hereby and
thereby.                                                                        

SECTION 4.2 CONSENTS AND APPROVALS.  The execution and delivery by the
Company of this Agreement and the Company Documents, the performance by the     
Company of its obligations hereunder and thereunder, and the consummation by the
Company of the transactions contemplated hereby and thereby, as the case may be,
do not require the Company to obtain any consent, approval or action of, or make
any filing or registration with, or give any notice to, any person or any       
Governmental Entity, other than (i) in connection, or in compliance, with the   
provisions of the H-S-R Act and any similar law applicable in a non-United      
States jurisdiction, if applicable, the Exchange Act, and the Securities Act,   
which will be duly obtained or made, as the case may be, on or prior to the     
Closing, and will be in full force and effect on the Closing Date, (ii) in the  
case of the performance by the Company of its obligations hereunder and under   
the Company Documents and the consummation by the Company of the transactions   
contemplated hereby and by the Company Documents, the approval of the holders of
the Company Common Stock as specified in Section 4.1, (iii) the filing of the   
Certificate of Merger with the Secretary of State of Delaware, and (iv)         
consents, approvals, actions, filings, registrations or notices under (a)       
contracts and other agreements listed in Section 4.16 of the Company Disclosure 
Schedule, which consents, approvals, actions, filings, registrations, and       
notices referred to in this clause (a) are listed in Section 4.2 of the Company 
Disclosure Schedule; and (b) any other contract and other agreement not referred
to in the preceding clause (a).                                                 

   SECTION 4.3 NO BREACH.  Except as set forth in Section 4.3 of the Company
Disclosure Schedule and assuming that the consents, approvals, actions, filings,
registrations, and notices referred to in Section 4.2 are duly made or effected,
the execution, delivery and performance by the Company of this Agreement and the
Company Documents and the consummation by the Company of the transactions       
contemplated hereby and thereby in accordance with the terms and conditions     
hereof and thereof will not (i) violate any provision of the Certificate of     
Incorporation or By-Laws of the Company; (ii) violate, conflict with or result  
in the breach of any of the terms of, result in any modification of the effect  
of or loss of material rights under, otherwise give any other contracting party 
the right to terminate, or constitute (or with notice or lapse of time or both, 
constitute) a default under, any contract or other agreement or instrument to   
which the Company or any of its Subsidiaries is a party or by or to which the   
assets or properties of the Company or any of its                               

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Subsidiaries may be bound or subject; (iii) violate any order, judgment,        
injunction, award or decree of any Governmental Entity against, or binding upon,
or any agreement with, or condition imposed by, any Governmental Entity binding 
upon, the Company or any of its Subsidiaries, or the securities, assets or      
business of the Company or any of its Subsidiaries; (iv) violate any statute,   
law or regulation of any jurisdiction as such statute, law or regulation relates
to the Company or any of its Subsidiaries, or to the securities, assets or      
business of the Company or any of its Subsidiaries; (v) result in the creation  
or imposition of any lien or other encumbrance or the acceleration of any       
indebtedness or other obligation of the Company or any of its Subsidiaries; or  
(vi) result in the breach of any of the terms or conditions of, constitute a    
default under, or otherwise cause a violation of, any Permit of the Company or  
any of its Subsidiaries; except in the case of (ii) through (vi) above, for     
violations, conflicts, breaches, defaults, modifications, loss of rights,       
impairments, liens or other encumbrances that would not, individually or in the 
aggregate, have a Company Material Adverse Effect.                              

SECTION 4.4 ORGANIZATION, STANDING AND AUTHORITY.  The Company is a   
corporation duly incorporated, validly existing and in good standing under the  
laws of the State of Delaware and has all requisite corporate power and         
authority to own, lease and operate its assets, properties and business and to  
carry on its business as now being conducted. Except as set forth in Section 4.4
of the Company Disclosure Schedule, the Company is duly qualified as a foreign  
corporation to do business, and is in good standing, in each jurisdiction where 
the character of its properties owned or held under lease or the nature of such 
activities make such qualification necessary, except where the failure to so    
qualify would not, individually or in the aggregate, have a Company Material    
Adverse Effect. All such jurisdictions are set forth on Section 4.4 of the      
Company Disclosure Schedule. The copies of the Certificate of Incorporation and 
By-Laws of the Company included as part of Section 4.4 of the Company Disclosure
Schedule constitute accurate and complete copies of such organizational         
instruments and accurately reflect all amendments thereto through the date      
hereof.                                                                         

     SECTION 4.5 CAPITALIZATION OF THE COMPANY.  The authorized capital stock of
the Company consists of 21,000,000 shares of capital stock of which 20,000,000  
are Company Common Stock and 1,000,000 are preferred stock. As of the date of   
this Agreement there were 6,889,844 shares of Company Common Stock outstanding  
and 0 shares of the Company's preferred stock outstanding. Except as set forth  
in Section 4.5 of the Company Disclosure Schedule, as of the date hereof there  
are no bonds, debentures, notes or other indebtedness having the right to vote  
on any matters on which the Company's stockholders may vote issued or           
outstanding. Section 4.5 of the Company Disclosure Schedule sets forth a true   
and complete list as of the date indicated of the holders of all (i) outstanding
vested and unvested Company Stock Options and (ii) outstanding Company Warrants,
showing as to each such holder the number of Company Stock Options (vested or   
unvested) or Company Warrants so held, such holder's mailing address and in the 
case of Company Stock Options, the date of grant, vesting schedules and exercise
price of all such Company Stock Options. All outstanding shares of Company      
Common Stock are duly authorized and are validly issued, fully paid and         
non-assessable and free of preemptive rights.                                   

     SECTION 4.6 OPTIONS AND OTHER STOCK RIGHTS.  Except as set forth in Section
4.5 or 4.6 of the Company Disclosure Schedule, there is no (i) outstanding      
option,                                                                         

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warrant, call, unsatisfied preemptive right or other agreement of any kind      
binding upon the Company to purchase or otherwise to receive from the Company   
any of the outstanding, authorized but unissued, unauthorized or treasury shares
of Company Common Stock or any other security of the Company, or cash based on  
the increase in the market price of Company Common Stock, (ii) outstanding      
security of any kind binding upon the Company convertible into any security of  
the Company, and (iii) outstanding contract or other agreement binding upon the 
Company or any of its Subsidiaries to purchase, redeem or otherwise acquire any 
outstanding shares of Company Common Stock or any other security of the Company.

SECTION 4.7 SUBSIDIARIES.  (a) Section 4.7 of the Company Disclosure  
Schedule sets forth (i) the name of each Subsidiary of the Company; (ii) the    
name of each corporation, limited liability company, partnership, joint venture 
or other entity (other than such Subsidiaries) in which the Company or any of   
its Subsidiaries has, or pursuant to any agreement has the right or obligation  
to acquire at any time by any means, directly or indirectly, an equity interest 
or investment; (iii) in the case of each such Person described in clauses (i) or
(ii) above, (A) the jurisdiction of organization and (B) the capitalization     
thereof and the percentage of each class of capital stock or other equity       
interest (including any rights, options, warrants or convertible securities     
outstanding or other agreements to acquire shares of capital stock or other     
equity interest) and issuance of outstanding debt owned by the Company or any of
it Subsidiaries and by any other person.                                        

       (b) Except as set forth in Section 4.7(b) of the Company Disclosure
  Schedule, each Subsidiary of the Company listed in Section 4.7(a) of the
  Company Disclosure Schedule has been duly organized, is validly existing
and in good standing under the laws of the jurisdiction of its        
    organization, has the corporate, limited liability company, partnership or
    similar power and authority to own and lease its properties and to conduct
   its business and is duly registered, qualified and authorized to transact
    business and is in good standing in each jurisdiction in which the conduct
     of its business or the nature of its properties requires such registration,
     qualification or authorization, except where the failure to be so qualified
     would not reasonably be expected to have a Company Material Adverse Effect.
All such jurisdictions are set forth in Section 4.7(b) of the Company 
Disclosure Schedule. All of the issued and outstanding equity or other
  participating interests of each Subsidiary have been duly authorized and
    validly issued, are fully paid and nonassessable, and, to the extent owned
by the Company as indicated in Section 4.7 of the Company Disclosure  
Schedule, are owned free and clear of any mortgage, pledge, lien,     
 encumbrance, security interest, claim or equity, except as set forth in
Section 4.7 of the Company Disclosure Schedule.                       

         (c) As of the date hereof, except as listed in Section 4.7 or Section
4.16 of the Company Disclosure Schedule, the Company has not made any 
     investments in, and does not own, directly or indirectly, any securities of
or other interests in, any other Person.                              

 SECTION 4.8 CORPORATE RECORDS.  The Company has heretofore delivered to
Parent true and complete copies of the minute books of the Company and each of  
its Subsidiaries for the five years prior to the date hereof through and        
including the date hereof, all as in effect on the date hereof.                 

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   SECTION 4.9 INFORMATION IN DISCLOSURE DOCUMENTS.  None of the information
with respect to the Company and its Subsidiaries to be included in (i) the joint
prospectus/proxy statement of the Company and Parent (the "Proxy Statement")    
required to be mailed to the stockholders of the Company in connection with the 
Merger and (ii) if applicable pursuant to Section 3.1A, the Registration        
Statement to be filed with the Commission by Parent on Form N-14 under the      
Securities Act for the purpose of registering the shares of Parent Common Stock 
to be issued in the Merger (the "Registration Statement") will, in the case of  
the Proxy Statement or any amendments or supplements thereto, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto, and at
the time of the Company Meeting, or, in the case of the Registration Statement, 
at the time it becomes effective and at the Effective Time, contain any untrue  
statement of a material fact or omit to state any material fact required to be  
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that this provision shall not apply to statements or omissions in the           
Registration Statement or Proxy Statement based upon information furnished by   
Parent for use therein. The Proxy Statement will comply as to form in all       
material respects with the provisions of the Exchange Act and the rules and     
regulations thereunder. No representation or warranty made by the Company       
contained in this Agreement and no statement contained in any certificate       
delivered pursuant to Article VII or any exhibit to this Agreement and the      
Company Disclosure Schedule, as the same may be amended pursuant to the         
provisions hereof, contains any untrue statement of a material fact or omits or 
will omit to state a material fact necessary to make the statements contained   
therein, in light of the circumstances under which they were made, not          
misleading.                                                                     

    SECTION 4.10 SEC DOCUMENTS; FINANCIAL STATEMENTS.  (a) The Company and its
Subsidiaries have filed and will file with the SEC all forms, reports,          
schedules, statements, exhibits and other documents (collectively, the "Company 
SEC Documents") required to be filed on or before the date hereof or the Closing
Date, respectively, by it under the Securities Act or the Exchange Act. The     
Company has furnished or made available to Parent true and correct copies of all
Company SEC Documents filed by the Company and its Subsidiaries since January 1,
1998 and will promptly furnish to Parent any other Company SEC Document filed by
or on behalf of the Company with the SEC from the date hereof to the Closing    
Date. At the time filed, the Company SEC Documents filed by the Company and its 
Subsidiaries since January 1, 1998 (i) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or 
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading and (ii) complied in all material    
respects with the applicable requirements of the Securities Act or Exchange Act,
as the case may be.                                                             

        (b) The audited consolidated financial statements of the Company and
     its Subsidiaries for the three years ended December 31, 2000, together with
the reports and opinions thereon of PricewaterhouseCoopers LLP (the   
    "Company Audited Financial Statements"), which are included in the Company
SEC Documents and have previously been delivered to Parent, and the   
unaudited consolidated financial statements of the Company and its    
Subsidiaries for the three months ended March 31, 2001 (the "Company  
Interim Financial Statements"), which are included in the Company SEC 
  Documents and have previously been delivered to Parent, are collectively
referred to herein as the                                             

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    "Company Financial Statements". The Company Financial Statements comply as
  to form in all material respects with applicable accounting requirements
  and the published rules and regulations of the SEC with respect thereto;
    and fairly present, in all material respects, on a consolidated basis, the
 financial position of the Company at the respective balance sheet dates
specified therein, and the results of its operations for each of the  
    periods then ended, and were prepared in conformity with GAAP applied on a
     consistent basis, except as otherwise disclosed therein and subject, in the
case of the Company Interim Financial Statements, to normal recurring 
  year-end adjustments, the absence of footnote disclosures, and any other
adjustments described therein.                                        

     SECTION 4.11 LIABILITIES.  To the Knowledge of the Company, the Company and
its Subsidiaries do not have any direct or indirect liability, contingent or    
otherwise, including but not limited to all liabilities retained, and all       
indemnification obligations created, in connection with the disposition of      
assets, that is required by GAAP to be reflected or reserved for on the         
financial statements of the Company (collectively, the "Liabilities"), that was 
not adequately reflected or reserved against on the Company Audited Financial   
Statements for the 12-month period ended December 31, 2000 or the Company       
Interim Financial Statements for the three-month period ended March 31, 2001,   
other than (i) liabilities set forth in Section 4.11 of the Company Disclosure  
Schedule, (ii) liabilities incurred in the ordinary course of business since    
December 31, 2000 consistent with past practices, or (iii) liabilities permitted
by this Agreement to be incurred in connection with the transactions            
contemplated by this Agreement.                                                 

  SECTION 4.12 NO COMPANY MATERIAL ADVERSE EFFECT.  Except as disclosed in
Section 4.12 of the Company Disclosure Schedule or as set forth in the Company  
SEC Reports filed prior to the date of this Agreement, since December 31, 2000, 
there has not been any change, event, occurrence or state of facts that has     
caused, or would reasonably be expected to cause, a Company Material Adverse    
Effect.                                                                         

     SECTION 4.13 COMPLIANCE WITH LAWS.  To the Knowledge of the Company, except
as disclosed in Section 4.13 of the Company Disclosure Schedule, neither the    
Company nor any of its Subsidiaries is in violation of any applicable order,    
judgment, injunction, award or decree, law, ordinance or regulation or any other
requirement of any Governmental Entity applicable to the Company or any of its  
Subsidiaries or any of its or their businesses, except for violations which     
would not, individually or in the aggregate, have a Company Material Adverse    
Effect. Neither the Company nor its Subsidiaries has received written notice or,
to the Knowledge of the Company, any other notice, that any such material       
violation has been alleged or is being reviewed or investigated. This Section   
4.13 shall not apply to Taxes.                                                  

     SECTION 4.14 PERMITS.  To the Knowledge of the Company, except as set forth
in Section 4.14 of the Company Disclosure Schedule, (i) the Company and its     
Subsidiaries have obtained all Permits that are necessary for the ownership and 
conduct of their respective businesses as presently conducted or currently      
proposed to be conducted, other than any Permits, the absence of which would    
not, individually or in the aggregate, have a Company Material Adverse Effect;  
(ii) such Permits are in full force and effect and are sufficient for the       
ownership and conduct of such businesses as presently conducted; (iii) no       
violations exist or have been recorded in respect of any Permit, except         
violations which would not, individually or in the aggregate, have a Company    
Material Adverse Effect; and (iv) no proceeding is                              

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pending or threatened, that would suspend, revoke or limit any Permit, except   
proceedings which would not, individually or in the aggregate, have a Company   
Material Adverse Effect.                                                        

    SECTION 4.15 ACTIONS AND PROCEEDINGS.  Except as disclosed in Section 4.15
of the Company Disclosure Schedule or the Company SEC Documents filed prior to  
the date of this Agreement, there are no outstanding orders, judgments,         
injunctions, awards or decrees of any Governmental Entity against or involving  
the Company, any of its Subsidiaries or any of its or their directors, officers 
or employees (in their capacities as such) in excess of $250,000 individually or
in the aggregate, or which materially impair the operation of the Company or its
Subsidiaries or materially detract from its business. Except as disclosed in    
Section 4.15 of the Company Disclosure Schedule or the Company SEC Documents    
filed prior to the date of this Agreement, there is no claim (including without 
limitation any indemnification claim arising out of any assets or stock sold by 
the Company or its Subsidiaries), action, suit, litigation, legal,              
administrative or arbitration proceeding, whether formal or informal (including,
without limitation, any written, or to the Knowledge of the Company, any other  
inquiry, claim or notice of intent to institute any matter) (a "Proceeding"),   
which is pending or, to the Company's Knowledge, threatened against or involving
the Company, any of its Subsidiaries or any of its or their directors, officers 
or employees (in their capacities as such) or properties, capital stock or      
assets.                                                                         

    SECTION 4.16 CONTRACTS AND OTHER AGREEMENTS.  (a) Other than (1) contracts
and other agreements disclosed in Section 4.16 of the Company Disclosure        
Schedule or (2) contracts between the Company and its direct or indirect wholly 
owned Subsidiaries or between the Company's direct or indirect wholly owned     
Subsidiaries, none of the Company or any of its Subsidiaries is a party to or   
bound by any:                                                                   

  (i)   commitments, contracts and other agreements, including employment,
           bonus, consulting, management or severance contracts, commitments and
  agreements with, or loans to, any current or former officer,
          director, employee, consultant, agent or other representative of the
    Company or its Subsidiaries, or any current stockholder of the
Company, or any affiliate (excluding the Company and its  
           Subsidiaries) or Family Member of the foregoing persons which involve
     the payment or receipt by the Company or its Subsidiaries of an
           amount in excess of $150,000 in any one year or in excess of $300,000
      in the aggregate for any such individual, other than pursuant to
         Plans described in Section 4.22 of the Company Disclosure Schedule;

   (ii)   contracts and other agreements with any labor union or association
representing any employee;                              

     (iii)  contracts and other agreements for the purchase or sale of equipment
           or services, which involve the receipt or payment by the Company or
   its Subsidiaries of an amount in excess of $300,000 (in the
          aggregate in the case of any related series of contracts and other
agreements);                                            

   (iv)  contracts and other agreements for the sale of any of the assets or
           properties of the Company or its Subsidiaries or for the grant to any
        person of any preferential rights to purchase any of the assets or
    properties of the Company or its Subsidiaries, for which there
remains any                                               

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          obligation to or from the Company or its Subsidiaries, which involve
     the receipt or payment by the Company or its Subsidiaries of an
       amount in excess of $250,000 (in the aggregate in the case of any
related series of contracts and other agreements);        

(v)   contracts and other agreements calling for an aggregate purchase
        price or payments in any one year of more than $250,000 payable by
          the Company or its Subsidiaries (in the aggregate in the case of any
related series of contracts and other agreements);        

 (vi)  contracts and other agreements relating to the acquisition by the
           Company or its Subsidiaries of any business of, or the disposition of
          any business involving the Company or its Subsidiaries to, any other
          person for which there remains any obligation to or from the Company
or its Subsidiaries;                                      

(vii)  contracts relating to the disposition or acquisition of any    
      investment or of any interest in any person, which involve the
          receipt or payment by the Company or its Subsidiaries of an amount
           in excess in any one year of $250,000 (in the aggregate in the case
          of any related series of contracts and other agreements) for which
  there remains any obligation to or from the Company or its
Subsidiaries;                                           

     (viii) joint venture and similar agreements which would involve the receipt
            or payment by the Company or its Subsidiaries of an amount in excess
          of $250,000 (in the aggregate in the case of any related series of
  contracts or other agreements) for which there remains any
obligation to or from the Company or its Subsidiaries;  

(ix)  contracts and other agreements under which the Company or its   
    Subsidiaries agreed to indemnify any party or agreed to retain
     liability of any party or to share liability of any party which
          indemnity obligation remains in effect, including but not limited to
          Tax liability, which could involve the payment by the Company or its
          Subsidiaries of an amount in excess of $150,000 (in the aggregate in
       the case of any related series of contracts or other agreements);

     (x)   contracts and other agreements containing covenants of the Company or
     its Subsidiaries, or, to the Company's Knowledge, its officers,
           directors or employees, not to compete in or solicit employees in any
     line of business or with any person in any geographical area or
  covenants of any other person not to compete with or solicit
  employees from the Company in any line of business or in any
geographical area;                                        

     (xi)  contracts and other agreements relating to the borrowing of money by,
          or indebtedness of, the Company or its Subsidiaries or the direct or
 indirect guaranty by the Company or its Subsidiaries of any
           obligation or indebtedness of any other person or Governmental Entity
    (other than any accounts receivable or accounts payable of the
          Company or its Subsidiaries), including, without limitation, any (a)
          agreement or arrangement relating to the maintenance of compensating
     balances, (b) agreement or arrangement with respect to lines of
          credit, (c) agreement to advance or supply funds to any other person
         other than in the ordinary course of business, (d) agreement to pay
         for property, products or services of any other person even if such
property, products or services are not conveyed,          

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        delivered or rendered, (e) keep-well, make-whole or maintenance of
        working capital or earnings or similar agreement, and (f) guaranty
        with respect to any lease or other similar periodic payments to be
made by any such person;                                  

  (xii)  contracts and other agreements relating to the provision by or to
    the Company or its Subsidiaries of third party management or
            administration services, which involve the receipt or payment by the
          Company or its Subsidiaries of an amount in excess of $300,000 (in
        the aggregate in the case of any related series of contracts and
other agreements);                                      

(xiii)  each lease of personal property which requires annual lease   
payments in excess of $100,000 and each Lease;        

(xiv)  contracts and other agreements between the Company or its      
         Subsidiaries and any Governmental Entity involving the current or
          future receipt or payment by the Company or its Subsidiaries of an
amount in excess of $300,000;                           

     (xv)  contracts and other agreements which require payments of an amount in
        excess of $250,000 generated by, or contracts and other agreements
         required to be set forth in any other clause of Section 4.16 of the
         Company Disclosure Schedule which would terminate upon, a change in
control of the Company; and                               

(xvi)  contracts and other agreements relating to disposal of any     
     controlled or Hazardous Materials for which there remains any
obligation to or from the Company or its Subsidiaries.  

        (b) Except as disclosed in Section 4.16(b) of the Company Disclosure
Schedule, each contract or other agreement to which the Company or any
   Subsidiary is a party is valid, in full force and effect and binding upon
the Company and its Subsidiaries, and, to the Company's Knowledge, the
    other parties thereto in accordance with its terms, except for failures to
be in full force and effect that would not, individually or in the    
    aggregate, have a Company Material Adverse Effect, and neither the Company
 nor any of its Subsidiaries is in default under any of them, except for
   defaults that would not, individually or in the aggregate, have a Company
    Material Adverse Effect, and the Company has no Knowledge of any threat of
  cancellation or termination thereunder. No Permits or other documents or
    agreements with, or issued by or filed with, any person, have been granted
to any other person that provide the right to use any real or tangible
personal property comprising any portion of the assets of the Company,
    except for grants that would not, individually or in the aggregate, have a
    Company Material Adverse Effect. Except as set forth in Section 4.16(b) of
the Company Disclosure Schedule, neither the Company nor any of its   
Subsidiaries is a party to any contract, commitment, arrangement or   
   agreement which would, following the Closing, restrain or restrict Parent
   or any affiliate of Parent, from operating the business of the Company in
the manner in which it is currently operated, except for contracts,   
    commitments, arrangements or agreements that would not, individually or in
the aggregate, have a Company Material Adverse Effect.                

 SECTION 4.17 REAL PROPERTY.  (a) Section 4.17 of the Company Disclosure
Schedule sets forth (i) a list of all leases, subleases, licenses, occupancy    
agreements                                                                      

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or other agreements, written and oral, together with any amendments or          
modifications thereto (each a "Lease" and collectively, the "Leases") with      
respect to (A) all real property leased by the Company or its Subsidiaries      
(whether as lessor or lessee and including those in the names of nominees or    
other entities) and used or occupied in connection with the business of the     
Company or its Subsidiaries (the "Leased Real Property") and (B) all real       
property leased or subleased by the Company or its Subsidiaries, as lessor or   
sublessor, to third parties; and (ii) a list of all real property owned by the  
Company or its Subsidiaries (the "Owned Real Property").                        

        (b) Each Lease is, with respect to the Company and its Subsidiaries,
    in full force and effect, and to the Company's Knowledge, is in full force
     and effect with respect to each other party thereto, except for failures to
be in full force and effect that would not, individually or in the    
    aggregate, have a Company Material Adverse Effect. To the Knowledge of the
Company, the Company and each of its Subsidiaries have performed all  
 obligations required to be performed by it to date under, and is not in
    default in respect of, any Lease, and, to the Knowledge of the Company, no
   event has occurred which, with due notice or lapse of time or both, would
   constitute such a default by the Company or its Subsidiaries, except with
   respect to non-performance or defaults that would not, individually or in
    the aggregate, have a Company Material Adverse Effect. To the Knowledge of
 the Company, there is no default asserted thereunder by any other party
    thereto. All material rentals and other payments due under each such Lease
have been duly paid.                                                  

     (c) Except as set forth in Section 4.17 of the Company Disclosure
     Schedule, the Company or its applicable Subsidiary, as the case may be, has
good and marketable title to the Owned Real Property and improvements 
  thereon, subject only to the title exceptions specified therein and such
other liens and imperfections of title, if any, as do not materially  
  interfere with the present use of the property affected thereby or which
would not, individually or in the aggregate, have a Company Material  
    Adverse Effect. None of the Owned Real Property is subject to any right or
   option of any other person, to purchase or otherwise obtain title to such
     property. No person other than the Company or its Subsidiaries, as the case
 may be, has any right to use, occupy or lease all or any portion of the
Owned Real Property.                                                  

        (d) The Company has not received any written, or to the Knowledge of
    the Company, any other notice of any violation of any applicable building,
    zoning, land use or other similar statutes, laws (other than Environmental
     Laws which are addressed in Section 4.30), ordinances, regulations, permits
  or other requirements (including, without limitation, the Americans with
     Disabilities Act) in respect of the Owned Real Property and the Leased Real
   Properties, which has not been heretofore remedied, and, to the Company's
     Knowledge, there do not exist any such violations which, individually or in
the aggregate, would reasonably be expected to have a Company Material
     Adverse Effect. The Company has not received any notice that any operations
on or uses of the Owned Real Property and the Leased Real Properties  
    constitute non-conforming uses under any applicable building, zoning, land
  use or other similar statutes, laws, ordinances, regulations, permits or
  other requirements. The Company has no Knowledge of nor has received any
notice (other than published notice not                               

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actually received) of any pending or contemplated rezoning proceeding 
affecting the Owned Real Property and the Leased Real Properties.     

    (e) Neither the Company nor any of its Subsidiaries has received
    notice from any insurance carrier regarding defects or inadequacies in the
Owned Real Properties and the Leased Real Properties, which, if not   
corrected, would result in termination of the Company's or its        
Subsidiaries' insurance coverage therefor or an increase in the cost  
thereof which defects, inadequacies or terminations would result,     
 individually or in the aggregate, in a Company Material Adverse Effect.

(f) To the Knowledge of the Company, there is no pending or 
   threatened: (i) condemnation of any part of the Leased Real Properties by
  any Governmental Entity; (ii) special assessment against any part of the
   Leased Real Properties; or (iii) litigation against the Company or any of
    its Subsidiaries for breach of any restrictive covenant affecting any part
of the Leased Real Properties.                                        

   (g) The Owned Real Property, the Leased Real Properties and the
  equipment of the Company are in good condition and repair, ordinary wear
     and tear excepted, and have not suffered any casualty or other damage which
has not been repaired, except to the extent the failure of any of the 
 foregoing to be true would not reasonably be expected to have a Company
Material Adverse Effect.                                              

   SECTION 4.18 INTELLECTUAL PROPERTY.  (a) The Company and its Subsidiaries
own free and clear of all liens or security interests, other than Permitted     
Liens, or possess a license for the life of the intellectual property right (i) 
to make, use, offer for sale or sell any system or method under or (ii) to use, 
reproduce, publicly display or create derivative works from, as the case may be,
all patents (and applications therefor), patent rights and disclosures;         
trademarks, trade names, domain names, trade dress and service marks (and       
applications or registrations therefor) and rights relating thereto; inventions,
discoveries, systems, scientific, engineering and marketing data, technology,   
trade secrets, formulae, and techniques, and all research records relating      
thereto; and all software programs and codes (both source and object) and       
related documentation as well as all supporting database information,           
modifications, enhancements and derivative works based on such software; that   
are used in the normal course of their businesses in any territory in which the 
Company and its Subsidiaries, are currently conducting such businesses and have 
plans to conduct such businesses, and any other proprietary information         
(collectively, the "Intellectual Property Rights"). The Company and its         
Subsidiaries are the sole and exclusive owners of all right to sue and keep any 
damage awards for past infringements by third parties of the Intellectual       
Property Rights. Section 4.18(a)(i) of the Company Disclosure Schedule sets     
forth a true and complete list of the owned Intellectual Property Rights of the 
Company and of its Subsidiaries. Section 4.18(a)(ii) of the Company Disclosure  
Schedule sets forth a true and complete list of the licensed Intellectual       
Property Rights of the Company and of its Subsidiaries, other than              
shrink-wrapped licensed Intellectual Property Rights.                           

        (b) Except as disclosed in Section 4.18(b) of the Company Disclosure
   Schedule, to the Knowledge of the Company, neither the Company nor any of
     its Subsidiaries has received notice or otherwise has reason to know of any
  conflict or alleged conflict with the rights of others pertaining to the
Intellectual                                                          

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   Property Rights; and to the Knowledge of the Company, neither the Company
    nor any of its Subsidiaries has received notice that the businesses of the
   Company and of its Subsidiaries, as presently conducted, infringe upon or
violate any intellectual property right of others.                    

        (c) Except as disclosed in Section 4.18(c) of the Company Disclosure
Schedule, to the Knowledge of the Company, none of the Intellectual   
    Property Rights is presently involved in, or subject to, any interference,
  reexamination, reissue, opposition, cancellation or other administrative
 proceeding before the United States Patent and Trademark Office, United
 States Copyright Office, or any comparable foreign office, or any other
     administrative agency or registrar of the United States, a foreign country,
or an international organization.                                     

        (d) Except as disclosed in Section 4.18(d) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is currently
     obligated or under any existing liability to make royalty or other payments
    to any owner of, licensor of, or other claimant to, any patent, trademark,
service mark, trade dress, domain name, trade name, copyright or other
     intangible asset, with respect to the use thereof or in connection with the
conduct of its business as now conducted or otherwise.                

        (e) Except as disclosed in Section 4.18(e) of the Company Disclosure
     Schedule, the employees of the Company and of the Subsidiaries are under an
obligation to assign all Intellectual Property Rights developed by the
     employee to the Company or the relevant Subsidiary; to the Knowledge of the
     Company, no employee of the Company or of its Subsidiaries has violated any
     employment agreement or proprietary information agreement which he had with
a previous employer, or is a party to or threatened by any litigation 
concerning any patents, trademarks, service marks, trade names, domain
   names, trade dress, trade secrets, copyrights, licenses and the like, the
 result of which would materially detract from the value of the property
subject thereto or materially impair the use of or the access to the  
     property subject thereto, or materially impair the operation of the Company
 or its Subsidiaries or materially detract from its business; and to the
    Knowledge of the Company, none of the employees, agents or representatives
of the Company or of its Subsidiaries has engaged in any acts of      
    inequitable conduct, fraud or misrepresentation of material information in
     securing any Intellectual Property Rights with the United States Patent and
Trademark Office, United States Copyright Office, comparable foreign  
office, or any state agency or office.                                

     (f) Except as disclosed in Section 4.16 or Section 4.18(f) of the
Company Disclosure Schedule, neither the Company nor any of its       
Subsidiaries has granted to any third party (i) any license or similar
rights in or to any of the Intellectual Property Rights required to be
    disclosed in Section 4.18(a)(i) of the Company Disclosure Schedule or (ii)
    any sublicense or similar rights in or to any Intellectual Property Rights
   required to be disclosed in Section 4.18(a)(ii) of the Company Disclosure
    Schedule. Section 4.18(f) of the Company Disclosure Schedule specifies the
territory in which any such granted licenses, sublicenses, or similar 
 rights are applicable, and whether they are exclusive or non-exclusive.

       (g) The Company and its Subsidiaries have taken reasonable measures
    and engaged in compliance monitoring, as necessary to protect the secrecy,
     confidentiality and value of the Intellectual Property Rights, except where
failure                                                               

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to do so would not reasonably be expected to have a Company Material  
Adverse Effect.                                                       

   SECTION 4.19 RECEIVABLES.  All accounts receivable and vendor receivables
which exceed $10,000 for a single receivable reflected in the Company Audited   
Financial Statements, and all accounts receivable and vendor receivables which  
exceed $10,000 for a single receivable arising subsequent to December 31, 2000, 
represent bona fide transactions that have arisen in the ordinary course of     
business and are valid and existing. The Company has made and will make         
adjustments to the carrying value of such receivables reasonably considered     
adequate for receivables not collectible in the ordinary course of its business 
in accordance with GAAP, consistently applied.                                  

SECTION 4.20 BANKING.  Section 4.20 of the Company Disclosure Schedule
contains a complete list of all of the bank accounts and lines of credit owned  
or used by the Company and its Subsidiaries, and the names of all persons with  
authority to withdraw funds from, or execute drafts or checks on, each such     
account, other than accounts or lines of credit involving less than $10,000.    

 SECTION 4.21 LIENS.  Except as set forth in Section 4.21 of the Company
Disclosure Schedule, the Company and its Subsidiaries have good title to all of 
its respective assets and properties, in each case free and clear of any lien or
other encumbrance, except for (i) liens or other encumbrances securing Taxes,   
assessments, governmental charges or levies, or the claims of materialmen,      
carriers, landlords and like persons, all of which are not yet delinquent or    
which are being contested in good faith or (ii) liens or other encumbrances of a
character that do not materially detract from the value of the property subject 
thereto or impair the use of or the access to the property subject thereto, or  
impair the operation of the Company or its Subsidiaries or detract from its     
business (collectively, "Permitted Liens").                                     

  SECTION 4.22 EMPLOYEE BENEFIT PLANS.  (a) Section 4.22(a) of the Company
Disclosure Schedule sets forth all "employee benefit plans," as defined in      
Section 3(3) of ERISA, and all other employee benefit arrangements, including,  
without limitation, any such arrangement providing severance pay, sick leave,   
vacation pay, salary continuation for disability, retirement benefits, deferred 
compensation, bonus pay, incentive pay, stock options, hospitalization          
insurance, medical insurance, life insurance, scholarships or tuition           
reimbursement plans or agreements, maintained by the Company or its Subsidiaries
or to which the Company or its Subsidiaries has any liability (contingent or    
otherwise) thereunder for current or former employees of the Company or its     
Subsidiaries. Each of the employee benefit plans, practices and arrangements set
forth in Section 4.22 of the Company Disclosure Schedule shall hereafter be     
referred to as a "Plan" (or "Plans" as the context may require).                

        (b) Except as disclosed in Section 4.22(b) of the Company Disclosure
Schedule, none of the Plans is a "multiemployer plan," as defined in  
   Section 3(37) of ERISA or a "defined benefit plan," as defined in Section
3(35) of ERISA.                                                       

      (c) Each of the trusts maintained under a Plan that is intended to
   qualify under Section 401(a) of the Code has been determined to be exempt
   from federal income taxation under Section 501 of the Code by the IRS (or
the Plan remains within the remedial amendment period for obtaining an
initial                                                               

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     determination of exemption from Tax), and nothing has occurred with respect
to the operation of any such Plan which could cause the loss of such  
   qualification or exemption or the imposition of any liability, penalty or
Tax under ERISA or the Code.                                          

   (d) All contributions (including all employer contributions and
   employee salary reduction contributions) required to have been made under
 the Plans or by law to any funds or trusts established thereunder or in
    connection therewith have been made by the due date thereof (including any
    valid extensions), and all contributions of any period ending on or before
    the Effective Time which are not yet due will have been paid or accrued on
or prior to the Effective Time.                                       

          (e) True, correct and complete copies of the following documents, with
     respect to each of the Plans, have been delivered to Parent by the Company:
(i) the most recent plan document and related trust documents, and    
 amendments thereto; (ii) the IRS Forms 5500 for the most recent two (2)
Plan years; (iii) the last IRS determination letter; and (iv) the most
recent summary plan descriptions.                                     

        (f) Except as set forth in Section 4.21(f) of the Company Disclosure
    Schedule, there are no pending actions, claims or lawsuits which have been
   asserted or instituted against the Plans, the assets of any of the trusts
under such plans, the plan sponsor, the plan administrator, or any    
   fiduciary of the Plans with respect to the operation of such Plans (other
     than routine benefit claims or actions seeking qualified domestic relations
 orders), nor does the Company have Knowledge of any threatened claim or
  lawsuit, or have reason to believe that such an action, claim or lawsuit
may be asserted or instituted.                                        

       (g) The Plans have been maintained substantially in accordance with
their terms and with all provisions of ERISA and the Code (including  
   applicable regulations thereunder) and other applicable federal and state
laws and regulations, and the Company has not engaged in a "prohibited
     transaction" within the meaning of Section 406 of ERISA or 4975 of the Code
that would result in a material liability to the Company or its       
     Subsidiaries or Parent. No fiduciary has engaged in any conduct which could
 give rise to any material liability for breach of fiduciary duty or any
 other failure to act or comply in connection with the administration or
investment of the assets of any Plan.                                 

        (h) Except as disclosed in Section 4.22(h) of the Company Disclosure
  Schedule, none of the Plans provides life or health benefits coverage to
     former employees of the Company or their dependents or beneficiaries except
     as may be required under applicable state law, Section 4980B of the Code or
Section 601 of ERISA or at the expense of the participant or the      
    participant's beneficiary or death benefits under the Company's retirement
plan.                                                                 

  (i) Except pursuant to the Employment Agreements and except as
  disclosed in Section 4.22(i) of the Company Disclosure Schedule, neither
  the execution and delivery of this Agreement nor the consummation of the
  transactions contemplated hereby will (i) result in any payment becoming
due to any employee (current, former or retired) of the Company, (ii) 
   increase any benefits otherwise payable under any Plan or (iii) result in
  the acceleration of the time of payment or vesting of any benefits under
any Plan.                                                             

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SECTION 4.23 EMPLOYEE RELATIONS.  (a) Except as disclosed in Section  
4.23(a) of the Company Disclosure Schedule, the Company and its Subsidiaries are
in compliance with all laws regarding employment, wages, hours, equal           
opportunity and collective bargaining and payment of social security and other  
Taxes, except for non-compliances that would not, individually or in the        
aggregate, have a Company Material Adverse Effect. Neither the Company nor any  
of its Subsidiaries is engaged in any unfair labor practice or discriminatory   
employment practice, no complaint of any such practice against the Company or   
its Subsidiaries has been filed or, to the Company's Knowledge, threatened to be
filed with or by the National Labor Relations Board, the Equal Employment       
Opportunity Commission or any other administrative agency, federal or state,    
that regulates labor or employment practices, and no grievance has been filed   
or, to the Company's Knowledge, threatened to be filed, against the Company or  
its Subsidiaries by any employee pursuant to any collective bargaining or other 
employment agreement to which the Company is a party or is bound. The Company   
and its Subsidiaries are in compliance with all applicable foreign, federal,    
state and local laws and regulations regarding occupational safety and health   
standards, except for non-compliances that would not, individually or in the    
aggregate, have a Company Material Adverse Effect, and have received no         
complaints from any foreign, federal, state or local agency or regulatory body  
alleging violations of any such laws and regulations.                           

        (b) Except as set forth in Section 4.23(b) of the Company Disclosure
 Schedule, the employment of all persons employed by the Company and its
Subsidiaries is terminable at will without any penalty or severance   
obligation of any kind on the part of the employer. All sums due for  
employee compensation and benefit and all vacation time owing to any  
   employee of the Company or its Subsidiaries have been duly and adequately
   accrued on the accounting records of the Company and its Subsidiaries. To
    the Company's Knowledge, all employees of the Company and its Subsidiaries
    located in the United States are either United States citizens or resident
     aliens specifically authorized to engage in employment in the United States
in accordance with all applicable laws.                               

  SECTION 4.24 INSURANCE.  Section 4.24 of the Company Disclosure Schedule
sets forth a list of all policies or binders of errors and omissions, fire,     
liability, product liability, workmen's compensation, vehicular and other       
insurance (excluding Plans) held by or on behalf of the Company or its          
Subsidiaries (collectively, the "Insurance Policies"). Such Insurance Policies  
are in full force and effect and in amounts of a nature which are adequate to   
meet all existing obligations relating to maintenance of insurance and customary
for the Company's and its Subsidiaries' businesses. In addition, Section 4.24 of
the Company Disclosure Schedule sets forth in respect of the Insurance Policies 
(i) a description of occurrences reported involving amounts in excess of $10,000
and (ii) the aggregate amount paid out under each such policy during the period 
from January 1, 1999 through the date hereof. There have been no disputes       
regarding denial or nonpayment of claims under any Insurance Policy since       
January 1, 1999, other than routine disputes under Insurance Policy coverage    
provided under the Plans.                                                       

    SECTION 4.25 OFFICERS, DIRECTORS, EMPLOYEES, CONSULTANTS.  Section 4.25 of
the Company Disclosure Schedule sets forth (i) the name of each officer and     
director of the Company or its Subsidiaries and the amount of compensation paid 
during fiscal year 2000 and the amount reasonably expected to be paid during    
fiscal 2001, and (ii) the name of each other employee or class of employees of  
the Company or its                                                              

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Subsidiaries who either (x) received compensation in fiscal year 2000 in excess 
of $150,000 or (y) is anticipated to receive, based on current compensation     
levels, compensation in fiscal year 2001 in excess of $150,000, indicating the  
amount of such compensation for such persons for fiscal year 2000 and fiscal    
year 2001. Except as disclosed in Section 4.25 of the Company Disclosure        
Schedule, the Company or any of its Subsidiaries does not employ any individual 
as a consultant, whose employment cannot be terminated on not less than 30 days'
notice without penalty.                                                         

    SECTION 4.26 TRANSACTIONS WITH DIRECTORS, OFFICERS AND AFFILIATES.  Except
as disclosed in Section 4.26 of the Company Disclosure Schedule or in the       
Company SEC Documents filed prior to the date of this Agreement, since January  
1, 1999, there have been no transactions between the Company or its Subsidiaries
and any director, officer, employee, stockholder or other affiliate of the      
Company or its Subsidiaries or loans, guarantees or pledges to, by or for the   
Company or its Subsidiaries from, to, by or for any of such persons. Since      
January 1, 1999, other than as disclosed in the Company SEC Documents filed     
prior to the date of this Agreement or in Section 4.26 of the Company Disclosure
Schedule, none of the officers, directors or employees of the Company or its    
Subsidiaries, or any Family Member of any of such persons, has been a director  
or officer of, or has had any direct or indirect interest in, any person or     
business enterprise which during such period has been a supplier, customer or   
sales agent of the Company or its Subsidiaries or has competed with or been     
engaged in any business of the kind being conducted by the Company or its       
Subsidiaries.                                                                   

 SECTION 4.27 OPERATIONS OF THE COMPANY.  Except as disclosed in Section
4.16 or 4.27 of the Company Disclosure Schedule or as set forth in the Company  
SEC Documents filed prior to the date of this Agreement, and except as may      
result from the transactions contemplated by this Agreement, since December 31, 
2000, neither the Company nor any of its Subsidiaries has:                      

     (i)   amended its certificate of incorporation or by-laws or merged with or
          into or consolidated with any other Person, subdivided or in any way
          reclassified any shares of its capital stock or changed or agreed to
         change in any manner the rights of its outstanding capital stock or
the character of its business;                            

(ii)   (A) issued or sold or purchased, or issued options or rights to
           subscribe to, or entered into any contracts or commitments to issue
          or sell or purchase, any shares of its capital stock or any of its
          bonds, notes, debentures or other evidences of indebtedness or (B)
     modified the terms of its options, rights or any contracts or
          commitments to issue or sell or purchase any shares of its capital
          stock or any of its bonds, notes, debentures or other evidences of
indebtedness;                                           

(iii)  entered into or amended any agreement contract or commitment   
            required to be disclosed in Section 4.16(a)(i) or Section 4.22(i) of
            the Company Disclosure Schedule, made any wage or salary increase or
bonus, loan or increase in any other direct or indirect 
          compensation, including but not limited to severance benefits, for
            or to any of its officers, directors, employees, individuals who are
   consultants, agents or other representatives or any current
           stockholder of the Company, or any affiliate (excluding the Company
         and its Subsidiaries) or Family Members of the foregoing persons,
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    loan, would require disclosure of the agreement, contract or
          commitment in Section 4.16(a)(i) or Section 4.22(i) of the Company
Disclosure Schedule;                                    

     (iv)  in the case of the Company, except in the ordinary course of business
          consistent with past practice, declared or made any Distributions to
any stockholder or made any direct or indirect redemption,
    retirement, purchase or other acquisition of any shares of its
capital stock;                                            

  (v)   made any change in its accounting methods or practices or made any
         change in depreciation or amortization policies, except as required
by law or GAAP;                                           

(vi)  made any loan or advance to its stockholders or to any of the   
   directors, officers or employees of the Company or any of its
    Subsidiaries, consultants, agents or other representatives, or
           otherwise than in the ordinary course of business made any other loan
or advance;                                               

(vii)  except in the ordinary course of business consistent with past 
         practice, (A) entered into any Lease; (B) sold, abandoned or made
     any other disposition of any of its assets or properties; (C)
       granted or suffered any lien or other encumbrance on any of its
         assets or properties; (D) entered into or amended any contract or
           other agreement to which it is a party, or by or to which it or its
          assets or properties are bound or subject which if existing on the
     date hereof would need to be disclosed in Section 4.16 of the
Company Disclosure Schedule;                            

     (viii) made or entered into any agreement to make any acquisition of all or
            a substantial part of the assets, properties, securities or business
of any other person;                                    

    (ix)  paid, directly or indirectly, any of its Liabilities before the same
      became due in accordance with its terms or otherwise than in the
ordinary course of business;                              

   (x)   terminated or failed to renew, or received any written threat (that
        was not subsequently withdrawn) to terminate or fail to renew, any
        contract or other agreement that is or was material to the assets,
         liabilities, properties, business, operations, condition (financial
   or otherwise), operations or prospects of the Company and its
Subsidiaries, taken as a whole;                           

    (xi)  made any revaluation of any assets or write-down of the value of any
       loans or receivables of the Company or any of its Subsidiaries in
excess of $50,000, unless required by GAAP;               

(xii)  except in the ordinary course of business consistent with past 
       practice, accelerated the collection, or made any sale to third
parties, of any receivables of the Company or any of its
            Subsidiaries, or delayed the payment of any payables of the Company;

(xiii)  entered into any other contract or other agreement or other   
           transaction that obligates the Company or any of its Subsidiaries
      to pay an amount in excess of $50,000, which contract is not
         terminable by the Company or its applicable Subsidiary upon not
more than 30 days' notice;                            

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(xiv)  suffered any damage, destruction or loss, whether covered by   
        insurance or not, which has had or could have a Company Material
Adverse Effect; or                                      

 (xv)  changed any of the Tax accounting methods or practices used by it
  unless required by applicable law, make or terminate any Tax
   election, take any Tax Return position inconsistent with past
        practices, file any amended Tax Return or settle or compromise any
claim relating to Taxes in excess of $50,000.             

 SECTION 4.28 BROKERAGE.  Except for the engagement of Janney Montgomery
Scott LLC by letter dated December 15, 2000, relating to the rendering of a     
fairness opinion, no broker, agent or finder has acted, directly or indirectly, 
for the Company or, to the Knowledge of the Company, any of the Company         
stockholders, nor has the Company or, to the Knowledge of the Company, any of   
the Company stockholders, incurred any obligation to pay any brokerage fee,     
agent's commission or finder's fee or other commission in connection with the   
transactions contemplated by this Agreement. The Company has furnished to Parent
a copy of any engagement letter relating to such broker, agent or finder.       

SECTION 4.29 TAXES.  (a) The Company and, as applicable, each of its  
Subsidiaries (i) have duly and timely filed (or there have been filed on their  
behalf) accurate and complete copies of all Tax Returns required to be filed    
(after taking into account all available extensions), (ii) have timely paid or  
adequately provided for in accordance with GAAP all Taxes due in respect of the 
periods covered by such Tax Returns, and (iii) have withheld and, if due, paid  
all Taxes required to have been withheld and, if due, paid in connection with   
amounts paid or owing to any employee, independent contractor, creditor,        
stockholder, or other third party.                                              

     (b) Except as set forth in Section 4.29 of the Company Disclosure
    Schedule, as of the date of this Agreement to the Knowledge of the Company
(i) no claim for assessment or collection of Taxes is presently being 
    asserted against the Company or its Subsidiaries, (ii) neither the Company
   nor any of its Subsidiaries is a party to any pending action, proceeding,
    or investigation by any governmental taxing authority relating to Tax, and
(iii) no such action, proceeding or investigation has been threatened.

     (c) Except as set forth in Section 4.29 of the Company Disclosure
   Schedule, neither the Company nor any of its Subsidiaries is, or has ever
been, a party to or bound by any Tax indemnity agreement, Tax sharing 
agreement, Tax allocation agreement, Tax indemnification agreement, or
similar allocation agreement or similar contract or arrangement.      

     (d) Except as set forth in Section 4.29 of the Company Disclosure
     Schedule, neither the Company nor any of its Subsidiaries has requested any
   extension of time within which to file any income Tax Return which return
  has not since been filed, nor is there outstanding any power of attorney
     with respect to any matter relating to Taxes that could affect the Company,
  nor has the Company or any of its Subsidiaries waived the running of any
statute of limitations with respect to any income Taxes.              

     (e) Except as set forth in Section 4.29 of the Company Disclosure
  Schedule, the Company has delivered to Parent true and correct copies of
all filed income Tax Returns (including information returns and Forms 
     1120), examination reports, closing agreements and statements of deficiency
of the Company and its                                                

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     Subsidiaries which refer to any period of time from January 1, 1997 through
the date of this Agreement or to any event which occurred during that 
   period of time. Neither the Company nor any of its Subsidiaries has filed
an election under Section 341(f) of the Code that is applicable to the
     Company, any of its Subsidiaries or any asset held by the Company or any of
its Subsidiaries. Neither the Company nor any of its Subsidiaries has 
agreed, or is required, to make any adjustment under Section 446(e) or
    481(a) of the Code (or any similar provision of law) by reason of a change
   in accounting method or otherwise. Except as set forth in Section 4.29 of
the Company Disclosure Schedule, neither the Company nor any of its   
     Subsidiaries is subject to or a member of any joint venture, partnership or
     other arrangement or contract which is treated as a partnership for federal
     income Tax purposes. The Company has not been a United States real property
 holding corporation within the meaning of Section 897(c)(2) of the Code
   during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code.                                                                 

     (f) Except as set forth in Section 4.29 of the Company Disclosure
  Schedule, neither the Company nor any Subsidiary has been a member of an
 affiliated group filing a consolidated federal income Tax Return (other
   than the affiliated group of which the Company is now the common parent),
or has any liability for Taxes of any Person under Treas. Reg. Section
1.1502-6, or any similar provision of state, local or foreign law or  
regulation, as a transferee or successor, by contract or otherwise.   

        (g) Section 4.29 of the Company Disclosure Schedule lists each state
     in which the Company and its Subsidiaries are required to file Tax Returns.
  To the Knowledge of the Company, no claim has been made after January 1,
 1997 by any authority in a jurisdiction where the Company or any of its
Subsidiaries does not file Tax Returns that it is or may be subject to
taxation by that jurisdiction.                                        

   (h) Neither the Company nor any of its Subsidiaries has any net
    operating loss carryovers that are subject to limitation under Section 382
of the Code.                                                          

     SECTION 4.30 ENVIRONMENTAL LAWS.  Except as or as set forth in Section 4.30
of the Company Disclosure Schedule:                                             

        (a) To the Knowledge of the Company, the Company and its present and
     former Subsidiaries (i) are in compliance in all material respects with all
   Environmental Laws, except for non-compliances which would not reasonably
   be expected to have a Company Material Adverse Effect; (ii) have obtained
    and currently maintain in full force and effect all Environmental Permits,
    the failure to obtain or maintain would, individually or in the aggregate,
  have a Company Material Adverse Effect; and (iii) are in compliance with
all terms and conditions of such Environmental Permits except for     
 noncompliances that would not, individually or in the aggregate, have a
Company Material Adverse Effect.                                      

         (b) To the Company's Knowledge, no event has occurred which, upon the
   passage of time, the giving of notice, or failure to act would reasonably
    be expected to give rise to liability to the Company or any of its present
 or former Subsidiaries under any Environmental Law, the result of which
    would materially detract from the value of the property subject thereto or
    materially impair the use of or access to the property subject thereto, or
materially impair the                                                 

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     operation of the Company of its Subsidiaries or materially detract from its
business.                                                             

  (c) To the Company's Knowledge, no Hazardous Material has been
     released, spilled, discharged, dumped, disposed of, or otherwise come to be
     located in, at or beneath any of the Owned Real Property or the Leased Real
    Property or any properties or assets formerly owned, operated or otherwise
     controlled or occupied by the Company or its present or former Subsidiaries
   and used in the conduct of the Company's and its Subsidiaries' businesses
    (i) in violation of any Environmental Law, or (ii) in such manner as would
   reasonably be expected to cause an environmental liability of the Company
or its present or former Subsidiaries.                                

    (d) To the Company's Knowledge, there are no: (i) aboveground or
underground storage tanks or surface impoundments containing Hazardous
Materials; (ii) asbestos containing materials or (iii) PCBs or        
PCB-containing equipment, located within any portion of the Owned Real
Property or the Leased Real Property or any property formerly owned,  
    operated or otherwise controlled or occupied by the Company or its present
or former Subsidiaries.                                               

      (e) To the Company's Knowledge, no liens have been placed upon any
    Owned Real Property or Leased Real Property (including formerly owned real
property and leased property) in connection with any actual or alleged
liability under any Environmental Law.                                

(f) There is no pending or, to the Knowledge of the Company,
     threatened, material claim, litigation or administrative proceeding against
the Company or its present Subsidiaries or, to the Knowledge of the   
Company, former Subsidiaries arising under any Environmental Law;     

        (g) Neither the Company nor any of its Subsidiaries has received any
written, or to the Knowledge of the Company, any other notice, claim, 
 demand, suit or request for information from any Governmental Entity or
     private entity with respect to any liability or alleged liability under any
Environmental Law, nor, to the Knowledge of the Company, has any other
    entity whose liability therefor, in whole or in part, may be attributed to
 the Company or any of its present or former Subsidiaries, received such
     notice, claim, demand, suit or request for information. Neither the Company
   nor any of its present Subsidiaries, nor, to the Company's Knowledge, any
  former Subsidiary or prior owner or operator of the Leased Real Property
(including formerly leased property) has generated, disposed of, or   
  arranged for the disposal of any Hazardous Material except in compliance
 with Environmental Law, except for such non-compliances that would not,
   individually or in the aggregate, have a Company Material Adverse Effect.

          (h) Neither the Company nor any of its present Subsidiaries or, to the
     Knowledge of the Company, former Subsidiaries has, and, to the Knowledge of
     the Company, no other entity whose liability therefor, in whole or in part,
 may be attributed to the Company or its present or former Subsidiaries,
   disposed of any Hazardous Material at any location which is identified on
  the current or proposed (i) National Priorities List under 40 C.F.R. 300
Appendix B or (ii) similar state priority list.                       

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          (i) To the Knowledge of the Company, the Company has made available to
 Parent all material environmental studies and reports and other records
pertaining to the Owned Real Property or the Leased Real Property     
(including formerly owned real property or leased property), and the  
operations conducted thereon, that are in the Company's possession.   

         (j) The representations and warranties set forth in this Section 4.30
 and in Section 4.16(a)((xvi) shall be the exclusive representations and
warranties with respect to environmental matters, including, but not  
limited to, Environmental Permits and Environmental Laws.             

   SECTION 4.31 COMPANY ACTION.  The Board of Directors of the Company (at a
meeting duly called and held) has by the requisite vote of all directors present
(a) determined that the Merger is advisable and fair and in the best interests  
of the Company and its stockholders, (b) approved the Merger in accordance with 
the applicable provisions of the Delaware Corporation Law and (c) recommended   
the approval of this Agreement and the Merger by the holders of the Company     
Common Stock and directed that the Merger be submitted for consideration by the 
Company's stockholders at the Company Meeting.                                  

   SECTION 4.32 OPINION OF FINANCIAL ADVISOR.  The Board of Directors of the
Company has received, on the date of this Agreement, the oral opinion of Janney 
Montgomery Scott, to be confirmed in writing, to the effect that, as of such    
date and subject to the assumptions and qualifications contained therein, the   
Exchange Ratio or, if applicable, the Cash Consideration in the Merger is fair  
to the holders of the Company Common Stock from a financial point of view. A    
copy of the written opinion of Janney Montgomery Scott will be delivered to     
Parent as soon as practicable after the date of this Agreement.                 

SECTION 4.33 STATUS OF CERTAIN EMPLOYMENT AND OTHER AGREEMENTS.  The  
Company has provided to Parent a true and correct copy of the employment        
agreement, severance agreement or similar agreement between the Company or one  
of its Subsidiaries, as applicable, and each person listed in Exhibit F, and    
each such agreement is as of the date of this Agreement in full force and       
effect.                                                                         

SECTION 4.34 RIGHTS AGREEMENT.  The Company has amended the Rights    
Agreement dated as of July 31, 1997 between Company and Registrar and Transfer  
Company (the "Rights Agent") (the "Rights Agreement") to exclude Parent, and Sub
as Acquiring Persons (as that term is defined in the Rights Agreement), and     
accordingly, the Company has taken all action necessary to ensure that, so long 
as this Agreement shall not have been terminated pursuant to Article XII, no    
Rights (as that term is defined in the Rights Agreement) have been exercised or 
are exercisable in connection with the execution and delivery of this Agreement 
or the consummation of the Merger. A copy of the executed amendment to the      
Rights Agreement is attached hereto as Exhibit D. The Board of Directors of the 
Company (at a meeting duly called and held) has by the requisite vote of all    
directors present, approved such amendment to the Rights Agreement.             

   SECTION 4.35 STOCKHOLDERS AGREEMENT.  The Stockholders Agreement dated as
of July 31, 1997 among the Company and the parties who are signatories thereto  
has been terminated and a copy of the termination agreement, executed by all    
parties to such Stockholders Agreement is attached hereto as Exhibit E. The     
Board of Directors                                                              

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of the Company (at a meeting duly called and held) has by the requisite vote of 
all directors present, approved the termination of such Stockholders Agreement. 

     SECTION 4.36 CUSTOMER RELATIONSHIP.  Section 4.36 of the Company Disclosure
Schedule contains a list of all contracts, agreements, arrangements or          
correspondence, formal or informal, by the Company or its Subsidiaries, with the
entities listed on Schedules 1 and 2, and the Company's or its Subsidiaries'    
internal policies and procedure manuals, guidelines or schedules, relating to   
the terms of their relationship with such customers including, but not limited  
to, pricing, rebates and slotting fees. Neither the Company nor any of its      
Subsidiaries has received any notice (written or verbal) from any of the        
entities listed on Schedules 1 and 2 of a change or intention to change the     
terms of their relationship with the Company or any of its Subsidiaries,        
including, but not limited to a termination of the relationship, and a material 
change in rebates or slotting fees. None of the entities listed in Schedule 2 to
this Agreement has expressed since January 1, 2001 an intention to reduce       
materially the amount of business that it does with the Company so that, after  
taking into account any increases in sales to these and other customers, it is  
reasonably likely that the Hillman Subsidiary's aggregate level of annual sales 
will be materially reduced relative to the level in effect on the date hereof.  

     SECTION 4.37 INVENTORY.  All inventory of the Company and its Subsidiaries,
required to be reflected in the Company Financial Statements in accordance with 
GAAP, consists of a quality and quantity usable and salable in the ordinary     
course of business, except for obsolete items and items of below-standard       
quality, all of which have been written off or written down to net realizable   
value in the Company Financial Statements or on the accounting records of the   
Company or its Subsidiaries as of the Closing Date, as the case may be. All     
inventories are valued at the lower of cost or market on a principally first in,
first out basis. The quantities of inventory (whether raw materials,            
work-in-process, or finished goods) are not excessive, including reserves, but  
are reasonable in the present circumstances of the Company and its Subsidiaries.

ARTICLE V 
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB

 Parent and Sub represent and warrant to the Company that, except as set
forth in the disclosure schedule attached hereto (the "Parent Disclosure        
Schedule"), which Parent Disclosure Schedule and shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article 
V:                                                                              

SECTION 5.1 EXECUTION AND DELIVERY.  Each of Parent and Sub has the   
corporate power and authority to enter into this Agreement and each other       
agreement, document or instrument contemplated hereby or to be delivered in     
connection herewith to which such person is a party (the "Parent Documents") and
to carry out its respective obligations hereunder and thereunder. The execution,
delivery and performance by Parent and Sub of this Agreement and the Parent     
Documents to which it is a party and the consummation of the transactions       
contemplated hereby and thereby have been duly authorized by the Board of       
Directors of Parent and Sub, as applicable (and, in the case of this Agreement, 
by the Board of Directors of Sub and by Parent as the sole stockholder of Sub). 
This Agreement constitutes the valid and binding obligation of Parent and Sub   
and the Parent Documents will constitute the valid and binding obligations of   
Parent and Sub, when executed by such person,                                   

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in each case, enforceable in accordance with their respective terms, except as  
enforcement may be limited by bankruptcy, insolvency or other similar laws      
affecting the enforcement of creditors' rights generally and except that the    
availability of equitable remedies, including specific performance, is subject  
to the discretion of the court before which any proceeding therefor may be      
brought. No other corporate proceedings on the part of Parent or Sub are        
necessary to authorize this Agreement or the Parent Documents and the           
transactions contemplated hereby and thereby.                                   

   SECTION 5.2 CONSENTS AND APPROVALS.  The execution and delivery by Parent
and Sub of this Agreement and the Parent Documents to which such person is a    
party, the performance by Parent and Sub of their respective obligations        
hereunder and thereunder and the consummation by Parent and Sub of the          
transactions contemplated hereby and thereby do not require Parent or Sub to    
obtain any consent, approval or action of, or make any filing or registration   
with or give any notice to, any Governmental Entity, other than (i) in          
connection, or in compliance, with the provisions of the H-S-R Act and any      
similar law applicable in a non-United States jurisdiction, and, if applicable, 
the Securities Act, the Exchange Act, the 1940 Act and the corporation,         
securities or blue sky laws or regulations of various states, all of which will 
be duly obtained or made, as the case may be, on or prior to the Closing, and   
will be in full force and effect on the Closing Date, (ii) the filing of the    
Certificate of Merger with the Secretary of State of Delaware and (iii) as to   
which the failure to so obtain, file or register would not have a Parent        
Material Adverse Effect.                                                        

   SECTION 5.3 NO BREACH.  Assuming the filings, registrations, consents and
approvals referred to in Section 5.2 are duly made or effected, the execution,  
delivery and performance by Parent and Sub of this Agreement and the Parent     
Documents to which either is a party and the consummation of the transactions   
contemplated hereby and thereby in accordance with the terms and conditions     
hereof and thereof will not (i) violate any provision of the Certificate of     
Incorporation or By-Laws of Parent or Sub; (ii) violate, conflict with or result
in the breach of any of the terms of, result in any modification of the effect  
of or loss of material rights under, otherwise give any other contracting party 
the right to terminate, or constitute (or with notice or lapse of time or both, 
constitute) a default under, any contract or other agreement or instrument to   
which Parent or any of its Subsidiaries is a party or by or to which the assets 
or properties of Parent or any of its Subsidiaries may be bound or subject;     
(iii) violate any order, judgment, injunction, award or decree of any           
Governmental Entity against, or binding upon, or any agreement with, or         
condition imposed by, any Governmental Entity binding upon, Parent or any of its
Subsidiaries, or the securities, assets or business of Parent or any of its     
Subsidiaries; (iv) violate any statute, law or regulation of any jurisdiction as
such statute, law or regulation relates to Parent or any of its Subsidiaries, or
to the securities, assets or business of Parent or any of its Subsidiaries; (v) 
result in the creation or imposition of any lien or other encumbrance or the    
acceleration of any indebtedness or other obligation of Parent or any of its    
Subsidiaries; or (vi) result in the breach of any of the terms or conditions of,
constitute a default under, or otherwise cause an impairment of, any Permit of  
Parent or any of its Subsidiaries; except in the case of (ii) through (vi) for  
violations, conflicts, breaches, defaults, modifications, loss of rights,       
impairments, liens or other encumbrances that would not, individually or in the 
aggregate, have a Parent Material Adverse Effect.                               

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    SECTION 5.4 SEC DOCUMENTS; FINANCIAL STATEMENTS.  (a) Parent has filed and
will file with the SEC all forms, reports, schedules, statements, exhibits and  
other documents (collectively, the "Parent SEC Documents") required to be filed 
on or before the date hereof or the Closing Date, respectively, by it under the 
Securities Act or the Exchange Act. Parent has furnished or made available to   
the Company true and correct copies of all Parent SEC Documents filed by Parent 
since January 1, 1999 and will promptly furnish to the Company any other Parent 
SEC Document filed by or on behalf of Parent with the SEC from the date hereof  
to the Closing Date. At the time filed, the Parent SEC Documents filed by Parent
since January 1, 1999 (i) did not contain any untrue statement of a material    
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under    
which they were made, not misleading and (ii) complied in all material respects 
with the applicable requirements of the Securities Act or Exchange Act, as the  
case may be.                                                                    

       (b) The audited consolidated financial statements of Parent for the
three years ended on December 31, 2000, together with the reports and 
   opinions thereon of Arthur Andersen LLP, which are included in the Parent
 SEC Documents and have previously been delivered to the Company and the
 unaudited consolidated financial statements of Parent as of and for the
three months ended March 31, 2001 (the "Parent Interim Financial      
    Statements"), which are included in the Parent SEC Documents and have been
     previously delivered to the Company, are collectively referred to herein as
   the "Parent Financial Statements". The Parent Financial Statements comply
     as to form in all material respects with applicable accounting requirements
  and the published rules and regulations of the SEC with respect thereto;
    and fairly present, in all material respects, on a consolidated basis, the
financial position of Parent at the respective balance sheet dates    
specified therein, and the results of its operations for each of the  
    periods then ended, and were prepared in conformity with GAAP applied on a
  consistent basis, except as otherwise disclosed therein and, subject, in
  the case of the Parent Interim Financial Statements, to normal recurring
  year-end adjustments, the absence of footnote disclosures, and any other
adjustments described therein.                                        

 SECTION 5.5 SHARES OF PARENT COMMON STOCK.  The shares of Parent Common
Stock will, when issued and delivered to the Company stockholders pursuant to   
Section 3.1A(a), be duly authorized, validly issued, fully paid, non-assessable,
and free of all liens and other encumbrances of any kind or nature whatsoever.  

   SECTION 5.6 ORGANIZATION, STANDING AND AUTHORITY OF PARENT AND SUB.  Each
of Parent and Sub is a corporation duly incorporated, validly existing and in   
good standing under the laws of the State of Delaware (in the case of Sub) or   
Maryland (in the case of Parent), and has all requisite power and authority to  
own, lease and operate its assets, properties and businesses and to carry on its
businesses as now being conducted. Parent is duly qualified as a foreign        
corporation to do business, and is in good standing, in each jurisdiction where 
the character of its properties owned or held under lease or the nature of such 
activities make such qualification necessary, except where the failure to so    
qualify would not, individually or in the aggregate, have a Parent Material     
Adverse Effect. Sub has not engaged in any business (other than certain         
organizational matters) since the date of its incorporation. The copies of the  
Certificate of Incorporation and By-Laws of Parent and Sub included as part of  
Section 5.6 of the Parent Disclosure Schedule constitute accurate and complete  
copies                                                                          

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of such organizational instruments and accurately reflect all amendments thereto
through the date hereof.                                                        

 SECTION 5.7 CAPITALIZATION.  (a) The authorized capital stock of Parent
consists of 200,000,000 shares of Parent Common Stock, par value $0.0001 per    
share. As of June 15, 2001, there were 91,517,429 shares of Parent Common Stock 
outstanding and there have been no material changes in such numbers through the 
date hereof. As of the date hereof, there are no bonds, debentures, notes or    
other indebtedness issued or outstanding having the right to vote on any matters
on which Parent's stockholders may vote. All outstanding shares of Parent Common
Stock are duly authorized and are validly issued, fully paid and nonassessable. 

       (b) The authorized capital stock of Sub consists of 1,000 shares of
   Sub Common Stock, all of which are duly authorized, validly issued, fully
paid and nonassessable.                                               

   SECTION 5.8 BROKERAGE.  No broker, agent or finder has acted, directly or
indirectly, for Parent or Sub, nor have Parent and Sub incurred any obligation  
to pay any brokerage fees, agent's commissions or finder's fee or commission in 
connection with the transactions contemplated by this Agreement.                

   SECTION 5.9 INFORMATION IN DISCLOSURE DOCUMENTS.  None of the information
supplied by Parent or Sub for inclusion in the Registration Statement (if       
applicable) and the Proxy Statement will, in the case of the Proxy Statement or 
any amendments or supplements thereto, at the time of the mailing of the Proxy  
Statement and any amendments or supplements thereto, or, in the case of the     
Registration Statement, at the time it becomes effective and at the Effective   
Time, contain any untrue statement of a material fact or omit to state any      
material fact required to be stated therein or necessary in order to make the   
statements therein, in light of the circumstances under which they were made,   
not misleading; provided, however, that this provision shall not apply to       
statements or omissions in the Registration Statement or Proxy Statement based  
upon information furnished by the Company for use therein. The Registration     
Statement will comply as to form in all material respects with the provisions of
the Securities Act, and the rules and regulations promulgated thereunder. No    
representation or warranty made by Parent contained in this Agreement and no    
statement contained in any certificate delivered pursuant to Article VII or any 
exhibit to this Agreement and the Parent Disclosure Schedule, contains any      
untrue statement of a material fact or omits or will omit to state a material   
fact necessary to make the statements contained therein, in light of the        
circumstances under which they were made, not misleading.                       

  SECTION 5.10 NO MATERIAL ADVERSE CHANGE.  Since December 31, 2000, there
has not been any change, event, occurrence or state of facts that has caused, or
would reasonably be expected to cause, a Parent Material Adverse Effect.        

    SECTION 5.11 SUB ACTION.  The Board of Directors of Sub (at a meeting duly
called and held) has by the requisite vote of all directors present approved the
Merger in accordance with the provisions of Section 251 of the Delaware         
Corporation Law. The sole stockholder of Sub has taken all actions necessary to 
adopt the Merger.                                                               

SECTION 5.12 OPTIONS AND OTHER STOCK RIGHTS.  Except for options to   
purchase Parent Common Stock outstanding under Parent's Amended Stock Option    
Plan, as amended to date, there is no (i) outstanding option, warrant, call,    
unsatisfied                                                                     

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preemptive right or other agreement of any kind to purchase or otherwise to     
receive from Parent any of the outstanding, authorized but unissued,            
unauthorized or treasury shares of Parent Common Stock, Parent Preferred Stock  
or any other equity security of the Parent (other than promissory notes not     
convertible into equity interests), (ii) outstanding equity security of any kind
convertible into any equity security of Parent, and (iii) outstanding contract  
or other agreement to purchase, redeem or otherwise acquire any outstanding     
shares of Parent Common Stock or any other equity security of Parent.           

   SECTION 5.13 LIABILITIES.  Neither Parent nor any of its Subsidiaries has
any liabilities or obligations of any nature, whether or not accrued, contingent
or otherwise that is required by GAAP to be reflected or reserved for on the    
financial statements of the Parent, except (a) liabilities or obligations       
disclosed or reserved against in the audited consolidated financial statements  
of Parent as of and for the fiscal year ended December 31, 2000 and the Parent  
Interim Financial Statements included in the Parent SEC Documents or disclosed  
in the footnotes thereto or otherwise disclosed in Parent's 2000 Form 10-K or   
Form 10Q for the three months ended March 31, 2001, and (b) liabilities or      
obligations which do not, individually or in the aggregate, have a Parent       
Material Adverse Effect.                                                        

   SECTION 5.14 COMPLIANCE WITH LAWS.  To the Knowledge of Parent, Parent is
not in violation of any applicable order, judgment, injunction, award or decree,
law, ordinance or regulation or any other requirement of any Governmental Entity
applicable to Parent or any of its businesses except for violations which would 
not, individually or in the aggregate, have a Parent Material Adverse Effect;   
Parent has not received written notice, or to the Knowledge of Parent, any other
notice that any such material violation has been alleged or is being            
investigated. This Section 5.14 shall not apply to Taxes.                       

   SECTION 5.15 PERMITS.  To the Knowledge of Parent (i) Parent has obtained
all Permits that are necessary for the ownership and conduct of its businesses  
as presently conducted or currently proposed to be conducted, other than any    
Permits, the absence of which would not, individually or in the aggregate, have 
a Parent Material Adverse Effect; (ii) such Permits are in full force and effect
and are sufficient for the ownership and conduct of such businesses as presently
conducted; (iii) no violations exist or have been recorded in respect of any    
Permit, except violations which would not, individually or in the aggregate,    
have a Parent Material Adverse Effect; and (iv) no proceeding is pending or     
threatened, that would suspend, revoke or limit any Permit, except proceedings  
which would not, individually or in the aggregate, have a Parent Material       
Adverse Effect.                                                                 

 SECTION 5.16 ACTIONS AND PROCEEDINGS.  There are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against or 
involving Parent or any of its directors, officers or employees (in their       
capacities as such). Except as disclosed in the Parent SEC Documents, as of the 
date of this Agreement there is no Proceeding which is pending or, to Parent's  
Knowledge, threatened against or involving Parent, any of its Subsidiaries, or  
any of their directors, officers or employees (in their capacities as such) or  
properties, capital stock or assets, except where the failure of any of the     
foregoing to be true does not individually or in the aggregate have a Parent    
Material Adverse Effect.                                                        

SECTION 5.17 NO PRIOR ACTIVITIES.  Except for obligations incurred in 
connection with its incorporation or organization or the negotiation and        
consummation of this                                                            

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Agreement and the transactions contemplated hereby, Sub has neither incurred any
obligation or liability nor engaged in any business or activity of any type or  
kind or entered into any agreement or arrangement with any person.              

  SECTION 5.18 TAXES.  Parent (i) has duly and timely filed (or there have
been filed on Parent's behalf) accurate and complete copies of all Tax Returns  
required to be filed (after taking into account all available extensions), (ii) 
has timely paid or adequately provided for in accordance with GAAP all Taxes due
in respect of the periods covered by such Tax Returns, and (iii) has withheld   
and, if due, paid all Taxes required to have been withheld and, if due, paid in 
connection with amounts paid or owing to any employee, independent contractor,  
creditor, stockholder, or other third party.                                    

ARTICLE VI
COVENANTS AND AGREEMENTS

   Each of Parent, Sub and the Company (as applicable) covenant and agree as
follows:                                                                        

  SECTION 6.1 CONDUCT OF BUSINESS.  Prior to the Effective Time, except as
set forth in Section 6.1 of the Company Disclosure Schedule or unless Parent    
shall otherwise agree in writing:                                               

     (i)  The Company shall, and shall cause its Subsidiaries to, carry on their
    respective business in the usual, regular and ordinary course in
        substantially the same manner as heretofore conducted, and shall use
    its reasonable efforts to preserve and cause its Subsidiaries to
        preserve intact their present business organizations, keep available
     the services of their present officers and employees and preserve
   their relationships with customers, suppliers and others having
          business dealings with them to the end that their goodwill and ongoing
     businesses shall be unimpaired at the Effective Time. The Company
    shall and shall cause its Subsidiaries to (i) maintain insurance
       coverages and their books, accounts and records in the usual manner
         consistent with prior practices; (ii) comply in all material respects
      with all laws, ordinances and regulations of Governmental Entities
      applicable to the Company and its Subsidiaries; (iii) maintain and
         keep their properties and equipment in good repair, working order and
       condition, ordinary wear and tear excepted; and (iv) perform in all
         material respects its obligations under all contracts and commitments
      to which it is a party or by which it is bound, in each case other
    than where the failure to so maintain, comply or perform, either
        individually or in the aggregate, would result in a Company Material
          Adverse Effect. The Company shall cause its management and that of its
         Subsidiaries to consult on a regular basis and in good faith with the
          employees and representatives of Parent concerning the business of the
        Company and its Subsidiaries and shall promptly advise Parent of any
          reduction in the prices charged to customers, or increases in the rate
of rebates payable to customers or slotting fees payable to 
         distributors. The Company shall not, and shall cause its Subsidiaries
      not to make, or commit to make in the future, any reduction in the
        prices charged to customers, or increase the rate of rebates payable
       to customers or slotting fees payable to distributors except in the
ordinary course of business.                                

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(ii) The Company shall not and shall cause its Subsidiaries not to    
          undertake any of the actions specified in Section 4.27 irrespective of
   any exception for items (i) required by such Section 4.27 to be
          disclosed on the Company Disclosure Schedule, or (ii) set forth in the
Company SEC Documents.                                      

   SECTION 6.2 LITIGATION INVOLVING THE COMPANY.  Prior to the Closing Date,
the Company shall notify Parent of any actions or proceedings of the type       
required to be described in Sections 4.15, 4.29 or 4.30 of the Company          
Disclosure Schedule that are threatened or commenced against the Company, any of
its Subsidiaries, or against any officer or director, property or asset of the  
Company, or with respect to the Company's affairs, promptly upon the Company    
becoming aware thereof, and of any requests of the Company or, to the Knowledge 
of the Company, any Company stockholder, for additional information or          
documentary materials by any Governmental Entity in connection with the         
transactions contemplated hereby promptly upon the Company becoming aware       
thereof. As to compliance with such requests for such information, the Company  
shall consult with and obtain the consent of Parent, which consent shall not be 
withheld unreasonably; provided that such consent shall be unnecessary where    
such information is required by law to be provided.                             

  SECTION 6.3 CONTINUED EFFECTIVENESS OF REPRESENTATIONS AND WARRANTIES OF
THE PARTIES.  (a) From the date hereof through the Closing Date, (a) the Company
shall use all reasonable efforts to conduct its affairs in such a manner so     
that, except as otherwise contemplated or permitted by this Agreement, the      
representations and warranties of the Company contained in Article IV shall     
continue to be true and correct in all material respects (or in all respects in 
the case of any representation or warranty which refers to a Company Material   
Adverse Effect or otherwise includes a concept of materiality) on and as of the 
Closing Date as if made on and as of the Closing Date, except that any such     
representations and warranties that are given as of a particular date and relate
solely to a particular date or period shall be true and correct in all material 
respects (or in all respects in the case of any representation or warranty which
refers to a Company Material Adverse Effect or otherwise includes a concept of  
materiality) as of such date or period; (b) Parent and Sub shall use their      
respective reasonable efforts to conduct their affairs in such a manner so that,
except as otherwise contemplated or permitted by this Agreement, the            
representations and warranties contained in Article V shall continue to be true 
and correct in all material respects (or in all respects in the case of any     
representation or warranty which refers to a Parent Material Adverse Effect or  
otherwise includes a concept of materiality) on and as of the Closing Date as if
made on and as of the Closing Date, except: (i) that any such representations   
and warranties that are given as of a particular date and relate solely to a    
particular date or period shall be true and correct in all material respects (or
in all respects in the case of any representation or warranty which refers to a 
Parent Material Adverse Effect or otherwise includes a concept of materiality)  
as of such date or period and (ii) if the Cash Election is made by Parent, then 
upon the date of the Cash Election, the representations and warranties contained
in Sections 5.4(a), 5.5, 5.7, 5.12, 5.13, 5.14, 5.15, 5.16 and 5.18 shall, for  
all purposes of this Agreement terminate and shall have no further force or     
effect, as if such representations and warranties had never been contained in   
this Agreement; (c) the Company shall promptly notify Parent and Sub of any     
event, condition or circumstance occurring from the date hereof through the     
Closing Date of which the Company becomes aware that would cause any material   
revisions to the Company Disclosure Schedule provided by the Company pursuant to
this Agreement, or that                                                         

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would constitute a violation or breach of this Agreement by the Company; and (d)
Parent and Sub shall promptly notify the Company of any event, condition or     
circumstance occurring from the date hereof through the Closing Date of which it
becomes aware that would cause any material revisions to the Parent Disclosure  
Schedule provided by Parent or Sub pursuant to this Agreement, or that would    
constitute a violation or breach of this Agreement by Parent or Sub. No such    
notification shall be deemed an amendment to the Disclosure Schedules to this   
Agreement, except as otherwise provided by this Agreement.                      

     (b) The Company agrees that on the Closing Date, it shall provide
  Parent with the written certification of Messrs. Maurice Andrien, Joseph
  Corvino, Max Hillman (only as to the Hillman Subsidiary of the Company),
  Rick Hillman (only as to the Hillman Subsidiary of the Company), Stephen
  Miller (only as to the Hillman Subsidiary of the Company), Justin Jacobi
   (only as to the SunSource Technology Services Subsidiary of the Company),
 Jim Waters (only as to the Hillman Subsidiary of the Company) and Chuck
 Freeman (only as to the SunSource Technology Services Subsidiary of the
Company), each in his corporate capacity and not in his individual    
    capacity, that each of them have reviewed all Company Disclosure Schedules
    and have concluded that, to his actual knowledge, they are accurate in all
material respects.                                                    

     SECTION 6.4 CORPORATE EXAMINATIONS AND INVESTIGATIONS; CONFIDENTIALITY. (a)
The Company shall cooperate with Parent as Parent shall reasonably request in   
connection with the Parent's due diligence review of the Company, including, but
not limited to, Parent's continued due diligence review of Owned Real Property  
and Leased Real Property (including formerly leased property or property or     
assets formerly owned, operated or otherwise controlled, or occupied by the     
Company or its present or former Subsidiaries). Notwithstanding the foregoing,  
Parent will not contact, in connection with the transactions contemplated by the
Agreement, any customers, suppliers or employees of the Company without         
obtaining the prior consent of the Company, which consent shall not be          
unreasonably withheld. Upon reasonable notice, the Company shall, and shall     
cause its Subsidiaries to, afford to Parent and to the officers, employees,     
accountants, counsel, financial advisors and other representatives of Parent,   
reasonable access during normal business hours during the period prior to the   
Effective Time to all its properties, books, contracts, personnel and records.  

   (b) Prior to the Closing, and following any termination of this
 Agreement, the Confidentiality Agreement shall remain in full force and
   effect in accordance with its terms. If this Agreement is not terminated,
  the Confidentiality Agreement shall expire and be of no further force or
effect following the Effective Time.                                  

    SECTION 6.5 INDEMNIFICATION OF COMPANY OFFICERS AND DIRECTORS.  (a) Parent
agrees, for a period of six years following the Effective Time, not to amend the
indemnification provisions set forth in the Certificate of Incorporation or     
By-Laws of the Surviving Corporation in a manner that would adversely affect the
rights of the Company's officers, directors and employees to indemnification    
thereunder for events occurring prior to the Effective Time and agrees to cause 
the Surviving Corporation to fulfill and honor such obligations to the maximum  
extent permitted by law; provided, however, that nothing in this Section 6.5    
shall prevent Parent from                                                       

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effecting any merger, reorganization or consolidation of the Surviving          
Corporation, so long as the successor in any such transaction assumes such      
obligations.                                                                    

          (b) Parent shall cause to be maintained, for a period of not less than
six (6) years after the Effective Time, all of Company's and its      
Subsidiaries' current directors' and officers' insurance and          
    indemnification policies to the extent that such policies provide coverage
  for events occurring prior to the Effective Time (collectively, the "D&O
   Insurance") for all current or former directors, officers or employees of
 the Company or its Subsidiaries; provided, however, that Parent may, in
lieu of maintaining such existing D&O Insurance as provided above, and
   shall, if the existing D&O Insurance expires or is terminated or canceled
   during such six (6) year period, cause comparable coverage to be provided
    under any policy maintained for the benefit of the directors, officers and
     employees of Parent or any of its Subsidiaries; and provided, further, that
    (i) the issuer thereof shall have a claims-paying rating at least equal to
    the issuer of the existing D&O Insurance; and (ii) the terms thereof shall
     be no less advantageous to the directors, officers and employees of Company
and its Subsidiaries than the existing D&O Insurance.                 

SECTION 6.6 REGISTRATION STATEMENT/PROXY STATEMENT.  As promptly as   
practicable after the execution of this Agreement, the Company and Parent shall 
prepare and file with the SEC preliminary proxy materials which shall constitute
the preliminary Proxy Statement and, if applicable, a preliminary prospectus    
with respect to the Parent Common Stock to be issued in connection with the     
Merger. As promptly as practicable after comments are received from the SEC with
respect to the preliminary proxy materials and after the furnishing by the      
Company and Parent of all information required to be contained therein, the     
Company shall file with the SEC the definitive Proxy Statement and Parent shall,
if applicable, file with the SEC the Registration Statement and Parent and the  
Company shall use all reasonable efforts to cause the Registration Statement to 
become effective as soon thereafter as practicable.                             

   SECTION 6.7 COMPLIANCE WITH THE SECURITIES ACT.  (a) If the Cash Election
is not made by Parent, and is not deemed to be made pursuant to Section         
3.1A(a)(1)(iii), then prior to the Effective Time the Company shall deliver to  
Parent a list of names and addresses of each person who, in the Company's       
reasonable judgment, is an affiliate within the meaning of Rule 145 of the rules
and regulations promulgated under the Securities Act (the "Affiliates").        

        (b) The Company shall use its reasonable efforts to obtain a written
agreement from each person who is identified as a possible Affiliate  
pursuant to clause (a) above, in the form previously approved by the  
parties and attached hereto as Exhibit 6.7(b), that he or she will not
    offer to sell, sell or otherwise dispose of any of the Parent Common Stock
     issued to him or her pursuant to the Merger, except in compliance with Rule
145 or another exemption from the registration requirements of the    
     Securities Act. The Company shall deliver such written agreements to Parent
on or prior to the Effective Time.                                    

    SECTION 6.8 NYSE LISTING.  If the Cash Election is not made by Parent, and
is not deemed to be made pursuant to Section 3.1A(a)(1)(iii), then Parent shall 
use its reasonable efforts to list on the New York Stock Exchange the Parent    
Common Stock to be issued pursuant to the Merger.                               

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    SECTION 6.9 ACQUISITION PROPOSALS.  (a) The Company agrees that neither it
nor any of its Subsidiaries, nor any of the officers and directors of any of    
them shall, and that it shall direct and use its reasonable efforts to cause its
and its Subsidiaries' employees, agents and representatives (including any      
investment banker, attorney or accountant retained by them or any of their      
Subsidiaries) not to, directly or indirectly, initiate, solicit or encourage any
inquiries or the making of any proposal or offer with respect to a merger,      
reorganization, share exchange, consolidation or similar transaction, or any    
purchase of all or 10% or more of the assets or any equity securities of the    
Company or any of its Subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), it being understood that any such    
activities engaged in prior to the date of this Agreement do not violate this   
Section 6.9. The Company further agrees that from and after the date hereof     
neither it nor any of its Subsidiaries nor any of the officers and directors of 
any of them shall, and that it shall direct and use its reasonable efforts to   
cause its and its Subsidiaries' employees, agents and representatives (including
any investment banker, attorney or accountant retained by them or any of their  
Subsidiaries) not to, directly or indirectly, engage in any negotiations        
concerning, or provide any confidential information or data to, or have any     
discussions with, any person relating to an Acquisition Proposal, or otherwise  
knowingly facilitate any effort or attempt to make or implement an Acquisition  
Proposal; provided, however, that nothing contained in this Agreement shall     
prevent the Company or its Board of Directors from (A) complying with Rules     
14d-9 and 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal; (B) providing information in response to a request therefor by a      
Person who has made a bona fide written Acquisition Proposal that was not       
solicited in violation of this Section 6.9(a) if the Board of Directors receives
from the Person so requesting such information an executed confidentiality      
agreement on terms substantially similar to those contained in the              
Confidentiality Agreement; (C) engaging in any negotiations or discussions with 
any person who has made a bona fide written Acquisition Proposal that was not   
solicited in violation of this Section 6.9(a); or (D) recommending such an      
Acquisition Proposal to the stockholders of the Company, if and only to the     
extent that, (i) in each such case referred to in clause (B), (C) or (D) above, 
the Board of Directors of the Company determines in good faith after            
consultation with outside legal counsel that such action is consistent with its 
directors' fiduciary duties under applicable law and (ii) in each case referred 
to in clause (C) or (D) above, the Board of Directors of the Company determines 
in good faith (after consultation with its financial advisor) that such         
Acquisition Proposal, if accepted, is reasonably likely to be consummated,      
taking into account all legal, financial and regulatory aspects of the proposal 
and the person making the proposal and would, if consummated, result in a       
transaction or a combination of transactions more favorable to the Company's    
stockholders from a financial point of view than the transactions contemplated  
by this Agreement (any such more favorable Acquisition Proposal being referred  
to in this Agreement as a "Superior Proposal"). The Company agrees that it will 
immediately cease and cause to be terminated any existing activities,           
discussions or negotiations with any parties conducted heretofore with respect  
to any Acquisition Proposal. The Company agrees that it will take the necessary 
steps to promptly inform the individuals or entities referred to in the first   
sentence hereof of the obligations undertaken in this Section 6.9. The Company  
agrees that it will notify Parent by the end of the next business day following 
receipt if any such inquiries, proposals or offers relating to an Acquisition   
Proposal are received by, any such                                              

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information is requested from, or any such discussions or negotiations are      
sought to be initiated or continued with, any of its representatives indicating,
in connection with such notice, the name of such person (unless disclosure of   
such name is precluded by the terms of the proposal or offer in question) and   
the material terms and conditions of any proposals or offers and thereafter     
shall keep Parent informed, on a current basis, on the status and terms of any  
such proposals or offers and the status of any such discussions or negotiations.
The Company also agrees that it will promptly request each Person that has      
heretofore executed a confidentiality agreement in connection with its          
consideration of acquiring it or any of its Subsidiaries to return or destroy   
all confidential information heretofore furnished to such Person by or on behalf
of it or any of its Subsidiaries.                                               

         (b) Notwithstanding anything in this Section 6.9 to the contrary, if,
  at any time prior to obtaining the Company stockholders' approval of the
   Merger, the Company's Board of Directors determines in good faith, on the
basis of the advice of its financial advisors and outside counsel, in 
  response to an Acquisition Proposal that did not result from a breach of
   Section 6.9(a), that such proposal is a Superior Proposal, the Company or
  its Board of Directors may terminate this Agreement if, and only if, the
    Company shall prior to or promptly following such termination enter into a
     definitive agreement containing the terms of a Superior Proposal; provided,
  however, that the Company shall not terminate this Agreement pursuant to
this sentence, and any purported termination pursuant to this sentence
shall be void and of no force or effect, unless the Company shall have
 complied with (i) all the provisions of this Section 6.9, including the
  notification provisions in this Section 6.9, (ii) the following proviso,
   and (iii) the payment of the termination fee described in Section 12.2(b)
within the time period required by such Section; and provided further,
  however, that the Company shall not exercise its right to terminate this
Agreement pursuant to this Section 6.9 until after three Business Days
following Parent's receipt of written notice (a "Notice of Superior   
Proposal") advising Parent that the Company's Board of Directors has  
  received such a Superior Proposal and that such Board of Directors will,
    subject to any action taken by Parent pursuant to this sentence, cause the
     Company to accept such Superior Proposal, specifying the material terms and
     conditions of such Superior Proposal and (unless disclosure of such name is
  precluded by the terms of the proposal or offer in question) identifying
  the person making such Superior Proposal (it being understood and agreed
that any amendment to the price or any other material term of such a  
   Superior Proposal shall require an additional Notice of Superior Proposal
and a new three Business Day period).                                 

SECTION 6.10 PARENT AND SUB APPROVALS.  Parent and Sub shall take all 
reasonable steps necessary or appropriate to obtain as promptly as practicable  
all necessary approvals, authorizations and consents of any person or           
Governmental Entity required to be obtained by Parent and Sub to consummate the 
transactions contemplated hereby, and will cooperate with the Company in seeking
to obtain all such approvals, authorizations and consents. Parent and Sub shall 
use all reasonable efforts to provide such information to such persons, bodies  
and authorities as such persons, bodies or authorities or the Company may       
reasonably request.                                                             

SECTION 6.11 COMPANY APPROVALS.  The Company shall take all reasonable
steps necessary or appropriate to obtain as promptly as practicable all         
necessary approvals, authorizations and consents of any third party or          
Governmental Entity                                                             

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required to be obtained by the Company to consummate the transactions           
contemplated hereby and will cooperate with Parent in seeking to obtain all such
approvals, authorizations and consents. The Company shall use all reasonable    
efforts to provide such information to such persons, bodies and authorities as  
such persons, bodies and authorities or Parent may reasonably request.          

   SECTION 6.12 EXPENSES.  Except as otherwise specifically provided herein,
Parent, Sub and the Company shall bear their respective expenses incurred in    
connection with the preparation, execution and performance of this Agreement and
the transactions contemplated hereby, including, without limitation, all fees   
and expenses of investment bankers, agents, representatives, counsel and        
accountants. In any action, suit or proceeding under or to enforce any provision
of this Agreement, the prevailing party shall be entitled to recover its        
reasonable attorney's fees and other out-of-pocket expenses from the losing     
party.                                                                          

   SECTION 6.13 FURTHER ASSURANCES.  (a) Each of Parent, Sub and the Company
shall execute such documents and other papers and take such further actions as  
may be reasonably required or desirable to carry out the provisions hereof and  
the transactions contemplated hereby. Each of Parent, Sub and the Company shall 
use all reasonable efforts to cause all actions to effectuate the Closing for   
which such party is responsible under this Agreement to be taken as promptly as 
practicable, including using all reasonable efforts to obtain all necessary     
waivers, consents and approvals (including, but not limited to, if applicable,  
filings under the H-S-R Act and with all applicable Governmental Entities) and  
to lift any injunction or other legal bar to the Merger (and, in each case, to  
proceed with the Merger as expeditiously as possible). Notwithstanding the      
foregoing, there shall be no action required to be taken and no action will be  
taken in order to consummate and make effective the transactions contemplated by
this Agreement if such action, either alone or together with another action,    
would result in a Company Material Adverse Effect or a Parent Material Adverse  
Effect.                                                                         

          (b) In case at any time after the Effective Time any further action is
 necessary or desirable to carry out the purposes of this Agreement, the
  proper officers and/or directors of Parent and the Surviving Corporation
shall take all such necessary action.                                 

   SECTION 6.14 HART-SCOTT-RODINO.  Each of the Company and Parent (i) shall
file, and shall cause their "ultimate parent entities" to file, as soon as      
practicable a "Notification and Report Form For Certain Mergers and             
Acquisitions" under the H-S-R Act or any similar law applicable in a non-United 
States jurisdiction, with respect to the Merger and the transactions            
contemplated hereby, (ii) shall use all reasonable efforts to obtain the        
required approval under the H-S-R Act or any such similar law, and (iii) will   
comply at the earliest practicable date with any request for additional         
information received by it from the FTC or Justice or any similar agency        
pursuant to the H-S-R Act or any such similar law.                              

   SECTION 6.15 UPDATING SCHEDULES.  In connection with the Closing, Parent,
Sub and the Company will, promptly upon becoming aware of any fact requiring    
supplementation or amendment of the Parent Disclosure Schedule (in the case of  
Parent or Sub) or the Company Disclosure Schedule (in the case of the Company), 
supplement or amend the applicable Disclosure Schedules to reflect any matter   
which, if existing, occurring or known on the date of this Agreement, would have
been required to be set forth or described in such Disclosure Schedules which   
was or                                                                          

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has been rendered inaccurate thereby. No such supplement or amendment to the    
Disclosure Schedules shall have any effect for the purpose of determining       
satisfaction of the conditions set forth in Articles VII, VIII and IX hereof, or
the compliance by any party hereto with its covenants and agreements set forth  
herein. Notwithstanding anything in this Section 6.15 to the contrary, if the   
Cash Election is made by Parent, then on and after the date the Cash Election is
made, Parent shall have no obligation to supplement or amend the Disclosure     
Schedules applicable to Sections 5.4(a), 5.5, 5.7, 5.12, 5.13, 5.14, 5.15, 5.16 
and 5.18 of this Agreement.                                                     

     SECTION 6.16 STOCK OPTIONS.  The Company shall take all action necessary in
accordance with the terms of the Stock Option Plan to provide written notice to 
each Grantee (as that term is defined in the Stock Option Plan) of the Merger   
and to require that all Grantees surrender their outstanding Company Stock      
Options (other than Rollover Options) in exchange for a payment by the Company  
in Company Common Stock in an amount for each Company Stock Option equal to the 
amount by which $10.375, or, if the provisions of Article IIIA are effective,   
the product of Average Parent Company Stock Price and the Exchange Ratio, or    
Adjusted Exchange Ratio, whichever is applicable, exceeds the exercise price (as
that term is defined in the Stock Option Plan) of the Company Stock Options.    

     SECTION 6.17 VOTING AGREEMENT.  The Company shall take no action which will
result in termination, amendment, waiver or modification of any provision of or 
otherwise interfere with or frustrate the purpose of the Voting Agreement.      

SECTION 6.18 COMPANY RECAPITALIZATION.  The Company shall use all     
reasonable efforts to consummate the Company Recapitalization prior to the      
Effective Time, including the obtaining of the necessary consents of the        
Company's stockholders thereto.                                                 

    SECTION 6.19 SUBORDINATED DEBT.  At or prior to the Effective Time, Parent
will lend the Surviving Corporation $10,000,000 in subordinated debt.           

     SECTION 6.20 WARRANT.  (a) If the Cash Election is made pursuant to Article
IIIB of this Agreement, or deemed to be made pursuant to Section                
3.1A(a)(1)(iii), then immediately prior to the Company Recapitalization if      
Parent and the Company shall determine that the conditions precedent to the     
Merger specified in Articles VII, VIII and IX have been or will promptly be     
satisfied or waived, Parent shall exercise the Warrant and the Company shall    
deliver the Warrant Shares (as defined in the Warrant) to Parent. Immediately   
following the exercise of the Warrant, Parent shall sell to the Company and the 
Company shall purchase from Parent 121,524 Warrant Shares at a cash price of    
$10.375 per share (the "Warrant Share Purchase").                               

        (b) If the Cash Election is not made and not deemed to be made, then
 immediately prior to the Company Recapitalization if Parent and Company
  shall determine that the conditions precedent to the Merger specified in
Articles VII, VIII and IX have been or will promptly be satisfied or  
waived, Parent shall exercise the Warrant in part, on a cashless basis
  pursuant to Section 11 of the Warrant and receive that number of Warrant
Shares equal to the quotient obtained by dividing: A by B, where:     

                                                                [Download Table]
                                                                            

A           =       $1,693,217                                              

B           =       the product of the Average Parent Common Stock Price and
                    the Exchange Ratio or Adjusted Exchange Ratio, whichever
                    is applicable.                                          

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Any unexercised portion of the Warrant shall remain in effect at the  
Effective Time without any change in the terms and conditions of the Warrant as 
in effect prior to the Effective Time.                                          

 SECTION 6.21 TAX-FREE REORGANIZATION.  Unless the Cash Election is made
pursuant to Article IIIB of this Agreement, or deemed to be made pursuant to    
Section 3.1A(a)(1)(iii), each of Parent, Sub, and the Company shall take all    
necessary actions to obtain tax-free reorganization treatment of the Merger     
under Section 368(a) of the Code and shall not take any action or any reporting 
position that is inconsistent with such treatment, except pursuant to or        
following a "determination" defined in Section 1313 of the Code, that the Merger
is not entitled to such treatment. Notwithstanding the prior sentence, the      
parties agree that Parent, Sub, and the Company may engage in the transactions  
contemplated by this Agreement or described in Exhibits G and H.                

ARTICLE VII 
CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATION 
TO EFFECT THE MERGER

The respective obligations of each party to effect the Merger shall be
subject to the satisfaction on or prior to the Closing of the following         
conditions, any one or more of which may be waived by them, to the extent       
permitted by law:                                                               

SECTION 7.1 COMPANY STOCKHOLDER APPROVAL.  This Agreement and the     
transactions contemplated hereby shall have been approved and adopted by the    
requisite vote of the Company's stockholders.                                   

     SECTION 7.2 LISTING OF SHARES.  If the Cash Election is not made by Parent,
and not deemed to have been made pursuant to Section 3.1A(a)(1)(iii), the shares
of Parent Common Stock issuable in the Merger shall have been approved for      
listing on the New York Stock Exchange.                                         

     SECTION 7.3 HART-SCOTT-RODINO.  All applicable waiting periods with respect
to any "Notification and Report Form For Certain Mergers and Acquisitions"      
required to be filed by Parent, the Company or any of their "ultimate parent    
entities" in compliance with the H-S-R Act or any similar law applicable in a   
non-United States jurisdiction in connection with the transactions contemplated 
hereby shall have passed, or early termination of such waiting periods shall    
have been granted.                                                              

    SECTION 7.4 EFFECTIVENESS OF REGISTRATION STATEMENT.  If the Cash Election
is not made by Parent, and not deemed to have been made pursuant to Section     
3.1A(a)(1)(iii), the Registration Statement shall have become effective in      
accordance with the provisions of the Securities Act, and no stop order         
suspending the effectiveness of the Registration Statement shall have been      
issued by the SEC and remain in effect.                                         

   SECTION 7.5 NO INJUNCTIONS OR RESTRAINTS, ILLEGALITY.  No action, suit or
proceeding shall have been instituted and be continuing or be threatened by any 
Governmental Entity to restrain, modify or prevent the carrying out of the      
transactions contemplated hereby. No law, rule or regulation shall have been    
adopted or promulgated, and no temporary restraining order, preliminary or      
permanent injunction or other order, decree or ruling issued by a court or other
Government Entity of competent jurisdiction shall be in effect having the effect
of making the Merger illegal or otherwise prohibiting the consummation of the   
Merger                                                                          

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or limiting or restricting Parent's conduct or operation of the business of the 
Company or its Subsidiaries after the Merger.                                   

ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATION OF 
PARENT AND SUB TO EFFECT THE MERGER 

   The obligation of Parent and Sub to effect the Merger shall be subject to
the satisfaction on or prior to the Closing of the following additional         
conditions, any one or more of which may be waived by them, to the extent       
permitted by law:                                                               

SECTION 8.1 REPRESENTATIONS AND COVENANTS.  The representations and   
warranties of the Company contained in this Agreement (including those contained
in the Company Disclosure Schedule) shall be true and correct on the date hereof
and as of the Closing Date with the same force and effect as though made on and 
as of the Closing Date, (except that any such representations and warranties    
that are given as of a particular date and relate solely to a particular date or
period shall be true and correct as of such date or period), except where the   
failure of such representations and warranties to be true and correct (without  
giving effect to any materiality or Company Material Adverse Effect limitations 
therein) would not have, and would not reasonably be expected to have,          
individually or in the aggregate, a Company Material Adverse Effect. The Company
and the Company stockholders who are parties to the Voting Agreement shall have 
performed and complied, respectively, in all material respects with all         
covenants (except for Section 6.16 which shall be performed in all respects) and
agreements required by this Agreement and the Voting Agreement to be performed  
or complied with by the Company or such Company stockholders on or prior to the 
Closing Date. The Company shall have delivered to Parent and Sub certificates,  
dated the Closing Date, and signed by an Executive Officer of the Company to the
foregoing effect.                                                               

 SECTION 8.2 ABSENCE OF MATERIAL ADVERSE CHANGE.  Since the date hereof,
there shall not have been any change, event, occurrence or state of facts that  
has caused or would reasonably be expected to cause a Company Material Adverse  
Effect.                                                                         

   SECTION 8.3 EFFECTIVENESS OF EMPLOYMENT AGREEMENTS.  On the Closing Date,
the Employment Agreements shall be in full force and effect without any change  
from the form delivered to Parent on the date of this Agreement, and no employee
thereunder shall have expressed an intention not to perform such Employment     
Agreement in accordance with its terms unless he has, as of the Closing Date,   
confirmed his intention to perform such Employment Agreement.                   

SECTION 8.4 RECEIPT OF CERTIFICATES.  On or prior to the Closing Date,
Parent shall have received the Certificates required by Section 6.3(b) of this  
Agreement.                                                                      

   SECTION 8.5 COMPANY RECAPITALIZATION.  The Company Recapitalization shall
have been consummated no later than the Effective Time of the Merger.           

   SECTION 8.6 SECTION 1445 CERTIFICATION.  Parent shall have received on or
before the Closing Date, pursuant to Treas. Reg. sec. 1.1445-2(c)(3), a copy of 
a statement issued by the Company complying with the requirements of Treas. Reg.
sec. 1.897-2(h) and certifying that the interests in the Company being acquired 
in the Merger are not U.S. real property interests.                             

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   SECTION 8.7 PURCHASE OF WARRANT SHARES.  The Company shall have delivered
the Warrant Shares pursuant to Section 6.20(a), or if applicable, the number of 
Warrant Shares calculated pursuant to Section 6.20(b) upon exercise of the      
Warrant by Parent and, if the Cash Election is made pursuant to Article IIIB of 
this Agreement, or deemed to be made pursuant to Section 3.1A(a)(1)(iii), shall 
have consummated the Warrant Share Purchase.                                    

    SECTION 8.8 DISSENTERS.  The holders of not more than ten percent (10%) of
the outstanding shares of the Company Common Stock are Dissenting Shares.       

ARTICLE IX
CONDITIONS PRECEDENT TO THE OBLIGATION OF THE 
COMPANY TO EFFECT THE MERGER

    The obligation of the Company to effect the Merger shall be subject to the
satisfaction on or prior to the Closing of the following additional conditions, 
any one or more of which may be waived by the Company, to the extent permitted  
by law:                                                                         

SECTION 9.1 REPRESENTATIONS AND COVENANTS.  The representations and   
warranties of Parent and Sub contained in this Agreement (including those       
contained in the Parent Disclosure Schedule) except for the representations and 
warranties contained in Sections 5.4(a), 5.5, 5.7, 5.12, 5.13, 5.14, 5.15, 5.16 
and 5.18 if the Cash Election is made by Parent shall be true and correct on the
date hereof and as of the Closing Date with the same force and effect as though 
made on and as of the Closing Date, (except that any such representations and   
warranties that are given as of a particular date and relate solely to a        
particular date or period shall be true and correct as of such date or period), 
except where the failure of such representations and warranties to be true and  
correct (without giving effect to any materiality or Parent Material Adverse    
Effect limitations therein) would not have, and could not reasonably be expected
to have, individually or in the aggregate, a Parent Material Adverse Effect.    
Parent and Sub shall have performed and complied in all material respects with  
all applicable covenants and agreements required by this Agreement to be        
performed or complied with by Parent or Sub on or prior to the Closing Date.    
Parent and Sub shall have delivered to the Company certificates of an Executive 
Officer of Parent and Sub, dated the Closing Date, to the foregoing effect.     

 SECTION 9.2 ABSENCE OF MATERIAL ADVERSE CHANGE.  Since the date hereof,
there shall not have been any change, event, occurrence or state of facts that  
has caused or would reasonably be expected to cause a Parent Material Adverse   
Effect.                                                                         

SECTION 9.3 TAX OPINION.  Unless the Cash Election is made pursuant to
Article IIIB or deemed to be made pursuant to Section 3.1A(a)(1)(iii) of this   
Agreement, the Company shall have received the opinion of Morgan, Lewis &       
Bockius LLP, counsel to the Company (or, if such counsel does not render such   
opinion, such other counsel as shall be reasonably acceptable to the Company),  
based on the representations of the Company, Parent and Sub, (which             
representations shall be in substantially the form attached hereto as Exhibits G
and H, respectively), to the effect that the Merger will be treated as a        
reorganization within the meaning of Section 368(a) of the Code and such opinion
shall not have been withdrawn or modified in any material respect. On and after 
June 29, 2001, the Company may not waive this condition (unless waived prior to 
such time) without the consent of Parent.                                       

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ARTICLE X 
CLOSING 

INTENTIONALLY OMITTED 

ARTICLE XI
NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS

 SECTION 11.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS.  Notwithstanding any right of Parent and Sub to investigate fully   
the affairs of the Company, or any right of the Company to investigate fully the
accuracy of the representations and warranties of Parent and Sub, and           
notwithstanding any knowledge of facts determined or determinable by Parent, Sub
or the Company, as the case may be, pursuant to such investigation or right of  
investigation, Parent, Sub and the Company, as the case may be, have the right  
to rely fully upon the representations, warranties, covenants and agreements of 
the Company, Parent and Sub, as the case may be, contained in this Agreement. No
representations, warranties, covenants or agreements in this Agreement, except  
the covenants and agreements contained in Articles I, II, IIIA or IIIB,         
whichever is applicable, XIII and XIV and Sections 6.5 and 6.12, shall survive  
the Effective Time.                                                             

ARTICLE XII 
TERMINATION OF AGREEMENT

  SECTION 12.1 TERMINATION.  This Agreement may be terminated prior to the
Closing as follows:                                                             

         (a) by either Parent or the Company if the Merger shall not have been
 consummated on or before December 31, 2001; provided, however, that the
     right to terminate under this Section 12.1(a) shall not be available to any
     party whose failure to fulfill any obligation under this Agreement has been
     the cause of, or resulted in, the failure of the Effective Time to occur on
or before such date;                                                  

        (b) by either Parent or the Company if a court or other Governmental
  Entity of competent jurisdiction shall have issued an order (which order
the parties shall use reasonable efforts to lift) that permanently    
    restrains, enjoins or otherwise prohibits the transactions contemplated by
   this Agreement, and such order shall have become final and nonappealable;

        (c) by the Company if any of the conditions specified in Article VII
   or IX have not been met or waived by the Company at such time as any such
condition is no longer capable of satisfaction;                       

      (d) by Parent if any of the conditions specified in Article VII or
VIII have not been met or waived by Parent at such time as any such   
condition is no longer capable of satisfaction;                       

    (e) by Parent if the Company or the Company stockholders who are
     parties to the Voting Agreement shall have breached any of their respective
   obligations under Article VI of this Agreement or the Voting Agreement in
 any material respect and such breach continues for a period of ten days
after the receipt of notice of the breach from Parent;                

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        (f) by the Company if Parent or Sub shall have breached any of their
   respective obligations under Article VI of this Agreement in any material
respect and such breach continues for a period of ten days after the  
receipt of notice of the breach from the Company;                     

        (g) by the Company if its Board of Directors, in the exercise of its
fiduciary duties, accepts an Acquisition Proposal in accordance with  
Section 6.9;                                                          

      (h) at any time on or prior to the Closing Date, by mutual written
consent of Parent, Sub and the Company.                               

 SECTION 12.2 EFFECT OF TERMINATION.  (a) Subject to Section 12.2(b), if
this Agreement is terminated and the transactions contemplated hereby are not   
consummated as described above, this Agreement shall become void and be of no   
further force and effect and there shall be no obligation on the part of Parent,
Sub or the Company, except for the provisions of this Agreement relating to the 
obligations of parties under Sections 6.4(b), 6.12, 12.1 and 12.2(b) and        
Articles XIII and XIV. None of the parties hereto shall have any liability in   
respect to a termination of this Agreement prior to Closing, except to the      
extent that termination results from the intentional, willful or knowing        
violation of the representations, warranties, covenants or agreements of such   
party under this Agreement and except as provided in Section 12.2(b) hereof.    

     (b) In the event that this Agreement is terminated by the Company
  pursuant to Section 12.1(g), then the Company shall, promptly, but in no
   event later than one Business Day after the date of such termination, pay
   to the Parent a termination fee of $2,270,000 payable by wire transfer of
same day funds.                                                       

ARTICLE XIII
DEFINITIONS 

    SECTION 13.1 DEFINITIONS.  The following terms when used in this Agreement
shall have the following meanings:                                              

"Acquisition Proposal" has the meaning set forth in Section 6.9.      

    "Adjusted Exchange Ratio" has the meaning set forth in Section 3.1A(a)(1).

   "Affiliate" (or "affiliates" as the context may require), with respect to
any person, means any other person controlling, controlled by or under common   
control with such person.                                                       

"Affiliates" has the meaning set forth in Section 6.7(a).             

"Agreement" has the meaning set forth in the preamble.                

    "Average Parent Company Stock Price" shall mean the average of the closing
prices of Parent Common Stock on the New York Stock Exchange Composite          
Transactions Reporting System, as reported in the Wall Street Journal, for the  
twenty (20) trading days immediately preceding the fifth trading day prior to   
the Effective Time.                                                             

   "Base Stock Price" shall mean the average of the closing prices of Parent
Common Stock on the Nasdaq National Market or the New York Stock Exchange       
Composite Transactions Reporting System, whichever is applicable, as reported in
the                                                                             

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Wall Street Journal, for the twenty (20) trading days immediately preceding the 
second trading day prior to the date of this Agreement.                         

     "Business Day" means any day other than a Saturday or a Sunday, or a day on
which banking institutions in the District of Columbia are obligated by law or  
executive order to close.                                                       

     "Canceled Company Stock" has the meaning set forth in Section 3.1A(a)(1) or
3.1B(a)(1), whichever is applicable.                                            

"Cash Consideration" has the meaning set forth in Section 3.1B(a).    

"Cash Election" has the meaning set forth in Article IIIB or Section  
3.1A(a)(1)(iii), if applicable.                                                 

 "Certificates" has the meaning set forth in Section 3.2A(a) or 3.2B(b),
whichever is applicable.                                                        

"Closing" has the meaning set forth in Section 1.2.                   

"Closing Date" has the meaning set forth in Section 1.2.              

"Code" means the Internal Revenue Code of 1986, as amended.           

"Company" has the meaning set forth in the preamble.                  

    "Company Audited Financial Statements" has the meaning provided in Section
4.10.                                                                           

     "Company Common Stock" means, the common stock of the Company, having a par
value of $.01 (one cent) per share. The term "Company Common Stock" does not    
include the Company New Preferred Stock.                                        

    "Company Disclosure Schedule" has the meaning set forth in the preamble to
Article IV.                                                                     

"Company Documents" has the meaning set forth in Section 4.1.         

   "Company Financial Statements" has the meaning set forth in Section 4.10.

     "Company Interim Financial Statements" has the meaning set forth in Section
4.10.                                                                           

  "Company Material Adverse Effect" means (a) a material adverse effect on
the business, properties, assets, condition (financial or otherwise),           
liabilities, or operations of (i) the Company and its Subsidiaries, taken as a  
whole, or (ii) the Hillman Subsidiary, taken individually, or (b) a material    
adverse effect on the ability of the Company to consummate the transactions     
contemplated hereby, but excluding from such definition any change, effect,     
event, occurrence or state of facts resulting from or arising in connection with
(A) changes in economic, regulatory or political conditions generally, (B) the  
United States securities markets, (C) changes or conditions generally affecting 
the industries in which the Company or its Subsidiaries operate, or (D) this    
Agreement, the transactions contemplated hereby or the announcement thereof.    

"Company Meeting" has the meaning set forth in Section 3.6A, or 3.6B, 
whichever is applicable.                                                        

"Company Recapitalization" means a recapitalization of the Company    
immediately prior to the Effective Time, pursuant to which (A) each of the      
following                                                                       

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individuals will purchase a number of shares of Company Common Stock (subject to
adjustment as specified in the second sentence of the definition) from Parent   
(which Parent will own pursuant to Section 6.20) pursuant to the terms of the   
Equity Purchase Agreements as follows: (i) Max Hillman will purchase 23,202     
shares of Company Common Stock for $240,717 cash, (ii) Richard Hillman will     
purchase 41,205 shares of Company Common Stock for $427,500 cash, (iii) Gary    
Seeds will purchase 2,410 shares of Company Common Stock for $25,000 cash, (iv) 
Terry Rowe will purchase 3,855 shares of Company Common Stock for $40,000 cash, 
(v) Jim Waters will purchase 2,410 shares of Company Common Stock for $25,000   
cash, (vi) Dennis Blake will purchase 24,096 shares of Company Common Stock for 
$250,000 cash, (vii) Rick Buller will purchase 2,410 shares of Company Common   
Stock for $25,000 cash, (viii) Ken Foskey will purchase 2,410 shares of Company 
Common Stock for $25,000 cash, (ix) John McDonnell will purchase 57,831 shares  
of Company Common Stock for $600,000 cash, and (x) John Marshall will purchase  
3,373 shares of Company Common Stock for $35,000 cash, (B) the Company New      
Preferred Stock will be created, (C) each of the following individuals will     
purchase a number of shares of the Company New Preferred Stock as follows: (i)  
Maurice Andrien will contribute 19,880 shares of Company Common Stock for 19,880
shares of Company New Preferred Stock, (ii) Joseph Corvino will contribute 8,711
shares of Company Common Stock for 8,711 shares of Company New Preferred Stock, 
(iii) Max Hillman will contribute 55,422 shares of Company Common Stock for     
55,422 shares of Company New Preferred Stock, (iv) Steve Miller will contribute 
20,000 shares of Company Common Stock for 20,000 shares of Company New Preferred
Stock, (v) Richard Hillman will contribute 41,205 shares of Company Common Stock
for 41,205 shares of Company New Preferred Stock, (vi) Gary Seeds will          
contribute 2,410 shares of Company Common Stock for 2,410 shares of Company New 
Preferred Stock, (vii) Terry Rowe will contribute 3,855 shares of Company Common
Stock for 3,855 shares of Company New Preferred Stock, (viii) Jim Waters will   
contribute 2,410 shares of Company Common Stock for 2,410 shares of Company New 
Preferred Stock, (ix) Dennis Blake will contribute 24,096 shares of Company     
Common Stock for 24,096 shares of Company New Preferred Stock, (x) Rick Buller  
will contribute 2,585 shares of Company Common Stock for 2,585 shares of Company
New Preferred Stock, (xi) Ken Foskey will contribute 2,410 shares of Company    
Common Stock for 2,410 shares of Company New Preferred Stock, (xii) John        
McDonnell will contribute 57,831 shares of Company Common Stock for 57,831      
shares of Company New Preferred Stock, and (xiii) John Marshall will contribute 
3,373 shares of Company Common Stock for 3,373 shares of Company New Preferred  
Stock.                                                                          

The amount of cash and number of shares indicated above are calculated
using the Cash Election price of $10.375. If the provisions of Article IIIA are 
effective, then (i) the actual amounts of shares of Company Common Stock to be  
purchased for cash shall, for each respective individual named in clause (A) of 
the preceding sentence, be equal to the quotient obtained by dividing A by B    
where A = the amount of cash shown in such clause (A) with respect to such      
individual and B = the product of the Average Parent Common Stock Price and the 
Exchange Ratio or Adjusted Exchange Ratio, whichever is applicable and (ii) the 
number of shares of Company Common Stock to be contributed by such individual   
pursuant to clause (B) of the preceding sentence, as well as the number of      
shares of New Preferred Stock to be issued pursuant to such clause (B) shall be 
reduced or increased accordingly.                                               

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"Company SEC Documents" has the meaning set forth in Section 4.10.    

    "Company Stock Option" means any option for the purchase of Company Common
Stock.                                                                          

"Company Trust Preferred Securities" means the 11.6% Trust Preferred  
Securities of SunSource Capital Trust.                                          

"Company Warrant" means any warrant for the purchase of Company Common
Stock.                                                                          

     "Confidentiality Agreement" means the Mutual Non-Disclosure Agreement dated
as of April 4, 2001 between Parent and the Company. "Confirmation" has the      
meaning set forth in Section 3.1A(d).                                           

 "Contracts and other agreements" mean all contracts, agreements, supply
agreements, undertakings, indentures, notes, bonds, loans, instruments, leases, 
mortgages, commitments or other binding arrangements.                           

"Converting Stockholder" has the meaning set forth in Section 3.2A(a).

"Delaware Corporation Law" has the meaning set forth in Section 1.1.  

     "Distribution" means any distribution of cash, securities or property on or
in respect of the Company Common Stock whether as a dividend or otherwise.      

"Dissenting Shares" has the meaning set forth in Section 3.3B.        

"D&O Insurance" has the meaning set forth in Section 6.5.             

"Effective Time" has the meaning set forth in Section 1.3.            

   "Employment Agreements" means employment agreements, satisfactory in form
and substance to Parent, between the Surviving Corporation (or its applicable   
Subsidiary), on the one hand, and Maurice Andrien, Joseph Corvino, Max Hillman  
and Steve Miller, respectively, on the other, to become effective at the        
Effective Time.                                                                 

   "Environmental Laws" means all applicable federal, state, and local laws,
ordinances, rules, regulations, codes, duties under the common law or orders,   
including, without limitation, any requirements imposed under any Environmental 
Permits, licenses, judgments, decrees, agreements or recorded covenants,        
conditions, restrictions or easements, the purpose of which is to protect the   
environment.                                                                    

"Environmental Permits" shall mean all Permits, licenses, approvals,  
authorizations, consents or registrations required under applicable             
Environmental Laws in connection with the ownership, use and/or operation by the
Company or its Subsidiaries of their properties.                                

 "Equity Purchase Agreements" has the meaning set forth in the preamble.

"ERISA" means the Employee Retirement Income Security Act of 1974, as 
amended.                                                                        

"Escrow Agreement" has the meaning set forth in the preamble.         

   "Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the regulations and rulings issued thereunder.                                  

"Exchange Agent" shall mean American Stock Transfer Company.          

"Exchange Ratio" has the meaning set forth in Section 3.1A(a)(1).     

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     "Executive Officers" means, as to Parent and the Company, respectively, its
chairman of the board, its president, its chief executive officer or its chief  
operating officer.                                                              

"Family Member" means, with respect to any person, a parent, spouse,  
sibling or lineal descendent of such person.                                    

"FTC" means the Federal Trade Commission or any successor agency or   
department.                                                                     

    "GAAP" means generally accepted accounting principles in the United States
of America from time to time in effect.                                         

     "Governmental Entity" means (a) any international, foreign, federal, state,
county, local or municipal government or administrative agency or political     
subdivision thereof, (b) any governmental agency, authority, board, bureau,     
commission, department or instrumentality, (c) any court or administrative      
tribunal, (d) any non-governmental agency, tribunal or entity that is vested by 
a governmental agency with applicable jurisdiction, or (e) any arbitration      
tribunal or other non-governmental authority with applicable jurisdiction.      

"Hazardous Materials" means (i) any substance or material regulated or
identified as hazardous, toxic, pollutant or contaminant under Environmental    
Laws, including gasoline, diesel fuel or other petroleum hydrocarbons, PCBs or  
asbestos; or (ii) any pollutant, toxic substance, or contaminant.               

"Hillman Subsidiary" means Hillman Group, Inc.                        

     "H-S-R Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.               

"Insurance Policies" has the meaning set forth in Section 4.24.       

 "In-the-Money" as applied to Company Stock Options means vested Company
Stock Options having an exercise price of less than $10.375 per share.          

"Intellectual Property Rights" has the meaning set forth in Section   
4.18(a).                                                                        

"IRS" means the Internal Revenue Service or any successor agency or   
department.                                                                     

   "Knowledge of Company" or "of which Company is aware" or words of similar
import shall, for purposes of this Agreement be deemed to mean the actual       
knowledge of directors and actual knowledge after due inquiry of the following  
officers and key employees of the Company and its Subsidiaries: Maurice Andrien,
Joseph Corvino, Max W. Hillman, Jr., Richard P. Hillman, Stephen Miller, Justin 
Jacobi, Jim Waters, Chuck Freeman, plus, for purposes of Section 4.30 only,     
Barry Pullin, Kim Schearer, James Slone and William Valdmanis.                  

 "Knowledge of Parent" or "of which Parent is aware" or words of similar
import shall be deemed to mean the actual knowledge of the following            
individuals: Joan M. Sweeney, G. Cabell Williams III and Daniel L. Russell.     

    "Justice" means the Antitrust Division of the Department of Justice or any
successor agency or department.                                                 

"Leased Real Property" has the meaning set forth in Section 4.17(a).  

"Lease" has the meaning set forth in Section 4.17(a).                 

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"Liabilities" has the meaning set forth in Section 4.11.              

    "lien or other encumbrance" (or "liens or other encumbrances" or "liens or
other encumbrance" or "lien or other encumbrances" as the context may require or
any similar formulation) means any lien, claim, pledge, mortgage, assessment,   
security interest, charge, option, right of first refusal, easement, servitude, 
adverse claim, transfer restriction under any stockholder or similar agreement  
or other encumbrance of any kind.                                               

"Merger" has the meaning set forth in the recitals.                   

     "Named Persons" means each of Maurice Andrien, Joseph Corvino, Max Hillman,
Steve Miller, Rick Hillman, George Heredia, Gary Seeds, Terry Rowe, Jim Waters, 
Dennis Blake, Rick Buller, Ken Foskey, Mike Mueller, Mark Yeary, John McDonnell 
and John Marshall.                                                              

   "New Preferred Stock" means preferred stock, par value $.01 per share, of
the Company created pursuant to the Company Recapitalization and having powers  
and rights identical to the Company Common Stock and voting together with the   
Company Common Stock as a single class.                                         

   "1940 Act" shall mean the Investment Company Act of 1940, as amended, and
the regulations and rulings issued thereunder.                                  

    "Notice of Superior Proposal" has the meaning set forth in Section 6.9(b).

"Owned Real Property" has the meaning set forth in Section 4.17.      

"Parent" has the meaning set forth in the preamble.                   

    "Parent Common Stock" means the common stock, par value $0.0001 per share,
of Parent.                                                                      

   "Parent Disclosure Schedule" has the meaning set forth in the preamble to
Article V.                                                                      

"Parent Documents" has the meaning set forth in Section 5.1.          

 "Parent Financial Statements" has the meaning set forth in Section 5.4.

    "Parent Interim Financial Statements" has the meaning set forth in Section
5.4.                                                                            

 "Parent Material Adverse Effect" means (a) a material adverse effect on
business, properties, assets, condition (financial or otherwise), liabilities,  
or operations of Parent and its Subsidiaries, taken as a whole, or (b) a        
material adverse effect on the ability of Parent to consummate the transactions 
contemplated hereby, but excluding from such definition any change, effect,     
event, occurrence or state of facts resulting from or arising in connection with
(A) changes in economic, regulatory or political conditions generally, (B) the  
United States securities markets, (C) changes or conditions generally affecting 
the industries in which Parent or its Subsidiaries operate, or (D) this         
Agreement, the transactions contemplated hereby or the announcement thereof.    

"Parent SEC Documents" has the meaning set forth in Section 5.4.      

"Permitted Liens" has the meaning set forth in Section 4.21.          

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"Permits" (or "Permit" as the context may require) mean all licenses, 
permits, certificates, certificates of occupancy, orders, approvals,            
registrations, authorizations and qualifications with and under all federal,    
state, or local or laws.                                                        

  "person" (or "persons" as the context may require) means any individual,
corporation, limited liability company, partnership, firm, joint venture,       
association, joint-stock company, trust, unincorporated organization,           
Governmental Entity or other entity.                                            

"Plan" or "Plans" has the meaning set forth in Section 4.22(a).       

"Proceeding" has the meaning set forth in Section 4.15.               

"property" (or "properties" as the context may require) means real,   
personal or mixed property, tangible or intangible.                             

"Proxy Statement" has the meaning set forth in Section 4.9.           

"Receiving Party" has the meaning set forth in Section 14.1.          

"Registration Statement" has the meaning set forth in Section 4.9.    

"Releasing Party" has the meaning set forth in Section 14.1.          

"Resale Agreements" has the meaning set forth in the Preamble.        

     "Revised Base Stock Price" has the meaning set forth in Section 3.1A(a)(1).

    "Rollover Options" means the Company Stock Options set forth on Exhibit F.

    "SEC" means the Securities and Exchange Commission or any successor agency
or department.                                                                  

"Securities Act" means the Securities Act of 1933, as amended, and the
regulations and rulings issued thereunder.                                      

"Share Consideration" has the meaning set forth in Section 3.2A(a).   

    "Stockholders Agreement" means an agreement between Parent and each of the
Named Persons, pursuant to which such persons agree to certain conditions and   
restrictions applicable to their Company Common Stock.                          

     "Stock Option Plan" means the SunSource Inc. 1998 Equity Compensation Plan.

"Sub" has the meaning set forth in the preamble hereof.               

 "Subsidiaries" (or "Subsidiary" as the context may require), means each
entity as to which a person, directly or indirectly, owns or has the power to   
vote, or to exercise a controlling influence with respect to, 50% or more of the
securities of any class of such entity, the holders of which are ordinarily, in 
the absence of contingencies, entitled to vote for the election of directors (or
persons performing similar functions) of such entity, provided that, with       
respect to Company or Parent, the term "Subsidiary" or "Subsidiaries" shall not 
include any person that is not required to be consolidated on consolidated      
financial statements of Company or Parent respectively, prepared in accordance  
with GAAP.                                                                      

"SunSource Technology Services Subsidiary" means SunSource Technology 
Services LLC.                                                                   

"Superior Proposal" has the meaning set forth in Section 6.9.         

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"Surviving Corporation" has the meaning set forth in Section 1.1.     

 "Taxes" (or "Tax" as the context may require) means all federal, state,
county, local, foreign and other taxes (including, without limitation, income,  
intangibles, premium, excise, sales, use, gross receipts, franchise, ad valorem,
severance, capital levy, transfer, employment and payroll-related, and property 
taxes, import duties and other governmental charges and assessments), and       
includes interest, additions to tax and penalties with respect thereto.         

"Tax Returns" means any return or report relating to Taxes.           

"Voting Agreement" has the meaning set forth in the preamble.         

"Warrant" means the common stock warrant dated as of December 28, 2000
issued by the Company to Parent and labeled as Certificate No. 1.               

"Warrant Shares" has the meaning set forth in Section 6.20.           

"Warrant Share Purchase" has the meaning set forth in Section 6.20.   

ARTICLE XIV 
MISCELLANEOUS 

     SECTION 14.1 PUBLICITY.  The Company and Parent shall agree on the form and
content of the initial press release regarding the transactions contemplated    
hereby, and thereafter, so long as this Agreement is in effect, prior to making 
a press release or other public statement with respect to the transactions      
contemplated by this Agreement, each party (a "Releasing Party") will consult   
with the other party (the "Receiving Party") and provide such other party with a
draft of such press release, in each case except as may otherwise be required by
law or stock exchange regulations.                                              

SECTION 14.2 NOTICES.  Any notice or other communication required or  
permitted hereunder shall be in writing and shall be delivered personally, sent 
by facsimile transmission or sent by certified, registered, express mail or     
nationally recognized courier service, postage prepaid. Any such notice shall   
deemed given when so delivered personally or successfully sent by facsimile     
transmission or, if mailed, five days after the date of deposit in the United   
States mails, as follows:                                                       

(i)  if to Parent or Sub to:                                          

Allied Capital Corporation                                  
1919 Pennsylvania Avenue, 3rd Floor                             
Washington, D.C. 20006                                          
Attention: Daniel L. Russell                                    
Telecopy No.: (202) 973-6351                                    
with a concurrent copy to:                                      
Sutherland Asbill & Brennan LLP                                 
1275 Pennsylvania Avenue, N.W.                                  
Washington, D.C. 20004                                          
Attention: James D. Darrow                                      
Telecopy No.: (202) 637-3593                                    

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(ii) if to the Company to:                                            

SunSource Inc.                                              
3000 One Logan Square                                           
Philadelphia, PA 19103                                          
Attention: Maurice P. Andrien, Jr.                              
Telecopy No.: (215) 282-1309                                    
with a copy to:                                                 
Morgan, Lewis & Bockius LLP                                     
1701 Market Street                                              
Philadelphia, PA 19103                                          
Attention: Thomas J. Sharbaugh                                  
Telecopy No. (215) 963-5299                                     

   Any party may by notice given in accordance with this Section 14.2 to the
other parties designate another address or person for receipt of notices        
hereunder.                                                                      

    SECTION 14.3 ENTIRE AGREEMENT.  This Agreement (including the exhibits and
schedules hereto) and the agreements contemplated hereby, including but not     
limited to the Confidentiality Agreement, contain the entire agreement among the
parties with respect to the subject matter hereof, and supersede all prior      
agreements, written or oral, with respect thereto.                              

     SECTION 14.4 WAIVERS AND AMENDMENTS; NON CONTRACTUAL REMEDIES; PRESERVATION
OF REMEDIES; LIABILITY.  This Agreement may be amended, superseded, canceled,   
renewed or extended, and the terms hereof may be waived, only by a written      
instrument signed by each of the parties or, in the case of waiver, by the party
waiving compliance. No delay on the part of any party in exercising any right,  
power or privilege hereunder shall operate as a waiver thereof, nor shall any   
waiver on the part of any party of any such right, power or privilege, nor any  
single or partial exercise of any such right, power or privilege, preclude any  
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided are cumulative and, except as provided  
in Section 12.2, are not exclusive of any rights or remedies that any party may 
otherwise have at law or in equity. The rights and remedies of any party based  
upon, arising out of or otherwise in respect of any inaccuracy in or breach of  
any representation, warranty, covenant or agreement contained in this Agreement 
shall in no way be limited by the fact that the act, omission, occurrence or    
other state of facts upon which any claim of any such inaccuracy or breach is   
based may also be the subject matter of any other representation, warranty,     
covenant or agreement contained in this Agreement (or in any other agreement    
between the parties) as to which there is no inaccuracy or breach.              

SECTION 14.5 GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY AND  
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.                                                

SECTION 14.6 BINDING EFFECT; NO ASSIGNMENT.  This Agreement shall be  
binding upon and inure to the benefit of the parties and their respective       
successors and assigns and heirs and legal representatives. Neither this        
Agreement, nor any right hereunder, may be assigned by any party without the    
prior written consent of the                                                    

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other party hereto; provided, however, that Parent may assign its rights (but   
not its obligations) hereto to its Subsidiaries.                                

     SECTION 14.7 THIRD PARTY BENEFICIARIES.  Except for Section 6.5, nothing in
this Agreement is intended or shall be construed to give any person, other than 
the parties hereto, any legal or equitable right, remedy or claim under or in   
respect of this Agreement or any provision contained herein.                    

    Without limiting the foregoing, no direct or indirect holder of any equity
interests or securities of any party hereto (whether such holder is a limited or
general partner, member, stockholder or otherwise), nor any affiliate of any    
party hereto, nor any director, officer, employee, representative, agent or     
other controlling person of each of the parties hereto and their respective     
affiliates, shall have any liability or obligation arising under this Agreement 
or the transaction contemplated hereby, except as may be provided in a separate 
written agreement signed by such Person.                                        

   SECTION 14.8 COUNTERPARTS.  This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered   
shall be an original, but all such counterparts shall together constitute one   
and the same instrument. Each counterpart may consist of a number of copies     
hereof each signed by less than all, but together signed by all of the parties  
hereto.                                                                         

     SECTION 14.9 EXHIBITS AND SCHEDULES.  The exhibits and schedules hereto are
a part of this Agreement as if fully set forth herein. All references herein to 
Articles, Sections, subsections, clauses, exhibits and schedules shall be deemed
references to such parts of this Agreement, unless the context shall otherwise  
require.                                                                        

   SECTION 14.10 HEADINGS.  The headings in this Agreement are for reference
only, and shall not affect the interpretation of this Agreement.                

    SECTION 14.11 SUBMISSION TO JURISDICTION; VENUE.  Any action or proceeding
against any party hereto with respect to this Agreement shall be brought in the 
courts of the State of Delaware or of the United States located in the State of 
Delaware, and, by execution and delivery of this Agreement, each party hereto   
hereby irrevocably accepts for itself and in respect of its property, generally 
and unconditionally, the jurisdiction of the aforesaid courts. Each party hereto
irrevocably consents to the service of process at any of the aforementioned     
courts in any such action or proceeding by the mailing of copies thereof by     
registered or certified mail, postage prepaid, to such party at its address set 
forth in Section 14.2, such service to become effective 30 days after such      
mailing. Nothing herein shall affect the right of any party hereto to serve     
process on any other party hereto in any other manner permitted by law. Each    
party hereto irrevocably waives any objection which it may now have or hereafter
have to the laying of venue of any of the aforesaid actions or proceedings      
arising out of or in connection with this Agreement brought in the courts       
referred to above and hereby further irrevocably waives and agrees not to plead 
or claim in any such court that any such action or proceeding brought in any    
such court has been brought in an inconvenient forum.                           

SECTION 14.12 SPECIFIC PERFORMANCE.  The parties hereto agree that    
irreparable damage would occur in the event that any of the provisions of this  
Agreement were not performed in accordance with their specific terms or were    
otherwise breached. It is accordingly agreed that the parties shall be entitled 
to an injunction or injunctions to prevent breaches of this Agreement and to    
enforce specifically the terms and                                              

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provisions hereof in any court of the United States or any state having         
jurisdiction, this being in addition to any other remedy to which they are      
entitled at law or in equity.                                                   

SECTION 14.13 SEVERABILITY.  If any court of competent jurisdiction   
determines that any provision of this Agreement is not enforceable in accordance
with its terms, then such provision shall be deemed to be modified so as to     
apply such provision, as modified, to the protection of the legitimate interests
of the parties hereto to the fullest extent legally permissible and shall not   
affect the validity or enforceability of the remaining provisions of this       
Agreement.                                                                      

  IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.                                                            

                ALLIED CAPITAL CORPORATION

               By: /s/ PHILIP A. MCNEILL
                                      ------------------------------------------
                        Title:   Managing Director
                     Name: Philip A. McNeill

                     ALLIED CAPITAL LOCK ACQUISITION
 CORPORATION

               By: /s/ PHILIP A. MCNEILL
                                      ------------------------------------------
                        Title:   Managing Director
                     Name: Philip A. McNeill

    SUNSOURCE INC.

                     By: /s/ MAURICE P. ANDRIEN, JR.
                                      ------------------------------------------
                            Title:   President and Chief Executive
Officer   
                   Name: Maurice P. Andrien, Jr.

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[LETTERHEAD OF JANNEY MONTGOMERY SCOTT LLC] 

                                                                      APPENDIX B

June 18, 2001                                                                   

Board of Directors                                                              
SunSource Inc.                                                                  
One Logan Square                                                                
Philadelphia, PA 19103                                                          

Members of the Board:                                                           

   You have requested our opinion as to the fairness, from a financial point
of view, to the stockholders of SunSource Inc. (the "Company") of the           
consideration to be received by such stockholders in connection with the        
proposed merger (the "Merger") pursuant to the Agreement and Plan of Merger     
dated as of June 18, 2001 (the "Agreement") by and among Allied Capital         
Corporation ("Allied"), Allied Capital Lock Acquisition Corporation, a wholly   
owned subsidiary of Allied, and the Company. Pursuant to the Agreement, the     
Company will become a wholly owned subsidiary of Allied, and Allied will        
exchange for each share of common stock, par value $0.01 per share, of the      
Company consideration equal $10.375 per share, in cash (the "Merger             
Consideration"), subject to the provisions of and as more fully described in the
Agreement.                                                                      

In arriving at our opinion, we have reviewed (i) selected publicly    
available financial and stock market data for the Company and certain other     
publicly traded companies; (ii) publicly available information regarding the    
financial terms of certain recent business combinations; (iii) certain internal 
financial analyses and forecasts for the Company; (iv) the terms of the Merger  
Agreement and certain related documents in draft form; and (v) such other       
studies and analyses, and considered such other information and factors, as we  
deemed appropriate. In addition, we held discussions with certain members of the
management of the Company regarding its business, operating results, financial  
condition and prospects.                                                        

     In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or that was furnished to us by the Company or otherwise reviewed by   
us, and we have not assumed any responsibility or liability therefore. In       
particular, we have relied upon the assessment of the management of the Company 
regarding its business and prospects, and assumed that the budgets and financial
projections provided to us were prepared by the Company's management on the     
basis of reasonable assumptions and reflect the best currently available        
estimates and good faith judgements of its future financial performance. We have
not conducted any valuation or appraisal of any assets or liabilities, nor have 
any such valuations or appraisals been provided to us. We have also assumed that
the Agreement and certain related documents reviewed by us in draft form will   
not vary materially from the drafts reviewed by us.                             

   Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of, 
the date of this letter. We undertake no obligation to update this opinion to   
reflect any                                                                     

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developments occurring after the date hereof. It is understood that this letter 
is provided to the Board of Directors of the Company in connection with its     
evaluation of the Merger and does not address the relative merits of the Merger 
or any other business strategies being considered by the Company's Board of     
Directors, nor does it address the Board's decision to proceed with the Merger. 
Our opinion does not constitute a recommendation to any stockholder of the      
Company as to how such stockholder should vote on the proposed Merger, or as to 
any other matter.                                                               

  Janney Montgomery Scott LLC ("Janney") is acting as financial advisor to
the Company in connection with the Merger and will receive a fee from the       
Company for our services. In addition, the Company has agreed to indemnify      
Janney against certain liabilities arising out of the rendering of this opinion.
Janney is a nationally recognized investment banking firm and, as part of its   
investment banking activities, is regularly engaged in the valuation of         
businesses and securities in connection with mergers and acquisitions,          
negotiated underwritings, secondary distributions of securities, private        
placements and valuations for corporate and other purposes.                     

   Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the Merger Consideration to be received by the stockholders of
the Company pursuant to the Merger is fair to the stockholders, including the   
unaffiliated stockholders, of the Company from a financial point of view.       

Very Truly Yours,                                                               

/s/ Janney Montgomery Scott LLC                                                 

Janney Montgomery Scott LLC                                                     

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                                                                      APPENDIX C

DELAWARE GENERAL CORPORATION LAW

 SECTION 262 APPRAISAL RIGHTS -- (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand      
pursuant to subsection (d) of this section with respect to such shares, who     
continuously holds such shares through the effective date of the merger or      
consolidation, who has otherwise complied with subsection (d) of this section   
and who has neither voted in favor of the merger or consolidation nor consented 
thereto in writing pursuant to sec. 228 of this title shall be entitled to an   
appraisal by the Court of Chancery of the fair value of the stockholder's shares
of stock under the circumstances described in subsections (b) and (c) of this   
section. As used in this section, the word "stockholder" means a holder of      
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily  
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more       
shares, or fractions thereof, solely of stock of a corporation, which stock is  
deposited with the depository.                                                  

(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be 
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.    
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec. 
264 of this title:                                                              

      (1) Provided, however, that no appraisal rights under this section
  shall be available for the shares of any class or series of stock, which
    stock, or depository receipts in respect thereof, at the record date fixed
    to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or    
    consolidation, were either (i) listed on a national securities exchange or
     designated as a national market system security on an interdealer quotation
     system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no    
appraisal rights shall be available for any shares of stock of the    
  constituent corporation surviving a merger if the merger did not require
    for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.              

          (2) Notwithstanding paragraph (1) of this subsection, appraisal rights
     under this section shall be available for the shares of any class or series
of stock                                                              

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 of a constituent corporation if the holders thereof are required by the
     terms of an agreement of merger or consolidation pursuant to sec. 251, 252,
    254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:                                                               

           a. Shares of stock of the corporation surviving or resulting from
        such merger or consolidation, or depository receipts in respect thereof;

             b. Shares of stock of any other corporation, or depository receipts
    in respect thereof, which shares of stock (or depository receipts in
    respect thereof) or depository receipts at the effective date of the
      merger or consolidation will be either listed on a national securities
exchange or                                                     

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 designated as a national market system security on an interdealer
        quotation system by the National Association of Securities Dealers, Inc.
or held of record by more than 2,000 holders;                   

       c. Cash in lieu of fractional shares or fractional depository
   receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or                                                   

            d. Any combination of the shares of stock, depository receipts and
   cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this  
paragraph.                                                      

          (3) In the event all of the stock of a subsidiary Delaware corporation
     party to a merger effected under sec. 253 of this title is not owned by the
    parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.   

  (c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any    
class or series of its stock as a result of an amendment to its certificate of  
incorporation, any merger or consolidation in which the corporation is a        
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision, 
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.                   

(d) Appraisal rights shall be perfected as follows:                   

        (1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a  
  meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
 record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that    
appraisal rights are available for any or all of the shares of the    
   constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such    
     stockholder's shares shall deliver to the corporation, before the taking of
    the vote on the merger or consolidation, a written demand for appraisal of
    such stockholder's shares. Such demand will be sufficient if it reasonably
 informs the corporation of the identity of the stockholder and that the
   stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not 
   constitute such a demand. A stockholder electing to take such action must
     do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or  
 resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
   favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or                      

        (2) If the merger or consolidation was approved pursuant to sec. 228
  or sec. 253 of this title, then, either a constituent corporation before
the effective date of the merger or consolidation, or the surviving or
    resulting corporation within ten days thereafter, shall notify each of the
     holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or     
consolidation and that appraisal rights are available for any or all  

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  shares of such class or series of stock of such constituent corporation,
   and shall include in such notice a copy of this section. Such notice may,
and, if given on or after the effective date of the merger or         
   consolidation, shall, also notify such stockholders of the effective date
of the merger or consolidation. Any stockholder entitled to appraisal 
     rights may, within 20 days after the date of mailing of such notice, demand
 in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably 
 informs the corporation of the identify of the stockholder and that the
     stockholder intends thereby to demand the appraisal of such older's shares.
 If such notice did not notify stockholders of the effective date of the
     merger or consolidation, either (i) each such constituent corporation shall
send a second notice before the effective date of the merger or       
     consolidation notifying each of the holders of any class or series of stock
  of such constituent corporation that are entitled to appraisal rights of
    the effective date of the merger or consolidation or (ii) the surviving or
   resulting corporation shall send such a second notice to all such holders
    on or within 10 days after such effective date; provided, however, that if
   such second notice is sent more than 20 days following the sending of the
    first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
 holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the      
 corporation that is required to give either notice that such notice has
   been given shall, in the absence of fraud, be prima facie evidence of the
     facts stated therein. For purposes of determining the stockholders entitled
     to receive either notice, each constituent corporation may fix, in advance,
 a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
 effective date of the merger or consolidation, the record date shall be
 such effective date. If no record date is fixed and the notice is given
     prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.       

(e) Within 120 days after the effective date of the merger or         
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to   
appraisal rights, may file a petition in the Court of Chancery demanding a      
determination of the value of the stock of all such stockholders.               
Notwithstanding the foregoing, at any time within 60 days after the effective   
date of the merger or consolidation, any stockholder shall have the right to    
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of   
the merger or consolidation, any stockholder who has complied with the          
requirements of subsections (a) and (d) hereof, upon written request, shall be  
entitled to receive from the corporation surviving the merger or resulting from 
the consolidation a statement setting forth the aggregate number of shares not  
voted in favor of the merger or consolidation and with respect to which demands 
for appraisal have been received and the aggregate number of holders of holders 
of such shares. Such written statement shall be mailed to the stockholder within
10 days after such stockholder's written request for such a statement is        
received by the surviving or resulting corporation or within 10 days after      
expiration of the period for delivery of demands for appraisal under subsection 
(d) hereof, whichever is later.                                                 

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 (f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which   
shall within 20 days after such service file in the office of the Register in   
Chancery in which the petition was filed a duly verified list containing the    
names and addresses of all stockholders who have demanded payment for their     
shares and with whom agreements as to the value of their shares have not been   
reached by the surviving or resulting corporation. If the petition shall be     
filed by the surviving or resulting corporation, the petition shall be          
accompanied by such a duly verified list. The Register in Chancery, if so       
ordered by the Court, shall give notice of the time and place fixed for the     
hearing of such petition by registered or certified mail to the surviving or    
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at    
least 1 week before the day of the hearing, in a newspaper of general           
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication  
shall be approved by the Court, and the costs thereof shall be borne by the     
surviving or resulting corporation.                                             

(g) At the hearing on such petition, the Court shall determine the    
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an   
appraisal for their shares and who hold stock represented by certificates to    
submit their certificates of stock to the Register in Chancery for notation     
thereon of the pendency of the appraisal proceedings; and if any stockholder    
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.                                                               

    (h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or        
consolidation, together with a fair rate of interest, if any, to be paid upon   
the amount determined to be the fair value. In determining such fair value, the 
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of 
interest which the surviving or resulting corporation would have had to pay to  
borrow money during the pendency of the proceeding. Upon application by the     
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery 
or other pretrial proceedings and may proceed to trial upon the appraisal prior 
to the final determination of the stockholder entitled to an appraisal. Any     
stockholder whose name appears on the list filed by the surviving or resulting  
corporation pursuant to subsection (f) of this section and who has submitted    
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally          
determined that such stockholder is not entitled to appraisal rights under this 
section.                                                                        

 (i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court 
may direct. Payment shall be so made to each such stockholder, in the case of   
holders of uncertificated stock forthwith, and the case of holders of shares    
represented by certificates upon the surrender to the corporation of the        
certificates representing such stock. The Court's decree may be enforced as     
other decrees in the Court of Chancery                                          

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may be enforced, whether such surviving or resulting corporation be a           
corporation of this State or of any state.                                      

  (j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon        
application of a stockholder, the Court may order all or a portion of the       
expenses incurred by any stockholder in connection with the appraisal           
proceeding, including, without limitation, reasonable attorney's fees and the   
fees and expenses of experts, to be charged pro rata against the value of all   
the shares entitled to an appraisal.                                            

  (k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of  
this section shall be entitled to vote such stock for any purpose or to receive 
payment of dividends or other distributions on the stock (except dividends or   
other distributions payable to stockholders of record at a date which is prior  
to the effective date of the merger or consolidation); provided, however, that  
if no petition for an appraisal shall be filed within the time provided in      
subsection (e) of this section, or if such stockholder shall deliver to the     
surviving or resulting corporation a written withdrawal of such stockholder's   
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as       
provided in subsection (e) of this section or thereafter with the written       
approval of the corporation, then the right of such stockholder to an appraisal 
proceeding in the Court of Chancery shall cease. Notwithstanding the foregoing, 
no appraisal proceeding in the Court of Chancery shall be dismissed as to any   
stockholder without the approval of the Court, and such approval may be         
conditioned upon such terms as the Court deems just.                            

(l) The shares of the surviving or resulting corporation to which the 
shares of such objecting stockholders would have been converted had they        
assented to the merger or consolidation shall have the status of authorized and 
unissued shares of the surviving or resulting corporation.                      

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                                                        [Enlarge/Download Table]
                                                                                                                                    
[X] PLEASE MARK VOTES                                      REVOCABLE PROXY                                                     ---- 
    AS IN THIS EXAMPLE                                     SUNSOURCE INC.                                                          |
                                                                                                                               |    

                                                                                                              FOR   AGAINST  ABSTAIN
                 SPECIAL MEETING OF STOCKHOLDERS                      1. MERGER AGREEMENT AND MERGER          [ ]     [ ]      [ ]  
                  TO BE HELD __________, 2001                                                                                       

        THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF             A vote for the approval and                                   
DIRECTORS OF SUNSOURCE INC. The undersigned hereby appoints           adoption of the merger                                        
Joseph M. Corvino and Maurice P. Andrien, Jr., the attorneys,         agreement by and among Allied                                 
agents and proxies of the undersigned, with full power of             Capital Corporation, Allied                                   
substitution (the "Proxy"), to attend and act as proxy of the         Capital Lock Acquisition                                      
undersigned at the Special Meeting of Stockholders (the "Special      Corporation, a wholly owned                                   
Meeting") of SunSource Inc. to be held at the law offices of          subsidiary of Allied Capital,                                 
Morgan, Lewis & Bockius LLP, 1701 Market Street, Room 18A and B       and SunSource Inc., and                                       
(18th Floor), Philadelphia, Pennsylvania on _____, 2001 at 10:00      approval of the merger.                                       
a.m., local time, or any adjournment thereof, and to vote as                                                                        
specified herein the number of shares which the undersigned, if                                                                     
personally present, would be entitled to vote.                        --------------------------------------------------------------

                                                                                                              FOR   AGAINST  ABSTAIN
                                                                      2. GRANT OF DISCRETIONARY AUTHORITY     [ ]     [ ]      [ ]  

                                                                         A vote for the grant of discretionary                      
                                                                         authority to vote in favor of an                           
                                                                         adjournment of the meeting, if necessary.                  

                                                                                THE BOARD OF DIRECTORS RECOMMENDS A VOTE            
                                                                                 "FOR" THE MERGER AGREEMENT, THE MERGER             
                                                                                AND THE GRANT OF DISCRETIONARY AUTHORITY            

                                          ----------------------                                                                    
Please be sure to sign and date          | Date                |                                                                    
  this Proxy in the box below.           |                     |                                                                    
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|                                                              |                                                                    
|                                                              |                                                                    
----Stockholder sign above----Co-holder (if any) sign above-----                                                                    
+                                                                                                                               +   
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                          /\ DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED. /\                           

                                                           SUNSOURCE INC.                                                           

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        This Proxy when properly executed will be voted as specified. If no instruction is specified with respect to the matter to  
be acted upon, the shares represented by the Proxy will be voted "FOR" the merger agreement and the merger and the grant of         
discretionary authority listed in Proposals 1 and 2. If any other business is properly presented at the Special Meeting, this       
Proxy confers authority to and shall be voted in accordance with the best judgment of the Proxy. This Proxy is solicited by the     
Board of Directors of SunSource, and may be revoked prior to its exercise by filing with the Secretary of SunSource a duly          
executed proxy bearing a later date or an instrument revoking this Proxy, or by attending the meeting and electing to vote in       
person.                                                                                                                             

        Please sign exactly as your name or names appear on this Proxy. If Common Shares are held jointly, each holder should sign. 
If signing as attorney, trustee, executor, administrator, custodian or corporate officer, please give your full title.              

                                                        PLEASE ACT PROMPTLY                                                         
                                              SIGN, DATE & MAIL YOUR PROXY CARD TODAY                                               
------------------------------------------------------------------------------------------------------------------------------------

IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE   
ENVELOPE PROVIDED.                                                                                                                  

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