<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 1-13293
SunSource Inc.
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2874736
- - ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 One Logan Square
Philadelphia, Pennsylvania 19103
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 282-1290
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
-------------- -----------------------------------------
Common Stock, New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
On May 13, 1998 there were 7,215,275 Common Shares outstanding.
Page 1 of 18
<PAGE>
SUNSOURCE INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE(S)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(Unaudited), and December 31, 1997 3
Consolidated Statements of Income and
Comprehensive Income for the three months ended
March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997
(Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
PART II. OTHER INFORMATION 17
SIGNATURES 18
Page 2 of 18
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1998
ASSETS (Unaudited) December 31,1997
-------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,043 $ 5,638
Accounts and notes receivable, net 90,469 82,501
Inventories 104,801 103,369
Deferred income taxes 10,566 10,791
Other current assets 4,361 4,559
--------- ---------
Total current assets 231,240 206,858
Property and equipment, net 21,805 21,939
Goodwill 62,139 62,588
Other intangibles 710 784
Deferred income taxes 4,971 5,014
Cash surrender value of life insurance policies 9,361 8,407
Other assets 666 552
--------- ---------
Total assets $ 330,892 $ 306,142
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade $ 57,568 $ 50,125
Notes payable 1,758 2,080
Current portion of capitalized lease obligations 180 156
Distributions payable to partners 277 2,353
Deferred tax liability 935 935
Accrued expenses:
Salaries and wages 6,137 6,891
Income and other taxes 3,966 4,286
Other accrued expenses 19,108 19,094
--------- ---------
Total current liabilities 89,929 85,920
Senior notes 60,000 60,000
Bank revolving credit 31,000 33,000
Capitalized lease obligations 505 572
Deferred compensation 11,809 10,451
Other liabilities 745 787
--------- ---------
Total liabilities 193,988 190,730
--------- ---------
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures 115,815 115,903
--------- ---------
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,
7,215,275 and 6,418,936 shares issued and outstanding 72 64
Additional paid-in capital 20,881 --
Retained earnings 2,635 1,735
Cumulative foreign translation adjustment (2,499) (2,290)
--------- ---------
Total stockholders' equity (deficit) 21,089 (491)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 330,892 $ 306,142
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3 of 18
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands, except for partnership interest and share amounts)
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 172,091 $ 169,016
Cost of sales 103,453 101,416
------------ ------------
Gross profit 68,638 67,600
------------ ------------
Operating expenses:
Selling, general and administrative expenses 59,432 58,690
Management fee to general partner -- 821
Depreciation 1,109 1,018
Amortization 513 455
------------ ------------
Total operating expenses 61,054 60,984
------------ ------------
Transaction costs -- 350
------------ ------------
Income from operations 7,584 6,266
Interest expense, net 1,688 1,831
Distributions on guaranteed preferred
beneficial interests 3,058 --
Other income, net 110 113
------------ ------------
Income before provision for income taxes 2,948 4,548
Income tax provision (benefit) 1,327 (28)
------------ ------------
Net income 1,621 4,576
Other comprehensive income, net of tax:
Change in cummulative foreign
translation adjustment (209) (341)
------------ ------------
Comprehensive income $ 1,412 $ 4,235
============ ============
Net income allocated to partners:
General partner N/A $ 46
------------
Class A limited partners N/A $ 3,052
------------
Class B limited partners N/A $ 1,478
------------
Earnings per limited partnership interest:
Net income
- Class A interest N/A $ 0.27
- Class B interest N/A $ 0.07
Net income per common share $ 0.25 N/A
Weighted average number of
outstanding common shares 6,474,223 N/A
Weighted average number of outstanding
limited partnership interests:
- Class A interests N/A 11,099,573
- Class B interests N/A 21,675,746
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4 of 18
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,621 $ 4,576
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,622 1,473
Decrease (increase) in cash value of life insurance (854) 129
Transaction costs -- 350
Provision for deferred compensation 415 817
Provision (benefit) for deferred income taxes 268 (324)
Changes in current operating items:
Increase in accounts and notes receivable (7,968) (13,132)
Decrease (increase) in inventories (1,432) 1,017
Decrease (increase) in other current assets 198 (147)
Increase in accounts payable 7,443 6,188
Increase in accrued interest -- 1,419
Decrease in income taxes payable (483) (94)
Decrease in accrued restructuring charges
and transaction costs (572) (719)
Decrease in other accrued liabilities (84) (3,182)
Other items, net 630 (452)
-------- --------
Net cash provided by (used for) operating activities 804 (2,081)
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 10 252
Capital expenditures (978) (1,016)
Investment in life insurance policies (100) --
Other, net (137) (52)
-------- --------
Net cash used for investing activities (1,205) (816)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 20,889 --
Cash distributions to public investors (2,718) (3,690)
Borrowings (repayments) under the bank credit agreement, net (2,000) 9,000
Repayments under other credit facilities, net (322) (953)
Principal payments under capitalized lease obligations (43) (30)
-------- --------
Net cash provided by financing activities 15,806 4,327
-------- --------
Net increase in cash and cash equivalents 15,405 1,430
Cash and cash equivalents at beginning of period 5,638 1,666
-------- --------
Cash and cash equivalents at end of period $ 21,043 $ 3,096
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5 of 18
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company"), its predecessor, SunSource L.P. (the
"Partnership"), and its wholly-owned subsidiaries including SDI Operating
Partners, L.P. (the "Operating Partnership") and SunSource Capital Trust (the
"Trust"). All significant intercompany balances and transactions have been
eliminated. The Company is one of the leading providers of industrial products
and related value-added services in the United States. The Company's five
business segments are Technology Services, Inventory Management - Expediter,
Inventory Management - Integrated Supply, Hardware Merchandising Services and
Glass Merchandising.
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, 1997.
Public Offering
On January 22, 1998, the Company filed a registration statement on Form S-2
with the United States Securities and Exchange Commission, which was amended
thereafter, for an offering of Common Shares of the Company (the "Offering").
The registration statement became effective on March 19, 1998 and the Offering
closed in its entirety on March 27, 1998. Of the 2,284,471 shares sold in the
Offering, 796,408 shares were issued and sold by the Company and 1,488,063
shares were sold by the selling stockholders, affiliates of Lehman Brothers
Inc.
The Company received net cash proceeds of $20,889 from the 796,408 shares sold
in the Offering. The Company recorded an increase of $8 in Common Stock and
$20,881 in Additional Paid-in Capital. The number of outstanding Common Shares
as of March 31, 1998 was 7,215,275. The weighted average number of Common
Shares outstanding for the three months ended March 31, 1998 was 6,474,223
including the shares sold in the Offering.
Page 6 of 18
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. Recent Accounting Pronouncements:
Effective with financial statements issued in 1998, the Company is required to
implement Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income", which requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Comprehensive income includes net income and other
items resulting in changes to stockholders' equity such as foreign currency
translation, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities.
The Company's only reportable item of comprehensive income, after net income,
is the change in the accumulated foreign translation adjustment. This will now
be reflected as a separate line item below net income in arriving at
comprehensive income. The Company will also report this item as a separate
component of the Statement of Changes in Stockholders' Equity in its annual
report on Form 10-K, however, identified as the single component of
Accumulated Comprehensive Income.
3. Common Stock Dividend:
On March 25, 1998, the Board of Directors declared a dividend of $0.10 per
Common Share which was paid on April 10, 1998 to holders of record as of April
6, 1998. The Company expects to declare future quarterly dividends on the
Common Shares to aggregate $0.40 per Common Share annually, subject to the
discretion of its Board of Directors and dependent upon, among other things,
the Company's future earnings, financial condition, capital requirements,
funds needed for acquisitions, level of indebtedness, contractual restrictions
and other factors that the Board of Directors deems relevant.
4. Lines of Credit and Long-Term Debt:
As of March 31, 1998, the Company had $56,763 available under its $90,000 Bank
Credit Agreement which provides revolving credit for working capital purposes
and acquisitions through September 30, 2002. The Company had $91,685 of
outstanding long-term debt at March 31, 1998, consisting of bank borrowings of
$31,000, outstanding Senior Notes of $60,000 and capital lease obligations of
$685.
The Company has another credit facility available in the amount of $500 for
letter of credit commitments only, of which no amount was outstanding as of
March 31, 1998. In addition, an indirect, wholly-owned Canadian subsidiary of
the Company has a $2,500 Canadian dollar line of credit for working capital
purposes of which no amount was outstanding at March 31, 1998.
Page 7 of 18
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
5. Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Debentures:
The Trust was organized in connection with the conversion of the Partnership
to corporate form on September 30, 1997 (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 principal amount of the
Junior Subordinated Debentures is $108,707, consisting of $3,261 related to
the Trust Common Securities and $105,446 related to the Trust Preferred
Securities; the interest rate is 11.6%; and their maturity date is September
30, 2027, unless redeemed earlier.
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
Declaration of Trust of the Trust, 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 distributions on the Trust Preferred
Securities aggregate $12,232 annually.
The Trust Preferred Securities will be redeemed upon maturity on September 30,
2027, or earlier redemption of the Junior Subordinated Debentures at 100% of
the liquidation amount plus accrued and unpaid distributions, provided that
any redemption due to a change in the tax status of the interest payments to
the Trust within the first five years will be at 101%. The Junior Subordinated
Debentures may be redeemed by the Company at any time after September 30,
2002.
In the event of a liquidation of the Trust, the holders of Trust Preferred
Securities would be entitled to receive a preferential distribution of $25 per
Trust Preferred Security, aggregating $105,446, plus accrued and unpaid
distributions. However, upon the occurrence of an event which changes the tax
status of interest payments to the Trust or the status of the Trust itself,
the Trust will be liquidated and, after satisfaction of creditors of the
Trust, the holders will receive Junior Subordinated Debentures.
Page 8 of 18
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
5. Guaranteed Preferred Beneficial Interests in the Company's
Junior Subordinated Debentures, continued:
The Trust Preferred Securities have equity characteristics but creditor's
rights and are therefore classified between liabilities and stockholders'
deficit on the balance sheet. On September 30, 1997, the Trust Preferred
Securities were recorded at fair value of $115,991 based on the price of the
Class A interests of $11.75 upon close of trading on the New York Stock
Exchange on that date. The excess of the 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 thirty-year life of the Trust Preferred
Securities.
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.
6. 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 these matters will
not have a material effect on the consolidated financial position, operations
or cashflows of the Company.
7. Subsequent Events:
From April 1, 1998 through May 1, 1998, the Company's Harding division
acquired the assets of three retail glass shops for net cash consideration of
$1,539 plus the assumption of certain liabilities.
On April 22, 1998, the Company's Hillman division acquired the assets of a
manufacturer of letters, numbers and signs for net cash consideration of $481,
plus the assumption of certain liabilities.
On May 6, 1998, the Company's Hillman division acquired the assets of a retail
hardware business for net cash consideration of $8,000 (of which $2,138 is
held in escrow pending the resolution of post-closing adjustments), plus the
assumption of certain liabilities. The transaction was effective as of the
close of business on May 2, 1998.
Page 9 of 18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - ------------------------------------------------------------------------------
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Company's operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere
herein.
General
SunSource Inc. (the "Company") is one of the leading providers of industrial
and retail products and related value-added services in North America. The
Company is organized into three businesses which are SunSource Industrial
Services Company, Hillman and Harding.
SunSource Industrial Services Company is comprised of SunSource Technology
Services ("STS") and SunSource Inventory Management Company ("SIMCO"). STS
offers a full range of technology-based products and services to small, medium
and large manufacturers. SIMCO provides small parts inventory management to
low volume customers through its expediter activity and integrated inventory
management to large industrial manufacturing customers through its integrated
supply activity.
Hillman operates in the Hardware Merchandising Services Segment, providing
small hardware and related items and merchandising services, to retail
outlets, primarily hardware stores, home centers and lumberyards.
Harding operates in the Glass Merchandising Segment, selling retail and
wholesale automotive and flat glass and providing auto glass installation and
small contract glazing services to individual consumers, insurance companies,
autobody shops, and other customers through a large network of retail glass
shops.
Public Offering
On January 22, 1998, the Company filed a registration statement on Form S-2
with the United States Securities and Exchange Commission, which was amended
thereafter, for an offering of Common Shares of the Company (the "Offering").
The registration statement became effective on March 19, 1998 and the Offering
closed in its entirety by March 27, 1998. Of the 2,284,471 shares sold in the
Offering, 796,408 shares were issued and sold by the Company and 1,488,063
shares were sold by the selling stockholders, affiliates of Lehman Brothers,
Inc.
The Company did not receive any of the proceeds from the shares sold by the
selling stockholders. The Company used the net proceeds raised (of $20.9
million) from the 796,408 shares sold in the Offering to repay borrowings
under its revolving credit facility. As of March 31, 1998, the Company had
7,215,275 Common Shares outstanding.
Page 10 of 18
<PAGE>
Acquisitions
The Company recently resumed its strategy to acquire retail glass shops for
integration with Harding. From August 31, 1997, through December 31, 1997,
Harding acquired the assets of three retail glass shops for net cash
consideration of $0.8 million, plus the assumption of certain liabilities.
Sales from the acquired shops aggregated $0.4 million for the three months
ended March 31, 1998.
From April 1, 1998, through May 1, 1998, Harding acquired the assets of three
retail glass shops for net cash consideration of approximately $1.5 million
plus the assumption of certain liabilities. Sales from the acquired shops
aggregated approximately $3.5 million for the twelve-month period prior to
acquisition. These acquisitions expand Harding's business into the
Albuquerque, New Mexico, and Dallas, Texas, markets.
On April 22, 1998, Hillman acquired the assets of a manufacturer of letters,
numbers and signs for net cash consideration of approximately $0.5 million
plus the assumption of certain liabilities. This acquisition had sales of
approximately $1.0 million for the twelve-month period prior to acquisition.
On May 6, 1998, Hillman acquired the assets of the franchise and independent
hardware segment of Axxess Technologies, Inc., including its PMI division, a
distributor of keys, letters, numbers and signs and other products to retail
hardware stores throughout the United States, for net cash consideration of
$8.0 million (of which $2.1 million is held in escrow pending the resolution
of post-closing adjustments) plus the assumption of certain liabilities. Sales
from the acquired operations were approximately $17 million in 1997. Hillman
will integrate the sales force and operations of the acquired business with
its existing operations.
Page 11 of 18
<PAGE>
Results of Operations
Segment Sales and Profitability for the Three Months Ended March 31, 1998 & 1997
<TABLE>
<CAPTION>
(dollars in thousands)
March 31, 1998 March 31, 1997
-------------- --------------
% Total % Total
Sales Sales
<S> <C> <C> <C> <C>
Sales
SunSource Industrial Services
STS $ 81,965 47.6% $ 78,957 46.7%
SIMCO - Expediter 31,331 18.2% 31,715 18.8%
SIMCO - Integrated Supply 12,201 7.1% 14,051(1) 8.3%
-------- ----- -------- -----
Industrial Services 125,497 72.9% 124,723 73.8%
Hillman 26,097 15.2% 24,337 14.4%
Harding 20,497 11.9% 19,956 11.8%
-------- ----- -------- -----
Consolidated Net Sales $172,091 100.0% $169,016 100.0%
======== ====== ======== ======
Gross Profit % Sales % Sales
SunSource Industrial Services
STS $ 20,774 25.3% $ 20,345 25.8%
SIMCO - Expediter 22,440 71.6% 22,771 71.8%
SIMCO - Integrated Supply 3,115 25.5% 3,522 25.1%
-------- --------
Industrial Services 46,329 36.9% 46,638 37.4%
Hillman 14,225 54.5% 12,817 52.7%
Harding 8,084 39.4% 8,145 40.8%
-------- --------
Consolidated Gross Profit $ 68,638 39.9% $ 67,600 40.0%
======== ========
EBITA (2)
SunSource Industrial Services
STS $ 2,575 3.1% $ 3,012 3.8%
SIMCO - Expediter 4,989 15.9% 5,162 16.3%
SIMCO - Integrated Supply 546 4.5% 854 6.1%
--------- --------
Industrial Services 8,110 6.5% 9,028 7.2%
Hillman 2,176 8.3% 1,261 5.2%
Harding 28 0.1% (191) (1.0%)
--------- ---------
Total operations before
corporate expenses 10,314 6.0% 10,098 6.0%
Corporate expenses (2,217) (1.3%) (2,206) (1.3%)
--------- ---------
Consolidated EBITA $ 8,097 4.7% $ 7,892 (3) 4.7%
========= =========
</TABLE>
(1) Includes sales of $3,437 related to Integrated Supply contracts
cancelled in 1997.
(2) "EBITA" (earnings before interest, taxes and amortization) is defined
as income from operations before amortization.
(3) Excludes $821 of management fees and $350 of transaction costs
related to the Company's conversion to corporate form (the
"Conversion") on September 30, 1997. The management fee represents a
payment made by the Company to its general partner while operating as
a master limited partnership. Since the Conversion, the management
fee is retained by a wholly-owned subsidiary of the Company and is
eliminated in consolidation.
Page 12 of 18
<PAGE>
Three months ended March 31, 1998 and 1997
Net sales increased $3.1 million or 1.8% in the first three months of 1998 to
$172.1 million from $169.0 million in 1997. Sales variances by business
segment are as follows:
<TABLE>
<CAPTION>
Sales Increase (Decrease)
-------------------------
Amount %
------ ---
(In thousands)
<S> <C> <C>
SunSource Industrial Services Company
STS $ 3,008 3.8 %
SIMCO - Expediter (384) (1.2)%
SIMCO - Integrated Supply (1,850) (13.2)%
---------
Industrial Services 774 .6 %
Hillman 1,760 7.2 %
Harding 541 2.7 %
---------
Total Company $ 3,075 1.8 %
=========
</TABLE>
STS sales increased $3.0 million or 3.8% in the first quarter of 1998 to $82.0
million from $79.0 million in 1997 due to continued strengthening in existing
product markets (particularly the mobile business), new product line additions
and sales territory expansion. Integrated Supply sales decreased $1.9 million
or 13.2% in 1998 to $12.2 million from $14.1 million in 1997, which includes a
decrease of $3.4 million due to contracts which were cancelled in 1997, offset
by $1.5 million in new contract sales in the 1998 period. Excluding 1997 sales
from terminated contracts, Integrated Supply sales increased 15.0% in the
first quarter of 1998 over the same prior-year quarter.
Hillman's sales increased $1.8 million or 7.2% in 1998 to $26.1 million from
$24.3 million in 1997 due to market penetration of new product lines in the
amount of $0.9 million and the balance of $0.9 million in growth from new
accounts and expansion of existing product lines.
Harding's sales increased $0.5 million or 2.7% in 1998 to $20.5 million from
$20.0 million in 1997 due primarily to an increase in retail and contract
sales of $1.0 million or 8.0%. In addition, the discontinuation of certain low
margin product lines and markets served resulted in reduced sales of $0.5
million. In recent years, Harding has discontinued certain low-margin product
lines and has withdrawn from non-strategic markets. Growth in Harding's retail
glass shops is expected to continue as a result of internal sales programs and
the recent acquisitions.
The Company's sales backlog on a consolidated basis was $81.7 million as of
March 31, 1998, compared with $68.3 million at December 31, 1997 and $68.7
million at March 31, 1997, an increase of 19.6% and 19.0%, respectively.
Total Company cost of sales increased $2.0 million or 2.0% in 1998 to $103.5
million from $101.4 million in 1997 due primarily to increased sales levels in
the comparison period.
The Company's consolidated gross margin was 39.9% in the first quarter of 1998
compared with 40.0% in the first quarter of 1997. SunSource Industrial
Services Company's gross margin was 36.9% in 1998 compared with 37.4% in 1997,
a decrease of 0.5%. STS's gross margin decreased 0.5% in 1998 due to decreased
labor efficiencies in its service and repair business. The SIMCO Expediter
activity's gross margin declined 0.2% in 1998 due mainly to competitive
pricing pressures. The SIMCO Integrated Supply activity's gross margin
increased 0.4% in 1998 due to the addition of product lines offset slightly by
changes in sales mix as a result of new in-plant inventory management
programs.
Page 13 of 18
<PAGE>
Hillman's gross margin increased 1.8% due primarily to improved purchasing
management and better control of obsolete and slow-moving inventories.
Harding's gross margin decreased 1.4% due to an increase in contract sales at
lower gross margins than the overall retail business.
The Company's selling, general and administrative ("S,G&A") expenses increased
by $0.7 million or 1.3% to $59.4 million in the first quarter of 1998 from
$58.7 million in 1997. Selling expenses increased $1.0 million supporting
increased 1998 sales levels Company-wide and increased marketing efforts at
SIMCO-Expediter, Hillman and Harding. Warehouse and delivery expenses
decreased slightly. General and administrative expenses decreased $0.2 million
in the comparison period.
S,G,&A expenses as a percentage of sales decreased slightly, as follows:
Three Months Ended
March 31,
------------------
1998 1997
---- ----
Selling Expenses 17.5% 17.2%
Warehouse and Delivery Expenses 5.9% 6.0%
General and Administrative Expenses 11.1% 11.5%
------ -----
Total S,G&A Expenses 34.5% 34.7%
====== =====
EBITA was $8.1 million for the three months ended March 31, 1998, compared
with $7.9 million for the same prior-year quarter excluding the previously
discussed $0.4 million charge for transaction and other costs associated with
the Conversion and non-recurring management fees of $0.8 million.
The Company's consolidated operating profit margin ("EBITA, as a percentage of
sales") after corporate expenses remained constant at 4.7% in the first
quarter of 1998 compared with the first quarter of 1997. SunSource Industrial
Services Company's operating profit margin declined to 6.5% in 1998 from 7.2%
in 1997, primarily reflecting slow first quarter 1998 sales growth, as well as
by increased selling expenses at SIMCO - Expediter as indicated above. Hillman
improved its operating profit margin significantly in 1998 to 8.3% from 5.2%
in 1997 due to increased sales and gross profit margin improvement from better
purchasing management in 1998 as previously discussed. Harding's operating
profit margin improved in 1998 to 0.1% from a negative 1.0% in 1997 due to
improved sales resulting from significant investments in sales and marketing
efforts over the last twelve months and better operating expense control,
offset by a decline in gross profit margin due to sales mix as previously
discussed.
Under partnership form, the management fee due the general partner amounted to
$3.3 million annually, of which $0.8 million was expensed in the 1997 period.
As a result of the Conversion, the management fee is retained by a
wholly-owned subsidiary of the Company and is eliminated in consolidation.
The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities in the amount of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million. The Trust distributes
an equivalent amount to the holders of the Trust Preferred Securities. For the
three months ended March 31, 1998, the interest paid by the Company and the
distributions made by the Trust amounted to $3.1 million.
Page 14 of 18
<PAGE>
The Company is subject to federal, state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
operations as accounted for in accordance with Statement of Financial
Accounting Standard ("SFAS") 109, "Accounting for Income Taxes". The Company's
combined effective tax rate was 45.0% for the three months ended March 31,
1998. Deferred income taxes represent differences between the financial
statement and tax bases of assets and liabilities as classified on the
Company's balance sheet.
After giving effect to the Offering in the 1998 period, the Conversion and
debt refinancing at September 30, 1997, and non-recurring items in the 1997
period, pro forma net income for the three months ended March 31, 1998, was
$1.8 million or $.25 per Common Share, an increase of 17.6% above the
comparable 1997 net income of $1.5 million or $.21 per Common Share. Pro forma
adjustments for the Offering reflect the benefits of interest savings as a
result of proceeds from the Offering used to reduce debt, offset by the
dilutive effects of the 796,408 shares sold by the Company in the Offering.
Liquidity and Capital Resources
Net cash provided by operations was $0.8 million for the three months ended
March 31, 1998, compared with net cash used for operations of $2.1 million for
1997, an increase of $2.9 million. This increase was due primarily to
decreased working capital investment in operations in the comparison period of
approximately $5.8 million and an increase in non-cash charges of $0.1, offset
by decreased net income of $3.0 million. The Company's net interest coverage
ratio on a pro forma basis for the three months ended March 31, 1998 was 1.75x
(earnings before interest, distributions on Trust Preferred Securities and
income taxes over net interest expense and distributions on Trust Preferred
Securities), compared with 1.60x in the 1997 period.
The Company's cash position of $21.0 million as of March 31, 1998, increased
$15.4 million from the balance at December 31, 1997. Cash was provided during
this period primarily from operations ($0.8 million), and net proceeds from
the Offering ($20.9 million). Cash was used during this period predominantly
for cash distributions to the public investors ($2.7 million), capital
expenditures ($1.0 million), net repayments on revolver and other credit
facilities ($2.3 million) and other items, net ($0.3 million).
The Company's working capital position of $141.3 million at March 31, 1998,
represents an increase of $20.4 million from the December 31, 1997 level of
$120.9 million, primarily due to the proceeds from the Offering. The Company's
current ratio improved to 2.57x at March 31, 1998 from 2.41x at December 31,
1997, principally due to the increase in cash.
As of March 31, 1998, the Company had $56.8 million available under its credit
facilities. The Company had $91.7 million of outstanding long-term debt at
March 31, 1998, consisting of the $60.0 million Senior Note, bank borrowings
totaling $31.0 million, and capitalized lease obligations of $0.7 million. On
April 4, 1998, the Company utilized its excess cash to repay an $18.0 million
one-month LIBOR loan on its bank revolver. An indirect, wholly-owned Canadian
subsidiary of the Company had a $2.5 million Canadian dollar line of credit
for working capital purposes, of which no amount was outstanding at March 31,
1998.
Page 15 of 18
<PAGE>
As of March 31, 1998, the Company's total debt (including distributions
payable) as a percentage of its consolidated capitalization (total debt, Trust
Preferred Securities and stockholders' equity) was 40.2% compared with 45.6%
as of December 31, 1997. The Company's consolidated capitalization (including
distributions payable) as of March 31, 1998, was $228.9 million compared to
$212.1 million at December 31, 1997.
The Company anticipates spending $4.1 million for capital expenditures in
1998, primarily for warehouse improvements, machinery and equipment and
computer hardware and software.
The Company paid $2.1 million on February 27, 1998, for remaining tax
distributions due to Class B interest holders of the predecessor partnership,
related to taxable income for the nine months ended September 30, 1997.
The Board of Directors of the Company declared on December 10, 1997, a cash
dividend of $0.10 per Common Share which was paid on January 6, 1998, to
holders of record as of December 22, 1997. On March 25, 1998, the Board of
Directors declared a dividend of $0.10 per Common Share which was paid on
April 10, 1998 to holders of record as of April 6, 1998. The Company expects
to declare future quarterly dividends on the Common Shares to aggregate $0.40
per Common Share annually, subject to the discretion of its Board of Directors
and dependent upon, among other things, the Company's future earnings,
financial condition, capital requirements, funds needed for acquisitions,
level of indebtedness, contractual restrictions and other factors that the
Board of Directors deems relevant.
The Company has deferred tax assets aggregating $15.5 million as of March 31,
1998, as determined in accordance with SFAS 109. Management believes that the
Company's deferred tax assets will be realized through the reversal of
existing temporary differences between the financial statement and tax bases,
as well as through future taxable income.
Page 16 of 18
<PAGE>
PART II
OTHER INFORMATION
Items 1, 2, 3, & 5 - None
Item 4 - Submission of Matters to a Vote of Security Holders
- - -------------------------------------------------------------
The Company held its Annual Meeting of Stockholders on April 28, 1998 to
consider and take action on the following:
1. Election of directors.
2. Approval of the 1998 Equity Compensation Plan.
3. Approval of the Stock Compensation Plan for Non-Employee
Directors.
The items listed above are discussed in detail in the Company's Proxy
Statement filed on April 7, 1998. The voting results for each of these items
are as follows:
1. Election of directors:
Votes For Withheld
--------- --------
O. Gordon Brewer, Jr. 5,200,789 67,639
Norman V. Edmonson 5,203,176 65,252
Arnold S. Hoffman 5,204,101 64,327
Robert E. Keith, Jr. 5,203,001 65,427
Donald T. Marshall 5,204,401 64,027
John P. McDonnell 5,203,836 64,592
Donald A. Scott 5,203,751 64,677
Votes Votes Broker
For Against Abstain Non-votes
----- ------- ------- ---------
2. Approval of the 1998 Equity
Compensation Plan 2,817,749 1,008,615 22,364 1,419,700
3. Approval of the Stock
Compensation Plan for
Non-employee Directors 3,620,267 187,154 41,317 1,419,690
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 - SunSource Inc. 1998 Equity Compensation Plan
Exhibit 10.2 - SunSource Inc. Stock Compensation Plan for
Non-Employee Directors.
(b) A report on form 8-K dated February 27, 1998, was filed on March 2,
1998, including under Item 5, financial statements of the Company
for the year ended December 31, 1997.
Page 17 of 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNSOURCE INC.
- - -------------------------- ---------------------------
Joseph M. Corvino John J. Dabrowski
Vice President - Finance Controller
(Chief Financial Officer) (Chief Accounting Officer)
DATE: May 15, 1998
Page 18 of 18
<PAGE>
Exhibit 10.1
Annex A
SUNSOURCE INC.
1998 EQUITY COMPENSATION PLAN
The purpose of the SunSource Inc. 1998 Equity Compensation Plan (the
"Plan") is to provide (i) designated officers (including officers who are also
directors) and other employees of SunSource Inc. (the "Company") and its
subsidiaries, and (ii) non-employee members of the board of directors of the
Company (the "Board") with the opportunity to receive grants of incentive stock
options, nonqualified stock options, stock appreciation rights, stock awards
and performance units (hereinafter collectively referred to as "Grants"). The
Company believes that the Plan will encourage the participants to contribute
materially to the growth of the Company, thereby benefitting the Company's
shareholders, and will align the economic interests of the participants with
those of the shareholders. For purposes of the Plan, the term subsidiary shall
refer to any company (whether a corporation, partnership, joint venture or
other entity) in which the Company owns, directly or indirectly, a majority of
the shares of capital stock or other equity interest.
1. Administration
(a) Committee. The Plan shall be administered and interpreted by a
committee (the "Committee"), which shall consist of two or more persons
appointed by the Board, all of whom shall be "outside directors" as defined
under section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") and related Treasury regulations and non-employee directors as defined
under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Notwithstanding the foregoing, the Board may ratify or approve
(and, in the case of Grants to the members of the Committee, shall approve)
Grants, in which case references to the Committee shall be deemed to include
the Board.
(b) Committee Authority. The Committee shall have the sole authority to
(i) determine the individuals to whom Grants shall be made under the Plan, (ii)
determine the type, size and terms of the Grants to be made to each such
individual, (iii) determine the time when the Grants will be made and the
duration of any applicable exercise or restriction period, including the
criteria for exercisability and the acceleration of exercisability, and (iv)
deal with any other matters arising under the Plan. Grants shall be made in
accordance with a compensation policy established by the Committee which may
require that Grants are made upon accomplishment of certain goals that relate
to the financial performance of the Company or its operating units, the
performance of the common stock of the Company (the "Company Stock"),
individual performance, or such other criteria as the Committee deems
appropriate. A description of the business criteria to be used, and the
procedures to be followed in awarding qualified performance-based compensation
are set forth in Section 9.
(c) Committee Determinations. The Committee shall have full power and
authority to administer and interpret the Plan, to make factual determinations
and to adopt or amend such rules, regulations, agreements and instruments for
implementing the Plan and for the conduct of its business as it deems necessary
or advisable, in its sole discretion. The Committee's interpretations of the
Plan and all determinations made by the Committee pursuant to the powers vested
in it hereunder shall be conclusive and binding on all persons having any
interest in the Plan or in any awards granted hereunder. All powers of the
Committee shall be executed in its sole discretion, in the best interest of the
Company, not as a fiduciary, and in keeping with the objectives of the Plan and
need not be uniform as to similarly situated individuals.
2. Grants
Awards under the Plan may consist of grants of stock options as described
in Section 5 ("Options"), stock awards as described in Section 6 ("Stock
Awards"), stock appreciation rights as described in Section 7 ("SARs"), and
performance units as described in Section 8 ("Performance Units"). All Grants
shall be subject to the terms and conditions set forth herein and to such other
terms and conditions consistent with this Plan as the Committee deems
appropriate and as are specified in writing by the Committee to the individual
in a grant instrument or an amendment to the grant instrument (the "Grant
Instrument"). The Committee shall approve the form and provisions of each Grant
Instrument. Grants under a particular Section of the Plan need not be uniform
as among the grantees.
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<PAGE>
3. Shares Subject to the Plan
(a) Shares Authorized. The aggregate number of shares of Company Stock
("Common Shares") that may be issued or transferred under the Plan is 2,000,000
shares; but no more than the Applicable Percentage of the number of Common
Shares issued and outstanding on the effective date of the Plan and at any time
thereafter may be issued or transferred under the Plan. The Applicable
Percentage shall be five percent (5%) as of the effective date of the Plan and
shall increase by five percent (5%) on each anniversary of the effective date;
provided that the Applicable Percentage shall not exceed twenty-five percent
(25%). In no event, however shall the aggregate number of Common Shares that
may be issued or transferred under the Plan be less than the number of Common
Shares previously issued or transferred under the Plan or subject to then
outstanding Grants. The maximum number of Common Shares that may be issued or
transferred as Stock Awards at any time shall not exceed twenty-five percent
(25%) of the aggregate number of Common Shares that may then be issued or
transferred under the Plan. Notwithstanding anything in the Plan to the
contrary, the maximum aggregate number of Common Shares that shall be subject
to Grants made under the Plan to any one individual during any calendar year
shall be 200,000 shares. The shares may be authorized but unissued Common
Shares or reacquired Common Shares, including shares purchased by the Company
on the open market for purposes of the Plan. If and to the extent Options
granted under the Plan terminate, expire, or are canceled, forfeited, exchanged
or surrendered without having been exercised or if any Stock Awards are
forfeited, the shares subject to such Grants shall again be available for
purposes of the Plan.
(b) Adjustments. If there is any change in the number or kind of Common
Shares outstanding (i) by
reason of a stock dividend, spinoff, recapitalization, stock split, or
combination or exchange of shares, (ii) by reason of a merger, reorganization
or consolidation in which the Company is the surviving corporation, (iii) by
reason of a reclassification or change in par value, or (iv) by reason of any
other extraordinary or unusual event affecting the outstanding Company Stock as
a class without the Company's receipt of consideration, or if the value of
outstanding Common Shares is substantially reduced as a result of a spinoff or
the Company's payment of an extraordinary dividend or distribution, the maximum
number of Common Shares available for Grants, the maximum number of Common
Shares that any individual participating in the Plan may be granted in a year,
the number of shares covered by outstanding Grants, the kind of shares issued
under the Plan, and the price per share or the applicable market value of such
Grants may be appropriately adjusted by the Committee to reflect any increase
or decrease in the number of, or change in the kind or value of, issued Common
Shares to preclude, to the extent practicable, the enlargement or dilution of
rights and benefits under such Grants; provided, however, that any fractional
shares resulting from such adjustment shall be eliminated. Any adjustments
determined by the Committee shall be final, binding and conclusive.
4. Eligibility for Participation
(a) Eligible Persons. All employees of the Company and its subsidiaries
("Employees"), including Employees who are officers or members of the Board,
and members of the Board who are not Employees ("Non-Employee Directors") shall
be eligible to participate in the Plan.
(b) Selection of Grantees. The Committee shall select the Employees and
Non-Employee Directors to receive Grants and determine the number of Common
Shares subject to a particular Grant in such manner as the Committee determines
pursuant to Section 1(b). Employees and Non- Employee Directors who receive
Grants under this Plan shall hereinafter be referred to as "Grantees."
5. Granting of Options
(a) Number of Shares. The Committee, in its sole discretion, shall
determine the number of Common Shares that will be subject to each Grant of
Options to any Employee or Non-Employee Director.
(b) Type of Option and Price.
(i) The Committee may grant Options that are intended to qualify as
"incentive stock options" within the meaning of section 422 of the Code
("Incentive Stock Options") or Options which are not intended to so
qualify ("Nonqualified Stock Options") or any combination of Incentive
Stock Options and Nonqualified Stock Options, all in accordance with the
terms and conditions set forth herein. However, Incentive
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<PAGE>
Stock Options may not be granted to any Non-Employee Director and may only
be granted to an Employee who is employed by the Company or any "parent
corporation" or "subsidiary corporation" (within the meaning of sections
424(e) and 424(f) of the Code, respectively).
(ii) The purchase price (the "Exercise Price") per share of Company
Stock subject to any Option shall be determined by the Committee and shall
not be less than the Fair Market Value (as defined below) of a share of
Company Stock on the date the Option is granted; provided that an
Incentive Stock Option may not be granted to an Employee who, at the time
of grant, owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company or any "parent
corporation" or "subsidiary corporation" of the Company (within the
meaning of sections 424(e) and 424(f) of the Code, respectively), unless
the Exercise Price per share is not less than 110% of the Fair Market
Value of Company Stock on the date of grant. Notwithstanding the
foregoing, the Exercise Price per share of Grants of Nonqualified Stock
Options may be at less than the Fair Market Value of Company Stock, but
not less than (85%) of the Fair Market Value of Company Stock, on the date
the Option is granted; provided that the Grant is subject to the
satisfaction of performance goals established by the Committee in
accordance with Sections 8 or 9.
(iii) If the Company Stock is publicly traded, then the Fair Market
Value per share shall be determined as follows: (1) if the principal
trading market for the Company Stock is a national securities exchange or
the Nasdaq National Market, the last reported sale price thereof on the
relevant date or (if there were no trades on that date) the latest
preceding date upon which a sale was reported, or (2) if the Company
Stock is not principally traded on such exchange or market, the mean
between the last reported "bid" and "asked" prices of Company Stock on
the relevant date, as reported on Nasdaq or, if not so reported, as
reported by the National Daily Quotation Bureau, Inc. or as reported in a
customary financial reporting service, as applicable and as the Committee
determines. If the Company Stock is not publicly traded or, if publicly
traded, is not subject to reported transactions or "bid" or "asked"
quotations as set forth above, the Fair Market Value per share shall be
as determined by the Committee.
(c) Option Term. The Committee shall determine the term of each Option.
The term of any Option shall not exceed ten years from the date of grant.
However, an Incentive Stock Option that is granted to an Employee who, at the
time of grant, owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company, or any parent or
subsidiary of the Company, may not have a term that exceeds five years from the
date of grant.
(d) Exercisability of Options. Options shall become exercisable in
accordance with such terms and conditions, consistent with the Plan, as may be
determined by the Committee, in its sole discretion, and specified in the Grant
Instrument. The Committee, in its sole discretion, may accelerate the
exercisability of any or all outstanding Options at any time for any reason.
(e) Termination of Employment or Service.
(i) Except as provided below and in Section 11, an Option may only be
exercised while the Grantee is employed by, or providing service to, the
Company as an Employee or Non-Employee Director. In the event that a
Grantee ceases to be employed by, or provide service to, the Company for
any reason other than a "disability", death, or termination for "cause",
any Option which is otherwise exercisable by the Grantee shall terminate
unless exercised within 90 days after the date on which the Grantee ceases
to be employed by, or provide service to, the Company (or within such
other period of time as may be specified by the Committee), but in any
event no later than the date of expiration of the Option term. Except as
otherwise provided by the Committee, any of the Grantee's Options that are
not otherwise exercisable as of the date on which the Grantee ceases to be
employed by, or provide service to, the Company shall terminate as of such
date.
(ii) In the event the Grantee ceases to be employed by, or provide
service to, the Company on account of a termination for "cause" by the
Company, any Option held by the Grantee shall terminate as of the date the
Grantee ceases to be employed by, or provide service to, the Company. In
the event a Grantee's employment or service is terminated for cause, in
addition to the immediate termination of all Grants, the Grantee shall
automatically forfeit all shares underlying any exercised portion of an
Option for which the Company has not yet delivered the share certificates,
upon refund by the Company of the Exercise Price paid by the Grantee for
such shares.
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<PAGE>
(iii) In the event the Grantee ceases to be employed by, or provide
service to, the Company because the Grantee is "disabled", any Option
which is otherwise exercisable by the Grantee shall terminate unless
exercised within one year after the date on which the Grantee ceases to
be employed by, or provide service to, the Company (or within such other
period of time as may be specified by the Committee), but in any event no
later than the date of expiration of the Option term. Except as otherwise
provided by the Committee, any of the Grantee's Options which are not
otherwise exercisable as of the date on which the Grantee ceases to be
employed by, or provide service to, the Company shall terminate as of
such date.
(iv) If the Grantee dies while employed by, or providing service to, the
Company or within 90 days after the date on which the Grantee ceases to be
employed or provide service on account of a termination specified in
Section 5(e)(i) above (or within such other period of time as may be
specified by the Committee), any Option that is otherwise exercisable by
the Grantee shall terminate unless exercised within one year after the
date on which the Grantee ceases to be employed by, or provide service to,
the Company (or within such other period of time as may be specified by
the Committee), but in any event no later than the date of expiration of
the Option term. Except as otherwise provided by the Committee, any of the
Grantee's Options that are not otherwise exercisable as of the date on
which the Grantee ceases to be employed by, or provide service to, the
Company shall terminate as of such date.
(v) For purposes of this Section 5(e) and Sections 6, 7, 8 and 9:
(A) The term "Company" shall mean the Company and its parent and
subsidiaries.
(B) "Employed by, or provide service to, the Company" shall mean
employment or service as an Employee or Non-Employee Director (so that,
for purposes of exercising Options and SARs and satisfying conditions
with respect to Stock Awards and Performance Units, a Grantee shall not
be considered to have terminated employment or service until the
Grantee ceases to be an Employee or Non-Employee Director), unless the
Committee determines otherwise.
(C) "Disability" shall mean a Grantee's becoming disabled within the
meaning of section 22(e)(3) of the Code.
(D) "Cause" shall mean, except to the extent specified otherwise by
the Committee, a finding by the Committee that the Grantee has: (i)
breached his or her employment or service contract with the Company;
(ii) failed to adequately perform assigned duties (if the Grantee does
not have an employment agreement) and does not remedy such breach
within 30 days after receiving written notice specifying the details
thereof; (iii) been engaged in disloyalty to the Company, including,
without limitation, fraud, embezzlement, theft, commission of a felony
or proven dishonesty in the course of his or her employment or service;
or (iv) disclosed trade secrets or confidential information of the
Company to persons not entitled to receive such information.
(f) Exercise of Options. A Grantee may exercise an Option that has become
exercisable, in whole or in part, by delivering a notice of exercise to the
Committee with payment of the Exercise Price. The Grantee shall pay the
Exercise Price specified in the Grant Instrument (1) in cash, (2) with the
approval of the Committee, by delivering Common Shares owned by the Grantee
(including Company Stock acquired in connection with the exercise of an Option,
subject to such restrictions as the Committee deems appropriate) and having a
Fair Market Value on the date of exercise equal to the Exercise Price, or (3)
by such other method as the Committee may approve, including payment through a
broker in accordance with procedures permitted by Regulation T of the Federal
Reserve Board. Such notice may instruct the Company to deliver Common Shares
due upon the exercise of the Option to any registered broker or dealer
designated by the Committee ("Designated Broker") in lieu of delivery to the
Grantee. Such instructions must designate the account into which the shares are
to be deposited. The Grantee may tender a notice of exercise, which has been
properly executed by the Grantee, and the aforementioned delivery instructions
to any Designated Broker. Common Shares used to exercise an Option shall have
been held by the Grantee for the requisite period of time to avoid adverse
accounting consequences to the Company with respect to the Option. The Grantee
shall pay the Exercise Price and the amount of any withholding tax due at the
time of exercise.
(g) Limits on Incentive Stock Options. Each Incentive Stock Option shall
provide that, if the aggregate Fair Market Value of the Company Stock on the
date of the grant with respect to which Incentive Stock Options
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<PAGE>
are exercisable for the first time by a Grantee during any calendar year, under
the Plan or any other stock option plan of the Company or "parent corporation"
or "subsidiary corporation" of the Company (within the meaning of sections
424(e) and 424(f) of the Code, respectively), exceeds $100,000, then such
Option, as to the excess, shall be treated as a Nonqualified Stock Option.
6. Stock Awards
The Committee may issue or transfer Common Shares to any Employee or
Non-Employee Director under a Stock Award, upon such terms as the Committee
deems appropriate. The Committee may grant Stock Awards with restrictions that
shall lapse over a period of time or restrictions that otherwise limit the
transferability of the Company Stock ("Restricted Stock"). The Committee may
also grant Stock Awards not subject to any such restrictions ("Unrestricted
Stock"); provided that Grants of Unrestricted Stock may only be made if the
Grant is subject to the satisfaction of performance goals established by the
Committee in accordance with Sections 8 or 9. The following provisions are
applicable to Stock Awards:
(a) General Requirements. Shares of Company Stock issued or transferred
pursuant to Restricted Stock Grants or Unrestricted Stock Grants may be issued
or transferred for consideration or for no consideration, at the sole
discretion of the Committee. The Committee may establish conditions under which
restrictions on shares of Restricted Stock shall lapse over a period of time or
according to such other criteria as the Committee deems appropriate. The period
of time during which the Restricted Stock will remain subject to restrictions
will be designated in the Grant Instrument as the "Restriction Period."
(b) Number of Shares. The Committee shall determine the number of Common
Shares to be issued or transferred pursuant to a Restricted Stock Grant or an
Unrestricted Stock Grant and, in the case of a Restricted Stock Grant, the
restrictions applicable to such shares.
(c) Requirement of Employment or Service. If the Grantee ceases to be
employed by, or provide service to, the Company (as defined in Section 5(e))
during a period designated in the Grant Instrument as the Restriction Period,
or if other specified conditions are not met, the Restricted Stock Grant shall
terminate as to all shares covered by the Grant as to which the restrictions
have not lapsed, and those Common Shares must be immediately returned to the
Company. The Committee may, however, provide for complete or partial exceptions
to this requirement as it deems appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate. During the
Restriction Period, a Grantee may not sell, assign, transfer, pledge or
otherwise dispose of the shares of Restricted Stock except to a Successor
Grantee under Section 11(a). Each certificate for a share of Restricted Stock
shall contain a legend giving appropriate notice of the restrictions in the
Grant. The Grantee shall be entitled to receive a stock certificate or
certificates, or have the legend removed from the stock certificate or
certificates covering any of the shares subject to restrictions, as applicable,
when all restrictions on such shares have lapsed. The Committee, in its sole
discretion, may determine that the Company will not issue certificates for
shares of Restricted Stock, or that the Company retain possession of
certificates for any shares issued pursuant to a Restricted Stock Grant, until
all restrictions on such shares have lapsed.
(e) Right to Vote and to Receive Cash Dividends. Unless the Committee
determines otherwise, during the Restriction Period, the Grantee shall have the
right to vote any shares of Restricted Stock for which certificates have been
issued or transferred to the Grantee and to receive any dividends or other
distributions paid on such shares, subject to any restrictions deemed
appropriate by the Committee.
(f) Lapse of Restrictions. All restrictions imposed on Restricted Stock
shall lapse upon the expiration of the applicable Restriction Period and the
satisfaction of all conditions imposed by the Committee. The Committee may
determine, as to any or all Restricted Stock Grants, that all the restrictions
shall lapse without regard to any Restriction Period.
7. Stock Appreciation Rights
(a) General Requirements. The Committee may grant stock appreciation
rights ("SARs") to an Employee or Non-Employee Director separately or in tandem
with any Option (for all or a portion of the applicable Option). Tandem SARs
may be granted either at the time the Option is granted or at any time
thereafter while
A-5
<PAGE>
the Option remains outstanding; provided, however, that, in the case of an
Incentive Stock Option, SARs may be granted only at the time of the Grant of
the Incentive Stock Option. The Committee shall establish the base amount of
the SAR at the time the SAR is granted. Unless the Committee determines
otherwise, the base amount of each SAR shall be equal to the per share Exercise
Price of the related Option or, if there is no related Option, the Fair Market
Value of a Common Share as of the date of Grant of the SAR.
(b) Tandem SARs. In the case of tandem SARs, the number of SARs granted to
a Grantee that shall be exercisable during a specified period shall not exceed
the number of Common Shares that the Grantee may purchase upon the exercise of
the related Option during such period. Upon the exercise of an Option or the
transfer of a Nonqualified Stock Option under Section 11(b), the SARs relating
to the Company Stock covered by such Option shall terminate. Upon the exercise
of SARs, the related Option shall terminate to the extent of an equal number of
Common Shares.
(c) Exercisability. An SAR shall be exercisable during the period
specified by the Committee in the Grant Instrument and shall be subject to such
vesting and other restrictions as may be specified in the Grant Instrument. The
Committee may accelerate the exercisability of any or all outstanding SARs at
any time for any reason. SARs may only be exercised while the Grantee is
employed by the Company or during the applicable period after termination of
employment as described in Section 5(e). A tandem SAR shall be exercisable only
during the period when the Option to which it is related is also exercisable.
(d) Value of SARs. When a Grantee exercises SARs, the Grantee shall
receive in settlement of such SARs an amount equal to the value of the stock
appreciation for the number of SARs exercised, payable in cash, Common Share or
a combination thereof. The stock appreciation for an SAR is the amount by which
the Fair Market Value of the underlying Common Share on the date of exercise of
the SAR exceeds the base amount of the SAR as described in Subsection (a).
(e) Form of Payment. The Committee shall determine whether the
appreciation in an SAR shall be paid in the form of cash, Common Shares, or a
combination of the two, in such proportion as the Committee deems appropriate.
For purposes of calculating the number of Common Shares to be received, Common
Shares shall be valued at their Fair Market Value on the date of exercise of
the SAR. If Common Shares are to be received upon exercise of an SAR, cash
shall be delivered in lieu of any fractional share.
8. Performance Units
(a) General Requirements. The Committee may grant performance units
("Performance Units") to an Employee. Each Performance Unit shall represent the
right of the Grantee to receive an amount based on the value of the Performance
Unit, if performance goals established by the Committee are met. A Performance
Unit may be based on the Fair Market Value of a Common Share or on such other
measurement base as the Committee deems appropriate. Anything contained herein
to the contrary notwithstanding, the Committee may grant Performance Units that
represent the right to receive a specified number of Common Shares, Options or
SARs. The Committee shall determine the number of Performance Units to be
granted and the requirements applicable to such Units.
(b) Performance Period and Performance Goals. When Performance Units are
granted, the Committee shall establish the performance period during which
performance shall be measured (the "Performance Period"), performance goals
applicable to the Units ("Performance Goals") and such other conditions of the
Grant as the Committee deems appropriate. Performance Goals may relate to the
financial performance of the Company or its operating units, the performance of
Company Stock, individual performance, or such other criteria as the Committee
deems appropriate.
(c) Payment with respect to Performance Units. At the end of each
Performance Period, the Committee shall determine to what extent the
Performance Goals and other conditions of the Performance Units are met and the
amount, if any, to be paid with respect to the Performance Units. Payments with
respect to Performance Units may be made in cash, in Common Shares, or in a
combination of the two, as determined by the Committee. If and to the extent
Performance Units represent the right to receive a specified number of Common
Shares, Options or SARs, payment of such Performance Units shall be made in
such form.
A-6
<PAGE>
(d) Requirement of Employment or Service. If the Grantee ceases to be
employed by, or provide service to, the Company (as defined in Section 5(e))
during a Performance Period, or if other conditions established by the
Committee are not met, the Grantee's Performance Units shall be forfeited. The
Committee may, however, provide for complete or partial exceptions to this
requirement as it deems appropriate.
9. Qualified Performance-Based Compensation
(a) Designation as Qualified Performance-Based Compensation. The Committee
may determine that a Grant to an Employee shall be considered "qualified
performance-based compensation" under section 162(m) of the Code. The
provisions of this Section 9 shall apply to Grants that are to be considered
"qualified performance-based compensation" under Section 162(m) of the Code.
(b) Performance Goals. When a Grant is to be considered "qualified
performance-based compensation," the Committee shall establish in writing (i)
the objective performance goals that must be met in order for restrictions on
the Restricted Stock to lapse or amounts to be paid under the Performance
Units, (ii) the Performance Period during which the performance goals must be
met, (iii) the threshold, target and maximum amounts that may be paid if the
performance goals are met, and (iv) any other conditions, including without
limitation provisions relating to death, disability, other termination of
employment or Change of Control, that the Committee deems appropriate and
consistent with the Plan and section 162(m) of the Code. The performance goals
may relate to the Employee's business unit or the performance of the Company
and its subsidiaries as a whole, or any combination of the foregoing. The
Committee shall use objectively determinable performance goals based on one or
more of the following criteria: stock price, earnings per share, net earnings,
operating earnings, return on assets, shareholder return, return on equity,
growth in assets, unit volume, sales, market share, or strategic business
criteria consisting of one or more objectives based on meeting specified
revenue goals, market penetration goals, geographic business expansion goals,
cost targets or goals relating to acquisitions or divestitures.
(c) Establishment of Performance Goals. The Committee shall establish the
Performance Goals in writing either before the beginning of the Performance
Period or during a period ending no later than the earlier of (i) 90 days after
the beginning of the Performance Period or (ii) the date on which 25% of the
Performance Period has been completed, or such other date as may be required or
permitted under applicable regulations under section 162(m) of the Code. The
Performance Goals shall satisfy the requirements for qualified
performance-based compensation, including the requirement that the achievement
of the goals be substantially uncertain at the time they are established and
that the goals be established in such a way that a third party with knowledge
of the relevant facts could determine whether and to what extent the
Performance Goals have been met. The Committee shall not have discretion to
increase the amount of compensation that is payable upon achievement of the
designated Performance Goals.
(d) Announcement of Grants. The Committee shall certify and announce the
results for each Performance Period to all Grantees immediately following the
announcement of the Company's financial results for the Performance Period. If
and to the extent that the Committee does not certify that the Performance
Goals have been met, Grants of Restricted Stock for the Performance Period
shall be forfeited, and amounts under the Performance Units shall not be paid.
10. Withholding of Taxes
(a) Required Withholding. All Grants under the Plan shall be subject to
applicable federal (including FICA), state and local tax withholding
requirements. The Company may require the Grantee or other person receiving
shares to pay to the Company the amount of any such taxes that the Company is
required to withhold with respect to such Grants, or the Company may deduct
from the amount payable under a Grant or from other wages paid by the Company
the amount of any withholding taxes due with respect to such Grants.
(b) Election to Withhold Shares. If the Committee so permits, a Grantee
may elect to satisfy the Company's income tax withholding obligation with
respect to an Option or Stock Award by having shares withheld up to an amount
that does not exceed the applicable withholding tax for federal (including
FICA), state and local tax liabilities. The election must be in the form and
manner prescribed by the Committee and is subject to the prior approval of the
Committee.
A-7
<PAGE>
11. Transferability of Grants
(a) Nontransferability of Grants. Except as provided below, only the
Grantee may exercise rights under a Grant during the Grantee's lifetime. The
Grantee may not transfer those rights except by will or by the laws of descent
and distribution or, with respect to Grants other than Incentive Stock Options,
if permitted in any specific case by the Committee in its sole discretion,
pursuant to a qualified domestic relations order (as defined under the Code or
Title I of the Employee Retirement Income Security Act of 1974, as amended or
the regulations thereunder). When a Grantee dies, the personal representative
or other person entitled to succeed to the rights of the Grantee ("Successor
Grantee") may exercise such rights. A Successor Grantee must furnish proof
satisfactory to the Company of his or her right to receive the Grant under the
Grantee's will or under the applicable laws of descent and distribution.
(b) Transfer of Nonqualified Stock Options. Notwithstanding the foregoing,
the Committee may provide, in a Grant Instrument, that a Grantee may transfer
Nonqualified Stock Options to family members, one or more trusts for the
benefit of family members, or one or more partnerships of which family members
are the only partners, or other persons or entities according to such terms as
the Committee may determine; provided that the Grantee receives no
consideration for the transfer of an Option and the transferred Option shall
continue to be subject to the same terms and conditions as were applicable to
the Option immediately before the transfer.
12. Change of Control of the Company
As used herein, a "Change of Control" shall be deemed to have occurred if:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) other than the management group of Harold J. Cornelius, Joseph M.
Corvino, Norman V. Edmonson, Max W. Hillman, Donald T. Marshall, and John P.
McDonnell, becomes a "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 20% or more of the voting power of the then outstanding securities
of the Company.
(b) The Company ceases to own, directly or indirectly, all of the general
and limited partnership interests in SDI Operating Partners, L.P.
(c) (i) A transaction is approved in which the stockholders of the Company
immediately before the transaction will not beneficially own, immediately after
the transaction, shares entitling such stockholders to 75% or more of all votes
to which all stockholders of the surviving entity would be entitled in the
election of directors or other governing persons (without consideration of the
rights of any class of stock to elect directors by a separate class vote), or
where the members of the board of directors, immediately prior to the
transaction, would not, immediately after the transaction, constitute a
majority of the board of directors of the surviving entity, (ii) the sale or
other disposition of all or substantially all of the assets of the Company,
SunSub A Inc., SunSub B Inc. or SDI Operating Partners, L.P., or (iii) a
liquidation or dissolution of the Company or SDI Operating Partners, L.P.
(d) Notwithstanding the foregoing, a Change of Control shall not occur as
a result of a reorganization of SunSub A Inc., SunSub B Inc., SDI Operating
Partners, L.P. and/or SDI Partners I, L.P.; provided that substantially all the
assets of SDI Operating Partners, L.P. continue to be owned directly or
indirectly by the Company.
(e) Any person has commenced a tender offer or exchange offer for 20% or
more of the voting power of the then outstanding securities of the Company.
(f) A majority of the Board shall cease for any reason to consist of (1)
individuals who on the effective date hereof are serving as directors of the
Company, or (2) individuals who subsequently become members of the Board and
whose nomination for election or election to the Board is recommended or
approved by a majority of the Board.
13. Consequences of a Change of Control
(a) Notice and Acceleration. Upon a Change of Control, unless the
Committee determines otherwise, (i) the Company shall provide each Grantee with
outstanding Grants written notice of such Change of Control, (ii) all
outstanding Options and SARs shall automatically accelerate and become fully
exercisable, (iii) the restrictions and conditions on all outstanding
Restricted Stock shall immediately lapse, and (iv) Grantees holding Performance
Units shall receive a payment in settlement of such Performance Units, in an
amount determined by the Committee, based on the Grantee's target payment for
the Performance Period and the portion of the Performance Period that precedes
the Change of Control.
A-8
<PAGE>
(b) Assumption of Grants. Upon a Change of Control where the Company is
not the surviving corporation (or survives only as a subsidiary of another
corporation), unless the Committee determines otherwise, all outstanding
Options and SARs that are not exercised shall be assumed by, or replaced with
comparable options or rights by, the surviving corporation.
(c) Other Alternatives. Notwithstanding the foregoing, subject to
subsection (d) below, in the event of a Change of Control, the Committee may
take one or both of the following actions: the Committee may (i) require that
Grantees surrender their outstanding Options and SARs in exchange for a payment
by the Company, in cash or Company Stock as determined by the Committee, in an
amount equal to the amount by which the then Fair Market Value of the Common
Shares subject to the Grantee's unexercised Options and SARs exceeds the
Exercise Price of the Options or the base amount of the SARs, as applicable, or
(ii) after giving Grantees an opportunity to exercise their outstanding Options
and SARs, terminate any or all unexercised Options and SARs at such time as the
Committee deems appropriate. Such surrender or termination shall take place as
of the date of the Change of Control or such other date as the Committee may
specify.
(d) Committee. The Committee making the determinations under this Section
13 following a Change of Control must be comprised of the same members as those
on the Committee immediately before the Change of Control. If the Committee
members do not meet this requirement, the automatic provisions of Subsections
(a) and (b) shall apply, and the Committee shall not have discretion to vary
them.
(e) Limitations.
(1) Notwithstanding anything in the Plan to the contrary, in the
event of a Change of Control, the Committee shall not have the right to
take any actions described in the Plan (including without limitation
actions described in Subsection (c) above) that would make the Change
of Control ineligible for pooling of interests accounting treatment or
that would make the Change of Control ineligible for desired tax
treatment if, in the absence of such right, the Change of Control would
qualify for such treatment and the Company intends to use such
treatment with respect to the Change of Control.
(2) The Committee shall limit the application of Section 13 if it
determines that: (i) a Grantee will receive an "excess parachute
payment," as defined in Section 280G of the Code, that will be subject
to an excise tax under Section 4999 of the Code, and (ii) the
Committee's imposition of limits on the application of Section 13 will
result in a Grantee receiving a larger amount on an after-tax basis than
he would have received had the Committee not imposed such limitations.
If the Committee must limit application of Section 13 as a result of the
foregoing, it shall do so in a manner that (A) maximizes total
compensation paid to the Grantee without causing any compensation to be
subject to the excise tax under Section 4999 of the Code, and (B) unless
the Committee determines otherwise, restores, in the following order,
Options, SARs, Restricted Stock and Performance Units on a
share-by-share or unit-by-unit basis, to the terms that applied before
the Change of Control.
14. Requirements for Issuance or Transfer of Shares
No Common Shares shall be issued or transferred in connection with any
Grant hereunder unless and until all legal requirements applicable to the
issuance or transfer of such Common Shares have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Grant made to any Grantee hereunder on such Grantee's undertaking in
writing to comply with such restrictions on his or her subsequent disposition
of such Common Shares as the Committee shall deem necessary or advisable as a
result of any applicable law, regulation or official interpretation thereof,
and certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing Common Shares issued or transferred
under the Plan will be subject to such stop-transfer orders and other
restrictions as may be required by applicable laws, regulations and
interpretations, including any requirement that a legend be placed thereon.
15. Amendment and Termination of the Plan
(a) Amendment. The Board may amend or terminate the Plan at any time;
provided, however, that the Board shall not amend the Plan without stockholder
approval if such approval is required by section 422 of the Code or section
162(m) of the Code.
A-9
<PAGE>
(b) Termination of Plan. The Plan shall terminate on the day immediately
preceding the tenth anniversary of its effective date, unless the Plan is
terminated earlier by the Board or unless extended by the Board with the
approval of the stockholders.
(c) Termination and Amendment of Outstanding Grants. A termination or
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
Committee acts under Section 21(b) hereof. The termination of the Plan shall
not impair the power and authority of the Committee with respect to an
outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant
may be terminated or amended under Section 21(b) hereof or may be amended by
agreement of the Company and the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling document. No
other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company and its successors and assigns.
16. Funding of the Plan
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant, including unpaid installments of
Grants.
17. Rights of Participants
Nothing in this Plan shall entitle any Employee, Non-Employee Director or
other person to any claim or right to be granted a Grant under this Plan.
Neither this Plan nor any action taken hereunder shall be construed as giving
any individual any rights to be retained by or in the employ of the Company or
any other employment rights. Except as otherwise provided by the Committee, a
Grantee or Successor Grantee shall have no rights as a stockholder with respect
to any Common Shares covered by a Grant until the shares are issued or
transferred to the Grantee or Successor Grantee on the stock transfer records
of the Company.
18. No Fractional Shares
No fractional Common Shares shall be issued or delivered pursuant to the
Plan or any Grant. The Committee shall determine whether cash, other awards or
other property shall be issued or paid in lieu of such fractional shares or
whether such fractional shares or any rights thereto shall be forfeited or
otherwise eliminated.
19. Headings
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
20. Effective Date of the Plan
This Plan shall be effective upon approval of the Plan by the Company's
stockholders.
<PAGE>
21. Miscellaneous
(a) Grants in Connection with Corporate Transactions and
Otherwise. Nothing contained in this Plan shall be construed to (i) limit the
right of the Committee to make Grants under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including Grants to
employees thereof who become Employees of the Company, or for other proper
corporate purposes, or (ii) limit the right of the Company to grant stock
options or make other awards outside of this Plan. Without limiting the
foregoing, the Committee may make a Grant to an employee of another corporation
who becomes an Employee by reason of a corporate merger, consolidation,
acquisition of stock or property, reorganization or liquidation involving the
Company or any of its subsidiaries in substitution for a stock option or
restricted stock grant made by such corporation. The terms and conditions of
the substitute grants may vary from the terms and conditions required by the
Plan and from those of the substituted stock incentives. The Committee shall
prescribe the provisions of the substitute grants.
A-10
<PAGE>
(b) Compliance with Law. The Plan, the exercise of Options and the
obligations of the Company to issue or transfer Common Shares under Grants
shall be subject to all applicable laws and to approvals by any governmental or
regulatory agency as may be required. With respect to persons subject to
Section 16 of the Exchange Act, it is the intent of the Company that the Plan
and all transactions under the Plan comply with all applicable provisions of
Rule 16b-3 or its successor under the Exchange Act. In addition, it is the
intent of the Company that Grants under the Plan intended to comply with the
applicable provisions of Sections 162(m) and 422 of the Code, so comply. To the
extent that any legal requirement of Section 16 of the Exchange Act or Section
162(m) or 422 of the Code as set forth in the Plan ceases to be required under
Section 16 of the Exchange Act or Section 162(m) or 422 of the Code, that
provision shall cease to apply. The Committee may revoke any Grant if it is
contrary to law or modify a Grant to bring it into compliance with any valid
and mandatory government regulation. The Committee may, in its sole discretion,
agree to limit its authority under this Section.
(c) Governing Law. The validity, construction, interpretation and effect
of the Plan and Grant Instruments issued under the Plan shall exclusively be
governed by and determined in accordance with the laws of the State of
Delaware.
A-11
<PAGE>
Exhibit 10.2
Annex B
SUNSOURCE INC.
STOCK COMPENSATION PLAN FOR
NON-EMPLOYEE DIRECTORS
1. Purpose
1.1 SunSource Inc. (the "Company") has established the Equity Plan for
Non-Employee Directors (the "Plan") to further its long-term financial success
by providing for stock awards to non-employee directors of the Company. The
Plan is intended to increase the proprietary interest of such persons by
providing further opportunity for ownership of the Company's Common Shares
("Shares") and to more closely align the interests of such persons with the
interests of the Company's stockholders.
1.2 All elections and transactions under the Plan by persons subject to
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") involving Shares are intended to comply with all exemptive conditions
under Rule 16b-3. The Board may establish and adopt written administrative
guidelines, designed to facilitate compliance with Section 16(b) of the
Exchange Act, as it may deem necessary or proper for the administration and
operation of the Plan and the transaction of business thereunder. To the extent
that any provision of the Plan, the administrative guidelines, or any action or
omission with respect to the Plan (including any action by an Eligible
Director, as hereinafter defined, that does not satisfy the exemptive
conditions under Rule 16b-3 or otherwise) is inconsistent with Section 16, the
provision, guidelines or act or omission shall be deemed null and void, as
permitted by applicable law.
2. Administration
2.1 The Plan shall be administered by the Board of Directors of the
Company (the "Board").
2.2 The Board may make such rules and establish such procedures for the
administration of the Plan as it deems appropriate to carry out the purpose of
the Plan. The interpretation and application of the Plan or of any rule or
procedure, and any other matter relating to or necessary to the administration
of the Plan, shall be determined in the sole discretion of the Board, and any
such determination shall be final and binding on all persons. All
determinations of the Board shall be made by a majority of its members at a
meeting duly called pursuant to the provisions of the By-laws of the Company.
The Board may delegate to one or more of its members or to one or more agents
such administrative duties as it may deem advisable.
2.3 All costs and expenses involved in administering the Plan shall be
borne by the Company.
2.4 For purposes of the Plan, an "Eligible Director" shall be a member of
the Board who is not an employee of the Company or any subsidiary or affiliate
of the Company. If any Eligible Director at any time becomes such an employee,
he or she shall thereupon cease to be an Eligible Director.
3. Common Shares
3.1 Shares Reserved. Shares which may be issued under the Plan may be
either authorized and unissued Shares or issued Shares which have been
reacquired by the Company, provided that the total number of Shares which may
be issued under the Plan shall not exceed 75,000 Shares, subject to adjustment
in accordance with Section 3.2 hereof.
3.2 Capital Adjustments. In the event that the Board shall determine that
any reorganization, recapitalization, stock split, stock dividend, combination
of shares, merger, consolidation, spin-off or a similar corporate transaction
affects the Shares such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Eligible Directors under the Plan,
then the Board shall make such equitable changes or adjustments as it deems
necessary to the maximum number or class of Shares available under the Plan,
and the number or class of Shares of Stock to be delivered hereunder.
B-1
<PAGE>
4. Delivery of Shares
4.1 Mandatory Portion. For each calendar year commencing with the calendar
year beginning January 1, 1998, each Eligible Director who is elected a
director of the Company at the annual meeting of stockholders or chosen as a
director thereafter shall receive a whole number of Shares equal in value to
50% of his or her retainer fee payable for services as a director during such
calendar year (including any additional retainer fee payable for service as a
chairperson of a committee of the Board) in lieu of payment of such percentage
of the retainer fee in cash. Such Shares shall be issued to each such Eligible
Director quarterly (the "Share Payment Date").
Each such Share shall be valued at the average of the high and low prices
of a Common Share on the Composite Tape for New York Stock Exchange Listed
Stocks, as reported in The Wall Street Journal on the last business day
preceding the Share Payment Date (the "Share Value Price"). The value of
fractional shares shall be paid to the Eligible Director in cash.
4.2 Elective Portion. For each calendar year commencing with the calendar
year beginning January 1, 1999, each Eligible Director elected at the annual
meeting of stockholders in such year or chosen as a director thereafter may
elect to receive a whole number of Shares equal in value (based on the Share
Value Price) to up to 100 percent of the balance of his or her retainer fee
payable for services as a director during such calendar year (including any
additional retainer fee payable for serving as a chairperson of a committee of
the Board) in lieu of payment of such percentage of the retainer fee in cash.
Such election may be made in incremental amounts of 5 percent of the total
retainer fee. Such Shares shall be delivered to each Eligible Director on the
Share Payment Date. The value of fractional shares shall be paid to the
Eligible Director in cash. Any such election shall be irrevocable and shall be
made in writing in accordance with written procedures adopted by the Board of
Directors.
4.3 Withholding Taxes. The Company shall have the right to make such
provisions as it deems necessary or appropriate to satisfy any obligations it
may have to withhold federal, state, or local income or other taxes incurred by
reason of payments pursuant to the Plan. In lieu thereof, the Company shall
have the right to withhold the amount of such taxes from any other sums due or
to become due from the Company to an Eligible Director upon such terms and
conditions as the Company may prescribed.
5. Term of Plan
5.1 The Plan is subject to approval by the stockholders of the Company at
the 1998 Annual Meeting of Shareholders. In no event shall any delivery of
Shares be made to any director or other person under the Plan until such time
as stockholder approval of the Plan is obtained.
5.2 The Plan shall remain in effect until December 31, 2007, unless sooner
terminated by the Board.
6. Amendment; Termination
6.1 The Board may at any time and from time to time alter, amend, suspend,
or terminate the Plan in whole or in part; provided, however, no amendment
which requires stockholder approval under applicable Delaware law, under the
rules of any securities exchange on which the Shares may be listed, or in order
for the Plan to continue to comply with Rule 16b-3 shall be effective unless
the same shall be approved by the requisite vote of the stockholders of the
Company.
7. Miscellaneous
7.1 Nothing in this Plan shall be construed as conferring any right upon
any director to continuance as a member of the Board.
7.2 This Plan and all rights hereunder shall be construed in accordance
with and governed by the laws of the State of Delaware.
B-2
<PAGE>
7.3 This Plan shall not be construed to require the Company to fund any
amount payable under the Plan, to create a trust of any kind or to set aside or
earmark any monies or other assets specifically for payments under the Plan.
7.4 Notwithstanding any other provision of this Plan, the Company shall
not be required to award or deliver any certificate for Common Shares under
this Plan prior to fulfillment of all of the following conditions:
(a) Any required listing or approval or notice of issuance of such
Shares on any securities exchange on which the Common Shares may then be
traded;
(b) Any registration or other qualification of such Shares under any
state or federal law or regulation or other qualification which the Board
shall upon the advice of counsel deem necessary or advisable; and
(c) The obtaining of any other required consent or approval or permit
from any state or federal government agency.
7.5 No right under this Plan shall be transferable or otherwise subject to
anticipation, sale, assignment, pledge, encumbrance or charge except by will or
the law of descent and distribution.
B-3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
sheet as of March 31, 1998 and the related Statement of Income for the
year-to-date ended March 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 21,043
<SECURITIES> 0
<RECEIVABLES> 92,858
<ALLOWANCES> 2,389
<INVENTORY> 104,801
<CURRENT-ASSETS> 231,240
<PP&E> 53,550
<DEPRECIATION> 31,745
<TOTAL-ASSETS> 330,892
<CURRENT-LIABILITIES> 89,929
<BONDS> 60,000<F1>
115,815<F2>
0
<COMMON> 72
<OTHER-SE> 21,089
<TOTAL-LIABILITY-AND-EQUITY> 330,892
<SALES> 172,091
<TOTAL-REVENUES> 172,091
<CGS> 103,453
<TOTAL-COSTS> 61,054
<OTHER-EXPENSES> (110)
<LOSS-PROVISION> 396
<INTEREST-EXPENSE> 1,688
<INCOME-PRETAX> 2,948
<INCOME-TAX> 1,327
<INCOME-CONTINUING> 1,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,621
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<FN>
<F1> Bonds represents all long-term debt for senior notes.
<F2> Represents Guaranteed preferred beneficial interests in the Corporations
junior subordinated debentures.
</FN>
</TABLE>
