<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
SunSource Inc.
- - -----------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
-----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
___________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
___________________________________________________________________________
4) Date Filed:
___________________________________________________________________________
<PAGE>
(LOGO) SUNSOURCE
April 7, 1998
To our Stockholders:
You are cordially invited to attend our first Annual Meeting of
Stockholders. The meeting will be held at 10:00 a.m. on Tuesday, April 28, 1998
at The Union League, 140 South Broad Street, Philadelphia, PA.
At the meeting we will take action on the election of directors, approval
of a 1998 Equity Compensation Plan and approval of a plan to pay a portion of
outside directors fees in Common Shares. We will also review SunSource's 1997
performance and answer your questions.
Enclosed with this Proxy Statement is your proxy card, the 1997 Annual
Report, and a Question and Answer brochure regarding the 1998 Equity
Compensation Plan. We encourage you to read this Proxy Statement and sign and
return your proxy card in the enclosed envelope as soon as possible, so that
your shares will be represented at the meeting.
Sincerely yours,
/s/ Donald T. Marshall
---------------------------------
DONALD T. MARSHALL
Chairman
<PAGE>
SunSource Inc.
3000 One Logan Square
Philadelphia, PA 19103
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD TUESDAY, APRIL 28, 1998
The Annual Meeting of Stockholders of SunSource Inc. will be held at 10:00
a.m. on Tuesday, April 28, 1998 at The Union League, 140 South Broad Street,
Philadelphia, PA 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.
4. The transaction of other business that may be properly presented.
Your Board of Directors recommends a vote in favor of all three proposals.
For information on the proposals, you are urged to read the Proxy
Statement that follows.
Stockholders of record at the close of business on March 31, 1998 will be
entitled to vote at the Annual Meeting or any adjournments of the meeting. A
list of such stockholders will be available for examination at the offices of
the Company, 3000 One Logan Square, Philadelphia, PA for ten days prior to the
date of the meeting.
By Order of the Board of Directors
/s/ Joseph M. Corvino
------------------------------------
Joseph M. Corvino
Secretary
April 7, 1998
<PAGE>
TABLE OF CONTENTS
PROXY STATEMENT ............................................ 1
VOTING PROCEDURES .......................................... 1
Revoking Your Proxy ..................................... 1
Vote Required and Method of Counting Votes .............. 1
Other Business .......................................... 1
BOARD OF DIRECTORS ......................................... 1
Election of Directors ................................... 1
Board Meetings; Committees of the Board ................. 2
Compensation of Directors ............................... 3
OWNERSHIP OF COMMON SHARES ................................. 3
REPORT OF COMPENSATION COMMITTEE ........................... 4
Base Salary ............................................. 4
Annual Bonus ............................................ 4
Long-Term Incentive ..................................... 4
Compensation of the Chief Executive Officer ............. 5
Deductibility of Compensation ........................... 5
STOCK PERFORMANCE CHART .................................... 6
EXECUTIVE COMPENSATION ..................................... 7
Summary Compensation Table .............................. 7
Deferred Compensation Plans ............................. 7
Change in Control Arrangements .......................... 8
APPROVAL OF PROPOSED 1998 EQUITY COMPENSATION PLAN ......... 8
APPROVAL OF PROPOSED STOCK COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS ................................ 14
OTHER INFORMATION .......................................... 16
Certain Related Transactions ............................ 16
Independent Accountants ................................. 16
Shareholder Proposals ................................... 16
Expenses of Solicitation ................................ 16
SUNSOURCE INC. 1998 EQUITY COMPENSATION PLAN ............... Annex A
STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS ......... Annex B
i
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PROXY STATEMENT
The Board of Directors of SunSource Inc. is soliciting your proxy for
voting at the Annual Meeting of Stockholders. This Proxy Statement is being
mailed to stockholders on April 7, 1998.
VOTING PROCEDURES
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend our Annual
Meeting of Stockholders, please take the time to vote by completing and mailing
the enclosed proxy card. We have included a postage-prepaid envelope for your
convenience.
If you sign, date and mail your proxy card without indicating how you want
to vote, your proxy will be voted as recommended by the Board of Directors.
Revoking Your Proxy
If you later wish to revoke your proxy, you may do so by: (1) sending a
written statement to that effect to the Secretary of the Company; (2)
submitting a properly signed proxy with a later date; or (3) voting in person
at the annual meeting.
Vote Required and Method of Counting Votes
o Number of Shares Outstanding and Quorum. At the close of business on the
record date, March 31, 1998, there were 7,215,344 Common Shares
outstanding and entitled to vote at the annual meeting. A majority of the
outstanding Common Shares present in person or by proxy is required for a
quorum to transact business at the meeting.
o Vote Required. The following is an explanation of the vote required for
each of the three items to be voted on at the annual meeting.
Item 1 -- Election of Directors.
The nominees receiving the highest number of votes will be elected. If you
do not wish your shares to be voted for a particular nominee, you may so
indicate in the space provided on the proxy card.
Item 2 -- Approval of 1998 Equity Compensation Plan and Item 3 -- Approval of
Stock Compensation Plan for Non-Employee Directors.
The affirmative vote of a majority of the Common Shares present in person
or by proxy is required for approval of Items 2 and 3. Shares represented by
proxy which are marked "abstain" will have the effect of a vote against Items 2
and 3. A "broker non-vote" (when a broker does not have authority to vote on a
particular issue) will have no effect on the vote.
Other Business
We know of no other matters to be presented for stockholder action at the
meeting. If other matters are properly brought before the meeting, the persons
named in the proxy card intend to vote your shares in accordance with their
best judgment.
BOARD OF DIRECTORS
The Company is the successor to SunSource L.P. (the "Partnership") as a
result of the conversion to corporate form on September 30, 1997 (the
"Conversion"). References to the Company in this Proxy Statement include the
Partnership, the general partner of the Partnership (SDI Partners I, L.P.) and
its general partner (Lehman/SDI, Inc.).
Election of Directors
Seven nominees, all of whom are presently directors of the Company, are
being proposed for election at the meeting.
1
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Ernest L. Ransome, III, who has served as a director since 1987, is
retiring as a director at the annual meeting. Eliot M. Fried and Henri I.
Talerman, who have served as directors since 1994 and 1995, respectively,
resigned from the Board in March upon completion of the public offering of
Common Shares held by affiliates of Lehman Brothers, Inc.
The shares represented by your proxy card will be voted, unless authority
to vote is withheld, "FOR" the election of the seven nominees. If any of the
nominees are unavailable for election, the number of directors to be elected at
the meeting will be reduced.
The following sets forth information with respect to each nominee.
<TABLE>
<CAPTION>
Principal Occupation; Five Year
Name, Age and Year Employment History; Other
First Became Director Directorships
- - ------------------------- --------------------------------------------------------------
<S> <C>
O. Gordon Brewer, Jr., 61
1987 ................... Vice President-Finance of Ikon Office Solutions (formerly
Alco Standard Corporation) for more than the past five
years; Director, Corporate Insurance Reinsurance Limited
Norman V. Edmonson, 57
1987 ................... Executive Vice President of the Company since December
1994; Group Vice President prior thereto
Arnold S. Hoffman, 62
1987 ................... Senior Managing Director in Corporate Finance of Legg
Mason Wood Walker, Incorporated since April 1995;
Managing Director prior thereto; Director, Intelligent
Electronics Incorporated
Robert E. Keith, Jr., 56
1997 ................... Managing Director and Chief Executive Officer of TL
Ventures (a venture capital firm) for more than the past five
years; President and Chief Executive Officer of Technology
Leaders Management, Inc. from February 1996; President
and Chief Operating Officer prior thereto; Director,
Cambridge Technology Partners, National Media Corporation,
Navigator, Safeguard Scientifics, Inc. and Wave
Technologies International
Donald T. Marshall, 64
1987 ................... Chairman and Chief Executive Officer of the Company for
more than the past five years
John P. McDonnell, 63
1995 ................... President and Chief Operating Officer of the Company
since December 1994; Group Vice President prior thereto
Donald A. Scott, 68
1987 ................... Partner of Morgan, Lewis & Bockius LLP for more than
the past five years; Director Provident Mutual Life
Insurance Company
</TABLE>
Your Board of Directors recommends a vote in favor of the election of
these nominees.
Board Meetings; Committees of the Board
The Board of Directors met eight times in 1997.
The Board has two standing committees: the Audit Committee whose members
are Mr. Brewer and Mr. Ransome; and the Compensation Committee whose members
are Mr. Hoffman and Mr. Keith (upon his election as a director in December
1997). The Audit Committee met four times in 1997; the Compensation Committee
met once.
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The Audit Committee reviews the performance and independence of the
Company's independent accountants, makes an annual recommendation to the Board
with respect to the appointment of independent accountants, approves the
general nature of the services to be performed and solicits and reviews the
accountants' recommendations. The Committee also consults with the Company's
financial officers and internal auditors.
The Compensation Committee reviews the Company's compensation policies and
executive compensation changes and makes recommendations on compensation plans.
The Board does not have a Nominating Committee. The Board will consider
recommendations for nominees for director from stockholders, who should submit
such recommendations in writing to the Secretary of the Company. Pursuant to
the Company's Bylaws, a nomination by a stockholder of a person for election as
a director must be made not later than 60 days nor earlier than 90 days prior
to the anniversary of the preceding year's annual meeting in writing with the
information specified in the Bylaws.
Compensation of Directors
Employee directors receive no additional compensation for serving as a
director.
During 1997 non-employee directors received an annual retainer of $14,000
plus $1,000 for each Board or committee meeting attended. For 1998, the
retainer has been increased to $20,000 with one half to be paid in Common
Shares if the stockholders approve the Stock Compensation Plan for Non-Employee
Directors described in this Proxy Statement.
Messrs. Brewer and Ransome also served on a Special Committee of the Board
to review, evaluate and reach a determination on the fairness of the Conversion
to the limited partners and to make a recommendation to the Board with respect
to the Conversion. As compensation for serving on the Special Committee, they
were each paid a retainer of $20,000 plus $1,000 for each Committee meeting
attended.
OWNERSHIP OF COMMON SHARES
The following table shows for (i) each director, (ii) each executive
officer named in the summary compensation table, (iii) certain persons known to
the Company to own beneficially more than 5% of the outstanding Common Shares,
and (iv) all officers and directors as a group, the beneficial ownership of
Common Shares as of March 27, 1998. Percentage amounts represent less than 1%
of the outstanding Common Shares unless otherwise indicated.
<TABLE>
<CAPTION>
Common
Name of Beneficial Owner Shares Percent
------------------------ ------ -------
<S> <C> <C>
Directors and Executive Officers
- - --------------------------------
O. Gordon Brewer, Jr. ...................... 250 --
Harold J. Cornelius ........................ 27,770 --
Norman V. Edmonson ......................... 440,729 6.1%
Max W. Hillman, Jr. ........................ 30,220 --
Arnold S. Hoffman .......................... 3,250 (1) --
Robert E. Keith, Jr. ....................... 2,000 --
Donald T. Marshall ......................... 698,988 9.7%
John P. McDonnell .......................... 211,208 2.9%
Ernest L. Ransome, III ..................... 1,250 (2) --
Donald A. Scott ............................ 2,250 --
All directors and executive officers as a
group (13 persons) ........................ 1,454,041 20.2%
Other 5% Owner
- - --------------
Lehman Brothers Capital Partners I ......... 524,106 (3) 7.3%
3 World Financial Center
New York, NY 10285
</TABLE>
- - ------------
(1) Does not include a limited partnership interest in Lehman Brothers Capital
Partners I owned by Mr. Hoffman for which he will receive 6,002 Common
Shares in June 1998. Includes 750 Common Shares owned by Hoffman
Investment Co., of which Mr. Hoffman is Managing Partner. In addition, Mr.
Hoffman's children own 1,000 Common Shares with respect to which he
disclaims beneficial ownership.
3
<PAGE>
(2) 625 of these Common Shares are held in a trust, of which Mr. Ransome is a
trustee.
(3) These Common Shares will be distributed to the individual limited partners
of Lehman Brothers Capital Partners I in June 1998.
Pursuant to a Stockholders Agreement dated as of July 31, 1997, Messrs.
Cornelius, Corvino, Edmonson, Hillman, Marshall and McDonnell (the "Senior
Executives") have agreed to vote, in the same proportion as the unaffiliated
Common Shares that are voted on any matter, that percentage of Excess Voting
Shares held by them that equals the percentage of unaffiliated Common Shares
that are voted on such matter. "Excess Voting Shares" means the Common Shares
beneficially owned by the Senior Executives that represent voting power in
excess of the respective voting powers they would have had immediately prior to
the Conversion in a vote of the holders of Class A Interests and Class B
Interests voting together as a single class.
REPORT OF COMPENSATION COMMITTEE
The Company's compensation program for executive officers is designed to
attract, retain, and motivate superior executive talent and to align a
significant portion of each officer's total compensation with the performance
of the applicable business unit, the Company and the interests of the Company's
stockholders.
SunSource maintains a highly leveraged pay for performance compensation
program recognizing and supporting its high risk/high reward business strategy
and culture. When performance is exceptional, rewards can be substantial and
well above average/median labor market values. When performance falls short of
expectations, there may be no incentive award payouts.
The Company has implemented a competitive total compensation program for
executive officers composed of the following elements discussed below: base
salary, annual bonus; and long-term incentive compensation.
Base Salary
Executive base salaries reflect the Company's operating philosophy,
culture and business direction with each salary determined subjectively by the
skills, experience and performance level of the individual executive, and the
needs and resources of the Company. Base salaries are targeted to medial market
levels based on reviews of published salary surveys and peer company
compensation conducted by an independent compensation consulting firm. The
Committee believes that the Company's most direct competitors for executive
talent are not necessarily restricted to those companies that are included in
the industry index used to compare stockholder returns, but encompass a broader
group of companies engaged in the recruitment and retention of executive talent
in competition with the Company. Thus, the compensation peer group is not the
same as, and is broader than, the companies comprising the peer group index as
it appears in the graph under the caption "Comparison of Five-Year Cumulative
Total Returns". See "Stock Performance Chart."
Annual Bonus
Annual bonuses may be earned by executive officers and key employees under
the Company's annual bonus plans. Payments under these plans are based on the
performance of the overall Company or the business unit over which the
individual has a direct influence. Annual bonus targets and goals are
recommended by the CEO. The goals incorporate the achievement of business plan
income targets, Return on Assets ("ROA") and Return on Average Net Tangible
Assets ("ROANTA") as well as the achievement of non-financial management
business objectives. The mix and weighting of the goals vary by business unit
and are subjectively determined. The level of achievement of the goals
determines the level of bonus. The maximum payout is two times the annual bonus
target.
Long-Term Incentive
Through 1997, SunSource has utilized a Deferred Compensation Plan for
Division Presidents (the "Presidents' Plan") and a Long-Term Performance Share
Plan (the "Share Plan") for its officers.
SunSource also maintains a Deferred Compensation Plan for Key Employees
(the "Key Employee Plan") which allows for deferral of cash compensation from
salary and annual bonuses. Executive deferrals can grow at mutual fund
investment rates.
4
<PAGE>
Under the Presidents' Plan, presidents of business units can earn deferred
compensation based on annual performance results using the goals described in
the annual bonus section above. Presidents' Plan awards unconditionally vest at
the rate of 20% per year over the five-year period from the date earned.
The Share Plan is based upon annual and cumulative net income performance
for a five-year term ending December 31, 1998.
As a result of the Conversion, participants became 100% vested in the
awards earned through December 31, 1996 in accordance with the change of
control provisions of the Presidents' Plan and the Share Plan.
Awards under the Presidents' Plan have been made for 1997. The Share Plan
continues to run from January 1, 1997 to December 31, 1998, to complete the
Share Plan's original five-year performance cycle. Awards resulting from 1997
performance have been deferred under the Share Plan and will become payable
following December 31,1998.
Subject to stockholder approval of the proposed 1998 Equity Compensation
Plan, the Presidents' Plan will be canceled effective December 31, 1997 and the
Share Plan will be canceled and awards that would have resulted from 1998
performance will be canceled. In the event that stockholders do not approve the
1998 Equity Compensation Plan, the Presidents' Plan will continue indefinitely
and the Share Plan will continue through December 31, 1998 and awards for 1998
under the Share Plan will be earned and paid out in accordance with the Share
Plan's provisions.
In 1998, the Board has adopted and has recommended for stockholder
approval the 1998 Equity Compensation Plan. See "Approval of Proposed 1998
Equity Compensation Plan." The new plan is designed to instill the economic
incentives of ownership, create management incentives to improve stockholder
value and, through the use of vesting periods, encourage executives to remain
with the Company and focus on long-term results.
The plan is designed to drive performance and reward top officers and key
employees when there is an increase in stock price or earnings per share (for
corporate employees) or an increase in income growth, excluding extraordinary
events (for the business unit employees). The maximum payout will be 100% of
the targeted long-term incentive as defined by the CEO with the approval of the
Compensation Committee.
Initial grants of awards are intended to be made in 1999 based on 1998
performance. The Committee intends to award stock options to qualifying
participants with the number of shares awarded varying according to position
responsibility, salary and performance results.
The number of shares awarded would be determined by first setting a
maximum number of shares and then measuring performance of the Company and
business units to compute actual stock option grants up to the maximum.
Compensation of the Chief Executive Officer
During 1997, Mr. Marshall's base salary was increased to $495,000 to
recognize his leadership in the growth of the Company, the value he has created
for shareholders and the successful conversion to a stock company. Mr.
Marshall's 1997 annual bonus was $51,087, reflecting the Company's achievement
of its 1997 performance goals. Additionally, his earned 1997 Share Plan award
was $602,137 as the result of the Company's 1997 performance.
Deductibility of Compensation
Section 162(m) of the Internal Revenue Code subjects public companies to
limits on the deductibility of certain executive compensation for taxable years
beginning on or after January 1, 1994. It limits deductible compensation for
the executive officers named in the Summary Compensation Table to $1 million
per year. Certain forms of compensation are exempt from this deductibility
limit, primarily performance-based compensation under plans approved by
stockholders.
In submitting the 1998 Equity Compensation Plan to stockholders for
approval, the Committee intends to qualify those awards that would be
considered performance-based for exemption under Section 162(m). The
5
<PAGE>
Committee will continue to examine the impact of the deductibility limit on the
Company and the executive group to determine when and if other aspects of the
executive compensation program are affected by the limit and the appropriate
actions necessary for the best interests of the stockholders.
STOCK PERFORMANCE CHART
The following graph compares the cumulative total stockholder return on
the Company's Common Shares (and Class B Interests of the Partnership) for the
five years ended December 31, 1997, with the cumulative total return on the
Russell 2000 Index and an industry peer group index. The 1997 Peer Group is
comprised of Applied Industrial Technologies, Inc.; Barnes Group, Inc.; Genuine
Parts Company; W.W. Grainger, Inc.; Hughes Supply, Inc.; Lawson Products, Inc.
and NCH Corporation. These companies were selected based on their similarities
in the aggregate to the Company.
The cumulative total shareholder return computations set forth in the
performance graph assume the investment of $100 on December 31, 1992, and the
reinvestment of all dividends, except Class B tax distributions of the Company
under partnership form as discussed below. The returns of each company in the
1997 Peer Group have been weighted according to the respective company's stock
market capitalization.
For periods prior to September 30, 1997, the Company was traded as a
master limited partnership. For those periods, the index includes returns on
Class B interests only due to the fact that those interests were converted into
Common Shares upon conversion to corporate form on September 30, 1997 (one
post-split share of the Company's Common Shares for four Class B Interests).
Also, for the periods under which the Company was a partnership, amounts
distributed to partners representing tax distributions were excluded from the
calculation based on the assumption that that type of distribution would not be
reinvested. The Class B tax distributions were intended to cover the partners'
tax liability on taxable income allocated from the Partnership.
250 |---------------------------------------------------------------------|
| |
| |
| |
| #|
200 |---------------------------------------------------------------------|
D | |
| # @|
O | *|
| @ |
L 150 |----------------------------------------#----------------------------|
| * |
L | #* #* @ * |
| |
A | @ @ |
100 |*#@------------------------------------------------------------------|
R | |
| |
S | |
| |
50 |---------------------------------------------------------------------|
| |
| |
| |
| |
0 |---------------------------------------------------------------------|
1992 1993 1994 1995 1996 1997
- - -------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
- - -------------------------------------------------------------------------------
SunSource Inc. * 100 121 121 143 118 169
Russell 2000 # 100 119 117 150 175 214
1997 Peer Group @ 100 107 108 124 145 175
6
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all cash compensation paid and accrued for
services rendered during the three years ended December 31, 1997, by each of
the Chief Executive Officer and the four other most highly compensated
executive officers of the Company whose remuneration exceeded $100,000.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Share
Name and ----------------------------------- Performance All Other
Principal Position Year Salary (1) Bonus (2) Plan (3) Compensation
- - -------------------------- ------ ------------ ----------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Donald T. Marshall 1997 $ 521,031 $ 51,087 $1,126,486 $ 13,649 (4)
Chairman and Chief 1996 452,509 45,230 -- 11,749 (4)
Executive Officer 1995 488,688 4,347 -- 10,234 (4)
John P. McDonnell 1997 426,302 43,354 354,036 3,383 (4)
President and Chief 1996 358,105 22,692 -- 3,273 (4)
Operating Officer 1995 374,451 32,812 -- 2,500 (4)
Norman V. Edmonson 1997 353,622 53,862 740,261 2,198 (4)
Executive Vice President 1996 308,125 105,600 -- 1,923 (4)
1995 333,849 82,200 -- 1,638 (4)
Harold J. Cornelius 1997 318,608 10,000 354,036 --
Group Vice President 1996 280,107 7,101 -- 19,000 (5)
1995 291,609 27,400 -- --
Max W. Hillman, Jr. 1997 384,991 66,816 354,036 296,975 (5)
Group Vice President 1996 269,816 -- -- 29,000 (5)
1995 268,920 36,350 -- 50,186 (5)
</TABLE>
- - ------------
(1) Represents base salary plus other types of miscellaneous compensation.
(2) Represents earned bonus for services rendered in each year. Does not
include the Management Fee payable to the General Partner. See "Other
Information" -- Certain Related Transactions" below.
(3) Represents deferred compensation awarded under the Share Plan for the three
years ended December 31, 1996 which was accelerated as a result of the
Conversion.
(4) Represents primarily term life insurance premiums paid by SDI Operating
Partners, L.P. (the "Operating Partnership") for the benefit of the named
executive officer.
(5) Represents deferred compensation awarded under the President's Plan for
services rendered in the year. The awards for 1995 and 1996 vested as a
result of the Conversion. The award for 1997 unconditionally vests at the
rate of 20% per year over the five-year period from the date earned.
The above table excludes deferred compensation awards earned for the year
ended December 31, 1997 by the executive officers in accordance with the Share
Plan since the awards earned are subject to reduction or forfeiture through
1998 if performance goals are not achieved. The value of the awards credited as
of December 31, 1997, for each executive officer are as follows: Donald T.
Marshall, $602,137; John P. McDonnell, $237,205; Norman V. Edmonson, $401,425;
Harold J. Cornelius, $-0-; and Max W. Hillman, Jr., $-0-. The Share Plan will
be terminated upon approval of the 1998 Equity Compensation Plan and the awards
earned through December 31, 1997 will be eligible for distribution in early
1999.
No stock options have been granted by the Company. As set forth elsewhere
in this Proxy Statement, the adoption of the 1998 Equity Compensation Plan is
being submitted to the stockholders for their approval.
Deferred Compensation Plans
The Company's deferred compensation plans are described in this proxy
statement in "Report of Compensation Committee -- Long-Term Incentive."
7
<PAGE>
Change in Control Arrangements
The executive officers named above were participants in the President's
Plan and the Share Plan in certain years. Upon a change in control, the plans
provide for payment of all vested and non-vested amounts including accrued
interest. A change of control occurred at September 30, 1997 as a result of the
Conversion because a majority of the directors of Lehman/SDI, Inc. did not
continue as directors of Lehman/SDI, Inc. after the Conversion.
The Company adopted the Key Employee Plan effective December 1,1996, to
offer key employees an opportunity to defer a portion of their compensation
including bonuses and any amounts credited to the accounts of such employees
which otherwise may become payable to such employees under other incentive
compensation programs maintained by the Company. This plan allowed participants
eligible for accelerated payments under the change in control provision of the
deferred compensation plans to elect to continue to defer their balances. The
amount of deferred compensation balances that became payable as a result of the
Conversion and eligible for elective deferral was $10.4 million. Approximately
$8.2 million of these balances eligible for payment were deferred and
approximately $2.2 million were paid. Messrs. Marshall, McDonnell, Edmonson,
Cornelius, and Hillman elected to defer their balances.
APPROVAL OF PROPOSED 1998 EQUITY COMPENSATION PLAN
At its March 3, 1998 meeting, the Board approved a modification to the
manner in which the Company provides incentive compensation to designated
employees of the Company and its subsidiaries. At the meeting, the Board
terminated, subject to stockholder approval of the 1998 Equity Compensation
Plan, the Presidents' Plan and the Share Plan. In the place of the terminated
plans the Board adopted, subject to stockholder approval, the 1998 Equity
Compensation Plan (the "1998 Equity Plan").
A copy of the 1998 Equity Plan is attached as Annex A to this Proxy
Statement. This summary contains all material elements of the 1998 Equity Plan
but does not purport to be complete and is subject to and qualified in its
entirety by reference to Annex A.
Purposes
The 1998 Equity Plan provides employees and non-employee members of 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" or
"Awards"). The Company believes that the 1998 Equity Plan will encourage
participants to contribute materially to the growth of the Company, thereby
benefitting the Company's stockholders, and will align the economic interests
of the participants with those of the stockholders.
Administration
The 1998 Equity Plan is administered and interpreted by the Compensation
Committee of the Board or a subcommittee thereof (the "Committee"). The
Committee 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. The
Committee shall have the sole authority to (i) determine the individuals to
whom Grants shall be made under the 1998 Equity 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,
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including the criteria for exercisability and the acceleration of
exercisability, and (iv) deal with any other matters arising under the 1998
Equity 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 Common Shares, individual
performance, or such other criteria as the Committee deems appropriate.
Participation
Grants may be made to any employees (including officers and Directors) and
non-employee directors. It is anticipated that up to 60 employees and two
directors will be eligible for Grants under the 1998 Equity Plan. Awards under
the 1998 Equity Plan may consist of grants of stock options ("Options"), stock
awards ("Stock Awards"), stock appreciation rights ("SARs"), and performance
units ("Performance Units"). All Grants shall be subject to the terms and
conditions set forth in the 1998 Equity Plan and to such other terms and
conditions consistent with the 1998 Equity Plan as the Committee deems
appropriate. Grants under the 1998 Equity Plan need not be uniform as among the
grantees.
Authorized Shares
The Board reserved 2,000,000 Common Shares for issuance over the ten year
term of the 1998 Equity Plan, subject to adjustment as described in "Adjustment
Provisions" below. However, no more than the Applicable Percentage of the
number of Common Shares issued and outstanding on the effective date of the
1998 Equity Plan and at any time thereafter may be issued or transferred under
the 1998 Equity Plan. The Applicable Percentage shall be five percent (5%) as
of April 28, 1998 (the effective date of the 1998 Equity 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 1998 Equity Plan be less than the number
of Common Shares previously issued or transferred under the 1998 Equity Plan or
subject to then outstanding Grants. The maximum aggregate number of Common
Shares that may be subject to Grants made under the 1998 Equity 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 1998
Equity Plan. If and to the extent options granted under the 1998 Equity 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 1998 Equity Plan.
The closing price of the Common Shares reported on the New York Stock
Exchange on March 27, 1998, was $29 7/16 per share.
Options
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 in the 1998
Equity Plan. The exercise price to purchase Common Shares subject to an Option
under the 1998 Equity Plan will be determined by the Committee and may be equal
to or greater than the fair market value of a Common Share on the date the
Option is granted. 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 a
Common Share 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 a Common Share, but not less than (85%) of the fair market
value of a Common Share, on the date the Option is granted; provided that the
Grant is subject to the satisfaction of performance goals established by the
Committee. The Committee shall determine the term of each Option which shall
not exceed ten years from the date of grant. However, an Incentive Stock
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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.
A participant may pay the exercise price (i) in cash, (ii) with the
approval of the Committee, by delivering Common Shares owned by the participant
having a fair market value on the date of exercise equal to the exercise price
or (iii) by any other method approved by the Committee. The Committee may
permit a participant to instruct the Company to deliver the Common Shares due
upon the exercise to a designated broker instead of to the participant.
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 Common Shares ("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. Common Shares issued or transferred pursuant to Restricted Stock
Grants or Unrestricted Stock Grants may be issued or transferred for cash
consideration or for no cash 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 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 1998 Equity Plan.
Stock Appreciation Rights
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 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.
Performance Units
The Committee may grant performance units ("Performance Units") to an
employee. Each Performance Unit represents 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. 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. When Performance Units
are granted, the Committee shall establish the performance period during which
performance shall be measured, performance goals applicable to the Performance
Units 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 Common Shares, individual
performance, or such other criteria as the Committee deems appropriate.
Section 162(m)
Under section 162(m) of the Code, the Company may be precluded from
claiming a federal income tax deduction for total remuneration in excess of
$1,000,000 paid to the chief executive officer or to any of the other four most
highly compensated officers in any one year. Total remuneration includes
amounts received upon the
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exercise of Stock Options and the value of shares received when the shares of
Restricted Stock became transferable (or such other time when income is
recognized). An exception exists, however, for "qualified performance-based
compensation." The 1998 Equity Plan is intended to allow Awards and Grants to
meet the requirements of "qualified performance-based compensation."
Stock options and SARs should generally meet the requirements of
"qualified performance-based compensation," if the exercise price is at least
equal to the fair market value of the Common Shares on the date of grant. In
addition, the Committee may grant Performance Units and Stock Awards that are
intended to be "qualified performance-based compensation" under section 162(m)
of the Code. In that event, the Committee will establish in writing the
objective performance goals that must be met and other conditions of the award
before the beginning of the annual incentive period (or within 90 days after
its commencement) or during such other period permitted by 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. The Committee will not have discretion to
increase the amount of compensation that is payable upon achievement of
performance goals. At the end of each performance period, the Committee will
certify the results of the performance goals and the extent to which the
performance goals have been met.
Transferability
Grants are generally not transferable by the participant, except in the
event of death. However, the Committee may permit participants to transfer
Nonqualified Stock Options to certain family members on such terms as the
Committee deems appropriate.
Amendment and Termination
The Board may amend or terminate the 1998 Equity Plan at any time;
provided, however, that the Board shall not amend the 1998 Equity Plan without
stockholder approval if such approval is required by section 422 of the Code or
section 162(m) of the Code. The 1998 Equity Plan will terminate on the date
immediately preceding the tenth anniversary of its effective date, unless
terminated earlier by the Board or extended by the Board with approval of the
stockholders.
Adjustment Provisions
In the event of stock splits, stock dividends, recapitalization, or other
similar changes in the outstanding Common Shares, the Committee shall
appropriately adjust: (i) the maximum number of Common Shares available for
Grants and the individual share limits, (ii) the number of shares covered by
outstanding Grants, (iii) the kind of shares issued under the 1998 Equity Plan
and (iv) the price per share or market value of Grants, and such adjustments
will be effective and binding for all purposes of the 1998 Equity Plan.
Change of Control of the Company
In the event of a change of control, unless the Committee determines
otherwise, all outstanding Options and SARs shall automatically accelerate and
become fully exercisable, the restrictions and conditions on all outstanding
Restricted Stock shall immediately lapse, and 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 "change of control" will be deemed to have occurred if (i) any person
(other than management) commences a tender offer for, or becomes a beneficial
owner of, 20% or more of the voting power of the outstanding securities of the
Company; (ii) the Company ceases to own, directly or indirectly, all of the
interests in the
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Operating Partnership; (iii) a transaction is approved in which the
stockholders of the Company will not own 75% or more of the voting power of the
surviving entity or members of the Board of Directors of the Company prior to
the transaction will not constitute a majority of the Board of Directors of the
surviving entity; (iv) all or substantially all of the assets of the Company or
the Operating Partnership are sold; (v) the Company or the Operating
Partnership liquidates or dissolves; or (vi) a majority of the Board of
Directors of the Company shall cease to consist of current directors or
directors whose election has been approved by a majority of the Board of
Directors. A transaction involving a reorganization of the Company and its
subsidiaries shall not be deemed to be a change in control so long as
substantially all of the assets owned by the Operating Partnership immediately
prior to the transaction continue to be owned directly or indirectly by the
Company.
Federal Income Tax Treatment
The following generally describes the current federal income tax treatment
of Grants under the 1998 Equity Plan. Local and state tax authorities may also
tax incentive compensation awarded under the 1998 Equity Plan, and tax laws are
subject to change.
There are no federal income tax consequences to a participant or to the
Company upon the grant of a Nonqualified Stock Option under the 1998 Equity
Plan. Upon the exercise of a Nonqualified Stock Option, a participant will
recognize ordinary compensation income in an amount equal to the excess of the
fair market value of the shares at the time of exercise over the exercise price
of the Nonqualified Stock Option, and the Company generally will be entitled to
a corresponding federal income tax deduction. Upon the sale of shares acquired
by the exercise of a Nonqualified Stock Option, a participant will have a
capital gain or loss in an amount equal to the difference between the amount
realized upon the sale and the participant's adjusted tax basis in the shares
(the exercise price plus the amount of ordinary income recognized by the
participant at the time of exercise of the Nonqualified Stock Option).
A participant who is granted an Incentive Stock Option will not recognize
taxable income for purposes of the regular income tax, upon either the grant or
exercise of the Incentive Stock Option. However, for purposes of the
alternative minimum tax imposed under the Code, in the year in which an
Incentive Stock Option is exercised, the amount by which the fair market value
of the shares acquired upon exercise exceeds the exercise price will be treated
as an item of adjustment and included in the computation of the recipient's
alternative minimum taxable income in the year of exercise. A participant who
disposes of the shares acquired upon exercise of an Incentive Stock Option
after two years from the date the Incentive Stock Option was granted and after
one year from the date such shares were transferred to him or her upon exercise
of the Incentive Stock Option will recognize capital gain or loss in the amount
of the difference between the amount realized on the sale and the exercise
price (or the participant's other tax basis in the shares), and the Company
will not be entitled to any tax deduction by reason of the grant or exercise of
the Incentive Stock Option. Generally, if a participant disposes of the shares
acquired upon exercise of an Incentive Stock Option before satisfying both
holding period requirements (a "disqualifying disposition"), his or her gain
recognized on such a disposition will be taxed as ordinary income to the extent
of the difference between the fair market value of such shares on the date of
exercise and the exercise price, and the Company will be entitled to a
deduction in that amount. However, the amount of ordinary income cannot be more
than the total amount of gain realized on the sale (amount received on the
disqualifying disposition less the exercise price). A participant will have a
capital gain or loss in an amount equal to the difference between the amount
realized upon the sale and the participant's adjusted tax basis in the shares
(the exercise price plus the amount of ordinary income recognized by the
participant).
A participant normally will not recognize taxable income upon receiving
Restricted Stock, and the Company will not be entitled to a deduction, until
such stock is transferable by the participant or no longer subject to a
substantial risk of forfeiture for federal tax purposes, whichever occurs
earlier. When the stock is either transferable or no longer subject to a
substantial risk of forfeiture, the participant will recognize ordinary
compensation income in an amount equal to the fair market value of the shares
(less any amounts paid for such shares) at that time, and the Company will be
entitled to a deduction in the same amount. A participant may, however, elect
to recognize ordinary compensation income in the year the Restricted Stock is
awarded in an amount equal to the fair market value of the shares subject to
the Restricted Stock Grant (less any amounts paid for such shares) at that
time, determined without regard to the restrictions. In such event, the Company
generally will be entitled to a corresponding deduction in the same year. A
participant will have a capital gain or loss
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upon subsequent disposition of the shares in an amount equal to the difference
between the amount realized upon the sale and the participant's adjusted tax
basis in the shares (the amount paid for the restricted stock, if any, plus the
amount of ordinary income recognized by the participant).
There are no federal income tax consequences to a participant or to the
Company upon the grant of an SAR under the 1998 Equity Plan. Upon the exercise
of an SAR, if the participant receives the appreciation inherent in the SAR in
cash, the participant will recognize ordinary compensation income in an amount
equal to the cash received. If the participant receives the appreciation in
Common Shares, the participant will recognize ordinary compensation income in
an amount equal to the fair market value of the Common Shares received. The
Company generally will be entitled to a corresponding federal income tax
deduction at the time of the exercise of the SAR. Upon the sale of any shares
acquired by the exercise of an SAR, a participant will have a capital gain or
loss in an amount equal to the difference between the amount realized upon the
sale and the participant's adjusted tax basis in the Common Shares (the amount
of ordinary income recognized by the participant at the time of exercise of the
SAR).
There are no federal income tax consequences to a participant or to the
Company upon the grant of Performance Units under the 1998 Equity Plan. If the
participant receives payment of the Performance Units in cash, the participant
will recognize ordinary compensation income in an amount equal to the cash
received. If the participant receives payment of the Performance Units in
Common Shares, the participant will recognize ordinary compensation income in
an amount equal to the fair market value of the Common Shares received. The
Company generally will be entitled to a corresponding federal income tax
deduction at the time of the payment of the Performance Units. Upon the sale of
any shares acquired upon payment of the Performance Units, a participant will
have a capital gain or loss in an amount equal to the difference between the
amount realized upon the sale and the participant's adjusted tax basis in the
Common Shares (the amount of ordinary income recognized by the participant at
the time of the payment of the Performance Units).
The rate at which a participant's capital gain will be taxed generally
depends on how long the stock is held by the participant.
The Company's income tax deduction in any of the foregoing cases may be
limited by the $1,000,000 limit of section 162(m) of the Code if the Grant does
not qualify as "qualified performance-based compensation" under section 162(m)
of the Code. See "Section 162(m)" above.
Tax Withholding
The Company has the right to deduct from all Grants paid in cash or from
other wages paid to an employee of the Company, any federal, state or local
taxes required by law to be withheld with respect thereto, and the participant
or other person receiving Common Shares under the 1998 Equity Plan will be
required to pay to the Company the amount of any such taxes that the Company is
required to withhold with respect to such shares. With the approval of the
Committee, a participant may elect to satisfy the Company's income tax
withholding obligation by withholding shares received.
New Plan Benefits
Because no Grants will be made under the 1998 Equity Plan until after
stockholder approval of the 1998 Equity Plan is obtained, the number of Awards
are not determinable at this time.
Action by Stockholders
Approval of this proposal requires the affirmative vote of the holders of
a majority of the Common Shares present, either in person or by proxy, at the
annual meeting and entitled to vote. Since the aggregate number of shares for
which a vote "For", "Against", or "Abstain" is made will be counted in
determining the minimum number of affirmative votes required for approval of
the proposal, an abstention will have the same legal effect as a vote "Against"
the proposal.
The Board of Directors recommends that stockholders vote FOR approval of
the 1998 Equity Compensation Plan.
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APPROVAL OF PROPOSED STOCK COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
The Board of Directors of the Company has adopted, subject to stockholder
approval, the Stock Compensation Plan for Non-Employee Directors (the
"Directors' Plan"). A copy of the Directors' Plan is attached as Annex B to
this Proxy Statement. This summary contains all material elements of the
Directors' Plan but does not purport to be complete and is subject to and
qualified in its entirety by reference to Annex B.
The basic terms of the Directors' Plan are:
o A mandatory grant of Common Shares equal to one-half the value of the
annual retainer to each non-employee director in lieu of a cash payment.
As stated above under "Board of Directors -- Compensation of Directors"
the annual retainer for 1998 has been fixed at $20,000.
o Beginning in 1999, directors will have the option to receive up to 100%
of the balance of their annual retainer in Common Shares.
o 75,000 Common Shares are reserved for future issuance pursuant to
awards.
Purposes
The purposes of the Directors' Plan are to further the Company's long-term
financial success by providing for stock awards to non-employee directors;
increase the proprietary interest of such persons by providing further
opportunity for ownership of Common Shares; and to more closely align the
interests of such persons with the interests of the Company's stockholders.
Administration
The Directors' Plan will be administered and interpreted by the Board of
Directors of the Company.
Participation
Non-employee members of the Board of Directors of the Company elected at
an annual meeting or chosen as a director thereafter will participate in the
Directors' Plan for that year.
Authorized Shares
The aggregate number of Common Shares reserved for issuance under the
Directors' Plan will be 75,000, subject to adjustment as described below.
Adjustments
The Directors' Plan provides that the Board of Directors shall make such
equitable changes or adjustments as it deems necessary to the maximum number or
class of shares available under the Directors' Plan, and the number and class
of Common Shares to be delivered thereunder in the event that the Board of
Directors determines that adjustment is appropriate in order to prevent
dilution or enlargement of the rights of participants in the event of any
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation, spin-off or similar corporate transaction.
Delivery of Common Shares
For each calendar year commencing with the calendar year beginning January
1, 1998, each non-employee 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 Common Shares equal in value to 50% of the director's
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) in lieu of payment of such percentage of the retainer fee in cash.
Such shares shall be issued to each such non-employee director quarterly.
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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 value of fractional shares shall be paid
in cash.
For each calendar year commencing with the calendar year beginning January
1, 1999, each non-employee director may elect to receive a whole number of
Common Shares equal in value to up to 100% of the balance of the director's
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) in lieu of payment of such percentage of the retainer fee in cash.
Such election may be made in incremental amounts of 5% of the total retainer
fee.
Term of Plan
The Directors' Plan will become effective upon approval by the
stockholders at the Annual Meeting to be held on April 28, 1998. The Directors'
Plan will remain in effect until December 31, 2007, unless sooner terminated by
the Board of Directors.
Amendment
The Board of Directors may alter, amend, suspend, or terminate the
Directors' Plan at any time except that no amendment which requires stockholder
approval under Delaware law, under the rules of any securities exchange on
which the shares may be listed, or in order for the Directors' 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.
Federal Income Tax Treatment
The following generally describes the current federal income tax treatment
of grants under the Director's Plan. Local and state tax authorities may also
tax compensation awarded under the Director's Plan, and tax laws are subject to
change.
A non-employee director will recognize ordinary income in an amount equal
to the fair market value of the Common Shares received and the Company
generally will be entitled to a corresponding federal income tax deduction at
the time of the payment. Upon the sale of any shares acquired under the
Director's Plan, a non-employee director will have a capital gain or loss in an
amount equal to the difference between the amount realized upon the sale and
the individual's adjusted tax basis in the Common Shares (the amount of
ordinary income recognized by the non-employee director at the time of the
grant). The rate at which a non-employee director's capital gain will be taxed
generally depends on how long the stock is held.
New Plan Benefits
All non-employee directors of the Company will participate in the
Directors' Plan. After the annual meeting there will initially be five
non-employee directors (including Mr. Edmonson who plans to retire as an
employee in May 1998). Assuming a share price of $29 and continued service by
these directors in 1998, approximately 1,725 Common Shares will be awarded
under the Directors' Plan in 1998.
Action by Stockholders
Approval of this proposal requires the affirmative vote of the holders of
a majority of the Common Shares present, either in person or by proxy, at the
annual meeting and entitled to vote. Since the aggregate number of shares for
which a vote "For", "Against", or "Abstain" is made will be counted in
determining the minimum number of affirmative votes required for approval of
the proposal, an abstention will have the same legal effect as a vote "Against"
the proposal.
The Board of Directors recommends that stockholders vote FOR approval of
the Stock Compensation Plan for Non-Employee Directors.
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OTHER INFORMATION
Certain Related Transactions
During the nine month period ending September 30, 1997 when the Conversion
became effective, SDI Operating Partners, L.P. paid a management fee of
$2,490,561 to the General Partner which was owned 53.8% by Lehman/SDI, Inc. and
46.2% by management. The interests of Lehman/SDI, Inc. and the executive
officers in this fee were as follows: Lehman/SDI, Inc., $1,339,922; Harold J.
Cornelius, $69,038; Joseph M. Corvino, $23,013; Norman V. Edmonson, $287,660;
Max W. Hillman, Jr., $69,038; Donald T. Marshall, $448,749; and John P.
McDonnell, $138,077.
As a result of the Conversion, Lehman/SDI, Inc. received 538,000 Common
Shares in exchange for its general partner interest in the General Partner and
the executive officers of the Company received a total of 415,800 Common Shares
in exchange for their limited partner interests in the General Partner as
follows: Harold J. Cornelius, 27,720 shares; Joseph M. Corvino, 9,240 shares;
Norman V. Edmonson, 115,500 shares; Max W. Hillman, Jr., 27,720 shares; Donald
T. Marshall, 180,180 shares; and John P. McDonnell, 55,440 shares.
Legg Mason Wood Walker, Incorporated, of which Mr. Hoffman is an officer,
was among the four managing underwriters for the public offering in which the
Company sold 796,408 Common Shares.
Mr. Scott is a partner in Morgan, Lewis & Bockius LLP, a law firm which
performed services for the Company in 1997. The Company proposes to have this
firm perform similar services as needed during the current fiscal year. The
Company also subleased some office space from the firm in 1997.
Independent Accountants
Coopers & Lybrand L.L.P. audited the financial statements of the Company
for 1997 and has been selected as the Company's independent accountants for
1998. Representatives of that firm are expected to be present at the meeting,
will have an opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions.
Shareholder Proposals
An eligible stockholder who wants to have a qualified proposal considered
for inclusion in the proxy statement for the 1999 annual meeting must notify
the Secretary of the Company. The proposal must be received at the Company's
offices no later than December 1, 1998. A stockholder must have been a record
or beneficial owner of at least one percent of the outstanding Common Shares or
Common Shares with a market value of $1,000 for at least one year prior to
submitting the proposal and must continue to own such shares through the date
on which the meeting is held.
Expenses of Solicitation
The Company pays the cost of preparing, assembling and mailing this
proxy-soliciting material. In addition to the use of the mail, proxies may be
solicited personally, by telephone or telegraph, or by Company officers without
additional compensation. The Company pays all costs of solicitation, including
certain expenses of brokers and nominees who will mail proxy material to their
customers or principals. In addition, D.F. King & Co., Inc. has been retained
to assist in the solicitation of proxies for a fee of $7,500 plus associated
costs and expenses.
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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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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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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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(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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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
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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.
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(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.
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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.
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>
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
<PAGE>
SUNSOURCE
SELECTED QUESTIONS AND ANSWERS REGARDING
THE PROPOSAL TO APPROVE THE
1998 EQUITY COMPENSATION PLAN
(Question No. 2 on the Proxy Card)
<PAGE>
1. What has been proposed for approval by the stockholders?
You are being asked to consider and vote on a proposal to modify the manner
in which SunSource (the "Company") provides incentive compensation to
designated employees of the Company and its subsidiaries. The Company has a
long history of providing various forms of incentive-based deferred
compensation to key employees based on annual Company/business unit
performance. Since the Company converted from partnership to corporate form
September 30, 1997, Management and the Board of Directors of the Company
have been evaluating the use of stock-based incentive compensation. As a
result of this process, the Company is proposing a new plan, the 1998
Equity Compensation Plan (the "1998 Equity Plan") to replace the existing
cash-basis deferred compensation programs. The 1998 Equity Plan is designed
to establish a variety of long-term incentive award programs for designated
officers and other employees of SunSource Inc. These programs include
grants of incentive stock options, nonqualified stock options, stock
appreciation rights, stock awards and performance units. The 1998 Equity
Plan, as proposed, is included in the enclosed proxy as Annex A.
2. What does the Company intend to provide under the 1998 Equity Plan?
The Company, under the administration of the Compensation Committee of the
Board of Directors, would like to establish regular annual stock
compensation grant opportunities for the most senior executive group and
create a pool of stock compensation grant opportunities that can be awarded
on a selective and discretionary basis to other critical employees. The
1998 Equity Plan will maintain the current highly leveraged pay for
performance strategy by linking the size of stock option grants to the
outcomes of annual Company/business unit performance.
3. What impact will the 1998 Equity Plan have on Earnings Per Share?
The Company estimates that the adoption of the 1998 Equity Plan will result
in a favorable impact on earnings per share because the dilution from issuing
additional shares under the 1998 Equity Plan is more than offset by the
expense savings resulting from the termination of the existing programs. The
amounts charged to income under the Company's cash-basis deferred
compensation plans were $3.2 million in 1997, $1.1 million in 1996 and $2.3
million in 1995. These charges would be eliminated in large part due to the
accounting treatment for stock options which would replace the existing
deferred compensation programs. In the event that the stockholders do not
approve the 1998 Equity Plan, the existing cash-basis defined compensation
programs will continue indefinitely.
<PAGE>
4. How will the Company determine the number of shares to be authorized for the
1998 Equity Plan?
The Company's compensation consultants determined the number of shares to be
utilized annually and over a 5-year period under the designated award
program. As stated in the 1998 Equity Plan, no more than the Applicable
Percentage of the number of Common Shares issued and outstanding on the
effective date of the 1998 Equity Plan and at any time thereafter may be
issued or transferred under the 1998 Equity Plan. The Applicable Percentage
shall be five percent (5%) as of April 28, 1998 (the effective date of the
1998 Equity Plan), and shall increase by five percent (5%) on each
anniversary of the effective date; provided that the Applicable Percentage
shall not exceed (25%). The number of shares to be utilized for the senior
management group that already participate in the current cash-basis deferred
compensation programs is expected to be approximately 3.6% annually of the
total shares outstanding - around the 90th percentile of peer companies and
general industry. The number of shares to be utilized for the other critical
employees is expected to be approximately 1.4% annually of the total shares
outstanding.
5. What are the reasons the Company believes the 1998 Equity Plan will be
beneficial?
As noted above, the 1998 Equity Plan will generate accretion in Earnings
Per Share and cash flow savings through the change in the primary form of
currency for long-term incentives/deferred compensation awards. In
addition, the 1998 Equity Plan will provide the following:
o Create a greater link between management and stockholders through
conversion of the current "cash basis" deferred compensation to a
stock-based plan;
o Generate shareholder wealth for the Company by all members of management
having an equity interest in the Company;
o Maintain current high risk/high reward performance benchmarks and pay
philosophy.
6. How should I vote on the 1998 Equity Plan?
You are urged to review the accompanying Proxy Statement carefully. In
making your decision, you should consider that the Company urges you to
vote "FOR" the adoption of the 1998 Equity Plan proposal.
7. Who can I call for more information?
In order to respond to your questions, SunSource has appointed D.F. King &
Co., Inc. as the Information Agent for stockholders desiring additional
information. You may call them toll free at 1-800-488-8075. Please have
your Proxy Card available when you call.
<PAGE>
REVOCABLE PROXY
SunSource Inc.
/X/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
Annual Meeting of Stockholders
to be Held April 28, 1998
This Proxy is solicited on behalf of SunSource Inc. The undersigned hereby
appoints Norman V. Edmonson and Joseph M. Corvino or either of them acting alone
in the absence of the other, the attorneys, agents and proxies of the
undersigned, with full powers of substitution (the "Proxies"), to attend and act
as proxy or proxies of the undersigned at the Annual Meeting of Stockholders
(the "Annual Meeting") of SunSource Inc. to be held at The Union League, 140
South Broad Street, Philadelphia, Pennsylvania on April 28, 1998 at 10:00 a.m.,
local time, or any adjournment thereof, and to vote as specified herein the
number of shares which the undersigned, if personally present, would be entitled
to vote.
With- For All
For hold Except
1. DIRECTORS.
A vote for election of the following
directors (except as marked to the
contrary below): / / / / / /
O. Gordon Brewer, Jr., Norman V. Edmonson, Arnold S. Hoffman, Robert E.
Keith, Jr., Donald T. Marshall, John P. McDonnell and Donald A. Scott
INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark
"For All Except" and write that nominee's name in the space
provided below.
- - -------------------------------------------------------------------------------
For Against Abstain
2. PROPOSAL. To approve the 1998 Equity
Compensation Plan. / / / / / /
3. PROPOSAL. To approve the Stock Compensation
Plan for Non-Employee Directors / / / / / /
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 1, 2 AND 3.
4. OTHER BUSINESS. In their discretion, the Proxies are authorized to vote upon
such other business as may properly come before the Annual Meeting.
This Proxy when properly executed will be voted as specified. If no
instruction is specified with respect to the matter to be acted upon, the shares
represented by the Proxy will be voted "FOR" Proposals 1, 2 and 3. If any other
business is properly presented at the Annual Meeting, this Proxy confers
authority to and shall be voted in accordance with the best judgement of the
Proxies. This Proxy is solicited by the Board of Directors of the Corporation,
and may be revoked prior to its exercise by filing with the Secretary of the
Corporation a duly executed proxy bearing a later date or an instrument revoking
this Proxy, or by attending the meeting and electing to vote in person.
Please be sure to sign and date this Proxy in the box below. Date
-------------
- - -------------------------------------------------------------------------------
Stockholder sign above Co-holder (if any) sign above
Detach above card, sign, date and mail in postage paid envelope provided.
SunSource Inc.
- - -------------------------------------------------------------------------------
Please sign exactly as name or names appear on this Proxy. If partnership
interests are held jointly, each holder should sign. If signing as attorney,
trustee, executor, administrator, custodian or corporate officer, please give
full title.
IMPORTANT - PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
- - -------------------------------------------------------------------------------
