-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N7clukO6FV3pUyDM+Qb7FYkyDYNABWJusy3yXPyafGBOszF4FWhEO+P85HrYSSop v8k5hO5952k0FUtWZYcK9g== 0000950116-98-001157.txt : 19980519 0000950116-98-001157.hdr.sgml : 19980519 ACCESSION NUMBER: 0000950116-98-001157 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNSOURCE INC CENTRAL INDEX KEY: 0001029831 STANDARD INDUSTRIAL CLASSIFICATION: 5080 IRS NUMBER: 232874736 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13293 FILM NUMBER: 98623881 BUSINESS ADDRESS: STREET 1: 3000 ONE LOAN SQ CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2156653650 MAIL ADDRESS: STREET 1: 2600 ONE LOAN SQUARE CITY: PHILADELPHIA STATE: PA ZIP: 19103 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 Commission file number 1-13293 SunSource Inc. - - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 23-2874736 - - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3000 One Logan Square Philadelphia, Pennsylvania 19103 - - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 282-1290 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Each Exchange on Which Registered -------------- ----------------------------------------- Common Stock, New York Stock Exchange par value $.01 per share Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- On May 13, 1998 there were 7,215,275 Common Shares outstanding. Page 1 of 18 SUNSOURCE INC. INDEX PART I. FINANCIAL INFORMATION PAGE(S) Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of March 31, 1998 (Unaudited), and December 31, 1997 3 Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 1998 and 1997 (Unaudited) 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 PART II. OTHER INFORMATION 17 SIGNATURES 18 Page 2 of 18 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
March 31, 1998 ASSETS (Unaudited) December 31,1997 -------------- ---------------- Current assets: Cash and cash equivalents $ 21,043 $ 5,638 Accounts and notes receivable, net 90,469 82,501 Inventories 104,801 103,369 Deferred income taxes 10,566 10,791 Other current assets 4,361 4,559 --------- --------- Total current assets 231,240 206,858 Property and equipment, net 21,805 21,939 Goodwill 62,139 62,588 Other intangibles 710 784 Deferred income taxes 4,971 5,014 Cash surrender value of life insurance policies 9,361 8,407 Other assets 666 552 --------- --------- Total assets $ 330,892 $ 306,142 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable, trade $ 57,568 $ 50,125 Notes payable 1,758 2,080 Current portion of capitalized lease obligations 180 156 Distributions payable to partners 277 2,353 Deferred tax liability 935 935 Accrued expenses: Salaries and wages 6,137 6,891 Income and other taxes 3,966 4,286 Other accrued expenses 19,108 19,094 --------- --------- Total current liabilities 89,929 85,920 Senior notes 60,000 60,000 Bank revolving credit 31,000 33,000 Capitalized lease obligations 505 572 Deferred compensation 11,809 10,451 Other liabilities 745 787 --------- --------- Total liabilities 193,988 190,730 --------- --------- Guaranteed preferred beneficial interests in the Company's junior subordinated debentures 115,815 115,903 --------- --------- Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $.01 par, 1,000,000 shares authorized, none issued -- -- Common stock, $.01 par, 20,000,000 shares authorized, 7,215,275 and 6,418,936 shares issued and outstanding 72 64 Additional paid-in capital 20,881 -- Retained earnings 2,635 1,735 Cumulative foreign translation adjustment (2,499) (2,290) --------- --------- Total stockholders' equity (deficit) 21,089 (491) --------- --------- Total liabilities and stockholders' equity (deficit) $ 330,892 $ 306,142 ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 3 of 18 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) FOR THE THREE MONTHS ENDED, (dollars in thousands, except for partnership interest and share amounts)
March 31, 1998 March 31, 1997 -------------- -------------- Net sales $ 172,091 $ 169,016 Cost of sales 103,453 101,416 ------------ ------------ Gross profit 68,638 67,600 ------------ ------------ Operating expenses: Selling, general and administrative expenses 59,432 58,690 Management fee to general partner -- 821 Depreciation 1,109 1,018 Amortization 513 455 ------------ ------------ Total operating expenses 61,054 60,984 ------------ ------------ Transaction costs -- 350 ------------ ------------ Income from operations 7,584 6,266 Interest expense, net 1,688 1,831 Distributions on guaranteed preferred beneficial interests 3,058 -- Other income, net 110 113 ------------ ------------ Income before provision for income taxes 2,948 4,548 Income tax provision (benefit) 1,327 (28) ------------ ------------ Net income 1,621 4,576 Other comprehensive income, net of tax: Change in cummulative foreign translation adjustment (209) (341) ------------ ------------ Comprehensive income $ 1,412 $ 4,235 ============ ============ Net income allocated to partners: General partner N/A $ 46 ------------ Class A limited partners N/A $ 3,052 ------------ Class B limited partners N/A $ 1,478 ------------ Earnings per limited partnership interest: Net income - Class A interest N/A $ 0.27 - Class B interest N/A $ 0.07 Net income per common share $ 0.25 N/A Weighted average number of outstanding common shares 6,474,223 N/A Weighted average number of outstanding limited partnership interests: - Class A interests N/A 11,099,573 - Class B interests N/A 21,675,746
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 4 of 18 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE THREE MONTHS ENDED, (dollars in thousands)
March 31, 1998 March 31, 1997 -------------- -------------- Cash flows from operating activities: Net income $ 1,621 $ 4,576 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 1,622 1,473 Decrease (increase) in cash value of life insurance (854) 129 Transaction costs -- 350 Provision for deferred compensation 415 817 Provision (benefit) for deferred income taxes 268 (324) Changes in current operating items: Increase in accounts and notes receivable (7,968) (13,132) Decrease (increase) in inventories (1,432) 1,017 Decrease (increase) in other current assets 198 (147) Increase in accounts payable 7,443 6,188 Increase in accrued interest -- 1,419 Decrease in income taxes payable (483) (94) Decrease in accrued restructuring charges and transaction costs (572) (719) Decrease in other accrued liabilities (84) (3,182) Other items, net 630 (452) -------- -------- Net cash provided by (used for) operating activities 804 (2,081) -------- -------- Cash flows from investing activities: Proceeds from sale of property and equipment 10 252 Capital expenditures (978) (1,016) Investment in life insurance policies (100) -- Other, net (137) (52) -------- -------- Net cash used for investing activities (1,205) (816) -------- -------- Cash flows from financing activities: Net proceeds from issuance of common stock 20,889 -- Cash distributions to public investors (2,718) (3,690) Borrowings (repayments) under the bank credit agreement, net (2,000) 9,000 Repayments under other credit facilities, net (322) (953) Principal payments under capitalized lease obligations (43) (30) -------- -------- Net cash provided by financing activities 15,806 4,327 -------- -------- Net increase in cash and cash equivalents 15,405 1,430 Cash and cash equivalents at beginning of period 5,638 1,666 -------- -------- Cash and cash equivalents at end of period $ 21,043 $ 3,096 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 5 of 18 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. Basis of Presentation: The accompanying financial statements include the consolidated accounts of SunSource Inc. (the "Company"), its predecessor, SunSource L.P. (the "Partnership"), and its wholly-owned subsidiaries including SDI Operating Partners, L.P. (the "Operating Partnership") and SunSource Capital Trust (the "Trust"). All significant intercompany balances and transactions have been eliminated. The Company is one of the leading providers of industrial products and related value-added services in the United States. The Company's five business segments are Technology Services, Inventory Management - Expediter, Inventory Management - Integrated Supply, Hardware Merchandising Services and Glass Merchandising. The accompanying consolidated financial statements and related notes are unaudited; however, in management's opinion all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of financial position, income and cash flows for the periods shown have been reflected. Results for the interim period are not necessarily indicative of those to be expected for the full year. Certain information in note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to Form 10-Q requirements although the Company believes that disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 1997. Public Offering On January 22, 1998, the Company filed a registration statement on Form S-2 with the United States Securities and Exchange Commission, which was amended thereafter, for an offering of Common Shares of the Company (the "Offering"). The registration statement became effective on March 19, 1998 and the Offering closed in its entirety on March 27, 1998. Of the 2,284,471 shares sold in the Offering, 796,408 shares were issued and sold by the Company and 1,488,063 shares were sold by the selling stockholders, affiliates of Lehman Brothers Inc. The Company received net cash proceeds of $20,889 from the 796,408 shares sold in the Offering. The Company recorded an increase of $8 in Common Stock and $20,881 in Additional Paid-in Capital. The number of outstanding Common Shares as of March 31, 1998 was 7,215,275. The weighted average number of Common Shares outstanding for the three months ended March 31, 1998 was 6,474,223 including the shares sold in the Offering. Page 6 of 18 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 2. Recent Accounting Pronouncements: Effective with financial statements issued in 1998, the Company is required to implement Statement of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income", which requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income includes net income and other items resulting in changes to stockholders' equity such as foreign currency translation, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. The Company's only reportable item of comprehensive income, after net income, is the change in the accumulated foreign translation adjustment. This will now be reflected as a separate line item below net income in arriving at comprehensive income. The Company will also report this item as a separate component of the Statement of Changes in Stockholders' Equity in its annual report on Form 10-K, however, identified as the single component of Accumulated Comprehensive Income. 3. Common Stock Dividend: On March 25, 1998, the Board of Directors declared a dividend of $0.10 per Common Share which was paid on April 10, 1998 to holders of record as of April 6, 1998. The Company expects to declare future quarterly dividends on the Common Shares to aggregate $0.40 per Common Share annually, subject to the discretion of its Board of Directors and dependent upon, among other things, the Company's future earnings, financial condition, capital requirements, funds needed for acquisitions, level of indebtedness, contractual restrictions and other factors that the Board of Directors deems relevant. 4. Lines of Credit and Long-Term Debt: As of March 31, 1998, the Company had $56,763 available under its $90,000 Bank Credit Agreement which provides revolving credit for working capital purposes and acquisitions through September 30, 2002. The Company had $91,685 of outstanding long-term debt at March 31, 1998, consisting of bank borrowings of $31,000, outstanding Senior Notes of $60,000 and capital lease obligations of $685. The Company has another credit facility available in the amount of $500 for letter of credit commitments only, of which no amount was outstanding as of March 31, 1998. In addition, an indirect, wholly-owned Canadian subsidiary of the Company has a $2,500 Canadian dollar line of credit for working capital purposes of which no amount was outstanding at March 31, 1998. Page 7 of 18 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 5. Guaranteed Preferred Beneficial Interests in the Company's Junior Subordinated Debentures: The Trust was organized in connection with the conversion of the Partnership to corporate form on September 30, 1997 (the "Conversion") for the purpose of (a) issuing its Trust Preferred Securities to the Company in consideration of the deposit by the Company of Junior Subordinated Debentures in the Trust as trust assets, and its Trust Common Securities to the Company in exchange for cash and investing the proceeds thereof in an equivalent amount of Junior Subordinated Debentures and (b) engaging in such other activities as are necessary or incidental thereto. The Trust had no operating history prior to the issuance of the Trust Preferred Securities. The terms of the Junior Subordinated Debentures include those stated in the Indenture (the "Indenture") between the Company and the indenture trustee, and those made part of the Indenture by the Trust Indenture Act. The principal amount of the Junior Subordinated Debentures is $108,707, consisting of $3,261 related to the Trust Common Securities and $105,446 related to the Trust Preferred Securities; the interest rate is 11.6%; and their maturity date is September 30, 2027, unless redeemed earlier. The Company has guaranteed on a subordinated basis the payment of distributions on the Trust Preferred Securities and payments on liquidation of the Trust and redemption of Trust Preferred Securities (the "Preferred Securities Guarantee"). The sole assets of the Trust are the Junior Subordinated Debentures and the obligations of the Company under the Declaration of Trust of the Trust, the Indenture, the Preferred Securities Guarantee and the Junior Subordinated Debentures in the aggregate constitute a full and unconditional guarantee by the Company of the Trust's obligations under the Trust Preferred Securities. The distributions on the Trust Preferred Securities aggregate $12,232 annually. The Trust Preferred Securities will be redeemed upon maturity on September 30, 2027, or earlier redemption of the Junior Subordinated Debentures at 100% of the liquidation amount plus accrued and unpaid distributions, provided that any redemption due to a change in the tax status of the interest payments to the Trust within the first five years will be at 101%. The Junior Subordinated Debentures may be redeemed by the Company at any time after September 30, 2002. In the event of a liquidation of the Trust, the holders of Trust Preferred Securities would be entitled to receive a preferential distribution of $25 per Trust Preferred Security, aggregating $105,446, plus accrued and unpaid distributions. However, upon the occurrence of an event which changes the tax status of interest payments to the Trust or the status of the Trust itself, the Trust will be liquidated and, after satisfaction of creditors of the Trust, the holders will receive Junior Subordinated Debentures. Page 8 of 18 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 5. Guaranteed Preferred Beneficial Interests in the Company's Junior Subordinated Debentures, continued: The Trust Preferred Securities have equity characteristics but creditor's rights and are therefore classified between liabilities and stockholders' deficit on the balance sheet. On September 30, 1997, the Trust Preferred Securities were recorded at fair value of $115,991 based on the price of the Class A interests of $11.75 upon close of trading on the New York Stock Exchange on that date. The excess of the fair value of the Trust Preferred Securities on September 30, 1997 over their liquidation value of $105,446, or $10,545 is amortized over the thirty-year life of the Trust Preferred Securities. The interest payments on the Junior Subordinated Debentures underlying the Trust Preferred Securities, aggregating $12,232 per year, are deductible for federal income tax purposes under current law and will remain an obligation of the Company until the Trust Preferred Securities are redeemed or upon their maturity in 2027. 6. Contingencies: On February 27, 1996, a lawsuit was filed against the Company by the buyer of its Dorman Products division for alleged misrepresentation of certain facts by the Company upon which the buyer allegedly based its offer to purchase Dorman. The complaint seeks damages of approximately $21,000. Certain other legal proceedings are pending which are either in the ordinary course of business or incidental to the Company's business. Those legal proceedings incidental to the business of the Company are generally not covered by insurance or other indemnity. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial position, operations or cashflows of the Company. 7. Subsequent Events: From April 1, 1998 through May 1, 1998, the Company's Harding division acquired the assets of three retail glass shops for net cash consideration of $1,539 plus the assumption of certain liabilities. On April 22, 1998, the Company's Hillman division acquired the assets of a manufacturer of letters, numbers and signs for net cash consideration of $481, plus the assumption of certain liabilities. On May 6, 1998, the Company's Hillman division acquired the assets of a retail hardware business for net cash consideration of $8,000 (of which $2,138 is held in escrow pending the resolution of post-closing adjustments), plus the assumption of certain liabilities. The transaction was effective as of the close of business on May 2, 1998. Page 9 of 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - ------------------------------------------------------------------------------ The following discussion provides information which management believes is relevant to an assessment and understanding of the Company's operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. General SunSource Inc. (the "Company") is one of the leading providers of industrial and retail products and related value-added services in North America. The Company is organized into three businesses which are SunSource Industrial Services Company, Hillman and Harding. SunSource Industrial Services Company is comprised of SunSource Technology Services ("STS") and SunSource Inventory Management Company ("SIMCO"). STS offers a full range of technology-based products and services to small, medium and large manufacturers. SIMCO provides small parts inventory management to low volume customers through its expediter activity and integrated inventory management to large industrial manufacturing customers through its integrated supply activity. Hillman operates in the Hardware Merchandising Services Segment, providing small hardware and related items and merchandising services, to retail outlets, primarily hardware stores, home centers and lumberyards. Harding operates in the Glass Merchandising Segment, selling retail and wholesale automotive and flat glass and providing auto glass installation and small contract glazing services to individual consumers, insurance companies, autobody shops, and other customers through a large network of retail glass shops. Public Offering On January 22, 1998, the Company filed a registration statement on Form S-2 with the United States Securities and Exchange Commission, which was amended thereafter, for an offering of Common Shares of the Company (the "Offering"). The registration statement became effective on March 19, 1998 and the Offering closed in its entirety by March 27, 1998. Of the 2,284,471 shares sold in the Offering, 796,408 shares were issued and sold by the Company and 1,488,063 shares were sold by the selling stockholders, affiliates of Lehman Brothers, Inc. The Company did not receive any of the proceeds from the shares sold by the selling stockholders. The Company used the net proceeds raised (of $20.9 million) from the 796,408 shares sold in the Offering to repay borrowings under its revolving credit facility. As of March 31, 1998, the Company had 7,215,275 Common Shares outstanding. Page 10 of 18 Acquisitions The Company recently resumed its strategy to acquire retail glass shops for integration with Harding. From August 31, 1997, through December 31, 1997, Harding acquired the assets of three retail glass shops for net cash consideration of $0.8 million, plus the assumption of certain liabilities. Sales from the acquired shops aggregated $0.4 million for the three months ended March 31, 1998. From April 1, 1998, through May 1, 1998, Harding acquired the assets of three retail glass shops for net cash consideration of approximately $1.5 million plus the assumption of certain liabilities. Sales from the acquired shops aggregated approximately $3.5 million for the twelve-month period prior to acquisition. These acquisitions expand Harding's business into the Albuquerque, New Mexico, and Dallas, Texas, markets. On April 22, 1998, Hillman acquired the assets of a manufacturer of letters, numbers and signs for net cash consideration of approximately $0.5 million plus the assumption of certain liabilities. This acquisition had sales of approximately $1.0 million for the twelve-month period prior to acquisition. On May 6, 1998, Hillman acquired the assets of the franchise and independent hardware segment of Axxess Technologies, Inc., including its PMI division, a distributor of keys, letters, numbers and signs and other products to retail hardware stores throughout the United States, for net cash consideration of $8.0 million (of which $2.1 million is held in escrow pending the resolution of post-closing adjustments) plus the assumption of certain liabilities. Sales from the acquired operations were approximately $17 million in 1997. Hillman will integrate the sales force and operations of the acquired business with its existing operations. Page 11 of 18 Results of Operations Segment Sales and Profitability for the Three Months Ended March 31, 1998 & 1997
(dollars in thousands) March 31, 1998 March 31, 1997 -------------- -------------- % Total % Total Sales Sales Sales SunSource Industrial Services STS $ 81,965 47.6% $ 78,957 46.7% SIMCO - Expediter 31,331 18.2% 31,715 18.8% SIMCO - Integrated Supply 12,201 7.1% 14,051(1) 8.3% -------- ----- -------- ----- Industrial Services 125,497 72.9% 124,723 73.8% Hillman 26,097 15.2% 24,337 14.4% Harding 20,497 11.9% 19,956 11.8% -------- ----- -------- ----- Consolidated Net Sales $172,091 100.0% $169,016 100.0% ======== ====== ======== ====== Gross Profit % Sales % Sales SunSource Industrial Services STS $ 20,774 25.3% $ 20,345 25.8% SIMCO - Expediter 22,440 71.6% 22,771 71.8% SIMCO - Integrated Supply 3,115 25.5% 3,522 25.1% -------- -------- Industrial Services 46,329 36.9% 46,638 37.4% Hillman 14,225 54.5% 12,817 52.7% Harding 8,084 39.4% 8,145 40.8% -------- -------- Consolidated Gross Profit $ 68,638 39.9% $ 67,600 40.0% ======== ======== EBITA (2) SunSource Industrial Services STS $ 2,575 3.1% $ 3,012 3.8% SIMCO - Expediter 4,989 15.9% 5,162 16.3% SIMCO - Integrated Supply 546 4.5% 854 6.1% --------- -------- Industrial Services 8,110 6.5% 9,028 7.2% Hillman 2,176 8.3% 1,261 5.2% Harding 28 0.1% (191) (1.0%) --------- --------- Total operations before corporate expenses 10,314 6.0% 10,098 6.0% Corporate expenses (2,217) (1.3%) (2,206) (1.3%) --------- --------- Consolidated EBITA $ 8,097 4.7% $ 7,892 (3) 4.7% ========= =========
(1) Includes sales of $3,437 related to Integrated Supply contracts cancelled in 1997. (2) "EBITA" (earnings before interest, taxes and amortization) is defined as income from operations before amortization. (3) Excludes $821 of management fees and $350 of transaction costs related to the Company's conversion to corporate form (the "Conversion") on September 30, 1997. The management fee represents a payment made by the Company to its general partner while operating as a master limited partnership. Since the Conversion, the management fee is retained by a wholly-owned subsidiary of the Company and is eliminated in consolidation. Page 12 of 18 Three months ended March 31, 1998 and 1997 Net sales increased $3.1 million or 1.8% in the first three months of 1998 to $172.1 million from $169.0 million in 1997. Sales variances by business segment are as follows:
Sales Increase (Decrease) ------------------------- Amount % ------ --- (In thousands) SunSource Industrial Services Company STS $ 3,008 3.8 % SIMCO - Expediter (384) (1.2)% SIMCO - Integrated Supply (1,850) (13.2)% --------- Industrial Services 774 .6 % Hillman 1,760 7.2 % Harding 541 2.7 % --------- Total Company $ 3,075 1.8 % =========
STS sales increased $3.0 million or 3.8% in the first quarter of 1998 to $82.0 million from $79.0 million in 1997 due to continued strengthening in existing product markets (particularly the mobile business), new product line additions and sales territory expansion. Integrated Supply sales decreased $1.9 million or 13.2% in 1998 to $12.2 million from $14.1 million in 1997, which includes a decrease of $3.4 million due to contracts which were cancelled in 1997, offset by $1.5 million in new contract sales in the 1998 period. Excluding 1997 sales from terminated contracts, Integrated Supply sales increased 15.0% in the first quarter of 1998 over the same prior-year quarter. Hillman's sales increased $1.8 million or 7.2% in 1998 to $26.1 million from $24.3 million in 1997 due to market penetration of new product lines in the amount of $0.9 million and the balance of $0.9 million in growth from new accounts and expansion of existing product lines. Harding's sales increased $0.5 million or 2.7% in 1998 to $20.5 million from $20.0 million in 1997 due primarily to an increase in retail and contract sales of $1.0 million or 8.0%. In addition, the discontinuation of certain low margin product lines and markets served resulted in reduced sales of $0.5 million. In recent years, Harding has discontinued certain low-margin product lines and has withdrawn from non-strategic markets. Growth in Harding's retail glass shops is expected to continue as a result of internal sales programs and the recent acquisitions. The Company's sales backlog on a consolidated basis was $81.7 million as of March 31, 1998, compared with $68.3 million at December 31, 1997 and $68.7 million at March 31, 1997, an increase of 19.6% and 19.0%, respectively. Total Company cost of sales increased $2.0 million or 2.0% in 1998 to $103.5 million from $101.4 million in 1997 due primarily to increased sales levels in the comparison period. The Company's consolidated gross margin was 39.9% in the first quarter of 1998 compared with 40.0% in the first quarter of 1997. SunSource Industrial Services Company's gross margin was 36.9% in 1998 compared with 37.4% in 1997, a decrease of 0.5%. STS's gross margin decreased 0.5% in 1998 due to decreased labor efficiencies in its service and repair business. The SIMCO Expediter activity's gross margin declined 0.2% in 1998 due mainly to competitive pricing pressures. The SIMCO Integrated Supply activity's gross margin increased 0.4% in 1998 due to the addition of product lines offset slightly by changes in sales mix as a result of new in-plant inventory management programs. Page 13 of 18 Hillman's gross margin increased 1.8% due primarily to improved purchasing management and better control of obsolete and slow-moving inventories. Harding's gross margin decreased 1.4% due to an increase in contract sales at lower gross margins than the overall retail business. The Company's selling, general and administrative ("S,G&A") expenses increased by $0.7 million or 1.3% to $59.4 million in the first quarter of 1998 from $58.7 million in 1997. Selling expenses increased $1.0 million supporting increased 1998 sales levels Company-wide and increased marketing efforts at SIMCO-Expediter, Hillman and Harding. Warehouse and delivery expenses decreased slightly. General and administrative expenses decreased $0.2 million in the comparison period. S,G,&A expenses as a percentage of sales decreased slightly, as follows: Three Months Ended March 31, ------------------ 1998 1997 ---- ---- Selling Expenses 17.5% 17.2% Warehouse and Delivery Expenses 5.9% 6.0% General and Administrative Expenses 11.1% 11.5% ------ ----- Total S,G&A Expenses 34.5% 34.7% ====== ===== EBITA was $8.1 million for the three months ended March 31, 1998, compared with $7.9 million for the same prior-year quarter excluding the previously discussed $0.4 million charge for transaction and other costs associated with the Conversion and non-recurring management fees of $0.8 million. The Company's consolidated operating profit margin ("EBITA, as a percentage of sales") after corporate expenses remained constant at 4.7% in the first quarter of 1998 compared with the first quarter of 1997. SunSource Industrial Services Company's operating profit margin declined to 6.5% in 1998 from 7.2% in 1997, primarily reflecting slow first quarter 1998 sales growth, as well as by increased selling expenses at SIMCO - Expediter as indicated above. Hillman improved its operating profit margin significantly in 1998 to 8.3% from 5.2% in 1997 due to increased sales and gross profit margin improvement from better purchasing management in 1998 as previously discussed. Harding's operating profit margin improved in 1998 to 0.1% from a negative 1.0% in 1997 due to improved sales resulting from significant investments in sales and marketing efforts over the last twelve months and better operating expense control, offset by a decline in gross profit margin due to sales mix as previously discussed. Under partnership form, the management fee due the general partner amounted to $3.3 million annually, of which $0.8 million was expensed in the 1997 period. As a result of the Conversion, the management fee is retained by a wholly-owned subsidiary of the Company and is eliminated in consolidation. The Company pays interest to the Trust on the Junior Subordinated Debentures underlying the Trust Preferred Securities in the amount of 11.6% per annum on their face amount of $105.4 million, or $12.2 million. The Trust distributes an equivalent amount to the holders of the Trust Preferred Securities. For the three months ended March 31, 1998, the interest paid by the Company and the distributions made by the Trust amounted to $3.1 million. Page 14 of 18 The Company is subject to federal, state and local income taxes on its domestic operations and foreign income taxes on its Canadian and Mexican operations as accounted for in accordance with Statement of Financial Accounting Standard ("SFAS") 109, "Accounting for Income Taxes". The Company's combined effective tax rate was 45.0% for the three months ended March 31, 1998. Deferred income taxes represent differences between the financial statement and tax bases of assets and liabilities as classified on the Company's balance sheet. After giving effect to the Offering in the 1998 period, the Conversion and debt refinancing at September 30, 1997, and non-recurring items in the 1997 period, pro forma net income for the three months ended March 31, 1998, was $1.8 million or $.25 per Common Share, an increase of 17.6% above the comparable 1997 net income of $1.5 million or $.21 per Common Share. Pro forma adjustments for the Offering reflect the benefits of interest savings as a result of proceeds from the Offering used to reduce debt, offset by the dilutive effects of the 796,408 shares sold by the Company in the Offering. Liquidity and Capital Resources Net cash provided by operations was $0.8 million for the three months ended March 31, 1998, compared with net cash used for operations of $2.1 million for 1997, an increase of $2.9 million. This increase was due primarily to decreased working capital investment in operations in the comparison period of approximately $5.8 million and an increase in non-cash charges of $0.1, offset by decreased net income of $3.0 million. The Company's net interest coverage ratio on a pro forma basis for the three months ended March 31, 1998 was 1.75x (earnings before interest, distributions on Trust Preferred Securities and income taxes over net interest expense and distributions on Trust Preferred Securities), compared with 1.60x in the 1997 period. The Company's cash position of $21.0 million as of March 31, 1998, increased $15.4 million from the balance at December 31, 1997. Cash was provided during this period primarily from operations ($0.8 million), and net proceeds from the Offering ($20.9 million). Cash was used during this period predominantly for cash distributions to the public investors ($2.7 million), capital expenditures ($1.0 million), net repayments on revolver and other credit facilities ($2.3 million) and other items, net ($0.3 million). The Company's working capital position of $141.3 million at March 31, 1998, represents an increase of $20.4 million from the December 31, 1997 level of $120.9 million, primarily due to the proceeds from the Offering. The Company's current ratio improved to 2.57x at March 31, 1998 from 2.41x at December 31, 1997, principally due to the increase in cash. As of March 31, 1998, the Company had $56.8 million available under its credit facilities. The Company had $91.7 million of outstanding long-term debt at March 31, 1998, consisting of the $60.0 million Senior Note, bank borrowings totaling $31.0 million, and capitalized lease obligations of $0.7 million. On April 4, 1998, the Company utilized its excess cash to repay an $18.0 million one-month LIBOR loan on its bank revolver. An indirect, wholly-owned Canadian subsidiary of the Company had a $2.5 million Canadian dollar line of credit for working capital purposes, of which no amount was outstanding at March 31, 1998. Page 15 of 18 As of March 31, 1998, the Company's total debt (including distributions payable) as a percentage of its consolidated capitalization (total debt, Trust Preferred Securities and stockholders' equity) was 40.2% compared with 45.6% as of December 31, 1997. The Company's consolidated capitalization (including distributions payable) as of March 31, 1998, was $228.9 million compared to $212.1 million at December 31, 1997. The Company anticipates spending $4.1 million for capital expenditures in 1998, primarily for warehouse improvements, machinery and equipment and computer hardware and software. The Company paid $2.1 million on February 27, 1998, for remaining tax distributions due to Class B interest holders of the predecessor partnership, related to taxable income for the nine months ended September 30, 1997. The Board of Directors of the Company declared on December 10, 1997, a cash dividend of $0.10 per Common Share which was paid on January 6, 1998, to holders of record as of December 22, 1997. On March 25, 1998, the Board of Directors declared a dividend of $0.10 per Common Share which was paid on April 10, 1998 to holders of record as of April 6, 1998. The Company expects to declare future quarterly dividends on the Common Shares to aggregate $0.40 per Common Share annually, subject to the discretion of its Board of Directors and dependent upon, among other things, the Company's future earnings, financial condition, capital requirements, funds needed for acquisitions, level of indebtedness, contractual restrictions and other factors that the Board of Directors deems relevant. The Company has deferred tax assets aggregating $15.5 million as of March 31, 1998, as determined in accordance with SFAS 109. Management believes that the Company's deferred tax assets will be realized through the reversal of existing temporary differences between the financial statement and tax bases, as well as through future taxable income. Page 16 of 18 PART II OTHER INFORMATION Items 1, 2, 3, & 5 - None Item 4 - Submission of Matters to a Vote of Security Holders - - ------------------------------------------------------------- The Company held its Annual Meeting of Stockholders on April 28, 1998 to consider and take action on the following: 1. Election of directors. 2. Approval of the 1998 Equity Compensation Plan. 3. Approval of the Stock Compensation Plan for Non-Employee Directors. The items listed above are discussed in detail in the Company's Proxy Statement filed on April 7, 1998. The voting results for each of these items are as follows: 1. Election of directors: Votes For Withheld --------- -------- O. Gordon Brewer, Jr. 5,200,789 67,639 Norman V. Edmonson 5,203,176 65,252 Arnold S. Hoffman 5,204,101 64,327 Robert E. Keith, Jr. 5,203,001 65,427 Donald T. Marshall 5,204,401 64,027 John P. McDonnell 5,203,836 64,592 Donald A. Scott 5,203,751 64,677 Votes Votes Broker For Against Abstain Non-votes ----- ------- ------- --------- 2. Approval of the 1998 Equity Compensation Plan 2,817,749 1,008,615 22,364 1,419,700 3. Approval of the Stock Compensation Plan for Non-employee Directors 3,620,267 187,154 41,317 1,419,690 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 10.1 - SunSource Inc. 1998 Equity Compensation Plan Exhibit 10.2 - SunSource Inc. Stock Compensation Plan for Non-Employee Directors. (b) A report on form 8-K dated February 27, 1998, was filed on March 2, 1998, including under Item 5, financial statements of the Company for the year ended December 31, 1997. Page 17 of 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUNSOURCE INC. - - -------------------------- --------------------------- Joseph M. Corvino John J. Dabrowski Vice President - Finance Controller (Chief Financial Officer) (Chief Accounting Officer) DATE: May 15, 1998 Page 18 of 18 EX-10.1 2 1998 EQUITY COMPENSATION PLAN Exhibit 10.1 Annex A SUNSOURCE INC. 1998 EQUITY COMPENSATION PLAN The purpose of the SunSource Inc. 1998 Equity Compensation Plan (the "Plan") is to provide (i) designated officers (including officers who are also directors) and other employees of SunSource Inc. (the "Company") and its subsidiaries, and (ii) non-employee members of the board of directors of the Company (the "Board") with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards and performance units (hereinafter collectively referred to as "Grants"). The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefitting the Company's shareholders, and will align the economic interests of the participants with those of the shareholders. For purposes of the Plan, the term subsidiary shall refer to any company (whether a corporation, partnership, joint venture or other entity) in which the Company owns, directly or indirectly, a majority of the shares of capital stock or other equity interest. 1. Administration (a) Committee. The Plan shall be administered and interpreted by a committee (the "Committee"), which shall consist of two or more persons appointed by the Board, all of whom shall be "outside directors" as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and related Treasury regulations and non-employee directors as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Notwithstanding the foregoing, the Board may ratify or approve (and, in the case of Grants to the members of the Committee, shall approve) Grants, in which case references to the Committee shall be deemed to include the Board. (b) Committee Authority. The Committee shall have the sole authority to (i) determine the individuals to whom Grants shall be made under the Plan, (ii) determine the type, size and terms of the Grants to be made to each such individual, (iii) determine the time when the Grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability, and (iv) deal with any other matters arising under the Plan. Grants shall be made in accordance with a compensation policy established by the Committee which may require that Grants are made upon accomplishment of certain goals that relate to the financial performance of the Company or its operating units, the performance of the common stock of the Company (the "Company Stock"), individual performance, or such other criteria as the Committee deems appropriate. A description of the business criteria to be used, and the procedures to be followed in awarding qualified performance-based compensation are set forth in Section 9. (c) Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2. Grants Awards under the Plan may consist of grants of stock options as described in Section 5 ("Options"), stock awards as described in Section 6 ("Stock Awards"), stock appreciation rights as described in Section 7 ("SARs"), and performance units as described in Section 8 ("Performance Units"). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument or an amendment to the grant instrument (the "Grant Instrument"). The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the grantees. A-1 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 A-2 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. A-3 (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 A-4 are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or "parent corporation" or "subsidiary corporation" of the Company (within the meaning of sections 424(e) and 424(f) of the Code, respectively), exceeds $100,000, then such Option, as to the excess, shall be treated as a Nonqualified Stock Option. 6. Stock Awards The Committee may issue or transfer Common Shares to any Employee or Non-Employee Director under a Stock Award, upon such terms as the Committee deems appropriate. The Committee may grant Stock Awards with restrictions that shall lapse over a period of time or restrictions that otherwise limit the transferability of the Company Stock ("Restricted Stock"). The Committee may also grant Stock Awards not subject to any such restrictions ("Unrestricted Stock"); provided that Grants of Unrestricted Stock may only be made if the Grant is subject to the satisfaction of performance goals established by the Committee in accordance with Sections 8 or 9. The following provisions are applicable to Stock Awards: (a) General Requirements. Shares of Company Stock issued or transferred pursuant to Restricted Stock Grants or Unrestricted Stock Grants may be issued or transferred for consideration or for no consideration, at the sole discretion of the Committee. The Committee may establish conditions under which restrictions on shares of Restricted Stock shall lapse over a period of time or according to such other criteria as the Committee deems appropriate. The period of time during which the Restricted Stock will remain subject to restrictions will be designated in the Grant Instrument as the "Restriction Period." (b) Number of Shares. The Committee shall determine the number of Common Shares to be issued or transferred pursuant to a Restricted Stock Grant or an Unrestricted Stock Grant and, in the case of a Restricted Stock Grant, the restrictions applicable to such shares. (c) Requirement of Employment or Service. If the Grantee ceases to be employed by, or provide service to, the Company (as defined in Section 5(e)) during a period designated in the Grant Instrument as the Restriction Period, or if other specified conditions are not met, the Restricted Stock Grant shall terminate as to all shares covered by the Grant as to which the restrictions have not lapsed, and those Common Shares must be immediately returned to the Company. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. (d) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of Restricted Stock except to a Successor Grantee under Section 11(a). Each certificate for a share of Restricted Stock shall contain a legend giving appropriate notice of the restrictions in the Grant. The Grantee shall be entitled to receive a stock certificate or certificates, or have the legend removed from the stock certificate or certificates covering any of the shares subject to restrictions, as applicable, when all restrictions on such shares have lapsed. The Committee, in its sole discretion, may determine that the Company will not issue certificates for shares of Restricted Stock, or that the Company retain possession of certificates for any shares issued pursuant to a Restricted Stock Grant, until all restrictions on such shares have lapsed. (e) Right to Vote and to Receive Cash Dividends. Unless the Committee determines otherwise, during the Restriction Period, the Grantee shall have the right to vote any shares of Restricted Stock for which certificates have been issued or transferred to the Grantee and to receive any dividends or other distributions paid on such shares, subject to any restrictions deemed appropriate by the Committee. (f) Lapse of Restrictions. All restrictions imposed on Restricted Stock shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of all conditions imposed by the Committee. The Committee may determine, as to any or all Restricted Stock Grants, that all the restrictions shall lapse without regard to any Restriction Period. 7. Stock Appreciation Rights (a) General Requirements. The Committee may grant stock appreciation rights ("SARs") to an Employee or Non-Employee Director separately or in tandem with any Option (for all or a portion of the applicable Option). Tandem SARs may be granted either at the time the Option is granted or at any time thereafter while A-5 the Option remains outstanding; provided, however, that, in the case of an Incentive Stock Option, SARs may be granted only at the time of the Grant of the Incentive Stock Option. The Committee shall establish the base amount of the SAR at the time the SAR is granted. Unless the Committee determines otherwise, the base amount of each SAR shall be equal to the per share Exercise Price of the related Option or, if there is no related Option, the Fair Market Value of a Common Share as of the date of Grant of the SAR. (b) Tandem SARs. In the case of tandem SARs, the number of SARs granted to a Grantee that shall be exercisable during a specified period shall not exceed the number of Common Shares that the Grantee may purchase upon the exercise of the related Option during such period. Upon the exercise of an Option or the transfer of a Nonqualified Stock Option under Section 11(b), the SARs relating to the Company Stock covered by such Option shall terminate. Upon the exercise of SARs, the related Option shall terminate to the extent of an equal number of Common Shares. (c) Exercisability. An SAR shall be exercisable during the period specified by the Committee in the Grant Instrument and shall be subject to such vesting and other restrictions as may be specified in the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding SARs at any time for any reason. SARs may only be exercised while the Grantee is employed by the Company or during the applicable period after termination of employment as described in Section 5(e). A tandem SAR shall be exercisable only during the period when the Option to which it is related is also exercisable. (d) Value of SARs. When a Grantee exercises SARs, the Grantee shall receive in settlement of such SARs an amount equal to the value of the stock appreciation for the number of SARs exercised, payable in cash, Common Share or a combination thereof. The stock appreciation for an SAR is the amount by which the Fair Market Value of the underlying Common Share on the date of exercise of the SAR exceeds the base amount of the SAR as described in Subsection (a). (e) Form of Payment. The Committee shall determine whether the appreciation in an SAR shall be paid in the form of cash, Common Shares, or a combination of the two, in such proportion as the Committee deems appropriate. For purposes of calculating the number of Common Shares to be received, Common Shares shall be valued at their Fair Market Value on the date of exercise of the SAR. If Common Shares are to be received upon exercise of an SAR, cash shall be delivered in lieu of any fractional share. 8. Performance Units (a) General Requirements. The Committee may grant performance units ("Performance Units") to an Employee. Each Performance Unit shall represent the right of the Grantee to receive an amount based on the value of the Performance Unit, if performance goals established by the Committee are met. A Performance Unit may be based on the Fair Market Value of a Common Share or on such other measurement base as the Committee deems appropriate. Anything contained herein to the contrary notwithstanding, the Committee may grant Performance Units that represent the right to receive a specified number of Common Shares, Options or SARs. The Committee shall determine the number of Performance Units to be granted and the requirements applicable to such Units. (b) Performance Period and Performance Goals. When Performance Units are granted, the Committee shall establish the performance period during which performance shall be measured (the "Performance Period"), performance goals applicable to the Units ("Performance Goals") and such other conditions of the Grant as the Committee deems appropriate. Performance Goals may relate to the financial performance of the Company or its operating units, the performance of Company Stock, individual performance, or such other criteria as the Committee deems appropriate. (c) Payment with respect to Performance Units. At the end of each Performance Period, the Committee shall determine to what extent the Performance Goals and other conditions of the Performance Units are met and the amount, if any, to be paid with respect to the Performance Units. Payments with respect to Performance Units may be made in cash, in Common Shares, or in a combination of the two, as determined by the Committee. If and to the extent Performance Units represent the right to receive a specified number of Common Shares, Options or SARs, payment of such Performance Units shall be made in such form. A-6 (d) Requirement of Employment or Service. If the Grantee ceases to be employed by, or provide service to, the Company (as defined in Section 5(e)) during a Performance Period, or if other conditions established by the Committee are not met, the Grantee's Performance Units shall be forfeited. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. 9. Qualified Performance-Based Compensation (a) Designation as Qualified Performance-Based Compensation. The Committee may determine that a Grant to an Employee shall be considered "qualified performance-based compensation" under section 162(m) of the Code. The provisions of this Section 9 shall apply to Grants that are to be considered "qualified performance-based compensation" under Section 162(m) of the Code. (b) Performance Goals. When a Grant is to be considered "qualified performance-based compensation," the Committee shall establish in writing (i) the objective performance goals that must be met in order for restrictions on the Restricted Stock to lapse or amounts to be paid under the Performance Units, (ii) the Performance Period during which the performance goals must be met, (iii) the threshold, target and maximum amounts that may be paid if the performance goals are met, and (iv) any other conditions, including without limitation provisions relating to death, disability, other termination of employment or Change of Control, that the Committee deems appropriate and consistent with the Plan and section 162(m) of the Code. The performance goals may relate to the Employee's business unit or the performance of the Company and its subsidiaries as a whole, or any combination of the foregoing. The Committee shall use objectively determinable performance goals based on one or more of the following criteria: stock price, earnings per share, net earnings, operating earnings, return on assets, shareholder return, return on equity, growth in assets, unit volume, sales, market share, or strategic business criteria consisting of one or more objectives based on meeting specified revenue goals, market penetration goals, geographic business expansion goals, cost targets or goals relating to acquisitions or divestitures. (c) Establishment of Performance Goals. The Committee shall establish the Performance Goals in writing either before the beginning of the Performance Period or during a period ending no later than the earlier of (i) 90 days after the beginning of the Performance Period or (ii) the date on which 25% of the Performance Period has been completed, or such other date as may be required or permitted under applicable regulations under section 162(m) of the Code. The Performance Goals shall satisfy the requirements for qualified performance-based compensation, including the requirement that the achievement of the goals be substantially uncertain at the time they are established and that the goals be established in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the Performance Goals have been met. The Committee shall not have discretion to increase the amount of compensation that is payable upon achievement of the designated Performance Goals. (d) Announcement of Grants. The Committee shall certify and announce the results for each Performance Period to all Grantees immediately following the announcement of the Company's financial results for the Performance Period. If and to the extent that the Committee does not certify that the Performance Goals have been met, Grants of Restricted Stock for the Performance Period shall be forfeited, and amounts under the Performance Units shall not be paid. 10. Withholding of Taxes (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state and local tax withholding requirements. The Company may require the Grantee or other person receiving shares to pay to the Company the amount of any such taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from the amount payable under a Grant or from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants. (b) Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company's income tax withholding obligation with respect to an Option or Stock Award by having shares withheld up to an amount that does not exceed the applicable withholding tax for federal (including FICA), state and local tax liabilities. The election must be in the form and manner prescribed by the Committee and is subject to the prior approval of the Committee. A-7 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 (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 (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 (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 EX-10.2 3 STOCK COMPENSATION PLAN Exhibit 10.2 Annex B SUNSOURCE INC. STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose 1.1 SunSource Inc. (the "Company") has established the Equity Plan for Non-Employee Directors (the "Plan") to further its long-term financial success by providing for stock awards to non-employee directors of the Company. The Plan is intended to increase the proprietary interest of such persons by providing further opportunity for ownership of the Company's Common Shares ("Shares") and to more closely align the interests of such persons with the interests of the Company's stockholders. 1.2 All elections and transactions under the Plan by persons subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") involving Shares are intended to comply with all exemptive conditions under Rule 16b-3. The Board may establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder. To the extent that any provision of the Plan, the administrative guidelines, or any action or omission with respect to the Plan (including any action by an Eligible Director, as hereinafter defined, that does not satisfy the exemptive conditions under Rule 16b-3 or otherwise) is inconsistent with Section 16, the provision, guidelines or act or omission shall be deemed null and void, as permitted by applicable law. 2. Administration 2.1 The Plan shall be administered by the Board of Directors of the Company (the "Board"). 2.2 The Board may make such rules and establish such procedures for the administration of the Plan as it deems appropriate to carry out the purpose of the Plan. The interpretation and application of the Plan or of any rule or procedure, and any other matter relating to or necessary to the administration of the Plan, shall be determined in the sole discretion of the Board, and any such determination shall be final and binding on all persons. All determinations of the Board shall be made by a majority of its members at a meeting duly called pursuant to the provisions of the By-laws of the Company. The Board may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable. 2.3 All costs and expenses involved in administering the Plan shall be borne by the Company. 2.4 For purposes of the Plan, an "Eligible Director" shall be a member of the Board who is not an employee of the Company or any subsidiary or affiliate of the Company. If any Eligible Director at any time becomes such an employee, he or she shall thereupon cease to be an Eligible Director. 3. Common Shares 3.1 Shares Reserved. Shares which may be issued under the Plan may be either authorized and unissued Shares or issued Shares which have been reacquired by the Company, provided that the total number of Shares which may be issued under the Plan shall not exceed 75,000 Shares, subject to adjustment in accordance with Section 3.2 hereof. 3.2 Capital Adjustments. In the event that the Board shall determine that any reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, spin-off or a similar corporate transaction affects the Shares such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Eligible Directors under the Plan, then the Board shall make such equitable changes or adjustments as it deems necessary to the maximum number or class of Shares available under the Plan, and the number or class of Shares of Stock to be delivered hereunder. B-1 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 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 EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Balance sheet as of March 31, 1998 and the related Statement of Income for the year-to-date ended March 31, 1998. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 21,043 0 92,858 2,389 104,801 231,240 53,550 31,745 330,892 89,929 60,000 115,815 0 72 21,089 330,892 172,091 172,091 103,453 61,054 (110) 396 1,688 2,948 1,327 1,621 0 0 0 1,621 .25 .25 Bonds represents all long-term debt for senior notes. Represents Guaranteed preferred beneficial interests in the Corporations junior subordinated debentures.
-----END PRIVACY-ENHANCED MESSAGE-----