<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
STRATEGIC DISTRIBUTION, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
STRATEGIC DISTRIBUTION, INC.
3220 TILLMAN DRIVE, SUITE 200
BENSALEM, PENNSYLVANIA 19020
-------------------------
NOTICE & PROXY STATEMENT
-------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 18, 1999
To Strategic Distribution Shareholders:
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders of
Strategic Distribution, Inc. ("SDI" or the "Company"), a Delaware corporation,
will be held on May 18, 1999, at 2:00 p.m., local time, at the Company's
headquarters, 3220 Tillman Drive, Suite 200, Bensalem, Pennsylvania, for the
following purposes, as more fully described in the accompanying Proxy Statement:
1. To elect nine (9) directors to serve for the ensuing year and
until their successors are elected ("Proposal I");
2. To approve the Company's 1999 Incentive Stock Option Plan
("Proposal II").
3. To ratify the appointment of KPMG LLP as independent auditors
of SDI for the fiscal year ending December 31, 1999 ("Proposal III"); and
4. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Only shareholders of record at the close of business on April 6,
1999 are entitled to receive notice of and to vote at the meeting.
All shareholders are cordially invited to attend the meeting in
person. However, to assure your representation at the meeting, you are
encouraged to complete, date, sign and mail the enclosed proxy card as promptly
as possible in the envelope provided. Shareholders attending the meeting may
vote in person even if they have returned a proxy.
<PAGE>
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THE PROPOSED
ACTIONS ARE IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND
RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE NOMINEES AS DIRECTORS AND FOR
PROPOSALS II AND III.
By order of the Board of Directors
/s/Andrew M. Bursky
----------------------
Andrew M. Bursky
Chairman of the Board
April 9, 1999
--------------------------
IMPORTANT: PLEASE COMPLETE, DATE, SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY IN
THE POSTAGE-PAID ENVELOPE PROVIDED TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT
THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO
SO EVEN THOUGH YOU HAVE SENT IN YOUR PROXY.
<PAGE>
STRATEGIC DISTRIBUTION, INC.
3220 TILLMAN DRIVE, SUITE 200
BENSALEM, PENNSYLVANIA 19020
PHONE: (215) 396-3088
-------------------------
PROXY STATEMENT
-------------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Strategic Distribution,
Inc. ("SDI" or the "Company"), for use at the annual meeting of shareholders to
be held on May 18, 1999 at the Company's headquarters, 3220 Tillman Drive, Suite
200, Bensalem, Pennsylvania and at any adjournment or postponement thereof (the
"Meeting"). The Company's 1998 Annual Report, which accompanies this Proxy
Statement, is being sent, on or about April 16, 1999, to persons who were
shareholders of record on April 6, 1999.
Written communications to the Company should be sent to the
Company's office at 3220 Tillman Drive, Suite 200, Bensalem, Pennsylvania 19020.
The Company can be reached by telephone at (215) 396-3088.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, the holders of shares of Common Stock, par value
$.10 per share (the "Common Stock"), of the Company will be asked to consider
and vote upon three proposals described in this Proxy Statement and on any other
matters properly brought before the Meeting.
The following is a brief summary of the three proposals. The
summary is not intended to be a complete statement of all material features of
the proposals and is qualified in its entirety by the more detailed information
contained elsewhere in this Proxy Statement. THE MEMBERS OF THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMEND A VOTE IN FAVOR OF THE NOMINEES AS DIRECTORS, IN
FAVOR OF APPROVAL OF THE COMPANY'S 1999 INCENTIVE STOCK OPTION PLAN AND IN FAVOR
OF THE RATIFICATION OF THE COMPANY'S INDEPENDENT AUDITORS.
PROPOSAL I
Proposal I concerns the election of a board of nine (9) directors,
all of whom are currently serving as members of the Board of Directors.
PROPOSAL II
Proposal II concerns the approval of the Company's 1999 Incentive
Stock Option Plan.
PROPOSAL III
Proposal III concerns the ratification of the appointment of KPMG
LLP, Certified Public Accountants, as the Company's independent auditors.
<PAGE>
VOTING AT THE MEETING
The Board of Directors has fixed the close of business on April 6,
1999 as the record date for the Meeting, and only holders of record of the
Common Stock at the close of business on that date are entitled to notice of,
and to vote at, the Meeting. On that date, there were outstanding and entitled
to vote 31,111,285 shares of the Common Stock, held by approximately 1,500
holders of record. The holders of a majority of the Common Stock outstanding and
entitled to vote who are present either in person or represented by proxy will
constitute a quorum for the Meeting.
The election of the Board of Directors requires the affirmative
vote of a plurality of the shares of the Common Stock present and voting at the
Meeting. "Plurality" means that the individuals who receive the largest number
of votes cast "for" are elected as directors up to the maximum number of
directors to be chosen at the Meeting. The approval of Proposals II and III
require the affirmative vote of a majority of the shares of the Common Stock
present, in person or by proxy, and entitled to vote at the Meeting. In
accordance with Delaware law, abstentions will, while broker nonvotes will not,
be treated as present for purposes of the preceding sentence. A broker nonvote
is a proxy submitted by a broker in which the broker fails to vote on behalf of
a client on a particular matter for lack of instruction when such instruction is
required. William R. Berkley currently owns approximately 23% of the outstanding
shares of the Common Stock and has advised the Company that he intends to vote
such shares in favor of the proposals described herein.
2
<PAGE>
PROXIES
If the enclosed proxy is properly executed and returned in time
for the Meeting, the shares of the Common Stock represented thereby will be
voted in accordance with the instructions given thereon. If no instructions are
given, such shares will be voted "for" each nominee as director and "for"
Proposals II and III. Proxies will extend to, and be voted at, any adjournment
of the Meeting.
The Board of Directors does not intend to bring before the Meeting
any business other than as set forth in this Proxy Statement and has not been
informed that any other business is to be presented at the Meeting. However,
should any other matter properly come before the Meeting, the proxies confer
discretionary authority with respect to acting thereon and it is the intention
of the persons named as proxies in the accompanying proxy or their duly
authorized and constituted substitutes to vote or act thereon in accordance with
their best judgment.
Any shareholder who has executed and returned a proxy and who for
any reason desires to revoke such proxy may do so at any time before the proxy
is exercised by giving written notice to the Secretary of the Company at the
above address, by voting the shares represented by such proxy in person at the
Meeting or by giving a later dated proxy at any time before the shares are voted
at the Meeting. Attendance at the Meeting will not, by itself, revoke a proxy.
EXPENSES OF SOLICITATION
The costs of the solicitation of proxies will be borne by the
Company. Such costs include preparing, printing and mailing the Notice of Annual
Meeting of Shareholders, this Proxy Statement and the enclosed proxy and
reimbursing brokerage firms and others for reasonable expenses incurred by them
in connection with forwarding proxy solicitation materials to beneficial owners.
The solicitation of proxies will be conducted primarily by mail, but may include
telephone or other communications by directors, officers or regular employees of
the Company acting without special compensation.
DESCRIPTION OF OUTSTANDING CAPITAL STOCK
The Common Stock is the only class of capital stock of the Company
outstanding and entitled to vote. As of April 6, 1999, there were issued and
outstanding 31,111,285 shares of the Common Stock. As of April 6, 1999, there
were outstanding options issued under the Company's Amended and Restated 1990
Incentive Stock Option Plan (the "1990 Plan") to purchase a total of 2,034,546
shares of the Common Stock at prices ranging from $.97 to $6.94 per share,
options issued under the Company's proposed 1999 Incentive Stock Option Plan
(the "1999 Plan") to purchase a total of 400,000 shares of the Common Stock at a
price of $2.81 per share (which options were granted subject to the approval of
the 1999 Stock Option Plan by the Company's shareholders at the Meeting), and
options issued under the Company's Amended and Restated 1996 Non-Employee
Director Stock Plan (the "Non-Employee Director Stock Plan") to purchase a total
of 84,000 shares of the Common Stock at prices ranging from $2.50 to $8.00 per
share. In addition, non-qualified options issued to an officer of the Company
and to two officers of a subsidiary of the Company to purchase a total of
492,000 shares of the Common Stock at prices ranging from $2.81 to $5.12 per
share, and options issued pursuant to certain stock option agreements to
purchase a total of 1,036,708 shares of the Common Stock for $5.82 per share,
remained outstanding.
Each share of the Common Stock is entitled to one vote.
3
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL I)
INTRODUCTION
The Board of Directors unanimously recommends that shareholders
vote FOR the election as directors of the nominees referred to in this section.
The following table sets forth each nominee's name, age and the
year in which such nominee first became a director:
<TABLE>
<CAPTION>
Year First
Name Position(s) Age Became Director
---- ----------- --- ---------------
<S> <C> <C> <C>
William R. Berkley Director of the Company 53 1994
Andrew M. Bursky Director of the Company and Chairman of the 42 1988
Board of Directors
Arnold W. Donald Director of the Company 44 1995
Catherine B. James Director of the Company 46 1990
Robert D. Neary Director of the Company 65 1999
Jack H. Nusbaum Director of the Company 58 1996
Joshua A. Polan Director of the Company 50 1988
Mitchell I. Quain Director of the Company 47 1995
John M. Sergey Director of the Company and President and 56 1997
Chief Executive Officer of the Company
</TABLE>
Directors are elected to serve for one year or until the next
annual meeting of shareholders.
The nine individuals set forth in the above table are all of the
nominees for election as directors at the Meeting. All of the nominees have
consented to being named as such in this Proxy Statement and have agreed to
serve if elected. If any nominee should become unavailable, the persons voting
the proxies solicited hereby may in their discretion vote for a substitute
nominee. The Board of Directors has no reason to believe that any substitute
nominee or nominees will be required.
4
<PAGE>
BACKGROUND OF NOMINEES
The following is a brief account of the business experience of
each of the nominees for election as a director. Except as indicated below,
there are no family relationships or special understandings pursuant to which
such persons have been nominated as directors of the Company. None of the
nominees has any substantial interest in any matter to be acted upon.
Mr. Berkley has been a member of the Board of Directors of the
Company since 1994. He serves as Chairman of the Board of several companies
which he controls or founded. These include W.R. Berkley Corporation, a property
and casualty insurance company, Pioneer Companies, Inc. which, through its
indirect wholly owned subsidiaries, is engaged in the business of manufacturing
and distributing chlorine and caustic soda and related products, The Greenwich
Bank & Trust Company, a Connecticut chartered commercial bank, Westport National
Bank, a Federally chartered commercial bank, and Interlaken Capital, Inc., a
private investment firm ("Interlaken Capital"). Mr. Berkley is Vice-Chairman of
the Board of Trustees of the University of Connecticut, a Director of Georgetown
University, a Trustee of New York University and a member of the Board of
Overseers of New York University Stern School of Business.
Mr. Bursky has been a member of the Board of Directors and
Chairman of the Board of Directors since July 1988. He was President of the
Company from November 1989 to December 1990. He has been an executive officer of
Interlaken Capital since May 1980, currently serving as a Managing Director. Mr.
Bursky is a director of Pioneer Companies, Inc.
Mr. Donald has been a member of the Board of Directors of the
Company since 1995. Mr. Donald joined Monsanto Company in 1977 and is President
of its Nutrition & Consumer Sector, whose products include NutraSweet, Canderel
and Equal; a number of food thickening and stabilizing ingredients, including
Keltrol and Kelcogel, and the Roundup Lawn & Garden family of herbicides. Mr.
Donald also serves as a member of Monsanto's Life Science Business Team. Mr.
Donald serves on the boards of Fair St. Louis, Carleton College, Jackson
Laboratories, Opera Theatre of St. Louis, and the Municipal Theatre Association
of St. Louis, and is a member of the board of directors of Oil-Dri Corporation.
Ms. James has been a member of the Board of Directors of the
Company since 1990. Ms. James served as Executive Vice President and Chief
Financial Officer of Fine Host Corporation, a contract food service company,
from April 1997 to September 1998. Ms. James served as Chief Financial Officer
of the Company from February 1996 to April 1997, served as Executive Vice
President of the Company from January 1989 to April 1997, and served as
Secretary and Treasurer of the Company from December 1989 to April 1997. She was
Chief Financial Officer of the Company from January 1989 to September 1993. From
1990 to April 1997, Ms. James served as a Managing Director of Interlaken
Capital, Inc. and, from 1982 through 1988, was employed by Morgan Stanley & Co.
Incorporated, serving as a Managing Director in the corporate finance area
during the last two years of her tenure.
Mr. Neary has been a member of the Board of Directors of the
Company since January 1999. He is retired Co-Chairman of Ernst & Young, and
currently is Chairman of the Boards of Trustees of the Armada Funds and of the
Parkstone Mutual Funds. Mr. Neary is a director of Cold Metal Products, Inc. and
is Chairman of the American Institute of Certified Public Accounts' Quality
Control Inquiry Committee.
5
<PAGE>
Mr. Nusbaum has been a member of the Board of Directors since
1996. He is Chairman of the New York law firm of Willkie Farr & Gallagher where
he has been a partner for more than the last five years. He also is a director
of W.R. Berkley Corporation, Fine Host Corporation, Pioneer Companies, Inc.,
Prime Hospitality Corp. and The Topps Company, Inc.
Mr. Polan has been a member of the Board of Directors of the
Company since 1988. He has been an executive officer of Interlaken Capital since
June 1988, currently serving as a Managing Director. For more than the five
years prior to June 1988, Mr. Polan was a partner in the accounting firm of
Touche Ross & Co.
Mr. Quain has been a member of the Board of Directors of the
Company since 1995. Mr. Quain is presently Chairman of the Industrial
Manufacturing Group at ING Baring Furman Selz LLC and, since May 1997, has been
Executive Vice President of ING Baring Furman Selz LLC. For more than five years
prior to May 1997, Mr. Quain was a Managing Director of Schroder Wertheim &
Company. Mr. Quain is a director of Allied Products Corporation, a director of
Mechanical Dynamics, Inc. and a director of Titan International, a member of the
Board of Overseers of the School of Engineering and Applied Sciences at the
University of Pennsylvania where he also serves on the President's Council, and
is a member of the Board of Trustees of St. Luke's Academy, a college
preparatory school in New Canaan, Connecticut.
Mr. Sergey has been a member of the Board of Directors of the
Company since May 1997, at which time he was also elected President and Chief
Executive Officer of the Company. From May 1996 until May 1997, Mr. Sergey
operated his own consulting business. From 1989 to May 1996, he was the
President and Chief Executive Officer of GAF Materials Corporation, a
manufacturer and marketer of roofing and other building materials products.
During the same period, Mr. Sergey was Executive Vice President and a member of
the Board of Directors of GAF Corporation, the parent of GAF Materials
Corporation. Mr. Sergey is being nominated as a Director in accordance with the
terms of the Employment Agreement, dated April 11, 1997, between Mr. Sergey and
the Company, as amended. See "Executive Compensation-Employment Contracts,
Termination of Employment and Change in Control Agreements".
Mr. Bursky was an executive officer of Blue Lustre Products, Inc.,
a privately owned company which was engaged in the sale and leasing of carpet
cleaning equipment and other carpet cleaning products which, in October 1995,
filed a Chapter 11 petition for reorganization under Federal bankruptcy laws.
Fine Host Corporation, of which Ms. James was Executive Vice President and Chief
Financial Officer from April 1997 to September 1998, filed a Chapter 11 petition
for reorganization under Federal bankruptcy laws in January 1999.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
ELECTION OF EACH OF THE NOMINEES AS DIRECTORS.
6
<PAGE>
APPROVAL OF STOCK OPTION PLAN
(PROPOSAL II)
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THIS PROPOSAL II.
On March 11, 1999, the Board of Directors adopted the 1999 Plan,
subject to shareholder approval, under which 1,500,000 shares of the Common
Stock were reserved for issuance pursuant to the grant of stock option awards
under the 1999 Plan. In connection with the adoption of the 1999 Plan, the Board
has appointed the Section 162(m) Committee (the "Committee"), which administers
the 1990 Plan and the 1999 Plan. The Company is seeking shareholder approval of
the 1999 Plan for the purpose of complying with Sections 162(m) and 422(b)(1) of
the Internal Revenue Code of 1986, as amended (the "Code").
The Company believes that the granting of options plays an
important role in the Company's ability to attract and retain employees of
outstanding ability, and that the adoption of the 1999 Plan to provide 1,500,000
additional shares of the Common Stock for grant is necessary to ensure that the
Company can continue to attract and retain such employees. As of April 6, 1999,
only 139,464 shares of the Common Stock remained available for grant under the
1990 Plan.
The following table summarizes information about stock options
outstanding at April 6, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- ------------------ --------------- --------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$0.97 - $2.00 177,670 4.0 $1.06 177,670 $1.06
$2.01 - $3.00 726,456 9.6 $2.62 28,000 $2.50
$3.01 - $4.00 428,331 7.7 $3.84 164,478 $3.75
$4.01 - $6.00 2,094,048(a) 4.8 $5.65 1,309,024(a) $5.75
$6.01 - $8.00 220,749 6.5 $7.05 96,152 $7.25
--------- ---------
3,647,254 6.1 $4.69 1,775,324 $5.13
--------- ---------
--------- ---------
</TABLE>
- ----------
(a) Includes options for 1,036,708 shares of the Common Stock issued in
connection with a 1995 business acquisition at a price of $5.82 per share
with an expiration date of May 12, 2000.
On November 16, 1998, the Company's Board of Directors authorized
a stock repurchase program of up to 1,500,000 shares of the Common Stock. At
this time, the Company has accumulated enough shares under this program to
satisfy the issuance of virtually all options that have exercise prices of $2.00
per share or less.
The following is a summary of the provisions of the 1999 Plan:
The purpose of the 1999 Plan is to provide an incentive to improve
the performance, encourage the continued employment, and increase the
proprietary interest of certain directors, officers and key employees of the
Company. The 1999 Plan allows such persons the opportunity to share in
7
<PAGE>
the Company's long-term success through stock ownership and affords them the
opportunity for additional compensation related to the value of the Common
Stock.
Pursuant to the 1999 Plan, directors, officers and key employees
of the Company, together with consultants and advisers to the Company, who have
been selected by the Section 162(m) Committee, are eligible to receive grants of
options under the 1999 Plan; provided, however, that notwithstanding any other
provision of the 1999 Plan to the contrary, no director of the Company, and no
person who is not an employee of the Company, shall be eligible to receive
incentive stock options. An aggregate of 1,500,000 shares of the Common Stock
are reserved for issuance under the 1999 Plan. Options for no more than 500,000
shares of the Common Stock may be granted to any individual optionee during any
calendar year that the 1999 Plan is in effect.
The Committee may grant incentive stock options under the 1999
Plan and options which do not qualify as incentive stock options ("non-qualified
stock options"). Subject to the provisions of the 1999 Plan, the Committee has
sole authority, in its absolute discretion: (a) to determine which of the
eligible participants shall be granted options; (b) to authorize the granting of
both incentive stock options and non-qualified stock options; (c) to determine
the times when options shall be granted and the number of shares to be subject
to options; (d) to determine the option price of the shares of the Common Stock
subject to each option, which price shall be not less than the minimum price
specified in the 1999 Plan; (e) to determine the time or times when each option
becomes exercisable, the duration of the exercise period and any other
restrictions on the exercise of options granted under the 1999 Plan; (f) to
prescribe the form or forms of the option agreements under the 1999 Plan (which
forms shall be consistent with the terms of the 1999 Plan but need not be
identical and may contain such terms as the Committee may deem appropriate to
carry out the purposes of the 1999 Plan); (g) to determine the nature of any
rights and restrictions to be imposed on shares of the Common Stock subject to
options issued; (h) to adopt, amend and rescind such rules and regulations as,
in the Committee's opinion, may be advisable in the administration of the 1999
Plan; and (i) to construe and interpret the 1999 Plan, the rules and regulations
and option agreements under the 1999 Plan and to make all other determinations
deemed necessary or advisable for the administration of the 1999 Plan. All
decisions, determinations and interpretations of the Committee shall be final
and binding on all optionees.
The option price of each option granted under the 1999 Plan shall
be determined by the Committee; provided, however, that in the case of each
incentive stock option granted under the 1999 Plan, the option price shall not
be less than the fair market value of the Common Stock at the time the option is
granted and in no event shall the exercise price of any option be less than the
par value per share of the Common Stock on the date the option is granted. On
April 6, 1999, the fair market value of the Common Stock was $2.0625 per share.
The 1999 Plan provides that, if the Common Stock is quoted on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), the fair market value shall be deemed to be the mean between the
last quoted bid and asked prices on NASDAQ on the date immediately preceding the
date on which the option is granted, or if not quoted on that day, then on the
last preceding date on which such stock is quoted. If the Common Stock is listed
on one or more national securities exchanges, the fair market value shall be
deemed to be the mean between the highest and the lowest sale prices reported on
the principal national securities exchange on which such stock is listed and
traded on the date immediately preceding the date on which the option is
granted, or, if there is no such sale on that date, then on the last preceding
date on which such a sale was reported. If the Common Stock is not quoted on
NASDAQ or listed on an exchange, or representative quotes are not
8
<PAGE>
otherwise available, the fair market value of the Common Stock shall mean the
amount determined by the Committee, in accordance with applicable regulations of
the Internal Revenue Service, to be the fair market value based upon a good
faith attempt to value the Common Stock accurately.
The purchase price of an option is to be paid (i) in immediately
available funds in United States dollars, by certified or bank cashier's check,
(ii) by surrender to the Company of shares of the Common Stock which have been
held by the optionee for at least six months, or (iii) by any other means
approved by the Committee.
The term of each option shall be fixed by the Committee, provided
that no option will be exercisable later than ten years from the date of grant
of the option, and each option will be exercisable for such number of shares and
at such time or times, including in periodic installments, as may be determined
by the Committee at the time of grant.
The 1999 Plan generally provides that options granted thereunder
are not transferable except by will or by the laws of descent and distribution.
In addition, options granted under the 1999 Plan may provide that, if the
employment of an optionee terminates other than by reason of death, disability
or for cause, such options shall remain exercisable for a period of up to three
months. Options granted under the 1999 Plan may also provide that if the
employment of an optionee shall terminate by reason of death or disability, such
options shall remain exercisable by the optionee (or the person or persons to
whom such options pass by will or the applicable laws of descent and
distribution) for a period of up to one year. Options granted under the 1999
Plan may also provide that such options shall terminate immediately upon the
termination of the employment of the optionee for cause. Notwithstanding the
foregoing, in no event is an option exercisable after the termination date
specified in the option.
The number, kind and price of the shares of the Common Stock
subject to each outstanding option and the number of shares reserved for
issuance pursuant to options granted under the 1999 Plan shall be appropriately
adjusted in the event of stock splits, stock dividends or other changes in the
Company's outstanding securities. If the Company shall be the surviving
corporation in any merger or reorganization or other business combination, any
option shall cover the securities or other property to which a holder of the
number of shares of the Common Stock covered by the unexercised portion of the
option would have been entitled pursuant to the terms of the merger. Upon any
merger or reorganization or other business combination in which the Company
shall not be the surviving corporation, or a dissolution or liquidation of the
Company, or a sale of all or substantially all of its assets, all outstanding
options shall terminate, subject to the right of the surviving or resulting
corporation to grant substitute options to purchase its shares on such terms and
conditions as it shall deem appropriate. Such adjustments shall be determined by
the Committee in its sole discretion. Any such adjustment may provide for the
elimination of any fractional share which might otherwise become subject to an
option.
The 1999 Plan will terminate on the tenth anniversary of the date
the 1999 Plan was adopted by the Board of Directors. The Board of Directors may
terminate or amend the 1999 Plan provided that no amendment without shareholder
approval shall increase the number of shares as to which options may be granted
or change the class of employees eligible to receive options under the 1999
Plan.
At present, approximately two directors, eleven officers of the
Company and its subsidiaries and 1,012 other key employees would be eligible to
receive options under the 1999 Plan.
9
<PAGE>
In March 1999, the Company granted 400,000 non-qualified stock options under the
1999 Plan to an officer of the Company. The options were granted subject to the
approval of the 1999 Plan by the shareholders at the Meeting.
The following table sets forth information with respect to options
that were granted under the 1999 Plan on March 11, 1999. Such grant is the only
grant made as of the date of this Proxy Statement and is subject to the approval
of the 1999 Plan by the shareholders at the Meeting. In the event that the 1999
Plan is not approved by the shareholders, the grant will become void. Because
the grant of options under the 1999 Plan is completely within the discretion of
the Committee, the Company cannot forecast the benefits or amounts that will be
granted in the future nor the degree to which benefits and amounts would have
been granted by the Committee in the last fiscal year had the 1999 Plan been in
place at such time.
1999 PLAN BENEFITS
<TABLE>
<CAPTION>
Number of Shares
Underlying Options
Name and Position Dollar Value ($) Granted
----------------- ---------------- -------
<S> <C> <C>
John M. Sergey
President and Chief Executive N/A 400,000
Officer
Executive Group N/A 400,000
</TABLE>
The following is a general summary of the federal income tax
consequences of the 1999 Plan.
INCENTIVE STOCK OPTIONS
No taxable income is realized by the optionee upon the grant or
exercise of an incentive stock option. If the Common Stock is issued to an
optionee pursuant to the exercise of an incentive stock option, and if no
disqualifying disposition of such shares is made by such optionee within two
years after the date of grant or within one year after the transfer of such
shares to such optionee, then (1) upon sale of such shares, any amount realized
in excess of the option price will be taxed to such optionee as a long-term
capital gain and any loss sustained will be a long-term capital loss, and (2) no
deduction will be allowed to the optionee's employer for federal income tax
purposes.
If the Common Stock acquired upon the exercise of an incentive
stock option is disposed of prior to the expiration of either holding period
described above, generally (1) the optionee will realize ordinary income in the
year of disposition in an amount equal to the excess (if any) of the fair market
value of such shares at exercise (or, if less, the amount realized on the
disposition of such shares) and (2) the optionee's employer will be entitled to
deduct such amount for federal income tax purposes if the amount represents an
ordinary and necessary business expense. Any further gain (or loss) realized by
the optionee will be taxed as short-term or long-term capital gain (or loss), as
the case may be, and will not result in any deduction by the employer.
10
Subject to certain exceptions for disability or death, if an
incentive stock option is exercised more than three months following termination
of employment, the exercise of the option will generally be taxed as the
exercise of a non-qualified stock option.
For purposes of determining whether an optionee is subject to any
alternative minimum tax liability, an optionee who exercises an incentive stock
option generally would be required to increase his or her alternative minimum
taxable income, and compute the tax basis in the stock so acquired, in the same
manner as if the optionee had exercised a non-qualified stock option. Each
optionee is potentially subject to the alternative minimum tax. In substance, a
taxpayer is required to pay the higher of his/her alternative minimum tax
liability or his/her "regular" income tax liability. As a result, a taxpayer has
to determine his/her potential liability under the alternative minimum tax.
NON-QUALIFIED STOCK OPTIONS
With respect to non-qualified stock options: (a) no income is
realized by the optionee at the time the option is granted; (b) generally, at
exercise, ordinary income is realized by the optionee in an amount equal to the
difference between the option price paid for the shares and the fair market
value of the shares, if unrestricted, on the date of exercise, and the
optionee's employer is generally entitled to a tax deduction in the same amount
subject to applicable tax withholding requirements; and (c) at sale,
appreciation (or depreciation) after the date of exercise is treated as either
short-term or long-term capital gain (or loss) depending on how long the shares
have been held.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THIS PROPOSAL II.
11
<PAGE>
APPROVAL OF INDEPENDENT AUDITORS
(PROPOSAL III)
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THIS PROPOSAL III.
KPMG LLP has been appointed by the Board of Directors as
independent certified public accountants to audit the financial statements of
the Company for the fiscal year ending December 31, 1999. The Board of Directors
is submitting this matter to a vote of shareholders in order to ascertain their
views. If the appointment of KPMG LLP is not ratified at the Meeting, the Board
of Directors will reconsider its action and will appoint auditors for the 1999
fiscal year without further shareholder action. Further, even if the appointment
of auditors is ratified by shareholder action, the Board of Directors may at any
time in the future in its discretion reconsider the appointment of auditors
without submitting the matter to a vote of shareholders. The audit for the
Company for fiscal 1998 was conducted by KPMG LLP.
A representative of KPMG LLP is expected to attend the Meeting and
will have the opportunity to make a statement and/or respond to appropriate
questions from shareholders present at the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THIS
PROPOSAL III.
12
<PAGE>
COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1998, the Board of
Directors held four meetings and acted by unanimous written consent six times.
Each of the Directors attended at least 75% of the total number of meetings of
the Board and meetings of the Committees of which the Director was a member.
Nominees for Directors are selected by the entire Board of
Directors rather than any committee of the Board. The Board has four standing
committees: the Executive Committee, the Stock Option and Compensation
Committee, the Audit Committee and the Section 162(m) Committee.
The Executive Committee, composed of William R. Berkley, Andrew M.
Bursky and John M. Sergey, has the authority, with the authorization of the
Board of Directors, to exercise all of the powers and authority of the Board to
the extent permitted under the laws of the State of Delaware and the Company's
Certificate of Incorporation and By-laws. The Executive Committee did not meet
or act during 1998.
The Stock Option and Compensation Committee, composed of Andrew M.
Bursky and Joshua A. Polan, establishes the general compensation policies of the
Company and the specific compensation level for the Company's executive
officers. The Stock Option and Compensation Committee also administers the
Company's Non-Employee Director Stock Plan and, prior to the formation of the
Section 162(m) Committee, administered the 1990 Plan. The Stock Option and
Compensation Committee held two meetings in 1998 and acted by unanimous written
consent six times.
The Audit Committee, composed of William R. Berkley, Joshua A.
Polan and Mitchell I. Quain, makes recommendations concerning the engagement of
independent public accountants, the plans and results of the audit engagement,
approves professional services provided by the independent public accountants,
considers audit and non-audit fees, and reviews the adequacy of the Company's
internal accounting controls. The Audit Committee held two meetings in 1998.
The Section 162(m) Committee, which was formed in March 1999, is
composed of Arnold W. Donald and Robert D. Neary, and has the authority to
administer the 1990 Plan and approve all options granted thereunder, as well as
all options to be granted under the 1999 Plan.
COMPENSATION OF DIRECTORS
During the fiscal year ended December 31, 1998, each of the
non-employee members of the Board of Directors received, under the Non-Employee
Director Stock Plan, non-qualified options to purchase 4,000 shares of the
Common Stock in consideration of services rendered during 1998. In the future,
on December 31 of each year, under the Non-Employee Director Stock Plan, each of
the Company's Directors who is not an employee of the Company will be granted an
option to purchase 4,000 shares of the Common Stock. All options are granted at
a price equal to the fair market value of the Common Stock on the date of grant,
and have a maximum term of five years. During 1998, each non-employee director
of the Company received a cash fee of $1,500 in consideration of each meeting of
the Board attended by the Director, and each non-employee director who remained
a director at the end of 1998 received an additional cash fee of $6,000. During
1999, each non-employee director of the Company will receive cash compensation
on the same basis as non-employee directors received cash compensation in 1998.
In addition, each non-employee director who serves on a committee of the Board
13
<PAGE>
during 1999, and who remains a director at the end of 1999, will receive a cash
fee of $1,000. The Company also has a general policy to reimburse members of the
Board of Directors for all reasonable expenses incurred in connection with their
attendance at Directors' meetings.
IDENTIFICATION OF EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Executive Position and Officer Term
Name Offices Held Since Expires Age
---- ------------ ----- ------- ---
<S> <C> <C> <C> <C>
Andrew M. Bursky Chairman of Board of Directors 1988 1999 42
John M. Sergey President and Chief Executive Officer 1997 1999 56
Jeffery O. Beauchamp Executive Vice President 1997 1999 56
Michael F. Devine III Chief Financial Officer, Secretary and 1997 1999 40
Treasurer
George E. Krauter Executive Vice President 1997 1999 67
David L. Courtright Controller and Chief Accounting 1998 1999 45
Officer
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS
The following is a brief account of the business experience of
each of the persons listed in the foregoing table. There are no family
relationships or special understandings pursuant to which such persons have been
elected as officers of the Company except as described below. None of the
officers has any substantial interest in any matter to be acted upon, other than
the election of Directors in the case of Mr. Bursky and Mr. Sergey.
Mr. Bursky has been Chairman of the Board of Directors of the
Company since July 1988. He was President of the Company from November 1989 to
December 1990. He has been an executive officer of Interlaken Capital since May
1980, currently serving as a Managing Director. Mr. Bursky is a director of
Pioneer Companies, Inc.
Mr. Sergey has served as President and Chief Executive Officer of
the Company since May 1997. From May 1996 until May 1997, Mr. Sergey operated
his own consulting business. From 1989 to May 1996, he was the President and
Chief Executive Officer of GAF Materials Corporation, a manufacturer and
marketer of roofing and other building materials products. During the same
period, Mr. Sergey was Executive Vice President and a member of the Board of
Directors of GAF Corporation, the parent of GAF Materials Corporation.
Mr. Beauchamp is currently Executive Vice President of the Company
and Chairman Emeritus of INTERMAT, which was founded by Mr. Beauchamp in 1978
and was acquired by the Company in January 1997. From November 1978 until
January 1997, Mr. Beauchamp served as
14
<PAGE>
Chairman of INTERMAT. Mr. Beauchamp is also the immediate past President and
Chief Executive Officer of the Utility Supply Management Alliance, a nonprofit
educational industry association.
Mr. Devine has been Chief Financial Officer, Secretary and
Treasurer of the Company since April 1997. He has been Chief Financial Officer
of the Company's Industrial Systems Associates, Inc. subsidiary ("ISA") since
July 1995. From 1989 to 1993 he served as Director of Finance and from 1993 to
July 1995 as Director of Operations at McMaster-Carr Supply Company, a
distributor of industrial supplies.
Mr. Krauter has served as Executive Vice President of the Company
since April 1997. Mr. Krauter is also Chairman Emeritus of ISA, which was
acquired by the Company in January 1994. He was President of ISA from March 1971
to January 1997. From 1994 until January 1, 1999, Mr. Krauter was a Director of
the Company.
Mr. Courtright was elected Controller and Chief Accounting Officer
of the Company in March 1998. From 1991 until joining the Company in September
1997, Mr. Courtright operated his own financial consulting business, primarily
providing services related to business mergers, acquisitions and divestitures.
From April 1987 until December 1990, Mr. Courtright served as Assistant
Corporate Controller of the Pullman Company, a diversified manufacturer of
industrial products. For twelve years prior to joining the Pullman Company, Mr.
Courtright practiced as a certified public accountant, most recently as Senior
Manager with Coopers & Lybrand.
15
<PAGE>
REPORT OF THE STOCK OPTION AND COMPENSATION COMMITTEE ON
EXECUTIVE COMPENSATION
The Stock Option and Compensation Committee of the Board of
Directors (the "Compensation Committee") establishes the general compensation
policies of the Company and the specific compensation level for the Company's
executive officers. The Compensation Committee also reviews the levels of
compensation of senior officers of the Company's subsidiaries. The Compensation
Committee is composed of Andrew M. Bursky and Joshua A. Polan.
CEO COMPENSATION
Compensation of the Company's Chief Executive Officer is governed
by the terms of his employment agreement, dated April 11, 1997, as amended (the
"CEO Employment Agreement"). The Compensation Committee established the Chief
Executive Officer's salary and other compensation by considering the
compensation packages of CEO's of comparably-sized companies, and by considering
the type of compensation package that would be necessary in order to attract a
Chief Executive Officer with the skills and experience necessary to achieve the
goals that the Board of Directors had established for the Company. The terms of
the CEO Employment Agreement are set forth under "Executive Compensation -
Employment Contracts, Termination of Employment and Change in Control
Agreements".
COMPENSATION OF EXECUTIVE OFFICERS GENERALLY
The Compensation Committee believes that the compensation of
executive officers of the Company should be heavily influenced by Company
performance, as measured by operating, financial and strategic objectives. It
further believes that Company performance should be viewed both from a
short-term and a long-term perspective. The compensation levels of the Company's
executive officers and of the senior officers of the Company's subsidiaries are
set with a view to aligning compensation with the Company's business objectives
and performance. The Compensation Committee believes it is important to use
compensation to enable the Company to attract and reward officers who contribute
to the Company's long-term success by demonstrated, sustained performance. To
this end, the Company relies on cash compensation consisting of base salary and
individual bonus awards and stock based compensation. Bonuses for 1998 were
awarded to executive officers of the Company, and to senior officers of the
Company's subsidiaries, based on the achievement of performance goals
established by management and confirmed by the Compensation Committee.
Stock options are granted to executive officers based on an
evaluation of the executives' ability to influence the Company's long-term
growth and profitability. In the case of senior officers employed by
subsidiaries, the subsidiary's financial performance and potential future
contributions to overall corporate profitability are also taken into account.
During 1998, Mr. Sergey received options to purchase 75,000 shares of the Common
Stock, Mr. Devine received options to purchase 53,000 shares of the Common Stock
and Mr. Courtright received options to purchase 8,600 shares of the Common
Stock.
Because none of the executive officers of the Company has received
annual compensation in excess of $1 million, the Compensation Committee has not
addressed all issues related to the annual deduction limit of $1 million for
compensation paid to executive officers, which limit is set forth in Section
162(m) of the Code. In March 1999, however, the Board of Directors formed the
Section 162(m) Committee, which Committee has the authority to approve all
options granted under the 1990 Plan and the 1999 Plan. All compensation received
by executive officers as a result of the exercise
16
<PAGE>
of options approved by the Section 162(m) Committee will be exempt from the
deduction limit set forth in Section 162(m) of the Code.
Deductibility of compensation will be one of the factors
considered by the Committee when reviewing compensation decisions; however, the
Compensation Committee does not believe it would be prudent to adopt a policy
precluding payment of nondeductible compensation without regard to other
considerations. Of the options granted to Mr. Sergey under the CEO Employment
Agreement, 400,000 options granted in 1997 were granted outside of the 1990 Plan
as an inducement to Mr. Sergey's entering into the Agreement. Compensation
attributable to such options will be subject to the $1 million deduction limit,
assuming the options are exercised in a taxable year for which Mr. Sergey is
serving as a named executive officer on the last day of such taxable year. A
grant under the 1999 Plan of 400,000 options to Mr. Sergey will be exempt. Of
the remaining 175,000 options previously granted to Mr. Sergey, 145,000 are
"incentive stock options" under Section 422 of the Code, as to which Mr. Sergey
will not recognize ordinary income and the Company will not be entitled to a
deduction, provided Mr. Sergey satisfies certain holding period requirements
with respect to the underlying stock.
STOCK OPTION AND COMPENSATION COMMITTEE
Andrew M. Bursky
Joshua A. Polan
April 9, 1999
The previous reports of the Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
Andrew M. Bursky is Chairman of the Board of Directors and Joshua
A. Polan is a Director of the Company. Mr. Bursky has served as Chairman of the
Board of Directors since 1988 and was President of the Company from November
1989 to December 1990. See "Transactions with Affiliates" for a description of
certain transactions between the Company and certain companies of which Mr.
Bursky, Mr. Polan and William R. Berkley are officers, directors and/or
shareholders.
17
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all the cash and non-cash
compensation for the fiscal year ended December 31, 1998, and for each of the
prior two fiscal years, awarded to or earned by the President, the Executive
Vice Presidents, the Chief Financial Officer, and the Controller and Chief
Accounting Officer of the Company. No other executive officer of the Company
earned more than $100,000 in salary and bonus in any of the three fiscal years
ended December 31, 1998. Mr. Bursky did not receive any compensation from the
Company but was an executive officer of and was compensated by Interlaken
Capital, which is party to a services agreement with the Company pursuant to
which Interlaken Capital received fees of approximately $21,100 during 1998. See
"Transactions with Affiliates."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation Awards
Annual Compensation -----------------------------
-------------------
Name and Principal Position Other Annual Number of Securities All Other
of Executive Officer Year Salary Bonus Compensation Underlying Options Granted(#) Compensation
-------------------- ----- ------ ----- ------------ ----------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
JOHN M. SERGEY 1998 $353,000 $ 65,000 $68,788 (4) 75,000 $12,986(6)
President and Chief Executive 1997 240,000(1) 180,000 138,955 (5) 500,000 12,496(7)
Officer
JEFFERY O. BEAUCHAMP 1998 147,000 -0- -0- 4,410(8)
Executive Vice President 1997 137,500(2) -0- -0- 4,235(8)
GEORGE E. KRAUTER 1998 147,000 40,000 -0- -0-
Executive Vice President 1997 150,000 65,000 -0- -0-
1996 135,000 78,500 -0- -0-
MICHAEL F. DEVINE, III 1998 151,000 42,500 53,000 371(8)
Chief Financial Officer 1997 145,000 70,000 25,000 -0-
1996 135,000 75,000 25,000 -0-
DAVID L. COURTRIGHT 1998 89,000 10,000 8,600 1,968(8)
Controller and Chief Accounting 1997 23,000(3) 5,000 -0- -0-
Officer
</TABLE>
- ----------
(1) Mr. Sergey's employment with the Company commenced on May 1, 1997.
(2) Mr. Beauchamp's employment with the Company commenced on January 28, 1997.
(3) Mr. Courtright's employment with the Company commenced on
September 15, 1997.
(4) Represents 1998 relocation expenses ($48,788) and an automobile allowance
($20,000).
(5) Represents 1997 relocation expenses ($80,722), amounts reimbursed for the
payment of taxes ($44,900) and an automobile allowance ($13,333).
(6) Represents premiums paid for term life and disability insurance ($10,452)
and contributions to the Company's Retirement Savings Plan ($2,534).
(7) Represents premiums paid for term life and disability insurance.
(8) Represents contributions to the Company's Retirement Savings Plan.
18
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all options granted during 1998 to
the persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
Potential Realizable Value At
Assumed Annual Rates of Stock
Number of % of Total Exercise or Price Appreciation for Option Term
Securities Underlying Options Granted Base Price Expiration ----------------------------------
Name Options Granted(#) to Employees ($/Sh) Date 5%($) 10%($)
----- ------------------ ------------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
John M. Sergey 25,000(1) 2.84% $2.81 10/26/2008 $ 44,250 $112,000
50,000(1) 5.68% $5.97 03/05/2008 187,500 475,500
Jeffery O. Beauchamp 0 0 0 0 0 0
George E. Krauter 0 0 0 0 0 0
Michael F. Devine III 15,000(2) 1.70% $2.81 10/26/2008 26,550 67,200
3,000(2) * $5.97 05/21/2008 11,250 28,530
35,000(2) 3.97% $5.97 03/05/2008 131,250 332,850
David L. Courtright 2,500(3) * $2.81 10/26/2008 4,425 11,200
1,100(3) * $5.97 05/21/2008 4,125 10,461
5,000(3) * $5.97 03/05/2008 18,750 47,550
</TABLE>
- ----------
* Less than 1%
(1) These options were granted on October 26, 1998 and March 5, 1998,
respectively. The October 26, 1998 options vest in four equal installments
on the first four anniversaries of the grant date. The March 5, 1998
options vest in five equal installments on the first five anniversaries of
the grant date.
(2) These options were granted on October 26, 1998, May 21, 1998 and March 5,
1998, respectively. The October 26, 1998 options vest in four equal
installments on the first four anniversaries of the grant date. The May 21,
1998 options vest in three equal installments on the first three
anniversaries of the grant date. The March 5, 1998 options vest in three
equal installments on the first three anniversaries of the grant date.
(3) These options were granted on October 26, 1998, May 21, 1998 and March 5,
1998, respectively. The October 26, 1998 options vest in four equal
installments on the first four anniversaries of the grant date. The May 21,
1998 options vest in three equal installments on the first three
anniversaries of the grant date. The March 5, 1998 options vest in three
equal installments on the first three anniversaries of the grant date.
19
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
The following table indicates, for all persons named in the
Summary Compensation Table, the value of in-the-money unexercised options at
December 31, 1998. None of these individuals exercised any options in 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money
Shares Underlying Unexercised Options At FY-End($)
Acquired on Value Options At FY-End(#) --------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable(1) Unexercisable(1)
---- ---------- ------------ ----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
John M. Sergey 0 0 100,000 475,000 0 $0
Jeffery O. Beauchamp 0 0 0 0 0 0
George E. Krauter 0 0 0 0 0 0
Michael F. Devine III 0 0 12,875 103,000 0 0
David L. Courtright 0 0 0 8,600 0 0
</TABLE>
- ----------
(1) The fiscal year-end closing price of the Common Stock was $2.43.
No options were in-the-money at December 31, 1998.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
CHANGE IN CONTROL AGREEMENTS
On April 11, 1997, the Company entered into a three year Executive
Employment Agreement (the "Executive Employment Agreement") with Mr. Sergey,
pursuant to which, beginning on May 1, 1997, Mr. Sergey became President and
Chief Executive Officer of the Company for base compensation of not less than
$360,000 per year. The Executive Employment Agreement was amended on March 11,
1999 (the "1999 Employment Agreement Amendment") in order to, among other
things, extend the term of the Executive Employment Agreement through May 1,
2003 and increase Mr. Sergey's base compensation to not less than $400,000 per
annum effective January 1, 1999. Pursuant to the Executive Employment Agreement,
Mr. Sergey is eligible for bonus compensation based upon the achievement of
goals established by the Compensation Committee. In addition, as an inducement
to enter into the Executive Employment Agreement, Mr. Sergey was granted
non-qualified options to purchase up to 400,000 shares of the Common Stock at an
exercise price of $5.12 per share (which the Compensation Committee determined
to be the fair market value of the Common Stock on the date of grant) and, upon
commencement of his employment with the Company, Mr. Sergey was granted
incentive stock options under the 1990 Stock Option Plan to purchase up to
100,000 shares of the Common Stock at an exercise price of $3.98 per share. In
addition, the Company sold Mr. Sergey 400,000 shares of the Common Stock (the
"Purchased Shares") for an aggregate amount of $1,700,000 (an amount which the
Compensation Committee determined to be the fair market value of the Common
Stock on the date of the Executive Employment Agreement). The purchase price for
the Purchased Shares was paid $700,000 in cash and the remainder was evidenced
by a five year promissory note bearing interest at the rate of 7% per annum from
Mr. Sergey to the Company that is secured by the Purchased Shares and recourse
only to the Purchased Shares (the "Purchase Note"). In addition, Mr. Sergey will
receive certain life insurance benefits, disability benefits, car allowance and
moving expenses. If Mr. Sergey's employment is terminated by the Company without
"Cause" (as defined in the Executive Employment Agreement), or by Mr. Sergey for
"Good Reason" (which, as defined in the Executive Employment Agreement, includes
a change in control of the Company), Mr. Sergey will continue to receive his
salary and reimbursement for the cost of health benefits until the balance of
the
20
<PAGE>
employment term or one year, if longer, subject to setoff by amounts earned by
Mr. Sergey from subsequent employment during such period. Upon a change in
control of the Company, all of Mr. Sergey's outstanding options will become
exercisable in full.
Pursuant to the 1999 Employment Agreement Amendment, the Company
agreed to recommend that the Section 162(m) Committee grant Mr. Sergey 400,000
non-qualified stock options (the "March 1999 Sergey Options") under the 1999
Plan, subject to the approval of the 1999 Plan by the shareholders at the
Meeting. The Section 162(m) Committee approved the March 1999 Sergey Options on
March 11, 1999. The March 1999 Sergey Options vest in four equal installments on
December 16 of 1999, 2000, 2001 and 2002; provided, however, that vesting of the
first 200,000 of the March 1999 Sergey Options will be delayed until December
16, 2005 unless the Common Stock trades at or above $6.00 per share for thirty
consecutive trading days prior to December 16, 2005, and the vesting of the
second 200,000 of the March 1999 Sergey Options will be delayed until December
16, 2005 unless the Common Stock trades at or above $9.00 per share for thirty
consecutive trading days prior to December 16, 2005. The 1999 Employment
Agreement Amendment also eliminated the Company's obligation to provide Mr.
Sergey with term life insurance in exchange for the Company's obligation to fund
a portion of the cost of a whole life insurance policy, the beneficiary of which
is a family trust created by Mr. Sergey. At the time the 1999 Employment
Agreement Amendment was executed, the terms of the Purchase Note were also
amended to extend the due date of the Note from May 20, 2002 to May 1, 2003, and
to provide that some or all of the principal and interest on the Note may be
forgiven in the event that there is a change in control of the Company prior to
May 1, 2003; the amount of the principal and interest to be forgiven depends
upon the date of the change in control and the trading price of the Common Stock
on the date of the change in control.
Mr. Beauchamp was appointed an Executive Vice President of the
Company in accordance with the terms of an Employment Agreement, dated as of
January 28, 1997, by and among the Company, INTERMAT and Mr. Beauchamp. The term
of the Employment Agreement is three years and provides for a salary of not less
than $150,000 per annum.
Mr. Krauter is party to an Employment Agreement, dated as of
January 4, 1994, by and between Mr. Krauter and ISA. The term of the Employment
Agreement is five years and provides a salary of not less than $100,000 per
annum.
21
<PAGE>
COMPANY STOCK PERFORMANCE GRAPH
Set forth below is a graph comparing the yearly cumulative total
shareholder return on the Company's Common Stock with the yearly cumulative
total shareholder return of the NASDAQ Market Index and an index of a group of
peer companies selected by the Company. The comparison of total shareholder
returns assumes that $100 was invested on March 31, 1994 in each of the
Companies, the NASDAQ Market Index and the peer group index, and that dividends
were reinvested when and as paid. March 31, 1994 was chosen as the beginning
point of the comparison period because March 31, 1994 was the first full month
the Company's stock was traded on a NASDAQ exchange. The companies in the peer
group are Lawson Products, Inc. ("Lawson"), Noland Company ("Noland"), MSC
Industrial Direct Co., Inc. ("MSC"), Arden Industrial Products Inc. ("Arden"),
JLK Direct Distribution, Inc. ("JLK") and Industrial Distribution Group, Inc.
("IDG"). The Company recently added JLK and IDG, which both began trading in
1997, to the peer group because the Company believes that a peer group
consisting of five companies as opposed to three is a better representative
sample for comparative purposes. The Company is not included in the peer group.
In calculating the yearly cumulative total shareholder return of the peer group
index, the shareholder returns of the companies included in the peer group are
weighted according to the stock market capitalizations of such companies at the
beginning of each period for which a return is indicated. Of the companies
included in the peer group, the stock of Lawson and Noland has been publicly
traded for the entire five-year period covered by the performance graph, and the
stock of MSC has been publicly traded since December 1995. The shareholder
returns of MSC are first included in the calculation of cumulative total
shareholder return of the peer group index for 1996. Arden no longer trades
publicly; the company was acquired by a third-party in 1997.
STRD NASDAQ Composite Selected Company Index
3/31/1994 100 100 100
12/30/1994 117 101 91
12/29/1995 185 142 89
12/31/1996 185 174 103
12/31/1997 110 203 120
12/31/1998 57 295 107
The Common Stock began trading on the NASDAQ Small Cap Market on
March 16, 1994 and began trading on the NASDAQ National Market on October 6,
1994. The price of the Common Stock on December 31, 1998, as set forth in the
Performance Graph, represents the last reported sale price of the Common Stock
on the NASDAQ National Market on December 31, 1998, the last trading date in
1998.
22
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information, as of April 6,
1999, concerning beneficial ownership of the Common Stock (calculated based on
31,111,285 shares outstanding) by (i) each person known by the Company to own
beneficially more than five percent of the outstanding shares of the Common
Stock, (ii) each director of the Company and each nominee to become a director,
(iii) each executive officer of the Company named in the Summary Compensation
Table and (iv) all directors and executive officers of the Company as a group.
Unless otherwise indicated, all amounts reflected in the table represent shares
the beneficial owners of which have sole voting and investment power.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Title of Class Beneficial Owner (a) Beneficial Ownership Percent of Class
- -------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
Common Stock Jeffery O. Beauchamp 218,750 *
Executive Vice President
Common Stock William R. Berkley 8,178,996(b) 25.51%(b)
Director
Common Stock Andrew M. Bursky 1,115,251(c) 3.58%(c)
Director, Chairman of the Board
Common Stock Arnold W. Donald 20,418(d) * (d)
Director
Common Stock Catherine B. James 789,208(e) 2.52%(e)
Director
Common Stock George E. Krauter 206,000 *
Executive Vice President
Common Stock Jack H. Nusbaum 22,000(f) *
Director
Common Stock Robert D. Neary 20,000 *
Director
Common Stock Joshua A. Polan 186,169(g) *
Director
Common Stock Mitchell I. Quain 109,488(h) *
Director
Common Stock John M. Sergey 791,000(i) 2.52%(i)
Director, President and
Chief Executive Officer
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C> <C>
Common Stock Michael F. Devine, III 33,874(j) *
Chief Financial Officer, Secretary
and Treasurer
Common Stock David L. Courtright 2,032(k) *
Controller and Chief Accounting
Officer
Common Stock Dimensional Fund Advisors, Inc. 2,389,740(l) 7.68%
Common Stock Barry R. Feirstein 2,720,500(m) 8.74%
Common Stock T. Rowe Price Associates, Inc./T. Rowe
Price New Horizons Fund, Inc. 2,387,000(n) 7.67%
Common Stock Wellington Management Company, LLP 2,248,250(o) 7.23%
Common Stock All executive officers and
directors as a group (13 persons) 11,693,186(p) 35.81%
</TABLE>
- ----------
* Owns less than 1% of the outstanding shares of the Common Stock.
(a) The business address of William R. Berkley is 165 Mason Street, Greenwich,
Connecticut 06830. The business address of Dimensional Fund Advisors, Inc.
is set forth in footnote (l). The business address of Barry R. Feirstein is
set forth in footnote (m).
(b) Includes (i) 45,000 shares of the Common Stock held by the Berkley Family
Limited Partnership, (ii) 12,000 shares of the Common Stock which are
subject to currently exercisable stock options held by Mr. Berkley, (iii)
19,649 shares of the Common Stock which are subject to currently exercisable
stock options held by The Berkley Family Limited Partnership, and (iv)
919,600 shares of the Common Stock which are subject to currently
exercisable stock options held by Interlaken Investment Partners, L.P. Mr.
Berkley is a general partner of The Berkley Family Limited Partnership and
is the sole owner of a company that indirectly controls Interlaken
Investment Partners, L.P.; as such, he may be deemed to be the beneficial
owner of shares of the Common Stock beneficially owned by those entities.
The number of outstanding shares used for calculating percent of class is
32,062,534.
(c) Includes (i) 1,000 shares of the Common Stock held by an IRA in Mr. Bursky's
name, (ii) 4,000 shares of the Common Stock held by a Keogh in Mr. Bursky's
name and (iii) 40,295 shares of the Common Stock which are subject to
currently exercisable stock options held by Mr. Bursky. The number of
outstanding shares used for calculating percent of class is 31,151,580.
(d) Includes 12,000 shares of the Common Stock which are subject to currently
exercisable stock options held by Mr. Donald.
(e) Includes (i) 193,133 shares of the Common Stock which are subject to
currently exercisable stock options and (ii) 16,667 shares of the Common
Stock which are subject to stock options
24
<PAGE>
held by Ms. James that will become exercisable within 60 days. The number of
outstanding shares used for calculating percent of class is 31,321,085.
(f) Includes 12,000 shares of the Common Stock which are subject to currently
exercisable stock options held by Mr. Nusbaum.
(g) Includes 12,000 shares of the Common Stock which are subject to currently
exercisable stock options held by Mr. Polan.
(h) Includes (i) 10,000 shares of the Common Stock held by the Samuel Quain
Trust, (ii) 10,000 shares of the Common Stock held by the Rhonda Quain
Trust, (iii) 10,000 shares of the Common Stock held by the Michelle Quain
Trust, (iv) 10,000 shares of the Common Stock held by the Jacob Quain Trust
(collectively, the "Trusts") and (v) 12,000 shares of the Common Stock which
are subject to currently exercisable stock options held by Mr. Quain. Mr.
Quain is Trustee of the Trusts and, as such, may be deemed to be beneficial
owner of the shares held by the Trusts.
(i) Includes (i) 135,000 shares of the Common Stock which are subject to
currently exercisable stock options and (ii) 125,000 shares of the Common
Stock which are subject to Stock Options held by Mr. Sergey that will become
exercisable within sixty days. The number of outstanding shares used for
calculating percent of class is 31,371,285.
(j) Includes (i) 24,541 shares of the Common Stock which are subject to
currently exercisable stock options and (ii) 9,333 shares of the Common
Stock which are subject to Stock Options held by Mr. Devine that will become
exercisable in sixty days.
(k) Includes 1,666 shares of the Common Stock which are subject to currently
exercisable stock options and (ii) 366 shares of the Common Stock which are
subject to Stock Options held by Mr. Courtright that will become exercisable
within 60 days.
(l) The business address of Dimensional Fund Advisors, Inc. ("Dimensional") is
1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. Information regarding
Dimensional has been obtained by the Company from a Schedule 13G filed by
Dimensional with the Securities and Exchange Commission on or about February
11, 1999. Dimensional, a registered investment advisor, is deemed to have
beneficial ownership of 2,389,740 shares of the Common Stock as of December
31, 1998, all of which shares are held by advisory clients of Dimensional,
no one of which, to the knowledge of Dimensional, owns more than 5% of the
class. Dimensional disclaims beneficial ownership of all such shares.
(m) The business address of Barry R. Feirstein ("Feirstein") is 767 Third
Avenue, 28th Floor, New York, NY 10017. Information regarding Feirstein has
been obtained by the Company from a Schedule 13G filed by Feirstein with the
Securities and Exchange Commission on or about February 5, 1999. Feirstein
has sole voting and dispositive power over 748,013 shares of the Common
Stock and shared voting and dispositive power over 1,972,487 shares of the
Common Stock. Feirstein Capital Management, L.L.C. and Feirstein Partners,
L.P. each have shared voting and dispositive power over 1,972,487 shares of
the Common Stock.
(n) The business address of T. Rowe Price Associates, Inc. and T. Rowe Price New
Horizons Funds, Inc. is 100 E. Pratt Street, Baltimore, Maryland 21202.
Information regarding T. Rowe
25
<PAGE>
Price Associates, Inc. and T. Rowe Price New Horizons Funds, Inc. has been
obtained by the Company from a Schedule 13G filed by T. Rowe Price
Associates, Inc. and T. Rowe Price New Horizons Funds, Inc. with the
Securities and Exchange Commission on or about February 11, 1999. The
securities are owned by various individuals and institutional investors
(including T. Rowe Price New Horizons Fund, Inc. ("Horizons Fund") which
owns 1,761,000 shares) which T. Rowe Price Associates, Inc. ("Price
Associates") serves as investment adviser with power to direct investments
and/or sole power to vote the securities. Price Associates has sole
dispositive power over 2,387,000 shares and sole voting power over 626,000
shares. Horizons Fund beneficially owns and has sole voting power over
1,761,000 shares. For purposes of reporting requirements of the Securities
Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of
all such securities; however, Price Associates expressly disclaims that it
is, in fact, the beneficial owner of such securities.
(o) The business address of Wellington Management Company is 75 State Street,
Boston, Massachusetts, 02109. Information regarding Wellington Management
Company has been obtained by the Company from a Schedule 13G filed by
Wellington Management Company with the Securities and Exchange Commission on
or about January 29, 1999. Wellington Management Company has shared
investment power over 2,248,250 shares of the Common Stock and shared voting
power over 1,183,250 shares of the Common Stock. Wellington Management
Company does not have sole voting or investment power over any shares of
Common Stock.
(p) Includes 1,545,250 shares of the Common Stock which are subject to options
held by executive officers and directors of the Company that are currently
exercisable or will become exercisable within 60 days. The number of
outstanding shares used for calculating percent of class is 32,656,535.
26
<PAGE>
TRANSACTIONS WITH AFFILIATES
The Company has entered into an agreement (the "Services
Agreement") with Interlaken Capital pursuant to which Interlaken Capital will
provide the Company with certain corporate and administrative services including
but not limited to services relating to accounting and internal legal advice.
Mr. Berkley is the sole shareholder of Interlaken Capital. Messrs. Berkley and
Bursky are the sole directors of Interlaken Capital. Mr. Bursky and Mr. Polan
are employees and executive officers of Interlaken Capital. The fee to be paid
by the Company pursuant to the Services Agreement is $12,500 per month plus
expenses incurred by Interlaken Capital (the "Interlaken Monthly Fee").
Interlaken Capital is also entitled to receive transaction fees under the
Services Agreement in connection with the divestiture of certain discontinued
Company businesses (the "Transaction Fees"). Interlaken Monthly Fees will be
reduced by any Transaction Fees received by Interlaken Capital. During 1998, the
Company paid Interlaken Capital $21,100 in connection with the sale of American
Technical Services, Inc. which was equal to 2% of the purchase price paid to the
Company. Besides providing services to the Company, Interlaken Capital provides
legal, accounting and other services to companies engaged in such businesses as
fire protection, infants' clothing manufacturing and chemical manufacturing. The
term of the Services Agreement extends from June 1, 1997 through May 31, 2000,
but will automatically renew for additional one-year terms unless either party
gives notice of termination at least thirteen months prior to the termination
date otherwise in effect. The terms of the Services Agreement were approved by
the Company's disinterested directors.
The Company issued a subordinated note, which was due and paid on
January 4, 1998, to Mr. Krauter in the principal amount of $500,000. The note
bore interest at the rate of 6% per annum. The Company issued this note on
January 4, 1994 in connection with its acquisition from Mr. Krauter of all of
the issued and outstanding stock of ISA.
The Company issued $1,400,000 aggregate principal amount of
subordinated notes to the former shareholders of INTERMAT in connection with the
Company's acquisition of INTERMAT in January 1997. Subsequent to the
acquisition, all of the subordinated notes, which are due in the year 2000 and
bear interest at the rate of 9% per annum, were acquired by Mr. Beauchamp and
his wife, who continue to hold all of the subordinated notes.
The Company believes that the foregoing transactions were on terms
no less favorable to the Company than those available from unaffiliated parties.
In the future, the Company will engage in transactions with affiliated parties
only if they satisfy the foregoing criteria.
SHAREHOLDER PROPOSALS
Securities and Exchange Commission regulations permit shareholders
to submit proposals for consideration at annual meetings of shareholders. Any
such proposals for SDI's Annual Meeting of Shareholders to be held in 2000 must
be submitted to SDI on or before December 11, 1999, and must comply with
applicable regulations of the Securities and Exchange Commission in order to be
included in proxy materials relating to that meeting. Proposals should be sent
to: Strategic Distribution, Inc., c/o John M. Sergey, President and Chief
Executive Officer, 3220 Tillman Drive, Suite 200, Bensalem, Pennsylvania 19020.
27
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge, each person who at any time during
1998 was a director, officer or beneficial owner of more than ten percent of the
Common Stock filed on a timely basis all reports required by Section 16(a) of
the Exchange Act, except that Mr. Sergey filed a report with respect to a
purchase of 10,000 shares in September 1998 approximately one month late.
MISCELLANEOUS
A copy of the Company's Annual Report for the year ended December
31, 1998, as filed with the Securities and Exchange Commission, has been
delivered free of charge to shareholders with this solicitation. A copy of the
Company's Annual Report on Form 10-K, including exhibits if requested, will be
furnished upon the payment of a reasonable fee to cover the Company's expense in
reproducing and mailing same, to each shareholder who mails a written request
therefor to: Strategic Distribution, Inc., 3220 Tillman Drive, Suite 200,
Bensalem, Pennsylvania 19020.
---------------------------
Please complete, date, sign and mail promptly the accompanying
proxy in the postage-paid envelope enclosed for your convenience. The signing of
the proxy will not prevent your attending the Meeting and voting in person.
Bensalem, Pennsylvania
April 9, 1999
28
<PAGE>
STRATEGIC DISTRIBUTION, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS, MAY 18, 1999
The undersigned stockholder(s) of Strategic Distribution, Inc. (the
"Company") hereby appoints Michael F. Devine III, William L. Mahone and David L.
Courtright (collectively, the "Proxies"), and each or either of them, the true
and lawful agents and attorneys-in-fact for the undersigned, with power of
substitution, to attend the meeting and to vote the stock owned by or registered
in the name of the undersigned, as instructed below, at the Annual Meeting of
Shareholders to be held at the Company's headquarters, 3220 Tillman Drive, Suite
200, Bensalem, Pennsylvania on May 18, 1999 at 2:00 p.m. local time, and at any
adjournments thereof, for the transaction of the following business:
/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ALL PROPOSALS
PROPOSAL I. Please indicate your vote for the election of Directors. The
nominees are William R. Berkley, Andrew M. Bursky, Arnold W.
Donald, Catherine B. James, Robert D. Neary, Jack H. Nusbaum,
Joshua A. Polan, Mitchell I. Quain and John M. Sergey.
Election of
Directors FOR / / WITHHELD / /
For all nominees, except those entered below:
__________________________________________________________________
PROPOSAL II. To approve the Company's 1999 Incentive Stock Option Plan under
which a total of 1,500,000 shares of the Company's Common Stock
will be reserved for issuance.
FOR / / AGAINST / / ABSTAIN / /
PROPOSAL III. To ratify the appointment of KPMG LLP, Certified Public
Accountants, as the Company's independent auditors for the fiscal
year ending December 31, 1999.
FOR / / AGAINST / / ABSTAIN / /
(CONTINUED ON OTHER SIDE)
<PAGE>
WHEN PROPERLY EXECUTED, THE PROXY WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED. IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF
DIRECTORS' RECOMMENDATIONS, JUST SIGN BELOW. YOU NEED NOT MARK ANY BOXES. IF NO
SPECIFICATION IS MADE, THE PROXIES INTEND TO VOTE "FOR" EACH PROPOSAL AND IN
THEIR DISCRETION FOR ANY OTHER MATTERS COMING BEFORE THE MEETING. THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders to be held on May 18, 1999 and the Proxy Statement dated April 9,
1999.
Date: ____________________________
Signature: _______________________
Date: ____________________________
Signature: _______________________
Please sign exactly as your name
appears hereon. Joint owners
should each sign. When signing as
attorney, executor, trustee or
guardian, please give full title
as such.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY, USING THE ENCLOSED
ENVELOPE.
