<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] 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 Rule 14a-11(c) or Rule 14a-12
</TABLE>
Applied Graphics Technologies, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statements, 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.:
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(3) Filing party:
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(4) Date Filed:
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<PAGE> 2
LOGO
28 WEST 23RD STREET, 11TH FLOOR
NEW YORK, NEW YORK 10010
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 19, 1997
------------------------
To our stockholders:
Notice is hereby given that the 1997 annual meeting of stockholders of
Applied Graphics Technologies, Inc. will be held at the corporate offices of
Applied Graphics Technologies, located at 28 West 23rd Street, 11th Floor, New
York, New York 10010, on Monday, May 19, 1997, at 10:00 a.m., local time, for
the following purposes:
1. to elect eight directors of the Company for terms expiring at the
1998 annual meeting of stockholders; and
2. to transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Only stockholders of record at the close of business on April 4, 1997 will
be entitled to notice of, and to vote at, the annual meeting or any adjournment
or postponement thereof.
By Order of the Board of Directors,
MARTIN D. KRALL
Secretary
Dated: April 18, 1997
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING,
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID
ENVELOPE PROVIDED.
<PAGE> 3
APPLIED GRAPHICS LOGO
28 WEST 23RD STREET, 11TH FLOOR
NEW YORK, NEW YORK 10010
------------------------
ANNUAL MEETING OF STOCKHOLDERS
MAY 19, 1997
------------------------
PROXY STATEMENT
------------------------
GENERAL INFORMATION
PROXY SOLICITATION
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Applied Graphics Technologies, Inc. (the
"Company") for use at the 1997 annual meeting of stockholders to be held at the
corporate offices of the Company, located at 28 West 23rd Street, 11th Floor,
New York, New York 10010, on Monday, May 19, 1997, at 10:00 a.m., local time.
The purpose of the annual meeting and the matters to be acted upon are set forth
in the accompanying notice of annual meeting.
The Company is mailing its annual report for the fiscal year ended December
31, 1996, together with this proxy statement and the enclosed proxy to
stockholders entitled to vote at the annual meeting. The annual report does not
form any part of the material for the solicitation of proxies.
The Company will pay the cost of all proxy solicitation. In addition to the
solicitation of proxies by use of the mails, officers and other employees of the
Company and its subsidiaries may solicit proxies by personal interview,
telephone and telegram. None of these individuals will receive compensation for
such services, which will be performed in addition to their regular duties. The
Company also has made arrangements with brokerage firms, banks, nominees and
other fiduciaries to forward proxy solicitation material for shares held of
record by them to the beneficial owners of such shares. The Company will
reimburse such persons for their reasonable out-of-pocket expenses in forwarding
such material.
This proxy statement and the enclosed proxy are first being mailed to the
Company's stockholders on or about April 18, 1997.
VOTING AND REVOCABILITY OF PROXIES
A proxy for use at the annual meeting and a return envelope are enclosed.
Shares of Common Stock, par value $0.01 per share (the "Common Stock"),
represented by a properly executed proxy, if such proxy is received in time and
not revoked, will be voted at the annual meeting in accordance with the
instructions indicated in such proxy. If no instructions are indicated, such
shares will be voted "FOR" the election of the eight director nominees named in
the proxy. Discretionary authority is provided in the proxy as to any matters
not specifically referred to therein. Management is not aware of any other
matters that are likely to be brought before the annual meeting. If any such
matters properly come before the annual meeting, however, the persons named in
the proxy are fully authorized to vote thereon in accordance with their judgment
and discretion.
A stockholder who has given a proxy may revoke it at any time prior to its
exercise at the annual meeting by (1) giving written notice of revocation to the
Secretary of the Company, (2) properly submitting to the Company a duly executed
proxy bearing a later date or (3) voting in person at the annual meeting. All
written notices of revocation or other communications with respect to revocation
of proxies should be addressed as
<PAGE> 4
follows: Applied Graphics Technologies, Inc., 28 West 23rd Street, 11th Floor,
New York, New York 10010, Attention: Corporate Secretary.
VOTING PROCEDURE
All holders of record of the Common Stock of the Company at the close of
business on April 4, 1997 will be eligible to vote at the annual meeting. Each
holder of Common Stock is entitled to one vote at the annual meeting for each
share held by such stockholder. As of April 4, 1997, there were 14,349,683
shares of Common Stock outstanding.
The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock entitled to vote will constitute a quorum for the
transaction of business. Votes cast in person or by proxy, abstentions and
broker non-votes (as hereinafter defined) will be tabulated by the inspectors of
election and will be considered in the determination of whether a quorum is
present at the annual meeting. The inspectors of election will treat shares
represented by executed proxies which abstain, as shares that are present and
entitled to vote for purposes of determining the approval of such matter. If,
with respect to any shares, a broker or other nominee submits a proxy indicating
that instructions have not been received from the beneficial owners or the
persons entitled to vote and that such broker or other nominee does not have
discretionary authority to vote such shares (a "broker non-vote") on Proposal 1,
those shares will not be treated as present and entitled to vote for purposes of
determining the approval of Proposal 1.
SECURITY OWNERSHIP
The information set forth on the next page regarding beneficial ownership
of the Common Stock has been presented in accordance with rules of the
Securities and Exchange Commission and is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership of Common Stock includes any shares as to which a person has the sole
or shared voting power or investment power and also any shares which a person
has the right to acquire within 60 days from April 4, 1996 through the exercise
of any stock option or other right.
2
<PAGE> 5
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 4, 1997, information regarding
the beneficial ownership of the Common Stock by each director and each nominee
to the Board of Directors, each executive officer of the Company named in the
Summary Compensation Table under "Executive Compensation," each beneficial owner
of more than 5% of the Company's Common Stock and all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS(6)
------------------------------------------------------- -------------------- -----------
<S> <C> <C>
Applied Printing(1)(2)................................. 8,635,000 60.2%
Fred Drasner(1)........................................ -- --
Melvin A. Ettinger(3).................................. 40,000 *
Diane Romano(3)........................................ 45,000 *
Louis Salamone, Jr.(3)................................. 25,000 *
Scott A. Brownstein(3)................................. 45,000 *
Georgia L. McCabe(3)................................... 28,000 *
Martin D. Krall(3)..................................... 20,000 *
John R. Harris(3)...................................... 12,250 *
Edward H. Linde(4)..................................... 22,250 *
Howard Stringer(4)..................................... 22,250 *
Linda J. Wachner(4).................................... 32,250 *
All directors and executive officers as a group (11
persons)(5).......................................... 8,922,000 62.2%
</TABLE>
- ---------------
* Represents holdings of less than 1%.
(1) Applied Printing Technologies, L.P. ("Applied Printing") is a limited
partnership in which Mr. Drasner is a minority limited partner and Mr.
Zuckerman beneficially owns the remaining limited partnership interests, and
Mr. Zuckerman is the sole stockholder of the corporate general partner and a
corporate limited partner. Messrs. Zuckerman and Drasner comprise the board
of directors of the corporate general partner of Applied Printing. Mr.
Zuckerman is the sole stockholder of the corporate general partner and
therefore can change at any time the members of the board of directors of
that entity. Consequently, Mr. Zuckerman indirectly will be able to
determine the outcome of all matters submitted to a vote of the Company's
stockholders, including election of the members of the Board of Directors,
amendment of the Certificate of Incorporation and consummation of a merger,
sale of substantially all of the Company's assets or other significant
corporate transactions. The address of Applied Printing is 77 Moonachie
Avenue, Moonachie, New Jersey 07074.
(2) Shares shown are reported on a Schedule 13D dated April 26, 1996 filed with
the Securities and Exchange Commission. Voting power with respect to such
shares is held by Mr. Zuckerman.
(3) Represents shares of Common Stock issuable upon exercise of options
exercisable within 60 days of the date of this Proxy Statement.
(4) Includes 12,250 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of this Proxy Statement.
(5) Includes 244,000 shares of Common Stock issuable upon options exercisable
within 60 days of the date of this Proxy Statement.
(6) Percentage of ownership of Common Stock is based on 14,349,683 shares of
Common Stock outstanding on the date of this Proxy Statement. For each
beneficial owner, shares of Common Stock subject to options exercisable by
such beneficial owner within 60 days of the date of this Proxy Statement are
deemed outstanding for purposes of computing the percentage ownership of
such beneficial owner.
3
<PAGE> 6
ELECTION OF DIRECTORS
(PROPOSAL 1)
NOMINEES FOR ELECTION AS DIRECTORS
The Amended and Restated Certificate of Incorporation and the Amended and
Restated Bylaws of the Company provide that the Board of Directors is to be
elected at the annual meeting of the stockholders. The number of directors of
the Board is currently fixed at eight.
If elected, the director nominees will serve a one-year term to expire at
the 1998 annual meeting of stockholders and until their successors are elected
and qualified or until their earlier resignation or removal. The Board of
Directors has nominated eight incumbent directors for election to the Board:
Mortimer B. Zuckerman, Fred Drasner, Melvin A. Ettinger, Martin D. Krall, John
R. Harris, Edward H. Linde, Howard Stringer and Linda J. Wachner.
Approval of the nominees requires the affirmative vote of a plurality of
the votes cast at the annual meeting. In the event that any nominee should
become unable or unwilling to serve as a director, it is the intention of the
persons named in the proxy to vote for the election of such substitute nominee
for the office of director as the Board of Directors may recommend. It is not
anticipated that any nominee will be unable or unwilling to serve as a director.
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE
COMPANY VOTE "FOR" THE ELECTION OF THE NOMINEES TO SERVE AS DIRECTORS.
Biographical information concerning each of the nominees and directors
continuing in office is presented below.
NOMINEES FOR ELECTION FOR 1997 TERM
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE
--------------------------------------------------------------------- --- --------
<S> <C> <C>
Mortimer B. Zuckerman................................................ 59 1996
Fred Drasner......................................................... 54 1995
Melvin A. Ettinger................................................... 55 1996
Martin D. Krall...................................................... 56 1996
John R. Harris....................................................... 48 1996
Edward H. Linde...................................................... 55 1996
Howard Stringer...................................................... 55 1996
Linda J. Wachner..................................................... 51 1996
</TABLE>
Mortimer B. Zuckerman, Chairman of the Board of Directors, has been the
Chairman and co-owner of Boston Properties, Inc., a national real estate
development and management company, since 1970. He has been the Chairman of U.S.
News & World Report, L.P. and Editor-in-Chief of U.S. News & World Report since
1985, Chairman of Daily News, L.P. and Co-Publisher of the New York Daily News
since 1993, and Chairman of The Atlantic Monthly Company since 1980. Mr.
Zuckerman also serves as a director of Snyder Communications, Inc.
Fred Drasner, Chairman, Chief Executive Officer and a director of the
Company, has been the Chief Executive Officer of Daily News, L.P. and
Co-Publisher of the New York Daily News since 1993, the President of U.S. News &
World Report L.P. from 1985 to February 1997 and Chief Executive Officer of U.S.
News & World Report, L.P. since 1985, the Chairman and Chief Executive Officer
of Applied Printing since 1986, and the Vice-Chairman and Chief Executive
Officer of The Atlantic Monthly Company since 1986. Mr. Drasner also was senior
counsel to Shaw, Pittman, Potts & Trowbridge until his resignation in April
1996. Mr. Drasner also serves as a director of Snyder Communications, Inc.
4
<PAGE> 7
Melvin A. Ettinger, Vice Chairman, Chief Operating Officer and a director
of the Company, served as President and Chief Executive Officer of Xerox
Graphics Systems, which conducts research and development of products to replace
film, from January 1994 to March 1996. He also served as Senior Vice President
of Sun Chemical Corporation and President and Chief Executive Officer of its
subsidiary, Polychrome Corporation, a supplier of lithographic plates, from May
1990 to January 1994.
Martin D. Krall, Executive Vice President, Chief Legal Officer, Secretary
and a director of the Company, has been since January 1995 Executive Vice
President and the Chief Legal Officer of the Daily News, L.P., Applied Printing,
The Atlantic Monthly Company, and U.S. News & World Report, L.P. Prior to 1995,
Mr. Krall was a partner in the law firm of Shaw, Pittman, Potts & Trowbridge
where he was a member of the Management Committee from 1978 to 1994, and
Vice-Chairman of such Committee from 1991 to 1994. From 1995, Mr. Krall also was
senior counsel to Shaw, Pittman, Potts & Trowbridge until his resignation in
April 1996.
John R. Harris has been a Vice President at Electronic Data Systems Corp.
("EDS") since 1996 where he is responsible for marketing and strategy. From 1989
to 1996, he served as a Vice President of the Communications Industry Group at
EDS where he was responsible for four business units directed toward wireline,
wireless, media and interactive services markets.
Edward H. Linde has been the President, Chief Operating Officer and
co-owner of Boston Properties, Inc., a national real estate development and
management company, since 1970. Mr. Linde also serves as the Chairman of the
Massachusetts Government Land Bank.
Howard Stringer is the Chairman and Chief Executive Officer of Tele-TV, a
joint venture among NYNEX, Pacific Telesis and Bell Atlantic to provide home
video delivery through telephone lines. Before joining Tele-TV, Mr. Stringer was
President of CBS/Broadcast Group from 1988 to 1995 where he oversaw all
broadcast operations, including news, sports, entertainment, and network-owned
stations.
Linda J. Wachner has been a director, President and Chief Executive Officer
of The Warnaco Group, Inc. since 1987 and the Chairman of the Board of The
Warnaco Group since August 1991. Ms. Wachner also serves as a director of the
Travelers Group Inc. and the Chairman and Chief Executive Officer of Authentic
Fitness Corporation.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors held four meetings during the Company's 1996 fiscal
year. During fiscal year 1996, each director attended at least 75% of the
aggregate of the total number of meetings of the Board held during the period he
or she served as a director and the total number of meetings held by each
committee of the Board on which he or she served (during the period for which he
or she served).
The Company's Board of Directors currently has a standing Audit Committee
and a standing Compensation Committee.
The Audit Committee, which met one time during fiscal year 1996, currently
consists of Ms. Wachner and Messrs. Krall and Stringer. The Committee is
responsible for recommending to the full Board of Directors the selection of the
Company's independent public accountants, reviewing the scope of the plans and
the results of the audit engagement, reviewing the independence of the public
accountants, considering the range of audit and non-audit fees, reviewing the
adequacy of the Company's internal accounting controls and exercising oversight
with respect to the Company's code of conduct and other policies and procedures
regarding adherence with legal requirements.
The Compensation Committee, which held three meetings during fiscal year
1996, currently consists of Ms. Wachner and Messrs. Zuckerman, Harris and
Stringer. The Committee is responsible for establishing salaries, bonuses and
other compensation for the Company's officers and administering the Company's
stock option plans.
Directors who are not also employees of the Company receive from the
Company $1,000 for each Board or Committee meeting attended and reimbursement of
expenses incurred in attending meetings. In addition,
5
<PAGE> 8
Ms. Wachner and Messrs. Linde, Stringer and Harris are eligible to participate
in the Company's Non-Employee Directors Non-Qualified Stock Option Plan and
received grants of options to purchase 25,000 shares of Common Stock in April
1996 at an exercise price equal to the initial public offering price and vesting
ratably over two years. Messrs. Drasner, Ettinger and Krall are eligible to
participate under the Company's 1996 Stock Option Plan. Messrs. Ettinger and
Krall were granted options to purchase 200,000 and 100,000 shares of Common
Stock, respectively, at an exercise price equal to the initial public offering
price, which vest over five years. Mr. Zuckerman is not eligible to participate
in either plan.
6
<PAGE> 9
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to the Chief Executive
Officer of the Company and to each of the other five most highly compensated
executive officers for fiscal year 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
---------------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION YEAR SALARY($) ($) ($) OPTIONS(#) ($)
- -------------------------- ------ -------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fred Drasner, Chairman and 1996 -- $265,000(1) -- --
Chief Executive Officer
Melvin A. Ettinger, Vice 1996 $262,500(2) -- 200,000 $3,870(3)
Chairman and Chief
Operating Officer
Diane Romano, President 1996 $250,000(4) -- $ 33,382(5) 225,000 --
Scott A. Brownstein, 1996 $225,000(4) -- -- 225,000 --
Executive Vice President
and General Manager,
Digital Imaging Services
Division
Georgia L. McCabe, Senior 1996 $198,400(4) -- -- 140,000 --
Vice President of
Marketing and Business
Development, Digital
Imaging Services Division
Louis Salamone, Jr., 1996 $140,000(6) -- -- 125,000 --
Senior Vice President and
Chief Financial Officer
</TABLE>
- ------------------------
(1) Of such total amount, Mr. Drasner received $25,000 per month from the
Company from May through December 1996, and received $25,000 per month from
January through April 1996 through his partnership interest in Applied
Printing. Of the amounts received through his partnership interest in
Applied Printing, 65% was allocated as compensation for services rendered to
the divisions that became the Company upon the initial public offering of
the Company's Common Stock.
(2) Mr. Ettinger received compensation from April to December 1996 based on
annual salary of $350,000.
(3) The amount shown represents life insurance premiums paid on a policy in Mr.
Ettinger's name.
(4) Such amount includes payments from Applied Printing from January through
April 1996 for services to the divisions of Applied Printing that became the
Company upon the initial public offering of Common Stock.
(5) The amount shown represents partial reimbursement of apartment rent paid by
the Company for a residence in New York City maintained partially for the
Company's benefit and the reimbursement for a leased automobile and
automobile insurance.
(6) Mr. Salamone served as a consultant to the Company from April 1996 to June
1996 when he commenced his full-time position as Chief Financial Officer. He
received compensation from June to December 1996 based on an annual salary
of $240,000.
7
<PAGE> 10
STOCK OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth information concerning all stock options
granted during 1996 to the executive officers named in the Summary Compensation
Table.
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE
% OF TOTAL OF ASSUMED ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE OR TERM(5)
OPTIONS FISCAL YEAR BASE PRICE EXPIRATION ------------------------
NAME GRANTED(1) 1996(2) ($/SHARE)(3) DATE(4) 5% 10%
- ----------------------- ---------- ------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Melvin A. Ettinger..... 200,000 8.2% $12.00 4/12/06 $1,509,347 $3,824,982
Diane Romano........... 225,000 9.3% $12.00 4/12/06 $1,698,015 $4,303,105
Scott A. Brownstein.... 225,000 9.3% $12.00 4/12/06 $1,698,015 $4,303,105
Georgia L. McCabe...... 140,000 5.8% $12.00 4/12/06 $1,056,543 $2,677,487
Louis Salamone, Jr..... 125,000 5.1% $12.00 4/12/06 $ 943,342 $2,390,614
</TABLE>
- ---------------
(1) One-fifth of each option vests on each of the first, second, third, fourth
and fifth anniversary of the option grant date. Upon a change in control of
the Company, all previously unvested options will vest and become
immediately exercisable.
(2) Percentage of total options granted to Employees is based upon options to
acquire 2,429,000 shares of Common Stock granted during 1996.
(3) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the exercise date, or in a combination of cash and
shares.
(4) The term of each option may not exceed ten years.
(5) The hypothetical potential appreciation shown in these columns reflects the
required calculations at annual assumed appreciation rates of 5% and 10%, as
set by the Securities and Exchange Commission, and therefore is not intended
to represent either historical appreciation or anticipated future
appreciation of the Common Stock.
The following table sets forth information concerning the number and value
of unexercised stock options at December 31, 1996. No options were exercisable
during 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------------- ------------------------------ -------------------------
<S> <C> <C>
Melvin A. Ettinger................... --/200,000 --/$3,425,000
Diane Romano......................... --/225,000 --/$3,853,125
Scott A. Brownstein.................. --/225,000 --/$3,853,125
Georgia L. McCabe.................... --/140,000 --/$2,397,500
Louis Salamone, Jr................... --/125,000 --/$2,140,625
</TABLE>
EXECUTIVE EMPLOYMENT CONTRACTS
Effective April 1996, the Company entered into employment agreements with
each of Mr. Ettinger, Ms. Romano, Mr. Salamone, Mr. Brownstein and Ms. McCabe.
The term of each agreement is two years, contains a non-compete provision
applicable during the term and provides for salary per year of $350,000,
8
<PAGE> 11
$250,000, $240,000, $225,000 and $198,400, respectively, a discretionary bonus
and options to purchase Common Stock in the amounts indicated in the table
above.
COMPENSATION PLANS AND OTHER ARRANGEMENTS
To promote the long-term growth of the Company and its subsidiaries, the
Company has adopted the plans described below. The provisions of the plans are
intended to conform to the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act").
Stock Option Plan
General. The purpose of the Company's Revised 1996 Stock Option Plan (the
"Stock Option Plan") is to provide employees of the Company and affiliated
entities who have a substantial responsibility for its management and growth
with an additional incentive to continue to contribute to the growth and success
of the Company by increasing their proprietary interest in the success of the
Company.
Awards under the Stock Option Plan may be made only in the form of stock
options (each, an "option"), which may be either incentive stock options or
non-qualified stock options. An "incentive stock option" is an option which
meets the requirements of Section 422 of the Internal Revenue Code of 1986 (the
"Code") and a "non-qualified stock option" is an option which does not meet the
requirements of Section 422 of the Code. To date, only non-qualified stock
options have been granted under the Stock Option Plan.
Shares Subject to the Stock Option Plan. Subject to adjustment as
described below, the aggregate number of shares of Common Stock which may be
issued upon the exercise of options may not exceed 4,200,000 shares, minus the
aggregate number of shares of Common Stock that have been issued pursuant to
options granted under the Company's NonEmployee Directors Nonqualified Stock
Option Plan. Any portion of the shares reserved for issuance under the Stock
Option Plan may be issued pursuant to incentive stock options. Subject to
adjustment as described below, the aggregate number of shares which may be
granted pursuant to options under the Stock Option Plan to any one participant
during the term of the Stock Option Plan is 4,200,000 shares. If all or any
portion of any outstanding option expires or is terminated, the Common Stock
allocable to the unexercised portion of such option may again be subject to an
award under the Stock Option Plan.
Effective Date and Termination. The Stock Option Plan became effective on
April 12, 1996 and will terminate on April 11, 2006. Options granted under the
Stock Option Plan will remain outstanding following the termination of the Stock
Option Plan and will be exercisable in accordance with their terms.
Administration and Operation. The Stock Option Plan is administered by the
Compensation Committee. The Compensation Committee has the exclusive power to
make awards under the Stock Option Plan and to determine when and to whom awards
will be granted and the form, amount and other terms and conditions of each
award, subject to the provisions of the Stock Option Plan. The Committee has the
authority to interpret the Stock Option Plan and any award or agreement made
under the Stock Option Plan, to establish, amend, waive and rescind any rules
and regulations relating to the administration of the Stock Option Plan, to
determine the terms and provisions of any agreements entered into under the
Stock Option Plan (that are not inconsistent with the Stock Option Plan), and to
make all other determinations necessary or advisable for the administration of
the Stock Option Plan. The Committee may delegate its responsibilities under the
Stock Option Plan for purposes of determining and administering awards solely to
employees who are not then subject to the reporting requirements of Section 16
of the Exchange Act or "covered employees" for purposes of Section 162(m) of the
Code.
Eligibility. Under the Stock Option Plan, any Key Employee of the Company
and of any subsidiary who are designated by the Compensation Committee may be
granted options under the Stock Option Plan. Key Employees include any
consultant, employee, officer or director (other than directors who serve on the
Compensation Committee) who may have a substantial effect upon the financial
performance of the Company. Employees of affiliated entities may be granted
nonqualified stock options. As of March 21, 1997 the Company had approximately
1260 employees.
9
<PAGE> 12
Terms and Conditions of Options.
General. An option granted under the Stock Option Plan is exercisable only
to the extent that it is vested on the date of exercise, and no option may be
exercisable more than ten years from the option grant date, or five years in the
case of an incentive stock option granted to a person who owns more than 10% of
the total combined voting power of all classes of the Company's stock (a "ten
percent stockholder").
The exercise price per share (the "option price") under each option granted
under the Stock Option Plan may not be less than 100% (110% in the case of a ten
percent stockholder) of the fair market value of the Common Stock on the option
grant date. For options granted on or prior to the closing date of the Company's
initial public offering (the "Offering Closing Date"), the fair market value was
$12 per share of Common Stock. The Common Stock currently is quoted on the
NaSDAQ National Market. For as long as the Common Stock is so quoted, the fair
market value of the Common Stock for all purposes of the Stock Option Plan will
be the closing price of the Common Stock as reported by the NASDAQ National
Market on the option grant date. If there are no sales of shares reported on the
option grant date, the fair market value will be deemed equal to the closing
price as reported by the NASDAQ National Market for the last preceding date on
which sales of Common Stock were reported.
An option may be exercised, in full or in part, provided that the option is
vested and, further provided, that if the option holder is employed by the
Company or an affiliated company, the Compensation Committee consents to such
exercise. Payment of the exercise price may be made (1) in cash, (2) with the
consent of the Compensation Committee, with Common Stock owned by the
participant, (3) by delivery to the Company of irrevocable instructions to
deliver directly to a broker the stock certificates representing the shares for
which the option is being exercised ("option stock") and irrevocable
instructions to the broker to sell the option stock and to deliver promptly to
the Company the portion of the proceeds equal to the option price or (4) any
combination thereof. The value of any Common Stock used to pay the option price
or any portion thereof will be the fair market value of Common Stock on the date
of exercise.
In the case of incentive stock options, the aggregate fair market value of
the Common Stock (determined on the option grant date) with respect to which
incentive stock options are exercisable for the first time during any calendar
year may not exceed $100,000.
Vesting. Options are exercisable only to the extent they are vested. The
Compensation Committee may accelerate the vesting of any option in its
discretion. Vesting of an option generally will cease on the date that an Option
holder terminates employment with the Company or an affiliated entity. If the
option holder terminates employment as a result of death or disability, however,
the option will become fully vested. The Plan provides that options, whether or
not vested, may be forfeited if the option holder engages in (1) conduct related
to the option holder's employment for which either civil or criminal penalties
may be sought, (2) material violation of the Company's policies, (3) competition
with the Company, including solicitation of the Company's employees, or (4)
disclosure of the Company's confidential information.
Termination of Employment. In the case of any incentive stock option
granted under the Stock Option Plan, the Compensation Committee will provide
that the option will terminate on the date three months (one year, in the event
the participant terminates employment by reason of death or disability) after
the date on which the participant terminates employment, or, if earlier, ten
years after the option grant date (five years in the case of a 10% stockholder).
Unless the participant terminates employment by reason of death, non-qualified
stock options will terminate 90 days after the termination of employment. In the
event a participant terminates employment by reason of the participant's death,
the option will terminate one year after the date of the option holder's death.
In any event, non-qualified stock options will terminate ten years after the
option grant date.
Corporate Changes; Change of Control. Subject to any required stockholder
action, the number of shares of Common Stock subject to each outstanding option
and the option price will be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend (but only on the
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Common Stock) or any other increase or decrease in the number of shares effected
without receipt of consideration by the Company.
Upon the occurrence of an event constituting a "Change of Control" (as
defined by the Compensation Committee) any and all outstanding options will
become immediately exercisable. The Compensation Committee has defined a "Change
of Control" to include (1) the acquisition by a "person" or "group" (other than
a person or group affiliated with Mortimer B. Zuckerman) as defined in Section
13(d) of the Exchange Act of 50% or more of the Company's Common Stock, (2) the
merger of the Company with another corporation not controlled by Mortimer B.
Zuckerman, or (3) the sale of all or substantially all of the Company's assets.
Amendment of the Stock Incentive Plan and Options. The Board generally may
amend the Stock Option Plan from time to time, except that, without the approval
of the stockholders of the Company, no revision or amendment may (1) materially
increase the benefits accruing under the Stock Option Plan, (2) materially
increase the number of shares that may be issued, (3) materially modify the
requirements as to eligibility for participation in the Plan as to insiders, (4)
change the class of eligible employees, officers, or directors, (5) withdraw
administration of the Stock Option Plan from the Compensation Committee or (6)
extend the term of the Plan or the period during which any incentive stock
option may be exercised. The terms and conditions applicable to any award may
thereafter be amended or modified by mutual agreement between the Company and
the participant or such other persons as may then have an interest therein.
Further, by mutual agreement between the Company and a participant, or under any
other present or future plan of the Company, options or other awards may be
granted to a participant in substitution and exchange for, and in cancellation
of, any awards previously granted to the participant under the Stock Option
Plan, or under any future plan of the Company.
Transferability of Awards. Incentive stock options are not transferable by
a participant during the participant's lifetime and may not be assigned,
exchanged, pledged, transferred or otherwise encumbered or disposed of except
pursuant to a qualified domestic relations order, by will or by the applicable
laws of descent and distribution. Under the Stock Option Plan, non-qualified
stock options may be transferred, without payment of consideration, to immediate
family members of the option holder or to a trust or partnership for such family
members. Except as provided above, nonqualified stock options are not
transferable by a participant during the participant's lifetime and may not be
assigned, exchanged, pledged, transferred or otherwise encumbered or disposed of
except pursuant to a qualified domestic relations order, by will or by the
applicable laws of descent and distribution.
Federal Income Tax Consequences.
Incentive Stock Options. A participant who holds options will not realize
taxable income upon the grant of an incentive stock option. In addition, such a
participant generally will not realize taxable income upon the exercise of an
incentive stock option. Such a participant's alternative minimum taxable income,
however, will be increased by the amount that the fair market value of the
option stock (generally determined as of the date of exercise) exceeds the
option price of the option.
If the participant sells the Common Stock acquired upon exercise of an
incentive stock option, the tax consequences of the sale (a "disposition")
depend upon whether the disposition is qualifying or disqualifying. The
disposition of the option stock is qualifying if it is made at least two years
after the date the incentive stock option was granted and at least one year
after the date the incentive stock option was exercised. If the disposition of
the option stock is qualifying, any excess of the sale price of the option stock
over the option price of the option will be treated as long-term capital gain
taxable to the participant at the time of the sale. If the disposition is not
qualifying (a "disqualifying disposition"), the excess of the fair market value
of the option stock on the date the option was exercised over the option price
will be compensation income taxable to the participant at the time of the
disposition, and any excess of the sale price of the option stock over the fair
market value of the option stock on the date the option was exercised will be
taxed as capital gains.
Unless a participant engages in a disqualifying disposition, the Company
will not be entitled to a deduction with respect to an incentive stock option.
If a participant engages in a disqualifying disposition, the
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Company will be entitled to a deduction equal to the amount of compensation
income taxable to the participant.
Non-Qualified Stock Options. A participant will not realize taxable income
upon the grant of a non-qualified stock option. However, when the participant
exercises the option, the difference between the option price of the option and
the fair market value of the option stock on the date of exercise will
constitute compensation income taxable to the participant. The Company will be
entitled to a deduction equal to the amount of compensation income taxable to
the participant, as long as income taxes are withheld on the participant's
compensation income.
Outside Directors Plan
General. The purpose of the Company's Non-Employee Directors Nonqualified
Stock Option Plan (the "Outside Directors Plan") is to assist the Company in
attracting and retaining dedicated and qualified persons to serve as outside
directors of the Company. All stock options granted under the Outside Directors
Plan will be non-qualified options.
Shares Subject to the Outside Directors Plan. The Company has reserved an
aggregate of 4,200,000 shares of Common Stock for issuance pursuant to the
exercise of options granted under the Stock Option Plan and the Outside
Directors Plan. The aggregate number of shares of Common Stock reserved for
issuance under the Outside Directors Plan is subject to adjustment in certain
circumstances, which are described below, and will be reduced by the issuance of
shares upon the exercise of options.
Effective Date and Termination. The Outside Directors Plan became
effective on April 12, 1996 and will terminate on April 11, 2006. Options
granted under the Outside Directors Plan prior to its termination will remain
outstanding following the termination of the Outside Directors Plan and will be
exercisable in accordance with their terms.
Administration. The Outside Directors Plan provides that the Board will be
responsible for the proper implementation of the Outside Directors Plan, but
that the Board may not exercise any discretion with respect to the
administration of the Plan.
Eligibility and Option Grants. No director of the Company who is an
employee of the Company or of an affiliated company is eligible to participate
in the Outside Directors Plan. Each other director of the Company is an "Outside
Director" eligible to participate in the Outside Directors Plan. As of the date
of this Proxy Statement, four individuals qualify as Outside Directors under the
Outside Directors Plan.
Each Outside Director who met the eligibility requirements of the Outside
Directors Plan on the Offering Closing Date received an option to purchase
25,000 shares of Common Stock effective on such date. Each other eligible
Outside Director will receive an option to purchase 25,000 shares of Common
Stock on the date and at the time of such person's initial appointment or
election to the position of Outside Director. Each eligible Outside Director who
has received an initial grant under the Outside Directors Plan also will receive
an annual grant of an option to purchase 5,000 shares of Common Stock on each
anniversary of the initial grant of an option to such Outside Director.
Vesting. Options are exercisable only to the extent they are vested.
One-half of each initial option granted will vest on the first anniversary of
the option grant date, and one-half of the option granted will vest on the
second anniversary of the option grant date, provided that the optionee is an
Outside Director on such date. Subsequent option grants are fully vested.
Option Price. The option price for each option granted under the Outside
Directors Plan will be determined as of the option grant date. The option price
will be equal to the fair market value of one share of Common Stock on the
option grant date. The fair market value of an option granted under the Outside
Directors Plan is calculated in the same manner as the fair market value of an
option granted under the Stock Option Plan, as described above.
An Outside Director may pay the option price (1) in cash, (2) by the
surrender of shares of Common Stock owned by the Outside Director exercising the
option and having a fair market value on the date of
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<PAGE> 15
exercise equal to the aggregate option price or (3) any combination thereof.
Shares of Common Stock that are surrendered in payment of the option price will
be valued at their fair market value on the date of exercise.
Term and Limitations on Exercise. Options may be exercised during their
term by an Outside Director, in whole or in part, by giving timely written
notice to the Company, but only with respect to whole shares of Common Stock.
The term of any option granted under the Outside Directors Plan will be ten
years from the option grant date. No option may be exercised after the
expiration of its term.
If an Outside Director ceases to be an Outside Director as a result of such
Outside Director's death or disability, all outstanding options granted to such
Outside Director will vest. The Outside Director (or such Outside Director's
estate, in the event of death) may exercise the Outside Director's outstanding
options at any time (1) during the 90-day period beginning on the date on which
the Outside Director ceases to be an Outside Director or, if later, (2) one year
after the death of the Outside Director.
If an Outside Director ceases to act as such for any reason other than the
reasons described in the preceding paragraph, the Outside Director may exercise
such Outside Director's outstanding options to the extent vested at any time (1)
during the three-month period beginning on the date on which the Outside
Director ceases to act as such or, if earlier, (2) until the date on which such
outstanding options expire according to their terms.
Transferability of Options. Options, by their terms, may be transferred by
an Outside Director during such Outside Director's lifetime, without payment of
consideration, to immediate family members of the option holder or to a trust or
partnership for such family members. Except as provided above, options may not
be assigned, exchanged, pledged, transferred or otherwise encumbered or disposed
of except pursuant to a qualified domestic relations order, by will or by the
applicable laws of descent and distribution.
Tax Withholding. To the extent required by applicable federal, state,
local or foreign law, a participant under the Outside Directors Plan must make
arrangements acceptable to the Company for the satisfaction of any withholding
tax obligations that arise by reason of the exercise of an option or any sale of
the shares of Common Stock acquired upon exercise of an option. The Company is
not required to issue shares of Common Stock until such obligations are
satisfied. The Company may permit such obligations to be satisfied by
withholding a portion of the shares of Common Stock that otherwise would be
issued to an Outside Director upon exercise of the option.
Corporate Changes; Change of Control. Appropriate adjustments will be made
to the option price and the number of shares subject to options under the
Outside Directors Plan if there are any changes in the Common Stock by reason of
stock dividends, stock splits, reverse stock splits, recapitalizations, mergers
or consolidations. In the event of a Change of Control (as defined in the
description of the Stock Option Plan), each option that has been outstanding for
at least six months after the option grant date will become fully vested and
exercisable.
Amendments to the Outside Directors Plan. The Board may from time to time
make such changes in and additions to the Outside Directors Plan as it deems
proper; provided that, unless such change is authorized by the stockholders of
the Company, no change may be made that (1) materially increases the benefits
accruing under the Outside Directors Plan, (2) materially increases the total
number of shares reserved for issuance pursuant to options granted under the
Outside Directors Plan, (3) materially modifies the requirements as to
eligibility for participation in the Outside Directors Plan or (4) changes the
class of eligible directors. In addition, if and to the extent required by Rule
16b-3, the provisions of the Outside Directors Plan may not be amended more
frequently than once every six months unless otherwise required by law and
permitted by Rule 16b-3. The termination of the Outside Directors Plan or any
change or addition to the Outside Directors Plan shall not, without the consent
of any Outside Director who is adversely affected thereby, alter any options
previously granted to the Outside Director pursuant to the Outside Directors
Plan.
Federal Income Tax Consequences. An Outside Director will not realize
taxable income upon the grant of an option. When the Outside Director exercises
the option, however, the difference between the option price of the option and
the fair market value of the Common Stock on the date of exercise will
constitute
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compensation income taxable to the Outside Director. The Company will be
entitled to a deduction equal to the amount of compensation income taxable to
the Outside Director.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD
OF DIRECTORS OF APPLIED GRAPHICS TECHNOLOGIES, INC.
ON EXECUTIVE COMPENSATION
In accordance with the rules of the Securities and Exchange Commission, the
Compensation Committee of the Board of Directors of the Company offers this
report regarding its executive compensation policy and compensation program for
the Chief Executive Officer and other executive officers of the Company in
effect for fiscal year 1996. This report, as well as the Performance Graph on
page 19, are not soliciting materials, are not deemed filed with the Securities
and Exchange Commission and are not incorporated by reference in any filing of
the Company under the Securities Act of 1933, as amended, or the Exchange Act,
whether made before or after the date of this proxy statement and irrespective
of any general incorporation language in any such filing.
The overall goal of the Compensation Committee is to develop compensation
policies and practices which support the attainment of the Company's strategic
business objectives, which include growth in stockholder value over time. From
the date of the Company's initial public offering through December 31, 1996, the
Company's share price increased by over 143%.
The Compensation Committee intends to review annually compensation levels
for the executive officers against the compensation of comparable executives at
comparable companies. This review also may compare the Company's short-term and
long-term results with the performance of comparable companies.
The Company's executive compensation program includes a base salary,
discretionary annual cash bonuses and long-term incentive compensation in the
form of stock options. Overall, these programs are intended to link executive
compensation to the Company's performance. Fixed base salaries generally are set
at or below competitive levels, with total potential compensation (including
bonuses and stock options) targeted at or above competitive levels. The
Compensation Committee believes that a substantial portion of total compensation
should be tied to the performance of the Company's stock. To encourage equity
ownership by the Company's executives and to link executive compensation with
increases in stockholder value, the Compensation Committee intends to provide a
significant portion of total executive compensation in the form of stock option
awards.
Chief Executive Officer. The Chief Executive Officer received compensation
in 1996 of $265,000 for services provided to the Company. Of this amount, he
received $25,000 per month from May through December 1996 from the Company, and
$25,000 per month from January through April 1996 through his partnership
interest in Applied Printing. Of the amounts received through his partnership
interest in Applied Printing, 65% was allocated as compensation for services
rendered to the divisions that became the Company upon the initial public
offering of the Company's Common Stock. The Chief Executive Officer's
compensation was determined prior to the Company's initial public offering and
the formation of the Compensation Committee. For this reason, the Compensation
Committee did not determine the amount of compensation received by the Chief
Executive Officer in 1996. The Compensation Committee, however, did review his
compensation in February 1997 and determined that the compensation would remain
at $25,000 per month. The Compensation Committee believes that the amount of
compensation paid to the Chief Executive Officer is reasonable in light of the
significant and material contributions of the Chief Executive Officer to the
management of the Company's day-to-day business, sales efforts with respect to
major customers, negotiations of the Company's major contracts, the development
and implementation of the Company's strategic objectives, the management of
investor relations, and the identification and negotiation of acquisitions.
Although the Chief Executive Officer is eligible to receive stock options under
the terms of the Stock Option Plan, the Compensation Committee did not grant
stock options to the Chief Executive Officer since the Chief Executive Officer
owns a substantial interest in the Company through his limited partnership
interest in Applied Printing. The Chief Executive Officer did not receive a
bonus in 1996.
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Base Salary of Other Executive Officers. The five most highly compensated
executive officers in 1996 received compensation based on written employment
agreements executed prior to the Company's initial public offering. Based on
such agreements for 1996, the base salaries of such officers were: Vice Chairman
and Chief Operating Officer -- $350,000; President -- $250,000; Executive Vice
President and General Manager of the Digital Imaging Services Division
("DISD") -- $225,000; Senior Vice President of Marketing and Business
Development of DISD -- $198,400; and Senior Vice President and Chief Financial
Officer -- $240,000. The Compensation Committee reviewed base salaries in the
employment agreements for such executive officers in February 1997 and
recommended no changes to the agreements.
Annual Cash Bonuses of Other Executive Officers. The Company may pay
annual cash bonuses to its executive officers. For 1996, no cash bonuses were
approved since the stock options granted to the executive officers appreciated
in value significantly.
Long-Term Incentives of Other Executive Officers. Prior to the effective
date of the initial public offering, the Compensation Committee approved the
grant of stock options to the four most highly compensated officers of the
Company, other than the Chief Executive Officer, in the following amounts:
200,000 shares of Common Stock to the Vice Chairman and Chief Operating Officer;
225,000 shares of Common Stock to the President; 225,000 shares of Common Stock
to the Executive Vice President and General Manager of DISD; 140,000 to the
Senior Vice President of Marketing and Business Development of DISD; and 125,000
shares of Common Stock to the Senior Vice President and Chief Financial Officer.
In determining the amount and terms of stock options, the Compensation Committee
considers each executive's current performance and anticipated future
contributions to the Company's performance. During 1996, the Compensation
Committee awarded stock options for 2,429,000 shares to all eligible employees
of the Company and affiliated entities, including the executive officers.
All stock options granted to executive officers in 1996 were nonqualified
stock options with an exercise price that was equal to the fair market value of
the Common Stock on the date of grant. The options increase in value only to the
extent of appreciation in the Company's Common Stock, thereby providing a clear
link to enhancement of stockholder value. The stock options of the executive
officers vest in increments over a five year period to emphasize the long-term
incentive provided by such options.
Section 162(m) of the Code. Section 162(m) of the Code generally sets a
limit of $1 million on the amount of compensation paid to executive employees
(other than enumerated categories of compensation, including performance-based
compensation) that may be deducted by a publicly-held company. The Committee's
policy is to seek to qualify executive compensation for deductibility to the
extent that such policy is consistent with the Company's overall objectives and
executive compensation policy. Compensation attributable to stock options
granted under the Company's stock incentive plans currently is excluded from the
$1 million limit as "qualified performance-based compensation" under the rules
contained in applicable Treasury regulations. None of the Company's executive
officers received compensation in 1996 in excess of the limits imposed under
Section 162(m). The Compensation Committee intends to continue to qualify
compensation attributable to stock options as "qualified performance-based
compensation" within the meaning of Section 162(m).
COMPENSATION COMMITTEE:
Mortimer B. Zuckerman
John R. Harris
Howard Stringer
Linda J. Wachner
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
AND CERTAIN TRANSACTIONS
Mortimer B. Zuckerman, Chairman of the Board of Directors, served on the
Compensation Committee during 1996. Mr. Zuckerman beneficially owns the shares
of Common Stock owned by Applied Printing, beneficially owns a majority of U.S.
News & World Report, L.P. and Daily News, L.P. and is a director and a greater
than 10% beneficial owner of common stock of Snyder Communications, Inc.
Additionally, Mr. Drasner is a minority limited partner of both Applied Printing
and Daily News, L.P. and is a director and a beneficial owner of common stock of
Snyder Communications, Inc. The following is a description of certain
transactions between the Company and Applied Printing, U.S. News & World Report,
L.P., Daily News, L.P. and Snyder Communications, Inc., respectively.
FORMATION OF THE COMPANY
In preparation for its initial public offering of Common Stock, the Company
was incorporated in Delaware in December 1995 and Applied Printing separated its
prepress, digital imaging and related businesses (the "transferred businesses")
into a single, separately identifiable division as of January 1, 1996. In
January 1996, the Company and Applied Printing entered into an Assignment,
Assumption and Conveyance Agreement (the "Conveyance Agreement") pursuant to
which substantially all of the assets relating to the transferred businesses
were transferred, assigned and conveyed by Applied Printing to the Company, in
exchange for 9,309,900 shares of Common Stock and the additional consideration
of (i) the assumption by the Company of $21.0 million of secured senior
indebtedness to Applied Printing's primary institutional lender (the
"Institutional Senior Indebtedness") and (ii) the issuance of a $16.0 million
promissory note by the Company to Applied Printing (the "Applied Printing
Note").
Upon completion of the initial public offering, the Company used a portion
of the net proceeds of the offering to pay in full and discharge the
Institutional Senior Indebtedness, as a result of which the security interest of
Applied Printing's primary institutional lender was released and terminated, and
the assets so transferred, assigned and conveyed to the Company by Applied
Printing became free and clear. The Applied Printing Note was paid in full on
February 1, 1997.
The $16.0 million received upon payment of the Applied Printing Note were
used to satisfy outstanding indebtedness of Applied Printing to Daily News,
L.P., a company which is beneficially owned by Mortimer B. Zuckerman, Chairman
of the Board of Directors and Fred Drasner, Chairman and Chief Executive Officer
and a director of the Company, and to Mr. Zuckerman personally.
PREPRESS, GRAPHIC AND DIGITAL IMAGING SERVICES FOR AFFILIATES
The Company has entered into Production Services Agreements with each of
U.S. News & World Report, L.P. and Daily News, L.P., pursuant to which it
provides a variety of services. The agreement with U.S. News & World Report,
L.P. is primarily to provide prepress services and it expires on December 31,
2000, renewable annually thereafter by mutual agreement of the parties. The
agreement with Daily News, L.P. to provide prepress services to a New York Daily
News periodical commenced in October 1995, was renewed in October 1996 and is
renewable annually by mutual agreement of the parties. In addition, an agreement
with Daily News, L.P. to provide digital archiving services to the New York
Daily News commenced in January 1995 and is for a two-year term. This agreement
ended in January 1997, and the Company is currently in discussions with Daily
News, L.P. to continue such arrangement. Pursuant to another agreement, the
Company provides certain advertising make-up and related graphic services for
Daily News, L.P.'s publications. The agreement is for a one-year term that
commenced in May 1996 and may thereafter be renewed for additional one-year
periods. The Company anticipates that the agreement will be renewed for an
additional one year term commencing on May 15, 1997. The Company also performs
additional services for U.S. News & World Report, L.P. and Daily News, L.P. on a
per project basis. In 1996, the Company received for services performed in 1996
approximately $5,831,000 in total (including amounts paid to divisions of
Applied Printing which became the Company upon its initial public offering) and
approximately $5,455,000 in total (including amounts paid to the divisions of
Applied Printing which became the Company upon its initial
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public offering) from each of U.S. News & World Report, L.P. and Daily News,
L.P., respectively. The Company also performed prepress services on a per
project basis for Applied Printing for which it received approximately $324,000
in 1996. The Company believes that the terms under which it provides these
services to U.S. News & World Report, L.P., to Daily News, L.P. and to Applied
Printing are no less favorable to the Company than those under which it provides
these services to similar unaffiliated publications.
SHARED SERVICES AGREEMENTS
The Company has also entered into shared services agreements with U.S. News
& World Report, L.P. and Daily News, L.P. for the period January 1 through
December 31, 1996, renewable annually. During 1996, the Company incurred charges
of approximately $168,000 from U.S. News & World Report, L.P. for certain legal
services and data processing services and approximately $135,000 from Daily
News, L.P. for certain legal services specifically related to labor union and
collective bargaining issues and for management information services in the form
of software programming support, software application support, hardware on
desktop workstations, and access to certain applications on Daily News'
mainframe computer.
In each services agreement, the Company is required to pay the stated
amounts regardless of the actual use of the services of the affiliate and is
also required to pay additional amounts for any non-routine services and any
fees, costs or expenses of third parties. The Company believes that this
allocation of expenses for the covered services is fair and is less than the
cost of obtaining these services from unaffiliated parties or the cost of
providing all of these services internally.
In connection with the formation of the Company, Applied Printing personnel
who had performed certain accounting services with respect to operations of
Applied Printing's business not included in the transferred businesses became
employees of the Company. The Company and Applied Printing entered into an
agreement pursuant to which Applied Printing paid the Company for the continued
services of five of these employees. Such services were provided to Applied
Printing pursuant to an agreement which terminated in December 1996, at the
option of the Company. One of these employees expected to spend less than
approximately 10%, one expected to spend less than approximately 5% and three of
these employees expected to spend approximately one-third of their time
performing Applied Printing services. Under this agreement, Applied Printing
paid the Company approximately $5,700 per month from mid-April through December
31, 1996, which represents the pro rata share of the total compensation cost of
such employees multiplied by the percentage of their time spent on Applied
Printing's activities. Applied Printing was required to pay the stated amount
without regard to the extent to which Applied Printing used the specified
services. The Company believes this allocation of expenses was fair to the
Company.
In addition, in order to obtain the benefits of volume purchasing, the
Company utilized in 1996 All Star Purchasing, Inc. ("All Star Purchasing"), a
wholly-owned affiliate of Applied Printing, as a joint purchasing agent for the
Company, Applied Printing and the publishing affiliates of Mr. Zuckerman. This
arrangement is terminable at any time by the Company. Under this arrangement,
the Company incurred charges of approximately $137,000 for its allocated portion
of the costs of All Star Purchasing. The Company is charged its allocation of
the costs of All Star Purchasing in proportion to the relative volume of goods
and services purchased by the Company and each of the publishing affiliates of
Mr. Zuckerman.
OTHER TRANSACTIONS
The Company subleases approximately 8,750 square feet of space at the
headquarters of U.S. News & World Report, L.P. in Washington, D.C. from U.S.
News & World Report, L.P., a limited partnership, a substantial majority of
which is beneficially owned by Messrs. Zuckerman and Drasner. Such space is used
primarily to perform prepress services for U.S. News & World Report, L.P. The
Company believes the lease amounts may be higher than if such space were located
in a different building. The amounts incurred by the Company for the lease in
fiscal year 1996 totaled approximately $293,000.
The Company is subleasing from Applied Printing, for a term of two years,
expiring in April 1998, that portion of the space it uses at the Applied
Printing facility in New York City at a fixed annual payment, which includes
charges for occupancy-related and telecommunications services, of approximately
$500,000 (without
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escalation or payment of any other charges). The Company incurred occupancy
charges of approximately $375,000 during 1996 with respect to this space. The
Company also incurred charges of approximately $14,000 for space at the
Oceanside facility of Applied Printing. The Company subleases space from Daily
News, L.P. for which the Company incurred charges of approximately $53,000 in
1996. The Company believes that the terms of these lease arrangements are fair
and comparable to the amount it would pay to unaffiliated third parties for
comparable space.
Applied Printing provides printing services to the Company on a per project
basis. In 1996, the Company incurred charges of approximately $2,810,000 for
such services.
In connection with the initial public offering, executive officers of the
Company sometimes traveled by means of an aircraft owned by ZWA, Inc., a
corporation beneficially owned by Mr. Zuckerman. In 1996, the Company incurred
charges, based on direct operating costs, of approximately $150,000 for such
offering-related travel which the Company believes were fair given the
scheduling and flexibility advantages derived by the Company and its officers
from having access to ZWA's aircraft.
VENDOR AGREEMENT
The Company is a major purchaser of certain types of products. Because of
the dollar amount of the products it purchases, the Company has been in a
position to enter into arrangements with vendors pursuant to which the vendors
pay rebates and, in some instances, prepay to the Company a rebate based upon a
specified dollar volume of products purchased by the Company over a given time
period. The Company is entitled to retain the prepaid amount in full if it
purchases the stated volume, and would be obligated to repay all or a portion of
the amount depending on the difference between the stated volume and the volume
actually purchased. In 1995, the Company received prepaid rebates aggregating
approximately $3.5 million, approximately $0.8 million of which was earned with
respect to volumes purchased in 1995 and approximately $2.7 million of which is
earnable based on purchases to be made in 1997 and 1998. The Company expects,
through its normal purchasing requirements, to purchase the amounts necessary to
earn the rebate prepaid with respect to 1997 and 1998. The Company also received
prepaid rebates in March 1996 aggregating approximately $0.9 million, all of
which was earned in 1996.
In connection with this agreement, the vendor's affiliate loaned $15
million to Mr. Zuckerman. The loan, which matures on December 31, 1998, bears
interests at the lender's commercial paper rate. If the Company and Applied
Printing do not jointly satisfy the cumulative minimum purchase obligations
specified in the agreement, Mr. Zuckerman must repay the loan balance in full at
that time. These minimum purchase obligations have been satisfied to date, and
the Company expects, through its normal purchasing requirements, to continue to
exceed such minimum obligation through December 31, 1998. The Company believes
that the terms for its purchases of the products covered by this agreement are
no less favorable to the Company than those that could be obtained from another
vendor.
POTENTIAL AGREEMENT WITH SNYDER COMMUNICATIONS, INC.
The Company is contemplating entering into an agreement with Snyder
Communications, Inc. ("Snyder") to provide prepress services to be used by
Snyder in connection with wallboard advertising that Snyder is providing under a
separate agreement to U.S. News & World Report, L.P. Mr. Zuckerman and Mr.
Drasner are each a director of Snyder and the beneficial owners, in the
aggregate, of approximately 26% of Snyder's common stock. Mr. Zuckerman is also
the Chairman of U.S. News & World Report, L.P. and Editor-in-Chief of U.S. News
& World Report, and Mr. Drasner is also Chief Executive Officer of U.S. News &
World Report, L.P., of which he and Mr. Zuckerman are the beneficial owners. The
Company believes that the terms of such contemplated agreement would be no less
favorable to the Company than those that could be obtained from an unaffiliated
prepress customer.
18
<PAGE> 21
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph and table show the cumulative total stockholder return
on the Company's Common Stock compared to the Nasdaq Composite Stock Index and a
self-constructed peer group index for the periods between April 17, 1996 (the
date the Company's Common Stock began trading on the Nasdaq National Market) and
December 31, 1996 (the last trading day in fiscal year 1996). The peer group
index is composed of Katz Media, CKS Group, Devon Group, Unidigital and Schawk,
Inc., all of which are public companies with significant operations in the
prepress industry. The total stockholder return on each company included in the
peer group index has been weighted according to such company's capitalization as
of the beginning of each period. The graph assumes $100 was invested on April
17, 1996 in (1) the Company's Common Stock, (2) the Nasdaq Composite Stock Index
and (3) the peer group index, and assumes reinvestment of dividends.
[LINE GRAPH]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
4/17/96 6/28/96 9/30/96 12/31/96
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Applied Graphic Technologies, Inc. $100.00 $118.69 $111.21 $217.76
Peer Group $100.00 $105.29 $ 79.48 $ 96.73
Nasdaq Composite Index $100.00 $105.72 $109.46 $115.18
- -----------------------------------------------------------------------------------------------
</TABLE>
The Nasdaq Composite Stock Index has been selected as a broad equity market
index. The peer group identified above was selected because the Company believes
that such group represents companies whose primary operations are in the
prepress industry. The Company performs certain other services such as, digital
image archiving and dub and ship services, and provides on-site prepress
facilities management services that the peer group may not perform. The Company
believes, however, that since approximately 75% of it's 1996 revenues were from
prepress services and approximately 90% were from prepress services and on-site
prepress facilities management service, the peer group selected provides a
meaningful basis for comparison.
19
<PAGE> 22
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP has acted as the Company's independent accountants
since October 1996. Representatives of Deloitte & Touche LLP are expected to be
present at the annual meeting and will be afforded the opportunity to make a
statement if they so desire and to respond to appropriate questions. Until
September 1996, Coopers & Lybrand L.L.P. acted as the independent public
accountant for the Company and its predecessor, Applied Printing. On September
27, 1996, and effective on October 1, 1996, the Audit Committee of the Board of
Directors recommended and approved the replacement of Coopers & Lybrand L.L.P.
by Deloitte & Touche LLP as the independent public accountants for the Company.
The independent auditors' reports for each of the past two fiscal years were
unqualified. The Company had no disagreements with the former accountants during
the two most recent fiscal years or the subsequent interim period ended
September 30, 1996, on any matter of accounting principle, financial statement
disclosure or auditing scope of procedure.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities to file with the Securities and Exchange
Commission and the Nasdaq Stock Market initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. In addition, under Section 16(a), trusts for which a reporting person
is a trustee and a beneficiary (or for which a member of his immediate family is
a beneficiary) may have a separate reporting obligation with regard to ownership
of the Common Stock and other equity securities of the Company. Such reporting
persons are required by rules of the Securities and Exchange Commission to
furnish the Company with copies of all Section 16(a) reports they file. In 1996,
the Company received Section 16(a) reports and written representations that
certain reports were not required. Based upon a review of that information, the
Company believes that (a) Forms 3 were filed 10 days after the effective date of
the Company's initial public offering for those people and entities who were, at
the effective date of the offering, members of the Board of Directors, executive
officers and the beneficial owner of more than 10% of the Company's Common
Stock, and (b) a Form 3 for Mr. Louis Salamone, Jr. was not filed, although the
information required by that form was included on a Form 5.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Pursuant to rules of the Securities and Exchange Commission, in order for
stockholder proposals to be presented at the 1998 annual meeting of
stockholders, such proposals must be received by the Secretary of the Company at
the Company's principal office in New York, New York no later than December 12,
1997.
By Order of the Board of Directors,
MARTIN D. KRALL
Secretary
Dated: April 18, 1997
STOCKHOLDERS ARE REMINDED TO SIGN AND DATE THE ENCLOSED PROXY AND MAIL
IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED.
20
<PAGE> 23
APPLIED GRAPHICS TECHNOLOGIES, INC.
PROXY/VOTING INSTRUCTION CARD
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
APPLIED GRAPHICS TECHNOLOGIES, INC. FOR THE ANNUAL MEETING ON MAY 19, 1997
The undersigned appoints Martin D. Krall, Melvin A. Ettinger and Louis
Salamone, Jr., and each of them, with full power of substitution in each, the
proxies of the undersigned, to represent the undersigned and vote all shares of
Applied Graphics Technologies, Inc. Common Stock which the undersigned may be
entitled to vote at the Annual Meeting of Shareholders to be held on May 19,
1997, and at any adjournment or postponement thereof, as indicated on the
reverse side.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1, ELECTION OF DIRECTORS.
(Continued and to be dated and signed on the reverse side.)
Applied Graphics Technologies, Inc.
P.O. Box 11271
New York, NY 10203-0271
<PAGE> 24
1. Election of Directors
FOR all nominees / / WITHHOLD AUTHORITY / / *EXCEPTIONS / /
listed below to vote for all
nominees listed below
Nominees: Mortimer B. Zuckerman, Fred Drasner, Melvin A. Ettinger, Martin D.
Krall, John R. Harris, Edward H. Linde, Howard Stringer and Linda J. Wachner.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
*Exceptions____________________________________________________________________
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS
AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT
THEREOF.
If you plan to attend
meeting, please check here / /
Change of Address and or
Comments Mark Here / /
The signature on this Proxy should correspond exactly
with stockholder's name as printed to the left. In the
case of joint tenancies, co-executors, or co-trustees,
both should sign. Persons signing as Attorney, Executor,
Administrator, Trustee or Guardian should give their
full title.
Dated: __________________________________________, 1997
_______________________________________________________
Signature
_______________________________________________________
Signature
(PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE.)
VOTE MUST BE INDICATED
(X) IN BLACK OR BLUE INK. / /
