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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
(AMENDMENT NO. 1)
SOLICITATION/RECOMMENDATION STATEMENT UNDER SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
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APPLIED GRAPHICS TECHNOLOGIES, INC.
(Name of Subject Company)
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Name of Person Filing Statement)
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COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class of Securities)
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037937208
(CUSIP Number of Class of Securities)
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MARTIN D. KRALL, ESQ.
EXECUTIVE VICE PRESIDENT, CHIEF LEGAL OFFICER AND SECRETARY
APPLIED GRAPHICS TECHNOLOGIES, INC.
450 WEST 33RD STREET
NEW YORK, NEW YORK 10001
(212) 716-6600
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person Filing Statement)
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COPY TO:
TED S. WAKSMAN, ESQ.
WEIL, GOTSHAL & MANGES LLP
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153
(212) 310-8000
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|_| CHECK THE BOX IF THE FILING RELATES SOLELY TO PRELIMINARY COMMUNICATIONS
MADE BEFORE THE COMMENCEMENT OF A TENDER OFFER.
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NY2:1288948
This Amendment No. 1 amends and supplements the
Solicitation/Recommendation Statement on Schedule 14D-9 initially filed with the
Securities and Exchange Commission (the "SEC") on June 20, 2003 (as previously
filed with the SEC, the "Schedule 14D-9"), by Applied Graphics Technologies,
Inc., a Delaware corporation ("AGT"), relating to the tender offer made by KAGT
Acquisition Corp. ("Purchaser"), a wholly owned subsidiary of KAGT Holdings,
Inc., as set forth in a Tender Offer Statement filed by Purchaser on Schedule
TO, dated June 20, 2003 (as previously filed with the SEC, the "Schedule TO"),
to pay $0.85 net per share in cash, without interest thereon, for each share of
common stock, par value $.01 per share, upon the terms and subject to the
conditions set forth in the Schedule TO.
The information in the Schedule 14D-9 is hereby expressly
incorporated herein by reference, except as otherwise set forth below.
Capitalized terms used herein but not otherwise defined herein shall have the
meanings given to them in the Schedule 14D-9.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
RECOMMENDATION OF THE BOARD. At a meeting held on June 3, 2003, the
Board of Directors, by a unanimous vote of all of the Company's Directors, (a)
approved the Merger Agreement and the transactions contemplated by the Merger
Agreement, including the Offer, the Recapitalization Transactions and the
Merger, and declared that they were advisable and (b) determined that the terms
of the Offer and the Merger Agreement are fair, from a financial point of view,
to the Company and its stockholders. The Board of Directors also unanimously
recommended that the stockholders of the Company accept the Offer and tender
their Common Stock pursuant to the Offer and that the stockholders of the
Company adopt the Merger Agreement, if such adoption is required. At such
meeting, the Board of Directors also, among other things, approved consummation
of the transactions contemplated by the Merger Agreement and related
transactions for purposes of Section 203 of the DGCL and approved, under Rule
16b-3 promulgated under the Exchange Act, certain actions to be taken by certain
affiliates of the Company in connection with the Offer.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS ACCEPT THE OFFER
AND TENDER COMMON STOCK IN THE OFFER.
A letter to the Company's stockholders communicating the
recommendation of the Board of Directors is filed herewith as Exhibit (a)(2)(A)
and is incorporated herein by reference.
BACKGROUND OF THE OFFER; CONTACTS WITH PURCHASER. The Company has
recently operated under difficult financial circumstances arising from the
Company's inability to meet mandatory milestones under its Senior Indebtedness,
including circumstances described below in paragraph F of "-- Reasons For The
Recommendation of the Board of Directors" which resulted in the Company's
independent auditors issuance of a "going concern" opinion in connection with
the audit of the Company's 2002 financial statements. The Senior Lenders have
extended the date of maturity of the Senior Indebtedness from April 2003 to
April 2004 and imposed additional milestones for the Company to meet, including
consummation of a recapitalization or restructuring by July 15, 2003. The
circumstances giving rise to the substantial doubt raised by the Company's
independent auditors concerning the Company's ability to comply with the terms
of the Senior Indebtedness, however, remain.
In seeking solutions to the Company's ongoing financial problems, the
Board of Directors and the Company's executive officers have, from time to time,
discussed and considered possible strategic alternatives for the Company,
including plans to complete an overall recapitalization of the Company. In
August 2002, the Company entered into preliminary negotiations with a third
party in connection with a potential recapitalization of the Company. The terms
of the proposed recapitalization were acceptable to most of the Senior Lenders,
in both number of lenders and dollar amount of commitment, but were rejected by
a few for not containing sufficient consideration. Such negotiations were,
consequently, terminated.
In late February 2003, Mr. Christopher Lacovara of Kohlberg contacted
the Company to initiate discussions of a possible recapitalization.
On March 4, 2003, Mr. Lacovara met with Fred Drasner, the Chairman of
the Board and Chief Executive Officer of the Company, and on March 11, 2003,
with Mr. Drasner, Joseph D. Vecchiolla, the President and Chief Operating
Officer of the Company and Martin D. Krall, the Executive Vice President, Chief
Legal Officer, and Secretary of the Company, to discuss the Company's business,
capital structure, and the goals of a potential recapitalization transaction.
The parties had additional discussions regarding a potential transaction over
the following two weeks.
On March 20, 2003, the Company and Kohlberg entered into a
confidentiality agreement to facilitate Kohlberg being furnished with certain
non-public information in connection with a possible transaction.
The Company and Kohlberg Management IV, L.L.C. entered into a
non-binding letter of intent on March 26, 2003. The letter of intent outlined
the terms of a recapitalization and the possible allocation of invested funds
among the Company's lenders and the holders of various securities of the
Company. It also provided for a period of exclusivity through April 30, 2003 to
perform due diligence and pursue more definitive agreements with the holders of
various securities of the Company. The letter of intent did not obligate either
party to ultimately enter into a transaction and provided for reimbursement of
up to $250,000 in expenses in the event the letter of intent was terminated for
any reason.
Over the following weeks, there were a number of meetings and
conversations between the management of the Company and representatives from
Kohlberg regarding a possible transaction. During this period, representatives
of Kohlberg conducted a due diligence investigation of the Company's various
business lines and discussed with Company representatives historical trends in
revenue and profit margins for the Company's various business segments.
On April 3, 2003, Mr. Lacovara and Gordon Woodward of Kohlberg met
with Ralph Palma, Senior Vice President of Fleet, the administrative agent and a
lender under the Senior Credit Agreement, Fleet's counsel and Messrs. Drasner,
Krall and Vecchiolla of the Company. The parties discussed the potential
recapitalization transactions, the structure of such recapitalization, and the
proceeds as they related to Fleet and the other lenders under the Senior Credit
Agreement.
Throughout April 2003, representatives of Kohlberg conducted
additional due diligence at the Company, including meetings and conference calls
with certain division managers and Mr. Vecchiolla. Representatives of Foothill
Capital Corporation ("Foothill"), as a potential source of debt financing for
the potential transaction, also attended certain of these meetings. During this
period, further negotiations also took place among Messrs. Drasner, Krall,
Vecchiolla and Lacovara concerning the structure and allocation of invested
2
funds across holders of various Company securities in a potential
recapitalization transaction.
During April, Kohlberg held further discussions with Fleet and
representatives of the Company, as well as representatives of certain of the
holders of the Subordinated Notes and the Wace Preference Shares. During these
negotiations, potential terms of the recapitalization transactions were
discussed with each group and draft documents intended to secure provisional
approval of the recapitalization from the required holders of each of these
securities were negotiated.
During April, representatives of the Company and Mr. Lacovara also
discussed terms of the potential recapitalization transactions with Foothill and
Silver Point Capital, L.P. ("Silver Point") to discuss the possibility of such
entities participating in the transactions to provide debt financing for the
recapitalization and serve as new lenders to the Company.
On May 6, 2003, representatives of Kohlberg met with certain
independent members of the Board of Directors to discuss the proposed
recapitalization on terms that would have paid holders of the Company's common
stock $0.75 per Share. On May 8, the Board of Directors met with Mr. Lacovara
and Mr. Woodward to discuss the Offer and the recapitalization and the
possibility of a price in the Offer of $1.00 per Share as proposed by the Board
of Directors and $0.85 per Share, as proposed by Mr. Lacovara. The Board of
Directors directed the independent directors negotiating with Kohlberg to seek
additional compensation to be paid to the common stockholders of the Company.
On May 8, 2003, the Company and Kohlberg entered into a revised
letter of intent, extending the period of exclusivity from April 30, 2003 to May
31, 2003. This extension letter provided for the amount available for the
reimbursement of certain expenses incurred in the due diligence investigation by
Kohlberg to be increased to $500,000.
On May 13, 2003, David Parker, a director of the Company, wrote Mr.
Lacovara on behalf of the Company, to communicate the Board of Directors' belief
that, given all of the circumstances, $1.00 per share would represent a fair
price to holders of the Common Stock and seeking an increase in the amount of
consideration to be offered by Kohlberg & Company, L.L.C. to such holders.
During May 2003, representatives of the Company negotiated
preliminary terms of the Merger Agreement with Kohlberg.
On May 21, 2003, representatives of Kohlberg contacted the Company to
state that, based upon its arrangement with Foothill and Silver Point, the
negotiations with the Senior Lenders and its due diligence investigations,
Kohlberg would be willing to proceed with a transaction at $0.85 per Share.
Between May 26, 2003 and June 12, 2003, representatives of Kohlberg and the
Company and their respective counsel negotiated the final terms of the Merger
Agreement.
On June 3, 2003 the Board of Directors met to consider the tender
offer, Merger and related transactions. Messrs. Krall and Drasner updated the
Board of Directors on the course of negotiations regarding the transaction. A
representative of Weil, Gotshal & Manges LLP, the Company's outside law firm,
reviewed with the Board of Directors the terms of the proposed merger agreement
and tender agreements and the timetable and various approvals that would be
required to close the transaction and discussed various other aspects of the
proposed transaction with the Board of Directors and responded to questions
3
posed by directors. On that same day, the Board of Directors unanimously
authorized the Company's management to execute the Merger Agreement.
Between April 29, 2003 and June 9, 2003, the Company entered into
agreements with holders of approximately 59% of the outstanding Subordinated
Notes of the Company to repurchase, subject to the terms and conditions set
forth therein, the Subordinated Notes held by such holders through a tender
offer and/or redemption.
On June 12, 2003, the Company and Wace entered into agreements with
holders of approximately 88% of the outstanding Wace Preference Shares to
repurchase and/or redeem, subject to the terms and conditions set forth therein,
the outstanding Wace Preference Shares held by such holders (other than those
held by Applied Graphics Technologies (UK) Limited) and obligating such holders
to vote in favor of a proposal permitting Wace to make redemptions of all of the
Wace Preference Shares (other than those held by Applied Graphics Technologies
(UK) Limited).
On June 12, 2003, the parties executed the Merger Agreement. On June
13, 2003, the Company issued a press release announcing the transaction.
On June 20, 2003, in accordance with the Merger Agreement, the
Purchaser commenced the Offer.
REASONS FOR THE RECOMMENDATION OF THE BOARD OF DIRECTORS
In approving the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger, and making its recommendation that
all stockholders tender their Common Stock pursuant to the Offer, approve the
Merger and approve and adopt the Merger Agreement, if required, the Board of
Directors considered a number of factors, including, but not limited to, the
following material considerations, all of which supported such approvals and
recommendation by the Board of Directors:
A. The amount of consideration to be received by the holders
of shares of Common Stock pursuant to the Offer and the
Merger;
B. The process leading to the Offer and the Merger and the
possible alternatives thereto, the range of possible
benefits to the Company's stockholders and other
constituencies of such alternatives and the expected
timing and likelihood of accomplishing any of such
alternatives;
C. Information with regard to the financial condition,
results of operations, business and prospects of the
Company, the regulatory approvals required to consummate
the Offer and the Merger as well as current economic and
market conditions;
D. The historical and recent market prices of the Common
Stock and the fact that the Offer and the Merger will
enable the holders of the shares to realize an 89.9%
premium over the $0.45 closing price of the Common Stock
on June 2, 2003, the last trading day prior to the meeting
of the Board of Directors to approve the Merger Agreement;
4
E. The likelihood that the Merger would be consummated, in
light of (1) the Tender Agreements pursuant to which
Applied Printing Technologies, L.P., Fred Drasner, Martin
Krall, Joseph Vecchiolla, David Parker, Marne Obernauer,
Jr. and the Senior Lenders, who beneficially own
approximately 33.9% of the outstanding fully diluted
shares of Common Stock (including in-the-money options),
agreed, among other things, to tender all of their Common
Stock in the Offer and vote all of their Common Stock in
favor of the Merger, and (2) the experience, reputation
and financial capabilities of Kohlberg and its affiliates;
and
F. The Board of Directors belief that consummation of the
Offer would present stockholders with the best opportunity
to receive a premium to current market prices for their
shares of Common Stock. This belief is based upon;
o The Board of Directors' belief that the Company
will be unable to pay when due the outstanding
principal amount of its Senior Indebtedness,
which would also be a default under the
Subordinated Notes and could result in
acceleration of such indebtedness;
o The necessity that the Company consummate a
restructuring or recapitalization on or before
July 15, 2003 to avoid the automatic
acceleration of its outstanding Senior
Indebtedness absent an agreement by the Senior
Lenders to waive such default;
o The Company's inability, prior to the execution
of the Merger Agreement and related documents,
to obtain agreements of its Senior Lenders
sufficient to effect any previously proposed
restructuring or recapitalization and
sufficient to avoid the acceleration of the
Company's Senior Indebtedness;
o The Board of Directors' belief that the assets
of the Company would not be sufficient to repay
the Company's indebtedness, all of which has a
claim superior to that of the Common Stock and,
as a consequence, its belief that no proceeds
would be paid to holders of Common Stock in the
event of a bankruptcy or liquidation of the
Company. The Board of Directors can give no
assurance that bankruptcy or liquidation would
not result from an acceleration of the
Company's Senior Indebtedness;
o The Board of Directors' belief that the
significant discounts that holders of the
Company's Senior Indebtedness, Subordinated
Notes and holders of the Wace Preference Shares
have committed to accept in exchange for such
instruments demonstrate that the Offer
represents the most favorable terms obtainable
by the Company and the Stockholders;
o The Board of Directors' belief, after
consultation with its legal advisors, that the
terms of the Merger Agreement, including
amounts payable to the Parent in the event of
termination, do not preclude a superior
proposal to acquire the Company. In this
regard, the Board of Directors recognized that
certain provisions of the Merger Agreement
relating to termination fees and
non-solicitation of acquisition proposals were
insisted upon by Kohlberg as a condition to
entering into the Merger Agreement. Although
5
the Board of Directors considered that these
provisions could have the effect of deterring
third parties who might be interested in
exploring an acquisition of the Company, the
Board of Directors concluded that the
advantages of entering into the Merger
Agreement outweighed the possibility that
another company might be willing to pay a
higher price for the Company, but would be
unwilling to present an unsolicited proposal
after the Merger Agreement was announced; and
o The efforts of the Company's management to
solicit indications of interest in acquiring
the Company from other potential buyers, and
the fact that no other proposal that was both
meaningful and acceptable to the Company's
Senior Lenders resulted from that process.
In view of these many considerations, the Board of Directors did not
assign relative weights to the above factors or determine that any factor was of
special importance. Rather, the Board of Directors viewed its position and
recommendations as being based on the totality of the information presented to
and considered by it, both positive and negative. In addition, it is possible
that different members of the Board of Directors assigned different weights to
the various factors described above. After weighing all of these considerations,
the Board of Directors was unanimous in approving the Offer, the Merger, the
Merger Agreement and the transactions contemplated thereby and recommending that
the stockholders of the Company tender their shares of Common Stock in the
Offer.
INTENT TO TENDER
After reasonable inquiry and to the best knowledge of the Company,
each executive officer, director, affiliate and subsidiary of the Company who
owns shares of Common Stock intends to tender in the Offer all such shares that
each person owns of record or beneficially, other than such shares, if any, that
any such persons may have an unexercised right to purchase by exercising stock
options. Upon consummation of the Offer, outstanding options to purchase Common
Stock will be canceled and the Company will pay holders thereof, in respect of
each Share subject thereto, cash equal to the excess, if any, of the price per
Share to be paid in the Offer over the exercise price per share of such option.
See "Item 3. Past Contacts, Transactions, Negotiations and Agreements - Effects
of the Offer and the Merger under Company Stock Plans and Agreements Between the
Company and its Officers." Messrs. Fred Drasner, Martin Krall and Joseph
Vecchiolla, the Chairman of the Board and Chief Executive Officer, Executive
Vice President, Chief Legal Officer and Secretary, and President and Chief
Operating Officer, respectively, of the Company and each a director of the
Company and David Parker and Marne Obernauer, Jr., directors of the Company,
Applied Printing Technologies, L.P., an affiliate of the Company, and the Senior
Lenders each entered into a Tender Agreement with Purchaser and Parent on June
12, 2003, pursuant to which each such person committed, among other things, to
tender in the Offer all Common Stock held or subsequently acquired by such
person. Such persons own, in the aggregate, approximately 33.9% of the
outstanding fully diluted shares of Common Stock (including in-the-money
options).
6
ANNEX A
APPLIED GRAPHICS TECHNOLOGIES, INC.
450 WEST 33RD STREET
NEW YORK, NEW YORK 10001
INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about June
20, 2003 as part of the Solicitation/Recommendation Statement on Schedule
14D-9 (the "Statement") of Applied Graphics Technologies, Inc. (the "Company").
You are receiving this Information Statement in connection with the possible
election of persons designated by KAGT Acquisition Corp. ("Purchaser"), a
Delaware corporation and a wholly owned subsidiary of KAGT Holdings, Inc., a
Delaware corporation ("Parent"), to at least a majority of the seats on the
board of directors of the Company (the "Board" or the "Board of Directors").
On June 12, 2003, the Company entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Parent and Purchaser, pursuant
to which Purchaser is required to commence a tender offer to purchase all of the
outstanding shares of common stock, par value $0.01 per share, of the Company
(the "Shares"), at a price per Share of $0.85, net to the seller in cash,
without interest (such price, or the highest price per Share as may be paid in
the Offer, is hereinafter referred to as the "Offer Price"), on the terms and
subject to the conditions set forth in the Offer to Purchase dated June 20, 2003
(the "Offer to Purchase"), and the related Letter of Transmittal (which,
together with any amendments or supplements thereto, collectively constitute the
"Offer"). Copies of the Offer to Purchase and the Letter of Transmittal have
been mailed to stockholders of the Company and are filed as Exhibit (a)(1) and
(a)(2), respectively, to the Tender Offer Statement on Schedule TO filed by
Purchaser and Parent and Kohlberg (the "Schedule TO") with the Securities and
Exchange Commission (the "SEC") on June 20, 2003.
The Merger Agreement provides, among other matters, that on
the terms and subject to the satisfaction or waiver of the conditions set
forth in the Merger Agreement, following consummation of the Offer, and in
accordance with the General Corporation Law of the State of Delaware, as amended
(the "DGCL"), Purchaser will be merged with and into the Company (the "Merger").
Following the Effective Time, the Company will continue as the surviving
corporation and a wholly-owned subsidiary of Parent. At the Effective Time, each
issued and outstanding Share (other than Shares held by (i) the Company, (ii)
Purchaser or Parent and (iii) stockholders who are entitled to and have properly
exercised their dissenters' rights under the DGCL) will be converted into the
right to receive the Offer Price, without interest (the "Merger Consideration").
The Offer, the Merger, and the Merger Agreement are more
fully described in the Statement to which this Information Statement is annexed
as Annex A, which was filed by the Company with the SEC on June 20, 2003 and
which is being mailed to stockholders of the Company along with this Information
Statement.
This Information Statement is being mailed to you in
accordance with Section 14(f) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Rule 14f-1 promulgated thereunder. The information set
7
forth herein supplements certain information set forth in the Statement.
Information set forth herein related to Parent, Purchaser or the Parent
Designees (as identified herein) has been provided by Parent. You are urged to
read this Information Statement carefully. You are not, however, required to
take any action in connection with the matters set forth herein. Capitalized
terms used but not otherwise defined herein have the meanings set forth in the
Statement.
Pursuant to the Merger Agreement, Purchaser commenced the
Offer on Friday, June 20, 2003. The Offer is scheduled to expire at 12:00
Midnight, New York City time, on Friday, July 18, 2003, unless extended in
accordance with its terms.
GENERAL INFORMATION REGARDING THE COMPANY
The common stock, par value $0.01 per share ("Common
Stock"), is the only class of equity securities of the Company outstanding that
is entitled to vote at a meeting of the stockholders of the Company. Each share
of Common Stock is entitled to one vote. As of June 16, 2003, there were
9,147,565 Shares issued and outstanding, of which Parent and Purchaser own no
Shares as of the date hereof.
RIGHTS TO DESIGNATE DIRECTORS AND PARENT DESIGNEES
The Merger Agreement provides that, promptly upon the first
acceptance for payment of, and payment by Purchaser for, any Shares tendered
pursuant to the Offer, Purchaser will be entitled to designate such number of
directors on the Board of Directors, subject to compliance with Section 14(f) of
the Exchange Act, as will give Purchaser representation on the Board of
Directors equal to at least that number of directors, rounded up to the next
whole number, which is the product of (i) the total number of directors on the
Board of Directors (giving effect to the directors elected as described in this
sentence) multiplied by (ii) the percentage that (a) such number of Shares so
accepted for payment and paid for by Purchaser plus the number of Shares
otherwise owned by Purchaser or any other subsidiary of Parent bears to (b) the
number of Shares then outstanding, and the Company will, at such time, cause
Purchaser's designees to be so elected or appointed to the Board of Directors.
Subject to provisions of applicable law, the Merger
Agreement obligates the Company to take all action requested by Parent necessary
to effect any such election or appointment. In connection with such request, the
Company will promptly, at the option of Purchaser, either increase the size of
the Board of Directors or obtain the resignation of such number of its current
directors as is necessary to enable Purchaser's designees to be elected or
appointed to the Board of Directors as described above.
In the event that Purchaser's designees are appointed or
elected to the Board of Directors, until the Effective Time, the Board of
Directors will have at least three directors who are directors on June 12, 2003
and who are not officers of the Company (the "Independent Directors"). In
addition, in that event, if the number of Independent Directors is reduced below
three for any reason whatsoever, any remaining Independent Directors (or the
Independent Director, if there is only one such director remaining) will be
entitled to designate persons to fill the vacancies who shall be deemed
Independent Directors. If no Independent Directors then remain, the other
directors shall designate three persons to fill such vacancies who are not
8
officers, stockholders or affiliates of the Company, Parent or Purchaser, and
such persons will be deemed to be Independent Directors.
The following table sets forth certain information with
respect to individuals Parent may designate as the Parent Designees (including
age as of the date hereof, current principal occupation or employment and
five-year employment history) (each, a "Parent Designee"). Each Parent Designee
is a citizen of the United States. Unless otherwise indicated, the business
address of each designee is c/o Parent, 111 Radio Circle, Mount Kisco, New York
10549.
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT; MATERIAL POSITIONS HELD
NAME OF PARENT DESIGNEE AGE DURING PAST FIVE YEARS
----------------------- --- ----------------------
James A. Kohlberg ...............45 Mr. Kohlberg has been a Co-Founder
and Managing Principal of Kohlberg &
Co., L.L.C. since 1987. He also
serves on the Board of Directors of
Holley Performance Products, Inc.
and Katy Industries, Inc.
Samuel P. Frieder ...............38 Mr. Frieder has been a Principal of
Kohlberg & Co., L.L.C. since 1995.
He also serves on the Board of
Directors of Holley Performance
Products, Inc. and Katy Industries,
Inc.
Christopher Lacovara ............38 Mr. Lacovara has been a Principal of
Kohlberg & Co., L.L.C. since 1995.
He also serves on the Board of
Directors of Holley Performance
Products, Inc. and Katy Industries,
Inc.
Gordon Woodward..................34 Mr. Woodward has been a Principal of
Kohlberg & Co., L.L.C. since 2002
and was previously an analyst of
Kohlberg & Co., L.L.C. from 1996 to
2002.
Parent has informed the Company that each of the
individuals listed above has consented to act as a director, if so designated.
If necessary, Parent may choose additional or other Parent Designees, subject to
the requirements of Rule 14f-1. None of the Parent Designees is currently a
director of, or holds any position with the Company. The Parent has advised the
Company that, to the Parent's knowledge, none of the Parent Designees has a
familial relationship with any director or executive officer of the Company or,
beneficially owns any securities (or any rights to acquire such securities) of
the Company. The Company has been advised by Parent that, to Parent's knowledge,
none of the Parent Designees has been involved in any transactions with the
Company or any of its directors, officers, or affiliates which are required to
be disclosed pursuant to the rules and regulations of the SEC, other than with
respect to transactions between Parent and the Company that have been described
in the Schedule TO or the Statement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of June 16, 2003,
information regarding the beneficial ownership of the Common Stock by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
Common Stock, (ii) each director of the Company, (iii) the chief executive
9
officer of the Company; (iv) each of the Company's top four most highly
compensated executive officers (other than the Company's Chief Executive
Officer) whose compensation exceeded $100,000 in 2002 and (v) all directors and
executive officers of the Company as a group. Except as indicated, each person
identified in the following table has sole voting and investment power with
respect to the shares shown. Percentage ownership of Common Stock is based on
9,147,565 shares outstanding as of June 16, 2003.
Beneficial ownership is determined in accordance with rules
of the SEC and includes shares over which the indicated beneficial owner
exercises voting and/or investment power. Shares of Common Stock subject to
options or warrants currently exercisable or exercisable within 60 days of June
16, 2003 are deemed outstanding for computing the percentage ownership of the
person holding the options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other person. Unless otherwise
indicated, the address for the directors and executive officers is the principal
offices of the Company.
NUMBER OF PERCENTAGE OF
SHARES OF OUTSTANDING
COMMON STOCK SHARES
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED
------------------------ ----- -----
Applied Printing Technologies, L.P. (1) (2)........................ 1,313,933 14.4
Mortimer B. Zuckerman (1) (2)...................................... 1,313,933 14.4
Fleet National Bank (3)............................................ 1,008,833 11.0
Fred Drasner (1) (4)............................................... 690,100 7.3
David M. Knott (5)................................................. 470,000 5.1
Martin D. Krall (6)................................................ 324,333 3.5
Joseph D. Vecchiolla (7)........................................... 312,334 3.3
Marne Obernauer, Jr. (8)........................................... 209,919 2.3
David R. Parker (9)................................................ 156,600 1.7
Kenneth G. Torosian (10)........................................... 49,066 *
John W. Dreyer (10)................................................ 47,833 *
John Zuccotti (10)................................................. 35,000 *
John R. Walter (10)................................................ 27,000 *
John R. Harris (10)................................................ 26,500 *
Philip Guarascio (10).............................................. 5,000 *
All directors, director nominees and executive officers as a group
(12 persons) (11).................................................. 3,197,618 31.9
--------------------
* Represents holdings of less than 1%.
(1) Applied Printing Technologies, L.P. ("Applied Printing") is a limited
partnership in which Mr. Drasner, the Company's Chairman and Chief
Executive Officer, is a minority limited partner and Mr. Zuckerman, a
director, beneficially owns the remaining limited partnership
interests. Mr. Zuckerman is also the sole stockholder of the
corporate general partner of Applied Printing and a corporate limited
partner of Applied Printing. Mr. Zuckerman is the sole director of
10
the corporate general partner of Applied Printing. Because Mr.
Zuckerman is the sole stockholder of the corporate general partner of
Applied Printing, and the sole director, he will be able to exercise
substantial influence over the outcome of all matters submitted to a
vote of the Company's stockholders. Pursuant to a 2001 agreement
between Mr. Drasner and Mr. Zuckerman regarding Mr. Drasner's
interest in Applied Printing, Mr. Drasner no longer has any economic
interest in the Common Stock held by Applied Printing. Mr. Drasner
therefore disclaims beneficial ownership of shares held by Applied
Printing. 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, as
amended on September 4, 1997, November 26, 1997, September 1, 1998,
October 5, 1998, November 25, 1998, August 2, 2001 and June 13, 2003
filed with the Commission by Applied Printing. Voting and investment
power with respect to such shares is held by Mr. Zuckerman. See note
(1) above. In July 2001, Applied Printing granted an irrevocable call
option to the Senior Lenders to purchase 680,067 shares of the Common
Stock held by Applied Printing (subject to adjustment), at $0.01 per
share (the "Call Option") in connection with an amendment to the
Company's Senior Credit Agreement. The Call Option was exercised on
June 11, 2003.
(3) Includes 690,444 shares issuable upon exercise of currently
exercisable warrants that will be canceled in connection with the
consummation of the Offer. The warrants were issued in connection
with amendments to the Company's Senior Credit Agreement and are
exercisable at $0.01 per share. Also includes 318,389 shares, Fleet's
portion of the 680,087 shares issued upon exercise of the Call Option
described in note (2) above. The address of Fleet National Bank is
777 Main Street, Hartford, Connecticut 06115.
(4) Includes 250,000 shares issuable upon exercise of currently
exercisable options.
(5) According to a Schedule 13G filed on June 12, 2003 by David M. Knott,
Mr. Knott has sole voting and dispositive power with respect to
288,000 Shares and shared voting and dispositive power with respect
to 167,800 Shares. Mr. Knott's address is 485 Underhill Boulevard,
Suite 405, Syosset, New York 11791.
(6) Includes 204,333 shares issuable upon exercise of currently
exercisable options.
(7) Includes 192,334 shares issuable upon exercise of currently
exercisable options.
(8) Includes an aggregate of 2,880 shares held by Mr. Obernauer, Jr., as
trustee, for trusts created for the benefit of his sons, a niece, and
a nephew over which Mr. Obernauer, Jr. has sole voting and investment
power.
(9) Includes 35,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(10) Represents shares of Common Stock issuable upon exercise of currently
exercisable options.
(11) Includes 872,066 shares of Common Stock issuable upon exercise of
currently exercisable options.
11
CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
DIRECTOR
NAME AGE SINCE
---- --- -----
Fred Drasner................................. 60 1995
John W. Dreyer............................... 65 2000
Philip Guarascio............................. 61 2002
John R. Harris............................... 55 1996
Martin D. Krall.............................. 62 1996
Marne Obernauer, Jr.......................... 59 1998
David R. Parker.............................. 59 1998
Joseph D. Vecchiolla......................... 47 2000
John R. Walter............................... 56 2000
John Zuccotti................................ 65 1998
Mortimer B. Zuckerman........................ 66 1996
Fred Drasner has been Chairman of the Company since April
1996, Chairman of the Board of the Company since June 2001 and Chief Executive
Officer of the Company since May 2002. Mr. Drasner also served as Chief
Executive Officer of the Company from 1996 until April 2000. Mr. Drasner has
been co-owner of Pro-Football, Inc., d/b/a The Washington Redskins, since July
1999. He has been the Chief Executive Officer of Daily News, L.P. ("Daily News")
and Co-Publisher of the New York Daily News since 1993, Co-Chairman of U.S. News
& World Report, L.P. ("U.S. News") since 1998, Chief Executive Officer of U.S.
News from 1985 to 1998, and President of U.S. News from 1985 to 1997, and
Chairman and Chief Executive Officer of Applied Printing Technologies, L.P.
("Applied Printing") since 1988. Mr. Drasner served as Co-Chairman from 1998 to
1999 and Vice Chairman and Chief Executive Officer from 1986 to 1998 of The
Atlantic Monthly Company, and as Co-Chairman of Fast Company Media Group, L.L.C.
("Fast Company") from January 1999 until October 2000. Mr. Drasner also serves
as a director of Ventiv Health, Inc.
John W. Dreyer currently serves as an independent
consultant to the graphic arts and prepress industry. Mr. Dreyer served as
Chairman of the Board of Pitman Company, a graphic arts and image supplier, from
1978 until January 2001 and as Chief Executive Officer of Pitman Company from
1977 until January 2001. He served as President of Pitman Company until 1998 and
Chief Operating Officer until 1994. Mr. Dreyer is also a director of Presstek,
Inc.
Philip Guarascio has, since May 2000, been Chairman and
Chief Executive Officer of PG Ventures LLC, a marketing consulting firm. Mr.
Guarascio served as Vice President, Corporate Marketing and Advertising, of
General Motors Corporation from October 1985 to May 2000. He is also a director
of Arbitron Inc.
John R. Harris currently serves as President and Chief
Executive Officer of Delinea Corporation, a provider of software and services to
the utility market. From December 2001 to August 2002, Mr. Harris was President,
Chief Executive Officer and a director of ExoLink Corporation, a provider of
12
retail transaction services to the deregulated energy industry. From August 1999
to September 2001, Mr. Harris served as Chairman and Chief Executive Officer of
Ztango, a wireless Internet software and services company. From 1973 to 1999,
Mr. Harris was with Electronic Data Systems Corporation and served in a variety
of senior leadership positions, including Corporate Vice President of Marketing
and Strategy and President of the Communications Industry Group. Mr. Harris also
serves as a director of Genuity, Inc. and Ventiv Health, Inc.
Martin D. Krall, Executive Vice President, Chief Legal
Officer and Secretary of the Company since 1996, has been Executive Vice
President, Chief Legal Officer, and Secretary of Daily News, Applied Printing
and U.S. News since January 1995. Mr. Krall served as Executive Vice President,
Chief Legal Officer, and Secretary of The Atlantic Monthly Company from 1995 to
1999 and as Executive Vice President and Secretary of Fast Company from January
1999 until December 2000.
Marne Obernauer, Jr. served as Vice Chairman of the Company
from May 1998 until February 2003. Prior to that, Mr. Obernauer, Jr., served as
Chairman of the Board of Directors of Devon Group, Inc. ("Devon") from 1986 and
Chief Executive Officer of Devon from 1980 until Devon's merger with and into a
wholly-owned subsidiary of the Company in May 1998.
David R. Parker has served as Managing Director of
Archstone Partnerships, a fund of funds manager, since January 2003. Mr. Parker
is also a founder and Managing General Partner of Interprise Technology
Partners, L.P., a venture capital fund focused on information technology
investments established in January 1999. From 1992 through May 1998, Mr. Parker
was Chairman of ProSource Distribution Services, Inc., a food service
distributor, which was acquired by AmeriServe, Inc. in May 1998. In May 1998,
Mr. Parker became Vice Chairman of AmeriServe, Inc. He resigned his officer
position in July 1998 and his position on AmeriServe's Board of Directors in
November 1999. Mr. Parker also serves on the Board of Directors of Tupperware
Corporation and Spherion Corporation.
Joseph D. Vecchiolla, President and Chief Operating Officer
of the Company, joined the Company in May 2000 as its Senior Vice President and
Chief Financial Officer and has served as Chief Operating Officer since December
2000 and President since August 2001. From February 1999 through April 2000 he
served as Vice President of Marketing and Vice President of Finance at Favorite
Brands International, which was acquired by Nabisco in November 1999. Favorite
Brands International filed for protection under Chapter 11 of the U. S.
Bankruptcy Code in March 1999. From May 1997 until February 1999 he served as
President of Old Greenwich Capital Corporation.
John R. Walter currently serves as an independent
consultant. From November 1996 through July 1997, he served as President and
Chief Operating Officer of AT&T Corp. Mr. Walter was Chairman and Chief
Executive Officer from 1989 to October 1996 and President from 1987 to October
1996 of R.R. Donnelley & Sons Company, a print and digital information
management, reproduction and distribution company. Mr. Walter also serves on the
Board of Directors of Abbott Laboratories, Deere & Company and Manpower, Inc.
John Zuccotti has been Chairman of Brookfield Financial
Properties, Inc. (formerly World Financial Properties) since 1996 and Vice
Chairman of Brookfield Properties Corporation since 1998. Mr. Zuccotti has been
a senior counsel at Weil, Gotshal & Manges LLP since 1997. Mr. Zuccotti also
13
serves as a director of eight funds of The Dreyfus Corporation, a director of
Empire Blue Cross and Blue Shield, and a trustee of Columbia University.
Mortimer B. Zuckerman served as Chairman of the Board of
the Company from 1996 until June 2001. He has been Chairman of the Board of
Directors and a principal stockholder of Boston Properties, Inc., a national
real estate development and management company, since 1970. He has been Chairman
of U.S. News and Editor-in-Chief of U.S. News & World Report since 1985, and
Chairman of Daily News and Co-Publisher of the New York Daily News since 1993.
Mr. Zuckerman served as Chairman of The Atlantic Monthly Company from 1980 to
1999, and as Chairman of Fast Company from January 1999 until December 2000. Mr.
Zuckerman also serves as a director of JPMorganChase National Advisory Board.
EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Fred Drasner 60 Chairman of the Board and Chief
Executive Officer
Joseph D. Vecchiolla 47 President, Chief Operating Officer,
and Director
Martin D. Krall 62 Executive Vice President, Chief
Legal Officer, Secretary, and
Director
Kenneth G. Torosian 41 Senior Vice President, Chief
Financial Officer, and Treasurer
For information relating to Messrs. Drasner, Vecchiolla and
Krall, see "Current Directors and Executive Officers of the Company - Directors"
above.
Kenneth G. Torosian has served as Senior Vice President and
Chief Financial Officer since September 2001 and as Treasurer since November
2002. Prior to that, Mr. Torosian served as Vice President of Finance from
August 2000 until September 2001, and Corporate Controller from January 1997
until August 2000.
14
INFORMATION CONCERNING THE BOARD OF DIRECTORS
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board held ten meetings during the Company's 2002
fiscal year. During fiscal year 2002, each director attended at least 75% of the
aggregate of the total number of meetings of the Board held during the period he
served as a director and the total number of meetings held by each committee of
the Board on which he served during the period for which he served.
The Board currently has a standing Audit Committee and a
standing Compensation Committee. It does not currently have a standing
nominating committee.
The Audit Committee currently consists of Mr. Parker, as
Chairman, and Messrs. Harris and Zuccotti. The Audit Committee met eight times
during fiscal year 2002. The Audit Committee is responsible for recommending to
the full Board 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, exercising oversight of management's and the public
accountants' review of 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 Audit Committee is composed entirely of outside directors that are
"independent" as defined by the rules of The American Stock Exchange applicable
to the Company.
The Compensation Committee, which met three times during
fiscal year 2002, currently consists of Mr. Harris, as Chairman, and Messrs.
Dreyer, Parker, Guarascio, Walter and Zuccotti. The Compensation Committee is
responsible for establishing salaries, bonuses and other compensation for the
Company's officers and administering the Company's stock option plans.
COMPENSATION OF DIRECTORS
Commencing in July 2002, directors who are not also
employees of the Company or its affiliates ("nonemployee directors") receive
from the Company an annual fee of $50,000, which fee is paid in equal quarterly
installments, plus $1,000 for each Board or committee meeting attended in person
($500 for each such meeting participated in by telephone) and reimbursement of
expenses incurred in attending such meetings. In addition, the Chairman of the
Audit Committee receives an annual fee of $50,000 and the Chairman of the
Compensation Committee receives an annual fee of $20,000, each of which is paid
in equal quarterly installments. Directors are also eligible to receive options
to purchase Common Stock under the Company's Amended and Restated 1998 Incentive
Compensation Plan, as amended (the "Incentive Compensation Plan").
Under the Incentive Compensation Plan, employees,
nonemployee directors, certain affiliated persons and independent contractors of
the Company may be granted cash awards, options to purchase Common Stock, stock
appreciation rights, stock awards, stock units, performance shares, and
performance units. Options to purchase Common Stock granted under the Incentive
Compensation Plan have a term of ten years and, except for those granted to
15
nonemployee directors, vest over a vesting schedule determined by the committee
administering the plan or, in lieu thereof, a five-year vesting schedule, as
specified in the plan. Under the Incentive Compensation Plan, each nonemployee
director is granted options to purchase 10,000 shares of Common Stock upon
commencement of his or her service as a director. Such options have an exercise
price equal to the fair market value on the date of grant and vest ratably over
a two-year period. In addition, each nonemployee director then in office is
automatically granted, on the anniversary date of his or her commencement of
service as a director, a fully-vested, non-qualified option to purchase 2,000
shares of Common Stock at a per-share exercise price equal to its fair market
value on such date (the "anniversary grant"). Given the substantial interest in
the Company he has through his interest in Applied Printing, Mr. Zuckerman has
not received any options, although commencing in July 2002, Mr. Zuckerman
receives fees in accordance with the schedule for nonemployee directors.
In May 2002, Messrs. Harris, Dreyer, Parker, Walter and
Zuccotti each received grants of options to purchase 5,000 shares of Common
Stock at an exercise price of $0.41 per share, which options vested immediately.
In June 2002, Mr. Guarascio received a grant of options to purchase 10,000
shares of Common Stock at an exercise price of $0.90, in connection with his
commencement of service as a director, which options vest ratably over two
years. In July 2002, Messrs. Harris, Dreyer, Parker, Walter and Zuccotti each
received grants of options to purchase 2,000 shares of Common Stock at an
exercise price of $0.55 per share, which options vested immediately. In
addition, each of Messrs. Harris, Dreyer, Parker, Walter and Zuccotti agreed
that the grant date for all future anniversary grants to be made to each of them
would be July 1. In June 2003, Mr. Guarascio also agreed that for all
anniversary grants to be made to him, the grant date would be July 1.
In addition, Messrs. Drasner, Krall and Vecchiolla received
grants of options to purchase shares of Common Stock in their capacities as
officers of the Company, as disclosed in "Executive Compensation - Stock Option
Grants in Fiscal Year 2002" below.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the
Chairman and Chief Executive Officer of the Company and to each of the four
other most highly compensated executive officers (the "Named Executive
Officers") in fiscal years 2002, 2001 and 2000.
16
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------------ -------------------
NUMBER OF
SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) (#) ($)
--------------------------- ---- ---------- --------- ---------------- --- ---
FRED DRASNER................ 2002 750,000 150,000 (1) 250,000 --
Chairman and Chief 2001 750,000 75,000 (1) -- --
Executive Officer 2000 750,000 -- (1) -- --
JOSEPH D. VECCHIOLLA........ 2002 500,000 150,000 (1) 75,000 --
President and Chief 2001 414,152 250,000 (1) 100,000 --
Operating Officer 2000 183,869(2) 137,500(2) (1) 64,000 --
MARTIN D. KRALL............. 2002 350,000(3) 125,000(3) (1) 75,000 --
Executive Vice President, 2001 350,000(3) 100,000(3) (1) 50,000 --
Chief Legal Officer, and 2000 350,000(3) -- (1) 32,000 --
Secretary
MARNE OBERNAUER, JR......... 2002 300,000 -- (1) -- --
Vice Chairman(4) 2001 300,000 -- (1) -- --
2000 300,000 -- (1) -- --
KENNETH G. TOROSIAN......... 2002 303,769 100,000 (1) 40,000 --
Senior Vice President, 2001 242,427 -- (1) 20,000 --
Chief Financial Officer 2000 216,200 226,000(5) (1) -- --
and Treasurer
----------------------
(1) The Named Executive Officer received perquisites or other personal
benefits in the years shown, although the value of these benefits did
not exceed in the aggregate the lesser of $50,000 or 10% of his
salary and bonus in such year.
(2) Mr. Vecchiolla's employment commenced on May 1, 2000.
(3) Mr. Krall did not receive compensation directly from the Company. The
amounts shown reflect reimbursement of the affiliate that employs Mr.
Krall in accordance with a shared services agreement with such
affiliate (See "Certain Relationships and Related Transactions -
Shared Services Agreement").
(4) Mr. Obernauer, Jr. ceased being Vice Chairman of the Company in
February 2003. He continues to serve as a director.
(5) Includes $178,500 paid to Mr. Torosian in connection with an
Agreement and General Release dated April 3, 2000, and a retention
agreement dated May 31, 2000.
17
STOCK OPTION GRANTS IN FISCAL YEAR 2002
Stock options were granted during fiscal year 2002 to
Messrs. Drasner, Vecchiolla, Krall and Torosian. The following table sets forth
information concerning the stock options granted during 2002.
OPTION GRANTS IN FISCAL YEAR 2002
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF
STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM
------------------------------------------------------------------- -----------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE
NAME OPTIONS GRANTED 2002(1) PRICE ($/SH) EXPIRATION DATE 5% ($) 10% ($)
---- --------------- ------- ------------ --------------- ------ -------
Fred Drasner................ 250,000 27.7% $0.41 5/13/12 64,462 163,359
Joseph D. Vecchiolla........ 75,000 8.3% $0.41 5/13/12 19,339 49,008
Martin D. Krall............. 75,000 8.3% $0.41 5/13/12 19,339 49,008
Kenneth G. Torosian......... 40,000 4.4% $0.41 5/13/12 10,314 26,137
----------------------
1. Based on total grants of options to purchase 903,000 shares of Common
Stock.
No Named Executive Officer exercised stock options in
fiscal year 2002. The following table sets forth information concerning the
number and value of unexercised stock options granted to Named Executive
Officers at December 31, 2002.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2002 AND
2002 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY
YEAR-END (#) OPTIONS AT FISCAL
NAME (EXERCISABLE/UNEXERCISABLE) YEAR-END ($)
---- --------------------------- ------------
Fred Drasner.............................. 250,000/-- $22,500/--
Joseph D. Vecchiolla...................... 126,000/113,000 $ 4,500/$2,250
Martin D. Krall........................... 177,000/52,000 $ 6,750/--
Marne Obernauer, Jr....................... --/-- --/--
Kenneth G. Torosian....................... 29,067/88,000 --/$3,600
18
EXECUTIVE EMPLOYMENT CONTRACTS
In January 2003, the Company entered into an employment
agreement with Mr. Drasner. Pursuant to such employment agreement, Mr. Drasner
is to receive an annual base salary of $750,000. In addition, Mr. Drasner is
eligible to receive a bonus for each year during the term of his employment
agreement in accordance with the Company's Management Incentive Plan and such
other bonuses that may be approved by the Board in its sole discretion. The term
of the agreement is through January 30, 2005. Pursuant to the agreement, Mr.
Drasner performs his duties on a part-time basis, and is required to devote
approximately the same portion of his business efforts to the performance of his
duties as he has devoted to his duties to the Company since it became a public
company in 1996. Mr. Drasner's agreement contains a noncompete provision
applicable during the term and extends for a period of two years following
termination of Mr. Drasner's employment, except that such period shall be
reduced to six months in the event the Company terminates Mr. Drasner's
employment other than for Cause or Mr. Drasner terminates his employment for
Good Reason (as such terms are defined in the employment agreement). The
agreement also contains a nonsolicitation provision applicable during the term
and for two years after termination of Mr. Drasner's employment with the
Company, except that such period shall be reduced to six months in the event the
Company terminates Mr. Drasner's employment other than for Cause or Mr. Drasner
terminates his employment for Good Reason.
In January 2003, the Company entered into an employment
agreement with Mr. Vecchiolla. Pursuant to such employment agreement, Mr.
Vecchiolla is to receive an annual base salary of $560,000. In addition, Mr.
Vecchiolla is eligible to receive a bonus for each year during the term of his
employment agreement in accordance with the Company's Management Incentive Plan.
The term of the agreement is through January 15, 2005. Mr. Vecchiolla's
agreement contains a noncompete provision applicable during the term and extends
for a period of two years, except that such period shall be reduced to six
months in the event the Company terminates Mr. Vecchiolla's employment other
than for Cause or Mr. Vecchiolla terminates his employment for Good Reason (as
such terms are defined in the employment agreement). The agreement also contains
a nonsolicitation provision applicable during the term and for two years after
termination of Mr. Vecchiolla's employment with the Company, except that such
period shall be reduced to six months in the event the Company terminates Mr.
Vecchiolla's employment other than for Cause or Mr. Vecchiolla's terminates his
employment for Good Reason.
In January 2003, the Company entered into an employment
agreement with Mr. Krall. Pursuant to such employment agreement, Mr. Krall is to
receive an annual base salary of $375,000. In May, 2003, Mr. Krall's employment
agreement was amended to increase his annual base salary to $450,000. In
addition, Mr. Krall is eligible to receive a bonus for each year during the term
of his employment agreement in accordance with the Company's Management
Incentive Plan and such other bonuses that may be approved by the Board in its
sole discretion. The term of the agreement is through January 30, 2005. Pursuant
to the agreement, Mr. Krall performs his duties on a part-time basis, and is
required to devote approximately the same portion of his business efforts to the
performance of his duties as he has devoted to his duties to the Company since
it became a public company in 1996. Mr. Krall's agreement contains a noncompete
provision applicable during the term and extends for a period of two years,
except that such period shall be reduced to six months in the event the Company
terminates Mr. Krall's employment other than for Cause or Mr. Krall terminates
his employment for Good Reason (as such terms are defined in the employment
agreement). The agreement also contains a nonsolicitation provision applicable
during the term and for two years after termination of Mr. Krall's employment
19
with the Company, except that such period shall be reduced to six months in the
event the Company terminates Mr. Krall's employment other than for Cause or Mr.
Krall terminates his employment for Good Reason.
In January 2003, the Company entered into an employment
agreement with Mr. Torosian. Pursuant to such employment agreement, Mr. Torosian
is to receive an annual base salary of $300,000. In addition, Mr. Torosian is
eligible to receive a bonus for each year during the term of his employment
agreement in accordance with the Company's Management Incentive Plan. The term
of the agreement is through January 30, 2005. Mr. Torosian's agreement contains
a noncompete provision applicable during the term and extends for a period of
twelve months, except that such period shall be reduced to six months in the
event the Company terminates Mr. Torosian's employment other than for Cause or
Mr. Torosian terminates his employment for Good Reason (as such terms are
defined in the employment agreement). The agreement also contains a
nonsolicitation provision applicable during the term and for twelve months after
termination of Mr. Torosian's employment with the Company, except that such
period shall be reduced to six months in the event the Company terminates Mr.
Torosian's employment other than for Cause or Mr. Torosian terminates his
employment for Good Reason.
CHANGE OF CONTROL AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Pursuant to Mr. Drasner's employment agreement, in the
event the Company terminates his employment, other than for Cause, or if Mr.
Drasner terminates his employment with the Company for Good Reason, the Company
is required to pay Mr. Drasner the sum of (i) his base salary for a period of
two years following such termination and (ii) the aggregate amount by which all
then unvested stock options are in the money on the date of termination (less
the applicable exercise prices of the stock options).
Pursuant to Mr. Vecchiolla's employment agreement, in the
event the Company terminates his employment, other than for Cause, or if Mr.
Vecchiolla terminates his employment with the Company for Good Reason, the
Company is required to pay Mr. Vecchiolla the sum of (i) his base salary for a
period of 18 months following such termination and (ii) the aggregate amount by
which all then unvested stock options are in the money on the date of
termination (less the applicable exercise prices of the stock options).
Pursuant to Mr. Krall's employment agreement, in the event
the Company terminates his employment, other than for Cause, or if Mr. Krall
terminates his employment with the Company for Good Reason, the Company is
required to pay Mr. Krall (i) the sum of his base salary for a period of two
years following such termination and (ii) the aggregate amount by which all then
unvested stock options are in the money on the date of termination (less the
applicable exercise prices of the stock options).
Pursuant to Mr. Torosian's employment agreement, in the
event the Company terminates his employment, other than for Cause, or if Mr.
Torosian terminates his employment with the Company for Good Reason, the Company
is required to pay Mr. Torosian (i) the sum of his base salary for a period of
one year following such termination and (ii) the aggregate amount by which all
then unvested stock options are in the money on the date of termination (less
the applicable exercise prices of the stock options).
20
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS OF THE COMPANY
ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY
The Compensation Committee reviews the performance and
compensation levels for executive officers and sets salary and bonus levels and
option grants under the Company's incentive plans. The objectives of the
Compensation Committee are to correlate executive compensation with the
Company's business objectives and performance, and to enable the Company to
attract, retain and reward executive officers who contribute to the long term
success of the Company.
BASE SALARY
Base salaries of the executive officers are established by
evaluating the requirements of the position and the contribution of the
executive with respect to Company performance and the executive's
responsibilities. In determining executive officer salaries, the Compensation
Committee generally sets base salaries at or below competitive levels, with
total potential compensation (including bonuses and stock options) targeted at
or above competitive levels. The Compensation Committee relies on, among other
things, recommendations from the Chief Executive Officer in making such
determinations.
During 2002, Fred Drasner served as Chairman and Chief
Executive Officer of the Company. Mr. Drasner received a base salary of $750,000
in 2002, the same salary he received in 2001. The Compensation Committee
determined that, in light of the significant amount of time Mr. Drasner would be
devoting to the Company's review of strategic alternatives, relationship with
its Senior Lenders and efforts to improve sales and reduce costs, he should
continue at an annual base salary of $750,000 during 2002.
ANNUAL CASH BONUSES
The Company pays annual cash bonuses to its executive
officers in accordance with the terms of its Management Incentive Plan, which
provides for incentives based on the Company's performance as well as individual
performance. In addition, the Company may pay additional bonuses as approved by
the Board of Directors in its sole discretion. In accordance with the Management
Incentive Plan, the Compensation Committee awarded Mr. Drasner a bonus of
$562,500 for 2002, which bonus was paid in 2003.
LONG-TERM INCENTIVES
The Compensation Committee believes that equity ownership
provides significant motivation to executive officers to maximize value for the
Company's stockholders and, therefore, periodically grants stock options under
the Company's incentive plans. The Compensation Committee determines the size
and frequency of option grants for executive officers after consideration of
recommendations of the Chief Executive Officer. Such recommendations are based
upon the relative position and responsibilities of each executive officer,
previous and expected contributions of each executive officer to the Company and
previous option grants to such executive officers. Stock options granted to
executive officers are generally nonqualified stock options with exercise prices
21
that equal or exceed the fair market value of the Company's Common Stock on the
date of grant and vest in such increments as may be determined by the
Compensation Committee.
In May 2002, the Compensation Committee awarded Mr. Drasner
options to purchase 250,000 shares of Common Stock, at an exercise price of
$0.41 per share. Mr. Drasner had not been awarded stock options in the past due
to the substantial interest he had in the Company through his limited
partnership interest in Applied Printing. Since Mr. Drasner's economic interest
in the Common Stock held by Applied Printing was, by agreement, to cease after
September 1, 2002, the Compensation Committee determined that it would be
appropriate to award Mr. Drasner stock options at that time.
SECTION 162(M)
Section 162(m) of the Internal Revenue Code of 1986, as
amended, generally sets a limit of $1 million on the amount of compensation
(other than certain enumerated categories, including performance-based
compensation) paid to executive employees 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 2002 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
John R. Harris, Chairman
John W. Dreyer
Philip Guarascio
David R. Parker
John R. Walter
John Zuccotti
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board
during 2002 were Messrs. Dreyer, Harris, Parker, Walter and Zuccotti, none of
which is or has been an officer or employee of the Company.
The Company engaged the law firm of Weil, Gotshal & Manges
LLP, at which John Zuccotti, a director of the Company, is senior counsel, to
perform legal services for the Company in 2002 and 2003.
22
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Zuckerman beneficially owns the shares of Common Stock
owned by Applied Printing and beneficially owns a majority of U.S. News and
Daily News. Additionally, Mr. Drasner is a minority limited partner of Applied
Printing, U.S. News and Daily News. The following is a description of certain
transactions between the Company and each of Applied Printing, U.S. News, and
Daily News, as well as transactions between the Company and entities affiliated
with certain other directors of the Company.
CONTENT MANAGEMENT AND DIGITAL IMAGING SERVICES FOR AFFILIATES
The Company provides content management services to a New
York Daily News periodical, digital archiving services to the New York Daily
News, and certain advertising make-up and related graphic services for Daily
News' publications. The Company and Daily News are currently negotiating a new
production agreement for such services that would extend the term to 2005. The
Company also provided content management services to Applied Printing and U.S.
News during 2002.
The Company's 2002 revenues included approximately
$423,000, $2,909,000, and $1,642,000 for services performed for each of U.S.
News, Daily News, and Applied Printing, respectively. Included in this revenue
figure for 2002 is approximately $120,000 recognized under an agreement by Agile
Enterprise, Inc., a wholly-owned subsidiary of the Company, to license certain
software to U.S. News.
SHARED SERVICES AGREEMENT
The Company entered into a shared services agreement in
1999 with U.S. News and Daily News, under which both U.S. News and Daily News
provide certain legal, computer, and administrative services to the Company.
Under this agreement, the Company pays a percentage of the costs associated with
U.S. News and Daily News employees who provide such services to the Company
based on the percentage of each such employee's total time that is devoted to
Company-related matters, including compensation for services provided by Mr.
Krall. See "Executive Compensation - Summary Compensation Table" above. The term
of the agreement is for one year and is renewable annually. During 2002, the
Company incurred charges of approximately $970,000 for such services. In May
2003, the Board of Directors approved amending this Shared Services Agreement to
increase certain costs paid by the Company in order to more accurately reflect
services actually provided.
OTHER TRANSACTIONS
During 2002, the Company subleased space at the
headquarters of U.S. News in Washington, D.C., from U.S. News. The amount
incurred by the Company for the sublease in fiscal year 2002 totaled
approximately $47,000 and corresponded to the amounts U.S. News was required to
pay for the space under its lease.
The Company subleases space at its corporate headquarters
from U.S. News, for which the Company incurred charges of approximately $390,000
in 2002.
The Company subleases certain Daily News space at its New
York location, for which the Company incurred charges of approximately $104,000
in 2002.
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Applied Printing provides printing services to the Company
on a per-project basis. In 2002, the Company incurred charges of approximately
$423,000 for such services.
The Company received services from Weil, Gotshal & Manges
LLP, at which Mr. Zuccotti is employed, as disclosed in "Compensation Committee
Interlocks and Insider Participation" above.
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph and table show the cumulative total
stockholder return on the Common Stock compared to the AMEX Composite Index and
a self-constructed peer group index for the periods between December 31, 1997
and December 31, 2002. Currently, the peer group is composed of Schawk, Inc.,
which is a public company with significant independent operations in the
prepress industry, and R.R. Donnelly & Sons, Co. and Quebecor World, Inc.,
commercial printers that provide prepress services. Previously, the peer group
included American Greetings Corporation (Class A), which is a publishing
company, and Schawk, Inc. The Company sold its publishing services business in
April 2002. Accordingly, it is no longer appropriate to include American
Greetings Corporation in the peer group. The total stockholder return on each
company included in the peer group index has been weighted according to such
company's capitalization at the beginning of each period. The graph assumes $100
was invested in (1) the Common Stock, (2) the AMEX Composite Index and (3) the
peer group index, and assumes reinvestment of dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG APPLIED GRAPHICS TECHNOLOGIES, INC.,
THE AMEX MARKET VALUE (U.S. & FOREIGN) INDEX,
A NEW PEER GROUP AND AN OLD PEER GROUP
------------------- ----------------------------- ------------------------ ----------------------- -----------------------
APPLIED
GRAPHICS
TECHNOLOGIES, AMEX MARKET VALUE
INC. (U.S. & FOREIGN) NEW PEER GROUP OLD PEER GROUP
------------------- ----------------------------- ------------------------ ----------------------- -----------------------
12/97 100 100 100 100
------------------- ----------------------------- ------------------------ ----------------------- -----------------------
12/98 30.99 99.99 121.24 108.17
------------------- ----------------------------- ------------------------ ----------------------- -----------------------
12/99 16.2 132.8 79.26 64.38
------------------- ----------------------------- ------------------------ ----------------------- -----------------------
12/00 2.54 126.49 89.8 31.67
------------------- ----------------------------- ------------------------ ----------------------- -----------------------
12/01 0.41 119.31 94.87 45.85
------------------- ----------------------------- ------------------------ ----------------------- -----------------------
12/02 0.36 100.65 80.99 50.27
------------------- ----------------------------- ------------------------ ----------------------- -----------------------
* $100 invested on 12/31/97 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.
The peer group identified above was selected because the
Company believes that such group represents companies who maintain significant
operations in the prepress industry.
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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 SEC and The
American Stock Exchange 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
or 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 SEC to furnish the Company with copies of
all Section 16(a) reports (specifically, Forms 3, 4 and 5) they file. Based
solely on the Company's review of the copies of such forms it has received and
written representations from certain reporting persons that they were not
required to file Forms 5 for the last fiscal year, the Company believes that all
of its officers, directors, and greater than ten percent beneficial owners
complied with all filing requirements applicable to them with respect to
transactions during fiscal 2002.
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SIGNATURE
After due inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this Statement is true,
complete and correct.
APPLIED GRAPHICS TECHNOLOGIES, INC.
/s/ Kenneth Torosian
------------------------------------------
Name: Kenneth Torosian
Title: Senior Vice President and
Chief Financial Officer
Dated: July 3, 2003
26