UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number 0-28208
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3864004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28 WEST 23RD STREET
NEW YORK, NY
(Address of principal executive offices)
10010
(Zip Code)
212-929-4111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of registrant's voting stock held by non-affiliates
as of February 28, 1998 was $763,864,610.
The number of shares of the registrant's Common Stock outstanding as of February
28, 1998, was 17,904,486 shares.
The following documents are hereby incorporated by reference into this Form
10-K:
(1) Portions of the 1998 Proxy Statement/Prospectus included as part of
the Registrant's Registration Statement on Form S-4 to be filed with
the Securities and Exchange Commission (Part III).
TABLE OF CONTENTS
PAGE
ITEM PART I
1. Business 1
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
Executive Officers of the Company 9
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 11
6. Selected Financial Data 11
7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 12
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
39
PART III
10. Directors and Executive Officers of the Registrant 40
11. Executive Compensation 40
12. Security Ownership of Certain Beneficial Owners
and Management 40
13. Certain Relationships and Related Transactions 40
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 41
Signatures 44
<PAGE>
PART I
Certain statements made in this Annual Report on Form 10-K are
"forward-looking" statements (within the meaning of the Private Securities
Litigation Reform Act of 1995). Such statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: the trend toward electronic distribution of content; the
efficiency of competitors or customers of the Company; the trend toward
outsourcing ancillary functions; the rate of expansion of services under the
agreement with General Motors; the securing of additional, or the renewal of
existing, on-site arrangements; the expansion of on-line distribution services;
the growth of the market for advanced digital imaging services; the Company's
expansion into broadcast media distribution services; generating additional
business from on-site customers; the successful entry into the event-driven and
retail digital photography markets; market acceptance of the Company's digital
photography product line; the rate of expansion of the Company's sales force;
cross-selling the Company's services; the rate of opening additional facilities;
the rate and level of capital expenditures; and the securing of additional
credit facilities.
Item 1. BUSINESS.
General
Applied Graphics Technologies, Inc. (the "Company") is an independent
provider of digital prepress services to magazine publishers, advertising
agencies, entertainment companies, automobile manufacturers, and retailers. The
Company's largest customers in each of these categories include McGraw-Hill,
Newsweek and Conde Nast; The InterPublic Group of Companies and Team One
Advertising; The Walt Disney Company and Time Warner; General Motors; The Home
Depot and Sears Roebuck & Company. The Company provides its services on an
outsourcing basis either in the Company's own facilities or onsite at the
customer's location, emphasizing its ability to provide a full range of services
more effectively and economically than its customers could internally. In 1994,
the Company began to provide advanced digital imaging services to meet the
evolving needs of its customers. Digital archiving and distribution services are
now being provided to customers including General Motors, Time Warner's Time
Picture Collection, CBS, ABC, Citibank, the American Society of Media
Photographers and the United States Holocaust Memorial Museum.
The scope of the Company's services and the range of customers that can
make use of these services have expanded with the emergence of electronic
distribution channels and the ability to create digital archives. "Prepress
services" combine text with black and white and full-color pictures and graphics
into page layout format, and have traditionally been used to prepare content for
reproduction in print. A similar process is required to digitize information for
electronic distribution, such as on the World Wide Web and for CD-ROM.
Publishers, advertising agencies, entertainment companies and others are
increasingly exploiting these new distribution channels for marketing and
promotion, for targeting individual or groups of customers or for reselling
their graphic images in a cost-effective manner.
The Company uses its Digital Link System and other commercially available
systems to provide digital imaging services. The Digital Link System uses an
integrated suite of software applications that allows the Company to offer
customers the ability to capture, edit, store, archive, retrieve, and distribute
their content in a digital environment.
Technological advances in desktop publishing and graphics software have
heightened differences between image-intensive "full service" users of prepress
services and other customers with less demanding needs, whose paramount concern
is price. The Company believes that its primary customers, which are full
service users, are recognizing production complexities, the increasing use of
color and the need to remain abreast of technological developments and,
accordingly, are increasingly relying on outsourced digital prepress and digital
imaging services. The Company intends to continue to expand its base of
traditional prepress service users by emphasizing its ability to provide a full
range of high quality digital prepress and digital imaging services.
In December 1996, the Company acquired the assets of SpotLink, Inc.
("SpotLink"), a subsidiary of Western International Media Corporation
("Western"), which is owned by The InterPublic Group of Companies. In September
1997, the Company acquired the broadcast media distribution business of Winkler
Video Associates, Inc. ("Winkler"). Through the SpotLink and Winkler
acquisitions, the Company provides volume duplication and distribution of radio
and television advertisements, a service known as "dub and ship," to broadcast
stations. With the expansion into the broadcast media distribution business, the
Company increased its service offerings to existing customers, including The
Walt Disney Company and General Motors.
The Company currently maintains a network of twenty-three principal digital
prepress facilities located in metropolitan areas to provide localized services
to its customers, many of which have offices nationwide. Additionally, the
Company provides its on-site services at eighteen customer locations, often
under multi-year contracts. The Company believes that performing its services
on-site strengthens its relationship with its customers and broadens their
demand for the range and volume of the Company's services. Four of these on-site
service locations also perform services for other customers.
The Company was incorporated in Delaware on December 12, 1995. On April
16, 1996, upon the Company's Registration Statement on Form S-1 under the
Securities Act of 1933 being declared effective, the Company acquired
substantially all of the assets and certain related liabilities relating to the
prepress, digital imaging services, and related businesses of Applied Printing
Technologies, L.P. ("Applied Printing").
Services
The Company provides a full range of digital prepress, outsourced
facilities management, advanced digital imaging, and broadcast media
distribution services.
Digital Prepress Services. Digital prepress services are necessary to
combine text with black and white and full-color picture and graphic content
into page format for publication in print and distribution on the World Wide
Web, e-mail, proprietary on-line services, and CD-ROM. In general, the prepress
services provided by the Company begin with scanning the customer's content into
digital format. Scanning separates color content into component colors and
converts them into colors used in the printing process - cyan, magenta, yellow,
and black. Once the image is separated, two file formats of the image are
produced - high resolution for final output and low resolution for customer
design and/or layout. The low resolution file is sent to the customer on-line or
on a computer disk, and the customer can position the low resolution file into
its page on its own desktop system and size and crop the image as desired.
Simultaneously, the Company personnel compare the "separated" image on the high
resolution file to the original picture and use specialized computer software to
refine the colors and to make enhancements to the image as the customer
requests. Throughout this process, the Company works closely with the creative
and artistic directors of the customer. Often, multiple iterations of the image
are exchanged by the Company and the customer before the final, high resolution
image is set in the page. The Company personnel then replace the low resolution
image and perform certain technical processes (such as masking and trapping) to
enhance the quality of the final product. The page is then output to four
separate color files (film or transmission) that when processed will generate
four pieces of film used to create four printing plates per page. The image is
generated in print by the cumulative effect of the plates. Similarly, content to
be distributed on-line is output to three colors (red, green, and blue) which is
converted from the final high resolution file. In performing prepress services,
the Company frequently uses the Digital Link System, which performs several
prepress functions efficiently. See "- Technology."
Capitalizing on these services, the Company established a Magazine Ad
Management Division and Newspaper Ad Management Division to provide
comprehensive digital prepress and print content management services to
magazines and newspapers. The Magazine Ad Management Division provides digital
advertising storage management and electronic transmission services to magazine
publishers, advertising agencies, and printers nationwide using the Digital Link
System. The Company has a multi-year agreement with Time, Inc., to provide a
variety of digital ad management services to People, Time, Sports Illustrated,
Entertainment Weekly, Fortune, and Life and also has a multi-year agreement with
U.S. News & World Report, L.P., to provide such services. The Newspaper Ad
Management Division provides services to the New York Daily News and the Newark
(New Jersey) Star-Ledger, including electronic design, digital advertising
composition, and transmission of display advertising.
During 1997, the Company acquired the operations of several prepress
companies, including all of the assets of MBA Graphics, Inc. ("MBA"), an
unaffiliated provider of prepress production, direct mailing, and brokered
commercial printing services primarily to The Home Depot at its four facilities.
Pursuant to the acquisition agreement with MBA, the Company may be required to
make additional payments, in a combination of cash and the Company's common
stock, based upon MBA's financial performance for calendar years 1997, 1998, and
1999. The Company also acquired certain assets of Star Graphic Arts Co., Inc.,
an unaffiliated prepress company in Northern California, and all of the assets
of Vancor Color, Inc. ("Vancor"), an unaffiliated provider of prepress services
in Southern California. Pursuant to the acquisition agreement with Vancor, the
Company may be required to make additional payments to Vancor in shares of the
Company's common stock based upon Vancor's financial performance for the
calendar years ended December 31, 1997, 1998, and 1999.
Outsourced Facilities Management Services. In response to demands of
certain customers, the Company performs services at a customer's location rather
than at one of the Company's facilities. In addition, the Company may perform
services at a primary customer's location for other customers as capacity
allows. Contracts with customers for on-site work are often for three years or
more and for a base amount of services, although the Company believes its
on-site presence generates additional business in the form of digital imaging
services and more prepress work from that customer. If the primary customer's
work flow is high, or if there is an equipment failure at that location, the
Company augments on-site staff and equipment by working on the primary
customer's projects at the Company's other facilities. The Company's on-site
services vary according to the customer's needs. For some publications, such as
Newsweek, US. News & World Report, and BusinessWeek, the Company is responsible
for operating, maintaining, and staffing the on-site prepress equipment and for
performing all prepress services for editorial content. Performing work on-site
permits the Company to better understand its customers' preferences and workflow
demands. On-site work also reduces the time needed to approve or discuss
revisions with the customer and to deliver the final product to the customer.
These advantages enable the Company to be more responsive and to increase the
level and type of service it provides. For example, when performing prepress
work on-site, the Company has the ability to introduce the customer to its
archiving and other digital imaging services.
Advanced Digital Imaging Services. The Company's Digital Imaging Services
Division ("DISD") commenced work on the Digital Link System in 1995 as a project
for the New York Daily News to assist the newspaper with its demanding prepress
and related image storage and retrieval functions. Using integrated equipment
and proprietary software, the Digital Link System offers a cost-effective,
easy-to-use method to store, manipulate, repurpose, and distribute digital
images. The open architecture of the Digital Link System enables the Company to
tailor the system to each customer's digital imaging needs. The Company uses the
Digital Link System to provide advanced digital imaging services, such as
archiving and online distribution to both traditional prepress and new groups of
customers. These customers are increasingly looking to distribute their content
digitally through traditional media channels and to exploit new distribution
methods, such as the World Wide Web, e-mail, proprietary on-line services, and
CD-ROM, all of which use digitized content.
The Company uses its Digital Link System to create digital archives of
photographic prints, slides, film, and other images. Archiving images provides
the customer with an organized, easily accessible digital format in which its
images can be retrieved, distributed, substituted, and re-edited. Because the
archived images are in digital form, they may be reused without having to be
rescanned, thereby saving time and money, and are in a format suitable for print
or on-line distribution. The Company's archiving services are tailored to each
customer by evaluating the content and the customer's needs and provided to the
customer as an open system archive. Once the images are digitized, the Company
customizes a database that allows the customer to quickly access images using
keywords, text searches, or bar-codes. The archive may be created at the
customer's location or the Company's facilities depending on the size of the
library. The Company's archiving services are provided under long term
contracts, are typically related to millions of images, and are usually priced
on a per image basis according to the Company's evaluation of the customer's
images and the scope of services to be provided.
The Company has developed a family of digital photography systems,
including a digital portrait system and a portable digital events system. These
systems integrate a suite of proprietary Digital Link software applications with
specialized hardware and are based on an open architecture that supports the
leading digital cameras and printers. The Company recently consummated the
acquisition of two digital events photography businesses and now provides
complete digital event photography services at various locations, including
sporting events, stadiums, and resorts. To date the Company has not derived
significant revenues from these services.
Broadcast Media Distribution Services. Through the SpotLink and Winkler
acquisitions, the Company entered the broadcast media distribution business in
which the Company receives a master copy of a commercial on video or audiotape,
duplicates the tape, and ships the copies via air freight to radio and
television stations for rebroadcast. As part of the SpotLink acquisition, the
Company entered into a multi-year contract under which Western is obligated to
direct all of its broadcast media distribution business to the Company. The
Company has agreed to provide broadcast media distribution services to General
Motors under its contract to act as General Motors' digital content manager.
Related Services
At its facility in Los Angeles, California, the Company provides printing
services performed principally for entertainment customers, such as The Walt
Disney Company. The Company prints movie posters, CD covers, video covers, and
promotional materials. Revenues from these printing services represented less
than 10% of the Company's revenues in 1997. The Company also licenses software
and sells hardware related to the Digital Link System.
Technology
The Company aggressively implements technological advances in order to
improve and expand its prepress and advanced digital imaging and digital imaging
related services. This commitment is demonstrated by its Digital Link System and
its internal communications and satellite transmission capabilities.
The Digital Link System. The Digital Link System is a suite of proprietary
software applications that integrates a wide variety of digital imaging
hardware. Operating over large area networks, including the World Wide Web, this
networked set of applications is used to capture, edit, store, archive,
retrieve, and distribute large numbers of digital assets, including images,
video, and audio. Its features include zooming, enlarging, side-by-side
comparison, sorting, categorizing, and text annotations, as well as a variety of
image optimization tools including cropping and retouching. Images that are
archived using the system may be easily retrieved through text and key word
searches, manipulated by computer, and distributed through both conventional
print as well as electronic distribution channels that require digitized
content. To date, this system has been used predominantly to process graphic
images, although it also is capable of capturing, storing, and retrieving audio
and video files.
The Digital Link System uses software to integrate a variety of different
image capture devices such as digital cameras, drum and flatbed scanners, wire
services, and other suitable high capacity storage devices. Optional software
from the Company's suite of applications may be added to suit each customer's
image management needs. For example, a customer may add a Photo CD Gateway,
which interfaces with a scanner to capture images. A customer may also select
the Digital Link Photo Editor that categorizes, reviews, and selects images
stored in the Digital Link System. The Digital Link System includes customized
software that permits the system to interface with virtually any equipment the
customer may already have, such as a proprietary or "closed" prepress system or
existing desktop systems. The software used in the Digital Link System was
created by a team headed by Scott A. Brownstein, Executive Vice President,
Digital Imaging Services Division of the Company. Mr. Brownstein played a major
role in the development of many of the technologies used in Kodak's patented
Photo CD system.
The Digital Link System enhances the delivery of prepress services. For
example, the system enables a user to quickly and easily retrieve an image, and
then enlarge, reposition, and retouch the image as if using stand-alone prepress
computer equipment.
Communications Networks. Many of the Company's facilities are connected by
a data network system that enables the Company to allocate prepress work among
its facilities for timely completion. The Company has also established
communications links among its facilities and customer sites at which the
Company is providing services. Additionally, the Company uses a satellite system
to deliver final prepress work in digital form to eleven printing plants of
eight unaffiliated printing companies. The Company leases transmission time on
three frequencies on a year-round basis and has installed satellite transmitting
equipment at its facilities and receiving equipment at the printing sites. This
system was established originally to assist magazine publishers in meeting their
demanding production cycles but has been expanded to include transmissions for
other publications. The connection to multiple printing sites allows these
publications to be printed at several locations in order to meet distribution
schedules. The Company personnel working at the printing plants on this network
produce the film required to create printing plates and receive digital data
used to drive computer to plate equipment. In addition, the Company personnel
coordinate and calibrate the receiving equipment in an effort to ensure
consistency in the final product among the various printing sites.
Customers
The Company's customer base encompasses a wide variety of enterprises and
organizations, including leading publishers, advertising agencies, entertainment
companies, automobile manufacturers, and catalog and other businesses focused on
quality print and graphic images and the distribution of advertising content. In
1997, the Interpublic Group of Companies produced approximately $19.1 million in
revenues, or 10.3%, of the Company's total revenues, through its various
advertising agencies, including the work provided to the broadcast media
distribution business under the multi-year contract associated with the
acquisition of SpotLink. The Company's twenty largest nonaffiliated customers
accounted for approximately 53.4% of the Company's revenues in 1997. Revenues
from many of the Company's large customers, however, are an aggregation of
revenues for services provided by the Company to different groups or
publications within a customer. For example, the Company provides services to
twelve divisions of The Walt Disney Company, each of which plays a major role in
the selection of a prepress vendor. In 1997, approximately 9.1% of the Company's
total revenues came from business with affiliates. Such affiliates include U.S.
News & World Report, L.P., Daily News, L.P., and Applied Printing, companies
beneficially owned by Mr. Mortimer B. Zuckerman, the Chairman of the Board of
Directors of the Company, and Mr. Fred Drasner, Chairman, Chief Executive
Officer, and a director of the Company, as well as with Snyder Communications,
Inc., of which both Messrs. Zuckerman and Drasner are members of the Board of
Directors and in the aggregate own approximately 13% of the outstanding common
stock. An additional 34.8% of the Company's revenues were under multi-year
contracts or arrangements with nonaffiliated customers. As is customary in the
prepress industry, in most cases there is no contractual arrangement that would
prevent prepress customers from selecting a competitor of the Company to perform
some or all of their prepress work.
Sales and Marketing
To date, the Company has relied primarily on its senior officers, general
managers and regional sales organizations to market its prepress and digital
imaging services. Because they have conducted business together over several
years, personnel at each facility have established strong working relationships
with particular customer industries that are prevalent around its location. For
instance, personnel at the Los Angeles facilities have strong relationships with
the entertainment industry, at the Detroit facility with the automotive
industry, and at the New York facilities with the publishing industry. These
relationships also extend to advertising agencies that perform work for these
customers. This specialization within certain industries developed over the
Company's years of service performing prepress work.
The Company continues to expand its sales force to focus on on-site and
outsourcing arrangements for customers currently performing all or a portion of
their prepress work in-house. Because such a decision to outsource is made at a
level higher than prepress vendor selection decisions, the Company believes that
a separate sales force is more conducive to obtaining such business.
The Company is also is in the process of expanding its sales force to
market digital imaging services to traditional and new groups of customers.
Prior to the latter half of 1996, such services have been marketed only by
several senior officers of the Company. The Company is also expanding the sales
force of its SpotLink division. The Company believes its long-term agreement
with Western, the largest media buyer in the U.S., under which Western will
direct its "dub & ship" business to the Company, creates a significant sales
opportunity. Additionally, the Company's sales force has begun cross-selling the
broad range of its services.
Vendor Arrangements
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 to the Company based upon a specified dollar volume of products
purchased by the Company over a given time period.
Competition
Prepress services are performed primarily by three types of businesses:
(i) independent providers that typically do not also offer commercial printing
services as a principal part of their overall business, (ii) commercial printers
that provide prepress and other image management services as an adjunct to their
printing businesses, and (iii) customers that perform certain services
themselves using available desktop publishing technologies. The industry
currently is extremely fragmented and serviced by a large number of regional and
local businesses and few national enterprises. Commercial printers providing
prepress services generally compete on the basis of the convenience of "one-stop
shopping" for prepress and printing services, and on the basis of price by
bundling the cost of prepress services with the printing cost or by
substantially discounting the separate prepress services. A customer might
prefer services by a printer where price is the primary consideration and
quality of and control over the artistic process are not key concerns.
Independent providers, such as the Company, generally are able to offer a higher
level of specialization, customization, and individualized service and also
provide customers with the flexibility to select the printer of their choice,
thus giving the customer greater leverage in negotiating for printing services.
A customer would look to perform its own prepress services internally if the
customer believed that control over the process was advantageous and quality of
the product was not paramount. Customers typically provide for themselves only a
portion of the prepress services they need, augmenting their own capabilities,
as needed, with third-party services usually from independent prepress
providers.
The Company competes for prepress work on the basis of quality of service,
price of service, and the ability to satisfy demanding customers. The Company
believes that not every prepress provider can meet the demands of the types of
customers served by the Company. Among this smaller group, the Company competes
primarily based on historical reliability of service and on price. The Company
believes it maintains competitive prices by efficiently implementing new
technologies in its digital imaging and prepress businesses. Additionally, the
Company believes that it is able to maintain competitive prices by coordinating
its customers' in-house capabilities with its own equipment, thereby minimizing
redundant processes and lowering customer costs. In addition, the Company
competes for prepress work based on its ability to provide other digital imaging
services. For example, the Company provides digital archiving services for
prepress customers at a lower cost than if purchased on a stand-alone basis
because of the Company's ability to efficiently integrate the prepress and
archiving processes.
Independent prepress providers typically provide services based upon a
customer's request for which the provider is paid on a per-job basis. In most
cases, there is no contractual arrangement that would prevent a customer from
changing prepress providers on a per-project basis except for the Company's
typical on-site arrangement for which a multi-year contract is obtained.
In the publication area, the Company competes with numerous regional
prepress companies, such as Spectragraphics in the New York area, TSI Graphics
in St. Louis, and NEC in Tennessee. The Company competes nationally for
publication business with American Color. Additionally, the Company competes
with large commercial printers, such as R. R. Donnelley & Sons, Co., World Color
Press, Inc., and Quad/Graphics, Inc. These commercial printers typically offer
major price incentives through multi-year contracts for publications to do both
their printing and prepress work at that printer's facilities. The Company's
primary national competitor for advertising agency business is Wace, U.S.A.,
headquartered in Chicago, and a number of smaller regional prepress companies.
The Company competes with many vendors in providing advanced digital imaging
services, including Wace, U.S.A. and R. R. Donnelley & Sons, Co.
In the area of digital imaging and archiving, the Company competes with a
small number of software-development companies marketing products to manage
image databases. The Company believes, however, that the breadth of service
(i.e., associated scanning and output options) provided by the Company through
its Digital Link System surpasses that of these other products. For example,
Cascade and SRA are competing database software products; however, in both
cases, the Company has secured ancillary business (e.g., scanning services and
archiving) with enterprises using these competing products. T-l is a production
and archiving alternative developed specifically for the newspaper market, and
is in direct competition with the Company's Digital Link System for customers in
the newspaper-publishing industry. The Company believes that its
fully-integrated system offers greater flexibility than its competitors'
systems, which are primarily stand-alone databases.
In the area of retail photography and events imaging, competition to the
Company's offerings is mainly in the form of small software shops offering
digital solutions, such as EPS, Castleworks, and ANSI. The Company believes that
its ability to effectively market its products and support its installations
surpasses the ability of its competitors. Various larger companies, such as
Polaroid and Kodak, compete with the Company as equipment vendors and offer more
fully equipped systems that utilize hardware components manufactured by their
respective parent companies, unlike the Company's offerings for retail
photography and events imaging, which are modular and capable of integrating
equipment (e.g., digital cameras and dye-sublimation printers) from virtually
any leading manufacturer.
In the broadcast media distribution business, the Company competes with
many local and/or regional suppliers as well as national suppliers, such as
Vyvx, Inc., a subsidiary of The Williams Companies, Inc., Digital Generation
Systems, Inc., and VDI Media. These services are typically provided on a per-job
basis. The Company generally has no contractual arrangements that would prevent
a customer from changing providers. The Company believes competition is based on
quality of duplication, speed, and reliability of distribution as well as price.
Employees
As of December 31, 1997, the Company had approximately 1,757 full-time
employees, approximately 608 of whom are salaried employees and approximately
1,149 of whom are hourly employees. Approximately 144 of the Company's employees
at two facilities, one each in Chicago and Los Angeles, primarily in the area of
production, are covered by two collective bargaining agreements with the Graphic
Communications International Union that expire August 31, 1999, and December 31,
1999, respectively. The Company has never experienced a work stoppage and
believes that its relationships with its employees, both unionized and
nonunionized, are satisfactory.
Intellectual Property
The Company has a copyright in the software comprising the Digital Link(R)
System. Copyrights do not preclude competitors from developing comparable
software. The Company does not currently have any patents. The Company owns the
registered trademarks "Applied Graphics Technologies," "Digital Link," "AGT,"
and other marks used in its business.
Recent Developments
In February 1998, the Company entered into a definitive agreement to merge
Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a
newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal
year ended March 31, 1997, Devon had total assets, revenues, and operating
income of $163.8 million, $209.5 million, and $29.1 million, respectively. Under
the terms of the agreement, which is subject to regulatory approval and the
approval of the Company's and Devon's stockholders, the Company will pay $30 per
share in cash and distribute 0.6 share of the Company's common stock in exchange
for each outstanding share of Devon common stock. The total consideration to be
paid is estimated to be $450 million including transaction costs. To fund the
cash portion of the merger consideration, estimated to be approximately $230
million including the transaction costs, the Company has a fully-underwritten
commitment from a commercial bank that would increase its borrowing capacity to
$250 million. This commitment expires on June 15, 1998. The Company is also
contemplating other financing alternatives to fund all or part of the cash
portion of the merger consideration.
In January 1998, the Company acquired all of the assets of Flying Color
Graphics, Inc. ("Flying Color") in exchange for $18.9 million, 68,103 shares of
the Company's common stock, and the assumption of certain liabilities. Flying
Color was an unaffiliated provider of prepress services to various retailers,
including Spiegel, with 1997 revenues of approximately $18.7 million. Flying
Color operates five facilities located throughout the Midwest.
<PAGE>
Item 2. PROPERTIES
The Company leases its corporate headquarters in New York City and operates
twenty-three principal digital prepress facilities at the locations indicated
below. Four of these facilities are on-site facilities that also provide
services to other customers as capacity allows.
New York City Northern New Jersey
(3 facilities) (3 facilities)
Atlanta, Georgia Central Illinois
(3 facilities)
Boulder, Colorado Rochester, New York
Chicago, Illinois San Diego, California
(2 facilities)
San Francisco, California
Detroit, Michigan metropolitan area
(2 facilities) (2 facilities)
Los Angeles, California Washington, D.C.
metropolitan area
(2 facilities) Indianapolis, Indiana
The Company also provides on-site services at fourteen other customer
locations in New York City, New Jersey, Connecticut, California, and Illinois.
At these on-site facilities, services are performed for a single customer. In
addition, the Company maintains broadcast media distribution centers in New York
City, Los Angeles, and Wilmington, Ohio, and operates digital photography
businesses at two customer locations in Florida. Except for one of the Los
Angeles and two of the Central Illinois prepress facilities, which are owned by
the Company, the prepress and broadcast media distribution facilities are
operated under leases that expire in 1998 through 2002. The Company believes
that its facilities are adequate to meet its needs.
Item 3. LEGAL PROCEEDINGS.
The Company is not subject to any material litigation, nor to the Company's
knowledge is any material litigation currently threatened against the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table lists the executive officers of the Company. Officers
are appointed by the Board of Directors and serve at the discretion of the Board
Name Age Position
Fred Drasner.......... 55 Chairman and Chief Executive Officer, Director
Melvin A. Ettinger.... 57 Vice Chairman and Chief Operating Officer, Director
Diane Romano.......... 47 President
Scott A. Brownstein... 49 Executive Vice President, Digital Imaging Services
Division
Martin D. Krall....... 57 Executive Vice President, Chief Legal Officer and
Secretary, Director
Louis Salamone, Jr.... 51 Senior Vice President and Chief Financial Officer
Georgia L. McCabe..... 43 Senior Vice President, Digital Imaging Services
Division
Fred Drasner, Chairman and 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 Chief Executive Officer
of U.S. News & World Report, L.P. since 1985, and President of U.S. News & World
Report, L.P. from 1985 to February 1997, 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.
Melvin A. Ettinger, Vice Chairman, Chief Operating Officer and a director
of the Company, joined the Company in April 1996. From January 1994 to March
1996, he served as President and Chief Executive Officer of Xerox Graphic
Systems, which conducts research and development of products to replace film. 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 1990 to 1994.
Diane Romano, President of the Company, served as Executive Vice President
of Applied Printing from 1993 to 1995 where she had overall responsibility for
prepress and digital imaging services, sales, operations and technical
developments. Ms. Romano served as Senior Vice President of the Publication and
Catalog Division of Applied Printing from 1988 to 1993.
Scott A. Brownstein, Executive Vice President, Digital Imaging Services
Division, was the Senior Vice President and General Manger of DISD from 1993 to
1995 where he was responsible for developing, manufacturing and marketing the
Company's digital imaging services. Prior to joining the Company, Mr. Brownstein
served from 1988 to 1993 as Manager of Advanced Development CD Imaging Division
at the Eastman Kodak Company, where he was responsible for the design,
development and implementation of Kodak's Photo CD technology and end user
technology for Photo CD.
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 the
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.
Louis Salamone, Jr., Senior Vice President and Chief Financial Officer of
the Company, joined the Company in 1996. He previously served as Vice President
and Chief Financial Officer of Nextel Communications, Inc., a provider of
wireless communications services, from September 1994 through May 1996. He was a
partner in Deloitte & Touche LLP, an international accounting and consulting
firm, from June 1980 through September 1994.
<PAGE>
Georgia L. McCabe, Senior Vice President, Digital Imaging Services
Division, was the Senior Vice President, Marketing and Business Development of
DISD at the Company from 1993 to 1995 where she was responsible for developing
the overall business and marketing strategies for the division. Prior to joining
the Company, Ms. McCabe served from 1991 to 1993 as Worldwide Director of
Marketing, Commercial CD Imaging at the Eastman Kodak Company, where she was
responsible for developing and implementing corporate strategies for marketing
Photo CD products.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company commenced trading on April 17, 1996, the
date of its initial public offering. The Company's common stock is traded on the
Nasdaq National Market. The following table sets forth the high and low sales
price for each full quarterly period during which the common stock was traded.
1997 1996
-------------------- -------------------
High Low High Low
--------- ---------- --------- ---------
First quarter 35 3/8 25 1/8
Second quarter 39 3/4 28 3/8
Third quarter 57 7/8 36 1/4 16 10 1/2
Fourth quarter 61 1/4 43 3/4 29 1/8 14 3/4
As of March 20, 1998, there were 3,309 holders of record of the Company's
common stock. No dividends have been paid since the date of the initial public
offering. The Company currently intends to retain any future earnings for use in
the operation of its business for the foreseeable future. There is no
restriction on the payment of dividends under the Company's revolving credit
facility other than obtaining approval of the financial institution.
Item 6. SELECTED FINANCIAL DATA.
The following financial data was prepared in accordance with the basis of
presentation discussed in Note 1 to the financial statements. No dividends have
been paid on the Company's common stock.
<TABLE>
<CAPTION>
December 31, 1997(b) 1996 1995 (a) 1994 (a) 1993
- -------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(In thousands of dollars, except per-share
amounts)
<S> <C> <C> <C> <C> <C>
Revenues $184,993 $132,725 $117,802 $115,986 $103,973
Income (loss) before provision for income taxes 22,707 10,820 (7,812) (8,757) 798
Net income (loss) 13,567 9,955 (7,812) (8,757) 798
Earnings per common share (c):
Basic 0.88 0.79
Diluted 0.83 0.77
Total assets 224,793 72,147 44,809 53,859 57,506
Long-term obligations:
Long-term debt 812 6,005 853 2,394 3,821
Obligations under capital lease 2,011 1,265 2,415 3,017 4,056
----------- ----------- ----------- ----------- -----------
Total $ 2,823 $ 7,270 $ 3,268 $ 5,411 $ 7,877
=========== =========== =========== =========== ===========
<FN>
(a) Amounts for 1995 and 1994 include reorganization charges of $3,060 and
$6,668, respectively (see Note 21 to the financial statements).
(b) Amounts in 1997 include a charge of $2,487 related to the Chapter 11
bankruptcy filing of one of the Company's on-site facilities management
customers, Nobody Beats the Wiz.
(c) Amounts in 1996 have been restated in accordance with Statement of
Financial Accounting Standards No. 128,"Earnings per Share."
</FN>
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OFOPERATIONS
On April 16, 1996 (the "Initial Offering Date"), the Company commenced the
initial public offering (the "Initial Offering") of its common stock. Concurrent
with the Initial Offering, the Company acquired substantially all of the assets
and certain liabilities relating to the prepress, digital imaging services, and
related businesses of Applied Printing (collectively, the "Prepress Business").
The acquisition of the Prepress Business has been accounted for in a manner
similar to a pooling of interests. Accordingly, the financial statements of the
Company reflect the combined results of operations of the Prepress Business
through the Initial Offering Date and the results of the Company thereafter.
On September 3, 1997, the Company's Registration Statement on Form S-3
under the Securities Act of 1933, as amended, relating to an offering of the
Company's common stock (the "Offering"), was declared effective. As part of the
Offering, the Company sold 3,000,000 shares of common stock, generating
proceeds, net of underwriters' discount and transaction expenses, of
$121,700,000. Also as part of the Offering, an additional 3,900,000 shares were
sold by certain stockholders of the Company, of which 3,650,000 shares were sold
by Applied Printing.
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto.
Results of Operations
Year Ended December 31, 1997, Compared with 1996
Revenues in 1997 increased $52,268,000 or 39.4% over 1996. This increase was
primarily due to $13,102,000 of revenues generated from the operations of
additional on-site facilities management contracts during 1997 that were in
effect for none or only a portion of 1996, $8,675,000 of increased revenues from
broadcast media distribution operations that have been acquired since 1996,
increased revenues of $6,016,000 in the digital imaging services division from
equipment and software license sales, archiving services, and digital
photography operations, $22,475,000 of additional revenues from the traditional
prepress business, and receipt of a nonrefundable payment of $2,000,000 related
to an agreement with one of the Company's major suppliers. Traditional prepress
revenues increased primarily from an overall increase in business at various
facilities, the results of MBA Graphics, Inc. ("MBA"), whose operations were
acquired in July 1997, increased business at the Foster City facility resulting
from the acquisition of the operations of Star Graphics Arts Co., Inc. ("Star
Graphics"), in May 1997, and additional revenue generated at the Detroit
facility as a result of the contract entered into with General Motors to provide
prepress services. The revenues from the contract with General Motors have not
been received at the pace originally anticipated. The Company has assigned a
senior executive to oversee this arrangement and plans certain capital
expenditures to further expand this business.
The gross profit percentage in 1997 was 35.1% as compared to 30.5% in 1996.
Gross profit increased $24,492,000 or 60.5% in 1997 as a result of the
additional revenues for the period as discussed above, increased business in
higher margin work, and the reduction of costs due to favorable pricing
negotiated with certain suppliers.
Selling, general, and administrative expenses in 1997 were $11,625,000
higher than in 1996 and as a percent of revenue increased slightly to 21.7% in
1997 from 21.5% in 1996. Although improvements were achieved from the increase
in revenues discussed above and increased business from on-site facilities
management contracts, which require less sales support than the traditional
prepress business, such improvements were offset by additional corporate
expenses incurred related to being a publicly-traded company, additional
expenses incurred as part of the Company's expansion and development of a
national sales force to better market its services, and expanded business at
certain operations.
In 1997, the Company incurred a charge of $2,487,000 primarily for
uncolledtable receivables related to the Chapter 11 bankruptcy filing of one of
its on-site facilities management customers, Nobody Beats the Wiz.
Interest expense in 1997 was $799,000 less than in 1996 primarily due to the
repayment of debt in April 1996 with the proceeds from the Initial Offering and
the repayment of borrowings under the Company's line of credit in September 1997
with the proceeds from the Offering. Interest income in 1997 was $1,227,000
higher than in 1996 due to investment earnings on the proceeds of the Offering.
The effective rate of the provision for income taxes increased in 1997 due
to the lower than would be expected rate in 1996 as a result of a reversal of
$4,070,000 of deferred tax asset valuation allowances in 1996 as compared to the
reversal of $881,000 of deferred tax asset valuation allowances in 1997.
In addition to its ongoing relationship with Applied Printing, the Company
also transacts business with other affiliates, including the Daily News, L.P.
and U.S. News & World Report, L.P., both of which are beneficially owned by the
Chairman of the Board of Directors of the Company (the "Chairman") and the Chief
Executive Officer of the Company (the "CEO"), as well as with Snyder
Communications, Inc., a provider of outsourced marketing services, of which both
the Chairman and the CEO are members of the Board of Directors and in the
aggregate own approximately 13% of the outstanding common stock. Sales to
related parties for the years ended December 31, 1997, 1996, and 1995, totaled
$16,845,000, $11,610,000, and $7,901,000, respectively, representing 9.1%, 8.8%,
and 6.7%, respectively, of the Company's revenues.
Year Ended December 31, 1996, Compared with 1995
Revenues in 1996 were $14,923,000 higher than in 1995 primarily due to
increased digital imaging services, additional on-site facilities management
contracts, and revenue from the ad management business that commenced in 1996.
Additional gross profit of $8,977,000 in 1996 resulted from the additional
revenues for the year as well as from an increase in the higher margin digital
business and improved gross profit in the traditional prepress business as a
result of the Company shedding low margin business and implementing more cost
effective production workflows in certain of its facilities. These improvements
resulted in an increase in the gross profit percentage to 30.5% in 1996 as
compared to 26.7% in 1995.
Selling, general, and administrative expenses decreased $4,975,000 in 1996
and represented 21.5% of revenue as compared to 28.5% in 1995. This decrease was
principally the result of non-recurring charges incurred in 1995 relating to
closed facilities and the reversal of certain bad debt and state sales tax
reserves no longer required in 1996. The sales tax reserve was established for
potential exposure with respect to an issue that was not raised by the
governmental authority within the statute of limitations period, which expired
in 1996. The reduction in the bad debt reserve reflects the results of an
improved collection effort in 1996. These decreases were partially offset by
increased costs associated with the new on-site facilities management contracts
and the ad management business. Selling, general, and administrative expenses in
1996 include $1,534,000 of costs allocated from related parties. Prior to the
Initial Offering, Applied Printing and other related parties provided general
management, treasury, financial reporting, and legal services. These expenses
were allocated to the Prepress Business on the basis of either specific
identification or an allocation methodology that management believes to be
reasonable.
Operating income in 1996 was $17,012,000 higher than in 1995 primarily due
to the improvements discussed above and the effects of a reorganization charge
of $3,060,000 incurred in 1995 with no corresponding charge incurred in 1996.
Interest expense in 1996 was $1,499,000 less than in 1995 primarily due
to the repayment of debt with the proceeds from the Initial Offering.
Prior to the Initial Offering, the Prepress Business was treated as a
partnership for Federal and state income tax purposes and was not subject to
income tax. A provision for income taxes is included for 1996 only for the
results of operations subsequent to the Initial Offering Date.
<PAGE>
Liquidity and Capital Resources
In September 1997, the Company received $121,700,000 in proceeds, net of
underwriters' discount and transaction expenses, from the Offering. Of such
proceeds, approximately $22,700,000 were used to repay the amount then
outstanding under the Company's revolving line of credit. The remaining proceeds
of approximately $99,000,000 were invested in marketable securities. The Company
plans to use a significant portion of the proceeds from the Offering to further
expand its business through acquisitions. During the remainder of 1997, the
Company used approximately $5,100,000 of the proceeds for acquisitions. Although
the Company continues to evaluate acquisition opportunities on an ongoing basis,
there is no assurance that the Company will successfully complete additional
acquisitions. See below for a discussion of acquisitions completed and pending
in 1998. The Company also received $5,641,000 from the exercise of 486,700 stock
options in 1997.
During 1997, the Company repaid the remaining $1,600,000 of the Applied
Printing Note with the proceeds from the maturity of marketable securities. In
1997, the Company entered into several sale and leaseback arrangements that
generated proceeds of $3,469,000. Such arrangements resulted in immaterial gains
that have been deferred and are being recognized as credits against future
rental expense. In November 1997, the Company renegotiated its existing
revolving line of credit, increasing its borrowing capacity to an aggregate of
$60,000,000, consisting of a $35,000,000 revolving line of credit (the
"Revolver") and a $25,000,000 acquisition line of credit (the "Acquisition
Line"). The amount available to be borrowed under the Revolver may be limited by
outstanding eligible receivables. Amounts borrowed under either the Revolver or
the Acquisition Line are collateralized primarily by receivables and inventory.
The Revolver and the Acquisition Line have repayment terms that run through
November 13, 2000, and December 1, 2003, respectively. Interest rates on funds
borrowed under the Revolver and the Acquisition Line vary from the lower of
prime less 1.00% or LIBOR plus 0.50%, to the greater of prime plus 0.125% or
LIBOR plus 1.375%. Under the terms of these facilities, the Company must comply
with certain covenants related to earnings, funded debt ratios, and fixed charge
coverage ratios. At December 31, 1997, the Company was in compliance with all
covenants. There are no borrowings currently outstanding under either of these
facilities.
Cash flows from operating activities during 1997 increased by $2,173,000 as
compared to 1996 due primarily to cash generated from additional income and the
timing of vendor payments offset by increased accounts receivable resulting from
additional business, increased rebates due from certain suppliers, and
additional tax payments. In addition to the cash generated and used as part of
the capital transactions described above, during 1997 the Company invested
$15,232,000 in equipment, including $1,235,000 financed with a capital lease
obligation, paid $10,533,000 related to acquisitions, and repaid $4,805,000 of
debt and lease obligations with the proceeds from the Offering, the sale and
leaseback transactions, and the exercise of stock options.
Working capital increased $115,440,000 during 1997 primarily from the
proceeds from the Offering, increased receivables, including amounts due from
affiliates, resulting from additional business at existing facilities, and from
acquired operations. The Company also recorded a tax benefit in the amount of
$6,407,000 associated with the exercise of stock options that reduced the cash
requirement for taxes in 1997. Long-term debt decreased $5,193,000 due primarily
to the repayment of amounts previously borrowed under the line of credit with a
portion of the proceeds from the Offering.
The Company expects to expend approximately $16,800,000 over the course of
the next twelve months for capital improvements, essentially all of which is for
modernization and growth, including a $3,200,000 capital investment to further
expand the General Motors business, a $5,000,000 investment in new information
systems, and $1,400,000 for expansion to handle additional business from The
Home Depot. The Company intends to finance a substantial portion of these
expenditures under operating leases, sale and leaseback arrangements, or with
working capital, including the proceeds from the Offering.
The investment in new information systems referred to above, which includes
replacing and upgrading the Company's internal financial and operational
systems, will result in such systems being Year 2000 compliant. The Company
expects to have these new systems implemented by the second quarter of 1999. In
addition, the Company has performed a review of its production systems and,
based on this review, believes that such systems are Year 2000 compliant. Some
of the Company's suppliers and customers may face Year 2000 issues. The Company
has not fully evaluated the impact of Year 2000 issues with respect to its
customers and suppliers.
In January 1998, the Company acquired Flying Color Graphics, Inc., a
prepress company with five facilities throughout the midwest, for approximately
$22,000,000. The purchase price was paid for with approximately $18,900,000 in
cash from the Company's working capital and 68,103 shares of the Company's
common stock.
In February 1998, the Company entered into a definitive agreement to merge
Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a
newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal
year ended March 31, 1997, Devon had total assets, revenues, and operating
income of $163,751,000, $209,522,000, and $29,063,000, respectively. Under the
terms of the agreement, which is subject to regulatory approval and the approval
of the Company's and Devon's stockholders, the Company will pay $30 per share in
cash and distribute 0.6 share of the Company's common stock in exchange for each
outstanding share of Devon common stock. The total consideration to be paid is
estimated to be $450,000,000 including transaction costs. To fund the cash
portion of the merger consideration, estimated to be $230,000,000 including the
transaction costs, the Company has a commitment from a commercial bank that
would increase its borrowing capacity to $250,000,000. This commitment expires
on June 15, 1998. The Company is also contemplating other financing alternatives
to fund all or part of the cash portion of the merger consideration.
The Company believes that the cash flow from operations, proceeds from the
Offering, its revolving credit facility, and its potential ability to obtain
funding from other financing sources will be sufficient to fund its cash needs
for the foreseeable future.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued in June
1997 and is effective for financial statements for periods beginning after
December 15, 1997. This statement establishes standards for the way public
companies report information about operating segments in annual and interim
financial statements. The Company believes its current reporting systems will
enable it to comply with the implementation of SFAS No. 131.
Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued
in October 1997 and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. This statement establishes standards for
recognizing revenue on software transactions and supersedes Statement of
Position (SOP) 91-1, "Software Revenue Recognition." A proposed Statement of
Position was issued in February 1998 that, if issued, would postpone certain
provisions of SOP 97-2 for one year. The Company does not expect the
implementation of SOP 97-2 or the proposed SOP, if issued, to have a material
effect on its results of operations.
The Company does not believe that inflation has had a material impact on its
business.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Applied Graphics Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Applied Graphics
Technologies, Inc. and subsidiaries ("the Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and owners' deficit, and cash flows for the years then ended. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996 and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/
DELOITTE & TOUCHE LLP
March 23, 1998
New York, New York
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners of the Predecessor Group:
We have audited the accompanying combined statements of operations,
cash flows and changes in owners' equity (deficit) of the Predecessor Group to
Applied Graphics Technologies, Inc. for the year ended December 31, 1995. These
financial statements are the responsibility of the Predecessor Group's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined results of operations and
cash flows of the Predecessor Group for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/
Coopers & Lybrand L.L.P.
New York, New York
March 8, 1996
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per-share amounts)
December 31,
----------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 12,584 $ 2,567
Marketable securities .............................. 90,150 1,600
Trade accounts receivable (net of allowances
of $3,989 in 1997 and $472 in 1996) ............ 43,025 29,584
Due from affiliates ................................ 5,561
Inventory .......................................... 6,234 4,639
Prepaid expenses and other current assets .......... 7,881 2,485
Deferred income taxes .............................. 3,016 705
--------- ---------
Total current assets ........................ 168,451 41,580
Property, plant, and equipment - net .................. 31,020 20,544
Goodwill (net of amortization of $1,289 in 1997
and $552 in 1996) .................................. 22,229 7,121
Deferred income taxes ................................. 1,384 1,644
Other assets .......................................... 1,709 1,258
--------- ---------
Total assets ................................ $ 224,793 $ 72,147
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............. $ 27,264 $ 19,630
Applied Printing Note .............................. 1,600
Current portion of long-term debt .................. 606 507
Current portion of obligations under capital leases 1,697 1,354
Due to affiliates .................................. 923 354
Other current liabilities .......................... 6,793 2,407
--------- ---------
Total current liabilities ................... 37,283 25,852
Long-term debt ........................................ 812 6,005
Obligations under capital leases ...................... 2,011 1,265
Other liabilities ..................................... 1,190 3,142
--------- ---------
Total liabilities ........................... 41,296 36,264
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock (no par value, 10,000,000
shares authorized; no shares outstanding)
Common stock ($0.01 par value, 40,000,000
shares authorized; shares issued
and outstanding: 17,836,383 in 1997
and 14,349,683 in 1996) .......................... 178 143
Additional paid-in capital ......................... 159,627 25,584
Unrealized investment loss ......................... (31)
Retained earnings .................................. 23,723 10,156
--------- ---------
Total stockholders' equity ...................... 183,497 35,883
--------- ---------
Total liabilities and stockholders' equity ..... $ 224,793 $ 72,147
========= =========
See Notes to Consolidated Financial Statements
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
For the years ended December 31, 1997 1996 1995
--------- --------- ---------
Revenues ................................. $ 184,993 $ 132,725 $ 117,802
Cost of revenues ......................... 120,018 92,242 86,296
--------- --------- ---------
Gross profit ............................. 64,975 40,483 31,506
--------- --------- ---------
Selling, general, and
administrative expenses .............. 40,179 28,554 33,529
Charge for customer bankruptcy ........... 2,487
Reorganization charge .................... 3,060
--------- --------- ---------
Total operating expenses ............... 42,666 28,554 36,589
--------- --------- ---------
Operating income (loss) ................ 22,309 11,929 (5,083)
Interest expense ......................... (1,034) (1,833) (3,332)
Interest income .......................... 1,724 497
Other income (expense) - net ............. (292) 227 603
--------- --------- ---------
Income (loss) before provision
for income taxes ...................... 22,707 10,820 (7,812)
Provision for income taxes ............... 9,140 865
--------- --------- ---------
Net income (loss) ........................ $ 13,567 $ 9,955 $ (7,812)
========= ========= =========
Earnings per common share:
Basic .................................. $ 0.88 $ 0.79
Diluted ................................ $ 0.83 $ 0.77
Weighted average number of
common shares:
Basic .................................. 15,475 12,660
Diluted ................................ 16,430 12,924
Pro Forma Net Income Data:
Income (loss) before provision
for income taxes,
as reported ......................... $ 10,820 $ (7,812)
Pro forma provision for income taxes.... 785 115
--------- ---------
Pro forma net income (loss) ............ $ 10,035 $ (7,927)
========= =========
Pro forma earnings (loss) per common
share:
Basic .................................. $ 0.79 $ (0.80)
Diluted ................................ $ 0.78 $ (0.80)
Pro forma weighted average number
of common shares:
Basic .................................. 12,660 9,930
Diluted ................................ 12,924 9,930
See Notes to Consolidated Financial Statements
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
For the years ended December 31, 1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ........................ $ 13,567 $ 9,955 $ (7,812)
Adjustments to reconcile net income
(loss) to net cash from operating activities:
Depreciation and amortization ...... 6,222 4,932 5,359
Deferred taxes ..................... (1,591) (2,349)
Gain on insurance settlement ....... (18) (2,023)
Reorganization charge .............. 3,060
Charge for customer bankruptcy ..... 2,487
Other .............................. 644 (40) 1,012
Changes in Operating Assets and
Liabilities, net of effects of acquisitions:
Trade accounts receivable .......... (13,779) (11,442) 3,772
Due from/to affiliates ............. (4,991) 1,917 (981)
Inventory .......................... (1,285) (937) (422)
Other assets ....................... (1,042) 2,452 1,401
Accounts payable and accrued
expenses ........................ 1,139 (413) 1,387
Other liabilities .................. 2,268 (2,591) 204
--------- --------- ---------
Net cash provided by operating
activities ............................ 3,639 1,466 4,957
--------- --------- ---------
Cash flows from investing activities:
Investment in available-for-
sale securities .................. (320,553) (1,600)
Proceeds from sale of available-
for-sale securities ............. 231,072
Proceeds from maturities of held-
to-maturity securities .......... 1,600
Property, plant, and equipment
expenditures .................... (13,997) (14,851) (3,455)
Proceeds from the sale of
fixed assets .................... 12 1,099 1,483
Net proceeds from insurance
claims .......................... 243 1,782
Entities purchased, net of
cash acquired ................... (10,533) 350 (69)
--------- --------- ---------
Net cash used in investing activities .... (112,399) (14,759) (259)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of common
stock ........................... 121,700 46,103
Proceeds from exercise of stock
options ......................... 5,641
Borrowings (repayments) under
revolving credit line - net ..... (5,628) 5,628
Proceeds from sale/leaseback
transactions .................... 3,469 4,093 558
Repayment of Applied Printing
Note ............................ (1,600) (14,400)
Repayment of notes and capital
lease obligations ............... (4,805) (2,662) (4,020)
Increase in (repayments of)
intercompany borrowings - net ... (18,000) 3,789
Distributions to Applied
Printing - net .................. (5,568) (4,449)
--------- --------- ---------
Net cash provided by (used in)
financing activities .................. 118,777 15,194 (4,122)
--------- --------- ---------
Net increase in cash and cash
equivalents ........................... 10,017 1,901 576
Cash and cash equivalents at
beginning of year ..................... 2,567 666 90
--------- --------- ---------
Cash and cash equivalents at
end of year ........................... $ 12,584 $ 2,567 $ 666
========= ========= =========
See Notes to Consolidated Financial Statements
<TABLE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' DEFICIT
(In thousands of dollars, except per-share amounts)
<CAPTION>
Additional Unrealized
Common Paid-in- Investment Retained Owners'
Stock Capital Loss Earnings Deficit
----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ (7,120)
Net loss (7,812)
Distribution (4,449)
------------
Balance at December 31, 1995 (19,381)
Issuance of 9,309,900 common shares in
exchange for assets of Prepress Business $ 93
Issuance of 4,500,000 common shares in
a public offering at $12.00 per share 45 $ 46,058
Issuance of 539,683 shares in an
acquisition at $15.75 per share 5 8,495
Net income (loss) $ 10,156 (201)
Distribution (9,387)
Conveyance (28,969) 28,969
----------- ------------- ----------- ------------
Balance at December 31, 1996 143 25,584 10,156 $ 0
============
Issuance of 3,000,000 common shares in a
public offering at $43.00 per share 30 121,670
Granting of 19,000 warrants to purchase
common shares 330
Issuance of 486,700 common shares upon
exercise of stock options 5 5,636
Income tax benefit associated with
exercise of stock options 6,407
Unrealized loss on investments in
available-for-sale securities $ (31)
Net income 13,567
----------- ------------- ------------- -----------
Balance at December 31, 1997 $ 178 $ 159,627 $ (31) $ 23,723
=========== ============= ============= ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per-share amounts)
1. ORGANIZATION AND BASIS OF PRESENTATION
Applied Graphics Technologies, Inc. and its subsidiaries (the
"Company") provide digital prepress services to magazine publishers, advertising
agencies, entertainment companies, automobile manufacturers, and catalog
retailers. In addition, the Company provides outsourced, on-site prepress and
related services to third parties and advanced digital imaging services, such as
digital archiving and distribution services and duplication and distribution
services of advertising content for the broadcast industry. The Company was
incorporated in Delaware on December 12, 1995. Applied Printing Technologies,
L.P. ("Applied Printing"), an entity beneficially owned by the Chairman of the
Board of Directors of the Company (the "Chairman") and the Chief Executive
Officer of the Company (the "CEO"), was issued 100 shares of common stock and
became the Company's sole stockholder.
On April 16, 1996 (the "Initial Offering Date"), the Company's
Registration Statement on Form S-1 under the Securities Act of 1933, as amended,
relating to the initial public offering (the "Initial Offering") of the
Company's common stock, was declared effective. Upon the offering being declared
effective, the Company acquired substantially all of the assets and certain
related liabilities relating to the prepress, digital imaging services, and
related businesses of Applied Printing (collectively, the "Prepress Business")
in exchange for 9,309,900 shares of the Company's common stock and $37,000 of
additional consideration ("Additional Consideration") comprised of (i) the
assumption by the Company of the principal amount of collateralized senior
indebtedness to Applied Printing's primary institutional lender (the
"Institutional Senior Indebtedness") of $21,000 and (ii) the issuance of a
promissory note by the Company to Applied Printing (the "Applied Printing Note")
of $16,000. The Company received net proceeds of $46,103 from the Initial
Offering, of which $21,000 was used to repay Institutional Senior Indebtedness
and $16,000 was used to invest in short-term investments to support a standby
letter of credit that collateralized the Applied Printing Note. At December 31,
1997, Applied Printing owned approximately 28% of the Company's outstanding
common stock.
The acquisition of the Prepress Business was accounted for in a manner
similar to a pooling of interests. Accordingly, the financial statements of the
Company reflect the combined results of operations of the Prepress Business
through the Initial Offering Date and the results of the Company thereafter. The
statements of operations and cash flows covering the periods through the Initial
Offering Date have been prepared by combining the results of operations and cash
flows of the specific divisions that comprised the Prepress Business. Prior to
the Initial Offering Date, these specific divisions operated as separate
business units and maintained their own books and records. Through the Initial
Offering Date, Applied Printing managed the cash and financing requirements of
all of its divisions centrally and, as such, the interest expense and related
intercompany borrowing up until that date represent an allocation of Applied
Printing's interest expense and the related debt. As discussed in Note 10, this
allocation of debt is presented as an intercompany borrowing. Additionally,
prior to the Initial Offering Date, Applied Printing and other related parties
provided certain corporate, general, and administrative services to the Prepress
Business, including general management, treasury, financial reporting, and legal
services. Accordingly, the financial statements include an allocation of
expenses for such services. The combined results of operations and cash flows
for the years ended December 31, 1996 and 1995, may have differed had the
Company operated as an independent entity during those entire periods.
On September 3, 1997, the Company's Registration Statement on Form S-3 under
the Securities Act of 1933, as amended, relating to an offering of the Company's
common stock (the "Offering"), was declared effective. As part of the Offering,
the Company sold 3,000,000 shares of common stock, generating proceeds, net of
underwriters' discount and transaction expenses, of $121,700. Also as part of
the Offering, an additional 3,900,000 shares were sold by certain stockholders
of the Company, of which 3,650,000 shares were sold by Applied Printing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include
the accounts of the Company and all of its subsidiaries. All intercompany
accounts and transactions have been eliminated in the Consolidated Financial
Statements.
Cash and Cash Equivalents: Cash and cash equivalents include all cash
balances and highly liquid investments having original maturities of three
months or less.
Marketable Securities: The Company has classified its investments in
marketable securities at December 31, 1997, as "available for sale" and has
recorded them at fair market value. Marketable securities at December 31, 1996,
were classified as "held to maturity" and were recorded at amortized cost.
Inventory: Raw materials are valued at the lower of cost (cost being
determined on a weighted average basis) or market. Work-in-process, consisting
of labor, materials, and overhead on partially completed projects, is recorded
at cost (specific identification) but not in excess of net realizable value.
Property, Plant, and Equipment: Property, plant, and equipment is stated at
cost. Depreciation is computed principally on the straight-line method over the
estimated useful lives of the assets, which generally range from 30 years for
buildings to three years for computer software and vehicles. Leasehold
improvements and amounts recorded under capital leases are amortized on the
straight-line method over the terms of the leases or their estimated useful
lives.
Revenue recognition: Revenue is recognized at the time projects are shipped
or transmitted to the customer. Revenue for digital archiving services is
recognized on a per-image basis as items are prepared and scanned. Revenue from
the licensing of software and the sale of digital equipment is recognized upon
the later of delivery or satisfaction of significant obligations.
Goodwill: Goodwill is being amortized on the straight-line method over
periods ranging from 7 to 30 years.
Income taxes: The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." The Prepress Business was treated as a partnership for Federal
and state income tax purposes prior to the Initial Offering Date and was not
subject to tax. A provision for income taxes is included in the Company's
Consolidated Statements of Operations only for the periods subsequent to the
Initial Offering Date.
Earnings per Share of Common Stock: The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," in December
1997. In accordance with the provisions of SFAS No. 128, earnings per share of
common stock for prior periods, including pro forma amounts, have been restated.
Long-lived assets: The Company evaluates the recoverability of its
long-lived assets by comparing their carrying value to the expected future cash
flows to be generated from such assets when events or circumstances indicate
that an impairment may have occured.
Recently Issued Accounting Standards: Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued in June 1997 and is effective for financial
statements for periods beginning after December 15, 1997. This statement
establishes standards for the way public companies report information about
operating segments in annual and interim financial statements. The Company
believes its current reporting systems will enable it to comply with the
implementation of SFAS No. 131.
Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued
in October 1997 and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. This statement establishes standards for
recognizing revenue on software transactions and supersedes Statement of
Position (SOP) 91-1, "Software Revenue Recognition." A proposed Statement of
Position was issued in February 1998 that, if issued, would postpone certain
provisions of SOP 97-2 for one year. The Company does not expect the
implementation of SOP 97-2 or the proposed SOP, if issued, to have a material
effect on its results of operations.
Estimates: The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification of Prior Years' Financial Statements: Certain prior-year
amounts in the accompanying financial statements have been reclassified to
conform with the 1997 presentation.
3. ACQUISITIONS
In May 1997, the Company completed the purchase of certain assets of Star
Graphic Arts Co., Inc., a prepress company. In June 1997, the Company acquired
certain assets of Digital Imagination, Inc. ("DI"), a digital events photography
business, and also acquired certain rights from a former joint venture partner.
In July 1997, the Company acquired all of the assets of MBA Graphics, Inc.
("MBA"), a provider of prepress production, direct mailing, and brokered
commercial printing services. In September 1997, the Company acquired certain
assets of the broadcast media distribution business of Winkler Video Associates,
Inc. In December 1997, the Company acquired the assets of another prepress
company, Vancor Color, Inc., and the stock of another digital events photography
business, Amusematte Corp. For such acquisitions, the Company paid an aggregate
of $11,024 from amounts borrowed under its line of credit and from proceeds of
the Offering, assumed $10,850 of liabilities, and granted warrants to purchase a
minimum of 19,000 shares of its common stock with an approximate value of $330.
In addition, the Company will make contingent payments in the form of cash or
shares of common stock in the amount of $3,174 as additional consideration for
certain of the acquisitions based on 1997 performance. Any additional
consideration will be determined based upon the future financial performance of
the acquired operations and will be recorded as additional purchase price at the
time the necessary conditions are satisfied. Such additional consideration may
be in the form of cash, shares of common stock, or warrants to purchase shares
of common stock.
On December 3, 1996, the Company acquired the assets of SpotLink, Inc.
("SpotLink"), a company that reproduces and distributes commercials to broadcast
and cable media, for a purchase price of approximately $8,500. The assets,
consisting primarily of duplication equipment, were acquired for 539,683 shares
of the Company's common stock.
The acquisitions were accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities have been recorded at their estimated
fair values at the date of acquisition. The excess of the purchase price over
the fair value of the net assets acquired in 1997 and 1996 was $15,818 and
$6,716, respectively, and has been recorded as goodwill, which is being
amortized on the straight-line method over periods ranging from 20 to 30 years.
The results of operations of these acquisitions have been included in the
Consolidated Statements of Operations subsequent to the respective dates of the
acquisitions.
At the time of the acquisition of DI, the Company intended to dispose of the
portion of the business related to photography at golf courses and retain the
portion of the business that related to photography at events and fixed-based
locations. The projected cash loss for the golf course operations from the date
of acquisition through the anticipated date of disposal totaled $1,068 and is
included as part of the purchase price. During the period June 6, 1997, the date
of acquisition, through December 31, 1997, the golf course operations incurred
cash losses of approximately $800. Such losses have been excluded from the
consolidated results of operations for the year ended December 31, 1997.
The following unaudited pro forma information combines the results of
operations of the Company and the acquisitions for the years ended December 31,
1997 and 1996, calculated as if the acquisitions had occurred on January 1,
1996. The pro forma information has been prepared for comparative purposes only
and does not purport to be indicative of the results of operations that would
have occurred had the acquisitions been consummated at the beginning of 1996 or
of results which may occur in the future.
Unaudited 1997 1996
----------- -----------
Total revenues $ 199,658 $ 164,338
Income before provision for income taxes $ 22,156 $ 9,085
Net income $ 13,238 $ 9,067
Earnings per common share:
Basic $ 0.86 $ 0.72
Diluted $ 0.81 $ 0.70
<PAGE>
4. MARKETABLE SECURITIES
The Company has classified its investments in marketable securities at
December 31, 1997, as "available for sale" and has recorded them at fair market
value. Marketable securities at December 31, 1996, were classified as "held to
maturity" and were recorded at amortized cost. Marketable securities at December
31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------------- -------------------------------------
Amortized Amortized
Market Value Cost Market Value Cost
----------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Debt issued by municipalities
and their subdivisions:
Maturing within 1 year $ 400 $ 400
Maturing after 1 year through 5 years 1,600 1,600
Maturing after 5 years through 10 years 3,675 3,675
Maturing after 10 years 9,400 9,400
Corporate debt securities maturing within 1
year 55,341 55,372
Certificates of Deposit maturing within 1
year 4,498 4,498
Corporate Equity Fund 1,000 1,000
U.S. Government Treasury Fund 14,236 14,236
U.S. Government Securities $ 1,600 $ 1,600
----------------- -------------- ---------------- ----------------
Total $ 90,150 $ 90,181 $ 1,600 $ 1,600
================= ============== ================ ================
</TABLE>
At December 31, 1997, all marketable securities held by the Company were
available for current operations and are therefore classified in the
Consolidated Balance Sheets as current assets. Unrealized holding gains and
losses on available-for-sale securities, which were not material at December 31,
1997, are reflected as a separate component of Stockholders' Equity. Proceeds
from sales of available-for-sale securities during the twelve month period ended
December 31, 1997, totaled $231,072 and resulted in no realized gain or loss.
Realized gains and losses are determined based on a specific identification
basis.
5. INVENTORY
The components of inventory at December 31 were as follows:
1997 1996
----------- -----------
Work-in-Process $ 2,721 $ 2,596
Raw Materials 3,513 2,043
----------- -----------
Total $ 6,234 $ 4,639
=========== ===========
<PAGE>
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 consisted of the following:
1997 1996
----------- -----------
Land $ 1,360 $ 1,360
Machinery and equipment 32,490 23,843
Leasehold improvements 8,423 7,019
Buildings and improvements 7,119 6,893
Computer software 2,687 1,651
Furniture and fixtures 2,165 1,531
Construction in progress 3,289 203
----------- -----------
Total 57,533 42,500
Less accumulated depreciation and amortization 26,513 21,956
---------- -----------
Net $ 31,020 $ 20,544
=========== ===========
Interest capitalized on construction of buildings and improvements
during 1996 was $130. Depreciation and amortization of property, plant, and
equipment charged to expense for the years ended December 31, 1997, 1996, and
1995, was $6,055, $4,785 and $5,106, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31 consisted of the
following:
1997 1996
----------- -----------
Accounts payable $ 13,098 $ 7,694
Salaries and benefits 5,207 4,329
Income taxes 54 2,449
Commissions 1,640 1,374
Other operating accruals 7,265 3,784
----------- -----------
Total $ 27,264 $ 19,630
=========== ===========
8. APPLIED PRINTING NOTE
On April 16, 1996, as part of the acquisition of the assets of the Prepress
Business, the Company issued a promissory note to Applied Printing in the amount
of $16,000. A principal payment in the amount of $14,400 was made during 1996.
The remaining balance of $1,600 was repaid in February 1997. This obligation,
which bore interest at the rate of 4.145% per annum, was collateralized by a
letter of credit. The Company incurred interest charges of $8 and $295 during
the years ended December 31, 1997 and 1996, respectively.
<PAGE>
9. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
1997 1996
----------- -----------
8% - Prime plus 1% notes payable
due 1999 through 2002 $ 812 $ 377
Variable rate revolving credit line 5,628
----------- -----------
Total $ 812 $ 6,005
=========== ===========
At December 31, 1997, the Company had a revolving line of credit
aggregating $60,000, consisting of a $35,000 revolving line of credit (the
"Revolver") and a $25,000 acquisition line of credit (the "Acquisition Line").
The amount available to be borrowed under the Revolver may be limited by
outstanding eligible receivables. Amounts borrowed under either the Revolver or
the Acquisition Line are collateralized primarily by receivables and inventory.
The Revolver and the Acquisition Line are with a major financial institution and
have repayment terms that run through November 13, 2000, and December 1, 2003,
respectively. Interest rates on funds borrowed under the Revolver and the
Acquisition Line vary from the lower of prime less 1.00% or LIBOR plus 0.50%, to
the greater of prime plus 0.125% or LIBOR plus 1.375%. Under the terms of the
facilities, the Company must comply with certain covenants related to earnings,
funded debt ratios, and fixed charge coverage ratios. At December 31, 1997, the
Company was in compliance with all covenants and there were no outstanding
borrowings under either the Revolver or the Acquisition Line. The average
variable rate on revolving credit facility borrowings during 1997 and 1996 was
7.50% and 8.25%, respectively. There is no restriction on the payment of
dividends other than obtaining approval of the financial institution.
Principal payments on the long-term debt are as follows:
1998 $ 606
1999 399
2000 259
2001 111
2002 43
-----------
Total 1,418
Less current portion 606
-----------
Total long-term debt $ 812
===========
10. INTERCOMPANY BORROWINGS
Prior to the Initial Offering Date, the Prepress Business had been financed
principally through advances from Applied Printing. Historically, Applied
Printing had financed all of its operations, including those of the Prepress
Business, with Institutional Senior Indebtedness, borrowings from the Daily
News, L.P. (the "Daily News") (see Note 15), and borrowings from the majority
limited partner (collectively, "Borrowings").
Prior to the Initial Offering Date the financial statements include an
allocation of Applied Printing's interest expense and related Borrowings.
Applied Printing's interest expense related to the Borrowings had been allocated
to the Prepress Business based on the ratio of net assets of the Prepress
Business, before an allocation of intercompany debt, to the sum of the total
consolidated net assets of Applied Printing plus the Applied Printing debt that
is not directly attributable to specific divisions within Applied Printing. The
intercompany borrowing amounts represented derived amounts which have been
computed by applying Applied Printing's weighted average interest rate to the
allocated interest expense, calculated using the methodology discussed above.
The weighted average interest rates during the period ended April 16, 1996, and
the year ended December 1995, were 10.8% and 8.9%, respectively. The Company
incurred interest charges of $944 and $2,683 for the period ended April 16,
1996, and the year ended December 31, 1995, respectively.
<PAGE>
11. LEASES
The Company leases certain property and equipment used in its operations
under agreements that are classified as both capital and operating leases. Such
agreements generally include provisions for inflation-based rate adjustments
and, in the case of leases for buildings and office space, payments of certain
operating expenses and property taxes.
Future minimum rental payments required under capital leases and operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
Capital Operating
Leases Leases
------------ ------------
1998 $ 1,991 $ 7,320
1999 1,061 6,396
2000 428 2,659
2001 289 1,724
2002 168 1,600
Later years 387 4,925
------------ ------------
Total minimum lease payments 4,324 $ 24,624
============
Less imputed interest 616
------------
Present value of minimum lease payments 3,708
Less current portion 1,697
------------
Long-term obligation under capital leases $ 2,011
============
Assets recorded under capital leases are included in property, plant, and
equipment as follows:
1997 1996
------------- -----------
Buildings $ 4,768 $ 4,768
Machinery and equipment 13,179 11,431
------------- -----------
Total 17,947 16,199
Less accumulated depreciation 9,766 8,660
------------- -----------
Net $ 8,181 $ 7,539
============= ===========
Total rental expense under operating leases amounted to $10,002, $7,578,
and $12,106 for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company enters into sale and leaseback arrangements that are recorded as
operating leases. The gain from these sale and leaseback arrangements is
deferred and recognized as credits against future rental expenses over the terms
of the related leases. At December 31, 1997, the remaining balance of the
deferred gain totaling $377 is included in "Other liabilities", both current and
noncurrent, in the accompanying Consolidated Balance Sheets.
<PAGE>
12. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the asset and liability method of accounting for income taxes.
Under this method, deferred taxes are recognized based on the expected future
tax consequences of events that have been included in the financial statements
or tax returns by applying currently enacted statutory tax rates applicable to
future years to differences between the financial statement and tax bases of
assets and liabilities.
The Prepress Business was treated as a partnership for Federal and state
income tax purposes prior to the Initial Offering Date and was not subject to
tax. At the date of the Initial Offering, the Company recorded the applicable
deferred tax assets related to the differences between financial statement and
tax basis of the assets and liabilities of the Prepress Business. These deferred
tax assets were entirely offset by a valuation allowance. A provision for income
taxes is included in the Company's Consolidated Statements of Operations only
for the periods subsequent to the Initial Offering Date.
The components of the provision for income taxes were as follows:
1997 1996
------------ ------------
Current:
Federal $ 3,018 $ 2,287
State 1,187 927
------------ ------------
Total current 4,205 3,214
------------ ------------
Deferred:
Federal (430) (2,349)
State (1,161)
------------ ------------
Total deferred (1,591) (2,349)
------------ ------------
Tax benefits not impacting provision:
Federal 4,650
State 1,876
------------
Total tax benefits not impacting provision 6,526
------------
Total provision for income taxes $ 9,140 $ 865
============ ============
The provision for income taxes varied from the Federal statutory income tax
rate due to the following:
1997 1996
------------ ------------
Taxes at statutory rate $ 7,720 $ 3,679
State income taxes, net of
Federal tax benefit 1,256 612
Change in valuation allowance
for Federal deferred tax assets (3,870)
Permanent items 158 252
Other - net 6 192
------------ ------------
Provision for income taxes $ 9,140 $ 865
============ ============
Federal statutory rate 34.00% 34.00%
Effective rate 40.25% 8.00%
<PAGE>
The components of the net deferred tax asset at December 31 were as
follows:
1997 1996
------------- -------------
Deferred tax assets:
Accounts receivable $ 1,978 $ 221
Property, plant, and equipment 837 679
Accrued expenses 349 1,193
Obligations under capital leases 460 639
Other liabilities 262 300
Other assets 514 198
------------- -------------
Total deferred tax assets 4,400 3,230
Valuation allowance (881)
------------- -------------
Net deferred tax asset $ 4,400 $ 2,349
============== ============
There were no deferred tax liabilities at December 31, 1997 and 1996. A
valuation allowance was established at the date of initially recording the
deferred tax assets associated with the acquisition of the Prepress Business.
Due to the Prepress Business having historically incurred losses, the valuation
allowance was deemed necessary due to the uncertainty relating to the Company's
ability to utilize these benefits in the future. During the year ended December
31, 1997, the Company reduced the valuation allowance for state deferred tax
assets by $881. During the period ended December 31, 1996, the Company reduced
the valuation allowance by $3,870 for Federal and $200 for state deferred tax
assets. Based on operating earnings subsequent to the Initial Offering Date and
the Company's expectations of future earnings from established contracts and
relationships, the Company believes that it is more likely than not that the
benefit associated with Federal and state deferred tax assets will be realized
in the future and therefore has not established a valuation allowance for
deferred tax assets at December 31, 1997.
13. STOCK OPTIONS
In 1996, the Board of Directors and stockholders approved a Stock Option
Plan (the "Employee Plan") and a Non-employee Directors' Nonqualified Stock
Option Plan (the "Directors' Plan"). Under the Employee Plan, options are
granted to key employees of the Company to purchase common stock of the Company.
Options granted under the Employee Plan, which have a term of ten years, become
exercisable over a five year period in varying amounts, but in no event less
than 5% or more than 25% in any year for any individual optionee. Under the
Directors' Plan, options are granted to members of the Board of Directors who
are not employees of the Company. Options initially granted under the Directors'
Plan become exercisable over a two year period and have a term of ten years. The
Directors' Plan also provides for an additional 5,000 options to be granted to
non-employee directors on each subsequent anniversary date of having first
become a member of the Board of Directors. Such future option grants will have
an exercise price equal to the fair market value of the common stock on the date
of grant and are fully vested at grant. The two plans call for a combined
maximum of 4,200,000 shares of the Company's common stock to be available for
issuance upon exercise of options. At December 31, 1997, 1,504,100 shares were
reserved for the issuance of stock options.
<PAGE>
Information relating to activity in the Company's stock option plans is
summarized as follows:
Weighted Weighted
Number of Average Average
Shares Exercise Price Fair Value
-------------- ----------------- ---------------
Options granted on Initial
Offering Date 2,475,000 $12.00 $17,489
Additional options granted 54,000 $15.61 $ 496
Options forfeited (38,000) $12.37
--------------
Options outstanding at
December 31, 1996
(none exercisable) 2,491,000 $12.07
Options granted 255,500 $45.15 $ 6,858
Options exercised (486,700) $12.03
Options forfeited (50,600) $12.79
--------------
Options outstanding at
December 31, 1997 2,209,200 $15.89
==============
Options exercisable at
December 31, 1997 72,500 $18.29
==============
Information relating to options outstanding at December 31, 1997, is
summarized as follows:
Outstanding Exercisable
--------------------------------------- -----------------------
Range of Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Prices Options Exercise Price Remaining Life Options Exercise Price
- --------------- --------- -------------- -------------- ------- --------------
$12.00 - $16.63 1,953,700 $12.07 8.29 52,500 $12.31
$34.00 - $39.25 60,000 $37.50 9.38 20,000 $34.00
$47.50 195,500 $47.50 9.83 0
The Company accounts for the issuance of stock options under the provisions
of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees," which requires compensation cost to be measured at the
date of grant based on the intrinsic value of the options granted. The intrinsic
value of an option is equal to the difference between the market price of the
common stock on the date of grant and the exercise price of the option. There
was no compensation cost recognized by the Company on the options granted in
1997 and 1996.
In 1995, Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," was issued. SFAS No. 123 provides for
an alternative measurement of compensation cost based on the fair value of the
options granted. The fair value of an option is based on the intrinsic value as
well as the time value of the option. The fair value of stock options granted
was estimated on the grant dates using the Black-Scholes option-pricing model.
The following weighted average assumptions were used in calculating the fair
value of options granted:
1997 1996
--------- ---------
Risk-free interest rate 6.20% 6.75%
Expected life 6 years 6 years
Expected volatility 0.5606 0.5394
Expected dividend yield 0% 0%
<PAGE>
Had the Company elected to account for the issuance of stock options under
SFAS No. 123, the compensation cost would have been $3,957 and $2,511 for the
years ended December 31, 1997 and 1996, respectively. The pro forma net income
and earnings per share for the years ended December 31, 1997 and 1996,
calculated as if the Company had elected to account for the issuance of stock
options under SFAS No. 123, were as follows:
1997 1996
------- -------
Net Income $11,203 $ 8,298
Basic Earnings per Share $ 0.72 $ 0.66
Diluted Earnings per Share $ 0.70 $ 0.66
14. EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," in December 1997. SFAS No. 128
requires the presentation of both basic and diluted earnings per share as
opposed to primary and fully diluted earnings per share, which were required
under the previous standard, Accounting Principles Board Opinion No. 15. In
accordance with the provisions of SFAS No. 128, prior period earnings per share
data has been restated.
Basic earnings per share of common stock are computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted earnings per share of common stock are computed by giving
effect to all dilutive potential shares. There were no reconciling items to net
income to arrive at income available to common stockholders for the years ended
December 31, 1997, 1996, and 1995. The number of common shares used in the
computation of basic and diluted earnings per share for the years ended December
31, 1997, 1996, and 1995, including pro forma computations, are summarized as
follows:
1997 1996 1995
-------------- -------------- -------------
Basic:
Weighted average shares
outstanding 15,475,000 12,660,000 9,930,000
Effect of Dilutive Securities:
Stock options and warrants 946,000 264,000
Contingently issuable
common shares 9,000
-------------- -------------- -------------
Diluted:
Weighted average shares
outstanding 16,430,000 12,924,000 9,930,000
============== ============== =============
15. RELATED PARTY TRANSACTIONS
In addition to the business it transacts with Applied Printing, the Company
also does business and shares services with entities beneficially owned by the
Chairman and the CEO, including the Daily News and U.S. News & World Report,
L.P. ("U.S. News"), and occasionally utilizes an aircraft owned by ZWA, Inc., an
entity owned by the Chairman. The Company also does business with Snyder
Communications, Inc. and its subsidiaries, a provider of outsourced marketing
services, of which both the Chairman and the CEO are members of the Board of
Directors and in the aggregate own approximately 13% of the outstanding common
stock.
Due to/from affiliates - Affiliates owed the Company $5,561 and $46 at
December 31, 1997 and 1996, respectively, representing trade receivables. The
Company owed affiliates $923 and $400 at December 31, 1997 and 1996,
respectively.
Affiliate sales and purchases - The Company has entered into Production
Services Agreements with U.S. News and the Daily News pursuant to which it will
provide prepress services. The agreement with U.S. News, which expires on
December 31, 2000, is renewable annually thereafter by mutual agreement of the
parties. The agreement with the Daily News commenced in October 1995 and is
renewable annually by mutual agreement of the parties. In 1995, the Company
entered into a two-year agreement to digitize the entire library of photographs
of an affiliate. In addition, the Company occasionally provides services to and
purchases services from related parties that are negotiated on an arms-length
basis. Sales to and purchases from related parties for the years ended December
31, 1997, 1996, and 1995, were as follows:
1997 1996 1995
------------ ------------ ------------
Affiliate sales $ 16,845 $ 11,610 $ 7,901
Affiliate purchases $ 4,683 $ 3,097 $ 421
Sales to affiliates represented 9.1%, 8.8%, and 6.7% of the Company's
revenues for the years ended December 31, 1997, 1996, and 1995, respectively.
Allocated costs - Prior to the Initial Offering Date, Applied Printing and
other related parties provided to the Company certain administrative services
that included cash management, financial reporting, legal, and other similar
services. The costs allocated to the Company were based on either specific
identification of expenses attributable to the Prepress Business, where
practicable, or an allocation of the total costs incurred. For such services,
the Company incurred charges of $1,534 and $6,645 for the period ended April 16,
1996, and for the year ended December 31, 1995, respectively.
In the opinion of management, such allocated costs have been made on a basis
that is considered to be reasonable; however, these costs are not necessarily
indicative of the total costs that the Company would have incurred had it
operated on a stand-alone basis.
Shared costs - Pursuant to shared services agreements, the Company receives
certain legal and computer services from the Daily News and U.S. News. For such
services, the Company incurred charges of $308, $303, and $150 for the years
ended December 31, 1997, 1996, and 1995, respectively. In 1995, the shared costs
are included as part of the allocated costs.
Technology development agreement - Under an arrangement with the Daily News,
the Company was reimbursed for the costs incurred in the development of certain
digital technologies. Such reimbursements totaled $100 and $1,184 in the years
ended December 31, 1996, and 1995, respectively. There was no reimbursement in
the year ended December 31, 1997.
Leases - The Company leases office space in Washington, D.C. from U.S. News.
The charges incurred for the lease were $301, $293, and $281 for the years ended
December 31, 1997, 1996, and 1995, respectively. In addition, the Company leases
office space in New York City from Applied Printing and incurred charges of $385
and $289 for the years ended December 31, 1997 and 1996, respectively. The
Company also leases a facility from the Daily News and incurred charges of $72
and $53 for the years ended December 31, 1997 and 1996, respectively.
Vendor Agreement - The Company is a party to an agreement originally
entered into in January 1992 by Applied Printing with a vendor and its
affiliate. Pursuant to such agreement, the Company and Applied Printing are
obligated to purchase a specified cumulative annual minimum amount of the
vendor's products provided that the prices are market competitive and that the
products meet technological and customer specifications. The Company receives a
significant rebate from the vendor that varies based on the volume of products
purchased. In addition, in 1995, the vendor prepaid to the Company $2,745 of the
rebate expected to be earned in future periods. If the Company does not earn the
full amount of the prepaid rebate in future periods, it would be required to
repay the difference to the vendor along with interest accrued since 1995. At
December 31, 1997, "Other current liabilities" in the Company's Consolidated
Balance Sheet include approximately $2,917 related to prepaid rebates, of which
approximately $2,621 represents an amount expected to be applied to this
obligation based on purchases made during 1997. Such amount to be applied is
also included as part of the total rebate receivable from the vendor included in
"Other current assets" in the Consolidated Balance Sheet at December 31, 1997.
The Chairman is a guarantor of the Company's contingent repayment obligation.
In connection with the agreement, the vendor's affiliate loaned $15,000 to
the Chairman. The loan, which matures on December 31, 1998, bears interest at
the lender's commercial paper rate. 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.
<PAGE>
16. RETIREMENT PLANS
The Company has a defined contribution plan in which employees are eligible
to participate upon the completion of six months of service and the attainment
of 21 years of age. Participants can contribute into the plan on both a pre-tax
and after-tax basis. In addition, the Company can make discretionary
contributions into the plan. Participants vest 100% in the Company's
discretionary contribution upon the completion of five years of service. The
Company did not make any discretionary contributions for the years ended
December 31, 1997, 1996, and 1995.
17. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is contingently liable as a result of transactions arising in
the ordinary course of business and is involved in certain legal proceedings in
which damages and other remedies are sought. In the opinion of Company
management, after review with counsel, the ultimate resolution of these matters
will not have a material effect on the Company's Consolidated Financial
Statements.
Applied Printing and its corporate general partner are defendants in
litigation arising out of Applied Printing's business. The Company is not a
defendant in any such litigation, and does not believe there is a sustainable
basis for the Company to be named as a defendant in any of such litigation. If
the Company were to be named or held responsible in connection with any of such
litigation, the Company is indemnified by Applied Printing.
18. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents and trade receivables.
The Company maintains cash balances and cash equivalents with high credit
quality financial institutions and limits the amount of credit exposure to any
one financial institution.
The Company provides credit to customers on an uncollateralized basis after
evaluating customer credit worthiness. The Company's customers are not
concentrated in any specific geographic region, but are concentrated in the
publishing, advertising agency, entertainment, and catalog retailing businesses.
The Company's largest customer, a group of commonly owned advertising agencies,
accounted for approximately $19,120, or 10.3%, of revenues for the year ended
December 31, 1997. The Company's five largest customers, excluding related
parties, comprise 33%, 35%, and 37% of revenues for the years ended December 31,
1997, 1996, and 1995, respectively. In addition, amounts due from these
customers represent 26% and 29% of trade accounts receivable as of December 31,
1997 and 1996, respectively. Any termination or significant disruption of the
Company's relationships with any of its principal customers could have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows.
<PAGE>
19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes were as follows:
1997 1996 1995
---------- ---------- ----------
Interest paid (net of
amounts capitalized) ............... $1,138 $702 $905
Income taxes paid ..................... $4,847 $766
Noncash investing and financing activities were as follows:
1997 1996 1995
---------- ---------- ----------
Notes payable issued in
connection with an acquisition ..... $ 488
Increase in additional paid-in
capital from income tax
benefit associated with
exercise of stock options .......... $ 6,407
Reduction of goodwill from
amortization of excess tax
deductible goodwill ................ $ 119
Acquisition of property,
plant, and equipment
in exchange for obligations
under capital leases ............... $ 1,235 $ 480
Additions to goodwill for
contingent purchase
price adjustments .................. $ 3,174 $ 69
Conversion of intercompany
borrowing into
Applied Printing Note .............. $16,000
Distribution to Applied
Printing in the form of
increased intercompany borrowing ... $ 3,819
Common stock issued in exchange
for the Prepress Business .......... $ 93
Common stock issued for acquisition ... $ 8,500
Acquisitions:
Fair value of assets acquired ......... $22,204 $ 8,600
Cash paid ............................. (11,024)
Fair value of common stock and
warrants issued .................... (330) (8,500)
---------- ----------
Liabilities assumed ................... $10,850 $ 100
========== ==========
<PAGE>
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
The carrying amount and estimated fair values of financial instruments
at December 31 are summarized as follows:
1997 1996
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Assets:
Cash and cash equivalents .... $12,584 $12,584 $2,567 $2,567
Marketable securities ........ $90,150 $90,150 $1,600 $1,600
Other assets ................. $ 5,995 $ 5,995 $1,470 $1,470
Liabilities:
Applied Printing Note ........ $1,600 $1,600
Long-term debt ............... $ 1,418 $ 1,263 $6,512 $6,400
Obligations under
capital leases ............ $ 3,708 $ 3,629 $2,619 $2,557
The following methods and assumptions were used to estimate the fair value
of financial instruments presented above:
Cash and cash equivalents - the carrying amount is a reasonable
approximation of fair value.
Marketable securities - the fair value of marketable securities is based on
quoted market prices or dealer quotes.
Other assets - the carrying amount of non-trade accounts receivables is a
reasonable approximation of fair value.
Applied Printing Note - due to the short-term nature of the obligation, the
carrying amount is a reasonable approximation of fair value.
Long-term debt - the fair value of notes payable, including the current
portion, is estimated by discounting the future streams of payments using the
rate at which the Company can currently obtain funds under its revolving credit
line. The carrying amount of the revolving credit line is a reasonable
approximation of fair value since it is a variable-rate obligation.
Obligations under capital leases - the fair value of obligations under
capital leases, including the current portion, is estimated by discounting the
future streams of payments using the rate at which the Company can currently
obtain funds under its revolving credit line.
21. REORGANIZATION CHARGES
During 1995, the Company reorganized its operations in response to the
operational impact of acquisitions and the technological changes within the
industry. As part of the reorganization, the Company consolidated several
operations during 1995 in an effort to gain operational and administrative
efficiencies. The Consolidated Statements of Operations include reorganization
charges of $3,060 for the year ended December 31, 1995. Such charges were
comprised primarily of the write off of assets, including leasehold improvements
that are no longer utilized in the Company's business, and contractual lease
obligations for facilities and equipment that provide no further benefit to the
Company. The Company utilized a discount rate of 10% to determine the present
value of the contractual lease payments. The balance of the reorganization
liability, which was fully paid by December 31, 1997, was $409 as of December
31, 1996.
22. SUBSEQUENT EVENTS
In January 1998, the Company acquired Flying Color Graphics, Inc., a
prepress company with five facilities throughout the midwest, for approximately
$22,000. The purchase price was paid for with approximately $18,900 in cash from
the Company's working capital and 68,103 shares of the Company's common stock.
In February 1998, the Company entered into a definitive agreement to merge
Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a
newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal
year ended March 31, 1997, Devon had total assets, revenues, and operating
income of $163,751, $209,522, and $29,063, respectively. Under the terms of the
agreement, which is subject to regulatory approval and the approval of the
Company's and Devon's stockholders, the Company will pay $30 per share in cash
and distribute 0.6 shares of the Company's common stock in exchange for each
outstanding share of Devon common stock. The total consideration to be paid is
estimated to be $450,000 including transaction costs. To fund the cash portion
of the merger consideration, estimated to be $230,000 including the transaction
costs, the Company has a commitment from a commercial bank that would increase
its borrowing capacity to $250,000. This commitment expires on June 15, 1998.
The Company is seeking stockholder approval at the Special Meeting in lieu
of Annual Meeting relating to the merger with Devon to increase the number of
authorized shares of its common stock from 40,000,000 shares to 150,000,000
shares.
23. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Prior to the Initial Offering Date, the Company was treated as a partnership
for Federal and state income tax purposes and was not subject to tax. The Pro
Forma Net Income Data in the Consolidated Statements of Operations presents what
the provision for income taxes, net income, and earnings per common share for
the years ended December 31, 1996 and 1995, would have been had the Company been
treated as a C Corporation for the periods prior to the Initial Offering Date.
24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1997 Quarter Ended March 31 June 30 September 30 December 31(1)
------- ------- ----------- -----------
(In thousands of dollars,
except per-share amounts)
Revenues ....................... $39,761 $41,311 $50,416 $53,505
Gross profit ................... $12,940 $15,261 $18,634 $18,140
Income before provision for
income taxes ................. $ 4,259 $ 5,382 $ 6,995 $ 6,071
Net income ..................... $ 2,598 $ 3,283 $ 4,142 $ 3,544
Earnings per common share:
Basic ........................ $ 0.18 $ 0.23 $ 0.27 $ 0.20
Diluted ...................... $ 0.17 $ 0.21 $ 0.25 $ 0.19
1996 Quarter Ended March 31 June 30 September 3 December 31
------- ------- ----------- -----------
(In thousands of dollars,
except per-share amounts)
Revenues ....................... $30,598 $30,988 $35,177 $35,962
Gross profit ................... $ 8,269 $ 9,352 $11,542 $11,320
Income before provision for
income taxes ................. $ 146 $ 2,096 $ 4,216 $ 4,362
Net income ..................... $ 146 $ 2,033 $ 4,005 $ 3,771
Earnings per common share:
Basic ........................ $ 0.01 $ 0.16 $ 0.29 $ 0.27
Diluted ...................... $ 0.01 $ 0.15 $ 0.29 $ 0.26
(1) Includes a pretax charge of $2,487 related to the Chapter 11 bankruptcy
filing of one of the Company's on-site facilities management customers,
Nobody Beats the Wiz.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The information required by this item was previously reported on the
Company's Form 8-K filed with the Securities and Exchange Commission on October
4, 1996.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors. - The information with respect to directors required by
this item is incorporated herein by reference to the 1998 Proxy
Statement/Prospectus included as part of the Company's
Registration Statement on Form S-4 to be filed with the Securities
and Exchange Commission by April 30, 1998.
(b) Executive Officers. - The information with respect to officers
required by this item is included at the end of Part I of this
document under the heading Executive Officers of the Company.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement/ Prospectus included as part of the Company's
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement/ Prospectus included as part of the Company's
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement/ Prospectus included as part of the Company's
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Listed below are the documents filed as a part of this report:
1. Financial Statements and the Independent Auditors'
Reports:
Independent Auditors' Reports.
Consolidated Balance Sheets.
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Stockholders' Equity and
Owners' Deficit for the Years Ended December 31,
1997, 1996, and 1995.
Notes to Financial Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for
the year ended December 31, 1997.
3. Exhibits:
2.1 Asset Purchase Agreement by and among Applied Graphics
Technologies, Inc., and Flying Color Graphics, Inc. and
its Shareholders dated January 16, 1998 (Incorporated by
reference to Exhibit No. 2.1 forming part of the
Registrant's Report on Form 8-K (File No. 0-28208) filed
with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, on January
30, 1998).
2.2 Agreement and Plan of Merger, dated as of February 13,
1998, by and among Devon Group, Inc., Applied Graphics
Technologies, Inc., and AGT Acquisition Corp.
3.1 Certificate of Incorporation (Incorporated by reference
to Exhibit No. 3.1 forming part of the Registrant's
Registration Statement on Form S-1 (File No. 333-00478)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended).
3.2 Amended and Restated By-Laws of Applied Graphics
Technologies, Inc. (Incorporated by reference to Exhibit
No. 3.2 forming part of Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (File
No. 333-00478) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as
amended).
4 Specimen Stock Certificate (Incorporated by reference to
Exhibit No. 4 forming part of Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (File
No. 333-00478) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as
amended).
10.2 Applied Graphics Technologies, Inc. 1996 Stock Option
Plan (Incorporated by reference to Exhibit No. 10.2
forming part of Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-00478)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended).
10.3 Applied Graphics Technologies, Inc. Non-Employee
Directors Nonqualified Stock Option Plan (Incorporated
by reference to Exhibit No. 10.3 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.4* Loan and Purchase Agreement, dated January 8, 1992, as
amended (Incorporated by reference to Exhibit No. 10.4
forming part of Registrant's Report on Form 10-K/A (File
No. 0-28208) filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as
amended, for the fiscal year ended December 31, 1996).
10.4(a)* Second Amendment to Loan and Purchase Agreement dated
April 19, 1996 (Incorporated by reference to Exhibit No.
10.4(a) forming part of the Registrant's Report on Form
10-K/A (File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the fiscal year ended December 31,
1996).
10.4(b)* Third Amendment to Loan and Purchase Agreement dated
June 30, 1997. (Incorporated by reference to Exhibit No.
10.4(b) forming part of the Registrant's Report on Form
10-Q/A (File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the quarterly period ended June
30, 1997).
10.5 Agreement, dated May 1, 1979, between WAMM Associates
and Publisher Phototype International, L.P., as amended
(Incorporated by reference to Exhibit No. 10.5 forming
part of Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(a) Employment Agreement, effective as of April 1, 1996,
between the Company and Diane Romano (Incorporated by
reference to Exhibit No. 10.6 forming part of Amendment
No. 3 to the Registrant's Registration Statement on Form
S-1 (File No. 333-00478) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended).
10.6(b) Employment Agreement, effective as of April 1, 1996,
between the Company and Georgia L. McCabe (Incorporated
by reference to Exhibit No. 10.6 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(c) Employment Agreement, effective as of March 13, 1996,
between the Company and Melvin A. Ettinger (Incorporated
by reference to Exhibit No. 10.6 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(d) Employment Agreement, effective as of April 1, 1996,
between the Company and Scott A. Brownstein
(Incorporated by reference to Exhibit No. 10.6 forming
part of Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(e)(i) Employment Agreement, effective as of June 1, 1996,
between the Company and Louis Salamone, Jr.
(Incorporated by reference to Exhibit No. 10.6(e)
forming part of the Registrant's Report on Form 10-Q
(File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the quarterly period ended March
31, 1997).
10.6(e)(ii) Noncompetition, Nonsolicitation, and Confidentiality
Agreement, effective as of June 1, 1996, between the
Company and Louis Salamone, Jr. (Incorporated by
reference to Exhibit No. 10.6(e) forming part of the
Registrant's Report on Form 10-K (File No. 0-28208)
filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, for the
fiscal year ended December 31, 1996).
10.7 Form of Registration Rights Agreement (Incorporated by
reference to Exhibit No. 10.7 forming part of Amendment
No. 3 to the Registrant's Registration Statement on Form
S-1 (File No. 333-00478) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended).
16 Letter regarding Change in Certifying Accountant
(Incorporated by reference to the Registrant's Report on
Form 8-K (File No. 0-28208) filed with the Securities
and Exchange Commission under the Securities Exchange
Act of 1934, as amended, on October 4, 1996).
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P
27.1 Financial Data Schedule (EDGAR filing only).
27.2 Restated Financial Data Schedule - 1996 Restatements
(EDGAR Filing only).
27.3 Restated Financial Data Schedule - 1997 Restatements
(EDGAR Filing only).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Confidential portions omitted and supplied separately to the Securities and
Exchange Commission.
(b) The Registrant did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Registrant)
By: /s/ Fred Drasner
_____________________________ March 27, 1998
Fred Drasner
Director, Chairman, and Chief Executive Officer
(Duly authorized officer)
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on March 27, 1998.
Signature
Title
/s/ Fred Drasner Director, Chairman, and Chief Executive Officer
Fred Drasner (Principal Executive Officer)
/s/ Melvin A. Ettinger Vice Chairman, Chief Operating Officer, and Director
Melvin A. Ettinger
/s/ Diane Romano President
Diane Romano
/s/ Louis Salamone, Jr. Senior Vice President and Chief Financial Officer
Louis Salamone, Jr. (Principal Financial and Accounting Officer)
/s/ Martin D. Krall Executive Vice President, Chief Legal Officer,
Martin D. Krall Secretary and Director
/s/ Mortimer B. Zuckerman Chairman of the Board of Directors
Mortimer B. Zuckerman
/s/ John R. Harris Director
John R. Harris
/s/ Edward H. Linde Director
Edward H. Linde
/s/ Howard Stringer Director
Howard Stringer
/s/ Linda J. Wachner Director
Linda J. Wachner
<PAGE>
<TABLE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the year ended December 31, 1997
(In thousands)
<CAPTION>
Additions
------------------------------------
Balance at
beginning Charged to costs Charged to other Balance at
Description of period and expenses accounts (1) Deductions (2) end of period
- -------------------------------- -------------- ------------------ ------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowances deducted in the
balance sheetfrom assets
to which they apply:
Allowance for doubtful accounts $ 472 $ 3,990 $ 308 $ (781) $ 3,989
<FN>
(1) Represents allowances for doubtful accounts recorded in connection with acquisitions.
(2) Represents uncollectible accounts written off.
</FN>
</TABLE>
<PAGE>
Exhibit 2.2
AGREEMENT AND PLAN OF MERGER
AMONG
APPLIED GRAPHICS TECHNOLOGIES, INC.,
AGT ACQUISITION CORP.
AND
DEVON GROUP, INC.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
THE MERGER..............................3
SECTION 1.1. The Merger...................................................3
SECTION 1.2. Effective Time...............................................3
SECTION 1.3. Closing of the Merger........................................4
SECTION 1.4. Effects of the Merger........................................4
SECTION 1.5. Certificate of Incorporation and Bylaws......................4
SECTION 1.6. Directors....................................................4
SECTION 1.7. Officers.....................................................4
ARTICLE 2
CONVERSION OF SHARES; MERGER CONSIDERATION..............4
SECTION 2.1. Conversion of Shares.........................................4
SECTION 2.2. Exchange of Certificates and Cash............................6
SECTION 2.3. Stock Options................................................7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY............................8
SECTION 3.1. Organization and Qualification...............................8
SECTION 3.2. Capitalization of the Company and its Subsidiaries...........8
SECTION 3.3. Authority Relative to this Agreement.........................9
SECTION 3.4. SEC Reports; Financial Statements...........................10
SECTION 3.5. Information Supplied........................................10
SECTION 3.6. Consents and Approvals; No Violations.......................11
SECTION 3.7. No Default..................................................11
SECTION 3.8. No Undisclosed Liabilities; Absence of Changes..............12
SECTION 3.9. Litigation..................................................12
SECTION 3.10. Compliance with Applicable Law..............................12
SECTION 3.11. Employee Plans..............................................13
SECTION 3.12. Environmental Matters.......................................14
SECTION 3.13. Tax Matters.................................................16
SECTION 3.14. Intellectual Property.......................................18
SECTION 3.15. Opinion of Financial Advisor................................19
SECTION 3.16. Brokers.....................................................19
SECTION 3.17. Material Contracts..........................................19
SECTION 3.18. Labor Matters...............................................20
SECTION 3.19. Insurance...................................................20
SECTION 3.20. Customers...................................................20
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF AGT AND ACQUISITIONS......................20
SECTION 4.1. Organization and Qualification..............................20
SECTION 4.2. Capitalization of AGT and its Subsidiaries..................21
SECTION 4.3. Authority Relative to this Agreement........................22
SECTION 4.4. SEC Reports; Financial Statements...........................22
SECTION 4.5. Information Supplied........................................23
SECTION 4.6. Consents and Approvals; No Violations.......................23
SECTION 4.7. No Default..................................................24
SECTION 4.8. No Undisclosed Liabilities; Absence of Changes..............24
SECTION 4.9. Litigation..................................................24
SECTION 4.10. Compliance with Applicable Law..............................24
SECTION 4.11. Employee Plans..............................................25
SECTION 4.12. Environmental Matters.......................................26
SECTION 4.13. Tax Matters.................................................27
SECTION 4.14. Intellectual Property.......................................29
SECTION 4.15. Material Contracts..........................................29
SECTION 4.16. Labor Matters...............................................30
SECTION 4.17. Insurance...................................................30
SECTION 4.18. Customers...................................................30
SECTION 4.19. No Prior Activities.........................................30
SECTION 4.20. Opinion of Financial Advisor................................30
SECTION 4.21. Brokers.....................................................30
SECTION 4.22. Ownership of Company Common Stock...........................30
ARTICLE 5
COVENANTS.............................31
SECTION 5.1. Conduct of Business.........................................31
SECTION 5.2. Preparation of S-4 and the Joint Proxy Statement............34
SECTION 5.3. No Solicitation.............................................34
SECTION 5.4. Letters of the Company's and AGT's Accountants..............36
SECTION 5.5. Meetings....................................................36
SECTION 5.6. Access to Information.......................................37
SECTION 5.7. Additional Agreements; Reasonable Best Efforts..............37
SECTION 5.8. Antitrust Reviews...........................................38
SECTION 5.9. Public Announcements........................................38
SECTION 5.10. Indemnification; Directors' and Officers' Insurance.........38
SECTION 5.11. Notification of Certain Matters.............................39
SECTION 5.12. Tax-Free Reorganization Treatment...........................39
SECTION 5.13. Company Employee Benefits...................................40
SECTION 5.14. Certain Payment of Deferred Compensation and Bonuses........40
SECTION 5.15. Stock Options...............................................40
SECTION 5.16. SEC Filings.................................................40
SECTION 5.17. Guarantee of Performance....................................40
ARTICLE 6
CONDITIONS TO CONSUMMATION
OF THE MERGER...........................40
SECTION 6.1. Conditions to Each Party's Obligations to Effect............
the Merger..................................................40
SECTION 6.2. Conditions to the Obligations of the Company................41
SECTION 6.3. Conditions to the Obligations of AGT and Acquisition........42
ARTICLE 7
TERMINATION; AMENDMENT; WAIVER...................42
SECTION 7.1. Termination.................................................42
SECTION 7.2. Effect of Termination.......................................43
SECTION 7.3. Fees and Expenses...........................................43
SECTION 7.4. Amendment...................................................44
SECTION 7.5. Extension; Waiver...........................................44
ARTICLE 8
MISCELLANEOUS...........................45
SECTION 8.1. Nonsurvival of Representations and Warranties...............45
SECTION 8.2. Entire Agreement; Assignment................................45
SECTION 8.3. Notices.....................................................45
SECTION 8.4. Governing Law...............................................46
SECTION 8.5. Descriptive Headings........................................46
SECTION 8.6. Interpretive Provisions; Certain Definitions................46
SECTION 8.7. Parties in Interest.........................................46
SECTION 8.8. Severability................................................46
SECTION 8.9. Specific Performance........................................46
SECTION 8.10. Brokers.....................................................46
SECTION 8.11. Counterparts................................................47
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of February 13,
1998 (the "Agreement"), is among APPLIED GRAPHICS TECHNOLOGIES, INC., a Delaware
corporation ("AGT"), AGT ACQUISITION CORP., a Delaware corporation and a
wholly-owned subsidiary of AGT ("Acquisition"), and DEVON GROUP, INC., a
Delaware corporation (the "Company").
WHEREAS, the respective Boards of Directors of AGT,
Acquisition and the Company have determined that the Merger (as defined in
Section 1.1) is fair to and in the best interests of their respective
stockholders and have approved the Merger in accordance with this Agreement;
WHEREAS, for federal income tax purposes, it is intended that
the Merger shall qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, concurrently with the execution hereof, certain
holders of Shares (as defined in Section 2.1) are entering into an agreement
(the "Stockholders Agreement") providing for certain matters with respect to
their Shares, a copy of which is attached hereto as Exhibit A;
WHEREAS, the Company has delivered to AGT a letter identifying
all persons (each, a "Company Affiliate") who are, at the date hereof,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act of
1933, as amended (the "Securities Act"), and each Company Affiliate has
delivered to AGT a letter (each, an "Affiliate Letter") relating to (i) the
transfer, prior to the Effective Time (as defined in Section 1.2), of the Shares
beneficially owned by such Company Affiliate on the date hereof and (ii) the
transfer of the shares of AGT Common Stock (as defined in Section 2.1(d)) to be
received by such Company Affiliate in the Merger; and
WHEREAS, AGT, Acquisition and the Company desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the premises and the
mutual representations, warranties, covenants and agreements herein contained,
AGT, Acquisition and the Company hereby agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1. The Merger. At the Effective Time and upon the
terms and subject to the conditions of this Agreement and in accordance with the
Delaware General Corporation Law (the "DGCL"), the Company shall be merged with
and into Acquisition (the "Merger"). Following the Merger, Acquisition shall
continue as the surviving corporation (the "Surviving Corporation") and the
separate corporate existence of the Company shall cease.
SECTION 1.2. Effective Time. Subject to the provisions of this
Agreement, AGT, Acquisition and the Company shall cause the Merger to be
consummated by filing an appropriate Certificate of Merger or other appropriate
documents (the "Certificate of Merger") with the Secretary of State of the State
of Delaware in such form as required by, and executed in accordance with, the
relevant provisions of the DGCL, as soon as practicable on or after the Closing
Date (as defined in Section 1.3). The Merger shall become effective upon such
filing or at such time thereafter as is provided in the Certificate of Merger
(the "Effective Time").
SECTION 1.3. Closing of the Merger. The closing of the Merger
(the "Closing") will take place at a time and on a date to be specified by the
parties, which shall be the third business day after satisfaction or waiver of
the conditions set forth in Article 6 (the "Closing Date"), at the offices of
Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, unless
another time, date or place is agreed to in writing by the parties hereto.
SECTION 1.4. Effects of the Merger. The Merger shall have the
effects set forth in the DGCL. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all the properties, rights,
privileges, powers and franchises of the Company and Acquisition shall vest in
the Surviving Corporation, and all debts, liabilities and duties of the Company
and Acquisition shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.5. Certificate of Incorporation and Bylaws. The
Certificate of Incorporation of Acquisition in effect at the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation until
amended in accordance with applicable law. The Bylaws of Acquisition in effect
at the Effective Time shall be the Bylaws of the Surviving Corporation until
amended in accordance with applicable law.
SECTION 1.6. Directors. The directors of Acquisition at the
Effective Time shall be the initial directors of the Surviving Corporation, each
to hold office in accordance with the Certificate of Incorporation and Bylaws of
the Surviving Corporation until such director's successor is duly elected or
appointed and qualified. On or prior to the Closing Date, the number of
directors of AGT shall be increased by two and the vacancies created thereby
shall be initially filled by Marne Obernauer, Jr. and a designee to be
determined jointly by the Company and AGT.
SECTION 1.7. Officers. The officers of the Company at the
Effective Time shall be the initial officers of the Surviving Corporation, each
to hold office in accordance with the Certificate of Incorporation and Bylaws of
the Surviving Corporation until such officer's successor is duly elected or
appointed and qualified.
ARTICLE 2
CONVERSION OF SHARES; MERGER CONSIDERATION
SECTION 2.1. Conversion of Shares. At the Effective Time, by
virtue of the Merger and without any action on the part of any of the parties
hereto or any holder of shares of the Company's common stock, par value $.01 per
share (the "Company Common Stock"):
(a) Common Stock of Acquisition. Each issued and outstanding
share of common stock, par value $0.01 per share, of Acquisition shall be
converted into one share of common stock, par value $0.01 per share, of the
Surviving Corporation.
(b) Cancellation of Treasury Shares and AGT-Owned Shares. Each
Share (as defined in Section 2.1(c)) that is owned by the Company, or by AGT,
Acquisition or any other subsidiary of AGT shall automatically be cancelled and
retired and shall cease to exist, and no cash or other consideration shall be
delivered or deliverable in exchange therefor.
(c) Common Stock of the Company. Each share of Company Common
Stock issued and outstanding immediately prior to the Effective Time (each, a
"Share"), other than Shares to be cancelled in accordance with Section 2.1(b)
and any Dissenting Shares (as defined in Section 2.1(e)), shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease to
exist, and each certificate evidencing any such Shares shall thereafter
represent the right to receive, upon the surrender of such certificate in
accordance with the provisions of Section 2.2, the Merger Consideration (as
defined in Section 2.1(d)) multiplied by the number of Shares evidenced by the
cancelled certificate. The holders of such certificates previously evidencing
such Shares outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such Shares except as otherwise provided herein
or by law.
(d) Merger Consideration. The term "Merger Consideration"
means (i) a cash payment in an amount equal to $30.00 (the "Per Share Cash
Amount") and (ii) .6 fully paid and nonassessable shares of common stock, par
value $.01 per share of AGT ("AGT Common Stock").
(e) Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, Shares issued and outstanding immediately prior to
the Effective Time held by a holder (if any) who has the right to demand, and
who properly demands, an appraisal of such Shares in accordance with Section 262
of the DGCL (or any successor provision) ("Dissenting Shares") shall not be
converted into a right to receive the Merger Consideration, unless such holder
fails to perfect or otherwise loses such holder's right to such appraisal, if
any. If, after the Effective Time, such holder fails to perfect or loses any
such right to appraisal, each such Share of such holder shall be treated as a
Share that had been converted as of the Effective Time into the right to receive
the Merger Consideration. At the Effective Time, any holder of Dissenting Shares
shall cease to have any rights with respect thereto, except the rights provided
in Section 262 of the DGCL (or any successor provision) and as provided in the
immediately preceding sentence. The Company shall give prompt notice to AGT of
any demands received by the Company for appraisal of Shares, and AGT shall have
the right to participate in and direct all negotiations and proceedings with
respect to such demands. The Company shall not, except with the prior written
consent of AGT, make any payment with respect to, or settle or offer to settle,
any such demands.
(f) Adjustment. If, based on the Merger Consideration payable
pursuant to Section 2.1(d), the tax opinions referred to in Sections 6.2(c) and
6.3(f) hereof cannot be delivered as a result of the Merger potentially failing
to satisfy continuity of interest requirements under applicable federal income
tax principles relating to reorganizations under Section 368(a) of the Code (as
reasonably determined by Weil, Gotshal & Manges LLP and O'Sullivan Graev &
Karabell, LLP, such determination to be made (x) taking into account Dissenting
Shares and cash issued in lieu of fractional shares, if any, (y) using the
Closing Date Price as the measure of value of the shares of AGT Common Stock
issued as Merger Consideration and (z) requiring that the total value of such
AGT Common Stock issued as Merger Consideration represent no less than 45% of
the total consideration issued and to be issued in the Merger to all holders of
Shares), then the Merger Consideration shall be adjusted by reducing, to the
extent necessary to enable the tax opinions to be rendered, the amount of cash
to be delivered to the holders of Shares, for each Share converted, and in lieu
thereof delivering to such holders such number of shares of AGT Common Stock
equal to (x) the amount by which the cash component of the Merger Consideration
is reduced, pursuant to this clause, in order to enable the rendering of the tax
opinions, divided by (y) the Closing Date Price.
For purposes hereof, the "Closing Date Price" of a share of
AGT Common Stock shall be the closing sales price of AGT Common Stock as
reported on the Nasdaq National Market ("NASDAQ") as of the close of the trading
day immediately prior to the Closing Date.
SECTION 2.2. Exchange of Certificates and Cash.
(a) Exchange Agent. On the Effective Date, AGT shall deposit,
or shall cause to be deposited, with or for the account of a bank or trust
company designated by AGT, which shall be reasonably satisfactory to the Company
(the "Exchange Agent"), for the benefit of the holders of Shares (other than
Dissenting Shares), for exchange in accordance with this Article 2, through the
Exchange Agent, (i) certificates evidencing the whole shares of AGT Common Stock
issuable pursuant to Sections 2.1(d) and 2.1(f), to the extent applicable, in
exchange for outstanding Shares, (ii) cash in the aggregate amount required to
be exchanged for Shares pursuant to Sections 2.1(d) and 2.1(f), to the extent
applicable, and (iii) cash in an amount sufficient to permit payment of cash
payable in lieu of fractional shares pursuant to Section 2.2(d) (the cash
described in (ii) and (iii) is hereafter collectively referred to as the
"Exchange Cash Consideration" and such certificates for shares of AGT Common
Stock, together with any dividends or distributions with respect thereto, and
the Exchange Cash Consideration are hereafter collectively referred to as the
"Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable
instructions, deliver the Merger Consideration to holders of Shares. Except as
contemplated by Section 2.2(d) hereof, the Exchange Fund shall not be used for
any other purpose. Any interest, dividends or other income earned on the
investment of cash or other property held in the Exchange Fund (except for
dividends on shares of AGT Common Stock) shall be for the account of AGT.
(b) Exchange Procedures. As soon as reasonably practicable
after the Effective Time, AGT will instruct the Exchange Agent to mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time evidenced outstanding Shares (the "Certificates"), other than
Dissenting Shares, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as AGT may reasonably
specify) and (ii) instructions to effect the surrender of the Certificates in
exchange for the certificates evidencing shares of AGT Common Stock and cash.
Upon surrender of a Certificate for cancellation to the Exchange Agent together
with such letter of transmittal, duly executed, and such other customary
documents as may be required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger
Consideration, multiplied by the number of Shares evidenced by such Certificate,
and the Certificate so surrendered shall forthwith be cancelled. In the event of
a transfer of ownership of Shares which is not registered in the transfer
records of the Company, shares of AGT Common Stock and cash may be issued and
paid in accordance with this Article 2 to a transferee if the Certificate
evidencing such Shares is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.2, each Certificate shall be deemed at any time
after the Effective Time to evidence only the right to receive upon such
surrender the Merger Consideration, multiplied by the number of Shares
previously evidenced by such Certificate.
(c) Distributions With Respect to Unexchanged Shares of AGT
Common Stock. No dividends or other distributions with respect to shares of AGT
Common Stock, with a record date after the Effective Time, shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of AGT Common
Stock they are entitled to receive until the holder of such Certificate shall
surrender such Certificate.
(d) Fractional Shares. No fraction of a share of AGT Common
Stock shall be issued in the Merger. In lieu of any such fractional shares, each
holder of Shares entitled to receive shares of AGT Common Stock in the Merger,
upon surrender of a Certificate for exchange pursuant to this Section 2.2, shall
be paid an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying (x) the per share closing price of a share of AGT
Common Stock on the NASDAQ on the date of the Effective Time (or the last bid
price in the absence of a trade) by (y) the fractional interest in AGT Common
Stock to which such holder would otherwise be entitled (after taking into
account all Shares then held of record by such holder).
(e) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the holders of Shares for six months after
the Effective Time shall be delivered to AGT, upon demand, and any holders of
Shares who have not theretofore complied with this Article 2 shall thereafter
look only to AGT for the Merger Consideration to which they are entitled
pursuant to this Article 2.
(f) No Liability. Neither AGT nor the Company shall be liable
to any holder of Shares for any such shares of AGT Common Stock (or dividends or
distributions with respect thereto) or cash from the Exchange Fund delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
(g) Withholding Rights. AGT or the Exchange Agent shall be
entitled to deduct and withhold, from the consideration otherwise payable
pursuant to this Agreement to any holder of Shares, such amounts as AGT or the
Exchange Agent is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by AGT or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the Shares in respect of which such deduction
and withholding was made by AGT or the Exchange Agent.
SECTION 2.3. Stock Options. At the Effective Time, each holder
of a then outstanding option to purchase Shares (collectively, "Options") under
the Company's Non-Qualified Stock Option Plan, 1993 Non-Qualified Stock Option
Plan or 1995 Non-Qualified Stock Option Plan (collectively, the "Stock Option
Plans"), whether or not then exercisable or fully vested, in settlement thereof,
shall be entitled to receive from the Company for each Share subject to such
Option (whether or not then exercisable) an amount in cash equal to the
difference between $60.00 and the per share exercise price of such Option, to
the extent $60.00 is greater than the per share exercise price of such Option
and all such Options under the Stock Option Plans shall be cancelled and cease
to exist and the Stock Option Plans shall be terminated.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of AGT and
Acquisition as follows:
SECTION 3.1. Organization and Qualification.
(a) The Company and each of its subsidiaries (as defined in
Section 3.1(b)) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
and has all requisite corporate power and authority to own, lease and operate
its properties and to carry on its businesses as now being conducted, except
where the failure to be so organized, existing and in good standing or to have
such power and authority would not have or constitute a Material Adverse Effect
(as defined below) on the Company.
When used in any clause of this Agreement in connection with
any party hereto, the term "Material Adverse Effect" means (i) a material
adverse effect, or any development that is reasonably likely to result in a
material adverse effect, on the business, financial condition or results of
operations of such party and its subsidiaries, taken as whole, or (ii) an event,
change, effect or development that is reasonably likely to materially impair or
materially delay the ability of such party to consummate the transactions
contemplated hereby.
(b) Except as set forth in Section 3.1(b) of the Disclosure
Schedule previously delivered by the Company to AGT (the "Company Disclosure
Schedule"), the Company has no subsidiaries and does not own, directly or
indirectly, beneficially or of record, any shares of capital stock or other
security of any other entity or any other investment in any other entity. The
term "subsidiary" shall mean, when used with reference to any party to this
Agreement, any entity more than fifty percent (50%) of either the outstanding
voting securities or the value of the outstanding equity securities or interests
(including membership interests) of which are owned directly or indirectly by
such party.
(c) The Company and each of its subsidiaries is duly qualified
or licensed and in good standing to do business in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except in such
jurisdictions where the failure to be so duly qualified or licensed and in good
standing would not have or constitute a Material Adverse Effect on the Company.
(d) The Company has heretofore delivered to AGT accurate and
complete copies of the certificate of incorporation and by-laws, as currently in
effect, of the Company and each of its subsidiaries.
SECTION 3.2. Capitalization of the Company and its Subsidiaries.
(a) The authorized capital stock of the Company consists of:
(i) 30,000,000 shares of Company Common Stock, of which, as of December 31,
1997, 7,358,817 shares were issued and outstanding and 1,099,500 shares were
held in treasury and (ii) 5,000,000 shares of Preferred Stock, par value $.01
per share, 24,060 shares of Redeemable Preferred Stock - Series A, par value
$1.00 per share and 21,940 shares of Redeemable Preferred Stock - Series B, par
value $1.00 per share, no shares of which were issued and outstanding. All of
the issued and outstanding shares of Company Common Stock have been validly
issued, and are fully paid, nonassessable and free of preemptive rights. As of
December 31, 1997, 842,500 shares of Company Common Stock were reserved for
issuance and issuable upon or otherwise deliverable in connection with the
exercise of outstanding Options issued pursuant to the Stock Option Plans. Since
December 31, 1997, no shares of the Company's capital stock have been issued
other than pursuant to the exercise of Options already in existence on such date
and, since December 31, 1997, no stock options have been granted. Except as set
forth above in this Section 3.2(a), as of the date hereof, there are outstanding
(i) no shares of capital stock or other voting securities of the Company, (ii)
no securities of the Company or its subsidiaries convertible into or
exchangeable for shares of capital stock or voting securities of the Company,
(iii) no options or other rights to acquire from the Company or its
subsidiaries, and no obligations of the Company or its subsidiaries to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company, and (iv) no
equity equivalents, interests in the ownership or earnings of the Company or its
subsidiaries or other similar rights (including stock appreciation rights)
(collectively, "Company Securities"). There are no outstanding obligations of
the Company or its subsidiaries to repurchase, redeem or otherwise acquire any
Company Securities. Except as set forth in Section 3.2(a) of the Company
Disclosure Schedule and except as contemplated by this Agreement, there are no
stockholder agreements, voting trusts or other agreements or understandings to
which the Company is a party or to which it is bound relating to the voting of
any shares of capital stock of the Company.
(b) Except as set forth in Section 3.2(b) of the Company
Disclosure Schedule, all of the outstanding capital stock of the Company's
subsidiaries is owned by the Company, directly or indirectly, free and clear of
any Lien (as defined below) or any other limitation or restriction (including
any restriction on the right to vote or sell the same, except as may be provided
as a matter of law). There are no securities of the Company or its subsidiaries
convertible into or exchangeable for, no options or other rights to acquire from
the Company or its subsidiaries, and no other contract, understanding,
arrangement or obligation (whether or not contingent) providing for the issuance
or sale, directly or indirectly of, any capital stock or other ownership
interests in, or any other securities of, any subsidiary of the Company. There
are no outstanding contractual obligations of the Company or its subsidiaries to
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
or other ownership interests in any subsidiary of the Company. For purposes of
this Agreement, "Lien" means, with respect to any asset (including, without
limitation, any security) any mortgage, lien, pledge, charge, security interest
or encumbrance of any kind in respect of such asset.
SECTION 3.3. Authority Relative to this Agreement.
(a) The Company has all necessary corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of the Company (the "Company
Board") and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby (other than, with respect to the Merger, the approval and
adoption of this Agreement by the holders of a majority of the then outstanding
shares of Company Common Stock). This Agreement has been duly and validly
executed and delivered by the Company and constitutes a valid, legal and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).
(b) The Company Board has, by unanimous vote of those present,
duly and validly approved, and taken all corporate actions required to be taken
by the Company Board for the consummation of, the transactions contemplated
hereby, including the Merger, and resolved to recommend that the stockholders of
the Company approve and adopt this Agreement. The action of the Company Board in
approving this Agreement and the transactions contemplated hereby, including the
Merger, is sufficient to render inapplicable to the Merger and this Agreement
the provisions of Section 203 of the DGCL and, to the knowledge of the Company,
no Delaware or other State takeover statute or similar statute or regulation
applies to the Merger, this Agreement or any of the transactions contemplated
hereby.
SECTION 3.4. SEC Reports; Financial Statements.
(a) The Company has filed all required forms, reports and
documents with the Securities and Exchange Commission (the "SEC") since April 1,
1995, each of which has complied in all material respects with all applicable
requirements of the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), each as in effect on the dates such forms, reports
and documents were filed. The Company has heretofore delivered to AGT, in the
form filed with the SEC (including any amendments thereto), (i) its Annual
Reports on Form 10-K for each of the fiscal years ended March 31, 1997 and March
31, 1996, (ii) all definitive proxy statements relating to the Company's
meetings of stockholders (whether annual or special) held since April 1, 1995
and (iii) all other reports or registration statements filed by the Company with
the SEC since April 1, 1995 (the "Company SEC Reports"). None of such forms,
reports or documents, including, without limitation, any financial statements or
schedules included or incorporated by reference therein, contained, when filed,
any untrue statement of a material fact or omitted to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements of the Company
included in the Company SEC Reports complied as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto and fairly presented, in conformity with United
States generally accepted accounting principles ("GAAP") applied on a consistent
basis (except as may be indicated in the notes thereto), the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and their consolidated results of operations and changes in
financial position for the periods then ended (subject, in the case of the
unaudited interim financial statements, to normal year-end adjustments). Since
April 1, 1997, except as set forth in the Company SEC Reports, there has not
been any change, or any application or request for any change, by the Company or
any of its subsidiaries in accounting principles, methods or policies for
financial accounting or tax purposes (subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments).
(b) The Company has heretofore made available to AGT a
complete and correct copy of any material amendments or modifications, which
have not yet been filed with the SEC, to agreements, documents or other
instruments which previously had been filed by the Company with the SEC pursuant
to the Exchange Act.
SECTION 3.5. Information Supplied. None of the information
supplied or to be supplied by the Company in writing for inclusion or
incorporation by reference in (i) the registration statement on Form S-4 to be
filed with the SEC by AGT in connection with the issuance of shares of AGT
Common Stock in the Merger (the "S-4") will, at the time the S-4 is filed with
the SEC and at the time it becomes effective under the Securities Act, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading and (ii) the proxy statement relating to the meetings of the
Company's stockholders and AGT's stockholders to be held in connection with the
Merger (the "Joint Proxy Statement") will, at the date mailed to stockholders of
the Company and AGT and at the times of the meetings of stockholders of the
Company and AGT to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If at any time
prior to the Effective Time, any event with respect to the Company, its officers
and directors or any of its subsidiaries should occur which is required to be
described in an amendment of, or a supplement to, the S-4 or the Joint Proxy
Statement, the Company shall promptly so advise AGT and such event shall be so
described, and such amendment or supplement (which AGT and the Company shall
have a reasonable opportunity to review) shall be promptly filed with the SEC
and, as required by law, disseminated to the stockholders of the Company. The
Joint Proxy Statement, insofar as it relates to the meeting of the Company's
stockholders to vote on the Merger, will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder.
SECTION 3.6. Consents and Approvals; No Violations. Except for
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Securities Act, the Exchange
Act, state securities or blue sky laws, the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the filing and recordation
of the Certificate of Merger as required by the DGCL and as otherwise set forth
in Section 3.6 to the Company Disclosure Schedule, no filing with or notice to,
and no permit, authorization, consent or approval of, any court or tribunal or
administrative, governmental or regulatory body, agency or authority (a
"Governmental Entity") is necessary for the execution and delivery by the
Company of this Agreement or the consummation by the Company of the transactions
contemplated hereby, except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings or give such
notice would not have a Material Adverse Effect on the Company. Except as set
forth in Section 3.6 to the Company Disclosure Schedule, neither the execution,
delivery and performance of this Agreement by the Company nor the consummation
by the Company of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the respective certificate or articles
of incorporation or bylaws (or similar governing documents) of the Company or
any of its subsidiaries, (ii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancellation or acceleration or Lien)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which the Company or any of its subsidiaries is a party or by which any of
them or any of their respective properties or assets may be bound, or (iii)
violate any order, writ, injunction, decree, law, statute, rule or regulation
applicable to the Company or any of its subsidiaries or any of their respective
properties or assets, except in the case of (ii) for violations, breaches or
defaults which would not have a Material Adverse Effect on the Company.
SECTION 3.7. No Default. None of the Company or its
subsidiaries is in default or violation (and no event has occurred which with or
without due notice or the lapse of time or both would constitute a default or
violation) of any term, condition or provision of (i) its certificate or
articles of incorporation or bylaws (or similar governing documents), (ii) any
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which the Company or any of its subsidiaries is now
a party or by which any of them or any of their respective properties or assets
may be bound or (iii) any order, writ, injunction, decree, law, statute, rule or
regulation applicable to the Company, its subsidiaries or any of their
respective properties or assets, except in the case of (ii) or (iii) for
violations, breaches or defaults which would not have or constitute a Material
Adverse Effect on the Company.
SECTION 3.8. No Undisclosed Liabilities; Absence of Changes.
Except as and to the extent publicly disclosed by the Company in the Company SEC
Reports filed prior to the date of this Agreement or disclosed in Section 3.8 of
the Company Disclosure Schedule, since April 1, 1997, (a) neither the Company
nor its subsidiaries has incurred any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which in the aggregate would have a Material
Adverse Effect on the Company, (b) the business of the Company and its
subsidiaries has been carried on only in the ordinary course consistent with
past practices, (c) the Company has not paid any dividend or distribution in
respect of, or redeemed or repurchased any Company Securities, (d) other than
consistent with past practices, the Company has not entered into or consummated
any transaction with any officer, director or affiliate of the Company or any
person known by the Company to be an affiliate of any of them and (e) the
Company has not changed its methods of accounting.
SECTION 3.9. Litigation. Except as publicly disclosed by the
Company in the Company SEC Reports or disclosed in Section 3.9 of the Company
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of the Company, threatened against
the Company or any of its subsidiaries or any of their respective properties or
assets which (a) individually or in the aggregate, would have a Material Adverse
Effect on the Company or (b) questions the validity of this Agreement or any
action to be taken by the Company in connection with the consummation of the
transactions contemplated hereby or could otherwise prevent or materially delay
the consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by the Company in the Company SEC Reports, none of the
Company or its subsidiaries is subject to any outstanding order, writ,
injunction or decree which would have a Material Adverse Effect on the Company.
SECTION 3.10. Compliance with Applicable Law. Except as
publicly disclosed by the Company in the Company SEC Reports, the Company and
its subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for the lawful conduct of their
respective businesses (the "Company Permits"), except for failures to hold such
permits, licenses, variances, exemptions, orders and approvals which would not
have a Material Adverse Effect on the Company. Except as publicly disclosed by
the Company in the Company SEC Reports, the Company and its subsidiaries are in
compliance with the terms of the Company Permits, except where the failure so to
comply would not have a Material Adverse Effect on the Company. Except as
publicly disclosed by the Company in the Company SEC Reports, the businesses of
the Company and its subsidiaries are not being conducted in violation of any
law, ordinance or regulation of any Governmental Entity except that no
representation or warranty is made in this Section 3.10 with respect to
Environmental Laws (as defined and addressed in Section 3.12(a)) and except for
violations or possible violations which would not have a Material Adverse Effect
on the Company. Except as publicly disclosed by the Company in the Company SEC
Reports or as disclosed in Section 3.10 of the Company Disclosure Schedule, no
investigation or review by any Governmental Entity with respect to the Company
or its subsidiaries is pending or, to the knowledge of the Company, threatened,
nor, to the knowledge of the Company, has any Governmental Entity indicated an
intention to conduct the same, other than, in each case, those the outcome of
which would not have a Material Adverse Effect on the Company.
SECTION 3.11. Employee Plans.
(a) Section 3.11(a) of the Company Disclosure Schedule lists
all "employee benefit plans," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and all other
employee benefit plans or other benefit arrangements, including executive
compensation, directors' benefit, bonus or other incentive compensation,
severance and deferred compensation plans and practices which the Company or any
of its subsidiaries maintains, is a party to, contributes to or has any
obligation to or liability for (each a "Company Benefit Plan" and collectively,
the "Company Benefit Plans").
(b) True, correct and complete copies or descriptions of each
Company Benefit Plan (and, where applicable, the most recent summary plan
description, actuarial report, determination letter, most recent Form 5500 and
trust agreement) have been delivered to AGT for review prior to the date hereof.
(c) As of the date hereof, except as disclosed on Section
3.11(c) of the Company Disclosure Schedule, (i) all material payments required
to be made by or under any Company Benefit Plan, any related trusts, or any
collective bargaining agreement have been made; (ii) the Company and its
subsidiaries have performed all material obligations required to be performed by
them under any Company Benefit Plan; (iii) the Company Benefit Plans have been
administered in material compliance with their terms and the requirements of
ERISA, the Code and other applicable laws; (iv) there are no actions, suits,
arbitrations or claims (other than routine claims for benefit) pending or, to
the knowledge of the Company, threatened with respect to any Company Benefit
Plan; and (v) the Company and its subsidiaries have no liability as a result of
any "prohibited transaction" (as defined in Section 406 of ERISA and Section
4975 of the Code) for any excise tax or civil penalty.
(d) Except as disclosed on Section 3.11(d) of the Company
Disclosure Schedule, none of the Company Benefit Plans is subject to
Title IV of ERISA.
(e) Except as set forth on Section 3.11(e) of the Company
Disclosure Schedule, the Company and its subsidiaries have not incurred any
unsatisfied withdrawal liability with respect to any multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
(f) Section 3.11(f) of the Company Disclosure Schedule sets
forth a list of all "employee pension plans," as defined on Section 3(2) of
ERISA, maintained by the Company or any of its subsidiaries on any trade or
business (whether or not incorporated) which are under control, or which are
treated as a single employer, with the Company under Section 414(b), (c), (m) or
(o) of the Code (an "ERISA Affiliate"), or to which the Company, its
Subsidiaries or any ERISA Affiliate contributed or is obligated to contribute
thereunder ("Company Pension Plans"). Except as set forth on Section 3.11(f) of
the Company Disclosure Schedule, each of the Pension Plans which is intended to
be "qualified" within the meaning of Section 401(a) and 401(k), if applicable,
and 501(a) of the Code has been determined by the Internal Revenue Service to be
so "qualified" and, to the knowledge of the Company, there is no fact which
would adversely affect the qualified status of any such Company Pension Plan.
(g) Except as set forth on Section 3.11(g) of the Company
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (i) result in any
payment becoming due, or increase the amount of compensation due, to any current
or former employee of the Company or any of its subsidiaries; (ii) increase any
benefits otherwise payable under any Company Benefit Plan; or (iii) result in
the acceleration of the time of payment or vesting of any such benefits.
(h) If and to the extent applicable, no Company Benefit Plan
has or has incurred an accumulated funding deficiency within the meaning of
Section 302 of ERISA or Section 412 of the Code, nor has any waiver of the
minimum funding standards of Section 302 of ERISA and Section 412 of the Code
been requested of or granted by the IRS with respect to any Company Benefit
Plan, nor has any lien in favor of any such plan arisen under Section 412(n) of
the Code or Section 302(f) of ERISA. Except as indicated on Schedule 3.11(h) of
the Company Disclosure Schedule, no Company Benefit Plan is self funded by the
Company. Except as disclosed on Schedule 3.11(h) of the Company Disclosure
Schedule, with respect to any insurance policy providing funding for benefits
under any Company Benefit Plan, there is no liability of the Company in the
nature of a retroactive rate adjustment, loss sharing arrangement, or other
actual or contingent liability, and there will be no such liability arising
wholly or partially out of events occurring prior to the execution of this
Agreement, nor would there be any such liability if the Company cancelled such
policy as of the date hereof.
SECTION 3.12. Environmental Matters. (a) As used in this Agreement:
(1) "Environmental Law" means any applicable federal, state or
local law, statute, code, ordinance, policy, rule, regulation or other
governmental requirement from any U.S. or foreign jurisdiction concerning the
Release (as defined herein), handling, storage, processing, transportation or
other use of any solid waste, industrial waste or Hazardous Substance (as
defined herein) including, by way of example but not limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (43 U.S.C.
ss. 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. ss.
1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et
seq.), the Clean Water Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (33
U.S.C. ss. 2601 et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601
et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss.
136 et seq.) and the Occupational Safety and Health Act (29 U.S.C. ss. 651 et
seq.), as such laws have been amended, and the regulations promulgated pursuant
thereto, and any applicable and analogous state or local statutes, codes,
policies or related requirements of governmental entities of foreign
jurisdictions.
(2) "Environmental Claim" means any allegation, notice of
violation, action, claim, lien, demand, order, injunction, judgment, decree,
ruling, assessment or arbitration award or directive (conditional or otherwise)
by any court, arbitrator or governmental entity or any person for personal
injury (including sickness, disease or death), tangible or intangible property
damage, diminution in value, damage to the environment or natural resources,
nuisance, pollution, contamination or other adverse effects on the environment,
or for fines, penalties or restrictions resulting from or based upon (a) the
existence, or the continuation of the existence, of a Release (including,
without limitation, sudden or non-sudden accidental or non-accidental Release)
of, or exposure to, any Hazardous Substance, odor, audible noise or any solid or
industrial waste; (b) the transportation, storage, treatment or disposal of
solid waste, industrial waste or Hazardous Substances, in connection with the
past or present operations of the Company, any of its subsidiaries or any of
their respective predecessors or assigns; or (c) the violation, or alleged
violation, of any Environmental Laws, orders, injunctions, judgments, decrees,
rulings, assessments, arbitration awards, Environmental Permits or rulings,
orders or decisions of any court arbitrator or Government Entity relating to
environmental matters.
(3) "Environmental Permit" means any permit, approval,
authorization, license, variance, registration, permit application,
notification, program development and implementation, or permission required
under any applicable Environmental Law.
(4) "Hazardous Substance" means any substance, material or
waste which is regulated under any Environmental Law or by any applicable
governmental entity, governmental entity in the jurisdictions in which the
Company or any subsidiary or any of their respective predecessors or assigns
conducts or has conducted business, or the United States, including, without
limitation, any material or substance which is defined as a "hazardous waste,"
"hazardous material," "hazardous substance," "extremely hazardous waste" or
"restricted hazardous waste," "subject waste," "contaminant," "toxic waste,"
"toxic substance" or "residual waste'" under any Environmental Law, including,
but not limited to, radioactive materials, petroleum products, asbestos and
polychlorinated biphenyls.
(5) "Property" means any land, facility or operations
currently or previously owned, leased, subleased or otherwise used by the
Company, any of its subsidiaries or any of their respective predecessors or
assigns.
(6) "Release" means any intentional or unintentional,
continuous or intermittent release, spill, emission, seepage, leaking, pumping,
uncontrolled loss, injection, deposit, disposal, discharge, dispersal, leaching
or migration into the environment, or any building surface, or onto or from any
Property of any Hazardous Substance, including the movement of any Hazardous
Substance through or in the air, soil, surface water, ground water or otherwise.
(7) "Remedial Action" means all actions, including, without
limitation, any capital expenditures, required or voluntarily undertaken to (i)
clean up, remove, treat, or in any other way address any Hazardous Substance or
any other material required pursuant to applicable Environmental Law; (ii)
prevent the Release or threat of Release, or minimize the further Release of any
Hazardous Substance or any other material required pursuant to applicable
Environmental Law, (iii) perform pre-remedial studies and investigations or
post-remedial monitoring and care including the conduct of risk assessments and
negotiation with applicable governmental entities regarding Hazardous Substance
or any other material required pursuant to applicable Environmental Law; or (iv)
bring the Properties into compliance with all applicable Environmental Laws and
Environmental Permits.
(b) Except as disclosed in Section 3.12(b) of the Company
Disclosure Schedule, the Company and each of its subsidiaries, with respect to
its use of and operations at each Property, is in compliance in all respects
with all applicable Environmental Laws, except where the failure to so be in
compliance would not, individually or in the aggregate, have a Material Adverse
Effect on the Company.
(c) Except as disclosed in Section 3.12(c) of the Company
Disclosure Schedule or as disclosed in any Company SEC document filed with the
SEC prior to the date hereof, as of the date hereof, neither the Company nor any
of its subsidiaries or any of their respective predecessors has received any
written communication form a court, arbitrator or governmental entity or any
other person that alleges that the Company or any such subsidiary or predecessor
is not in compliance, in any respect, with any Environmental Law or has
liability thereunder, except, in each case it is reasonably unlikely,
individually or in the aggregate, to have a Material Adverse Effect on the
Company.
(d) Except as disclosed in Section 3.12(d) of the Company
Disclosure Schedule, none of the operations or Properties of the Company or any
of its subsidiaries or any of their respective predecessors or assigns is the
subject of investigation by any governmental entity whether U.S., State, local
or foreign, respecting (A) Environmental Laws, (B) Remedial Action or (C) any
Environmental Claim arising from a Release or otherwise of any Hazardous
Substance or any other substance regulated under any Environmental Law, which in
each case would, individually or in the aggregate, have a Material Adverse
Effect on the Company.
(e) Except as disclosed in Section 3.12(e) of the Company
Disclosure Schedule, the Company, each of its subsidiaries and any of their
respective predecessors have filed all notices required to be filed under all
Environmental Laws reporting any Release, except where failure to file such
notices would not, individually or in the aggregate, have a Material Adverse
Effect on the Company.
(f) Except as disclosed in Section 3.12(f) of the Company
Disclosure Schedule, or as disclosed in any Company SEC Report, neither the
Company nor any of its subsidiaries has any contingent liabilities with respect
to its business or that of its predecessors in connection with any Hazardous
Substance or Environmental Law that would, individually or in the aggregate,
have a Material Adverse Effect on the Company.
(g) Except as disclosed in Section 3.12(g) of the Company
Disclosure Schedule, or as disclosed in any Company SEC Report, as of the date
hereof, underground storage tanks are not located on or under any Property and
there have been no Releases of Hazardous Substances on, in or under any Property
or other real property for which the Company or any of its subsidiaries would be
responsible or potentially responsible and that would have a Material Adverse
Effect on the Company.
(h) Except as disclosed in Section 3.12(h) of the Company
Disclosure Schedule, or as disclosed in any Company SEC Report filed with the
SEC prior to the date hereof, neither the Company nor any of its subsidiaries or
any of their respective predecessors is subject to any judicial, administrative
or arbitral actions, suits, proceedings (public or private), written claims or
governmental proceedings alleging the violation of any Environmental Law or
Environmental Permit that is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company.
(i) Except as disclosed in Section 3.12(i) of the Company
Disclosure Schedule, or as disclosed in any Company SEC Document filed with the
SEC prior to the date hereof, neither the Company nor any of its subsidiaries or
any of their respective predecessors or assigns, as a result of their respective
past and current operations, has caused or permitted any Hazardous Substances to
remain or be disposed of, either on or under any Property or on any real
property not permitted to accept, store or dispose of such Hazardous Substances,
that would, individually or in the aggregate, have a Material Adverse Effect on
the Company.
SECTION 3.13. Tax Matters. Except as disclosed on Section 3.13
of the Company Disclosure Schedule:
(a) The Company and each of its subsidiaries, and each
affiliated group (within the meaning of Section 1504 of the Code) of which the
Company or any of its subsidiaries is or has ever been a member, has (or, by the
Closing Date, will have) timely filed with the appropriate taxing authorities
all federal income tax returns and all other material tax returns and reports
required to be filed by it through the Closing Date. All such tax returns are
(or will be) complete and correct in all material respects. Except to the extent
adequately reserved for in accordance with GAAP, the Company and each of its
subsidiaries has (or, by the Closing Date, will have) paid (or the Company has
paid on its subsidiaries' behalf) all taxes due in respect of the taxable
periods covered by such tax returns. The most recent consolidated financial
statements contained in the Company SEC Reports reflect an adequate reserve in
accordance with GAAP for all taxes payable by the Company and its subsidiaries
for all taxable periods and portions thereof through the date of such financial
statements. The Company has previously made available or delivered to AGT copies
of all income and franchise tax returns filed by the Company and each of its
subsidiaries for their taxable years ended in 1995, 1996 and 1997. For purposes
of this Agreement, "tax" or "taxes" shall mean all taxes, charges, fees,
imposts, levies, gaming or other assessments, including, without limitation, all
net income, gross receipts, capital, sales, use, ad valorem, value added,
transfer, franchise, profits, inventory, capital stock, license, withholding,
payroll, employment, social security, unemployment, excise, severance, stamp,
occupation, property and estimated taxes, customs duties, fees, assessments and
charges of any kind whatsoever, together with any interest and any penalties,
fines, additions to tax or additional amounts imposed by any taxing authority
(domestic or foreign) and shall include any joint and/or transferee liability in
respect of taxes or any liability in respect of taxes imposed by contract, tax
sharing agreement, tax indemnity agreement or any similar agreement. "Tax
returns" shall mean any report, return, document, declaration or any other
information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to taxes, including, without
limitation, information returns, any document with respect to or accompanying
payments or estimated taxes, or with respect to or accompanying requests for the
extension of time in which to file any such report, return document, declaration
or other information.
(b) No material deficiencies for any taxes have been proposed,
asserted or assessed against the Company or any of its subsidiaries that have
not been fully paid or adequately provided for in the appropriate financial
statements of the Company and its subsidiaries, no State where the Company or
one of its subsidiaries does not file an income or franchise tax return has
asserted in writing during the preceding five years that such corporation should
be so filing, no requests for waivers of the time to assess any taxes are
pending, and no power of attorney with respect to any taxes has been executed or
filed with any taxing authority. No material issues relating to taxes have been
raised in writing by the relevant taxing authority during any presently pending
audit or examination. The federal income tax returns of the Company and each of
its subsidiaries consolidated in such tax returns have been reviewed or passed
upon by the Internal Revenue Service for all years through March 31, 1994.
(c) No material Liens for taxes exist with respect to any
assets or properties of the Company or any of its subsidiaries, except for
statutory liens for taxes not yet due.
(d) None of the Company or any of its subsidiaries is a party
to or is bound by any tax sharing agreement, tax indemnity obligation or similar
agreement, arrangement or practice with respect to taxes (including any advance
pricing agreement, closing agreement or other agreement relating to taxes with
any taxing authority) (other than any such tax sharing agreement among the
Company and its subsidiaries as set forth in Section 3.13(d) of the Company
Disclosure Schedule).
(e) None of the Company or any of its subsidiaries has taken,
agreed to take or will take any action that would prevent the Merger from
constituting a reorganization qualifying under the provisions of Section 368(a)
of the Code.
(f) Neither the Company nor any of its subsidiaries has made,
will make, is obligated to make or is party to any employment, severance or
termination agreement, other compensation arrangement or Company Benefit Plan
currently in effect which provides for the making of any payment (whether in
cash or property or the vesting of property) that would not be deductible by
reason of Sections 280G or 162(m) of the Code.
(g) The Company and its subsidiaries have complied in all
material respects with all applicable laws, rules and regulations relating to
the payment and withholding of taxes.
(h) No federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending or
threatened in writing with regard to any federal income or material state, local
or foreign taxes or tax returns of the Company or its subsidiaries and neither
the Company nor any of its subsidiaries has received a written notice of any
pending audit or proceeding.
(i) Neither the Company nor any of its subsidiaries has agreed
to or is required to make any adjustment under Section 481(a) of the Code.
(j) Neither the Company nor any of its subsidiaries has (i)
with regard to any assets or property held or acquired by any of them, filed a
consent to the application of Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by the Company
or any of its subsidiaries, (ii) executed or entered into a closing agreement
pursuant to Section 7121 of the Code or any similar provision of state, local or
foreign law or (iii) received or filed any requests for rulings or
determinations in respect of any taxes within the last five years.
(k) No property owned by the Company or any of its
subsidiaries (i) is property required to be treated as being owned by another
Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue
Code of 1954, as amended and in effect immediately prior to the enactment of the
Tax Reform Act of 1986; (ii) constitutes "tax exempt use property" within the
meaning of Section 168(h)(1) of the Code; or (iii) is "tax exempt bond financed
property" within the meaning of Section 168(g) of the Code.
(l) The Company and each of its subsidiaries are not
currently, have not been within the last five years and do not anticipate
becoming a "United States real property holding company" within the meaning of
Section 897(c) of the Code.
(m) The Company is not a foreign person within the meaning of
Section 1445(b)(2) of the Code.
(n) No subsidiary of the Company owns any Shares.
SECTION 3.14. Intellectual Property.
(a) Except as set forth in Section 3.14 of the Company
Disclosure Schedule, the Company or one of its subsidiaries owns or possesses
(and will own or possess as of the Effective Time) all right, title and interest
in and to, or a valid and enforceable license or other right to use all of the
Intellectual Property (as defined below), and all of the right, benefits and
privileges associated therewith, that is material to the conduct of the business
of the Company and its subsidiaries as currently conducted (and as conducted as
of the Effective Time). To the knowledge of the Company, neither the Company nor
any of its subsidiaries has infringed, misappropriated or otherwise violated any
Intellectual Property of any other person. To the knowledge of the Company, no
person is materially infringing upon any Intellectual Property right of the
Company or any of its subsidiaries.
(b) The term "Intellectual Property" means all patents, patent
applications and patent disclosures; all inventions (whether or not patentable
and whether or not reduced to practice); all trademarks, service marks, trade
dress, trade names and corporate names and all the goodwill associated
therewith; all mask works; all registered and unregistered statutory and common
law copyrights; all registrations, applications and renewals for any of the
compositions, know-how, manufacturing and production processes and techniques,
research information, drawings, specifications, design plans, improvements,
proposals, technical and computer data, documentation and software, financial
proposals, technical and computer data, documentation and software, financial
business and marketing plans, customer and supplier lists and related
proprietary information, marketing materials and all other proprietary rights.
SECTION 3.15. Opinion of Financial Advisor. Donaldson, Lufkin
& Jenrette Securities Corp. (the "Company Financial Advisor") has delivered to
the Company Board its opinion, dated the date of this Agreement, to the effect
that, as of such date, the Merger Consideration is fair to the holders of Shares
from a financial point of view, and such opinion has not been withdrawn or
modified.
SECTION 3.16. Brokers. No broker, finder or investment banker
(other than the Company Financial Advisor, a true and correct copy of whose
engagement agreement has been provided to AGT) is entitled to any brokerage,
finder's or other fee or commission or expense reimbursement in connection with
the transactions contemplated by this Agreement based upon arrangements made by
and on behalf of the Company or any of its affiliates.
SECTION 3.17. Material Contracts.
(a) The Company has delivered or otherwise made available to
AGT true, correct and complete copies of all contracts and agreements (and all
amendments, modifications and supplements thereto and all side letters to which
the Company is a party affecting the obligations of any party thereunder) to
which the Company or any of its subsidiaries is a party or by which any of its
properties or assets are bound that are material to the business, properties or
assets of the Company and its subsidiaries taken as a whole, including, without
limitation, (I) contracts or agreements with any supplier or customer, in each
case which could result in the payment or receipt of monies in excess of
$2,500,000 in any calendar year period; (II) to the extent any of the following
are, individually or in the aggregate, material to the business, properties or
assets of the Company and its subsidiaries taken as a whole, all: (i)
employment, product design or development, personal services, consulting,
non-competition, severance or indemnification contracts (including, without
limitation, any contract to which the Company or any of its subsidiaries is a
party involving employees of the Company or any of its subsidiaries); (ii)
licensing, merchandising or distribution agreements; (iii) contracts granting a
right of first refusal or first negotiation; (iv) partnership or joint venture
agreements; (v) agreements for the acquisition, sale, lease or other disposition
of material properties or assets of the Company or its subsidiaries or
predecessors (by merger, purchase or sale of assets or stock or otherwise)
entered into since April 1, 1995 and (vi) contracts or agreements with any
Governmental Entity and (III) all commitments and agreements to enter into any
of the foregoing items in (I) or (II) above (collectively, together with any
such contracts entered into in accordance with Section 5.1 hereof, the
"Contracts").
(b) Each of the Contracts is valid and enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity), and there is no default under any Contract so
listed either by the Company or, to the knowledge of the Company, by any other
party thereto, and no event has occurred that with the lapse of time or the
giving of notice or both would constitute a default thereunder by the Company
or, to the knowledge of the Company, any other party, in any such case in which
such default or event would have a Material Adverse Effect on the Company.
(c) No party to any such Contract has given notice to the
Company of or made a claim against the Company with respect to any breach or
default thereunder, in any such case in which such breach or default would have
a Material Adverse Effect on the Company.
SECTION 3.18. Labor Matters. Except as set forth in Section
3.18 of the Company Disclosure Schedule, neither the Company nor any of its
subsidiaries is a party to or bound by any employment, severance compensation,
labor or collective bargaining agreement pertaining to any current or former
directors, officers, employees or consultants of the Company or any of its
subsidiaries. No labor organization or group of employees of the Company or any
of its subsidiaries has made a pending written demand for recognition or
certification.
SECTION 3.19. Insurance. Except as set forth in Section 3.19
of the Company Disclosure Schedule, each of the Company and its subsidiaries is,
and has been continuously since April 1, 1996, insured with financially
responsible insurers in such amounts and against such risks and losses as are
customary for companies conducting the business as conducted by the Company and
its subsidiaries during such time period. Except as set forth in Section 3.19 of
the Company Disclosure Schedule, since April 1, 1996, neither the Company nor
any of its subsidiaries has received notice of cancellation or termination (or a
denial of coverage) with respect to any material insurance policy of the Company
or its subsidiaries. The insurance policies of the Company and its subsidiaries
are valid and enforceable policies.
SECTION 3.20. Customers. Except as set forth in Section 3.20
of the Company Disclosure Schedule, no customer from which the Company has
received revenues of at least $2,500,000 in any of the past three fiscal years
has: (a) threatened within the last twelve months to terminate, or to the
knowledge of the Company, intends to cancel or otherwise terminate, the
relationship of such person with the Company or any of its subsidiaries or (b)
has during the last twelve months decreased materially or threatened in writing
to decrease or limit materially its usage or purchase of the services or
products of the Company or any of its subsidiaries, or, to the knowledge of the
Company, intends to modify materially its relationship with the Company or any
of its subsidiaries.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF AGT AND ACQUISITION
AGT and Acquisition hereby represent and warrant to the
Company as follows:
SECTION 4.1. Organization and Qualification.
(a) AGT is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its businesses as now being
conducted, except where the failure to be so organized, existing and in good
standing or to have such power and authority would not have a Material Adverse
Effect on AGT.
(b) Except as set forth in Section 4.1(b) of the Disclosure
Schedule previously delivered by AGT to the Company (the "AGT Disclosure
Schedule"), AGT has no subsidiaries and does not own, directly or indirectly,
beneficially or of record, any shares of capital stock or other security of any
other entity or any other investment in any other entity.
(c) AGT is duly qualified or licensed and in good standing to
do business in each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification or
licensing necessary, except in such jurisdictions where the failure to be so
duly qualified or licensed and in good standing would not have or constitute a
Material Adverse Effect on AGT.
(d) AGT has heretofore made available to the Company accurate
and complete copies of the Certificates of Incorporation and Bylaws, as
currently in effect, of AGT and Acquisition.
SECTION 4.2. Capitalization of AGT and its Subsidiaries.
(a) The authorized capital stock of AGT consists of (i)
40,000,000 shares of AGT Common Stock, of which, as of December 31, 1997,
17,836,383 shares were issued and outstanding, and (ii) 10,000,000 shares of
preferred stock, no par value, no shares of which were issued and outstanding.
All of the issued and outstanding shares of AGT Common Stock have been validly
issued, and are fully paid, nonassessable and free of preemptive rights. As of
December 31, 1997, 2,209,200 shares of AGT Common Stock were reserved for
issuance and issuable upon or otherwise deliverable in connection with the
exercise of outstanding options. Except as described in the AGT SEC Reports (as
defined in Section 4.4(a)) and except as set forth in Section 4.2(a) of the AGT
Disclosure Schedule since December 31, 1997, no shares of AGT's capital stock
have been issued other than pursuant to stock options already in existence on
such date, and no stock options have been granted. Except (i) as described in
the AGT SEC Reports and (ii) as set forth above, as of the date hereof, there
are outstanding (A) no shares of capital stock or other voting securities of
AGT, (B) no securities of AGT or its subsidiaries convertible into or
exchangeable for shares of capital stock or voting securities of AGT, (C) no
options or other rights to acquire from AGT or its subsidiaries, and no
obligations of AGT or its subsidiaries to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of AGT, and (D) no equity equivalents, interests in the
ownership or earnings of AGT or its subsidiaries or other similar rights
(including stock appreciation rights) (collectively, "AGT Securities"). There
are no outstanding obligations of AGT or any of its subsidiaries to repurchase,
redeem or otherwise acquire any AGT Securities. Except as set forth in the AGT
SEC Reports, there are no stockholder agreements, voting trusts or other
agreements or understandings to which AGT is a party or to which it is bound
relating to the voting of any shares of capital stock of AGT.
(b) All of the outstanding capital stock of AGT's subsidiaries
(including Acquisition) is owned by AGT, directly or indirectly, free and clear
of any Lien or any other limitation or restriction (including any restriction on
the right to vote or sell the same, except as may be provided as a matter of
law). There are no securities of AGT or its subsidiaries convertible into or
exchangeable for, no options or other rights to acquire from AGT or its
subsidiaries, and no other contract, understanding, arrangement or obligation
(whether or not contingent) providing for the issuance or sale, directly or
indirectly, of any capital stock or other ownership interests in, or any other
securities of, any subsidiary of AGT. There are no outstanding contractual
obligations of AGT or its subsidiaries to repurchase, redeem or otherwise
acquire any outstanding shares of capital stock or other ownership interests in
any subsidiary of AGT.
SECTION 4.3. Authority Relative to this Agreement.
(a) Each of AGT and Acquisition has all necessary corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Boards of Directors of AGT (the "AGT Board") and
Acquisition and by AGT as the sole stockholder of Acquisition, and no other
corporate proceedings on the part of AGT or Acquisition are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby
(other than, with respect to the issuance of AGT Common Stock as required by the
terms of this Agreement (the "Share Issuance"), the approval and adoption of the
Share Issuance by the holders of a majority of the total votes cast on the
approval and adoption of the Share Issuance at the meeting of AGT's stockholders
called for such purpose). This Agreement has been duly and validly executed and
delivered by each of AGT and Acquisition and constitutes a valid, legal and
binding agreement of each of AGT and Acquisition, enforceable against each of
AGT and Acquisition in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally, and subject, as
to enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
(b) The AGT Board has, by unanimous vote of those present,
duly and validly approved, and taken all corporate actions required to be taken
by the AGT Board for the consummation of, the transactions contemplated hereby,
including the Merger, and resolved to recommend that the stockholders of AGT
approve and adopt the Share Issuance. The action of the AGT Board in approving
this Agreement and the transactions contemplated hereby, including the Merger,
is sufficient to render inapplicable to the Merger and this Agreement the
provisions of Section 203 of the DGCL and, to the knowledge of AGT, no Delaware
or other State takeover statute or similar statute or regulation applies to the
Merger, this Agreement or any of the transactions contemplated hereby.
SECTION 4.4. SEC Reports; Financial Statements.
(a) AGT has filed all required forms, reports and documents
with the SEC since April 16, 1996, each of which has complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act, each as in effect on the dates such forms, reports and documents were
filed. AGT has heretofore made available to the Company, in the form filed with
the SEC (including any amendments thereto), (i) its Annual Reports on Form 10-K
for the fiscal year ended December 31, 1996, (ii) all definitive proxy
statements relating to AGT's meetings of stockholders (whether annual or
special) held since April 16, 1996 and (iii) all other reports or registration
statements filed by AGT with the SEC since April 16, 1996 (the "AGT SEC
Reports"). None of such forms, reports or documents, including, without
limitation, any financial statements or schedules included or incorporated by
reference therein, contained, when filed, any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by reference therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
consolidated financial statements of AGT included in the AGT SEC Reports
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto and fairly presented, in conformity with GAAP applied on a consistent
basis (except as may be indicated in the notes thereto), the consolidated
financial position of AGT and its consolidated subsidiaries as of the dates
thereof and their consolidated results of operations and changes in financial
position for the periods then ended (subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments). Since January 1,
1997, except as set forth in the AGT SEC Reports, there has not been any change,
or any application or request for any change, by AGT or any of its subsidiaries
in accounting principles, methods or policies for financial accounting or tax
purposes (subject, in the case of the unaudited interim financial statements, to
normal year-end adjustments).
(b) AGT has heretofore made available to the Company a
complete and correct copy of any material amendments or modifications, which
have not yet been filed with the SEC, to agreements, documents or other
instruments which previously had been filed by AGT with the SEC pursuant to the
Exchange Act.
SECTION 4.5. Information Supplied. None of the information
supplied or to be supplied by AGT or Acquisition in writing for inclusion or
incorporation by reference in (i) the S-4 will, at the time the S-4 is filed
with the SEC and at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and (ii) the Joint Proxy Statement will, at the date mailed to
stockholders of the Company and AGT and at the times of the meetings of
stockholders of the Company and AGT to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time, any event with respect
to AGT, its officers and directors or any of its subsidiaries should occur which
is required to be described in an amendment of, or a supplement to, the S-4 or
the Joint Proxy Statement, AGT shall promptly so advise the Company and such
event shall be so described, and such amendment or supplement (which the Company
and AGT shall have a reasonable opportunity to review) shall be promptly filed
with the SEC. The S-4 will comply as to form in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder. The
Joint Proxy Statement will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
SECTION 4.6. Consents and Approvals; No Violations. Except for
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Securities Act, the Exchange
Act, state securities or blue sky laws, the HSR Act, the filing and recordation
of the Certificate of Merger as required by the DGCL and as otherwise set forth
in Section 4.6 of the AGT Disclosure Schedule, no filing with or notice to, and
no permit, authorization, consent or approval of, any Governmental Entity is
necessary for the execution and delivery by AGT or Acquisition of this Agreement
or the consummation by AGT or Acquisition of the transactions contemplated
hereby, except where the failure to obtain such permits, authorizations,
consents or approvals or to make such filings or give such notice would not have
or constitute a Material Adverse Effect on AGT. Except as set forth in Section
4.6 of the AGT Disclosure Schedule, neither the execution, delivery and
performance of this Agreement by AGT or Acquisition nor the consummation by AGT
or Acquisition of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the respective certificate or articles
of incorporation or bylaws (or similar governing documents) of AGT or
Acquisition or any of AGT's subsidiaries, (ii) result in a violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration or Lien) under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which AGT or Acquisition or any of AGT's
subsidiaries is a party or by which any of them or any of their respective
properties or assets may be bound or (iii) violate any order, writ, injunction,
decree, law, statute, rule or regulation applicable to AGT or Acquisition or any
of AGT's subsidiaries or any of their respective properties or assets, except in
the case of (ii) for violations, breaches or defaults which would not have or
constitute a Material Adverse Effect on AGT.
SECTION 4.7. No Default. None of AGT or its subsidiaries is in
default or violation (and no event has occurred which with or without due notice
or the lapse of time or both would constitute a default or violation) of any
term, condition or provision of (i) its certificate or articles of incorporation
or bylaws (or similar governing documents), (ii) any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which AGT or any of its subsidiaries is now a party or by which any of them
or any of their respective properties or assets may be bound or (iii) any order,
writ, injunction, decree, law, statute, rule or regulation applicable to AGT,
its subsidiaries or any of their respective properties or assets, except in the
case of (ii) or (iii) for violations, breaches or defaults which would not have
or constitute a Material Adverse Effect on AGT.
SECTION 4.8. No Undisclosed Liabilities; Absence of Changes.
Except as and to the extent publicly disclosed by AGT in the AGT SEC Reports
filed prior to the date of this Agreement, or as set forth in Section 4.8 of the
AGT Disclosure Schedule, since January 1, 1997, (a) neither AGT nor its
subsidiaries has incurred any liabilities or obligations of any nature, whether
or not accrued, contingent or otherwise, and whether due or to become due or
asserted or unasserted, which would have a Material Adverse Effect on AGT, (b)
AGT has conducted its business in the ordinary course consistent with past
practices, (c) AGT has not paid any dividend or distribution in respect of, or
redeemed or repurchased any AGT Securities, (d) other than consistent with past
practices, AGT has not entered into or consummated any transaction with any
officer, director or affiliate of AGT or any person known by AGT to be an
affiliate of any of them and (e) AGT has not changed its methods of accounting.
SECTION 4.9. Litigation. Except as publicly disclosed by AGT
in the AGT SEC Reports or disclosed in Section 4.9 of the AGT Disclosure
Schedule, there is no suit, claim, action, proceeding or investigation pending
or, to the knowledge of AGT, threatened against AGT or any of its subsidiaries
or any of their respective properties or assets which (a) individually or in the
aggregate, would have or constitute a Material Adverse Effect on AGT or (b)
questions the validity of this Agreement or any action to be taken by AGT in
connection with the consummation of the transactions contemplated hereby or
could otherwise prevent or materially delay the consummation of the transactions
contemplated by this Agreement. Except as publicly disclosed by AGT in the AGT
SEC Reports, none of AGT or its subsidiaries is subject to any outstanding
order, writ, injunction or decree which would have a Material Adverse Effect on
AGT.
SECTION 4.10. Compliance with Applicable Law. Except as
publicly disclosed by AGT in the AGT SEC Reports, AGT and its subsidiaries hold
all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities necessary for the lawful conduct of their respective
businesses (the "AGT Permits"), except for failures to hold such permits,
licenses, variances, exemptions, orders and approvals which would not have a
Material Adverse Effect on AGT. Except as publicly disclosed by AGT in the AGT
SEC Reports, AGT and its subsidiaries are in compliance with the terms of the
AGT Permits, except where the failure so to comply could not reasonably be
expected to have a Material Adverse Effect on AGT. Except as publicly disclosed
by AGT in the AGT SEC Reports, the businesses of AGT and its subsidiaries are
not being conducted in violation of any law, ordinance or regulation of any
Governmental Entity except that no representation or warranty is made in this
Section 4.10 with respect to Environmental Laws and except for violations or
possible violations which would not have a Material Adverse Effect on AGT.
Except as publicly disclosed by AGT in the AGT SEC Reports or as disclosed in
Section 4.10 of the AGT Disclosure Schedule, no investigation or review by any
Governmental Entity with respect to AGT or its subsidiaries is pending or, to
the knowledge of AGT, threatened, nor to the knowledge of AGT, has any
Governmental Entity indicated an intention to conduct the same, other than, in
each case, those the outcome of which would not have a Material Adverse Effect
on AGT.
SECTION 4.11. Employee Plans.
(a) Section 4.11(a) of the AGT Disclosure Schedule lists all
"employee benefit plans," as defined in Section 3(3) of the ERISA and all other
employee benefit plans or other benefit arrangements, including executive
compensation, directors' benefit, bonus or other incentive compensation,
severance and deferred compensation plans and practices which AGT or any of its
subsidiaries maintains, is a party to, contributes to or has any obligation to
or liability for (each an "AGT Benefit Plan" and collectively, the "AGT Benefit
Plans").
(b) True, correct and complete copies or descriptions of each
AGT Benefit Plan (and, where applicable, the most recent summary plan
description, actuarial report, determination letter, most recent Form 5500 and
trust agreement) have been made available to the Company for review prior to the
date hereof.
(c) As of the date hereof, except as disclosed on Section
4.11(c) of the AGT Disclosure Schedule, (i) all material payments required to be
made by or under any AGT Benefit Plan, any related trusts, or any collective
bargaining agreement have been made; (ii) AGT and its subsidiaries have
performed all material obligations required to be performed by them under any
AGT Benefit Plan; (iii) the AGT Benefit Plans have been administered in material
compliance with their terms and the requirements of ERISA, the Code and other
applicable laws; (iv) there are no actions, suits, arbitrations or claims (other
than routine claims for benefit) pending or, to the knowledge of AGT, threatened
with respect to any AGT Benefit Plan; and (v) AGT and its subsidiaries have no
liability as a result of any "prohibited transaction" (as defined in Section 406
of ERISA and Section 4975 of the Code) for any excise tax or civil penalty.
(d) Except as disclosed on Section 4.11(d) of the AGT
Disclosure Schedule, none of the AGT Benefit Plans is subject to Title IV of
ERISA.
(e) Except as set forth on Section 4.11(e) of the AGT
Disclosure Schedule, AGT and its subsidiaries have not incurred any unsatisfied
withdrawal liability with respect to any multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
(f) Section 4.11(f) of the AGT Disclosure Schedule sets forth
a list of all "employee pension plans," as defined on Section 3(2) of ERISA,
maintained by AGT or any of its subsidiaries on any trade or business (whether
or not incorporated) which are under control, or which are treated as a single
employer, with AGT under Section 414(b), (c), (m) or (o) of the Code (an "AGT
ERISA Affiliate"), or to which AGT, its Subsidiaries or any AGT ERISA Affiliate
contributed or is obligated to contribute thereunder ("AGT Pension Plans").
Except as set forth on Section 4.11(f) of the AGT Disclosure Schedule, each of
the AGT Pension Plans which is intended to be "qualified" within the meaning of
Section 401(a) and 401(k), if applicable, and 501(a) of the Code has been
determined by the Internal Revenue Service to be so "qualified" and, to the
knowledge of AGT, there is no fact which would adversely affect the qualified
status of any such AGT Pension Plan.
(g) Except as set forth on Section 4.11(g) of the AGT
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (i) result in any
payment becoming due, or increase the amount of compensation due, to any current
or former employee of AGT or any of its subsidiaries; (ii) increase any benefits
otherwise payable under any AGT Benefit Plan; or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
(h) If and to the extent applicable, no AGT Benefit Plan has
or has incurred an accumulated funding deficiency within the meaning of Section
302 of ERISA or Section 412 of the Code, nor has any waiver of the minimum
funding standards of Section 302 of ERISA and Section 412 of the Code been
requested of or granted by the IRS with respect to any AGT Benefit Plan, nor has
any lien in favor of any such plan arisen under Section 412(n) of the Code or
Section 302(f) of ERISA. Except as indicated on Schedule 4.11(h) of the AGT
Disclosure Schedule, no AGT Benefit Plan is self funded by AGT. Except as
disclosed on Schedule 4.11(h) of the AGT Disclosure Schedule, with respect to
any insurance policy providing funding for benefits under any AGT Benefit Plan,
there is no liability of AGT in the nature of a retroactive rate adjustment,
loss sharing arrangement or other actual or contingent liability, and there will
be no such liability arising wholly or partially out of events occurring prior
to the execution of this Agreement, nor would there be any such liability if AGT
cancelled such policy as of the date hereof.
SECTION 4.12. Environmental Matters. (a) Except as disclosed
in Section 4.12(a) of the AGT Disclosure Schedule, AGT and each of its
subsidiaries, with respect to its use of and operations at each Property, is in
compliance in all respects with all applicable Environmental Laws, except where
the failure to so be in compliance would not, individually or in the aggregate,
have a Material Adverse Effect on AGT.
(b) Except as disclosed in Section 4.12(b) of the AGT
Disclosure Schedule or as disclosed in any AGT SEC document filed with the SEC
prior to the date hereof, as of the date hereof, neither AGT nor any of its
subsidiaries or any of their respective predecessors has received any written
communication form a court, arbitrator or governmental entity or any other
person that alleges that AGT or any such subsidiary or predecessor is not in
compliance, in any respect, with any Environmental Law or has liability
thereunder, except, in each case it is reasonably unlikely, individually or in
the aggregate, to have a Material Adverse Effect on AGT.
(c) Except as disclosed in Section 4.12(c) of the AGT
Disclosure Schedule, none of the operations or Properties of AGT or any of its
subsidiaries or any of their respective predecessors or assigns is the subject
of investigation by any governmental entity whether U.S., State, local or
foreign, respecting (A) Environmental Laws, (B) Remedial Action or (C) any
Environmental Claim arising from a Release or otherwise of any Hazardous
Substance or any other substance regulated under any Environmental Law, which in
each case would, individually or in the aggregate, have a Material Adverse
Effect on AGT.
(d) Except as disclosed in Section 4.12(d) of the AGT
Disclosure Schedule, AGT, each of its subsidiaries and any of their respective
predecessors have filed all notices required to be filed under all Environmental
Laws reporting any Release, except where failure to file such notices would not,
individually or in the aggregate, have a Material Adverse Effect on AGT.
(e) Except as disclosed in Section 4.12(e) of the AGT
Disclosure Schedule, or as disclosed in any AGT SEC Report, neither AGT nor any
of its subsidiaries has any contingent liabilities with respect to its business
or that of its predecessors in connection with any Hazardous Substance or
Environmental Law that would, individually or in the aggregate, have a Material
Adverse Effect on AGT.
(f) Except as disclosed in Section 4.12(f) of the AGT
Disclosure Schedule, or as disclosed in any AGT SEC Report, as of the date
hereof, underground storage tanks are not located on or under any Property and
there have been no Releases of Hazardous Substances on, in or under any Property
or other real property for which AGT or any of its subsidiaries would be
responsible or potentially responsible and that would have a Material Adverse
Effect on AGT.
(g) Except as disclosed in Section 4.12(g) of the AGT
Disclosure Schedule, or as disclosed in any AGT SEC Report filed with the SEC
prior to the date hereof, neither AGT nor any of its subsidiaries or any of
their respective predecessors is subject to any judicial, administrative or
arbitral actions, suits, proceedings (public or private), written claims or
governmental proceedings alleging the violation of any Environmental Law or
Environmental Permit that is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on AGT.
(h) Except as disclosed in Section 4.12(h) of the AGT
Disclosure Schedule, or as disclosed in any AGT SEC Document filed with the SEC
prior to the date hereof, neither AGT nor any of its subsidiaries or any of
their respective predecessors or assigns, as a result of their respective past
and current operations, has caused or permitted any Hazardous Substances to
remain or be disposed of, either on or under any Property or on any real
property not permitted to accept, store or dispose of such Hazardous Substances,
that would, individually or in the aggregate, have a Material Adverse Effect on
AGT.
SECTION 4.13. Tax Matters. Except as disclosed on Section 4.13
of the AGT Disclosure Schedule:
(a) AGT and each of its subsidiaries, and each affiliated
group (within the meaning of Section 1504 of the Code) of which AGT or any of
its subsidiaries is or has ever been a member, has (or, by the Closing Date,
will have) timely filed with the appropriate taxing authorities all federal
income tax returns and all other material tax returns and reports required to be
filed by it through the Closing Date. All such tax returns are (or will be)
complete and correct in all material respects. Except to the extent adequately
reserved for in accordance with GAAP, AGT and each of its subsidiaries has (or,
by the Closing Date, will have) paid (or AGT has paid on its subsidiaries'
behalf) all taxes due in respect of the taxable periods covered by such tax
returns. The most recent consolidated financial statements contained in AGT SEC
Reports reflect an adequate reserve in accordance with GAAP for all taxes
payable by AGT and its subsidiaries for all taxable periods and portions thereof
through the date of such financial statements. AGT has made available to the
Company copies of all income and franchise tax returns filed by AGT and each of
its subsidiaries for their taxable years ended in 1995, 1996 and 1997.
(b) No material deficiencies for any taxes have been proposed,
asserted or assessed against AGT or any of its subsidiaries that have not been
fully paid or adequately provided for in the appropriate financial statements of
AGT and its subsidiaries, no State where AGT or one of its subsidiaries does not
file an income or franchise tax return has asserted in writing during the
preceding five years that such corporation should be so filing, no requests for
waivers of the time to assess any taxes are pending, and no power of attorney
with respect to any taxes has been executed or filed with any taxing authority.
No material issues relating to taxes have been raised in writing by the relevant
taxing authority during any presently pending audit or examination. The federal
income tax returns of AGT and each of its subsidiaries consolidated in such tax
returns have not been reviewed or passed upon by the Internal Revenue Service.
(c) No material Liens for taxes exist with respect to any
assets or properties of AGT or any of its subsidiaries, except for statutory
liens for taxes not yet due.
(d) None of AGT or any of its subsidiaries is a party to or is
bound by any tax sharing agreement, tax indemnity obligation or similar
agreement, arrangement or practice with respect to taxes (including any advance
pricing agreement, closing agreement or other agreement relating to taxes with
any taxing authority) (other than any such tax sharing agreement among AGT and
its subsidiaries as set forth in Section 4.13(d) of the AGT Disclosure
Schedule).
(e) None of AGT or any of its subsidiaries has taken, agreed
to take or will take any action that would prevent the Merger from constituting
a reorganization qualifying under the provisions of Section 368(a) of the Code.
(f) Neither AGT nor any of its subsidiaries has made, will
make, is obligated to make or is party to any employment, severance or
termination agreement, other compensation arrangement or AGT Benefit Plan
currently in effect which provides for the making of any payment (whether in
cash or property or the vesting of property) that would not be deductible by
reason of Sections 280G or 162(m) of the Code.
(g) AGT and its subsidiaries have complied in all material
respects with all applicable laws, rules and regulations relating to the payment
and withholding of taxes.
(h) No federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending or
threatened in writing with regard to any federal income or material state, local
or foreign taxes or tax returns of AGT or its subsidiaries and neither AGT nor
any of its subsidiaries has received a written notice of any pending audit or
proceeding.
(i) Neither AGT nor any of its subsidiaries has agreed to or
is required to make any adjustment under Section 481(a) of the Code.
(j) Neither AGT nor any of its subsidiaries has (i) with
regard to any assets or property held or acquired by any of them, filed a
consent to the application of Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by AGT or any
of its subsidiaries, (ii) executed or entered into a closing agreement pursuant
to Section 7121 of the Code or any similar provision of state, local or foreign
law or (iii) received or filed any requests for rulings or determinations in
respect of any taxes within the last five years.
(k) No property owned by AGT or any of its subsidiaries (i) is
property required to be treated as being owned by another Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect immediately prior to the enactment of the Tax Reform Act of 1986;
(ii) constitutes "tax exempt use property" within the meaning of Section
168(h)(1) of the Code; or (iii) is "tax exempt bond financed property" within
the meaning of Section 168(g) of the Code.
(l) AGT and each of its subsidiaries are not currently, have
not been within the last five years and do not anticipate becoming a "United
States real property holding company" within the meaning of Section 897(c) of
the Code.
(m) AGT is not a foreign person within the meaning of Section
1445(b)(2) of the Code.
SECTION 4.14. Intellectual Property. Except as set forth in
Section 4.14 of the AGT Disclosure Schedule, AGT or one of its subsidiaries owns
or possesses (and will own or possess as of the Effective Time) all right, title
and interest in and to, or a valid and enforceable license or other right to use
all of the Intellectual Property (as defined below), and all of the right,
benefits and privileges associated therewith, that is material to the conduct of
the business of AGT and its subsidiaries as currently conducted (and as
conducted as of the Effective Time). To the knowledge of AGT, neither AGT nor
any of its subsidiaries has infringed, misappropriated or otherwise violated any
Intellectual Property of any other person. To the knowledge of AGT, no person is
materially infringing upon any Intellectual Property right of AGT or any of its
subsidiaries.
SECTION 4.15. Material Contracts.
(a) AGT has made available to the Company true, correct and
complete copies of all contracts and agreements (and all amendments,
modifications and supplements thereto and all side letters to which AGT is a
party affecting the obligations of any party thereunder) to which AGT or any of
its subsidiaries is a party or by which any of its properties or assets are
bound that are material to the business, properties or assets of AGT and its
subsidiaries taken as a whole, including, without limitation, (I) contracts or
agreements with any supplier or customer, in each case which could result in the
payment or receipt of monies in excess of $2,500,000 in any calendar year
period; (II) to the extent any of the following are, individually or in the
aggregate, material to the business, properties or assets of AGT and its
subsidiaries taken as a whole, all: (i) employment, product design or
development, personal services, consulting, non-competition, severance or
indemnification contracts (including, without limitation, any contract to which
AGT or any of its subsidiaries is a party involving employees of AGT or any of
its subsidiaries); (ii) licensing, merchandising or distribution agreements;
(iii) contracts granting a right of first refusal or first negotiation; (iv)
partnership or joint venture agreements; (v) agreements for the acquisition,
sale, lease or other disposition of material properties or assets of AGT or its
subsidiaries or predecessors (by merger, purchase or sale of assets or stock or
otherwise) entered into since April 16, 1996 and (vi) contracts or agreements
with any Governmental Entity and (III) all commitments and agreements to enter
into any of the foregoing items in (I) or (II) above (collectively, together
with any such contracts entered into in accordance with Section 5.1 hereof, the
"AGT Contracts").
(b) Each of the AGT Contracts is valid and enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity), and there is no default under any AGT Contract
so listed either by AGT or, to the knowledge of AGT, by any other party thereto,
and no event has occurred that with the lapse of time or the giving of notice or
both would constitute a default thereunder by AGT or, to the knowledge of AGT,
any other party, in any such case in which such default or event would have a
Material Adverse Effect on AGT.
(c) No party to any such AGT Contract has given notice to AGT
of or made a claim against AGT with respect to any breach or default thereunder,
in any such case in which such breach or default would have a Material Adverse
Effect on AGT.
SECTION 4.16. Labor Matters. Except as set forth in Section
4.16 of the AGT Disclosure Schedule, neither AGT nor any of its subsidiaries is
a party to or bound by any employment, severance compensation, labor or
collective bargaining agreement pertaining to any current or former directors,
senior executive officers or general managers of AGT or any of its subsidiaries.
No labor organization or group of employees of AGT or any of its subsidiaries
has made a pending written demand for recognition or certification.
SECTION 4.17. Insurance. Except as set forth in Section 4.17
of the AGT Disclosure Schedule, each of AGT and its subsidiaries, is, and has
been continuously since April 16, 1996 or as to those subsidiaries acquired by
AGT subsequent to April 16, 1996, since becoming a subsidiary insured with
financially responsible insurers in such amounts and against such risks and
losses as are customary for companies conducting the business as conducted by
AGT and its subsidiaries during such time period. Except as set forth in Section
4.17 of the AGT Disclosure Schedule, since April 16, 1996 or as to those
subsidiaries acquired by AGT subsequent to April 16, 1996, since becoming a
subsidiary, neither AGT nor any of its subsidiaries has received notice of
cancellation or termination (or a denial of coverage) with respect to any
material insurance policy of AGT or its subsidiaries. The insurance policies of
AGT and its subsidiaries are valid and enforceable policies.
SECTION 4.18. Customers. Except as set forth in Section 4.18
of the AGT Disclosure Schedule, no customer from which AGT has received revenues
of at least $2,500,000 in any of the past three fiscal years has: (a) threatened
within the last twelve months to terminate, or to the knowledge of AGT, intends
to cancel or otherwise terminate, the relationship of such person with AGT or
any of its subsidiaries or (b) has during the last twelve months decreased
materially or threatened in writing to decrease or limit materially its usage or
purchase of the services or products of AGT or any of its subsidiaries, or, to
the knowledge of AGT, intends to modify materially its relationship with AGT or
any of its subsidiaries.
SECTION 4.19. No Prior Activities. Except for obligations
incurred in connection with its incorporation or organization or the negotiation
and consummation of this Agreement and the transactions contemplated hereby,
Acquisition has neither incurred any obligation or liability nor engaged in any
business or activity of any type or kind whatsoever or entered into any
agreement or arrangement with any person or entity.
SECTION 4.20. Opinion of Financial Advisor. Goldman, Sachs &
Co. (the "AGT Financial Advisor") has delivered to the AGT Board its opinion,
dated the date of this Agreement, to the effect that, as of such date, the
Merger Consideration is fair to the holders of AGT Common Stock from a financial
point of view, and such opinion has not been withdrawn or modified.
SECTION 4.21. Brokers. No broker, finder or investment banker
(other than Goldman, Sachs & Co.) is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by and on behalf of AGT or Acquisition or
any of their affiliates.
SECTION 4.22. Ownership of Company Common Stock. AGT does not
own any shares of Company Common Stock.
ARTICLE 5
COVENANTS
SECTION 5.1. Conduct of Business. Except as contemplated by
this Agreement, during the period from the date hereof to the Effective Time,
each of the Company and AGT will, and will cause each of their respective
subsidiaries to, conduct its operations in the ordinary course of business
consistent with past practice and, to the extent consistent therewith, with no
less diligence and effort than would be applied in the absence of this
Agreement, seek to preserve intact its current business organizations, seek to
keep available the service of its current officers and employees and seek to
preserve its relationships with customers, suppliers and others having business
dealings with it to the end that goodwill and ongoing businesses shall be
unimpaired at the Effective Time. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in this Agreement, prior
to the Effective Time, neither the Company, nor AGT, nor any of their respective
subsidiaries will, without the prior written consent of the other, which consent
shall not be unreasonably withheld:
(a) amend its certificate or articles of incorporation or
bylaws (or other similar governing instrument), except as may be necessary to
effectuate the transactions contemplated hereby;
(b) other than in connection with a Business Acquisition (as
hereinafter defined), authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise)
any stock of any class or any other securities or equity equivalents (including,
without limitation, any stock options or stock appreciation rights), except for
the issuance of options by AGT to employees of AGT and its subsidiaries in the
ordinary course of business and the issuance or sale of shares of common stock
by the Company or AGT pursuant to outstanding options granted prior to the date
hereof;
(c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its capital
stock, make any other actual, constructive or deemed distribution in respect of
any shares of its capital stock or otherwise make any payments to stockholders
in their capacity as such, or redeem or otherwise acquire any of its securities
or any securities of any of its subsidiaries;
(d) other than in connection with a Business Acquisition,
adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company, AGT or any of their respective subsidiaries (other than the Merger);
(e) other than in connection with a Business Acquisition,
alter through merger, liquidation, reorganization, restructuring or in any other
fashion the corporate structure or ownership of any subsidiary;
(f) except as may be required by law or as contemplated by
this Agreement, and other than in connection with a Business Acquisition, enter
into, adopt or amend or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase agreement, pension,
retirement, deferred compensation, employment, severance or other employee
benefit agreement, trust, plan, fund, award or other arrangement for the benefit
or welfare of any director, officer or employee in any manner, or (except as set
forth in Section 5.1(f) of the Company Disclosure Schedule or Section 5.1(f) of
the AGT Disclosure Schedule and except for normal increases in the ordinary
course of business consistent with past practice that, in the aggregate, do not
result in a material increase in benefits or compensation expense to the Company
or AGT, as the case may be, and as required under existing agreements or in the
ordinary course of business generally consistent with past practice) increase in
any manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any plan and arrangement as in
effect as of the date hereof (including, without limitation, the granting of
stock appreciation rights or performance units);
(g) except as may be required as a result of a change in law
or in generally accepted accounting principles, change any of the accounting
principles or practices used by it;
(h) revalue in any material respect any of its assets,
including, without limitation, writing down the value of inventory or
writing-off notes or accounts receivable other than in the ordinary course of
business;
(i) make or revoke any tax election or settle or compromise
any tax liability material to the Company and its subsidiaries or AGT and its
subsidiaries, as the case may be, taken as a whole or change (or make a request
to any taxing authority to change) any material aspect of its method of
accounting for tax purposes;
(j) pay, discharge or satisfy any material claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business of liabilities reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the notes thereto) of
the Company and its subsidiaries or AGT and its subsidiaries, as the case may
be, or incurred in the ordinary course of business consistent with past
practice;
(k) settle or compromise any pending or threatened suit,
action or claim relating to the transactions contemplated hereby; or
(l) other than in connection with a Business Acquisition,
take, propose to take, or agree in writing or otherwise to take, any of the
actions described in Sections 5.1(a) through 5.1(k) or any action which would
make any of the representations or warranties of the Company or AGT and
Acquisition contained in this Agreement untrue or incorrect in any material
respect.
In addition, prior to the Effective Time, neither the Company nor any of its
subsidiaries will, without the prior written consent of AGT, which consent shall
not be unreasonably withheld:
(m) enter into or modify in any material respect (i) any
agreement which, if in effect on the date hereof, would have been a Contract or
(ii) any employment, consulting, non-competition or severance agreement as
disclosed in Section 3.18 of the Company Disclosure Schedule.
In addition, prior to the Effective Time, neither the Company nor its
subsidiaries will, without the prior written consent of AGT:
(n) (i) incur or assume any long-term or short-term debt or
issue any debt securities except for borrowings under existing lines of credit
in the ordinary course of business and in amounts not material to the Company
and its subsidiaries, taken as a whole; (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person except in the ordinary course
of business consistent with past practice and in amounts not material to the
Company and its subsidiaries, taken as a whole, and except for obligations of
wholly owned subsidiaries; (iii) make any loans, advances or capital
contributions to, or investments in, any other person (other than to wholly
owned subsidiaries of the Company or customary loans or advances to employees in
the ordinary course of business consistent with past practice and in amounts not
material to the maker of such loan or advance); (iv) pledge or otherwise
encumber shares of capital stock of the Company or its subsidiaries; or (v)
mortgage or pledge any of its material assets, tangible or intangible, or create
or suffer to exist any material Lien thereupon;
(o) acquire, sell, lease or dispose of any assets outside the
ordinary course of business or any assets which in the aggregate are material to
the Company and its subsidiaries, taken as a whole, enter into any commitment or
transaction outside the ordinary course of business or grant any exclusive
distribution rights;
(p) (i) acquire (by merger, consolidation or acquisition of
stock or assets) any corporation, partnership or other business organization or
division thereof or any equity interest therein; (ii) authorize any new capital
expenditure or expenditures which, individually, is in excess of $500,000 or, in
the aggregate, are in excess of $2.0 million; provided, that none of the
foregoing shall limit any capital expenditure already included in the Company's
fiscal 1998 capital expenditure budget provided to AGT prior to the date hereof;
or (iv) enter into or amend any contract, agreement, commitment or arrangement
providing for the taking of any action that would be prohibited hereunder; or
(q)take, propose to take, or agree in writing or otherwise to
take, any of the actions described in Sections 5.1(n) through (p).
In addition, prior to the Effective Time, neither AGT nor its subsidiaries will,
other than in conjunction with this Merger, without the prior written consent of
the Company, which consent shall not be unreasonably witheld:
(r) enter into or modify in any material respect any agreement
which, if in effect on the date hereof, would have been an AGT Contract pursuant
to Section 4.15.
In addition, prior to the Effective Time, neither AGT nor its subsidiaries will,
other than in conjunction with this Merger, without the prior written consent of
the Company:
(s) (i) incur or assume any long-term or short-term debt or
issue any debt securities except for borrowings under existing lines of credit
in the ordinary course of business, borrowings in conjunction with Sections (t)
and (u) of this Section 5.1; (ii) assume, guarantee, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person except in the ordinary course of business
consistent with past practice, and except for obligations of wholly owned
subsidiaries; (iii) make any loans, advances or capital contributions to, or
investments in, any other person (other than to wholly owned subsidiaries of AGT
or customary loans or advances to employees in the ordinary course of business
consistent with past practice and in amounts not material to the maker of such
loan or advance); (iv) pledge or otherwise encumber shares of capital stock of
AGT or its subsidiaries; or (v) mortgage or pledge any of its material assets,
tangible or intangible, or create or suffer to exist any material Lien
thereupon; provided, however, that notwithstanding the foregoing provisions of
the paragraph (s), AGT shall be permitted to take any action under this
paragraph (s), which without this proviso would otherwise require the Company's
prior written consent, without the prior written consent of the Company if such
actions in the aggregate are in an amount not in excess of $20,000,000;
(t) acquire, sell, lease or dispose of any assets outside the
ordinary course of business in a transaction or series of transactions for which
AGT would be required to amend the Form S-4 filed with the SEC pursuant to
Section 5.2 below had the Form S-4 been filed on the date hereof, enter into any
commitment or transaction outside the ordinary course of business or grant any
exclusive distribution rights;
(u) (i) acquire (by merger, consolidation, or acquisition of
stock or assets) any corporation, partnership or other business organization or
division thereof or any equity interest therein for which AGT would be required
to amend the Form S-4 filed with the SEC pursuant to Section 5.2 below had the
Form S-4 been filed on the date hereof; (ii) authorize any new capital
expenditure or expenditures which, in the aggregate, are in excess of
$3,000,000; provided, that none of the foregoing shall limit any capital
expenditure already included in AGT's fiscal 1998 capital expenditure budget
provided to the Company prior to the date hereof; or (iii) enter into or amend
any contract, agreement, commitment or arrangement providing for the taking of
any action that would be prohibited hereunder; or
(v) take, propose to take, or agree in writing or otherwise
to take, any of the actions described in Sections 5.1(s) through (u).
For purposes hereof, a "Business Acquisition" shall be any
acquisition by AGT or any of its subsidiaries of any assets, capital stock or
operating businesses as may be approved by the Board of Directors of AGT and, if
required by this Section 5.1, by the Company .
SECTION 5.2. Preparation of S-4 and the Joint Proxy Statement.
AGT and the Company will, as promptly as practicable, jointly prepare and file
with the SEC the Joint Proxy Statement in connection with the vote of the
stockholders of the Company with respect to the Merger and the vote of the
stockholders of AGT with respect to the Share Issuance. AGT will, as promptly as
practicable, prepare and following receipt of notification from the SEC that it
has no further comments on the Joint Proxy Statement, file with the SEC the S-4,
containing the Joint Proxy Statement and forms of proxy, in connection with the
registration under the Securities Act of the shares of AGT Common Stock issuable
upon conversion of the Shares and the other transactions contemplated hereby.
AGT and the Company will, and will cause their accountants and lawyers to, use
all reasonable best efforts to have or cause the S-4 to be declared effective as
promptly as practicable, including, without limitation, causing their
accountants to deliver necessary or required instruments such as opinions,
consents and certificates, and will take any other action required or necessary
to be taken under federal or state securities laws or otherwise in connection
with the registration process. Each of AGT and the Company will use its
reasonable best efforts to cause the Joint Proxy Statement to be mailed to its
stockholders at the earliest practicable date after the effectiveness of the
S-4.
SECTION 5.3. No Solicitation.
(a) Until the termination of this Agreement, the Company shall
not, and shall not permit any of its subsidiaries, or any of its or its
subsidiaries' officers, directors, employees, representatives, agents or
affiliates (including, without limitation, any investment banker, financial
advisor, attorney, accountant or other representative of the Company or any of
its subsidiaries), to, directly or indirectly, initiate, solicit or knowingly
encourage (including by way of furnishing non-public information or assistance),
or take any other action to facilitate, any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, an
Acquisition Proposal (as defined below), or enter into or maintain or continue
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain an Acquisition Proposal or agree to or endorse any
Acquisition Proposal, or authorize or permit any of its officers, directors or
employees or any of its subsidiaries or any investment banker, financial
advisor, attorney, accountant or other representative of it or any of its
subsidiaries to take any such action; provided, however, that this Section
5.3(a) shall not prohibit the Company from furnishing non-public information
regarding the Company to, or entering into discussions and negotiations with,
any person in response to an unsolicited written Acquisition Proposal submitted
by such person if (i) the Company Board concludes in good faith, after having
received the advice of its financial advisor, that such Acquisition Proposal, if
consummated, could result in a transaction that is more favorable from a
financial point of view to the Company's stockholders than the Merger, including
as part of the Company Board's determination, that, as to any cash consideration
to be paid pursuant to such Acquisition Proposal, the person making the
Acquisition Proposal has all requisite funds on hand or has provided customary
financing commitments for the requisite funds to consummate the Acquisition
Proposal, (ii) not later than 24 hours after receipt of any unsolicited
Acquisition Proposal, the Company gives AGT notice (which notice shall be
provided orally and in writing and shall identify the person making such
Acquisition Proposal and set forth the material terms thereof) of the receipt of
such Acquisition Proposal unless the Company Board determines in good faith,
after having received the advice of its legal counsel, that giving such notice
is inconsistent with the Company Board's fiduciary duties to the Company's
stockholders under applicable law, (iii) prior to furnishing any such non-public
information to such Person, the Company enters into a confidentiality agreement
with terms not materially less favorable to the Company than the Confidentiality
Agreement (as defined in Section 5.6(d)) and (iv) prior to furnishing such
non-public information to such Person, the Company furnishes such non-public
information to AGT to the extent such non-public information has not previously
been furnished by the Company to AGT. Notwithstanding anything to the contrary
in this Agreement, the Company may give a copy of this Section 5.3 to any person
who inquires about submitting an unsolicited Acquisition Proposal. For purposes
of this Agreement, "Acquisition Proposal" means any proposal regarding any of
the following (other than the transactions contemplated by this Agreement)
involving the Company or any of its subsidiaries: (w) any merger, consolidation,
share exchange, recapitalization, business combination or other similar
transaction; (x) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 20 percent or more of the assets of the Company and its
subsidiaries, taken as a whole, in a single transaction or series of related
transactions; (y) any tender offer or exchange offer that if consummated would
result in any person beneficially owning more than 20 percent of the outstanding
shares of Company Common Stock or the filing of a registration statement under
the Securities Act in connection therewith; or (z) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
(b) Except as set forth in this Section 5.3(b), the Company
Board shall not (i) withdraw or modify, or propose to withdraw or modify, in a
manner adverse to AGT, the approval or recommendation of the Merger and this
Agreement by the Company Board, (ii) approve or recommend, or propose to approve
or recommend, any Acquisition Proposal or (iii) cause the Company to enter into
any agreement (including, without limitation, any letter of intent) with respect
to any Acquisition Proposal (any of (i), (ii) or (iii), "Withdraw"); provided,
however, that nothing in this Agreement shall prevent the Company Board from
withdrawing, amending or modifying its recommendation of the Merger and this
Agreement if (i) an unsolicited bona fide written Acquisition Proposal is
submitted to the Company, (ii) the Company Board concludes in good faith, after
having received the advice of its independent financial advisor, that such
Acquisition Proposal would result in a transaction that is more favorable from a
financial point of view to the Company's stockholders than the Merger (a
"Superior Proposal") and (iii) the Company Board concludes in good faith, after
consultation with its legal counsel, that the withdrawal, amendment or
modification of such recommendation in connection with the Superior Proposal is
consistent with the fiduciary obligations of the Company Board to the Company's
stockholders under applicable law. Nothing herein shall prevent the Company
Board from recommending that its stockholders accept an unsolicited tender offer
or exchange offer commenced by a third party with respect to the Company's
Common Stock if (u) such tender offer or exchange offer constitutes an
Acquisition Proposal, (v) the Company Board shall have withdrawn its
recommendation in favor of the Merger in accordance with and as permitted by the
preceding sentence, (w) the Company Board shall have concluded in good faith,
after having received the advice of its financial advisor, that such tender
offer or exchange offer is a Superior Proposal, (x) the Company Board shall have
concluded in good faith, after consultation with legal counsel, that the
recommendation in favor of acceptance of such tender offer or exchange offer is
consistent with the fiduciary obligations of the Company Board to the Company's
stockholders under applicable law, (y) the Company shall have given AGT notice
of the Company Board's intention to Withdraw and (z) AGT does not make within
five days of AGT's receipt of such notice, an offer which the Company Board,
after consultation with its financial advisors, determines is superior to such
Superior Proposal. In addition, if the Company Withdraws, it shall concurrently
pay, or cause to be paid, to AGT the fee required by Section 7.3(a) hereof.
SECTION 5.4. Letters of the Company's and AGT's Accountants.
(a) The Company shall use all reasonable best efforts to cause
to be delivered to AGT a letter of KPMG Peat Marwick LLP (or its successor
firm), the Company's independent auditors, dated a date within two business days
before the date on which the S-4 shall become effective and addressed to AGT, in
form and substance reasonably satisfactory to AGT and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the S-4.
(b) AGT shall use all reasonable best efforts to cause to be
delivered to the Company a letter of Deloitte & Touche LLP (or its successor
firm), AGT's independent auditors, dated a date within two business days before
the date on which the S-4 shall become effective and addressed to the Company,
in form and substance reasonably satisfactory to the Company and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the S-4.
SECTION 5.5. Meetings. The Company and AGT each shall call a
meeting of its stockholders to be held as promptly as practicable for the
purpose of voting upon this Agreement and the Merger (with respect to the
Company) and the Share Issuance (with respect to AGT). Subject to Section
5.3(b), the Company agrees that its obligations pursuant to the first sentence
of this Section 5.5 shall not be affected by the commencement, public proposal,
public disclosure or communication to the Company of any Acquisition Proposal.
AGT and the Company will, through their respective Boards of Directors,
recommend to their respective stockholders approval of this Agreement and the
Merger (with respect to the Company) and the Share Issuance (with respect to
AGT), subject to the right of the Company Board to modify or withdraw its
recommendation pursuant to Section 5.3(b). The Company and AGT shall coordinate
and cooperate with respect to the timing of such meetings and each of the
Company and AGT shall use its best efforts to hold such meeting as soon as
practicable after the date hereof.
SECTION 5.6. Access to Information.
(a) Between the date hereof and the Effective Time, each of
the parties hereto will give the other party hereto and their authorized
representatives reasonable access to all its employees, plants, offices,
warehouses and other facilities and to all its and its subsidiaries' books and
records, will permit the other parties hereto to make such inspections as the
other parties may reasonably require and will cause its officers and those of
its subsidiaries to furnish the other parties with such financial and operating
data and other information with respect its and its subsidiaries' business,
properties and personnel as the other parties may from time to time reasonably
request, provided that no investigation pursuant to this Section 5.6(a) shall
affect or be deemed to modify any of the representations or warranties made by
any party hereto.
(b) Between the date hereof and the Effective Time, the
Company shall furnish to AGT and Acquisition (i) within five business days after
the delivery thereof to management, such monthly financial statements and data
as are regularly prepared for distribution to Company management and (ii) at the
earliest time they are available, such quarterly and annual financial statements
as are prepared for the Company's SEC filings, which (in the case of this clause
(ii)), shall be in accordance with the books and records of the Company.
(c) Between the date hereof and the Effective Time, AGT shall
furnish to the Company (i) within five business days after the delivery thereof
to management, such monthly financial statements and data as are regularly
prepared for distribution to AGT management and (ii) at the earliest time they
are available, such quarterly and annual financial statements as are prepared
for AGT's SEC filings, which (in the case of this clause (ii)), shall be in
accordance with the books and records of AGT.
(d) Each of AGT and Acquisition will hold and will cause its
consultants and advisors to hold in confidence all documents and information
concerning the Company and its subsidiaries furnished to AGT or Acquisition in
connection with the transactions contemplated by this Agreement to the extent
required by that certain confidentiality agreement entered into between the
Company and AGT dated November 25, 1997 (the "Confidentiality Agreement").
SECTION 5.7. Additional Agreements; Reasonable Best Efforts.
Subject to the terms and conditions herein provided, each of the parties hereto
agrees to use its reasonable best efforts to take, or cause to be taken, all
action, and to do, or cause to be done, all things reasonably necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, (i) cooperation in the preparation and filing of the Joint Proxy
Statement and the S-4, any filings that may be required under the HSR Act, and
any amendments to any thereof; (ii) cooperation in obtaining, prior to the
Effective Time, the approval for quotation on the NASDAQ, effective upon the
official notice of issuance, of the shares of AGT Common Stock into which the
Company Common Stock will be converted pursuant to Article I hereof; (iii) the
taking of all action reasonably necessary, proper or advisable to secure any
necessary consents of all third parties and Governmental Entities, including
those relating to existing debt obligations of the Company, AGT and their
respective subsidiaries; (iv) contesting any legal proceeding relating to the
Merger; and (v) the execution of any additional instruments, including the
Certificate of Merger, necessary to consummate the transactions contemplated
hereby. Subject to the terms and conditions of this Agreement, AGT and
Acquisition agree to use all reasonable efforts to cause the Effective Time to
occur as soon as practicable after the shareholder vote with respect to the
Merger. In case at any time after the Effective Time any further action is
necessary to carry out the purposes of this Agreement, the proper officers and
directors of each party hereto shall take all such necessary action.
SECTION 5.8. Antitrust Reviews. Each party hereto will use all
reasonable efforts (a) to file with the US Department of Justice and US Federal
Trade Commission, as soon as practicable after the date hereof, the Notification
and Report Form under the HSR Act and any supplemental information or material
requested pursuant to the HSR Act, and (b) to comply as soon as practicable
after the date hereof with any other laws of any country and the European Union
under which any consent, authorization, registration, declaration or other
action with respect to the transactions contemplated herein may be required.
Each party hereto shall furnish to the other such information and assistance as
the other may reasonably request in connection with any filing or other act
undertaken in compliance with the HSR Act or other such laws, and shall keep
each other timely apprised of the status of any communications with, and any
inquiries or requests for additional information from, any Governmental Entity
under the HSR Act or other such laws. Each of the Company and AGT shall take any
and all action reasonably necessary to prevent the entry of any order,
preliminary or permanent injunction, or other legal restraint or prohibition
preventing consummation of the Merger or any related transactions contemplated
by this Agreement, and to lift, mitigate or rescind the effect of any litigation
or administrative proceeding adversely affecting this Agreement or any
transactions contemplated herein.
SECTION 5.9. Public Announcements. Each of AGT, Acquisition
and the Company will consult with one another before issuing any press release
or otherwise making any public statements with respect to the transactions
contemplated by this Agreement, including, without limitation, the Merger, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by applicable law or by
obligations pursuant to any agreement with NASDAQ, as determined by AGT,
Acquisition or the Company, as the case may be.
SECTION 5.10. Indemnification; Directors' and Officers'
Insurance.
(a) Indemnification. From and after the Effective Time, AGT
shall, to the fullest extent permitted by applicable law, indemnify, defend and
hold harmless each person who is now, or has been at any time prior to the date
hereof, or who becomes prior to the Effective Time, a director, officer or
employee of the parties hereto or any subsidiary thereof (each an "Indemnified
Party" and, collectively, the "Indemnified Parties") against all losses,
expenses (including reasonable attorneys' fees and expenses), claims, damages or
liabilities or, subject to the proviso of the next succeeding sentence, amounts
paid in settlement, arising out of actions or omissions occurring at or prior to
the Effective Time and whether asserted or claimed prior to, at or after the
Effective Time that are in whole or in part (i) based on, or arising out of, the
fact that such person is or was a director, officer or employee of such party or
a subsidiary of such party or (ii) based on, arising out of or pertaining to the
transactions contemplated by this Agreement. In the event of any such loss,
expense, claim, damage or liability (whether or not arising before the Effective
Time), (i) AGT shall pay the reasonable fees and expenses of counsel selected by
the Indemnified Parties, which counsel shall be reasonably satisfactory to AGT,
promptly after statements therefor are received and otherwise advance to such
Indemnified Party upon request reimbursement of documented expenses reasonably
incurred, in either case to the extent not prohibited by the DGCL and upon
receipt of any affirmation and undertaking required by the DGCL, (ii) AGT will
cooperate in the defense of any such matter and (iii) any determination required
to be made with respect to whether an Indemnified Party's conduct complies with
the standards set forth under the DGCL and AGT's articles of incorporation or
bylaws shall be made by independent counsel mutually acceptable to AGT and the
Indemnified Party; provided, however, that AGT shall not be liable for any
settlement effected without its written consent (which consent shall not be
reasonably withheld). The Indemnified Parties as a group may retain only one law
firm with respect to each related matter except to the extent there is, in the
opinion of counsel to an Indemnified Party, under applicable standards of
professional conduct, a conflict on any significant issue between positions of
any two or more Indemnified Parties.
(b) Insurance. For a period of six years after the Effective
Time, AGT shall cause to be maintained in effect the policies of directors' and
officers' liability insurance maintained by the Company for the benefit of those
persons who are covered by such policies at the Effective Time (or AGT may
substitute therefor policies of at least the same coverage with respect to
matters occurring prior to the Effective Time), to the extent that such
liability insurance can be maintained annually at a cost to AGT not greater than
150 percent of the premium for the current Company directors' and officers'
liability insurance; provided that if such insurance cannot be so maintained or
obtained at such costs, AGT shall maintain or obtain as much of such insurance
as can be so maintained or obtained at a cost equal to 150 percent of the
current annual premiums of the Company for such insurance.
(c) Successors. In the event AGT or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity or such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then and in either such case, proper provision shall be made so
that the successors and assigns of AGT shall assume the obligations set for in
this Section 5.10.
(d) Survival of Indemnification. To the fullest extent
permitted by law, from and after the Effective Time, all rights to
indemnification now existing in favor of the employees, agents, directors or
officers of the Company and its subsidiaries with respect to their activities as
such prior to the Effective Time, as provided in the Company's articles of
incorporation or bylaws, in effect on the date thereof or otherwise in effect on
the date hereof, shall survive the Merger and shall continue in full force and
effect for a period of the lesser of six years from the Effective Time and the
expiration of the applicable statute of limitations.
(e) Benefit. The provisions of this Section 5.10 are intended
to be for the benefit of, and shall be enforceable by, each Indemnified Party,
his or her heirs and his or her representatives.
SECTION 5.11. Notification of Certain Matters. The Company
shall give prompt notice to AGT and Acquisition, and AGT and Acquisition shall
give prompt notice to the Company, of (i) the occurrence or nonoccurrence of any
event the occurrence or nonoccurrence of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time, (ii) any
material failure of the Company, AGT or Acquisition, as the case may be, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder, (iii) any notice of, or other communication
relating to, a default or event which, with notice or lapse of time or both,
would become a default, received by it or any of its subsidiaries subsequent to
the date of this Agreement and prior to the Effective Time, under any contract
or agreement material to the financial condition, properties, businesses or
results of operations of it and its subsidiaries taken as a whole to which it or
any of its subsidiaries is a party or is subject, (iv) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement, or (v) the occurrence of any Material Adverse Effect; provided,
however, that the delivery of any notice pursuant to this Section 5.11 shall not
cure such breach or non-compliance or limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
SECTION 5.12. Tax-Free Reorganization Treatment. The Company,
Company Affiliates, AGT and Acquisition shall execute and deliver to O'Sullivan
Graev & Karabell, LLP, counsel to the Company, and Weil, Gotshal & Manges LLP,
counsel to AGT, certificates containing customary representations substantially
in the forms agreed to by the parties on or prior to the date hereof (with such
changes as may be reasonably requested by such law firms) at such time or times
as may be reasonably requested by such law firms in connection with their
respective deliveries of opinions, pursuant to Sections 6.2(c) and 6.3(f)
hereof, with respect to the tax-free reorganization treatment of the Merger.
Prior to the Effective Time, none of the Company, Company Affiliates, AGT or
Acquisition shall take or cause to be taken any action which would cause to be
untrue (or fail to take or cause not to be taken any action which would cause to
be untrue) any of the representations in such previously-agreed upon
certificates.
SECTION 5.13. Company Employee Benefits. Through December 31,
1998, the employees of the Company shall continue to receive employee benefits
substantially comparable in the aggregate to those provided for under Company
Benefit Plans (other than the plans being terminated as set forth on Scedule
5.14 of the Company Disclosure Schedule) provided by the Company on the date
prior to the Effective Time.
SECTION 5.14. Certain Payment of Deferred Compensation and
Bonuses. Notwithstanding anything to the contrary herein, the Company shall take
such action as necessary (i) to terminate the Company Benefit Plans as indicated
on Schedule 5.14 of the Company Disclosure Schedule and (ii) make the payments
required to be made or elected by the Company to be made under all Company
Benefit Plans as set forth on Schedule 5.14 of the Company Disclosure Schedule
on or immediately prior to the Effective Time.
SECTION 5.15. Stock Options. The Company shall take any
actions required under the terms of the Stock Option Plans, including, but not
limited to, obtaining any required written consents of the Option holders, in
order to effectuate the provisions of Section 2.3 hereof.
SECTION 5.16. SEC Filings. Each of AGT and the Company shall
promptly provide the other party (or its counsel) with copies of all filings
made by the other party or any of its subsidiaries with the SEC or any other
state or federal Governmental Entity in connection with this Agreement and the
transactions contemplated hereby.
SECTION 5.17. Guarantee of Performance. AGT hereby guarantees
the performance by Acquisition of its obligations under this Agreement.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 6.1. Conditions to Each Party's Obligations to Effect
the Merger. The respective obligations of each party hereto to effect the Merger
are subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) this Agreement shall have been approved and adopted by the
requisite vote of the stockholders of the Company and, the Share Issuance shall
have been approved by the requisite vote of the stockholders of AGT;
(b) no statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or enforced
by any United States court or United States governmental authority and continued
in effect which prohibits, restrains, enjoins or restricts the consummation of
the Merger;
(c) any waiting period applicable to the Merger under the HSR
Act shall have terminated or expired, and any other governmental or regulatory
notices or approvals required with respect to the transactions contemplated
hereby shall have been either filed or received;
(d) the S-4 shall have become effective under the Securities
Act and shall not be the subject of any stop order or proceedings seeking a stop
order and AGT shall have received all state securities laws or "blue sky"
permits and authorizations necessary to issue shares of AGT Common Stock in
exchange for the Shares in the Merger;
(e) the AGT Common Stock issuable in the Merger shall have
been authorized for quotation on the NASDAQ, upon official notice of issuance;
and
(f) the number of directors of AGT shall have been increased
by two, and the vacancies created thereby shall have been initially filled by
Marne Obernauer, Jr. and a designee to be determined jointly by the Company and
AGT.
SECTION 6.2. Conditions to the Obligations of the Company. The
obligation of the Company to effect the Merger is subject to the satisfaction at
or prior to the Effective Time of the following conditions:
(a) the representations and warranties of AGT and Acquisition
contained in this Agreement or in any other document delivered pursuant hereto
shall be true and correct in all material respects at and as of the Effective
Time with the same effect as if made at and as of the Effective Time, and at the
Closing AGT and Acquisition shall have delivered to the Company a certificate to
that effect;
(b) each of the obligations of AGT and Acquisition to be
performed at or before the Effective Time pursuant to the terms of this
Agreement shall have been duly performed in all material respects at or before
the Effective Time and at the Closing AGT and Acquisition shall have delivered
to the Company a certificate to that effect;
(c) the opinion of O'Sullivan Graev & Karabell, LLP, dated the
Closing Date and addressed to the Company substantially to the effect that (i)
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (ii) each of AGT, Acquisition
and the Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code; and (iii) no gain or loss will be recognized by the
Company as a result of the Merger or by a stockholder of the Company as a result
of the Merger with respect to Shares converted into shares of AGT Common Stock
(other than with respect to the Per Share Cash Amount and cash received in lieu
of fractional shares of AGT Common Stock), shall have been delivered and such
opinion shall not have been withdrawn or modified in any material respect. In
rendering such opinion, O'Sullivan Graev & Karabell, LLP shall have received and
may rely upon the representations contained in the certificates referred to in
Section 5.12; and
(d) other than a change in the price of AGT Common Stock,
there shall have been no events, changes or effects with respect to AGT or its
subsidiaries which would have a Material Adverse Effect on AGT.
SECTION 6.3. Conditions to the Obligations of AGT and
Acquisition. The respective obligations of AGT and Acquisition to effect the
Merger are subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) the representations and warranties of the Company
contained in this Agreement or in any other document delivered pursuant hereto
shall be true and correct in all material respects at and as of the Effective
Time with the same effect as if made at and as of the Effective Time, and at the
Closing the Company shall have delivered to AGT and Acquisition a certificate to
that effect;
(b) each of the obligations of the Company to be performed at
or before the Effective Time pursuant to the terms of this Agreement shall have
been duly performed in all material respects at or before the Effective Time and
at the Closing the Company shall have delivered to AGT and Acquisition a
certificate to that effect;
(c) the Dissenting Shares shall constitute not more than ten
percent (10%) of the Shares;
(d) the Company shall have delivered to AGT and Acquisition
all consents or notices necessary to effect valid assignments of the contracts
listed on Section 3.18 of the Company Disclosure Schedule, except for the
contracts indicated thereon with an asterisk, all in form and substance
reasonably acceptable to AGT;
(e) there shall have been no events, changes or effects with
respect to the Company or its subsidiaries which would have a Material Adverse
Effect on the Company;
(f) the opinion of Weil, Gotshal & Manges LLP, dated the
Closing Date and addressed to AGT, substantially to the effect that (i) the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (ii) each of AGT, Acquisition
and the Company will be a party to the reorganization within the meaning of
Section 368(b) of the Code; and (iii) no gain or loss will be recognized by AGT,
Acquisition or the Company as a result of the Merger, shall have been delivered
and such opinion shall not have been withdrawn or modified in any material
respect. In rendering such opinion, Weil, Gotshal & Manges LLP shall have
received and may rely upon the representations contained in the certificates
referred to in Section 5.12;
(g) employment agreements between Black Dot Graphics, Inc., a
wholly-owned subsidiary of the Company, and each of Ettore G. Nardulli and
Howard A. Fiedler, each dated August 1, 1989, as amended, shall be in full force
and effect unless terminated due to death or disability (as defined therein).
ARTICLE 7
TERMINATION; AMENDMENT; WAIVER
SECTION 7.1. Termination. This Agreement may be terminated at
any time prior to the Effective Time:
(a) by mutual written consent of AGT, Acquisition and the
Company;
(b) by AGT and Acquisition or the Company if the Merger has
not been consummated by July 31, 1998, provided that no party may terminate this
Agreement pursuant to this Section 7.1(b) if such party's failure to fulfill any
of its obligations under this Agreement shall have been the reason that the
Effective Time shall not have occurred on or before said date;
(c) by AGT and Acquisition or the Company if (i) the Company
shall have convened a meeting of its stockholders and failed to obtain the
requisite vote to approve this agreement and the Merger, (ii) AGT shall have
convened a meeting of its stockholders and failed to obtain the requisite vote
to approve the Share Issuance, or (iii) the U.S. Department of Justice or U.S.
Federal Trade Commission shall have obtained or stated its intention in writing
to seek an order, preliminary or permanent injunction, or other legal restraint
or prohibition preventing consummation of the Merger or any related transactions
contemplated by this Agreement.
(d) by the Company if (i) there shall have been a breach of
any representation or warranty on the part of AGT or Acquisition set forth in
this Agreement, or if any representation or warranty of AGT or Acquisition shall
have become untrue, in either case such that the conditions set forth in Section
6.2(a) would be incapable of being satisfied by July 31, 1998 (or as otherwise
extended), (ii) there shall have been a breach by AGT or Acquisition of any of
their respective covenants or agreements hereunder having or constituting a
Material Adverse Effect on AGT or Acquisition, as the case may be, has not cured
such breach within 15 days after notice by the Company thereof, or (iii) the
Company enters into a definitive agreement relating to a Superior Proposal in
accordance with Section 5.3(b), so long as the Company is not then in breach of
its obligations under Section 5.3 (provided that such termination shall not be
effective until payment of the amount required under Section 7.3(a)); or
(e) by AGT and Acquisition if (i) there shall have been a
breach of any representation or warranty on the part of the Company set forth in
this Agreement, or if any representation or warranty of the Company shall have
become untrue, in either case such that the conditions set forth in Section
6.3(a) would be incapable of being satisfied by July 31, 1998 (or as otherwise
extended), (ii) there shall have been a breach by the Company of its covenants
or agreements hereunder having or constituting a Material Adverse Effect on the
Company and the Company has not cured such breach within 15 days after notice by
AGT or Acquisition thereof or (iii) the Company Board shall have withdrawn,
modified or changed its approval or recommendation of this Agreement or the
Merger, shall have recommended to the Company's stockholders any Acquisition
Proposal (other than the Merger), shall have failed to call, give notice of,
convene or hold a stockholders' meeting to vote upon the Merger, or shall have
adopted any resolution to effect any of the foregoing, or the Company shall have
entered into a definitive agreement relating to a Superior Proposal.
SECTION 7.2. Effect of Termination. In the event of the
termination of this Agreement pursuant to Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability on the part of
any party hereto or its affiliates, directors, officers or shareholders, other
than the provisions of this Section 7.2 and Sections 5.6(c) and 7.3, and nothing
contained in this Section 7.2 shall relieve any party from liability for any
breach of this Agreement prior to such termination.
SECTION 7.3. Fees and Expenses.
(a) In the event that this Agreement shall be terminated
pursuant to:
(i) Sections 7.1(e)(i) or 7.1(e)(ii), and, within
twelve months thereafter, the Company enters into an agreement with respect to
any Acquisition Proposal (other than the Merger); or
(ii) Sections 7.1(d)(iii) or 7.1(e)(iii),
then AGT and Acquisition would suffer direct and substantial
damages, which damages cannot be determined with reasonable certainty. To
compensate AGT and Acquisition for such damages, the Company shall pay to AGT
the amount of $13 million as liquidated damages and not a penalty as follows:
(i) in the case of a termination under Sections 7.1(e)(i) or 7.1(e)(ii), such
amount shall be paid on the date the Company enters into an agreement with
respect to any Acquisition Proposal and (ii) in the case of a termination under
Section 7.1(d)(iii) or 7.1(e)(iii), such amount shall be paid concurrently with
and, in the case of Section 7.1(d)(iii), as a precondition of, such termination.
(b) Upon the termination of this Agreement pursuant to
Sections 7.1(c)(i), 7.1(d)(iii), or 7.1(e)(iii), in addition to any amounts that
may otherwise be payable under Section 7.3(a), the Company shall reimburse AGT,
Acquisition and their affiliates for all actual documented out-of-pocket fees
and expenses, not to exceed $3 million, actually incurred by any of them or on
their behalf in connection with the Merger and the consummation of all
transactions contemplated by this Agreement (including, without limitation, fees
payable to investment bankers, counsel to any of the foregoing, and
accountants). If AGT or Acquisition shall submit a request for reimbursement
hereunder, AGT or Acquisition will provide the Company in due course with
invoices or other reasonable evidence of such expenses upon request. The Company
shall in any event pay the amount (not to exceed $3 million) within 10 business
days from when invoices are received by the Company.
(c) Upon the termination of this Agreement pursuant to Section
7.1(c)(ii), AGT shall reimburse the Company for all actual documented
out-of-pocket fees and expenses, not to exceed $3 million, actually incurred by
the Company or on its behalf in connection with the Merger and the consummation
of all transactions contemplated by this Agreement (including, without
limitation, fees payable to investment bankers, counsel to any of the foregoing,
and accountants). If the Company shall submit a request for reimbursement
hereunder, the Company will provide AGT in due course with invoices or other
reasonable evidence of such expenses upon request. AGT shall in any event pay
the amount (not to exceed $3 million) within 10 business days from when invoices
are received by AGT.
(d) Except as specifically provided in this Section 7.3, each
party shall bear its own expenses in connection with this Agreement and the
transactions contemplated hereby. The cost of printing the S-4 and the Joint
Proxy Statement of filing any required notification under the HSR Act shall be
borne equally by the Company and AGT.
SECTION 7.4. Amendment. This Agreement may be amended by
action taken by the Company, AGT and Acquisition at any time before or after
approval of the Merger by the stockholders of the Company and stockholders of
AGT but, after any such approval, no amendment shall be made which requires the
approval of such stockholders under applicable law without such approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of the parties hereto.
SECTION 7.5. Extension; Waiver. At any time prior to the
Effective Time, each party hereto (for these purposes, AGT and Acquisition shall
together be deemed one party and the Company shall be deemed the other party)
may (i) extend the time for the performance of any of the obligations or other
acts of the other party, (ii) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any document, certificate
or writing delivered pursuant hereto or (iii) waive compliance by the other
party with any of the agreements or conditions contained herein. Any agreement
on the part of either party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of either party hereto to assert any of its rights hereunder
shall not constitute a waiver of such rights.
ARTICLE 8
MISCELLANEOUS
SECTION 8.1. Nonsurvival of Representations and Warranties.
The representations and warranties made herein shall not survive beyond the
Effective Time or a termination of this Agreement.
SECTION 8.2. Entire Agreement; Assignment. This Agreement:
(a) and the Confidentially Agreement constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof; and
(b) shall not be assigned by operation of law or otherwise;
provided, however, that Acquisition may assign any or all of its rights and
obligations under this Agreement to any direct or indirect wholly-owned
subsidiary of AGT, but no such assignment shall relieve Acquisition of its
obligations hereunder if such assignee does not perform such obligations.
SECTION 8.3. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person, by
cable, telegram, facsimile or telex, or by registered or certified mail (postage
prepaid, return receipt requested), to the other party as follows:
if to AGT or Applied Graphics Technologies, Inc.
to Acquisition to: 450 West 33rd Street
New York, New York 10001
Attention: Martin D. Krall
Louis Salamone, Jr.
with a copy to: Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
Attention: Jeffrey J. Weinberg, Esq.
Facsimile: (212) 310-8007
if to the Company to: Devon Group, Inc.
450 Park Avenue
New York, New York 10022
Attention: Marne Obernauer, Jr.
with a copy to: O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, NY 10112
Attention: Lawrence G. Graev, Esq.
Facsimile: (212) 408-2420
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above.
SECTION 8.4. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware, without
regard to the principles of conflicts of law thereof.
SECTION 8.5. Descriptive Headings. The descriptive headings
herein are inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement.
SECTION 8.6. Interpretive Provisions; Certain Definitions.
Whenever used in this Agreement, "to the Company's knowledge" or "to the
knowledge of the Company" shall mean the actual knowledge of those persons who
are listed on Exhibit 1 and "to AGT's knowledge" or "to the knowledge of AGT"
shall mean the actual knowledge of the Persons listed on Exhibit 2. The
inclusion of any information on any schedule to this Agreement shall not be
deemed to be an admission or acknowledgement by the Company, in and of itself,
that such information is required to be listed on such Schedule or is material
to or outside the ordinary course of the business of the Company. Nothing
contained herein or in any of the exhibits or schedules hereto shall constitute
an admission of liability or an admission against the Company's interest.
SECTION 8.7. Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto and its
successors and permitted assigns, and except as provided in Sections 5.10 and
8.2 nothing in this Agreement, express or implied, is intended to or shall
confer upon any other person any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.
SECTION 8.8. Severability. If any term or other provision of
this Agreement is invalid, illegal or unenforceable, all other provisions of
this Agreement shall remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party.
SECTION 8.9. Specific Performance. The parties hereto
acknowledge that irreparable damage would result if this Agreement were not
specifically enforced, and they therefore consent that the rights and
obligations of the parties under this Agreement may be enforced by a decree of
specific performance issued by a court of competent jurisdiction. Such remedy
shall, however, not be exclusive and, shall be in addition to any other remedies
which any party may have under this Agreement or otherwise.
SECTION 8.10. Brokers. Except as otherwise provided in Section
7.3, the Company agrees to indemnify and hold harmless AGT and Acquisition, and
AGT and Acquisition agree to indemnify and hold harmless the Company, from and
against any and all liability to which AGT and Acquisition, on the one hand, or
the Company, on the other hand, may be subjected by reason of any brokers,
finder's or similar fees or expenses with respect to the transactions
contemplated by this Agreement to the extent such similar fees and expenses are
attributable to any action undertaken by or on behalf of the Company, or AGT or
Acquisition, as the case may be.
SECTION 8.11. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be duly executed on its behalf as of the day and year first above
written.
APPLIED GRAPHICS TECHNOLOGIES, INC.
By:
Name: Fred Drasner
Title: Chief Executive Officer
AGT ACQUISITION CORP.
By:
Name: Fred Drasner
Title: Chief Executive Officer
DEVON GROUP, INC.
By:
Name: Marne Obernauer, Jr.
Title: Chief Executive Officer
<PAGE>
Exhibit 1
Marne Obernauer, Jr.
Bruce K. Koch
Robert H. Donovan
Robert A. Frasco
<PAGE>
Exhibit 2
Fred Drasner
Martin D. Krall
Louis Salamone, Jr.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-25059 of Applied Graphics Technologies, Inc. on Form S-8 of our report dated
March 23, 1998, appearing in this Annual Report on Form 10-K of Applied Graphics
Technologies, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
New York, NY
March 23, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Applied Graphics Technologies, Inc. on Form S-8 (File No. 333-25059) of our
report dated March 8, 1996, on our audit of the combined statements of
operations, cash flows and changes in owners' equity (deficit) of the
Predecessor Group to Applied Graphics Technologies, Inc. for the year ended
December 31, 1995, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
New York, New York
March 23, 1998
<PAGE>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
COMPANY AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,584
<SECURITIES> 90,150
<RECEIVABLES> 47,014
<ALLOWANCES> 3,989
<INVENTORY> 6,234
<CURRENT-ASSETS> 168,451
<PP&E> 57,533
<DEPRECIATION> 26,513
<TOTAL-ASSETS> 224,793
<CURRENT-LIABILITIES> 37,283
<BONDS> 2,823
0
0
<COMMON> 178
<OTHER-SE> 183,319
<TOTAL-LIABILITY-AND-EQUITY> 224,793
<SALES> 184,993
<TOTAL-REVENUES> 184,993
<CGS> 120,018
<TOTAL-COSTS> 120,018
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,487
<INTEREST-EXPENSE> 1,034
<INCOME-PRETAX> 22,707
<INCOME-TAX> 9,140
<INCOME-CONTINUING> 13,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.83
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS OF THE COMPANY AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996, AND AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996,AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996
<CASH> 2,567 1,216
<SECURITIES> 1,600 1,698
<RECEIVABLES> 30,056 27,766
<ALLOWANCES> 472 889
<INVENTORY> 4,639 3,438
<CURRENT-ASSETS> 41,580 36,241
<PP&E> 42,500 39,174
<DEPRECIATION> 21,956 21,159
<TOTAL-ASSETS> 72,147 55,892
<CURRENT-LIABILITIES> 25,852 21,425
<BONDS> 7,270 0
0 0
0 0
<COMMON> 143 138
<OTHER-SE> 35,740 17,880
<TOTAL-LIABILITY-AND-EQUITY> 72,147 55,892
<SALES> 132,725 96,763
<TOTAL-REVENUES> 132,725 96,763
<CGS> 92,242 67,600
<TOTAL-COSTS> 92,242 67,600
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 62
<INTEREST-EXPENSE> 1,833 1,688
<INCOME-PRETAX> 10,820 6,458
<INCOME-TAX> 865 303
<INCOME-CONTINUING> 9,955 6,155
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,955 6,155
<EPS-PRIMARY> 0.79 0.51
<EPS-DILUTED> 0.77 0.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS OF THE COMPANY AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997, AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 8,719 2,039 2,540
<SECURITIES> 99,419 0 0
<RECEIVABLES> 45,986 35,350 31,938
<ALLOWANCES> 738 526 456
<INVENTORY> 6,013 6,194 4,454
<CURRENT-ASSETS> 170,859 51,782 44,047
<PP&E> 52,338 44,564 42,814
<DEPRECIATION> 26,950 24,290 23,070
<TOTAL-ASSETS> 212,634 86,155 74,404
<CURRENT-LIABILITIES> 28,028 23,797 25,247
<BONDS> 2,410 17,403 7,688
0 0 0
0 0 0
<COMMON> 178 144 143
<OTHER-SE> 179,331 42,214 38,338
<TOTAL-LIABILITY-AND-EQUITY> 212,634 86,155 74,404
<SALES> 131,488 81,072 39,761
<TOTAL-REVENUES> 131,488 81,072 39,761
<CGS> 84,653 52,871 26,821
<TOTAL-COSTS> 84,653 52,871 26,821
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<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 921 508 210
<INCOME-PRETAX> 16,636 9,641 4,259
<INCOME-TAX> 6,613 3,760 1,661
<INCOME-CONTINUING> 10,023 5,881 2,598
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