AM INTERNATIONAL INC, PREM14A, 1996-12-10

AM INTERNATIONAL INC
PREM14A, 1996-12-10
PRINTING TRADES MACHINERY & EQUIPMENT

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1996

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only
[ ] Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
</TABLE>

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

AM INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[ ] No fee required.

[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

Common Stock, par value $.01 per share, of the Registrant ("Common
Stock")

(2) Aggregate number of securities to which transaction applies:

7,039,176 (total includes 7,008,421 issued and outstanding shares of
Common Stock, options to purchase 834 shares of Common Stock and 29,921
deferred compensation award shares).

(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):

$5.00, based on the consideration to be paid for each share of Common
Stock and to be received in satisfaction of the deferred compensation
award shares. $.56 for the 834 options to purchase shares of Common Stock
which have an exercise price of $4.44.

(4) Proposed maximum aggregate value of transaction:

$35,192,178

(5) Total fee paid:

$7,038.10, equaling 1/50th of one percent of the proposed maximum
aggregate value of the transaction.

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

- --------------------------------------------------------------------------------

(2) Form, Schedule or Registration Statement No.:

- --------------------------------------------------------------------------------

(3) Filing Party:

- --------------------------------------------------------------------------------

(4) Date Filed:

- --------------------------------------------------------------------------------

PRELIMINARY COPY DATED DECEMBER 10, 1996
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[AM INTERNATIONAL LETTERHEAD]

, 1996

DEAR AM INTERNATIONAL
STOCKHOLDERS:

You are cordially invited to attend a Special Meeting of the Stockholders
of AM International, Inc., a Delaware corporation (the "Company"), which will be
held at , , on , 1997 at a.m.
(Central Time). At this important meeting, you will be asked to consider and
vote upon a proposal to approve and adopt a Merger Purchase Agreement dated as
of October 29, 1996 (the "Merger Agreement") among the Company, 8044 Acquisition
Inc., a Delaware corporation ("Buyer"), and 8044 Acquisition Sub Inc., a
Delaware corporation and a wholly-owned subsidiary of Buyer ("Sub"), and the
merger (the "Merger") of the Sub with and into the Company which will result in
the Company becoming a wholly-owned subsidiary of Buyer.

Pursuant to the terms of the Merger Agreement, upon consummation of the
Merger, each then outstanding share of Company Common Stock will be converted
into the right to receive $5.00 per share payable in cash.

The Board of Directors of the Company (the "Board") has carefully reviewed
and considered the terms and conditions of the Merger Agreement and the Merger.
The Board had previously retained Bear, Stearns & Co., Inc. ("Bear Stearns") to
review strategic options for the Company, including the sale of all or parts of
the operating units of the Company or the Company as a whole. In connection with
the Board's review and consideration of the Merger Agreement and the Merger,
Bear Stearns rendered an opinion, subject to the assumptions and limitations set
forth therein, to the effect that the consideration to be paid in the Merger is
fair, from a financial point of view, to the stockholders of the Company
(without rendering an opinion as to the fairness to Buyer and its affiliates).
See "SPECIAL FACTORS -- Opinion of the Company's Financial Advisor" in the
accompanying Proxy Statement. The full text of the opinion of Bear Stearns is
set forth as Appendix II to the accompanying Proxy Statement. In light of the
opinion of Bear Stearns, among other things, the Board has approved the Merger
Agreement and has determined that the terms of the Merger are fair to and in the
best interests of its stockholders.

YOUR BOARD OF DIRECTORS UNANIMOUSLY HAS APPROVED AND RECOMMENDS THAT YOU
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.

Enclosed with this letter are a Notice of Special Meeting and Proxy
Statement which describes in detail the Merger, its background and other
relevant information. A copy of the Merger Agreement is attached as Appendix I
to the accompanying Proxy Statement. Also enclosed is a form of proxy solicited
by the Board of Directors of the Company in connection with the special meeting.

HOLDERS OF COMPANY COMMON STOCK SHOULD NOT FORWARD THEIR CERTIFICATES
REPRESENTING SHARES OF COMPANY COMMON STOCK WITH THE ENCLOSED PROXY CARD, NOR
SHOULD THEY SUBMIT THEIR SUCH CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED
A LETTER OF TRANSMITTAL. STOCKHOLDERS SHOULD NOT FORWARD ANY CERTIFICATES AT
THIS TIME.

You should carefully consider all of the information in the proxy statement
and execute and return the enclosed form of proxy as soon as possible, whether
or not you expect to attend the special meeting. The giving of a proxy by a
stockholder will not prevent voting in person at the special meeting. The vote
of every
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stockholder of the Company is important. Your Board and management appreciates
your support and cooperation.

We look forward to seeing you on , 1997.

Cordially,

Jerome D. Brady
Chairman, President and
Chief Executive Officer
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AM INTERNATIONAL, INC.
431 LAKEVIEW COURT
MT. PROSPECT, IL 60056

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1997

To The Stockholders of AM International, Inc.:

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of AM
International, Inc. will be held at the
on ,
1997 at a.m. (Central Time) for the following purposes:

(1) To consider and vote upon a proposal to approve and adopt the Merger
Purchase Agreement dated October 29, 1996 among AM International, Inc.,
a Delaware corporation (the "Company"), 8044 Acquisition, Inc., a
Delaware corporation ("Buyer"), and 8044 Acquisition Sub Inc., a
Delaware corporation and a wholly-owned subsidiary of Buyer ("Sub"),
and the merger (the "Merger") of Sub with and into the Company which
will result in the Company becoming a wholly-owned subsidiary of Buyer.
A copy of the Merger Agreement appears as Appendix I to the
accompanying Proxy Statement. Pursuant to the terms of the Merger
Agreement, each then outstanding share of Company Common Stock will be
converted into the right to receive $5.00 per share payable in cash.

(2) To transact such other business as may properly come before the meeting
or any adjournments or postponements thereof.

The close of business on November 26, 1996 has been fixed as the record
date for the meeting. All holders of record of Company Common Stock on such date
are entitled to notice of and to vote at the meeting.

Each stockholder, even though he or she now plans to attend the meeting, is
requested to sign and date the enclosed proxy card and to return it without
delay in the enclosed postage-paid envelope. Any stockholder present at the
meeting may withdraw his or her proxy and vote personally on each matter brought
before the meeting.

By Order of the Board of Directors,

Steven R. Andrews, Secretary
Mt. Prospect, Illinois
, 1996
------------------------

IMPORTANT

TO ASSURE PROPER REPRESENTATION AT THE MEETING, ALL STOCKHOLDERS ARE
REQUESTED TO FILL IN AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE
ACCOMPANYING ENVELOPE.

THANK YOU FOR ACTING PROMPTLY.
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TABLE OF CONTENTS

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PAGE
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INTRODUCTION......................................................................... 1
SUMMARY.............................................................................. 3
Summary Financial Information...................................................... 8
VOTING RIGHTS AND PROXY INFORMATION.................................................. 9
SPECIAL FACTORS...................................................................... 10
Background of the Merger........................................................... 10
Recommendation of the Board of Directors of the Company; Reasons for the Merger.... 14
Opinion of the Company's Financial Advisor......................................... 16
Buyer's Purpose and Reasons For the Merger; Plans Following the Merger............. 19
Risk that the Merger Will Not be Consummated; the Company's Plans if the Merger is
Not Consummated................................................................. 20
Interest of Certain Persons in the Merger.......................................... 20
Certain Financial Forecasts........................................................ 21
Certain Federal Income Tax Consequences............................................ 24
Anticipated Accounting Treatment................................................... 26
Governmental and Regulatory Approvals.............................................. 26
Certain Significant Financial Considerations....................................... 26
THE MERGER AGREEMENT................................................................. 27
Effective Time..................................................................... 27
The Merger......................................................................... 27
Exchange Procedure................................................................. 27
Representations and Warranties..................................................... 28
Conduct of the Business Pending the Merger......................................... 29
Covenants.......................................................................... 29
Company Stock Options.............................................................. 29
Deferred Compensation Shares....................................................... 30
No Solicitation.................................................................... 30
Indemnification and Insurance...................................................... 30
Conditions to the Merger........................................................... 31
Termination........................................................................ 32
Termination Fees and Expenses...................................................... 32
Amendment.......................................................................... 33
The Undertaking.................................................................... 33
SOURCE AND AMOUNT OF FUNDS........................................................... 33
EXPENSES............................................................................. 34
CERTAIN INFORMATION CONCERNING THE COMPANY........................................... 34
PRO FORMA FINANCIAL INFORMATION...................................................... 40
SELECTED FINANCIAL DATA.............................................................. 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 45
CERTAIN INFORMATION CONCERNING BUYER AND SUB......................................... 52
APPRAISAL RIGHTS..................................................................... 53
DIVIDENDS; MARKET PRICES OF COMMON STOCK............................................. 56
PRINCIPAL STOCKHOLDERS............................................................... 57
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS............................... 58
INDEPENDENT ACCOUNTANTS.............................................................. 59
STOCKHOLDER PROPOSALS................................................................ 59
AVAILABLE INFORMATION................................................................ 59
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................... 59
OTHER BUSINESS....................................................................... 60
INDEX TO FINANCIAL STATEMENTS........................................................ F-1
APPENDICES
Appendix I -- Merger Purchase Agreement
Appendix II -- Opinion of Bear, Stearns & Co., Inc.
Appendix III -- Section 262 of the Delaware General Corporation Law
</TABLE>

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AM INTERNATIONAL, INC.
431 LAKEVIEW COURT
MT. PROSPECT, ILLINOIS 60056

------------------------

PROXY STATEMENT

------------------------

SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1997

INTRODUCTION

This Proxy Statement is being furnished to the stockholders of AM
International, Inc., a Delaware corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company (the
"Board") for use at a Special Meeting of Stockholders of the Company to be held
on , 1997 at a.m. (Central Time) and at any
postponement or adjournment thereof (the "Special Meeting"). This Proxy
Statement, the accompanying Notice of Special Meeting of Stockholders and the
enclosed form of proxy are being initially mailed to holders of the Company's
Common Stock on or about , 1996.

At the Special Meeting, stockholders will be asked to consider and vote
upon a proposal to approve and adopt the Merger Purchase Agreement (the "Merger
Agreement") dated October 29, 1996 among the Company, 8044 Acquisition Inc., a
Delaware corporation ("Buyer"), and 8044 Acquisition Sub Inc., a Delaware
corporation and a wholly-owned subsidiary of Buyer ("Sub"), and the merger (the
"Merger") of Sub with and into the Company which will result in the Company
becoming a wholly-owned subsidiary of Buyer. The Merger Agreement (without
schedules and exhibits) is attached as Appendix I to this Proxy Statement.

Thomas D. Rooney, Vice President and Chief Financial Officer of the Company
and, since August 1996, President of AM Multigraphics, is expected to acquire
20% of the issued and outstanding shares of common stock of Buyer. Following the
Merger, Mr. Rooney will serve as Chairman, Chief Executive Officer and President
of the Company and, in such capacity, will receive compensation and benefits
substantially equivalent to his current compensation. Dr. Asher O. Pacholder,
the Chairman of Pacholder Associates, Inc. and a director of the Company until
September 3, 1996, is also expected to acquire 20% of Buyer's issued and
outstanding common stock for approximately $60,000. Dr. Pacholder's wife, Sylvia
A. Pacholder, and two other affiliates of Pacholder Associates, Inc. are
expected to acquire the remaining shares of Buyer's common stock on similar
terms. See "SPECIAL FACTORS -- Interest of Certain Persons in the Merger,"
"SOURCE AND AMOUNT OF FUNDS" and "CERTAIN INFORMATION CONCERNING BUYER AND SUB."

The Merger Agreement provides that each outstanding share of common stock,
par value $.01 per share, of the Company (the "Common Stock"), other than shares
owned by Buyer or by stockholders who properly exercise dissenters' rights, will
be converted in the Merger into the right to receive $5.00 per share payable in
cash (the "Merger Consideration"). The Common Stock is traded on the American
Stock Exchange ("AMEX") under the symbol "AM." On October 28, 1996, the last
full trading day preceding the public announcement by the Company that it had
entered into the Merger Agreement, the high, low and closing sale prices of the
Common Stock, as reported in American Stock Exchange Composite Transactions,
were $2.75, $2.50 and $2.75 per share, respectively. On ,
1996, the last full trading day preceding the printing of this Proxy Statement,
the closing sale price of the Common Stock, as reported in American Stock

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Exchange Composite Transactions, was $ per share. If the Merger Agreement
and the Merger are approved and adopted, the Common Stock will be delisted from
the AMEX upon consummation of the Merger, and the Company will no longer be
obligated to file periodic reports with the Securities and Exchange Commission
(the "Commission") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").

Buyer and Sub were organized solely for the purpose of engaging in the
transactions contemplated by the Merger Agreement. As a result of the Merger,
Messrs. Pacholder and Rooney and the other stockholders of the Buyer will
acquire indirectly the entire equity interest in the Company and stockholders of
the Company, other than those stockholders of the Company who also own common
stock of Buyer, will no longer have any continuing equity interest in the
Company and therefore, will not have an opportunity to share in the future
earnings, if any, and potential growth of the Company.

THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

The Board has carefully reviewed and considered the terms and conditions of
the Merger Agreement and the Merger. The Board had previously retained Bear,
Stearns & Co., Inc. ("Bear Stearns") to review strategic options for the
Company, including the sale of all or parts of the operating units of the
Company or the Company as a whole. In connection with the Board's review and
consideration of the Merger Agreement and the Merger, Bear Stearns rendered an
opinion (the "Fairness Opinion"), subject to the assumptions and limitations set
forth therein, to the effect that the consideration to be paid in the Merger is
fair, from a financial point of view, to the stockholders of the Company
(without rendering an opinion as to the fairness to Buyer and its affiliates).
See "SPECIAL FACTORS -- Opinion of the Company's Financial Advisor." The
Fairness Opinion is set forth in full as Appendix II attached hereto. In light
of the Fairness Opinion, among other things, the Board has approved the Merger
Agreement and has determined that the terms of the Merger are fair to and in the
best interests of its stockholders. THE BOARD UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.

All information contained herein concerning Buyer and Sub has been supplied
by Buyer. Except as otherwise indicated, all other information contained in the
Proxy Statement has been furnished by the Company.

To the Company's knowledge, all of its executive officers and directors who
are the beneficial owners of 2,488,712 issued and outstanding shares
representing approximately 35.5% of the Common Stock issued and outstanding as
of the Record Date in the aggregate, intend to vote all such shares for the
approval and adoption of the Merger Agreement and the Merger.

STOCKHOLDERS ARE URGED TO READ AND CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT AND TO CONSULT WITH THEIR PERSONAL FINANCIAL
AND TAX ADVISORS.

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR
NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
------------------------

The date of this Proxy Statement is , 1997.
------------------------

2
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SUMMARY

Certain significant matters discussed in the Proxy Statement are summarized
below. This Summary is not intended to be complete and is qualified in all
respects by reference to the more detailed information appearing or incorporated
by reference in this Proxy Statement. Stockholders are urged to review carefully
the entire Proxy Statement (including the Appendices and the documents
incorporated herein by reference).

GENERAL INFORMATION

AM INTERNATIONAL, INC...The Company, through its sole remaining business unit,
AM Multigraphics ("AM Multigraphics"), is a distributor
of equipment, supplies and services to the graphic arts
industry and has recently exited the engineering and
manufacturing of offset duplicating equipment to focus
exclusively on distribution of equipment, supplies and
service.

In September 1996, the Company sold its interest in its
majority-owned Japanese subsidiary and distributor for
AM Multigraphics in Japan, AM Japan Co., Ltd. In August
1996, the Company sold substantially all of the assets
and liabilities of its Sheridan Systems division
("Sheridan Systems"), a leading supplier of systems and
components to both the printing and newspaper publishing
industries. In 1996, the Company discontinued its AM
Multigraphics-International Operations business segment,
which was a distributor to certain foreign graphics arts
markets of an extensive range of sheetfed offset
duplicating presses, digital color printing equipment,
pre and post press equipment and a wide range of
supplies and technical services. The mailing address of
its principal executive offices is 431 Lakeview Court,
Mt. Prospect, Illinois 60056, and its telephone number
is (847) 375-1700. See "CERTAIN INFORMATION CONCERNING
THE COMPANY."

BUYER...................8044 Acquisition Inc. was formed under the General
Corporation Law of the State of Delaware (the "Delaware
GCL") on October 25, 1996 for the purpose of
consummating the transactions contemplated by the Merger
Agreement. Other than activities connected with or
ancillary to the transactions contemplated by the Merger
Agreement, Buyer has not engaged in any material
business activities. Dr. Asher O. Pacholder, who was a
director of the Company until September 3, 1996, three
other affiliates of Pacholder Associates, Inc. and Mr.
Rooney are expected to own all the issued and
outstanding shares of common stock of Buyer. See
"CERTAIN INFORMATION CONCERNING BUYER AND SUB."

SUB.....................8044 Acquisition Sub Inc., a wholly-owned subsidiary of
Buyer, was formed under the Delaware GCL on October 25,
1996 for the purpose of consummating the transactions
contemplated by the Merger Agreement. Other than
activities connected with or ancillary to the
transactions contemplated by the Merger Agreement, Sub
has not engaged in any material business activities. See
"CERTAIN INFORMATION CONCERNING BUYER AND SUB."

MERGER AGREEMENT........On October 29, 1996, the Company, Buyer and Sub signed
the Merger Agreement, a copy of which is attached hereto
as Appendix I, providing for the Merger and the payment
of the Merger Consideration to the holders of Common
Stock. See "THE MERGER AGREEMENT."

MERGER..................Subject to the approval and adoption of the Merger
Agreement and the Merger by the stockholders of the
Company and certain other conditions contained in the
Merger Agreement, Sub will be merged with and into the
Company, as a result of which the Company will be the
surviving corporation

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(the "Surviving Corporation"), each share of common
stock of Sub will be converted into shares of common
stock of the Surviving Corporation and each share of
Common Stock (other than shares held by Buyer or
stockholders who properly exercise appraisal rights)
will be converted into the right to receive $5.00
payable in cash. As a result of the Merger, the Company
will become a wholly-owned subsidiary of Buyer.

CERTAIN EFFECTS OF THE
MERGER................As a result of the Merger, Buyer will acquire the entire
equity interest in the Company. Therefore, following the
Merger the holders of shares of Common Stock (other than
those stockholders of the Company who also own common
stock of the Buyer) will no longer have an equity
interest in the Company and will not have an opportunity
to share in the future earnings, if any, and potential
growth of the Company.

INFORMATION CONCERNING THE SPECIAL MEETING

DATE, TIME AND PLACE OF
THE SPECIAL MEETING...The Special Meeting of Stockholders of the Company is to
be held on , , 1997, at
at a.m. (Central
Time).

PURPOSES OF THE SPECIAL
MEETING...............The purposes of the Special Meeting are (1) to consider
and vote upon a proposal to approve and adopt the Merger
Agreement and the Merger; and (2) to transact any other
business that may properly come before the Special
Meeting.

RECORD DATE.............Only holders of record of shares of Common Stock at the
close of business on November 26, 1996 (the "Record
Date") are entitled to notice of and to vote at the
Special Meeting. On that date, 7,008,421 shares of
Common Stock were issued and outstanding, each of which
will be entitled to one vote on each matter to be acted
upon at the Special Meeting.

QUORUM AND VOTE
REQUIRED..............The presence of the holders of a majority of the
7,008,421 issued and outstanding shares of Common Stock
entitled to vote at the Special Meeting, present in
person or represented by a properly executed proxy, are
necessary to constitute a quorum for the transaction of
business. Pursuant to Section 251 of the Delaware GCL,
approval and adoption of the Merger Agreement and the
Merger will require the affirmative vote of the holders
of at least a majority of the outstanding shares of
Common Stock entitled to vote at the Special Meeting.
See "VOTING RIGHTS AND PROXY INFORMATION."

SPECIAL FACTORS

RECOMMENDATION OF THE
BOARD OF DIRECTORS
OF THE COMPANY;
REASONS FOR THE
MERGER................The Board has approved the Merger Agreement and has
determined that the terms of the Merger are fair to and
in the best interests of its stockholders. See "SPECIAL
FACTORS -- Recommendation of the Board of Directors of
the Company; Reasons for the Merger."

OPINION OF THE COMPANY'S
FINANCIAL ADVISOR.....Bear Stearns has rendered a Fairness Opinion to the
effect that the consideration to be paid in the Merger
is fair, from a financial point of view, to the

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stockholders of the Company (without rendering an
opinion as to the fairness to Buyer and its affiliates).
See "SPECIAL FACTORS -- Opinion of Company's Financial
Advisor." A copy of the Fairness Opinion is attached
hereto as Appendix II, which Fairness Opinion sets forth
the assumptions made, the matters considered and
limitations on the review undertaken in rendering the
Fairness Opinion.

BUYER'S PURPOSE AND
REASONS FOR THE
MERGER;
PLANS FOLLOWING THE
MERGER................Buyer anticipates that it will operate the Company as a
domestic provider of graphic arts supplies and prepress
equipment and services. Buyer will sharpen the Company's
focus on its core businesses and perhaps pursuing
consolidating acquisitions as favorable opportunities
present themselves. Buyer believes that the Company will
benefit from private ownership, which will allow the
Company to eliminate significant expenses associated
with public ownership and to focus on further
restructuring its business and operations. See "SPECIAL
FACTORS -- Buyer's Purpose and Reasons for the Merger;
Plans Following the Merger."

RISK THAT MERGER MAY NOT
BE CONSUMMATED; PLANS
IF MERGER NOT
CONSUMMATED...........There are a number of conditions to the obligations of
all or certain parties under the Merger Agreement to
consummate the Merger. See "THE MERGER AGREEMENT --
Conditions to the Merger." It is expected that if the
Merger Agreement and the Merger are not approved by the
Company's stockholders, or if the other conditions to
the consummation of the Merger are not satisfied or
waived, the Company's management, under the general
direction of the Board, will seek to continue to manage
the Company as an ongoing business and may seek other
purchasers for the Company or another strategic
alternative. See "SPECIAL FACTORS -- Risk that the
Merger May Not Be Consummated; Plans If Merger Not
Consummated."

INTEREST OF CERTAIN
PERSONS IN THE
MERGER................In considering the recommendation of the Board with
respect to the Merger Agreement and the Merger,
stockholders should be aware that certain members of
management and the Board at the time of such
recommendation had certain interests that may present
them with potential conflicts of interest in connection
with the Merger. See "SPECIAL FACTORS -- Interest of
Certain Persons in the Merger."

CERTAIN FINANCIAL
FORECASTS.............For information regarding the separate forecasts of
future operations that were prepared by the Company's
management and by Buyer, respectively, and furnished to
the Board in its consideration of the Merger Agreement
and prospective lenders in connection with efforts to
obtain financing for the Merger, see "SPECIAL FACTORS --
Certain Financial Forecasts."

CERTAIN FEDERAL INCOME
TAX CONSEQUENCES......The Merger will be a taxable transaction for holders of
Common Stock who receive the Merger Consideration. See
"SPECIAL FACTORS -- Certain Federal Income Tax
Consequences." The Federal income tax consequences
described herein are for general information only.
Stockholders should consult their own tax advisors as to
the particular tax consequences of the Merger to them,
including the application of state, local and foreign
tax laws.

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ACCOUNTING TREATMENT....The Merger is expected to be accounted for under the
"purchase" method of accounting. See "SPECIAL FACTORS --
Accounting Treatment."

CERTAIN SIGNIFICANT
FINANCIAL
CONSIDERATIONS........If a court in a lawsuit by an unpaid creditor or
representative of creditors, such as a trustee in
bankruptcy or the Surviving Corporation as debtor in
possession, were to find that, at the time the Merger
Consideration was distributed to the holders of Common
Stock, the Surviving Corporation (1) made such payment
with actual intent to hinder, delay or defraud
creditors, or (ii) did not receive reasonably equivalent
value and is insolvent or will be rendered insolvent by
reason of the transfer, then, subject to various
defenses which might be asserted, such court could void
the distributions to the holders of Common Stock and
require that such holders return the same (or equivalent
amounts) to the Surviving Corporation or to a fund for
the benefit of its creditors (including, under certain
circumstances, bank lenders and other holders of debt of
the Surviving Corporation).

THE MERGER AGREEMENT

EFFECTIVE TIME OF THE
MERGER................The "Effective Time" of the Merger will be the time of
the filing of the Certificate of Merger (the
"Certificate of Merger") with the Secretary of State of
the State of Delaware (or such later time thereafter as
is provided in the Certificate of Merger). See "THE
MERGER AGREEMENT -- Effective Time."

EXCHANGE OF SHARES......Immediately after the Effective Time, a letter of
transmittal with instructions for completion thereof
will be mailed to each holder of record of a certificate
or certificates that immediately prior to the Effective
Time represented shares of Common Stock (the
"Certificates"). See "THE MERGER AGREEMENT -- Exchange
Procedure." HOLDERS OF COMMON STOCK SHOULD NOT FORWARD
THEIR CERTIFICATES WITH THE ENCLOSED PROXY CARD, NOR
SHOULD THEY SUBMIT THEIR CERTIFICATES FOR EXCHANGE UNTIL
THEY HAVE RECEIVED A LETTER OF TRANSMITTAL. STOCKHOLDERS
SHOULD NOT FORWARD ANY CERTIFICATES AT THIS TIME.

CONDITIONS TO THE
MERGER..................The closing of the Merger (the "Closing") is conditioned
upon the fulfillment or waiver (where permissible) of
certain conditions set forth in the Merger

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Agreement. See "THE MERGER AGREEMENT -- Conditions to
the Merger."

TERMINATION OF THE
MERGER AGREEMENT......The Merger Agreement may be terminated (i) by mutual
written agreement of the Company, Buyer and Sub, (ii) by
either the Company or Buyer if the Closing has not
occurred on or before April 30, 1997 and (iii) in
certain other situations. See "THE MERGER AGREEMENT --
Termination."

TERMINATION FEES
AND EXPENSES..........Whether or not the Merger is consummated, all expenses
incurred in connection with the Merger Agreement and the
Merger will be paid by the party incurring such expense.
Notwithstanding the foregoing, under certain
circumstances, the Company must pay Buyer for its
expenses upon termination of the Merger Agreement (up to
an aggregate amount not to exceed $375,000), and, under
certain circumstances (including acceptance by the Board
of an offer by a third party to purchase the Company),
the additional sum of $1,000,000. See "THE MERGER
AGREEMENT -- Termination Fees and Expenses."

OTHER INFORMATION CONCERNING THE MERGER

SOURCE AND AMOUNT
OF FUNDS..............It is contemplated that approximately $2,000,000 of the
funds required in connection with the Merger will come
from the purchase of preferred stock of Buyer by
Pacholder Associates, Inc., and approximately $300,000
will come from the purchase of common stock of the Buyer
by Mr. Rooney, Dr. Pacholder and three affiliates of
Pacholder Associates Inc. Buyer will contribute the net
proceeds from such equity investments to the capital of
Sub. Sub will also borrow $35,200,000 from The Provident
Bank ("Provident") pursuant to a 7-day acquisition
facility bearing interest at Provident's prime rate of
interest plus one percent. The acquisition facility is
required to be repaid in full promptly after
consummation of the Merger. After consummation of the
Merger, the Surviving Corporation will also have access
to a 3-year $12,000,000 working capital facility from
Provident. See "INTRODUCTION" and "SOURCE AND AMOUNT OF
FUNDS."

MARKET PRICES OF
COMMON STOCK..........On October 28, 1996, the last full trading day preceding
the public announcement by the Company that it had
entered into the Merger Agreement, the high, low and
closing sale prices of the Common Stock, as reported in
American Stock Exchange Composite Transactions, were
$2.75, $2.50 and $2.75 per share, respectively. On
, 1996, the last full trading day
preceding the printing of this Proxy Statement, the
closing sale price of the Common Stock, as reported in
American Stock Exchange Composite Transactions, was $
per share.

APPRAISAL RIGHTS........Any person who is a holder of record of shares of Common
Stock and who objects to the terms of the Merger
Agreement and the Merger may seek appraisal of such
holder's shares of Common Stock under and in compliance
with the requirements of Section 262 of the Delaware
GCL. Certain procedures must be followed by any such
stockholder who wishes to protect that statutory right
to appraisal, including both not voting to approve and
adopt the Merger Agreement and the Merger and filing
with the Company, before the vote on the Merger
Agreement and Merger is taken, a written demand for
appraisal of the shares of Common Stock. See "APPRAISAL
RIGHTS" and Appendix III to the Proxy Statement which
contains the full text of Section 262 of the Delaware
GCL.

7
<PAGE> 13

SUMMARY FINANCIAL INFORMATION

The following is a summary of certain consolidated financial information of
the Company. This summary has been derived in part from, and should be read in
conjunction with, the consolidated financial statements of the Company and the
related notes thereto. See "INDEX TO FINANCIAL STATEMENTS OF AM INTERNATIONAL,
INC." Due to the reorganization of the Company and the implementation of Fresh
Start Reporting, financial statements for the Reorganized Company (period
starting September 30, 1993) are not comparable to those of the Predecessor
Company. See Note 14 to "Notes to Consolidated Financial Statements."

<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REORGANIZED COMPANY PREDECESSOR COMPANY
---------------------------------------- ----------------------------------------
YEAR ENDED YEAR ENDED SEPT. 30, 1993 AUG. 1, 1993 YEAR ENDED YEAR ENDED
JULY 31, JULY 31, THROUGH THROUGH JULY 31, JULY 31,
1996 1995 JULY 31, 1994 SEPT. 19, 1993 1993 1992
---------- ---------- -------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Historical Data:
Results of operations:
Net sales................................. $168,052 $191,485 $163,816 $ 26,532 $ 195,689 $ 202,419
Income (loss) from continuing
operations.............................. $(20,157) $ (4,151) $ 2,082 $ 21,795 $ (43,787) $ (83,069)
Income (loss) from discontinued
operations.............................. (25,342) 8,764 4,570 (27,810) (81,891) (41,709)
-------- -------- -------- -------- --------- ---------
Net income (loss)......................... $(45,499) $ 4,613 $ 6,652 $ (6,015) $(125,678) $(124,778)
======== ======== ======== ======== ========= =========
Financial Position:
Assets of continuing operations........... $ 55,022 $163,072 $169,274 $164,438 $ 175,432 $ 271,802
Assets of discontinued operations, net.... 42,940 114,952 133,957 139,710 100,515 169,609
-------- -------- -------- -------- --------- ---------
Total assets.............................. $ 97,962 $277,664 $303,231 $304,148 $ 275,947 $ 441,411
======== ======== ======== ======== ========= =========
Long-term debt............................ $ 8,527 $ 14,915 $ 19,359 $ 25,505 $ 129,000 $ 62,592
Stockholder's equity...................... 2,296 48,301 42,776 36,000 (49,651) 69,337
Per share of common stock
Income (loss) from continuing
operations.............................. $ (2.88) $ (0.59) $ 0.30 N/A N/A N/A
Income (loss) from discontinued
operations.............................. (3.62) 1.25 0.65 N/A N/A N/A
-------- -------- -------- -------- --------- ---------
Net income (loss)......................... $ (6.49) $ 0.66 $ 0.95 N/A N/A N/A
======== ======== ======== ======== ========= =========
Net book value............................ $ .33 $ 6.88 $ 6.11 N/A N/A N/A
</TABLE>

For the fiscal year ended July 31, 1995, earnings were inadequate to cover
fixed charges by $5,677,000. For the fiscal year ended July 31, 1996, earnings
were inadequate to cover fixed charges by $20,254,000.

SUMMARY PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma consolidated information illustrates the
effect of certain adjustments to the historical consolidated financial
statements of the Company that result from the sale of the Company's interest in
AM Japan and the sale of Sheridan Systems. The pro forma information does not
give effect to the Merger or related transactions. The pro forma information is
not necessarily indicative of future operations. See "PRO FORMA FINANCIAL
INFORMATION."

<TABLE>
<CAPTION>
YEAR
ENDED
JULY 31,
1995
--------
<S> <C>
Pro Forma Information:
Net sales....................................................................... $137,900
Income (loss) from continuing operations........................................ (18,900)
Total assets.................................................................... 87,700
Long-term debt.................................................................. 8,500
Total stockholder's equity...................................................... 4,700
Income (loss) per common share from continuing operations....................... (2.70)
Net book value per share........................................................ .67
</TABLE>

8
<PAGE> 14

VOTING RIGHTS AND PROXY INFORMATION

Proxies in the accompanying form are solicited on behalf of and at the
direction of the Board, which has fixed the close of business on November 26,
1996 as the Record Date for the determination of stockholders entitled to notice
of and to vote at the Special Meeting or any adjournments or postponements
thereof. On the Record Date, 7,008,421 shares of Common Stock were issued and
outstanding, which were held by approximately 1,230 holders of record. Each
stockholder is entitled to one vote on each matter, exercisable in person or by
properly executed proxy, for each share of Common Stock held of record on the
Record Date. The presence of the holders of a majority of the issued and
outstanding shares of Common Stock entitled to vote at the Special Meeting,
present in person or represented by a properly executed proxy, is necessary to
constitute a quorum for the transaction of business.

A stockholder may, with respect to the proposal to approve and adopt the
Merger Agreement and the Merger, (i) vote FOR such proposal, (ii) vote AGAINST
such proposal or (iii) ABSTAIN from voting on such proposal. A vote to abstain
from voting on the proposal will count for the purpose of determining the
presence of a quorum. All shares of Common Stock represented by properly
executed proxies will be voted at the Special Meeting or at any adjournments or
postponements thereof in accordance with the direction indicated on the proxies
unless such proxies have previously been revoked. If no direction is indicated,
the shares will be voted FOR approval and adoption of the Merger Agreement and
the Merger. If a proxy indicates that all or a portion of the shares represented
by such proxy are not being voted with respect to the proposal to approve and
adopt the Merger Agreement and the Merger ("non-votes"), such non-votes will not
be considered present and entitled to vote on the proposal and will not count
for the purpose of determining the presence of a quorum.

Pursuant to Section 251 of the Delaware GCL, the affirmative vote of the
holders of at least a majority of the issued and outstanding shares of Common
Stock entitled to vote at the Special Meeting is required for approval and
adoption of the Merger Agreement and the Merger. Accordingly, non-votes and
abstentions with respect to the proposal will have the effect of a vote against
the proposal. The Board recommends that stockholders vote FOR approval and
adoption of the Merger Agreement and the Merger. See "SPECIAL FACTORS --
Recommendation of the Company's Board of Directors; Reasons for the Merger." If
any other matters are properly presented at the Special Meeting for action, the
persons named in the proxies and acting thereunder will have discretion to vote
on such matters in accordance with their judgment.

A stockholder executing and returning a proxy has the power to revoke it at
any time before it is voted at the Special Meeting. A stockholder who wishes to
revoke a proxy can do so by properly executing a later-dated proxy relating to
the same shares which is either delivered to the Secretary of the Company prior
to the vote at the Special Meeting or delivered to another person who votes such
later-dated proxy at the Special Meeting, by giving written notice of revocation
to the Secretary prior to the vote at the Special Meeting or by appearing in
person at the Special Meeting and voting in person the shares to which the proxy
relates. Any written notice revoking a proxy should be sent to the Company, 431
Lakeview Court, Mt. Prospect, Illinois 60056, Attention: Steven R. Andrews,
Secretary.

In addition to the use of the mail, proxies may be solicited via personal
interview and telephone, telecopy or telegraph by the directors, officers and
regular employees of the Company. Such persons will receive no additional
compensation for such services. Arrangements will also be made with certain
brokerage firms and certain other custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of Common Stock
held of record by such persons, and such brokers, custodians, nominees and
fiduciaries will be reimbursed by the Company for reasonable out-of-pocket
expenses incurred by them in connection therewith. In addition, the Company has
retained Corporate Investor Communications, Inc. to assist with the solicitation
for a fee of $2,500 plus expenses.

9
<PAGE> 15

SPECIAL FACTORS

BACKGROUND OF THE MERGER

At a regular meeting of the Board on June 2, 1995, the Board determined to
undertake a review of the Company's strategic alternatives to maximize
stockholder value and provide liquidity to stockholders and directed management
to conduct discussions with potential financial advisors. The Board further
concluded that the Company's Compensation and Nominating Committee should review
measures designed to secure the continued services of the Company's executive
officers in view of the potential for a transaction involving the Company.

Two prospective financial advisors were interviewed by members of
management and Jeffrey D. Benjamin, a Director of the Company. Management
subsequently recommended to the Board of Directors that Bear Stearns be retained
as the Company's financial advisor. At a meeting of the Board on July 10, 1995,
representatives of Bear Stearns, Arthur Andersen LLP, the Company's tax and
audit advisor ("Arthur Andersen"), and Sidley & Austin, the Company's counsel,
reviewed with the Board a range of financial, tax and legal issues concerning
various strategic alternatives. Bear Stearns addressed the four primary
strategic alternatives they considered to be available to maximize and realize
stockholder value, which included (1) an equity offering, (2) a leveraged
recapitalization, (3) a sale, or (4) maintaining the status quo. Bear Stearns
advised that the strength of the market for acquisition candidates led them to
the preliminary conclusion that a sale of the Company would likely produce the
highest return to the Company's stockholders of all the available alternatives.
Also at that meeting, the Board approved the change-in-control agreements
described under "-- Interest of Certain Persons in the Merger."

On July 19, 1995, the Company retained Bear Stearns to act as its financial
advisor in connection with the consideration of possible strategic alternatives
to enhance stockholder value. In light of the differences in the Company's two
principal businesses that could limit a buyer's interest in acquiring the entire
company, it was deemed appropriate to pursue a sale of the individual businesses
as well as the Company as a whole.

In the fall of 1995, following the preparation of audited financial
statements for the Company's fiscal year ended July 31, 1995, the Company, with
the assistance of Bear Stearns, prepared a confidential memorandum describing
Sheridan Systems and began to solicit indications of interest from a number of
parties considered by the Company and Bear Stearns to be prospective purchasers
of the Sheridan Systems Division. Subsequently, a similar memorandum was
prepared with respect to AM Multigraphics and circulated to various parties the
Company and Bear Stearns thought might have a potential interest in acquiring AM
Multigraphics. Between November 1995 and September 1996, 87 parties, including
affiliates of Buyer, were contacted to solicit proposals with respect to AM
Multigraphics. A total of 7 preliminary expressions of interest were received
for such a transaction.

In December 1995, the Company reported a net loss for its first fiscal
quarter ended October 28, 1995, of $3.8 million, on revenues that were $19.5
million lower than the comparable prior year period. Approximately half of the
revenue decrease was attributed to a low beginning backlog and weak market
demand for bindery and newspaper mailroom systems at Sheridan Systems. The
Company did not comply with restrictive financial covenants for the quarter
ended October 28, 1995 under its principal domestic credit facility but received
waivers of the violations from its lenders. The Company lowered its forecasts
for Sheridan System, AM Multigraphics and the Company as a whole.

On January 3, 1996, the Company and Winton Associates, Inc., a wholly-owned
subsidiary of Pacholder Associates, Inc. and an affiliate of Buyer ("Winton"),
entered into a confidentiality agreement pursuant to which Winton and its
affiliates agreed to maintain the confidentiality of all nonpublic information
provided to it by the Company. A separate confidentiality agreement containing
substantially the same terms was executed on January 20, 1996 by A. Carl Mudd,
then a Director of the Company, who was working with affiliates of Buyer in its
consideration of a potential acquisition of AM Multigraphics.

Approximately 40 prospective purchasers entered into confidentiality
agreements with the Company and reviewed the confidential memorandum, and
several of those prospective purchasers conducted meetings with management and
due diligence. During roughly the same time period, Bear Stearns contacted
approximately one hundred companies to solicit proposals with respect to the
purchase of Sheridan Systems, of which

10
<PAGE> 16

approximately 40 parties entered into confidentiality agreements. No expressions
of interest were received for the purchase of the entire Company.

Also in January 1996, Directors A. Carl Mudd and Asher O. Pacholder
determined to recuse themselves from further consideration by the Board of the
Company's strategic alternatives in view of their expression of potential
interest in acquiring AM Multigraphics.

On February 23, 1996 the Company announced the preliminary results for its
second fiscal quarter ended January 27, 1996, indicating that there would be a
loss in the range of $8-9 million. The net loss resulted in part from the lower
backlog at the beginning of the quarter at Sheridan Systems and weaker market
conditions generally for Sheridan Systems' bindery products. AM Multigraphics'
revenues and operating income declined from the comparable period in the prior
year and fell short of the Company's budget, including the revenues and
operating income budgeted for the Xeikon product line. As a consequence, the
Company again lowered its forecasts for Sheridan Systems, AM Multigraphics and
for the Company as a whole. The Company also did not comply with certain
restrictive financial covenants in its credit agreement, received waivers from
its lenders, and stated that its projections indicated that it might not meet
income-related financial covenants in future quarters. In granting the waivers,
however, the Company's lenders expressed concern over the financial results and
the increased levels of borrowing and strongly encouraged the Company to
consummate a transaction for the sale of one or more operating divisions or for
the Company as a whole.

On February 26, 1996, in response to bid procedures set forth by Bear
Stearns in a letter to prospective bidders, an investor group including Mr.
Mudd, certain affiliates of Pacholder Associates, Inc. and certain affiliates of
Jefferies & Company, Inc. (the "Multigraphics Investor Group"), submitted a
non-binding expression of interest in acquiring the assets of AM Multigraphics
for approximately $25.0 million, subject to various terms and conditions
outlined in the letter. This and other bids received by the Company were
reviewed and discussions commenced about possible dates for conducting due
diligence reviews with members of the Company's and AM Multigraphics'
management.

On February 28, 1996, Heidelberger Druckmaschinen AG ("Heidelberg") offered
its non-binding indication of interest in purchasing the assets of the Sheridan
Systems division for $55 million, subject to due diligence and certain
adjustments. Following a series of meetings between representatives of the
Company and Heidelberg, on March 28, 1996 Heidelberg submitted to the Company a
non-binding letter of intent which included a preliminary purchase price of $65
million, subject to due diligence and other conditions. As Heidelberg's due
diligence review of Sheridan Systems proceeded, however, issues were identified
in Heidelberg's investigation and analysis which caused Heidelberg to indicate
to the Company that their price indication would be substantially lower than
previously indicated.

Due to the activities with Heidelberg, management diligence meetings with
parties interested in AM Multigraphics did not commence until the end of March
1996. On March 28, 1996, a diligence meeting took place at AM Multigraphics'
headquarters in Mt. Prospect between Mr. Mudd, James P. Shanahan, Jr., Managing
Director and General Counsel of Pacholder Associates, Inc., and Mark H. Prenger,
Assistant Vice President of Pacholder Associates, Inc., for the Multigraphics
Investor Group, and Jerome D. Brady, the Company's Chairman, President and Chief
Executive Officer, David R. Roberts, then Vice President of the Company and
President of AM Multigraphics, Dennis R. Lewis, then Vice President -- Finance
of AM Multigraphics, Mark Duchesne, Vice President -- Marketing of AM
Multigraphics and Barry E. Clark, then Vice President -- Sales of AM
Multigraphics, for the Company. Most of these same participants met again at the
AM Multigraphics' headquarters on April 3, 1996. Various telephone conversations
and requests for materials followed these meetings.

On May 8, 1996, the Multigraphics Investor Group sent another non-binding
expression of interest in acquiring the assets of AM Multigraphics and the
Company's interest in AM Japan Co. Ltd. for a price in the range of $15-20
million, subject to a number of conditions set forth in the letter. During this
period, representatives of the Company continued to meet with other interested
parties concerning a sale of AM Multigraphics.

At a meeting of the Board held on May 21 and 22, 1996 at the Sheridan
Systems facility in Dayton, Ohio, management reported to the Board that a review
of the Company's cash resources and current revolving credit facilities had been
undertaken and management did not expect that the Company's liquidity for the
next

11
<PAGE> 17

twelve-month period would be adequate absent the consummation of some
transaction providing capital resources to the Company. It was noted that the
Company's limited availability of cash was adversely affecting the ability of
each division to purchase inventory and thereby satisfy customer orders.
Accordingly, management had undertaken several initiatives to further reduce
expenses and had obtained preliminary indications of interest from new sources
of debt financing.

The Board considered the need for alternative sources of debt financing, as
well as preliminary indications of interest from potential purchasers of AM
Multigraphics and the current status of negotiations for the sale of Sheridan
Systems. The Board also heard detailed presentations from Mr. Roberts with
respect to the current status, future prospects and cash needs of AM
Multigraphics and from members of the management team of Sheridan Systems as to
the current status, future prospects and investment requirements for operation
of their business segment for the foreseeable future. In addition, the Board
received a report from Bear Stearns addressing their activities to market both
Sheridan Systems and AM Multigraphics, the absence of any indications of
interest for the purchase of the Company as a whole, and possible strategic
alternatives which included: (1) continued operation of the Company with no
sale, (2) sale of Sheridan Systems and continued operation of the remainder of
the Company, (3) sale of AM Multigraphics and the continued operation of the
remainder of the Company, and (4) sale of both operating segments and
liquidation of the Company. At the conclusion of the meeting, the Board directed
management to continue its efforts to find new sources of debt financing, but
concluded that exploring the potential transaction with Heidelberg should be the
top priority among the Company's existing options. Accordingly, at that time all
formal due diligence activities and negotiations with parties interested in a
transaction with AM Multigraphics were suspended.

Representatives of the Buyer were informed of the decision to delay
discussions with respect to a possible sale of AM Multigraphics. On May 31,
1996, Messrs. Brady and Shanahan met at the Company's headquarters, along with
Thomas D. Rooney, the Company's Vice President and Chief Financial Officer, to
discuss Buyer's interest in a transaction to acquire the Company after the
disposition of Sheridan Systems. On June 6, 1996, the Company received a letter
from AM Acquisition Corp., a corporation to be formed by Buyer, setting forth a
non-binding expression of interest for such an acquisition through tender offer,
merger or similar transaction, subject to various conditions set forth in the
letter. The proposed pricing of the transaction was also subject to a number of
issues discussed in the letter.

In late May 1996, Heidelberg sent to the Company a non-binding letter of
intent for the purchase by Heidelberg of the assets of the Sheridan Systems
division for a total cash purchase price of $56 million, subject to certain
adjustments, including a closing adjustment based on net asset value. At a
special telephonic meeting of the Board held on June 10, 1996, the Board
approved the execution of the letter of intent with Heidelberg.

Following the execution of the letter of intent and public announcement of
the proposed Heidelberg transaction, discussions resumed between the Company and
the prospective purchasers of AM Multigraphics. On June 21 and 22, 1996, Mr.
Shanahan and Robin E. Pacholder, Senior Vice President and Associate General
Counsel of Pacholder Associates, Inc., met at the Company's Rosemont
headquarters facility with Messrs. Brady, Rooney, Steven R. Andrews, Vice
President, General Counsel & Secretary of the Company, and David L. Rutherford,
the Company's Associate General Counsel to continue due diligence, particularly
investigation of the liabilities of the Company. On or about June 27, 1996,
however, Bear Stearns, upon instructions from the Company, informed Buyer and
other parties interested in a transaction involving AM Multigraphics that any
efforts in that regard would be suspended so that management could focus its
attention on signing and consummating the Heidelberg transaction.

Following numerous meetings between representatives of the Company and
Heidelberg, on July 9, 1996, the definitive Asset Purchase Agreement was
executed by the parties subject, among other things, to the approval of the
Board. On July 10, 1996, the Board unanimously approved the Asset Purchase
Agreement. The transaction was closed on August 27, 1996, following approval of
the transaction by a majority of the stockholders of the Company at a meeting
held on August 26, 1996. On August 27, 1996 the Company announced that it had
completed the sale of the Sheridan Systems assets for $50 million in cash and
that the transaction had been approved by the holders of approximately 90% of
the Company's shares of Common Stock.

12
<PAGE> 18

In its proxy statement mailed to the Stockholders on or about August 2,
1996 in connection with the August 26 Special Meeting, the Company included the
following information: "The Company continues to explore strategic alternatives
with respect to the remainder of its business (including a sale of all or part
of its remaining operations), as well as the retention and operation of the
remaining business." In August 1996, Mr. Roberts resigned and Mr. Rooney was
appointed President of AM Multigraphics as well as continuing as Vice President
and Chief Financial Officer of the Company.

While the Company was seeking approval of its stockholders for the sale of
the Sheridan Systems assets, management was also involved in discussions
concerning the sale of the Company's approximately 66.3% interest in AM Japan
Co., Ltd. ("AM Japan"). On August 12, 1996, the Company publicly announced a
non-binding letter of intent for the sale of the 2,148,000 shares of AM Japan
owned by the Company for Y575 per share (approximately $5.33 per share at
then-current exchange rates). Also on August 12, 1996, the Company supplemented
the Proxy Statement mailed to stockholders in connection with the Heidelberg
transaction, providing unaudited pro forma consolidated financial information,
including pro forma adjustments to the balance sheet for net proceeds of $10.0
million in connection with the proposed sale of its interest in AM Japan and
$31.9 million in net proceeds from the proposed Heidelberg transaction (after
repayment of the Company's revolving credit facilities and an expected reduction
of extended trade payables). On August 21, 1996, the Company announced the
signing of a definitive agreement for the sale of its interest in AM Japan and
on September 20, 1996, the Company announced that the sale had closed.

On September 3, 1996, Messrs. Pacholder and Mudd resigned from the Board.
On September 13, 1996, Messrs. Shanahan, Mudd and Prenger met at the Company's
corporate headquarters with Messrs. Brady and Rooney to resume their due
diligence review. Additional legal due diligence followed on September 17, 1996
at corporate headquarters with Mr. Shanahan, Ms. Pacholder, Mr. Andrews and Mr.
Rutherford. Following additional phone conversations and due diligence review,
on September 23, 1996, Mr. Shanahan informed Mr. Brady that a proposal would be
forthcoming the following day.

On September 24, 1996, the Company received a letter from Mr. Shanahan on
behalf of AM Acquisition, Inc., a corporation to be formed, for the acquisition
of all of the issued and outstanding capital stock of the Company, by merger,
for $4.00 per share. At a meeting of the Board on September 24, 1996, the Board
reviewed, but did not accept, the offer and management, at the direction of the
Board, informed Mr. Shanahan that the Board wanted a price of at least $5 per
share. Following this meeting, Mr. Rooney was contacted by Buyer, who asked
whether Mr. Rooney would consider staying on as Chief Executive Officer and
President of the Company following the acquisition, and whether Mr. Rooney would
consider an ownership position in the acquisition group to be formed. On
September 25, 1995, Messrs. Rooney and Shanahan had further discussions about
the prospect of Mr. Rooney's continued role in the Company.

On September 26, 1996, the Company received a letter from Mr. Shanahan on
behalf of AM Acquisition, Inc. for the acquisition of all of the issued and
outstanding capital stock of the Company, by merger, for $4.50 per share. On
September 27, 1996, the Board considered the offer without accepting it and
management, at the direction of the Board, informed Mr. Shanahan that the Board
wanted a price of at least $5 per share.

On September 27, 1996, following a discussion with Mr. Brady, Mr. Shanahan
sent another letter on behalf of AM Acquisition, Inc. for the acquisition of all
of the issued and outstanding capital stock of the Company, by merger, for $5.00
per share. In accordance with instructions from the Board, Mr. Brady advised Mr.
Shanahan of the conditions under which the Board might consider proceeding
toward a definitive agreement including, among other things, obtaining a
financing commitment for the transaction. During the course of these
negotiations, Mr. Mudd declined an offer to participate as a member of the Buyer
group.

On October 8, 1996, a first draft of the proposed merger agreement was
circulated for review by representatives of the Keating, Meuthing & Klekamp law
firm in Cincinnati, Ohio, counsel to Buyer. On October 9, Messrs. Shanahan and
Prenger met with Messrs. Rooney, Lewis and Gregory T. Knipp, the Company's
Treasurer, at the AM Multigraphics' facility to discuss the business plan and
forecasts. On October 10, 1996, representatives of a financial institution met
at the AM Multigraphics' facility with Messrs. Shanahan, Rooney, Andrews, Knipp,
Duchesne and Charles Richards, Vice President -- Service

13
<PAGE> 19

Operations of AM Multigraphics, to conduct due diligence in connection with the
potential financing of the transaction. On October 11, 1996, a drafting session
with respect to the Merger Agreement took place among Mr. Shanahan and a
representative of Keating, Meuthing & Klekamp on behalf of Buyer, and Messrs.
Brady, Rooney and Andrews, as well as representatives of Sidley & Austin,
counsel to the Company.

The parties jointly agreed to contact the specialty investment banking firm
of Houlihan Lokey to discuss the possibility of rendering a solvency opinion.
Following phone conversations between Messrs. Andrews and Brady and Mr. Ben
Buettell, Senior Vice President of Houlihan Lokey, on October 16, 1996, Messrs.
Shanahan and Brady met with Mr. Buettell at the Company's headquarters in
Rosemont. On October 22, 1996, Mr. Buettell and his associates, Mr. Robert M.
Gotto and Jeffrey S. Phillips, met at the AM Multigraphics facility in Mt.
Prospect, Illinois, to conduct due diligence sessions with Messrs. Rooney,
Andrews, Knipp, Duchesne, and Richards. Houlihan Lokey was retained on October
25, 1996.

On October 23, 1996, Mr. Shanahan and Mr. Brady discussed a preliminary
written proposal from a financing institution dated as of that date and the fact
that it appeared that a financing commitment would not be obtained at the time
of the proposed execution of a definitive agreement. Various phone conversations
ensued between Mr. Brady and Mr. Shanahan and between Mr. Brady and members of
the Company's management and Board. On October 25, 1996, a telephone conference
was held between Mr. Brady, Director Jeffrey D. Benjamin, a representative of
Sidley & Austin and Messrs. Rooney and Andrews to discuss the absence of a
financing commitment. Tentative agreement was reached to present the Merger
Agreement to the Board for approval the following Tuesday, October 29, provided
that various issues in the final draft could be resolved, as well as appropriate
provisions requiring Buyer to bear a larger portion of the Company's expenses in
the event that financing could not be obtained within a reasonable time frame.
In conversations over the weekend of October 26 and 27, Mr. Shanahan and Mr.
Brady discussed a proposed solution whereby (1) the Merger Agreement would
provide that (x) the parties could terminate the Merger Agreement in the event
Buyer and Sub did not enter into financing commitments and furnish copies
thereof to the Company (except to the extent such failure was materially
attributable to breach of a representation of, or a material adverse change in,
the Company) and (y) in the event of such a termination Buyer or Sub would pay
the Company $500,000 as liquidated damages, and (2) Pacholder Associates, Inc.
and one of its affiliates, PM Delaware, Inc., would undertake to provide equity
to Buyer or Sub in the amount of $2,000,000 to enable them to perform and
satisfy their respective obligations to the Company under the Merger Agreement,
including (without limitation) the payment of any damages to the Company that
may become payable as a result of a breach of the Merger Agreement. See "THE
MERGER AGREEMENT -- Termination," "-- Termination Fees and Expenses" and "-- The
Undertaking." Details of these provisions were finalized by Messrs. Shanahan,
Brady and Andrews and representatives of Keating, Meuthing & Klekamp and Sidley
& Austin on October 28, 1996.

On October 29, 1996, a meeting of the Board was held at the Company's
headquarters, at which the Directors received presentations from representatives
of Sidley & Austin concerning the terms of the Merger Agreement and a
presentation from Bear Stearns as to its financial analyses and its opinion as
to the fairness of the proposed transaction to the Company's stockholders, from
a financial point of view. The Board also received an oral presentation from
Houlihan Lokey concerning its work to date, and the additional analyses it
proposed to perform prior to the Closing and management's recommendation (Mr.
Rooney abstaining) that the transaction be approved. At the conclusion of the
presentations, the Board approved the Agreement and it was executed by
management.

RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY; REASONS FOR THE MERGER

The Board, at a meeting held on October 29, 1996, determined that the terms
of the Merger are fair to and in the best interests of the Company's
stockholders. At such meeting, the Board unanimously approved the Merger
Agreement and recommended that the stockholders approve and adopt the Merger
Agreement and the Merger.

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<PAGE> 20

In reaching these conclusions, the Board considered, with the assistance of
management and its legal and financial advisors, among other things, the
following factors:

1. The conclusion of Bear Stearns contained in the Fairness Opinion
that the Merger Consideration was fair, from a financial point of view, to
the stockholders of the Company (without rendering an opinion as to the
fairness to Buyer and its affiliates).

2. The condition that the Merger Agreement and the Merger be approved
and adopted by the affirmative vote of the holders of a majority of the
issued and outstanding shares of Common Stock entitled to vote at the
Special Meeting.

3. The fact that the Company has solicited offers to purchase the
Company from a large number of potential purchasers, the fact that the
Company received a limited number of preliminary offers to purchase the
Company pursuant to such solicitation process and the fact that the prices
and other terms of such preliminary offers were not as favorable to the
stockholders as the Merger Agreement and the Merger.

4. The Company's book value and liquidity, including the recent
improvement in its liquidity resulting from the cash proceeds of recent
transactions.

5. Information with respect to the historical financial condition,
results of operations, business and prospects of the Company, together with
current industry, economic and market conditions.

6. The pro forma and forecasted financial condition, results of
operations, prospects and strategic objectives of the Company, as well as
the risks involved in achieving those prospects and objectives with current
industry, economic and market conditions. See "-- Certain Financial
Forecasts."

7. The recommendation of the Company's management in favor of the
Merger Agreement and the Merger.

8. The trading prices and trading volume of the Common Stock and
prices at which similar companies have been trading, including the
substantial premium the Merger Consideration represents over recent trading
prices for the Common Stock.

9. Market statistics for selected companies in similar businesses,
including market valuation and capitalization, price-earnings ratios and
ratios of market capitalization to earnings and sales.

10. The interests of the two executive officers of the Company who
will remain with the Company after the Merger as well as those who are
departing and the payments certain executive officers will receive in the
Merger pursuant to their change-in-control agreements and the Company's
deferred compensation plan. See "-- Interest of Certain Persons in the
Merger".

11. Buyer's contemplated financing arrangements, including the
undertaking of affiliates of Buyer to provide $2,000,000 of funds to or on
behalf of Buyer or Sub to perform their respective obligations (the
"Undertaking"). See "THE MERGER AGREEMENT -- The Undertaking."

12. The fact that, following the Merger, stockholders of the Company,
other than stockholders of the Buyer who also own Common Stock of the
Company, will no longer have any continuing equity interest in the Company
and therefore will not have an opportunity to share in the future earnings,
if any, and potential growth of the Company.

13. The closing condition that a solvency opinion be received. See "--
Certain Significant Financial Considerations."

14. The terms and conditions of the Merger Agreement including the
non-solicitation provisions, conditions to closing and termination
provisions, including termination and expense reimbursement fees, which
were arrived at through extensive arm's-length negotiations. The Board
concluded that these provisions were reasonable under the circumstances and
provided reasonable flexibility for the Board to exercise its fiduciary
duties in the event of an unsolicited competing third party offer prior to
consummation of the Merger.

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<PAGE> 21

15. The likelihood that the Merger would be consummated, including the
likelihood of satisfaction of the conditions to the Merger contained in the
Merger Agreement, the experience, reputation and financial condition of
Pacholder Associates and the risks to the Company if the Merger were not
consummated.

In view of the variety of factors considered in connection with its
evaluation of the Merger Agreement and the Merger, the Board did not find it
practicable to, and did not, assign any relative weight to the various factors
it considered in reaching its decision. The Board did, however, place special
emphasis on factors 1, 2, 3, 6, 7 and 8. In light of such factors, the Board
unanimously determined that the terms of the Merger are fair to and in the best
interests of the Company's stockholders.

To the Company's knowledge, all of its executive officers and directors,
who are the beneficial owners of 2,488,712 issued and outstanding shares
representing approximately 35.5% of the Common Stock issued and outstanding as
of the Record Date in the aggregate, intend to vote all such shares for the
approval and adoption of the Merger Agreement and the Merger.

OPINION OF THE COMPANY'S FINANCIAL ADVISOR

The Company retained Bear Stearns in July 1995 as its financial advisor in
connection with the consideration of certain strategic alternatives. Pursuant to
this engagement, Bear Stearns performed services on behalf of the Company from
July 1995 to July 1996. In October 1996, the Company asked Bear Stearns to
render its opinion as to the fairness, from a financial point of view, of the
consideration to be received by the Company's stockholders (without rendering an
opinion as to the fairness to Buyer and its affiliates) in the Merger. The
Company retained Bear Stearns to render its Fairness Opinion based upon Bear
Stearns' familiarity with the Company as well as Bear Stearns' qualifications,
expertise and reputation. Bear Stearns is an internationally recognized
investment banking firm and is continually engaged in the valuation of
businesses and their securities and in rendering opinions in connection with
mergers and acquisitions and other purposes.

Bear Stearns has delivered to the Board its Fairness Opinion to the effect
that, based upon and subject to the various considerations set forth in such
Fairness Opinion, as of October 29, 1996, the Merger Consideration was fair,
from a financial point of view, to the Company's stockholders (without rendering
an opinion as to the fairness to Buyer and its affiliates). The full text of
Bear Stearns' Fairness Opinion is attached as Appendix II to this Proxy
Statement. The Company's stockholders are urged to, and should, read such
Fairness Opinion carefully in its entirety in conjunction with this Proxy
Statement for assumptions made, matters considered and limits of the review by
Bear Stearns. Bear Stearns' Fairness Opinion addresses only the fairness of the
Merger Agreement and the Merger Consideration from a financial point of view and
does not constitute a recommendation to any stockholder of the Company as to how
such stockholder should vote on the Merger Agreement and the Merger. The summary
of Bear Stearns' Fairness Opinion set forth in this Proxy Statement is qualified
in its entirety by reference to the full text of such Fairness Opinion. Bear
Stearns did not recommend the amount of the Merger Consideration which resulted
from negotiations between the Company and Buyer.

In rendering its Fairness Opinion, Bear Stearns, among other things: (i)
reviewed the Merger Agreement and related transaction documents; (ii) reviewed
certain audited and unaudited financial statements of the Company; (iii)
reviewed certain operating and financial information of the Company; (iv)
reviewed the trading history, including recent trading prices, for the Common
Stock; (v) reviewed certain estimated financial projections for the fiscal years
1997 through 1999 for the Company which were provided to Bear Stearns by the
management of the Company; (vi) met with certain members of senior management of
the Company to discuss the Company's operations, historical financial statements
and prospects; (vii) reviewed publicly available financial data and stock market
performance of certain publicly traded companies in businesses that Bear Stearns
deemed generally comparable to the Company; (viii) reviewed the financial terms
of certain recent acquisitions of companies Bear Stearns deemed generally
comparable to the Company; and (ix) conducted such other studies, analyses,
inquiries and investigations as Bear Stearns deemed appropriate. In addition, as
part of its July 1995 engagement, Bear Stearns assisted the Company in
identifying

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<PAGE> 22

and contacting various knowledgeable and qualified buyers which were given the
opportunity to make a thorough evaluation of the Company in preparation for the
submission of a proposal to acquire all or substantially all of the Company. As
a result of these efforts, the Company received various indications of interest
regarding possible business transactions involving the Company, which Bear
Stearns assessed and reviewed with the senior management and the Board. However,
no firm proposals were received that provided consideration equal to that of the
Merger. The Company did not impose any limitations on the scope of Bear Stearns'
investigation in connection with the Fairness Opinion.

In rendering its Fairness Opinion, Bear Stearns relied upon and assumed the
accuracy and completeness of the financial and other information provided to
Bear Stearns by the Company. Bear Stearns did not assume any responsibility for
such information and Bear Stearns relied upon the assurances of the management
of the Company that it was unaware of any facts that would make the information
provided to Bear Stearns incomplete or misleading. With respect to the
projections of the future financial performance of the Company, Bear Stearns
determined not to rely on such projections in its analyses because of, among
other factors, the inherent uncertainty of projections, the numerous revisions
made by management to their projections for fiscal 1996 and the fact that actual
results for the interim periods of fiscal 1996 had differed materially from past
projections for such periods. In arriving at its Fairness Opinion, Bear Stearns
did not perform or obtain any independent appraisal of the assets of the
Company. Bear Stearns' Fairness Opinion is necessarily based on economic, market
and other conditions, and the information made available to it, as of the date
thereof.

The following is a summary of certain of the financial and valuation
analyses presented by Bear Stearns to the Board on October 29, 1996, in
connection with Bear Stearns' Fairness Opinion, which, together with the other
factors described herein, constitute the material factors considered by Bear
Stearns in reaching its Fairness Opinion. For each of the valuation analyses
discussed below, Bear Stearns compared the multiple of enterprise value to
earnings before interest, taxes, depreciation and amortization ("EBITDA")
implied by the Merger Consideration to a reference range of enterprise value to
EBITDA multiples derived from each valuation analysis. Based on estimated EBITDA
for fiscal 1997, the implied enterprise value to EBITDA multiple for the Merger
is 12.9x. The Company's calculated EBITDA deficit was $9.7 million for the
latest twelve months ("LTM"), which period also represents the Company's 1996
fiscal year. The implied enterprise value to estimated fiscal 1997 EBITDA
multiple was considered in the context of the analyses described below and
supports the conclusion in the Bear Stearns Fairness Opinion.

Analysis of Publicly Traded Comparable Companies. Bear Stearns reviewed,
analyzed and compared certain operating, financial, and trading information of a
variety of graphics arts supplies, distribution or manufacturing companies and
determined to focus on six publicly traded companies that have operations in the
graphics arts supplies, distribution, manufacturing or related industries. These
six companies included AFP Imaging Corporation; Avery-Denison Corporation; Danka
Business Systems PLC; Oce-van der Grinten NV; PrimeSource Corporation; and
Scitex Corporation (collectively, the "Comparable Companies"). Bear Stearns'
analysis of the Comparable Companies indicated that the Comparable Companies
were trading in a range of enterprise value to LTM EBITDA multiples, as
calculated from publicly available information, of 6.6x to 15.0x with a harmonic
mean of 8.9x. This compared to an enterprise value to fiscal 1997 EBITDA
multiple for the Merger of 12.9x. Bear Stearns noted that the Merger was valued
at a significant premium, in terms of its enterprise value to EBITDA multiple,
when compared to the Comparable Companies's enterprise value to EBITDA
multiples, and this was one of the primary factors in assessing the fairness,
from a financial point of view, of the Merger Consideration.

Analysis of Selected Merger and Acquisition Transactions. Bear Stearns
compared, reviewed and analyzed the publicly available financial terms of nine
selected recent merger and acquisition transactions in the graphic arts supplies
distribution industry which, in Bear Stearns' judgment, were reasonably
comparable to the Merger, and compared the financial terms of such transactions
to those of the Merger. The nine transactions, which occurred between 1992 and
1996, were (acquirer/acquired company): Associated Stationers Inc. / Boise
Cascade Corporation; United Stationers Inc. / SDC Distribution Corporation;
OfficeMax, Inc. / OW Office Warehouse, Inc.; Eastman Acquisition Corporation /
Eastman Corporation; Office Depot, Inc. / Eastman Office Products Corporation;
Staples Inc. / National Office Supply Company, Inc.; Boise Cascade Corporation /
The Reliable Corporation's Mail Office Supply business; Corporate

17
<PAGE> 23

Express, Inc. / Joyce International, Inc.'s Office Products business; and
Associated Stationers Inc. / United Stationers Inc. (collectively, "the Selected
Transactions"). Bear Stearns reviewed the prices paid in the Selected
Transactions and analyzed various operating and financial information and
imputed valuation multiples and ratios. Bear Stearns noted that none of the
Selected Transactions was identical to the Merger and that, accordingly, any
analysis of the Selected Transactions necessarily involved complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that would necessarily affect the acquisition
value of the Company versus the acquisition values of the companies to which the
Company was being compared. Bear Stearns' analysis of the Selected Transactions
indicated that the range of enterprise value to LTM EBITDA multiples, as
estimated from publicly available information, was 4.1x to 10.7x with a harmonic
mean of 6.2x. This compared to an enterprise value to fiscal 1997 EBITDA
multiple for the Merger of 12.9x. Bear Stearns noted that the Merger was valued
at a more favorable enterprise value to EBITDA multiple when compared to the
harmonic mean multiple of the Selected Transactions, and this was one of the
primary factors in assessing the fairness, from a financial point of view, of
the Merger Consideration.

Discounted Cash Flow Calculations. In preparing its Fairness Opinion, Bear
Stearns decided to exclude a discounted cash flow analysis from its valuation
methodologies. The Company's management provided Bear Stearns with estimated and
projected financial results through fiscal year 1999 which, in the assessment of
Bear Stearns, contained a degree of risk and uncertainty that could not be
quantified in a traditional discounted cash flow analysis. Bear Stearns made
this assessment based on various factors, including the following. First, the
Company's management had downwardly revised the Company's estimated fiscal 1996
financial results several times since July 1995. The cumulative impact on these
revisions was a $31.8 million decrease in estimated fiscal 1996 revenue (from
$169.8 million to $138.0 million) and a $9.0 million decrease in estimated
fiscal 1996 EBIT (from a profit of $830,000 to a loss of $8.2 million). Second,
because greater than 90 percent of the Company's projected growth over the
fiscal 1997 to fiscal 1999 period is projected to come from: (i) unidentified
cost reductions; (ii) the successful turnaround of an unprofitable product line
and (iii) unidentified acquisitions, Bear Stearns felt there was a high degree
of uncertainty regarding the Company's ability to attain both its short-term
financial estimates and longer-term financial projections.

Stock Price Trading History. Bear Stearns reviewed the trading history for
the Common Stock. During the six month period ending October 28, 1996, the day
prior to the signing of the Merger Agreement, the Common Stock traded within a
range of $1.25 per share to $3.19 per share with an average closing price of
$2.29 per share. Bear Stearns noted that the Merger Consideration of $5.00 per
share represents a premium of 56.8% and 118.2% over the highest trading price of
$3.19 per share and the average closing price of $2.29 per share, respectively,
during such six month period. In addition, Bear Stearns noted that the Common
Stock closed at $2.75 per share on October 28, 1996 and that the Merger
Consideration of $5.00 per share represents a premium of 81.8% to such closing
price. The premium of the Merger Consideration per share over the Company's
recent stock price trading history was a factor taken into consideration by Bear
Stearns in assessing the fairness, from a financial point of view, of the Merger
Consideration.

Other Analyses. Bear Stearns conducted such other financial and valuation
analyses as it deemed necessary with respect to the Company.

The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the process
underlying Bear Stearns' Fairness Opinion. In arriving at its Fairness Opinion,
Bear Stearns considered the results of all such reviews, calculations and
analyses. The analyses were prepared solely for the purposes of providing its
Fairness Opinion as to the fairness of the Merger Consideration, from a
financial point of view, to the Company's stockholders (without rendering an
opinion as to the fairness to Buyer and its affiliates) and do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
may actually be sold. The foregoing summary, together with other factors
described herein, does not purport to be a complete description of the analysis
performed by Bear Stearns, but it does set forth the material factors considered
by Bear Stearns in making its Fairness Opinion. As described above, Bear
Stearns' Fairness Opinion and presentation to the Board was one

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<PAGE> 24

of many factors taken into consideration by the Board in making its
determination to approve the Merger Agreement and the Merger.

Pursuant to the original engagement letter between the Company and Bear
Stearns dated July 19, 1995, the Company agreed to pay Bear Stearns: (i) a
retainer fee of $100,000; (ii) a fee of $350,000 for rendering its opinion as to
the fairness of the consideration to be paid in connection with one or more
transactions involving the Company; and (iii) a success fee based on the
aggregate transaction consideration, payable upon the consummation of any such
transaction. The original engagement letter applied to any transaction involving
the sale of AM International, Inc. or any of its subsidiaries or principal
business segments. In August 1996, the Company sold its Sheridan Systems
division. In connection with the sale of Sheridan Systems and pursuant to the
original engagement letter, the Company paid Bear Stearns: (i) a retainer fee of
$100,000; (ii) a fee of $350,000 for rendering its opinion in connection with
the sale of Sheridan Systems; and (iii) a success fee of approximately $775,000.
Since all of the retainer fee and a certain portion of the opinion fee were
credited against the success fee, the total fees paid to Bear Stearns in
connection with the sale of Sheridan Systems were $1.1 million. In October 1996,
the Company requested Bear Stearns to render a fairness opinion in connection
with the Merger. The original engagement letter was amended on October 3, 1996.
Pursuant to the terms of the amended engagement letter, the Company agreed to:
(i) pay Bear Stearns a fee of $400,000 to render its Fairness Opinion in
connection with the Merger; (ii) reimburse Bear Stearns for its reasonable out-
of-pocket expenses, including the reasonable fees and disbursements of counsel;
and (iii) indemnify Bear Stearns and certain related persons against certain
liabilities in connection with the engagement of Bear Stearns, including certain
liabilities under federal securities law. From time to time during the past two
years, Bear Stearns has performed services for companies controlled by
affiliates of Lion Advisors, L.P. and AIF II, L.P., holders of approximately
35.4% of the outstanding Common Stock, in consideration of which it received
customary investment banking fees.

BUYER'S PURPOSE AND REASONS FOR THE MERGER; PLANS FOLLOWING THE MERGER

Buyer's purpose in acquiring the Company pursuant to the Merger is to
acquire and operate a domestic provider of graphic arts supplies and services.
While Buyer intends to sharpen the Company's focus on its core businesses, it
may, as favorable opportunities present themselves, pursue consolidating
acquisitions in the Company's line of business after the Merger.

Buyer believes that the Surviving Corporation will significantly benefit
from private ownership. As a private company, the Surviving Corporation will be
able to reduce corporate expenses relating primarily to public company status,
including the elimination of public company reporting requirements, decreases in
audit services and outside counsel fees, printing costs, directors' fees and
other associated costs. Private ownership will, Buyer believes, also enhance the
Surviving Corporation's ability to focus on further restructuring its business
and operations.

Buyer has considered the factors which were considered by the Board and has
concluded that the terms of the Merger are fair to and in the best interests of
the Company's stockholders. In view of the variety of factors considered in
connection with reaching this conclusion, Buyer did not find it practicable to,
and did not, quantify or otherwise assign relative weights to the individual
factors considered in reaching this conclusion. The interests of Buyer, however,
differ substantially from those of the unaffiliated stockholders of the Company,
and Buyer could potentially have a conflict of interest with such stockholders.

Following the acquisition, the directors of the Surviving Corporation are
expected to be Dr. Pacholder, Messrs. Shanahan, William J. Morgan and Rooney and
Mrs. Pacholder. See "CERTAIN INFORMATION CONCERNING BUYER AND SUB." The
executive officers of the Surviving Corporation are expected to include Mr.
Rooney as Chairman, Chief Executive Officer and President and Mr. Knipp as Chief
Financial Officer. See "INTEREST OF CERTAIN PERSONS IN THE MERGER." The
remaining management of AM Multigraphics is expected to continue with the
Surviving Corporation.

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<PAGE> 25

RISK THAT THE MERGER WILL NOT BE CONSUMMATED; THE COMPANY'S PLANS IF THE MERGER
IS NOT CONSUMMATED

There are a number of conditions to the obligations of all or certain
parties under the Merger Agreement to consummate the Merger. See "THE MERGER
AGREEMENT -- Conditions to the Merger." Obtaining appropriate financing is not a
condition to Buyer's and Sub's obligations to close. However, Buyer has limited
assets, so that it is highly unlikely that Buyer would be able to consummate the
Merger absent the receipt of financing. On November 26, 1996, Buyer received a
commitment letter from Provident to provide the financing necessary to
consummate the Merger, which commitment is subject to a number of conditions.
See "SOURCE AND AMOUNT OF FUNDS."

It is expected that if the Merger Agreement and the Merger are not approved
by the Company's stockholders, or if the other conditions to the consummation of
the Merger are not satisfied or waived, the Company's management, under the
general direction of the Board, will seek to continue to manage the Company as
an ongoing business and may seek other purchasers for the Company or another
strategic alternative. No other alternative is presently being considered. In
light of the competitive nature of the industry and factors specific to the
Company, no assurance can be given that some other offer for the Company might
be made or, if made, whether the consideration will be more or less than that
offered by Buyer.

INTEREST OF CERTAIN PERSONS IN THE MERGER

Under the Merger Agreement, each outstanding share of Common Stock (other
than those held by Buyer and stockholders who properly exercise dissenters'
rights) will be converted in the Merger into the right to receive $5.00 per
share payable in cash. The Directors and executive officers of the Company would
receive approximately $61,500 under the Merger Agreement in exchange for their
shares, $84,955 in connection with their deferred compensation awards ("Deferred
Compensation Shares") and $467 in cancellation of outstanding options to
purchase shares of Common Stock ("Company Stock Options").

The Merger Agreement provides that, from and after the Effective Time, the
Surviving Corporation will indemnify present and former officers and directors
of the Company for certain matters occurring at or prior to the Effective Time
and, from and after the Effective Time, will pay expenses in advance of the
final disposition of an action or proceeding. Buyer also is required to provide
present and former officers and directors of the Company with liability
insurance providing coverage for events occurring at or prior to the Effective
Time for a period of six years after the Effective Time. Buyer has also agreed
that the indemnification provisions contained in the Certificate of
Incorporation and By-laws of the Company in effect on October 29, 1996 will be
included in the certificate of incorporation and by-laws of the Surviving
Corporation and will not be amended, repealed or otherwise modified for a period
of six years after the Effective Time in any manner that would adversely affect
the rights of any prospective indemnitees. See "THE MERGER AGREEMENT --
Indemnification and Insurance."

In July 1995, the Board authorized the Company to enter into agreements
with each of Jerome D. Brady, President and Chief Executive Officer, Thomas D.
Rooney, Vice President and Chief Financial Officer, and Steven R. Andrews, Vice
President, General Counsel and Secretary, to secure their continued service in
the event of any "Change-in-Control" (collectively, the "Change-in-Control
Agreements"). The Change-in-Control Agreements provide, in the event of a
"Change-in-Control," that such officers will receive a "Retention Bonus"
($800,000 for Mr. Brady, $250,000 for Mr. Rooney and $200,000 for Mr. Andrews).
Under the Change-in-Control Agreements, a "Change-in-Control" occurred on August
27, 1996 when the sale of substantially all of the Company's Sheridan Systems
assets was consummated. The Retention Bonuses for Messrs. Brady, Rooney and
Andrews which accrued following the sale of Sheridan Systems were paid in
December 1996. Under the Change-in-Control Agreements, a "Qualifying
Termination" means, among other things, a termination by the Company for a
reason other than "cause" or by the officer for any reason on the date six
months following consummation of the sale of Sheridan Systems which date is
February 27, 1997. If after a Change-in-Control there is a Qualifying
Termination, the officer will receive a lump sum cash amount equal to two times
the officer's highest rate of annual base salary in effect at any time after the
date of the execution of the Change-in-Control Agreement (which amount is
reduced over time following the

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<PAGE> 26

Change-in-Control), together with a pro rata portion of bonus for the year and
payments of certain accrued benefits. Such lump sum cash payments are currently
estimated to be approximately $890,000 for Mr. Brady, $1,090,000 for Mr. Rooney
and $440,000 for Mr. Andrews.

On October 29, 1996, the Company entered into a letter agreement with Mr.
Rooney and executed acknowledgment letters in favor of Messrs. Brady and
Andrews. The letters from the Company to Messrs. Brady and Andrews advised them
that their employment would be terminated as of the Closing and acknowledged
that such termination of employment would be treated as a Qualifying Termination
under their Change-in-Control Agreements. The letter agreement between the
Company and Mr. Rooney effects a satisfaction and discharge of the parties'
respective obligations under Mr. Rooney's Change-in-Control Agreement. Under the
terms of Mr. Rooney's letter agreement, Mr. Rooney will receive the cash
payments from the Company he otherwise would have received had there been a
Qualifying Termination at the Closing.

Mr. Rooney is expected to acquire 20% of the issued and outstanding shares
of common stock of Buyer for approximately $60,000. Following the Merger, Mr.
Rooney will serve as Chairman, Chief Executive Officer and President of the
Company and, in such capacity, will receive compensation and benefits
substantially equivalent to his current compensation from the Company. Dr.
Pacholder, the Chairman of Pacholder Associates, Inc. and a director of the
Company until September 3, 1996, is also expected to acquire 20% of Buyer's
issued and outstanding common stock for approximately $60,000. Dr. Pacholder's
wife, Sylvia A. Pacholder, and two other affiliates of Pacholder Associates,
Inc. are expected to acquire the remaining shares of Buyer's common stock on
similar terms. Mr. Knipp, currently the Treasurer of the Company, is expected to
serve as Chief Financial Officer of the Company and, in such capacity, is
expected to receive compensation and benefits substantially similar to his
current compensation.

CERTAIN FINANCIAL FORECASTS

The Company does not, as a matter of course, make public forecasts as to
future revenues or earnings. However, certain forecasts are used internally by
the Company in connection with its budgeting and planning process (the
"Company's Forecasts"). Moreover, the Company's Forecasts, together with other
forecasts prepared by Buyer (the "Buyer's Forecasts") were furnished to lending
institutions in connection with seeking to obtain debt financing for the Merger
and to the Board in consideration of the Merger Agreement. Both sets of
forecasts are of necessity based on a variety of assumptions, some of which,
though considered reasonable at the time of preparation, may not be realized or
may have become out of date. The more significant of these assumptions are set
forth below.

The forecasts set forth are based on assumptions that are inherently
subject to significant economic and competitive uncertainties, all of which are
difficult to predict and many of which are beyond the control of Buyer and the
Company. The following assumptions are also based on information about
circumstances and conditions existing at the time the prospective information
was prepared. There can be no assurances that any of the forecasted results can
be realized or that the actual results will not be materially higher or lower
than either of the two sets of forecasts. In addition, the forecasts were not
prepared with a view to public disclosure or compliance with the published
guidelines of the Commission regarding forecasts, nor were they prepared to be
in accordance with the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
forecasts.

No independent accountants have audited, reviewed or compiled any of the
financial forecasts presented herein and, accordingly, have not expressed any
conclusion thereon or any other form of assurance with respect thereto.

The Company's Forecasts do not give effect to the Merger or the
transactions contemplated thereby. In addition, these forecasts were prepared in
early August (in the case of the Company) and October (in the case of Buyer) of
1996 and have not been updated since their original preparation. Neither the
Company nor Buyer intends to update or otherwise revise their forecasts.

Certain Differences Between Assumptions. Each set of forecasts should be
read in conjunction with its corresponding set of assumptions. Any comparison
between the two sets of forecasts should be qualified in

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<PAGE> 27

view of the fact that management's forecasts were prepared on the assumption
that there would be no transaction effecting a change in ownership of the
Company. Moreover, each preparer of the forecasts made certain materially
different assumptions particularly with respect to the use of cash balances,
acquisition strategy, product portfolio and other material distinctions. Whereas
Buyer's Forecasts assume no acquisitions, the Company's Forecasts assume that
acquisitions will be completed and will comprise the largest factor contributing
to revenue and income growth. The Company's Forecasts for Interest Expense
include offsetting interest income from the Company's cash balances, whereas the
Buyer's Forecasts include interest expense associated with the revolving credit
facility negotiated in connection with the financing of the Company after the
Merger. The Company's Forecasts include assumptions concerning the Xeikon
product line which are no longer true in view of the Company's and Xeikon's
mutual decision not to renew their distribution agreement. Accordingly, the
Buyer's Forecasts, which contain no revenue or income from the Xeikon business,
reflect more current information, although management of the Company does not
believe that the absence of this product line will have a material effect on the
income potential of the Company. The Company's Forecasts include the forecasted
results of its Canadian operations which the Company exited in October 1996.
Finally, the Company's Forecasts assume the ability of the Company to fully
utilize net operating loss carry forwards ("NOLs") without limitation, whereas
the Buyer's Forecasts assume that the usage of these tax benefits would be
limited pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code").

Forecasts Prepared by Company Management. In August 1996, while the Company
was completing the divestiture of Sheridan Systems and during the pending
transaction for the sale of the Company's interest in AM Japan, the Company's
management prepared forecasts for certain future operating results of the
Company for the fiscal years ending July 31, 1997 through 1999. Certain
assumptions relating to these forecasts, as well as a summary of the forecasted
results, are set forth below.

Assumptions:

1. The revenue projections assume enhancement of sales representative
productivity to at least $1.0 million in sales for each representative, per
year. The Company's Forecasts also assume that revenues would be derived from
the distribution of Xeikon presses, supplies and services.

2. It is assumed that acquisitions will be completed and will comprise the
largest factor contributing to revenue and income growth in the Company's
Forecasts. However, no specific acquisition targets had been identified at the
time of the preparation of the forecasts. Based on publicly-available industry
data, the Company has developed certain profiles of small, regional distributors
which indicate that the typical asset value of a smaller distributor is equal
roughly to 30-40% of its revenues. Moreover, certain acquisitions among the
Company's competitors have been achieved through cash purchase with little or no
consideration for goodwill. Accordingly, the Company's Forecasts assume that
acquisitions of regional distributors in 1997, 1998 and 1999 with combined
revenues of $60 million could be completed for approximately $15-20 million. The
Company Forecasts further assume that the Company has adequate cash resources to
pursue an acquisition strategy. Moreover, each acquisition would increase the
Company's inventory and asset levels and, accordingly would increase the
Company's borrowing base under a typical line of debt financing, thereby
providing additional sources of liquidity and funding for further growth.

3. The Company's Forecasts assume the benefits of cost reductions in 1998
and 1999. These reductions are premised on the assumption that full systems
implementation, which began in fiscal year 1996, will yield efficiencies and
that numerous cost reduction opportunities still exist within the Company.

4. It is assumed that there is no change in ownership significant enough to
cause the Company to limit its ability to use NOLs under Section 382 of the
Code. The Company has significant NOLs and was assumed not be a United States
taxpayer during the period covered by the Company's Forecasts.

5. It is assumed that the Company would continue as a publicly held entity,
and therefore certain costs of complying with periodic reporting
responsibilities, stockholder relations, auditing and outside counsel fees would
continue.

6. The Company's Forecasts assume that the Xeikon business continues at a
slightly better than break-even level. In December 1996, the Company and Xeikon
mutually agreed not to renew their distribution

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<PAGE> 28

agreement which would have an impact on the revenues in the Company's Forecasts,
but little impact on the operating income and net income.

7. Interest Expense is assumed to include interest expense on pre-petition
liabilities, letter of credit and other bank fees and interest expense from
healthcare obligations, partially offset by interest income from cash balances.

8. Revenues includes forecasts for the results of operations of the
Company's Canadian operations which the Company exited in October 1996.

COMPANY'S FORECASTS

(IN MILLIONS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JULY 31,
-----------------------------
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
REVENUES
Revenues prior to acquisitions................................ $91.3 $ 93.7 $ 96.6
Acquisitions.................................................. 3.3 25.0 55.0
----- ------ ------
TOTAL REVENUES........................................ 94.6 118.7 151.6
OPERATING INCOME
Operating Income prior to acquisitions........................ 1.6 1.6 1.7
Cost reductions............................................... -- 1.7 2.8
Acquisitions.................................................. 0.3 2.5 5.5
----- ------ ------
TOTAL OPERATING INCOME................................ 1.9 5.8 10.0
Corporate Expense............................................... (2.0) (2.0) (2.0)
Interest Expense................................................ (1.2) (1.3) (1.6)
----- ------ ------
Pre-tax Earnings................................................ (1.3) 2.5 6.4
Tax........................................................... -- -- --
----- ------ ------
NET INCOME...................................................... (1.3) 2.5 6.4
===== ====== ======
</TABLE>

Forecasts Prepared By Buyer. In October 1996, the Buyer prepared forecasts
for certain future operating results of the Company after the Merger for the
fiscal years 1997 through 2001. Certain assumptions to these forecasts, as well
as a summary of the forecasted results, are set forth below.

Buyer's Forecasts were prepared principally for purposes of Buyer's
internal analysis and to provide to lending institutions in connection with
seeking financing for the Merger. The forecasts were not prepared with a view to
public disclosure or compliance with the published guidelines of the Commission
regarding forecasts, nor were they prepared to be in accordance with the
guidelines established by the American Institute of Certified Public Accountants
for preparation and presentation of financial forecasts.

Assumptions:

1. Buyer's Forecasts assume the effect of the Merger with the purchase of
all of the issued and outstanding shares of capital stock of the Company for
$5.00 per share, for a total expenditure of $35.2 million. The Surviving
Corporation would pay the acquisition revolving loan following the Merger.

2. It is assumed that Buyer contributes $2.3 million in equity to the
surviving corporation in connection with the proposed transaction.

3. Buyer's Forecasts assume that the Xeikon business is exited.

4. It is assumed that $0.7 million can be saved in 1997 and $1.0 million
annually thereafter as a result of the reduction of the corporate expenses
relating primarily to the Company's current status as a public entity, including
the elimination of public company reporting requirements, decrease in audit
services, decreases in outside counsel fees, printing, directors' fees, and
other associated costs.

23
<PAGE> 29

5. Assumed Interest Expense includes interest expense on pre-petition
liabilities, interest expense from healthcare obligations and interest and fees
on the revolving credit facility negotiated in connection with the financing of
the Merger and other bank charges. See "SOURCE AND AMOUNT OF FUNDS."

6. Benefit from utilization of the Company's NOLs is assumed to be limited
to $0.7 million per year, however, in accordance with purchase accounting rules,
the acquired NOL's may not reduce the tax provisions reported on the Company's
income statement.

7. Straight line amortization of purchase goodwill over a 15 year period is
assumed.

8. State and local taxes are assumed to be at a combined 40% rate.

9. Buyer's Forecasts do not include results of the Company's Canadian
operations.

10. Buyer's Forecasts assume no acquisitions are made during the covered
period.

11. Buyer's Forecasts assume the same amounts for revenues and gross margin
for fiscal 1997, 1998 and 1999 as are in the Company's Forecasts after
eliminating revenues and gross margins relating to the exited Xeikon business,
the exited Canadian operations and acquisitions.

BUYER'S FORECASTS

(IN MILLIONS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JULY 31,
-----------------------------------------
1997 1998 1999 2000 2001
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
TOTAL REVENUE............................................ $79.4 $79.0 $79.1 $79.7 $80.7
OPERATING INCOME......................................... 0.9 4.4 5.3 5.3 5.5
Interest Expense......................................... (2.7) (1.8) (1.5) (1.1) (0.9)
Amort. Goodwill.......................................... (1.4) (1.9) (1.9) (1.9) (1.9)
----- ----- ----- ----- -----
Earnings before taxes.................................... (3.2) 0.7 1.9 2.3 2.7
Taxes.................................................... 1.3 (0.3) (0.8) (0.9) (1.1)
Benefit of utilization of NOLs........................... -- 0.3 0.7 0.7 0.7
----- ----- ----- ----- -----
NET INCOME............................................... (1.9) 0.7 1.8 2.1 2.3
===== ===== ===== ===== =====
</TABLE>

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following is a general summary of the material federal income tax
consequences of the Merger to beneficial owners of shares of Common Stock, of
Deferred Compensation Shares and of Company Stock Options and is based upon
current provisions of the Code, existing, proposed, temporary and final treasury
regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change (possibly on a retroactive basis). No attempt
has been made to comment on all federal income tax consequences of the Merger
that may be relevant to particular holders, including those that are subject to
special tax rules such as dealers in securities, mutual funds, insurance
companies, tax-exempt entities and holders who do not hold their shares of
Common Stock as capital assets. The following summary does not discuss the
United States federal income tax consequences, or any other tax consequences, of
the Merger to beneficial owners of shares of Common Stock, of Deferred
Compensation Shares and of Company Stock Options who or which, for United States
federal income tax purposes, are non-resident alien individuals, foreign
corporations, foreign partnerships or foreign estates or trusts.

The following summary does not discuss the federal income tax consequences,
or any other tax consequences, of the Merger to beneficial owners of shares of
Common Stock who are or will become stockholders of Buyer, who otherwise have or
will have a continuing direct or indirect ownership interest in the Company, or
who are or will be deemed to have such an interest in the Company under
constructive ownership rules set out in the Code. Such beneficial owners should
consult with their own tax advisors as to the tax consequences of the Merger to
them.

24
<PAGE> 30

The tax discussion set forth below is included for general information
only. It is not intended to be, nor should it be construed to be, legal or tax
advice to any particular holder. Holders are advised and expected to consult
with their own legal and tax advisers regarding the federal income tax
consequences of the Merger in light of their particular circumstances, and any
other consequences to them of the Merger under state, local and foreign tax
laws.

General. In general, each beneficial owner of shares of Common Stock will
recognize gain or loss for federal income tax purposes equal to the difference,
if any, between the cash received pursuant to the Merger and such beneficial
owner's adjusted tax basis for its shares. In general, such gain or loss will be
capital gain or loss and will be long-term capital gain or loss if the holder
has held its shares for more than one year as of the Effective Time.

A beneficial owner of shares of Common Stock who receives cash pursuant to
the exercise of appraisal rights under Section 262 of the Delaware GCL, as
described below under "APPRAISAL RIGHTS," will recognize gain or loss for
federal income tax purposes equal to the difference, if any, between the cash
received and such beneficial owner's adjusted basis for its shares. In general,
such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if the holder has held its shares for more than one year as of the
Effective Time.

Unless a beneficial owner of shares of Common Stock entitled to receive
cash payments in connection with the Merger complies with certain reporting and
certification procedures, or otherwise demonstrates that it is an exempt
recipient under applicable withholding provisions of the Code and the Treasury
regulations promulgated thereunder, such holder may be subject to federal backup
withholding at a rate of 31% with respect to all such cash payments which such
holder is entitled to receive. Backup withholding is not an additional tax.
Rather, the tax liability of persons subject to 31% backup withholding will be
reduced by the amount of tax withheld.

Deferred Compensation Shares. On the Closing Date, each holder of a
Deferred Compensation Share, whether or not then vested, shall, in settlement
thereof and without any action by such holder, be deemed to have made a
disposition of such Deferred Compensation Share to the Company and shall receive
from the Company for each Deferred Compensation Share an amount (subject to any
applicable withholding tax) in cash equal to the Merger Consideration. See "THE
MERGER AGREEMENT -- Deferred Compensation Shares." With respect to any Deferred
Compensation Share that, as of the Closing Date, is non-transferrable and
subject to a substantial risk of forfeiture under Section 83 of the Code, the
holder thereof will recognize ordinary compensation income on the excess, if
any, of Merger Consideration with respect to such Share over the amount, if any,
paid for such Share. Different consequences, described in the following
paragraph, will result if a holder has previously made an election under Section
83(b) of the Code. Beneficial owners of Deferred Compensation Shares should
consult their own tax advisors as to whether all or a portion of the cash
payable in exchange for Deferred Compensation Shares will be subject to the 20%
nondeductible excise tax under Sections 280G and 4999 of the Code imposed on
"excess parachute payments."

With respect to any Deferred Compensation Share that, as of the Closing
Date, is either transferable or not subject to a substantial risk of forfeiture
under Section 83 of the Code, or with respect to which an election under Section
83(b) of the Code has been made, a holder thereof will be taxed in the manner
described above under "-- General".

Company Stock Options. Each holder of a Company Stock Option outstanding on
the Closing Date, whether or not such Company Stock Option is then exercisable,
will, in settlement thereof and without any action by such holder, will receive
from the Company for each share of Common Stock subject to such Company Stock
Option an amount (subject to any applicable withholding tax) in cash equal to
the excess, if any, of the Merger Consideration over the per share exercise
price of such Company Stock Option. See "THE MERGER AGREEMENT -- Company Stock
Options." The holder of a Company Stock Option will recognize ordinary
compensation income on the cash received in respect of such Company Stock
Option. Beneficial owners of Company Stock Options should consult their own tax
advisors as to whether all or a portion of the cash payable in respect of a
Company Stock Option will be subject to the 20% nondeductible excise tax under
Sections 280G and 4999 of the Code imposed on "excess parachute payments."

25
<PAGE> 31

ANTICIPATED ACCOUNTING TREATMENT

The Merger is expected to be accounted for under the "purchase" method of
accounting.

GOVERNMENTAL AND REGULATORY APPROVALS

Based on information available to them, the Company and Buyer believe that
the Merger can be effected without seeking any material governmental or
regulatory approvals.

CERTAIN SIGNIFICANT FINANCIAL CONSIDERATIONS

If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Surviving Corporation as
debtor in possession, were to find that, at the time the Merger Consideration
was distributed to the holders of Common Stock, the Surviving Corporation (i)
made such payment with actual intent to hinder, delay or defraud creditors, or
(ii) did not receive reasonably equivalent value and is insolvent or will be
rendered insolvent by reason of the transfer, then, subject to various defenses
which might be asserted, such court could void the distributions to the holders
of Common Stock and require that such holders return the same (or equivalent
amounts) to the Surviving Corporation or to a fund for the benefit of its
creditors (including, under certain circumstances, bank lenders and other
holders of debt of the Surviving Corporation).

The test for insolvency for purposes of the foregoing varies depending
under the federal or state statute applied, but typically means that, taking
account of the effect of the proposed transaction: (i) the fair value of the
company's assets is less than the sum of the company's debts, or the present
fair salable value of the company's assets is less than the amount required to
pay the company's probable debts as they become mature, (ii) the company intends
to engage in a business for which it has unreasonably small capital, or (iii)
the company will likely incur debts beyond its ability to pay such debts as they
mature. No assurance can be given as to what method a court would use in order
to determine whether the Surviving Corporation was "insolvent" at the Effective
Time or that, regardless of the method of valuation, a court would not determine
that the Surviving Corporation was insolvent at the Effective Time.

The Board believes that the payment of the Merger Consideration will be
made for proper purposes and in good faith, and that, given the equity
investment being made by Buyer and based on present forecasts and other
financial information, the Company is, and the Surviving Corporation will be,
solvent, will have sufficient capital for carrying on its business after the
Merger and will be able to pay its debts as they mature. See "-- Certain
Financial Forecasts" and "SOURCE AND AMOUNT OF FUNDS." Pursuant to its retention
agreement with the Company, Houlihan Lokey has been requested to render, prior
to the consummation of the Merger, an opinion to the Board and the lenders
providing the revolving credit financing for the Merger to the effect that,
assuming the Merger is consummated as proposed, immediately after and giving
effect to the Merger: (a) on a pro forma basis, the fair value and present fair
saleable value of the Company's assets would exceed the Company's stated
liabilities and identified contingent liabilities; (b) the Company should be
able to pay its debts as they become absolute and mature; and (c) the capital
remaining in the Company after the Merger would not be unreasonably small for
the business in which the Company is engaged, as management has indicated it is
now conducted and is proposed to be conducted following the consummation of the
Merger. This opinion will value the Company as a going-concern (including
goodwill), on a pro forma basis, immediately after and giving effect to the
Merger and the associated indebtedness. In performing it analyses, Houlihan
Lokey will use, rely upon and assume the accuracy of, without independent
verification, data, material and other information (including without
limitation, the forecasts), with respect to the Company, furnished to Houlihan
Lokey by or on behalf of the Company. Houlihan Lokey is expected to complete its
analyses prior to the consummation of the Merger.

Receipt of a satisfactory solvency opinion from Houlihan Lokey is a
condition to the Company's and Buyer's obligation to consummate the Merger as
well as a condition to the closing under the revolving credit facility. See "THE
MERGER AGREEMENT -- Conditions to the Merger." A solvency opinion is an opinion
and is not binding upon courts.

26
<PAGE> 32

THE MERGER AGREEMENT

The following is a summary of the Merger Agreement, a copy of which is
attached as Appendix I and incorporated by reference herein. All references to
and summaries of the Merger Agreement in this Proxy Statement are qualified in
their entirety by reference to the Merger Agreement. Stockholders are urged to
read the Merger Agreement carefully and in its entirety.

EFFECTIVE TIME

Subject to the provisions of the Merger Agreement, on the second business
day following the satisfaction or waiver of all conditions set forth in the
Merger Agreement (the "Closing Date"), unless another time or date is agreed to
in writing by the Company, Buyer and Sub, the Certificate of Merger will be
filed with the Secretary of State of the State of Delaware. The Effective Time
of the Merger will be upon the filing of the Certificate of Merger or at such
time thereafter as is provided in the Certificate of Merger.

THE MERGER

The Merger Agreement provides that, subject to the approval and adoption of
the Merger Agreement and the Merger by the stockholders of the Company and
compliance with certain other covenants and conditions, Sub will be merged with
and into the Company, at which time the separate corporate existence of Sub will
cease and the Company will continue as the Surviving Corporation in accordance
with the Delaware GCL. Following consummation of the Merger, the Company, as the
Surviving Corporation, will be a wholly-owned subsidiary of Buyer. As a result
of the Merger and pursuant to the Delaware GCL, all the property, rights,
privileges, powers and franchises of the Company and Sub will vest in the
Surviving Corporation, and all debts, liabilities and duties of the Company and
Sub will become the debts, liabilities and duties of the Surviving Corporation.

At and as of the Effective Time, (i) each share of Common Stock that is
owned by the Buyer will be automatically canceled and no consideration will be
delivered or deliverable in exchange therefor, (ii) each issued and outstanding
share of Common Stock (other than shares to be canceled in accordance with the
immediately preceding clause and other than Dissenting Shares (as defined below,
see APPRAISAL RIGHTS)) will be converted into the right to receive $5.00 payable
in cash (without interest), (iii) each Dissenting Share will be converted into
the right to receive payment from the Surviving Corporation with respect thereto
to the extent provided by, and in accordance with, the provisions of the
Delaware GCL and (iv) each share of common stock, $.01 par value per share, of
Sub will be converted into one share of common stock, $.01 par value per share,
of the Surviving Corporation.

As a result of the Merger, Buyer will acquire the entire equity interest in
the Company. Therefore, following the Merger the holders of shares of Common
Stock (other than those stockholders of the Company who also own common stock of
Buyer) will no longer have an equity interest in the Company and will not have
an opportunity to share in the future earnings, if any, and potential growth of
the Company.

At the Effective Time, the directors of Sub will become the directors of
the Surviving Corporation, and the officers of the Company (except for those
officers who have agreed to resign at the Closing) will become the officers of
the Surviving Corporation. At the Effective Time, the Certificate of
Incorporation of the Surviving Corporation will be amended and restated to be
identical to the Certificate of Incorporation of Sub and the By-laws of Sub, as
in effect immediately prior to the Effective Time, except that in each case, the
name of the Surviving Corporation shall be changed to "Multigraphics, Inc."

EXCHANGE PROCEDURE

Buyer will designate a commercial bank or other person to act as paying
agent in the Merger (the "Paying Agent") and shall, immediately after the
Effective Time, deposit with the Paying Agent a corpus (the "Payment Fund")
consisting of cash sufficient in the aggregate for the Paying Agent to make full
payment of the Merger Consideration to the holders of record immediately prior
to the Effective Time of all the

27
<PAGE> 33

outstanding shares of Common Stock (other than any Dissenting Shares and
Buyer-owned shares of Common Stock). The Buyer may cause the Paying Agent to
invest the Payment Fund in certain permitted investments, provided, however,
that the terms and conditions of such investments shall be such as to permit the
Paying Agent to make prompt payment of the Merger Consideration as necessary.
The Buyer may cause the Paying Agent to pay over to the Surviving Corporation
any net earnings with respect to the investments, and the Buyer has agreed to
deposit promptly with the Paying Agent any portion of the Payment Fund which is
lost through investments.

Immediately after the Effective Time, Buyer will cause the Paying Agent to
mail to each holder of record of a Certificate, a letter of transmittal (which
will be in customary and reasonable form, will specify that delivery shall be
effected and risk of loss and title to the Certificates shall pass only upon
actual delivery thereof to the Paying Agent and will contain instructions for
use in effecting the surrender of such Certificates in exchange for the Merger
Consideration). Upon surrender of a Certificate for cancellation to the Paying
Agent, together with such letter of transmittal, duly executed, and such other
documents as may reasonably be requested by the Paying Agent, the holder of such
Certificate will be entitled to receive in exchange therefor cash, without
interest, in an amount equal to the number of shares of Common Stock represented
by such Certificate multiplied by the Merger Consideration, and the Certificate
so surrendered shall be canceled. In the event of a transfer of ownership of
shares of Common Stock that is not registered in the transfer records of the
Surviving Corporation, payment may be made to a person other than the person in
whose name the Certificate so surrendered is registered, if such Certificate is
properly endorsed or otherwise in proper form for transfer and the person
requesting such payment pays any transfer or other taxes required by reason of
the payment to a person other than the registered holder of such Certificate or
establishes to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Until surrendered as contemplated by the Merger
Agreement, each Certificate will be deemed at any time after the Effective Time
to represent only the right to receive upon such surrender the amount of cash,
without interest, into which the Shares theretofore represented by such
Certificate have been converted pursuant to the Merger Agreement.

Any portion of the Payment Fund which remains undistributed to the holders
of Certificates for 180 days after the Effective Time shall be delivered to the
Surviving Corporation, upon demand, and any holders who have not theretofore
complied with the procedures set forth in the Merger Agreement and the
instructions set forth in the letter of transmittal mailed to such holders after
the Effective Time shall thereafter look only to the Surviving Corporation
(subject to abandoned property, escheat and other similar laws) as general
creditors thereof with respect to the payment of the Merger Consideration to
which they are entitled.

HOLDERS OF COMMON STOCK SHOULD NOT FORWARD THEIR CERTIFICATES WITH THE
ENCLOSED PROXY CARD, NOR SHOULD THEY RETURN THEIR CERTIFICATES TO THE PAYING
AGENT UNTIL THEY HAVE RECEIVED A LETTER OF TRANSMITTAL. STOCKHOLDERS SHOULD NOT
FORWARD ANY CERTIFICATES AT THIS TIME.

REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains various representations and warranties of the
Company, Buyer and Sub which do not survive the Closing. Representations and
warranties of the Company relate, among other things, to: (i) its due
organization, existence, good standing, qualification and corporate power; (ii)
its authorized capitalization; (iii) the authorization, execution, delivery,
performance and enforceability of the Merger Agreement; (iv) the absence of
conflicts, violations, breaches and defaults under law, its Certificate of
Incorporation and By-laws and certain other agreements and documents; (v) the
documents and reports filed by the Company with the Securities and Exchange
Commission (the "Commission") and the accuracy and completeness of the
information contained therein; (vi) its preparation and fair presentation of
certain Financial Statements; (vii) the absence of any material adverse changes
to the Company since July 31, 1996; (viii) undisclosed liabilities; (ix)
brokers' fees; (x) insurance matters; (xi) pending or threatened litigation;
(xii) product warranty liability; (xiii) product liability matters; (xiv)
employee benefit matters; (xv) liabilities for any guarantees; (xvi)
environmental, health and safety matters; (xvii) the accuracy and completeness
of the information contained in this Proxy Statement; and (xviii) the Fairness
Opinion.

28
<PAGE> 34

Representations and warranties of Buyer and Sub relate, among other things,
to: (i) their respective due organization, existence, good standing,
qualification and corporate power; (ii) financing proposals relating to the
financing necessary to consummate the Merger and to fund the working capital
needs of the Surviving Corporation; (iii) cash and funding undertakings; (iv)
the authorization, execution, delivery, performance and enforceability of the
Merger Agreement; (v) the absence of conflicts, violations, breaches and
defaults under law, their respective Certificates of Incorporation and By-laws
and certain other agreements and documents; (vi) brokers' fees; (vii) the
accuracy and completeness of the information supplied for use in this Proxy
Statement; (viii) pending or threatened litigation; (ix) the solvency of the
Surviving Corporation following payment of the Merger Consideration; and (x)
receipt of an undertaking from PM Delaware Inc. and Pacholder Associates Inc.
relating to an undertaking to provide equity contributions to Buyer and Sub.

CONDUCT OF THE BUSINESS PENDING THE MERGER

During the period from October 29, 1996 until the Effective Time, the
Company has agreed to engage (and will cause its subsidiaries to engage) only in
practices, and only take actions, or enter into transactions in the ordinary
course of business consistent with past custom and practice. During such period,
except as permitted by the Merger Agreement or except as consented to in writing
by the Buyer, the Company has agreed that it will not, nor will it permit any of
its subsidiaries to: (i) authorize or effect any change in its charter or
bylaws; (ii) grant any options, warrants, or other rights to purchase or obtain
any of its capital stock or issue, sell, or otherwise dispose of any of its
capital stock (except upon the conversion or exercise of options, warrants, and
other rights currently outstanding); (iii) declare, set aside, or pay any
dividend or distribution with respect to its capital stock (whether in cash or
in kind), or redeem, repurchase, or otherwise acquire any of its capital stock;
(iv) issue any note, bond, or other debt security or, other than in the ordinary
course of business consistent with past custom and practice, create, incur,
assume or guarantee any indebtedness for borrowed money or capitalized lease
obligation; (v) impose (or permit or cause to be imposed) any security interest
or similar lien upon any of its assets outside the ordinary course of business
consistent with past custom and practice; (vi) make any capital investment in,
make any loan to, or acquire the securities or assets of any other person; (vii)
make any change in employment terms, policies or practices for any of its
directors or officers or make any change in employment terms, policies or
practices for its non-officer employees outside the ordinary course of business
consistent with past custom and practice; or (viii) commit to do any of the
foregoing.

COVENANTS

Pursuant to the Merger Agreement, the Company, Buyer and Sub each have
agreed, among other things, to: (i) use reasonable best efforts to consummate
the Merger; (ii) cooperate with regard to preparation of this Proxy Statement;
and (iii) give the other party prompt notice of any material adverse development
resulting in a breach of a representation or warranty.

The Company has also agreed, among other things, to: (i) give any required
notices to third parties of the Merger or and seek certain third party consents
to the Merger; (ii) call a special meeting of stockholders to approve and adopt
the Merger Agreement and the Merger; and (iii) provide Buyer with reasonable
access to the Company for due diligence purposes.

COMPANY STOCK OPTIONS

In accordance with the Company's 1994 Long-Term Incentive Plan, on the
Closing Date, each holder of a then outstanding Company Stock Option, whether or
not then exercisable, will, in settlement thereof and without any action by such
holder, be deemed to have made a disposition of such Company Stock Option to the
Company and will receive from the Company for each share of Common Stock subject
to such Company Stock Option an amount (subject to any applicable withholding
tax) in cash equal to the excess, if any, of the Merger Consideration over the
per share exercise price of such Company Stock Option ("Option Consideration").
Upon receipt of the Option Consideration, the related Company Stock Option shall
be automatically canceled. The total Option Consideration to be paid on the
Closing Date is $467.04.

29
<PAGE> 35

DEFERRED COMPENSATION SHARES

On the Closing Date, each holder of a Deferred Compensation Share, whether
or not then vested, shall, in settlement thereof and without any action by such
holder, be deemed to have made a disposition of such Deferred Compensation Share
to the Company and shall receive from the Company for each Deferred Compensation
Share an amount (subject to any applicable withholding tax) in cash equal to the
Merger Consideration ("Deferred Compensation Consideration"). Upon receipt of
the Deferred Compensation Consideration, the related Deferred Compensation Share
will be automatically canceled. Prior to the Closing Date, the Company has
agreed to obtain all necessary consents or releases from holders of Deferred
Compensation Shares and to take all such other lawful action as may be necessary
to give effect to the cancellation of the Deferred Compensation Shares and the
payment of the Deferred Compensation Consideration. On the Closing Date, there
are expected to be 29,921 Deferred Compensation Shares with a total Deferred
Compensation Consideration of $149,605.

NO SOLICITATION

The Merger Agreement provides that the Company will not (and will not
permit any of its subsidiaries to) solicit, initiate, or encourage the
submission of any proposal or offer from any person relating to a tender or
exchange offer, a merger, consolidation or other business combination involving
the Company or any of its subsidiaries or any proposal to acquire in any manner
a substantial equity interest in, or substantial portion of the assets of, the
Company or any of its subsidiaries (a "Third Party Offer"); provided, however,
that the Company, its subsidiaries, and their directors and officers may engage
in discussions or negotiations with, or furnish information concerning the
Company and its properties, assets and business to any person which makes a
Third Party Offer if the Board reasonably concludes in good faith after
consultation with, and based on the advice of, its outside counsel, that the
failure to take such action would be inconsistent with the fiduciary obligations
of the Board under applicable law; and provided further, that notwithstanding
anything to the contrary in the Merger Agreement, the Board may take and
disclose to the Company's stockholders a position contemplated by Rule 14e-2
promulgated under the Exchange Act, comply with Rule 14d-9 thereunder and make
all disclosures required by applicable law in connection therewith. The Company
has agreed to notify the Buyer promptly (but in no case later than 48 hours) (i)
of the receipt of any Third Party Offer (providing the Buyer with a summary of
the material terms thereof) or (ii) of a decision by the Company to engage in
discussions or negotiations with, or furnish information concerning the Company
or its properties, assets or business to, any person.

INDEMNIFICATION AND INSURANCE

The Merger Agreement provides that, from and after the Effective Time, the
Surviving Corporation shall indemnify, defend and hold harmless the present and
former officers, directors, agents and employees of the Company and its
subsidiaries (the "Indemnified Parties") against all losses, expenses, claims,
damages, liabilities or amounts that are paid in settlement of, with the
approval of Buyer and the Surviving Corporation, or otherwise in connection
with, any claim, action, suit, proceeding or investigation, based in whole or in
part on the fact that such person is or was such an officer, director, agent or
employee of the Company or any subsidiary and arising out of actions or
omissions occurring at or prior to the Effective Time (including the
transactions contemplated by the Merger Agreement), in each case to the fullest
extent permitted under the Delaware GCL, and, from and after the Effective Time,
shall pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the fullest extent permitted by the
Delaware GCL. In addition, Buyer has agreed to provide each individual who
served as a director or officer of the Company at any time prior to the
Effective Time with liability insurance providing coverage for events occurring
at or prior to the Effective Time for a period of six years after the Effective
Time. Such insurance is to be no less favorable in coverage and amount than the
insurance in effect immediately prior to the Effective Time. Furthermore, Buyer
has agreed that the Certificate of Incorporation and By-laws of the Surviving
Corporation will contain the indemnification provisions set forth in the
Certificate of Incorporation and By-laws of the Company as in effect on October
29, 1996, which provisions shall not be amended, repealed or otherwise modified
for a period of six years after the Effective Time in any manner that would
adversely affect

30
<PAGE> 36

the rights thereunder of persons who at any time prior to the Effective Time
were prospective indemnitees under the Certificate of Incorporation or By-laws
of the Company in respect of actions or omissions occurring at or prior to the
Effective Time, unless such modification is required by law.

CONDITIONS TO THE MERGER

Pursuant to the Merger Agreement, the respective obligation of each of the
Company, Buyer and Sub to effect the Merger is subject to the satisfaction of
the following conditions at or prior to the Closing Date: (i) approval and
adoption of the Merger Agreement and the Merger by the holders of at least a
majority of the issued and outstanding shares of Common Stock; (ii) absence of
any statute, rule, regulation, executive order, decree, temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other governmental entity or other legal restraint or
prohibition preventing the consummation of the Merger; provided, however, that
each of the parties shall have used reasonable efforts to prevent the entry of
any such injunction or other order and agrees to appeal as promptly as possible
any injunction or other order that may be entered; (iii) receipt of a solvency
opinion from a nationally recognized valuation firm reasonably acceptable to
each of the parties, dated the date of the Effective Time, in a form reasonably
acceptable to each of the parties; and (iv) there shall not have been instituted
or be pending, or threatened, any suit, action or proceeding by any governmental
entity as a result of the Merger Agreement or any of the transactions
contemplated thereby which, if such governmental entity were to prevail, would
reasonably be expected to prevent the consummation of the Merger or have a
material adverse effect on the business, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.

The obligation of each of Buyer and Sub to consummate the Merger is subject
to satisfaction or waiver of the following conditions: (i) the representations
and warranties of the Company set forth in the Merger Agreement being true and
correct in all material respects at and as of the Closing Date (other than to
the extent that any such representation and warranty is, by its terms, expressly
limited to a specific date, in which case such representation and warranty being
true and correct as of such date); (ii) the Company having performed and
complied, in all material respects, with all of its covenants required to be
performed or complied with pursuant to the Merger Agreement on or prior to the
Closing Date through the Closing; (iii) there not having been or occurred since
October 29, 1996 any material adverse change in the business, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, other than changes relating to the Company's industry or the economy in
general and not specifically related to the Company and its subsidiaries and
other than disruptions to the Company's business primarily attributable to the
announcement of the Merger; (iv) the delivery to Buyer of certain customary
certificates and an opinion of counsel; (v) the Buyer and Sub having received
the resignations, effective as of the Closing, of each director of the Company
and of certain officers of the Company and its subsidiaries; and (vi) all
Company Stock Options and all Deferred Compensation Shares having been canceled.

The obligation of the Company to consummate the Merger is subject to
satisfaction or waiver of the following conditions: (i) the representations and
warranties of Buyer and Sub set forth in the Merger Agreement being true and
correct in all material respects, at and as of the Closing Date (other than to
the extent that any such representation and warranty is, by its terms, expressly
limited to a specific date, in which case such representation and warranty being
true and correct as of such date); (iii) each of Buyer and Sub having performed
and complied, in all material respects, with all of their respective covenants
required to be performed or complied with on or prior to the Closing Date
pursuant to the Merger Agreement through the Closing; (iv) the Buyer, Sub and
the other parties thereto having executed and delivered definitive financing
agreements; (v) the delivery to the Company of certain customary certificates
and an opinion of counsel; and (vi) the Fairness Opinion not having been
withdrawn.

Notwithstanding the aforementioned conditions, the Merger Agreement
provides that no condition involving performance of covenants, the accuracy of
the representations and warranties as of the Closing Date or the furnishing of
officers' certificates or legal opinions will be deemed not fulfilled, and the
party to whom such condition runs will not be entitled to terminate the Merger
Agreement on such basis, if the respects in which such covenants have not been
performed, or the representations and warranties are untrue, or the certificates
or opinions do not conform to what is prescribed by the Merger Agreement, in the
aggregate, are

31
<PAGE> 37

not materially adverse to the business, financial condition, operations or
results of operations of the Company (including the Surviving Corporation) and
its subsidiaries, taken as a whole, or the consummation of the transactions
contemplated by the Merger Agreement.

TERMINATION

The Merger Agreement may be terminated by the mutual written consent of the
Company, Buyer and Sub at any time prior to the Effective Time, whether before
or after approval and adoption of the Merger Agreement and the Merger by the
stockholders.

The Merger Agreement may be terminated by the Company, Buyer or Sub under
the following circumstances: (i) if the Board, prior to the Closing Date,
withdraws its recommendation to the Company's stockholders to approve and adopt
the Merger Agreement and the Merger, and the Company has paid the specified
liquidated damages; (ii) if the Company's stockholders fail to approve and adopt
the Merger Agreement and the Merger; or (iii) if any governmental entity has
issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the consummation of the Merger
and such order, decree or ruling or other action has become final and
nonappealable. The Merger Agreement would have been terminable at any time
during the period commencing November 29, 1996 through 5:00 p.m., Chicago time,
Friday, December 6, 1996, in the event Buyer and Sub had not entered into the
financing commitments or the Buyer had not furnished copies of the financing
commitments to the Company and, in connection therewith, Buyer or Sub would have
been required to pay the specified liquidated damages, if any. See "--
Termination Fees and Expenses."

The Merger Agreement may be terminated by Buyer and Sub under either of the
following circumstances: (i) in the event the Company has breached any material
representation, warranty, or covenant contained in the Merger Agreement in any
material respect, the Buyer or Sub has notified the Company of the breach, and
the breach has continued without cure for a period of 30 days after the notice
of breach; or (ii) if the Closing shall not have occurred on or before April 30,
1997, unless the failure to consummate the Merger results from the failure of
Buyer or Sub to satisfy certain closing conditions.

The Merger Agreement may be terminated by the Company under the following
circumstances: (i) in the event the Buyer or Sub has breached any material
representation, warranty, or covenant contained in the Merger Agreement in any
material respect, the Company has notified the Buyer and Sub of the breach, and
the breach has continued without cure for a period of 30 days after the notice
of breach; (ii) if the Closing shall not have occurred on or before April 30,
1997, unless the failure to consummate the Merger results from the failure of
the Company to satisfy certain closing conditions; or (iii) if the Company
receives and accepts prior to the Closing Date a Third Party Offer and the
Company has paid the specified liquidated damages.

TERMINATION FEES AND EXPENSES

If the Company terminates the Merger Agreement after acceptance of a Third
Party Offer, the Company has agreed to pay to the Buyer the sum of the Expenses
(as defined below) and $1,000,000 as liquidated damages. If either party
terminates the Merger Agreement after the Board withdraws its recommendation to
the Company's stockholders to approve and adopt the Merger Agreement and the
Merger, the Company has agreed to pay to the Buyer the Expenses, and, in
addition, if within twelve months after such termination, the Company shall
consummate a Third Party Offer, the Company has agreed to pay the Buyer the
additional sum of $1,000,000 as liquidated damages.

If the Merger Agreement had been terminated by Buyer in the event Buyer and
the Sub had not entered into the financing commitments or Buyer had failed to
have furnished copies of the financing commitments to the Company in accordance
with the Merger Agreement (unless such failure to obtain and enter into the
financing commitments had been materially attributable to a breach by the
Company of any warranty or representation contained in the Merger Agreement or
any material adverse change after October 29, 1996 in the business financial
condition, operations or results of operations of the Company and its
subsidiaries, taken as a whole, in which event no liquidated damages would be
paid) Buyer would have paid to the Company $500,000 as liquidated damages. In
the event that the Company had given the notice of termination, Buyer

32
<PAGE> 38

and Sub agreed that Sub would have, within two business days after receipt of
such notice of termination, paid to the Company $500,000 as liquidated damages.

For purposes of the Merger Agreement, "Expenses" means documented
out-of-pocket fees and expenses of the Buyer and Sub incurred or paid after
October 29, 1996 but prior to any termination of the Merger Agreement in
connection with the Merger or the consummation of any of the transactions
contemplated by the Merger Agreement, including all fees and expenses of law
firms, commercial banks, investment banking firms, accountants, experts and
consultants to Buyer or Sub. Expenses are limited to an aggregate $125,000 if
the termination occurs prior to the time that the Buyer and/or Sub pay fees to
third parties with respect to financing commitments and to an aggregate of
$375,000 if the termination occurs after the time that Buyer and/or Sub pay fees
to third parties with respect to financing commitments.

In no event shall more than one termination fee be payable. Other than as
set forth herein, any expense incurred in connection with the Merger Agreement
and the Merger will be paid by the party incurring such expense.

AMENDMENT

At any time prior to the Effective Time, the Merger Agreement may be
amended by written agreement of each of the Company, Buyer and Sub with the
prior authorization of their respective Boards of Directors; provided, however,
that once the stockholders of the Company have approved and adopted the Merger
Agreement and the Merger, any amendment will be subject to the restrictions
contained in the Delaware GCL; provided, further, that any decrease in the
Merger Consideration per share of Common Stock must be submitted to the
Company's stockholders for approval.

THE UNDERTAKING

Pacholder Associates, Inc. and its affiliate, PM Delaware, Inc., have
undertaken to provide equity contributions or funds in the form of equity for
Buyer and/or Sub in an amount of $2,000,000 on a timely basis to enable Buyer
and Sub fully to perform and satisfy their respective obligations to the Company
under the Merger Agreement, including (without limitation) the payment of any
damages to the Company that may be payable by Buyer or Sub as a result of any
breach of the Merger Agreement by Buyer and/or Sub.

SOURCE AND AMOUNT OF FUNDS

It is contemplated that approximately $2,000,000 of the funds required in
connection with the Merger will be provided through the purchase by Pacholder
Associates, Inc. of shares of Buyer's cumulative preferred stock ("Buyer
Preferred Stock"). Approximately $300,000 is expected to be provided through the
purchase, for $60,000 apiece, of shares of Buyer's common stock ("Buyer Common
Stock") by Dr. Pacholder; three other affiliates of Pacholder Associates, Inc.,
including Mrs. Pacholder, Mr. Shanahan and Mr. Morgan, President and a Managing
Director of Pacholder Associates, Inc.; and Mr. Rooney. Buyer plans to
contribute the net proceeds from the issuance of the Buyer Preferred Stock and
Buyer Common Stock to the capital of Sub.

Sub also plans to borrow $35,200,000 from Provident pursuant to a 7-day
secured acquisition facility (the "Facility") that will bear interest at
Provident's prime rate of interest plus one percent for a facility fee equal to
one-half of one percent. The Facility is currently subject to the terms of the
commitment letter dated November 26, 1996.

As collateral for the Facility, Buyer will (a) grant Provident a first
security interest in all of Sub's assets, (b) pledge cash funds in the Company's
depositary account at Provident as of the Closing Date, (c) assign to Provident
the proceeds of an insurance policy on the life of Mr. Rooney and (d) assign to
Provident Buyer's and Sub's rights under the Merger Agreement and all ancillary
agreements.

The Facility will be subject to a number of conditions, including, without
limitation, (a) the execution and delivery of definitive loan documentation by
February 28, 1997; (b) receipt of a satisfactory solvency

33
<PAGE> 39

opinion by Houlihan Lokey; (c) consummation of the Merger; (d) receipt of
updated financial statements of the Company, Buyer and Sub; (e) evidence of an
equity contribution to Sub by Buyer of not less than $2.3 million; (f) evidence
that the net worth of Sub upon the Closing and the consummation of the Merger is
at least $2.3 million as determined in accordance with generally accepted
accounting principles; (g) evidence that funds in the Company's cash account are
at least $35.2 million immediately prior to the Merger; (h) evidence of consent
to the Merger by the Bankruptcy Court, if necessary; (i) evidence of receipt of
all regulatory approvals with respect to the Facility, the working capital
facility (as discussed below) and the Merger; (j) receipt of satisfactory lien
and litigation searches as to the Company, Buyer and Sub; and (k) no material
adverse change in the business, assets, operations or prospects of the Company
or Sub.

The Facility will be required to be repaid in full by the Surviving
Corporation utilizing the assets of the Surviving Corporation promptly after
consummation of the Merger. After consummation of the Merger, the Surviving
Corporation will also have access to a 3-year $12,000,000 secured working
capital facility from Provident. The working capital facility will bear interest
at Provident's prime rate of interest plus two percent. Funds will be advanced
under the working capital facility by Provident at the request of the Surviving
Corporation in amounts based on the levels of "Eligible Receivables" and
"Eligible Inventory" maintained by the Surviving Corporation. The Surviving
Corporation does not expect to draw on the working capital facility to repay
financing utilized in the Merger or to pay expenses incurred in connection with
the Merger.

EXPENSES

Estimated fees and expenses in connection with the Merger and related
transactions (assuming the consummation thereof) are as follows:

<TABLE>
<S> <C>
SEC filing fees........................................... $ 7,038
Bank fees and expenses(1).................................
Legal fees................................................
Financial advisory opinions fees.......................... 400,000
Accounting fees and expenses..............................
Solvency opinion fees..................................... 65,000
Paying agent's fees and expenses..........................
Transfer agent's fees and expenses........................
Printing expenses.........................................
Miscellaneous.............................................
--------
Total................................................... $
========
</TABLE>

- ---------------

(1) Reflects the approximate pro rata share of the total bank fees and expenses
incurred in connection with the entry by Buyer into the revolving credit
agreement described in "SOURCE AND AMOUNT OF FUNDS" based upon the amount
necessary to finance the Merger and related transactions (including
expenses) as compared to the maximum amount that may be borrowed under the
revolving credit facility.

CERTAIN INFORMATION CONCERNING THE COMPANY

GENERAL

The Company, through its sole remaining business unit, AM Multigraphics, is
a distributor of equipment, supplies and services to the graphics arts industry
in the United States. In September, 1996, the Company sold its interest in AM
Japan Co., Ltd. On October 17, 1996, the Company's Canadian subsidiary initiated
bankruptcy proceedings. Both of these subsidiaries were included as part of AM
Multigraphics for financial reporting purposes. In the last twelve months, the
Company has divested its Sheridan Systems and AM Multigraphics -- International
business segments.

On August 27, 1996, the Company sold substantially all of the assets and
liabilities of the Sheridan Systems division, a leading supplier of systems and
components to both the printing and newspaper publishing

34
<PAGE> 40

industries, to Heidelberg. The sale included substantially all of the assets and
liabilities of the Company's AM Graphics International Limited subsidiary in
Slough, England.

The disposition of the AM Multigraphics -- International operations has
taken place in stages as the Company has divested its unprofitable foreign
subsidiaries. In February 1996, the Company's AM International UK Limited
subsidiary in England entered into an Administrative proceeding, which resulted
in the sale of certain portions of that business. In March 1996, the Company
sold its Netherlands holding company, including all its subsidiaries in the
Netherlands, France and Belgium, to a local management buyout team.

All financial information has been restated to reflect the Sheridan Systems
and the AM Multigraphics -- International operations as discontinued operations.
AM Multigraphics is a distributor of an extensive range of equipment, supplies
and services to the graphics arts industry, having recently exited the
manufacture of equipment. To complement and expand its product lines, the
Company purchases products from outside suppliers, which are sold either under
the Company's or the producing company's trade names.

BUSINESS SEGMENTS

The Company currently conducts its business through its one remaining
business segment: AM Multigraphics, which currently has approximately 800
employees. AM Multigraphics is a distributor of equipment, supplies and services
to the graphic arts industry, and has exited the engineering and manufacturing
of offset duplicating equipment to focus exclusively on distribution of
equipment, supplies and service.

AM Multigraphics is headquartered in Mount Prospect, Illinois, where,
historically, it has manufactured and distributed a broad product line of
equipment and supplies and provided services for the graphics arts industry
through its own direct sales and service organizations in the United States. AM
Multigraphics products traditionally have included small offset printing
equipment, automated copy/duplicating systems, digital color printing systems,
pre and post press products and supplies.

AM Multigraphics has recently exited from the engineering and manufacturing
of offset duplicating equipment to focus entirely on distribution of supplies,
services and equipment to the graphics arts industry. The declining market for
the segment's traditional offset duplicator products, due to inroads by
alternative technologies, resulted in the re-evaluation of its traditional
strategy and the decision to exit manufacturing and focus upon the distribution
of supplies, services and equipment. Accordingly, the Company today is focused
on (1) supplies and prepress products, and (2) service and parts.

The supplies and prepress category consists of consumable products used in
the production of printed materials, such as films, inks, plates, rubber
rollers, cleaning solutions and cotton pads, as well as pre-press products such
as platemakers and image-setters. The Company tracks various categories of these
products, none of which accounts for more than 10% of its revenues. Similarly,
no single supplier accounts for more than 10% of Company's revenues.

The service and parts category provides service for the traditional
installed base of offset duplicators and associated prepress products and simple
bindery equipment. The Company has 400 service representatives.

35
<PAGE> 41

The following table sets forth the breakdown of revenues among machines,
supplies and services in the United States, Canada and Japan for fiscal 1996,
1995 and 1994.

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JULY 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
UNITED STATES
Machines................................. $ 39,598 $ 50,829 $ 46,775
Supplies................................. 40,921 43,578 45,599
Services................................. 47,511 52,748 55,936
-------- -------- --------
128,030 147,155 148,310
-------- -------- --------
CANADA
Machines................................. 4,352 3,849 4,599
Supplies................................. 2,312 2,842 2,865
Services................................. 3,287 3,594 4,093
-------- -------- --------
9,951 10,285 11,557
-------- -------- --------
JAPAN
Machines................................. 13,574 15,928 14,889
Supplies................................. 11,361 12,383 10,376
Services................................. 5,136 5,734 5,216
-------- -------- --------
30,071 34,045 30,481
-------- -------- --------
TOTAL
Machines................................. 57,524 70,606 66,263
Supplies................................. 54,594 58,803 58,840
Services................................. 55,934 62,076 65,245
-------- -------- --------
$168,052 $191,485 $190,348
======== ======== ========
</TABLE>

AM Multigraphics also manages a network of approximately 74 independent
dealers and sales representatives selling in approximately 95 other countries.

The principal customers of AM Multigraphics include in-plant print shops,
franchised and independent quick print shops, small commercial printers and
governmental and educational institutions. AM Multigraphics has in excess of
50,000 customers. No customer accounts for more than 10% of the Company's
revenues.

COMPETITION AND COMPETITIVE CONDITIONS

The Company operates in a highly competitive market in which price,
delivery and customer service are key factors. The Company's customers are
in-plant, quick print and small commercial printer market segments. The market
for small offset duplicator presses, the traditional proprietary equipment of
the division, is mature and continues to face competition from alternative
technologies. Because the installed base of equipment has historically provided
the primary market for many of the Company's services and supplies, the Company
is increasingly reliant on its general distribution capabilities in continuing
to serve its market segments. Gross margins are expected to decrease as the
Company seeks to add product lines through distribution agreements, joint
ventures and affiliations with third parties. To offset the lower margins the
Company has invested in information systems and has undertaken other
reorganization measures to increase efficiency and lower expenses.

The competitive market is also one of heavy regional competition, but
consolidation of dealers is occurring, which brings consolidated buying power
and distribution cost efficiencies. The Company's investments in information
systems and other reorganization measures are designed to enable it to expand
its business opportunities with existing customers and possibly to add volume
through acquisitions over time.

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<PAGE> 42

CYCLICAL NATURE OF BUSINESS AND LIQUIDITY

The revenues of the Company are dependent upon trends in the printing
industry, which are a function of (among other factors) overall economic factors
and advertising expenditures. The backlog for the AM Multigraphics segment is
less than 5% of annual revenues and is not a material factor in the conduct of
the business. The Company believes that substantially all of this backlog will
be shipped during the 1997 fiscal year.

Certain customers of AM Multigraphics require long-term financing for
purchases of equipment distributed by the Company. The Company cooperates with
various independent finance and leasing companies to provide such financing.
These agreements are sometimes on a partial recourse basis with remarketing
arrangements on a non-discretionary, non-priority basis. From time to time, the
Company's operations enter into long-term leases with their customers. The
Company periodically sells identified pools of lease receivables and pools of
rental equipment to financial institutions on a limited recourse basis. The
existence of such financing is not, however, significant to the Company's
operations.

RESEARCH AND DEVELOPMENT; PATENT AND TRADEMARKS

Approximately $0.4 million was expended by the Company for research and
development in fiscal 1996, $0.7 million in 1995, and $0.6 million in 1994. The
Company's research, development and engineering expenditures have been made
primarily to maintain competitive manufactured product offerings.

The Company owns or is licensed under various patents and trademarks. While
such rights are important, the Company does not believe that its business as a
whole is materially dependent on any one patent or trademark or group of patents
or trademarks.

BANKRUPTCY PROCEEDINGS

On May 17, 1993, the Company and its subsidiary, Addressograph-Multigraph
Corporation ("AMC"), filed for protection under Chapter 11 of the United States
Bankruptcy Code, in The United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") case numbers 93-582 through 93-583 (the
"Bankruptcy Proceedings"). The Company also filed on that date a proposed Plan
of Reorganization (the "Plan"). The Chapter 11 filing related to the Company's
domestic operations and did not include its foreign subsidiaries.

On August 26, 1993, a hearing was held by the Bankruptcy Court to consider
approval of a Disclosure Statement to be distributed to creditors and
shareholders of the Company. After that hearing, and by Order of the Bankruptcy
Court dated August 26, 1993, the Second Amended Disclosure Statement
(hereinafter the "Disclosure Statement") was approved as containing "adequate
information" for creditors and shareholders of the Company in accordance with
Section 1125(b) of the Bankruptcy Code.

On September 29, 1993, the Company's Plan was confirmed by the Bankruptcy
Court. In general, the Plan provided for distribution of approximately 7,000,000
shares of new common stock (such common stock, previously defined herein as
"Common Stock"), of which approximately 97% was distributed to former holders of
the Company's 12% Senior Subordinated Debentures, 2% to former holders of the
Company's $2.00 Convertible Exchangeable Preferred Stock ("Old Preferred Stock")
and 1% to former holders of the Company's common stock ("Old Common Stock"). The
Plan also provided for distribution of 1,095,000 Warrants to Purchase Common
Stock ("Warrants") to former holders of Old Preferred Stock. The Warrants
permitted the holder to purchase an aggregate of 1,095,000 shares of Common
Stock until October 15, 1996 at an exercise price of $18.00 per share, but have
now expired and are of no further effect. Under the Plan, general unsecured
creditors are to be paid in full over a period of five years with interest at 5%
per annum unless they elected to be paid in full under the convenience class
(claims under $2,000) or unless they elected before September 29, 1993 to
receive Common Stock in lieu of cash.

The Plan became effective on October 13, 1993 (the "Plan Effective Date").
Distributions provided for in the Plan, including Common Stock and Warrants,
commenced on that date. On the Plan Effective Date, all Old Preferred Stock, Old
Common Stock, Old Warrants to Purchase Common Stock and Old Preferred Stock

37
<PAGE> 43

Purchase Rights attached to the Old Common Stock were canceled and became of no
further force and effect except as evidence of the holder's entitlement to a
distribution under the Plan. All exchange rights associated with the Old
Preferred Stock and Old Common Stock expired on October 13, 1995. For
information relating to shares of Common Stock outstanding and shares of Common
Stock held for exchange as described above, see Notes 4 and 14 of the "Notes to
Consolidated Financial Statements" contained in this Proxy Statement. Also, on
the Plan Effective Date, the former directors of the Company were replaced.

PROPERTIES

The Company's principal executive offices are located in Mt. Prospect,
Illinois. The Company moved its corporate headquarters from Rosemont, Illinois
to its current headquarters in September 1996, following the disposition of the
Company's Sheridan Systems division. The Company moved to Rosemont in April,
1995 and previously had been located at the AM Multigraphics facility in Mt.
Prospect, Illinois since March 22, 1993 when it moved from its downtown Chicago
location.

In 1996, the Company undertook the relocation of its AM Multigraphics
operations from its 700,000 square foot manufacturing and office facility in Mt.
Prospect to newer, more cost efficient facilities. The project consisted of
three parts: (1) relocation of the business offices to a 64,400 square foot
facility in Mt. Prospect; (2) relocation of the distribution center to an 80,000
square foot nearby complex in Arlington Heights, Illinois, to enhance the unit's
distribution capabilities; and, (3) the sale of its former Mount Prospect,
Illinois facility for approximately $6.8 million in 1996.

The Company owns or leases distribution, sales and service facilities
throughout the United States. In the United States, the Company leases 30
facilities with total square footage of 455,000, but occupies only 19 of those
facilities in an effort to reduce costs. Leases for approximately 185,000 square
feet will expire in April and May of 1997, and will not be renewed.

The facilities occupied by Company as of October 28, 1996, which have more
than 20,000 square feet of space or which are otherwise material to the
Company's businesses, are set forth below. Although certain facilities remain
underused, the Company believes that the properties and equipment included
therein are well maintained, in good operating condition and adequate for the
current needs of its operations.

<TABLE>
<CAPTION>
APPROXIMATE SQUARE
FEET OF FLOOR AREA
LOCATION AND BUSINESS SEGMENT USE(1) LEASED
----------------------------------------- ------------- ------------------
<S> <C> <C>
Corporate
Rosemont, Illinois..................... ADM 10,700
AM Multigraphics - Domestic
Arlington Heights, Illinois............ DIST 79,700(3)
Mt. Prospect, Illinois................. MFG/ADM/DIST 175,000(4)
Mt. Prospect, Illinois................. ADM 64,400(3)
</TABLE>

- ---------------

(1) ADM = Administrative; MFG = Manufacturing and Engineering; DIST -
Distribution Center.

(2) Lease expires in May, 1997, and will not be renewed.

(3) Leases expire in 2005.

(4) Manufacturing operations are winding up and lease for this facility will
expire in April, 1997, and will not be renewed.

LEGAL PROCEEDINGS

The commencement of the Bankruptcy Proceedings resulted in an automatic
stay of certain litigation against the Company pursuant to Section 362 of the
Bankruptcy Code as of May 17, 1993. Therefore, with certain exceptions, all
legal proceedings against the Company pending as of May 17, 1993, will be
resolved through the bankruptcy process. In addition, there are significant
claims pending in the Bankruptcy Proceeding. The Company believes the resolution
of these legal proceedings and claims will not have a material adverse effect on
the business or the financial position of the Company.

38
<PAGE> 44

The Company has been notified of various environmental matters in
connection with certain current or former locations in Illinois, Indiana, Ohio,
Pennsylvania, and Rhode Island. The Company believes that the legal liability
relating to such matters, if any, will either be resolved consensually between
the Company and relevant governmental authorities or will be subject to
resolution through the bankruptcy process as with other disputed claims. The
Company believes the resolution of these matters will not have a material
adverse effect on the business or the financial position of the Company.

The Company is involved in various other administrative and legal
proceedings incidental to its business, including product liability and general
liability lawsuits against which the Company is partially insured. The
resolution of these other proceedings is not expected to have a material adverse
effect on the business or the financial position of the Company.

39
<PAGE> 45

PRO FORMA FINANCIAL INFORMATION

AM INTERNATIONAL, INC.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited pro forma consolidated financial statements are
presented to illustrate the effect of certain adjustments to the historical
consolidated financial statements that result from the sale of the Company's
interest in AM Japan and the sale of Sheridan Systems, as if the sales and
related transactions had occurred at the beginning of the fiscal year ended July
31, 1996. The accompanying financial statements do not give effect to the Merger
or related transactions.

The accompanying pro forma consolidated financial statements should be read
in conjunction with the Company's historical consolidated financial statements
and notes thereto appearing in the Company's July 31, 1996 Form 10-K filed on
October 29, 1996 and attached to this Proxy Statement. The pro forma
consolidated financial statements are presented for informational purposes only
and are not necessarily indicative of actual results had the sales and related
transactions occurred at the beginning of the fiscal year ended July 31, 1996
for the Consolidated Statement of Income from Continuing Operations and the
Consolidated Balance Sheet, nor do they purport to represent results of future
operations of the Company.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FROM
CONTINUING OPERATIONS

(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31, 1996

<TABLE>
<CAPTION>
AM SHERIDAN PRO
HISTORICAL JAPAN(A) SUB-TOTAL SYSTEMS FORMA
---------- -------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Revenues...................................................... $168.0 $(30.1) $ 137.9 -- $137.9
Cost of sales................................................. 130.4 (22.9) 107.5 -- 107.5
------ ------ ------ ---- ------
Gross Margin.................................................. 37.6 (7.2) 30.4 -- 30.4
Operating Expenses:
Selling, general and administrative......................... 47.1 (7.6) 39.5 -- 39.5
Unusual items............................................... 7.0 -- 7.0 -- 7.0
------ ------ ------ ---- ------
Total operating expenses.................................. 54.1 (7.6) 46.5 -- 46.5
Operating income (loss)....................................... (16.5) 0.4 (16.1) (16.1)
Non-operating income (expense):
Interest income............................................. 0.2 --(b) 0.2 --(b) 0.2
Interest expense............................................ (3.8) -- (3.8) 1.1(c) (2.7)
Other income (expense), net................................. (0.2) (0.1) (0.3) -- (0.3)
------ ------ ------ ---- ------
Income (loss) from continuing operations before income
taxes....................................................... (20.3) 0.3 (20.0) 1.1 (18.9)
Income tax expense (benefit).................................. (0.1) 0.1 -- -- --
------ ------ ------ ---- ------
Net income (loss) from continuing operations.................. $(20.2) $ 0.2 $ (20.0) $1.1 $(18.9)
====== ====== ====== ==== ======
Net income (loss) per common share from continuing
operations.................................................. $(2.88) $ (2.85) $(2.70)
====== ====== ======
</TABLE>

See the accompanying Notes to Unaudited Pro Forma Consolidated Financial
Statements.

40
<PAGE> 46

AM INTERNATIONAL, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF JULY 31, 1996
(IN MILLIONS)

ASSETS

<TABLE>
<CAPTION>
SHERIDAN
AM JAPAN SYSTEMS
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
------------- SUB -------------- PRO
HISTORICAL DR. CR. TOTAL DR. CR. FORMA
---------- ---- ---- ------ ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and equivalents......... $ 2.6 $10.1(d) $ -- $ 12.7 $30.2(g) $ -- $42.9
Accounts receivable, net..... 19.8 -- -- 19.8 -- -- 19.3
Inventories, net............. 11.6 -- -- 11.6 -- -- 11.6
Other current assets......... 1.1 -- -- 1.1 -- -- 1.1
Net assets held for sale..... 7.7 7.7(e) -- -- -- --
Net assets of discontinued
operations................ 42.9 -- -- 42.9 -- 42.9(k) --
----- ----- ---- ------ ----- ----- -----
Total current assets...... 85.7 10.1 7.7 88.1 30.2 42.9 75.4
Property, plant and
equipment.................... 10.9 -- -- 10.9 -- -- 10.9
Other assets................... 1.4 -- -- 1.4 -- -- 1.4
----- ----- ---- ------ ----- ----- -----
Total assets......... $ 98.0 $10.1 $7.7 $100.4 $30.2 $42.9 $87.7
===== ===== ==== ====== ===== ===== =====

LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Current Liabilities:
Short-term borrowings and
current maturities of
long-term debt............ $ 14.4 $ -- $ -- $ 14.4 $ 5.4(h) $ -- $ 9.0
Accounts payable............. 15.4 -- -- 15.4 6.0(i) -- 9.4
Service contract deferred
income.................... 12.9 -- -- 12.9 -- -- 12.9
Payroll related expenses..... 13.2 -- -- 13.2 -- -- 13.2
Other current liabilities.... 18.0 -- -- 18.0 1.3(j) -- 16.7
----- ----- ---- ------ ----- ----- -----
Total current
liabilities........ 73.9 -- -- 73.9 12.7 -- 61.2
Long-term debt............... 8.5 -- -- 8.5 -- -- 8.5
Other long-term
liabilities............... 13.3 -- -- 13.3 -- -- 13.3
----- ----- ---- ------ ----- ----- -----
95.7
Total liabilities......... 95.7 -- -- 12.7 -- 83.0
----- ----- ---- ------ ----- ----- -----
Shareholders' Equity
Common stock................. 0.1 -- -- 0.1 -- -- 0.1
Capital in excess of par
value..................... 35.9 -- -- 35.9 -- -- 35.9
Less: Treasury stock......... -- -- -- -- -- -- --
Warrants..................... 0.4 -- -- 0.4 -- -- 0.4
Accumulated earnings
(deficit)................. (34.2) -- 2.4(f) (31.8) -- -- (31.8)
Cumulative translation
adjustments............... 0.1 -- -- 0.1 -- -- 0.1
----- ----- ---- ------ ----- ----- -----
Total shareholders'
equity.................. 2.3 -- 2.4 4.7 -- -- 4.7
Total liabilities and
shareholders' equity......... $ 98.0 $ -- $2.4 $100.4 $12.7 $ -- $87.7
===== ===== ==== ====== ===== ===== =====
</TABLE>

See the accompanying Notes to Unaudited Pro Forma Consolidated Financial
Statements.

41
<PAGE> 47

AM INTERNATIONAL, INC.

UNAUDITED PRO FORMA CAPITALIZATION

AS OF JULY 31, 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
AM JAPAN SHERIDAN SYSTEMS
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
---------------- -----------------
HISTORICAL DR. CR. SUBTOTAL CR. DR. PRO FORMA
---------- ------ ------ -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM DEBT:
Revolving Credit Facility...... $ 5.4 $ -- $ -- $ 5.4 $ 5.4(h) $ -- $ --
Current portion of General
Unsecured Claims and
Priority Tax Claims......... 7.8 -- -- 7.8 -- -- 7.8
Current Portion of Capital
Leases...................... 1.2 -- -- 1.2 -- -- 1.2
------ ----- ----- ------ ----- ----- ------
TOTAL SHORT-TERM DEBT AND CURRENT
MATURITIES OF LONG-TERM DEBT... $ 14.4 $ -- $ -- $ 14.4 $ 5.4 $ -- $ 9.0
====== ===== ===== ====== ===== ===== ======
LONG-TERM DEBT
General Unsecured Claims and
Priority.................... $ 6.0 $ -- $ -- $ 6.0 $ -- $ -- $ 6.0
Capital Leases................. 2.5 -- -- 2.5 -- -- 2.5
------ ----- ----- ------ ----- ----- ------
TOTAL LONG-TERM DEBT............. $ 8.5 $ -- $ -- $ 8.5 $ -- $ -- $ 8.5
====== ===== ===== ====== ===== ===== ======
SHAREHOLDERS' EQUITY
Common Stock................... $ 0.1 $ -- $ -- $ 0.1 $ -- $ -- $ 0.1
Capital in Excess of Par
Value....................... 35.9 -- -- 35.9 -- -- 35.9
Less Treasury Stock............ -- -- -- -- -- -- --
Warrants....................... 0.4 -- -- 0.4 -- -- 0.4
Accumulated Earnings
(Deficit)................... (34.2) -- 2.4(f) (31.8) -- -- (31.8)
Cumulative Translation
Adjustments................. 0.1 -- -- 0.1 -- -- 0.1
------ ----- ----- ------ ----- ----- ------
TOTAL SHAREHOLDERS' EQUITY....... $ 2.3 $ -- $ 2.4 $ 4.7 $ -- $ -- $ 4.7
====== ===== ===== ====== ===== ===== ======
</TABLE>

See accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.

42
<PAGE> 48

AM INTERNATIONAL, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FROM CONTINUING OPERATIONS

(a) Represents the effects of the sale of AM Japan, a majority-owned
subsidiary.

(b) The Company will invest the net proceeds of the sale of AM Japan and
the sale of Sheridan Systems which are in excess of amounts applied to repay
indebtedness and reduce other liabilities. However, no interest income has been
reflected relative to the investment of such net proceeds.

(c) Interest expense has been reduced to give effect to the repayment of
the Company's revolving credit facility as a result of the proceeds from the
sale of Sheridan Systems. The Company's remaining debt is principally the
General Unsecured Claims and Priority Tax Claims.

PRO FORMA CONSOLIDATED BALANCE SHEET AND UNAUDITED PRO FORMA CAPITALIZATION

(d) Represents the proceeds from the sale of AM Japan, net of related
selling costs.

(e) Represents the reduction in the reported net assets disposed in
connection with the sale of AM Japan.

(f) Represents the gain on the sale of AM Japan.

(g) Represents the net proceeds from the sale of Sheridan Systems after the
repayment of the Company's revolving credit facility and the reduction of trade
payables.

(h) Reflects the repayment of the Company's revolving credit facility.

(i) Represents approximate reduction of extended trade payables.

(j) Represents change in control payments associated with the sale of
Sheridan Systems.

(k) Represents the reported net assets of Sheridan Systems disposed in
conjunction with the sale.

43
<PAGE> 49

SELECTED FINANCIAL DATA

FIVE YEAR FINANCIAL SUMMARY -- Financial information has been restated to
reflect the Sheridan Systems and the Multigraphics -- International operations
as discontinued operations.

<TABLE>
<CAPTION>
REORGANIZED COMPANY
---------------------------------------------- PREDECESSOR COMPANY
----------------------------------------------
YEARS ENDED SEPT. 30, 1993 AUG. 1, 1993 YEARS ENDED
----------------------------- THROUGH THROUGH -----------------------------
JULY 31, 1996 JULY 31, 1995 JULY 31, 1994 SEPT. 29, 1993 JULY 31, 1993 JULY 31, 1992
------------- ------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Revenues.................. $ 168.1 $ 191.5 $ 163.8 $ 26.5 $ 195.7 $ 202.4
Gross profit.............. 37.6 52.7 51.4 7.0 57.0 2.5
as a percent of revenues 22.4% 27.5% 31.4% 26.4 29.1% 30.9%
Unusual items
(inc.)/exp.............. 7.0 0.0 0.0 0.0 37.6 0.0
Operating income (loss)... (16.4) (2.5) 6.8 (2.0) (34.3) (75.4)
as a percent of
revenues................ (9.8)% (1.3)% (4.2)% (7.5)% (17.5)% (37.3)%
Net Income (Loss) from
Continuing Operations... (20.2) (4.2) 2.1 21.8 (43.8) (83.1)
Income (Loss) from
discontinued
operations.............. (25.3) 8.8 4.6 (27.8) (81.9) (41.7)
Extraordinary Gain........ 0.0 0.0 0.0 58.7 0.0 0.0
Net income (loss)......... $ (45.5) $ 4.6 $ 6.7 $ 52.7 $(125.7) $(124.8)
CAPITAL EMPLOYED
Working capital........... (38.9) 61.5 8.7 (17.6) 5.6 (23.6)
Total assets.............. 98.0 163.1 169.2 164.4 175.4 271.8
Long-term debt............ 8.5 14.9 19.4 25.5 129.0 62.6
Shareholders' equity...... 2.3 48.3 42.8 36.0 (49.7) 69.3
PER COMMON SHARE
Net income (loss) from
continuing operations... $ (2.88) $ (0.59) $ 0.30 N/A N/A N/A
Market price --
High(1)(3)... $ 8.375 $12.250 $ 11.875 N/A N/A N/A
Low(1)(3)... $ 1.875 $ 8.125 $ 8.750 N/A N/A N/A
Average number of common
shares and equivalents (in
thousands)(2)............. 7,009 7,021 7,006 N/A N/A N/A
NUMBER OF EMPLOYEES AT YEAR
END....................... 1,121 1,378 1,520 1,633 1,662 1,897
</TABLE>

- ---------------

(1) Trading of Reorganized Company Common Stock commenced on December 6, 1993.

(2) The net income per common share and average number of common shares and
equivalents for the Company has not been presented as this information is
not comparable.

(3) Trading of Predecessor Company Common Stock and Preferred Stock was
suspended on May 21, 1993. Periods prior to this date are not presented as
they /are not comparable.

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" for explanations of significant factors affecting
comparability of the above dates.

44
<PAGE> 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

ANALYSIS OF CONTINUING OPERATIONS AND DISCONTINUED OPERATIONS

Over the past several years, the Company has formulated and executed
various restructuring plans in order to improve operating results. These plans
have included the exit from certain unprofitable foreign subsidiaries, the
divestitures of non-core product lines, the exit from manufacturing operations
at AM Multigraphics and the implementation of strategic investments in new
products and capabilities. In July 1996 the Company entered into an Asset
Purchase Agreement with Heidelberger Druckmaschinen AG for the sale of its
Sheridan Systems business segment. The sale of Sheridan Systems was concluded in
August 1996. In addition, during 1996 the Company disposed of its AM
Multigraphics-International Operations. These segments are reflected as
discontinued operations. Included in Continuing Operations are results of the
two remaining foreign subsidiaries; however, the Company sold its interest in AM
Japan Co., Ltd. in September, 1996, and on October 17, 1996, AM Canada filed a
voluntary assignment in bankruptcy.

CONTINUING OPERATIONS

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------
1996 1995 1995
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues......................................................... $168.1 $191.5 $190.3
Operating Income (Loss).......................................... (16.4) (2.5) 4.8
Non Operating Expenses........................................... (3.9) (3.2) 21.5
------ ------ ------
Pre Tax Income (Loss)............................................ (20.3) $ (5.7) $ 26.3
Net Income (Loss)................................................ (20.2) $ (4.2) $ 23.9
====== ====== ======
</TABLE>

Note: To facilitate a meaningful discussion of the Company's comparative
operating performance in fiscal years 1996, 1995, and 1994, the results are
presented on a traditional comparative basis for all periods. Consequently, the
information presented for fiscal year 1994 does not comply with the accounting
requirements for companies upon emergence from bankruptcy, which calls for
separate reporting for the Reorganized Company and the Predecessor Company.

OPERATING RESULTS

The Continuing Operations are comprised of one business segment, the AM
Multigraphics segment. The AM Multigraphics segment serves the graphics arts
industries in North America, and until September 1996 Japan, by distributing an
extensive range of sheet fed offset duplicating presses, digital color printing
equipment, pre and post press equipment, and a wide range of supplies and
technical services. In 1995 the operation initiated efforts to transition out of
engineering and manufacturing to focus primarily on distribution, sales and
service activities.

In response to declining demand for manufactured duplicator products and
services, AM Multigraphics developed a strategic plan during 1995 to transition
from being a manufacturing based supplier to becoming a broad based distributor
of equipment, supplies and services to the graphics arts markets. Efficiency in
providing a broad line of products and services to its large customer base and
differentiation through the provision of technical service and support are the
tactical objectives of the strategy. The Company has efforts underway to phase
out its manufacturing operations, expand its product offering through new
distribution agreements and transition its organization structure and
capabilities to function as an efficient distribution business. While progress
has been made in adding new products, updating and enhancing systems and
restructuring the organization, significant efforts to complete the transition
from a manufacturing based supplier to a distribution business still need to be
completed. In addition, with the divestiture of Sheridan

45
<PAGE> 51

Systems, it will be necessary for the Company to restructure its corporate staff
and eliminate excess facilities and equipment.

During September of fiscal year 1994, the Company emerged from Chapter 11
Bankruptcy. The Company had operated under the protection of Chapter 11
following a voluntary petition for reorganization filed in May 1993. With the
emergence from Chapter 11 in 1994, the Company adopted Fresh Start Reporting,
which resulted in material changes to the balance sheet, including valuation
changes of assets and liabilities at fair market value and valuation of equity
based on the appraised reorganization value of the business.

Revenues in 1996 declined $23.4 million, or 12% from the prior year period.
In 1995 revenues increased slightly after a decline of 3% in 1994 from 1993. The
decline in revenues, which has been consistent with longer term trends, has
occurred principally in the sheet fed offset duplicator products which include
press and post-press machines, supplies and maintenance services. The duplicator
machines and supplies are products which have been largely manufactured by the
Company. Market demand for the Company's duplicator products has declined due to
inroads from competing printing technologies. As a result of these competitive
inroads, the installed base of duplicator equipment has experienced long term
decline which has led to decreased sales of equipment, supplies and services. In
addition, the Company experienced significant liquidity problems during 1996
which led to a reduction in inventory levels, among other things. The lower
inventory level negatively affected the Company's ability to serve its supply
and service customers which resulted in lower revenues and gross margin. The
subsidiaries in Japan and Canada, which the Company has divested, contributed
revenues of $40.0 million in 1996, $44.3 million in 1995 and $42.1 in 1994.

Non Operating Expenses consisted primarily of interest expense in 1996,
1995 and 1994. The interest expense related primarily to borrowings under the
Domestic Revolving Credit Agreement, which have been required to fund
operations, and interest on general unsecured claims and priority tax claims
from the Company's reorganization. In 1994 the Company recorded reorganization
income of $23.9 million which pertained to the adoption of Fresh Start
Reporting, as previously described. The income resulted from fair market
adjustments to tangible assets and liabilities of $8.0 million, a provision of
$10.1 million to accrue for professional fees related to the reorganization, and
to record the Reorganization Value in Excess of Fair Market Value of $26.0
million.

The net loss of $20.2 million from Continuing Operations in 1996 worsened
by $16.0 million as compared with 1995. The increased loss was primarily due to
volume driven margin erosion in 1996, declines in gross margin rates resultant
from shifts in product mix to lower margin distributed products, and
restructuring charges. The restructuring charges of $7.0 million in 1996 related
to the shutdown of manufacturing operations, the closure of corporate offices
and the exit costs for the Canadian subsidiary. Continuing Operations had a net
loss of $4.2 million in 1995 compared with a net income of $23.9 million in
1994. With the emergence from Chapter 11 in 1994, the Company adopted Fresh
Start Reporting, which resulted in material changes to the balance sheet,
including valuation changes of assets and liabilities at fair market value and
valuation of equity based on the appraised reorganization value of the business.
The reorganization and adoption of Fresh Start Reporting in 1994 resulted in a
one time reorganization income of $23.9 million.

The decrease in net income for the year ended July 31, 1995 as compared
with fiscal year 1994 was again primarily due to lower gross margins related to
the change in product mix to lower margin distributed products. In addition, in
1994 the Company recorded a favorable adjustment of $23.9 million which resulted
from the adoption of Fresh Start Reporting in 1994, as previously described.

46
<PAGE> 52

DISCONTINUED OPERATIONS

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues
Sheridan Systems.................................................. $109.3 $182.2 $158.1
AM Multigraphics -- International................................. 40.0 135.8 142.4
------ ------ ------
Total..................................................... 149.3 318.0 300.5
Operating income (loss)
Sheridan Systems.................................................. (2.6) 17.8 14.4
------ ------ ------
AM Multigraphics -- International................................. (4.2) (5.7) (2.5)
Unusual items income (expense).................................... -- 4.8 --
------ ------ ------
Total (6.8) 16.9 11.9
Non operating expense............................................... (2.6) (3.5) (30.9)
------ ------ ------
Pre-tax income (loss)............................................... (9.4) 13.4 (19.0)
Income (loss)....................................................... (10.1) 8.8 (23.2)
Loss on sale........................................................ (15.2) -- --
------ ------ ------
Income (loss) from discontinued operations.......................... $(25.3) $ 8.8 $ 23.2
====== ====== ======
</TABLE>

Note: To facilitate a meaningful discussion of the Company's comparative
operating performance in fiscal years 1996, 1995 and 1994 the results are
presented on a traditional comparative basis for all periods. Consequently, the
information presented for fiscal year 1994 does not comply with the accounting
requirements for companies upon emergence from bankruptcy, which calls for
separate reporting for the Reorganized Company and the Predecessor Company.

OPERATING RESULTS

The Discontinued Operations is comprised of two business segments, the
Sheridan Systems segment and the divested AM Multigraphics -- International
segment. The Sheridan Systems business serves the printing and newspaper
publishing industries by providing bindery systems and newspaper mailroom
systems. The products sold by Sheridan Systems were largely capital equipment
items and market demand has historically been cyclical. The divested AM
Multigraphics -- International segment served certain foreign graphics arts
markets through wholly-owned subsidiaries, situated primarily in Europe. The
divested AM Multigraphics -- International subsidiaries distributed an extensive
range of sheet-fed offset duplicating presses, digital color printing equipment,
pre and post press equipment and a wide range of supplies and technical
services.

The net loss from Discontinued Operations was $25.3 million in 1996
compared to net income of $8.8 million in 1995, and a net loss of $23.2 million
in 1994. The increased loss in 1996 over 1995 resulted primarily from
deteriorating market conditions for the Sheridan Systems segment in 1996, and a
$15.2 million loss recorded on the sale of the segment. During September of
fiscal year 1994, the Company emerged from Chapter 11 Bankruptcy. The Company
had operated under the protection of Chapter 11 following a voluntary petition
for reorganization filed in May 1993. With the emergence from Chapter 11 in
1994, the Company adopted Fresh Start Reporting, which resulted in material
changes to the balance sheet, including valuation changes of assets and
liabilities at fair market value and valuation of equity based on the appraised
reorganization value of the business. The reorganization and adoption of Fresh
Start Reporting in 1994 resulted in a one time reorganization expense of $27.0
million.

The operating results of Sheridan Systems significantly varied from period
to period primarily due to the cyclical nature of the business which
dramatically affected revenue levels and gross margins. Orders for Sheridan
Systems bindery and newspaper mailroom products have been in the millions of
dollars and therefore revenues, margins and customer backlogs varied
significantly depending on the timing of customer orders. In

47
<PAGE> 53

1996 Sheridan Systems revenues declined $72.9 million from the prior year. Weak
market demand and a low beginning backlog were the principal reasons for the
decrease in revenues. The weak market demand was attributable to a combination
of factors which include a reduction in printed product for magazines, catalogs
and direct mail and the existence of excess capacity in the printing industry.
Historically, the health of the retail sector of the U.S. economy which directly
impacts advertising expenditures impacts market demand. Sheridan Systems
incurred an operating loss of $2.6 million in 1996, compared to income of $17.8
million in the prior year period due principally to the lower volume. Fiscal
year 1995 revenues increased 15% over 1994 largely due to higher orders
particularly for bindery equipment, and a reduction in backlog. In 1995 Sheridan
Systems recognized approximately $20.0 million in revenues from prototype
equipment which had been shipped in 1994 and accepted by customers in 1995. The
operating income in 1995 of $17.8 million improved by $3.4 million over 1994 due
to the increased revenue level and related gross margin increase. The 1994
operating results reflected revenues of $158.1 million which was only slightly
improved over 1993.

The results of the divested AM Multigraphics -- International segment
consistently reflected operating losses and declining revenues. The revenue
decreases, throughout the periods, were attributable to declining market demand
for offset duplicating presses and the related erosion of the installed base of
duplicating equipment. The decline in market demand has been the result of
inroads made by competing printing technologies. The users of duplicators have
been the principal customers for the related supplies and services. The divested
AM Multigraphics -- International operations were also adversely impacted by
decreases in sales and margins of electronic pre-press products due to
competitive pressures in all periods. The Company undertook numerous
restructuring initiatives in response to the declining revenues and operating
losses, with significant headcount reductions accomplished and overall cost
reductions implemented over the reporting periods. The restructurings were
costly due to local statutory requirements and required labor negotiations which
slowed the implementation of cost reduction actions. Despite these restructuring
efforts and cash expenditures the Company was not able to eliminate the
operating losses which ultimately led to the divestiture of these operations.

In 1996, the Company had unusual item expense of $15.2 million which
resulted from the sales of substantially all of the assets and liabilities of
the Sheridan Systems division. In 1995 the Company had unusual item income of
$4.8 million. This income resulted from divestitures of non-core product lines
in the Discontinued Operations. The divestitures included the sale of certain
assets related to the service of forms and sheetfed presses, the service and
supply business formerly known as Advanced Imaging Products, and the U.K. copier
business.

Non Operating expenses include interest expense, primarily on borrowings
under the Revolving Credit Agreement and goodwill amortization expense. In 1994
the Company recorded reorganization expense of $27.0 million which pertained to
the adoption of Fresh Start Reporting, as previously described. The expense
resulted from fair market adjustments to tangible assets and liabilities of $9.7
million, a write off of existing Goodwill of $39.8 million and to record the
Reorganization Value on Excess of Fair Market Value of $22.5 million.

LIQUIDITY AND CAPITAL RESOURCES

The Company's total cash and cash equivalents were $2.6 million as of July
31, 1996 as compared with $12.6 million on July 31, 1995. In addition to the
reduction in cash balances, net short term borrowings increased $8.2 million
from prior year levels.

During 1996, the primary sources of cash from operating activities were a
reduction in inventories of $13.1 million, and an accounts receivable reduction
of $6.3 million. The inventory reduction in the current period was primarily the
result of the phase out of machine manufacturing activities and a related
reduction in parts and finished goods inventories. The reduction in accounts
receivable was the result of the collection of comparatively higher outstanding
balances which existed at July 31, 1995 due to a higher revenue level in the
period. Throughout the reporting periods, collection rates have remained
relatively consistent while increases and decreases in the overall accounts
receivable balance were due principally to changes in revenue levels.

48
<PAGE> 54

The primary use of cash in 1996 was the net loss of $45.5 million. The net
loss included a loss of $25.3 million from discontinued operations. This loss in
discontinued operations was offset by a reduction in assets of discontinued
operations prior to their divestiture of $26.3 million. The reduction in the
discontinued operations assets was primarily the collection of accounts
receivable and other long term assets, primarily lease receivables.

Capital expenditures of $9.0 million in 1996 were primarily to upgrade
systems and equipment and to provide for leasehold improvements. The Company
received $6.8 million in proceeds for the sale of its AM Multigraphics
headquarters, manufacturing and distribution facility in Mt. Prospect, Illinois.
The Company has committed to capital expenditures related to certain increased
systems capabilities. These expenditures will be financed utilizing a
combination of cash balances, funds obtained under the revolving credit
facility, and third party lease arrangements.

The Company's principal credit facility as of July 1996 was its $25.0
million revolving credit facility, which expired in October 1996. The
utilizations under this facility were limited by a borrowing base which as of
July 31, 1996, was approximately $18.4 million. The $8.2 million increase in
short-term borrowings for the year ended July 31, 1996, was required to
principally fund the net loss, required payments to holders of general unsecured
claims, and priority tax claims under the Company's Plan of Reorganization and
lease obligations.

In August 1996, the Company completed the sale of its Sheridan Systems
segment for proceeds of $50.1 million. In September the Company collected
approximately $11.0 million from the sale of its interest in AM Japan Co., Ltd.
The increase in cash balances from these transactions provides the Company with
adequate financial resources for the foreseeable future. At September 28, 1996,
the Company had a cash balance of $41.2 million after repaying bank debt and
meeting other short-term obligations. The Company is currently seeking to obtain
new banking facilities to provide for the issuance of letters of credit, fund
selected customer financing programs, and increase liquidity to the Company.

PLAN OF REORGANIZATION

On September 29, 1993 the Company's Reorganization Plan was confirmed by
the United States Bankruptcy Court, with the Plan being consummated on October
13, 1993. As a result of the reorganization and the recording of the
restructuring transaction and implementation of Fresh Start Reporting, the
Company's results of operations for the year ending July 31, 1996 are not
comparable to the two preceding years. See Note 14 of "Notes to Consolidated
Financial Statements" for information on consummation of the Plan and
implementation of Fresh Start Reporting.

The most significant adjustments which resulted from recording the
restructuring transaction and the implementation of Fresh Start Reporting
affected the Company's Statement of Operations. These adjustments related to
decreased interest expense, decreased amortization of intangibles and increased
income tax expense. In the Consolidated Balance Sheet, the most significant
adjustments affected long term debt and equity.

49
<PAGE> 55

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following is a list of the names, ages and business addresses, as of
November 26, 1996, of all of the executive officers and directors of the Company
and all positions and offices held by each person and each such person's
occupation or employment on such date and during the preceding five years.

<TABLE>
<CAPTION>
POSITIONS AND OFFICES HELD AND
PRINCIPAL OCCUPATIONS OR EMPLOYMENT
NAME AND BUSINESS ADDRESS AGE DURING THE PAST FIVE YEARS
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Jerome D. Brady............... 52 Director, Chairman of the Board of Directors, Chief
9399 W. Higgins Road Executive Officer and President since September 1994.
Suite 900 Mr. Brady was Vice President of FMC Corporation, a
Rosemont, IL 60018 manufacturer of chemicals and machinery, and General
Manager of its Food Machinery Group from October 1992
until he joined the Company. From 1978 to 1992 Mr. Brady
held a number of senior management positions at Harsco
Corporation, a diversified industrial manufacturing and
services company, most recently as Senior Vice President
of Operations responsible for the Industrial Services
and Building Products Group.
Steven R. Andrews............. 43 Vice President, General Counsel and Secretary of the
9399 W. Higgins Road Company since June 1994. Mr. Andrews was Vice President
Suite 900 and General Counsel of Amana Refrigeration, Inc., a
Rosemont, IL 60018 manufacturer of major household appliances, from
February 1993 to June 1994 and Senior Deputy General
Counsel of the Company from January 1992 to February
1993. From 1988 to 1991 Mr. Andrews was Associate
General Counsel of Tonka Corporation, an international
manufacturer and marketer of toys and games.
Gregory T. Knipp.............. 41 Treasurer of the Company since September 1995. From 1987
431 Lakeview Court to 1994 Mr. Knipp held several treasury-related
Mt. Prospect, IL 60056 management positions of the Company, including that of
Assistant Treasurer from 1994 to 1995. From 1981 to
1987, Mr. Knipp was the Cash Manager of Woodland
Services Co., a spinoff company of Masonite Corporation.
Prior to 1981, Mr. Knipp was an auditor with Peat
Marwick Mitchell & Co.
Thomas D. Rooney.............. 49 President of AM Multigraphics since August 1996, Vice
431 Lakeview Court President of the Company since February 1986, Chief
Mt. Prospect, IL 60056 Financial Officer since August 1993, and Controller and
Chief Accounting Officer of the Company from September
1989 to August 1993. From 1986 to 1989 Mr. Rooney was
President of the Company's former AM Bruning division, a
manufacturer and distributor of equipment, supplies and
services for the engineering graphics market.
Robert E. Anderson, III....... 61 Director of the Company since January 26, 1995. Mr.
4800 Cox Road Anderson is Executive Vice President, Planning and
Glen Allen, VA 23060 Development at Owens & Minor, Inc., a Virginia-based
wholesale distributor of medical/surgical supplies and
related products. He has held that position since 1994.
Prior thereto, Mr. Anderson held a number of senior
management positions at Owens & Minor, Inc., after their
acquisition of Powers & Anderson in 1967. Mr. Anderson
is a director of Mayer Electric Supply Company, a
wholesale distributor of supplies, and a former director
of the Savin Company, a distributor of copier machines.
</TABLE>

50
<PAGE> 56

<TABLE>
<CAPTION>
POSITIONS AND OFFICES HELD AND
PRINCIPAL OCCUPATIONS OR EMPLOYMENT
NAME AND BUSINESS ADDRESS AGE DURING THE PAST FIVE YEARS
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Jeffrey D. Benjamin........... 35 Director of the Company since October 13, 1993. Since
299 Park Avenue, 32nd Floor May 1996, Mr. Benjamin has been a Managing Director at
New York, NY 10171 UBS Securities LLC, a securities investment firm. From
January 1996 to May 1996, Mr. Benjamin was a Managing
Director at Bankers Trust Company, a financial services
company. From 1992 to May 1996, Mr. Benjamin was an
officer of Apollo Capital Management, Inc. and Lion
Capital Management, Inc., which respectively act as
general partners of Apollo Advisors, L.P. and Lion
Advisors, L.P. Mr. Benjamin is a limited partner of
Apollo Advisors, L.P., which acts as managing general
partner of Apollo Investment Fund, L.P. and AIF II,
L.P., securities investment funds, and a limited partner
of Lion Advisors, L.P., which acts as financial advisor
to and representative for Altus Finance and certain
other institutional investors with respect to securities
investments. From 1985 to 1992, Mr. Benjamin was a Vice
President at Salmon Brothers Inc, an investment banking
firm. Mr. Benjamin is a director of Empire Kosher
Poultry, Inc.
Robert N. Dangremond.......... 53 Director of the Company since February 8, 1993. Since
1155 Avenue of the Americas August 1995, Mr. Dangremond has acted as interim Chief
New York, NY 10036-2711 Executive Officer and President of Forstmann & Company,
Inc., a producer of clothing fabrics. From February 1993
to September 1994, Mr. Dangremond acted as interim
chairman of the Board, Chief Executive Officer, and
President of the Company. Since September 1989 Mr.
Dangremond has been a Principal with Jay Alix &
Associates, a consulting firm specializing in the
restructuring of major corporations. From 1982 to 1989
he was the CFO and Treasurer of Leach & Garner Company,
a diversified manufacturing and trading company. Prior
thereto, he served as a Vice President and Manager for
Chase Manhattan Bank and a Sales and Marketing Manager
for Scott Paper Company. Mr. Dangremond is also a
director of Standard Brands Paint Company, Envirodyne
Industries, Inc. and Forstmann & Company, Inc.
William E. Hogan II........... 54 Director of the Company since September 23, 1994. Mr.
3500 Holly Lane North Hogan is President and CEO of Telcom Systems Services,
Suite 60 Inc., a company that markets, sells, designs and
Plymouth, MN 55447 installs telecommunications systems, and, since 1993,
Mr. Hogan has been Chairman and CEO of the Hogan
Company, which specializes in the creation and building
of technology companies. From 1991 to 1993, Mr. Hogan
was Vice President, Corporate Operations and Quality for
Medtronic, Inc., a manufacturer of implantable medical
devices, and from 1984 to 1991, Mr. Hogan held various
management positions at Honeywell, Inc., a manufacturer
and marketer of control systems.
</TABLE>

51
<PAGE> 57

Each director will hold his office until the next annual meeting of
stockholders and until his successor is elected and qualified. Each officer and
director of the Company is a citizen of the United States.

CERTAIN INFORMATION CONCERNING BUYER AND SUB

GENERAL

Buyer was formed under the Delaware GCL on October 25, 1996 for the purpose
of consummating the transactions contemplated by the Merger Agreement. Other
than activities connected with, or ancillary to, the transactions contemplated
by the Merger Agreement, Buyer has not engaged in any material business
activities. Dr. Pacholder, three other Affiliates of Pacholder Associates, Inc.
and Mr. Rooney are expected to own all the issued and outstanding shares of
Buyer Common Stock. Pacholder Associates, Inc. is expected to purchase all of
the shares of Buyer Preferred Stock. The principal executive offices of Buyer
are located at c/o Pacholder Associates, Inc., 8044 Montgomery Road, Suite 382,
Cincinnati, Ohio 45236, Telephone Number (513) 985-3200.

Sub was formed under the Delaware GCL on October 25, 1996 for the purpose
of consummating the transactions contemplated by the Merger Agreement. Sub is a
wholly-owned subsidiary of Buyer. Other than activities connected with, or
ancillary to, the transactions contemplated by the Merger Agreement, Sub has not
engaged in any material business activities.

Pacholder Associates, Inc., based in Cincinnati, Ohio, is a provider of
investment management, financial advisory and investment banking services to
institutional clients.

52
<PAGE> 58

DIRECTORS AND EXECUTIVE OFFICERS OF BUYER AND SUB

The following is a list of the names, ages and business addresses, as of
December 8, 1996, of all of the directors and executive officers of each of
Buyer and Sub and all positions and offices held by each person and each such
person's occupation or employment on such date and during the preceding five
years. Mr. Shanahan is Treasurer of Buyer and Sub.

Each officer and director will hold his or her office until the next annual
meeting of stockholders and until his or her successor is elected and qualified.
Each director is a citizen of the United States. Dr. and Mrs. Pacholder are
husband and wife.

APPRAISAL RIGHTS

Any person who is a holder of record of shares of Common Stock and who
objects to the terms of the Merger Agreement and the Merger may seek appraisal
of such holder's shares of Common Stock under and in compliance with the
requirements of Section 262 of the Delaware GCL (the shares of Common Stock as
to which such appraisal rights have been asserted being referred to herein as
the "Dissenting Shares"). Section 262 provides a procedure by which persons who
are holders of shares of Common Stock at the Effective Time may seek an
appraisal of part of or all their shares in lieu of accepting the Merger
Consideration in exchange therefor as described in the Merger Agreement. In any
such appraisal proceeding, the Delaware Court of Chancery (the "Chancery Court")
would determine the "fair value" of the Dissenting Shares. Holders of shares of
Common Stock should recognize that such an appraisal could result in a

53
<PAGE> 59

determination of a value higher or lower than, or equivalent to the value of the
Merger Consideration. The following is a summary of the principal provisions of
Section 262 and does not purport to be a complete description. A copy of Section
262 is attached hereto as Annex III and is incorporated herein by reference.

FAILURE TO TAKE ANY NECESSARY STEPS FULLY AND PRECISELY TO SATISFY THE
REQUIREMENTS OF SECTION 262 OF THE DELAWARE GCL WILL RESULT IN A TERMINATION OR
WAIVER OF THE APPRAISAL RIGHTS OF THE STOCKHOLDER UNDER SUCH SECTION.

A holder of shares of Common Stock electing to exercise appraisal rights
under Section 262 must (a) deliver to Company, before the taking of the vote on
the proposal to approve and adopt the Merger Agreement and the Merger, a
separate written demand for appraisal that is made by or on behalf of the person
who is the holder of record of shares of Common Stock for which appraisal is
demanded and that reasonably informs the Company of the identity of the holder
of record of shares of Common Stock and of such holder's intention thereby to
demand the appraisal of such holder's shares of Common Stock and (b) not vote in
favor of approval and adoption of the Merger Agreement and the Merger or consent
to the Merger Agreement and the Merger in writing. A proxy or vote against
approval and adoption of the Merger Agreement and the Merger does not constitute
such a demand. In addition, mere failure, after the completion of the Merger, to
return a certificate representing shares of Common Stock does not constitute a
demand. Written demands for appraisal should be directed to the Company at 431
Lakeview Court, Mt. Prospect, Illinois 60056, Attention: Mr. Steven R. Andrews,
Secretary.

Only the holder of record of shares of Common Stock is entitled to assert
appraisal rights for the shares of Common Stock registered in that holder's
name. The holder of shares of Common Stock asserting appraisal rights must hold
Common Stock of record on the date of making the demand and continuously through
the Effective Time. The demand should be executed by or for the holder of
record, fully and correctly, as the holder's name appears on the holder's stock
certificate. If the stock is owned of record in a fiduciary capacity, such as by
a trustee, guardian or custodian, execution of the demand should be made in that
capacity, and if the stock is owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be executed by or for all
owners. An authorized agent, including one of two or more joint owners, may
execute the demand for appraisal for a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is acting as agent for the record owner or
owners.

A record holder who holds shares of Common Stock as nominee for beneficial
owners may exercise the holder's right of appraisal with respect to the shares
of Common Stock held for all or less than all of such beneficial owners. In such
case, the written demand should set forth the number of shares of Common Stock
covered by it. Where no number of shares of Common Stock is expressly mentioned,
the demand will be presumed to cover all shares of Common Stock held in the name
of the record holder.

Within ten days after the Effective Time, the Surviving Corporation is
required to send notice as to the effectiveness of the Merger to each person
who, prior to the Effective Time, satisfied the foregoing conditions.

Within 120 days after the Effective Time, the Surviving Corporation or any
holder of Dissenting Shares may file a petition in the Chancery Court demanding
a determination of the value of all of the Dissenting Shares. Holders of
Dissenting Shares should not assume that (i) the Surviving Corporation will file
a petition with respect to the appraisal value of their Dissenting Shares, (ii)
the Surviving Corporation will initiate any negotiations with respect to the
"value" of such Dissenting Shares or (iii) the Surviving Corporation will notify
them of any act in connection with the Merger other than as mandated by the
Delaware GCL. Accordingly, holders of Dissenting Shares should regard it as
their obligation to initiate all necessary action with respect to the perfection
of their appraisal rights within the time periods prescribed in Section 262.

The Chancery Court may require the holders of Dissenting Shares to submit
certificates representing Dissenting Shares to the Register in Chancery for
notation for the pendency of the proceedings.

Within 120 days after the Effective Time, any holder of Dissenting Shares
is entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of

54
<PAGE> 60

Dissenting Shares and the aggregate number of holders of such Dissenting Shares.
The Surviving Corporation is required to mail such statement within ten days
after it receives a written request therefor or within ten days after expiration
of the period for delivery of demands for appraisal, whichever is later.

If a petition for an appraisal is timely filed, after a hearing on such
petition, the Chancery Court will determine the holders of shares of Common
Stock entitled to appraisal rights and will appraise the Dissenting Shares owned
by such holders, determining their "fair value" exclusive of any element of
value arising from the accomplishment or expectation of the Merger and will
determine a fair rate of interest, if any, to be paid upon the "fair value." In
determining "fair value" of the Dissenting Shares, the Chancery Court shall take
into account all relevant factors. Any such judicial determination of the "fair
value" of the Dissenting Shares could be based upon considerations other than or
in addition to the consideration paid in the Merger and the market value of the
shares of Common Stock, including asset values and earning capacity. In
Weinberger v. UOP, Inc., the Delaware Supreme Court stated, among other things,
that "proof of value by any techniques or methods generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in an appraisal proceeding. The value so determined for the
Dissenting Shares could be more or less than, or the same as, the value of the
Merger Consideration. In determining the fair rate of interest, the Chancery
Court may consider all relevant factors, including the rate of interest the
Surviving Corporation would have had to pay to borrow during the pendency of the
proceedings. The Chancery Court may allocate the costs of the appraisal
proceedings as it deems equitable under the circumstances. The Chancery Court
may also order that all or a portion of the expenses incurred by any holder of
Dissenting Shares in connection with an appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all the Dissenting Shares.

Any holder of shares of Common Stock who has duly demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote such shares for any purpose or to receive payment of dividends or other
distributions on such shares (other than those payable or deemed to be payable
to holders of shares of Common Stock of record as of a date prior to the
Effective Time).

A holder of shares of Common Stock will fail to perfect, or effectively
lose, such holder's right to appraisal if no petition for appraisal is filed
within 120 days after the Effective Time, or if the holder of such shares
delivers to the Surviving Corporation a written withdrawal of such holder's
demand for an appraisal and an acceptance of the terms of the Merger, except
that any such attempt to withdraw made more than 60 days after the Effective
Time requires the written approval of the Surviving Corporation.

If any appraisal proceeding is timely instituted, such proceeding may not
be dismissed as to any holder of shares of Common Stock who has perfected his
right of appraisal without the approval of the Chancery Court.

55
<PAGE> 61

DIVIDENDS; MARKET PRICES OF COMMON STOCK

The Company has not paid any cash dividends on its Common Stock since 1981.
The Common Stock is listed on the American Stock Exchange. The table below sets
forth for the fiscal periods indicated the high and low market prices per share
as reported on the American Stock Exchange Composite Tape.

<TABLE>
<CAPTION>
COMMON STOCK
------------------
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1995
First Quarter........................................................... $12.250 $10.000
Second Quarter.......................................................... 10.125 8.875
Third Quarter........................................................... 9.250 8.625
Fourth Quarter.......................................................... 9.250 8.125
Fiscal 1996
First Quarter........................................................... 8.375 7.250
Second Quarter.......................................................... 7.500 4.688
Third Quarter........................................................... 4.688 1.875
Fourth Quarter.......................................................... 2.375 1.875
Fiscal 1997
First Quarter........................................................... 4.25 1.25
Second Quarter (through December 6, 1996)............................... 4.675 4.188
</TABLE>

On October 29, 1996, the last full trading day preceding the initial public
announcement by the Company that it entered into the Merger Agreement, the high,
low and closing sale prices of the Common Stock on the American Stock Exchange
were $2.75, $2.50 and $2.75 per share, respectively. On December , 1996, the
last full trading day preceding the printing of this Proxy Statement, the
closing price of the Common Stock, as reported in American Stock Exchange
Composite Transactions, was $ per share. Stockholders are urged to obtain
current quotations for the Common Stock. As of the Record Date, there were
approximately 1,230 holders of record of the Common Stock.

56
<PAGE> 62

PRINCIPAL STOCKHOLDERS

At November 1, 1996, to the Company's knowledge based on statements filed
with the Commission pursuant to Sections 13(d) and 13(g) of the Exchange Act or
upon information furnished in writing to the Company by the persons or entities
involved, the following were the only persons, entities or groups owning
beneficially 5% or more of the outstanding Common Stock entitled to vote at the
Special Meeting:

<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
---------------------------------------------------- ----------------- ----------
<S> <C> <C>
Lion Advisors, L.P.(3).............................. 1,875,000 26.8%
Two Manhattanville Road
Purchase, NY
AIF II, L.P.(3) .................................... 600,412 8.6%
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, NY
BEA Associates...................................... 1,290,117 18.4%(4)
153 East 53rd Street
One Citicorp Center
New York, New York 10022
State of Wisconsin Investment Board................. 669,100 9.6%
P. O. Box 7842
Madison, Wisconsin 53707
Fidelity Bankers Life Insurance Company............. 645,058 9.2%
1011 Boulder Springs Drive
Richmond, Virginia 2225
Hellmold Associates, Inc. .......................... 624,754 8.9%
640 Fifth Avenue
13th Floor
New York, New York 10019
Trust Company of the West........................... 400,584 5.7%
865 South Figueroa
Los Angeles, California 90017
</TABLE>

- ---------------

(1) Unless otherwise indicated in a note to the table, to the Company's
knowledge, ownership includes sole voting power and sole investment power.

(2) Based on 7,008,421 shares of Common Stock outstanding as of November 1, 1996
plus shares deemed outstanding pursuant to Rule 13d-3(d)(1) of the Exchange
Act.

(3) The shares shown for Lion Advisors, L.P. are beneficially held for the
benefit of an account under management. Lion Advisors, L.P. is an affiliate
of Apollo Advisors, L.P., the managing general partner of AIF II, L.P. Mr.
Moore, a director of the Company, is an officer of the general partner of
each of (i) Lion Advisors, L.P. and (ii) Apollo Advisors, L.P., the managing
general partner of AIF II, L.P. and may be deemed to beneficially own these
shares. Mr. Moore disclaims beneficial ownership of all of such shares. See
"Security Ownership of Directors and Executive Officers."

(4) Shares held by BEA Associates for Executive Life Insurance Company of New
York. Executive Life Insurance Company has sole voting power and sole
investment power for these shares.

The consummation of the Merger would result in a change in control of the
Company as the Company would become a wholly-owned subsidiary of Buyer.

57
<PAGE> 63

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information concerning the number of shares
of Common Stock that are beneficially owned, directly or indirectly, as of
November 1, 1996 by each director, by certain executive officers and by all
directors and all executive officers (including the named executive officers) as
a group. In December 1994, Mr. Rooney purchased 500 shares of Common Stock at a
purchase price of $9.375 per share.

Unless otherwise indicated in a note to the table, to the Company's
knowledge, ownership includes sole voting power and sole investment power.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER POSITION BENEFICIAL OWNERSHIP(1) CLASS(2)
- -------------------------------------- ------------------------- ----------------------- ----------
<S> <C> <C> <C>
Jerome D. Brady....................... Chairman, President and 81,000 1.2%
Chief Executive Officer
Robert E. Anderson, III............... Director 1,917 *
Jeffrey D. Benjamin(3)................ Director 2,000 *
Robert N. Dangremond.................. Director 2,300 *
William E. Hogan...................... Director 2,000 *
Jeff M. Moore(3)...................... Director 2,476,412 35.4%
Steven R. Andrews..................... Vice President and 14,500 *
Secretary
Thomas D. Rooney...................... Vice President and Chief 30,500 *
Financial Officer
All directors and executive officers
as a group (9 persons)(1)(3)........ 2,610,629 37.2%
</TABLE>

- ---------------

* Less than one percent

(1) Amounts include shares acquirable within 60 days of November 1, 1996
pursuant to the exercise of currently outstanding stock options granted
pursuant to the Company's 1994 Long-Term Incentive Plan as follows: Mr.
Andrews, 14,000 shares, Mr. Brady, 70,000 shares, Mr. Rooney, 30,000 shares,
Mr. Anderson 1,917 shares, Mr. Moore, 1,000 shares, and 2,000 shares each
for the remaining non-employee directors.

(2) Based on 7,008,421 shares of Common Stock outstanding as of November 1, 1996
plus shares deemed outstanding pursuant to Rule 13d-3(d)(1) of the Exchange
Act.

(3) Includes shares beneficially owned by Lion Advisors, L.P. and AIF II, L.P.
Mr. Moore is an officer of the general partner of each of (i) Lion Advisors,
L.P. and (ii) Apollo Advisors, L.P., the managing general partner of AIF II,
L.P. Mr. Moore disclaims beneficial ownership of the indicated shares. Mr.
Benjamin is a limited partner of each of Lion Advisors, L.P., Apollo
Advisors, L.P. and AIF II, L.P.

58
<PAGE> 64

INDEPENDENT ACCOUNTANTS

The Consolidated Financial Statements of AM International, Inc. for the
year ended July 31, 1995 included in this Proxy Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and have been so included upon the authority of
said firm as experts in accounting and auditing. Representatives of Arthur
Andersen LLP will be present at the Special Meeting to respond to appropriate
questions of stockholders and to make a statement if they desire.

STOCKHOLDER PROPOSALS

If the Merger is not consummated for any reason, is currently anticipated
that the Company will hold its next Annual Meeting of Stockholders on
, 1997 (the "Annual Meeting").

In order to be considered for inclusion in the Company's proxy materials
for the Annual Meeting, written notice of any stockholder proposal must be
delivered or mailed to and received at the Company's principal executive offices
at 431 Lakeview Court, Mt. Prospect, Illinois 60056 by , 1997 in
accordance with the procedures set forth in the Company's Bylaws.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and the rules and regulations thereunder, and in accordance therewith files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661-2511, and Suite 1300, Seven World
Trade Center, New York, New York 10048. Copies of such material can be obtained
at prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov. The Common
Stock is listed on the AMEX and such reports, proxy statements and other
information may also be inspected at the offices of the American Stock Exchange,
86 Trinity Place, New York, New York 10006-1881.

This Proxy Statement includes information required by the Commission to be
disclosed pursuant to Rule 13e-3 under the Exchange Act, which governs so-called
"going private" transactions by certain issuers with their affiliates. In
accordance with the rule, the Company and Buyer have filed with the Commission,
under the Exchange Act, a Schedule 13E-3 with respect to the Merger. This Proxy
Statement does not contain all the information set forth in the Schedule 13E-3,
parts of which are omitted in accordance with the regulations of the Commission.
The Schedule 13E-3, and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying at the offices of the
Commission as set forth above. In addition, such Schedule 13E-3, including all
exhibits thereto is available for inspection and copying at the principal
executive offices of the Company during regular business hours by any interested
holder of Common Stock or such holder's representative who has been so
designated in writing.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission (File No.
1-683) pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement:

1. Current Report on Form 8-K reporting events occurring on October
29, 1996.

2. Annual Report on Form 10-K for the year ended July 31, 1996,
together with the Form 10-K/A filed with the Commission on November 27,
1996.

59
<PAGE> 65

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the date of the Special Meeting (or any adjournments or postponements
thereof) shall be deemed to be incorporated by reference into this Proxy
Statement and to be made a part hereof from the respective dates of filing of
such documents.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.

The Company will provide without charge to each person to whom this Proxy
Statement is delivered, upon the written or oral request of any such person, by
first class mail within one business day of receipt of any such request, a copy
of any document described above (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into such documents).
Requests for such copies should be directed to Steve Andrews, Secretary, at the
principal executive offices of the Company: 431 Lakeview Court, Mt. Prospect,
Illinois 60056, telephone (847) 375-1700.

OTHER BUSINESS

It is not intended that any business other than that set forth in the
Notice of Special Meeting and described in this Proxy Statement will be brought
before the Special Meeting. If any other matters are properly presented for
action at the Special Meeting, it is intended that the persons named in the
accompanying proxy will vote or refrain from voting in accordance with their
judgment on such matters after consultation with the Board of Directors.

By Order of the Board of Directors,

Steven R. Andrews, Secretary

Mt. Prospect, Illinois
, 1996

60
<PAGE> 66

INDEX TO FINANCIAL STATEMENTS OF
AM INTERNATIONAL, INC.

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Operations................................................ F-2
Consolidated Balance Sheets.......................................................... F-3
Consolidated Statements of Shareholders' Equity...................................... F-4
Consolidated Statements of Cash Flows................................................ F-5
Notes to Consolidated Financial Statements........................................... F-6
Report of Independent Public Accountants............................................. F-22
Five Year Financial Summary (Unaudited).............................................. F-23
</TABLE>

F-1
<PAGE> 67

AM INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR
------------------------------------------------ COMPANY
-------------
TWELVE MONTHS ENDED TEN MONTHS TWO MONTHS
------------------------------ ENDED ENDED
JULY 31, 1996 JULY 31, 1995 SEPT. 29, 1994 JULY 31, 1993
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES..................................... $ 168,052 $ 191,485 $163,816 $26,532
COST OF SALES................................ 130,421 138,752 112,395 19,526
GROSS MARGIN................................. 37,631 52,733 51,421 7,006
OPERATING EXPENSES
Selling, general and administrative........ 47,048 55,224 44,632 9,032
Unusual items.............................. 7,032 0 0 0
--------- --------- -------- -------
TOTAL OPERATING EXPENSES........... 54,080 55,224 44,632 9,032
OPERATING INCOME (LOSS)...................... (16,449) (2,491) 6,789 (2,026)
Non-operating income (expense):
Interest income............................ 169 222 517 2
Interest expense........................... (3,762) (3,355) (2,663) (51)
Reorganization items, net.................. 0 0 575 23,946
Other, net................................. (212) (53) (742) (76)
--------- --------- -------- -------
Income (loss) before income taxes,
discontinued operations and extraordinary
gain....................................... (20,254) (5,677) 4,476 21,795
Income tax expense (benefit)................. (97) (1,526) 2,394 0
--------- --------- -------- -------
Net income (loss) before discontinued
operations and extraordinary gain.......... (20,157) (4,151) 2,082 21,795
Net income (loss) of discontinued operations,
net of tax................................. (25,342) 8,764 4,570 (27,810)
--------- --------- -------- -------
Net income (loss) before extraordinary
gain....................................... $ (45,499) $ 4,613 $ 6,652 $(6,015)
--------- --------- -------- -------
Extraordinary gain........................... 0 0 0 58,704
--------- --------- -------- -------
NET INCOME (LOSS)............................ $ (45,499) $ 4,613 $ 6,652 $52,689
========= ========= ======== =======
PER SHARE OF COMMON STOCK:(B)
Income (loss) from continuing operations..... (2.88) $ (0.59) $ 0.30 N/A
Income (loss) from discontinued operations... (3.62) 1.25 0.65 N/A
--------- --------- -------- -------
Net income (loss)............................ $ (6.49) $ 0.66 $ 0.95 N/A
========= ========= ======== =======
Weighted average shares of common stock and
common stock equivalents outstanding (in
thousands)................................. 7,009 7,021 7,006 N/A
========= ========= ======== =======
</TABLE>

- ---------------

(a) Due to the Reorganization and implementation of Fresh Start Reporting,
financial statements for the Reorganized Company (period starting September
30, 1993) are not comparable to those of the Predecessor Company. See Notes
to the Financial Statements (Note 14) for additional information.

(b) The weighted average number of common shares outstanding and net income per
common share for the Predecessor Company have not been presented because due
to the Reorganization and implementation of Fresh Start Reporting, they are
not comparable to subsequent periods.

The Notes to Consolidated Financial Statements are an integral part of these
financial statements.

F-2
<PAGE> 68

AM INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
JULY 31, 1996 JULY 31, 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 2,560 $ 12,563
Accounts receivable, net......................................... 19,774 36,409
Inventories, net................................................. 11,602 28,432
Prepaid expenses and other assets................................ 1,069 1,722
Net assets held for sale......................................... 7,698 0
Net assets of discontinued operations............................ 42,940 61,301
-------- --------
TOTAL CURRENT ASSETS............................................... 85,643 140,427
Property, plant and equipment, net................................. 10,867 12,453
Excess reorganization value........................................ 0 5,430
Other assets, net.................................................. 1,452 4,762
-------- --------
TOTAL ASSETS............................................. $ 97,962 $ 163,072
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt... $ 14,381 $ 6,132
Accounts payable................................................. 15,435 21,134
Service contract deferred income................................. 12,924 17,312
Payroll related expenses......................................... 13,227 13,175
Other current liabilities........................................ 17,956 21,172
-------- --------
TOTAL CURRENT LIABILITIES................................ 73,923 78,925
Long-term debt..................................................... 8,527 14,915
Other long-term liabilities........................................ 13,216 20,931
-------- --------
TOTAL LIABILITIES........................................ 95,666 114,771
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 40 million shares authorized;
7,010,000 issued as of July 31, 1996 and July 31, 1995........ 70 70
Capital in excess of par value................................... 35,865 35,637
Less: treasury stock, at cost, 1,579 shares as of July 31, 1996
and 1,245 shares as of July 31, 1995.......................... (6) (6)
Warrants, 1,095,000 issued, exercise price of $18.00 as of July
31, 1996 and July 31, 1995.................................... 383 383
Accumulated earnings (deficit)................................... (34,234) 11,265
Cumulative translation adjustment................................ 218 952
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................... 2,296 48,301
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $ 97,962 $ 163,072
======== ========
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of these
financial statements.

F-3
<PAGE> 69

AM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
------------------- ------------------- ---------------------
NUMBER NUMBER NUMBER
PREDECESSOR COMPANY: OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
---------- ------ ---------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance July 31, 1993..................................... 3,414,065 $ 34 52,477,683 $ 525 5,483,600 $(23,107)
Net Income...............................................
Reorganization Items:
Cancellation of Stock.................................. (3,414,065) (34) 52,477,683 (525) (5,483,600) 23,107
Fresh Start Adjustments................................ -- -- -- -- -- --
Aggregate effect of current year translation
adjustments..........................................
Issuance of New Common Stock........................... 7,000,000 70
Issuance of Warrants...................................
---------- ---- ---------- ----- ---------- --------
Reorganized Company Balance, September 30, 1993(a)....... -- -- 7,000,000 70 -- --
REORGANIZED COMPANY
Net Income...............................................
Aggregate effect of current year translation
adjustments............................................
Purchase of Treasury Stock............................... 1,119 (6)
---------- ---- ---------- ----- ---------- --------
Balance July 31, 1994..................................... -- -- 7,000,000 70 1,119 (6)
Net Income...............................................
Aggregate effect of current year translation
adjustments............................................
Issuance of new common stock............................. 10,000 --
Purchase of Treasury Stock............................... -- -- -- -- 126 --
---------- ---- ---------- ----- ---------- --------
Balance at July 31, 1995.................................. -- -- 7,010,000 70 1,245 (6)
Net loss.................................................
Aggregate effect of current year translation
adjustments............................................
Purchase of Treasury Stock............................... 334 --
Other, net............................................... --
---------- ---- ---------- ----- ---------- --------
Balance at July 31, 1996.................................. -- $ -- 7,010,000 $ 70 1,579 $ (6)
========== ==== ========== ===== ========== ========

<CAPTION>
WARRANTS CAPITAL
------------------ IN CUMULATIVE
NUMBER EXCESS OF ACCUMULATED TRANSLATION
PREDECESSOR COMPANY: OF SHARES AMOUNT PAR VALUE EARNINGS/(DEFICIT) ADJUSTMENT
--------- ------ --------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Balance July 31, 1993..................................... $ 339,781 $ (368,842) $ 1,958
Net Income............................................... 52,689 52,689
Reorganization Items:
Cancellation of Stock.................................. -- -- (339,781)
Fresh Start Adjustments................................ -- 316,153 (2,125)
Aggregate effect of current year translation
adjustments.......................................... 167
Issuance of New Common Stock........................... 35,547
Issuance of Warrants................................... 1,095,000 383
--------- ---- --------- --------- --------
Reorganized Company Balance, September 30, 1993(a)....... 1,095,000 383 35,547 -- --
REORGANIZED COMPANY
Net Income............................................... 6,652
Aggregate effect of current year translation
adjustments............................................ 130
Purchase of Treasury Stock............................... (6)
--------- ---- --------- --------- --------
Balance July 31, 1994..................................... 1,095,000 35,547 6,652 130
Net Income............................................... 4,613
Aggregate effect of current year translation
adjustments............................................ 822
Issuance of new common stock............................. 90
Purchase of Treasury Stock............................... -- --
--------- ---- --------- --------- --------
Balance at July 31, 1995.................................. 1,095,000 383 35,637 11,265 952
Net loss................................................. (45,499) (45,499)
Aggregate effect of current year translation
adjustments............................................ (734)
Purchase of Treasury Stock...............................
Other, net............................................... 228
--------- ---- --------- --------- --------
Balance at July 31, 1996.................................. 1,095,000 $383 $ 35,865 $ (34,234) $ 218
========= ==== ========= ========= ========

TOTAL
SHAREHOLDERS'
PREDECESSOR COMPANY: EQUITY
-------------
<S> <C>
Balance July 31, 1993..................................... $ (49,651)
Net Income...............................................
Reorganization Items:
Cancellation of Stock.................................. (317,233)
Fresh Start Adjustments................................ 314,028
Aggregate effect of current year translation
adjustments.......................................... 167
Issuance of New Common Stock........................... 35,617
Issuance of Warrants................................... 383
---------
Reorganized Company Balance, September 30, 1993(a)....... 36,000
REORGANIZED COMPANY
Net Income............................................... 6,652
Aggregate effect of current year translation
adjustments............................................ 130
Purchase of Treasury Stock...............................
---------
Balance July 31, 1994..................................... 42,776
Net Income............................................... 4,613
Aggregate effect of current year translation
adjustments............................................ 822
Issuance of new common stock............................. 90
Purchase of Treasury Stock............................... --
---------
Balance at July 31, 1995.................................. 48,301
Net loss.................................................
Aggregate effect of current year translation
adjustments............................................ (734)
Purchase of Treasury Stock............................... --
Other, net............................................... 228
---------
Balance at July 31, 1996.................................. $ 2,296
=========
</TABLE>

- ---------------
(a) Due to the Reorganization and implementation of Fresh Start Reporting,
financial statements for the Reorganized Company (period starting September
30, 1993) are not comparable to the Predecessor Company. See Notes to the
Financial Statements (Note 14) for additional information.

The Notes to Consolidated Financial Statements are an integral part of these
financial statements.

F-4
<PAGE> 70

AM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
-------------------------------------------------- -------------
AUG. 1, 1993
TWELVE MONTHS ENDED SEPT. 30, 1993 THROUGH
------------------------------- THROUGH SEPT. 29,
JULY 31, 1996 JULY 31, 1995 JULY 31, 1994 1993
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)..................... $(45,499) $ 4,613 $ 6,652 $52,689
Adjustments to reconcile net income to
cash flow from operating activities:
Depreciation of property, plant and
equipment........................ 3,769 1,632 2,204 327
Amortization and writedown of other
assets........................... 407 706 1,395 --
Benefit from operating loss
carryforwards.................... -- 8,037 10,494 --
Discontinued operations............. 26,284 (15,715) 12,636 9,596
Net assets held for sale............ (2,682) -- --
Change in assets and liabilities:
Accounts receivable, net......... 6,308 (391) (5,105) 6,855
Inventory, net................... 13,056 2,703 (4,455) (559)
Prepaid expenses and other
assets......................... (334) (372) (2,816) 314
Accounts payable and accruals.... (288) (2,157) (6,843) 10,704
Other, net....................... (2,794) (3,950) 3,130 1,041
Changes due to Fresh Start
Reporting and reorganization... -- -- -- (82,650)
CASH FLOW FROM OPERATING ACTIVITIES... (1,773) (4,894) 17,292 (1,683)
--------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................ (8,990) (2,362) (1,560) (135)
Proceeds from disposition of
property......................... 6,822 -- --
Discontinued operations.......... (1,262) 886 (2,973)
--------- ------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES... (3,430) (1,476) (4,533) (135)
--------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under
short-term borrowing
agreements....................... 8,249 131 (1,074) 100
Principal borrowings (payments) on
long-term debt................... (6,388) (4,443) (5,126) 1,831
Discontinued operations (6,661) 2,133 2,565 1,061
--------- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES (4,800) (2,179) (3,635) 2,992
--------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................... (10,003) (8,549) 9,124 1,174
Cash and cash equivalents at beginning
of period........................... 12,563 21,112 11,988 10,814
--------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD........................... $ 2,560 $12,563 $ 21,112 $11,988
========= ======= ======= =======
</TABLE>

- ---------------

The Notes to Consolidated Financial Statements are an integral part of these
financial statements.

F-5
<PAGE> 71

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

NOTE 1 -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: AM International, Inc. (the "Company"), a Delaware
corporation, distributes equipment and supplies, and provides services for the
graphics arts industry. The Company is in process of executing plans to exit its
machine manufacturing business, consistent with management's strategic
objectives. The Company's continuing distributed products consist primarily of
pre-press equipment, supplies and services. The Company has in excess of 50,000
customers, including small commercial printers, large quick print franchises,
company run in-house print shops, governmental agencies, and educational
institutions. No individual customer accounts for more than 10% of net revenue.

The Company's headquarters and primary operations are located in Mt.
Prospect, Illinois. Products are distributed throughout the United States
utilizing six distribution facilities. To a lesser extent, products are
distributed internationally through independent dealers. The Company employs
approximately 400 service technicians throughout the United States to provide
technical service and training.

Basis of Presentation: The Consolidated Financial Statements of the
Reorganized Company (period beginning September 30, 1993) and the Predecessor
Company (periods prior to September 30, 1993) include the accounts of AM
International, Inc. and its subsidiaries (the "Company"). All significant
intercompany transactions have been eliminated. The Company's fiscal year end is
July 31. All references to years, unless otherwise indicated, refer to the
fiscal year. Certain prior year amounts have been reclassified to be consistent
with current year presentation.

Use of Estimates: The preparation of 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.

Cash Equivalents: The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.

Inventories: Inventories are valued at the lower of cost, which includes
material, labor and overhead, determined by the first-in, first out (FIFO)
method, or market.

Properties, Equipment and Depreciation: Properties and Equipment are stated
at cost and are depreciated over estimated useful lives, ranging from 5 to 30
years, primarily on a straight-line basis. The Company adjusts the net book
value to recognize impairments in accordance with "SFAS 121: Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."

Intangibles: Excess reorganization values are amortized on a straight-line
basis over periods not exceeding 20 years. Identifiable intangible assets are
amortized on a straight-line basis over their estimated useful lives.
Accumulated amortization of excess reorganization value was $2,472 at July 31,
1996 and $2,065 at July 31, 1995. The Company continually evaluates current
events and circumstances in order to determine whether the estimated useful
lives and recorded balances of excess reorganization value have been impaired.
The Company utilizes evaluations of estimated undiscounted future cash flows and
financial ratios in this review.

Currency Translation: Foreign assets and liabilities have been translated
into United States dollars at current exchange rates as of the balance sheet
dates, and revenues and expenses have been translated at the average exchange
rates in effect during each period. Translation adjustments are reported as a
separate component of Shareholders Equity. Exchange gains and losses on foreign
currency transactions are included in the Consolidated Statement of Operations
and are not material.

F-6
<PAGE> 72

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

Revenue Recognition: Revenue is recognized from sales when a product is
shipped. Amounts billed for service contracts are credited to Service Contract
Deferred Income and recognized as revenues over the term of the contracts. The
Company recognizes warranty and equipment installation expenses at the time a
product is shipped, if applicable. The expense is estimated considering current
warranty policies and historical expense.

Research and Development Expense: Expenses for research and development are
charged to income as incurred. For the reorganized company, such expenses were
$364 in 1996, $744 in 1995, and $559 in 1994. Such expenses were $95 for the
Predecessor Company in 1994.

Income Taxes: Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, " Accounting for Income Taxes." Deferred income taxes are recorded to
reflect the future tax consequences of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each year end.

Income per Common Share: Income per share amounts are determined after
deducting any dividend requirements of preferred shares and are based on the
weighted average shares of common stock and common stock equivalents outstanding
during each period.

Financial Instruments: The carrying value of financial instruments
approximates fair market value of those assets and liabilities.

Future Adoption of Accounting Standards: In fiscal 1997, the Company is
required to adopt "SFAS 123: Accounting for Stock-Based Compensation." The
adoption of this accounting standards is not expected to have a material impact
on the financial statements.

NOTE 2 -- DISCONTINUED OPERATIONS

In August 1996, the Company completed the sale of substantially all of the
assets and liabilities of the Sheridan Systems division for proceeds of $50,100.
A loss of $15,212 has been recorded in the fourth quarter of the Company's
fiscal year ended July 31, 1996 as a result of the transaction, with no recorded
tax benefit.

During the year, the Company completed the exit of its AM
Multigraphics-International subsidiaries with the sale of its subsidiaries in
the Netherlands, France, and Belgium and the placement of the Company's AM
Multigraphics UK holding company into an Administration Proceeding. The sale of
the subsidiaries in the Netherlands, France, and Belgium required the Company to
provide consideration of approximately $3,000 in the form of cash and other
assets. No gain or loss was recorded as a result of the exit of the AM
Multigraphics-International subsidiaries.

F-7
<PAGE> 73

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

The results of these discontinued business units are included in the
consolidated statements of income under "discontinued operations." The following
table summarizes key financial data related to the above discontinued
operations:

<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TEN MONTHS TWO MONTHS
ENDED ENDED ENDED ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1994 SEPT. 29, 1993
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales.................................. $ 149,256 $ 318,016 $ 257,809 $ 42,682
Gross margin............................... 34,709 86,219 77,115 11,722
Unusual income............................. -- (4,845) --
Operating income (loss).................... (6,749) 16,944 12,220 (323)
Non-operating (income) expense............. 2,136 3,212 3,046 443
Allocated interest expense................. 581 314 315 --
Reorganization items, net.................. -- -- -- 27,049
Income tax provision (benefit) applicable
to discontinued businesses............... 664 4,654 4,289 (5)
-------- -------- -------- --------
Income (loss) from operations of
discontinued business net of applicable
taxes.................................... (10,130) 8,764 4,570 (27,810)
Loss on sale............................... (15,212) -- -- --
-------- -------- -------- --------
Income (loss) from discontinued
operations............................... $ (25,342) $ 8,764 $ 4,570 $(27,810)
======== ======== ======== ========
</TABLE>

The results of operations, net of taxes, and the net assets of Sheridan
Systems and the divested AM Multigraphics-International operations are presented
in the consolidated financial statements as discontinued operations. Interest
expense pertaining to the Company's Revolving Credit Facility has been allocated
based upon the ratio of the net assets of the discontinued operations to the
consolidated capitalization of the Company. Continuing operations and
discontinued operations reflect the net tax benefit or tax expense generated by
the respective operations, limited, however, by the income tax benefit or tax
expense recognized in the Company's historical financial statements. No general
corporate expenses have been allocated to the discontinued operations. The
results of the discontinued operations are not necessarily indicative of the
results of operations which may have been obtained had the continuing and
discontinued operations been operating independently.

The net assets of discontinued operations included in the Consolidated
Balance Sheets at July 31, 1996 and July 31, 1995 amounted to $42,940 and
$61,301, respectively, and consisted primarily of receivables inventory,
property and equipment, intangible assets related to the discontinued
operations, net of accounts payable and accrued liabilities.

The net assets of discontinued operations included in the Consolidated
Balance Sheet at July 31, 1996 is net of approximately $7,000 of liabilities to
be paid from the $50,100 sale proceeds.

F-8
<PAGE> 74

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

NOTE 3 -- BORROWING ARRANGEMENTS

The Company's short and long-term borrowings are comprised of the
following:

<TABLE>
<CAPTION>
JULY 31, JULY 31,
1996 1995
------- -------
<S> <C> <C>
Revolving Credit Facility................................................ $ 5,430 $ --
General Unsecured Claims & Priority Tax Claims........................... 13,795 21,047
Capital Leases........................................................... 3,683 --
------- -------
Total.......................................................... $22,908 $21,047
======= =======
Classified in the Consolidated Balance Sheet as follows:
Short-term............................................................. $14,381 $ 6,132
Long-term.............................................................. 8,527 14,915
------- -------
Total.......................................................... $22,908 $21,047
======= =======
</TABLE>

The Company maintained a $25,000 three year secured domestic Revolving
Credit Facility (subject to borrowing base limitations) which expired October
12, 1996 with BT Commercial Corporation and LaSalle National Bank. The Revolving
Credit Facility included a $10,000 sub-facility for the issuance of letters of
credit. As of July 31, 1996, the calculated borrowing base was approximately
$18,400. As security for utilizations of the Revolving Credit Facility, the
Company granted a security interest and general lien upon its domestic assets.
As of July 31, 1996 the Company had borrowings of $5,430 under the Revolving
Credit Facility and was utilizing $3,347 of the facility to secure outstanding
letters of credit. Interest was charged at a rate of 1.75% in excess of the
prime lending rate of Bankers Trust Company. Letter of credit fees were 2.5% per
annum plus a 0.5% facing fee on standby letters of credit and 1.5% per annum on
commercial documentary letters of credit. As of July 31, 1996, the interest rate
was 10.0%.

The Revolving Credit Facility agreement contained restrictive covenants
which limited capital expenditures, restricted the payment of dividends and
other payments and provided for quarterly measures of pretax net income and
interest coverage, among other things. In addition, the agreement limited the
Company's ability to borrow or to request letters of credit following a material
adverse change as determined by the lenders.

In August, 1996 the Company completed the sale of substantially all of the
assets and liabilities of the Sheridan Systems division for proceeds of $50,100.
The proceeds of the sale were used in part to pay off all outstanding borrowings
on the Revolving Credit Facility and to cash collateralize outstanding letters
of credit. At September 28, the Company had a cash balance of $41,228 after
repaying bank debt and meeting other short term obligations. The Company is
currently seeking to obtain new banking facilities to provide for the issuance
of letters of credit, fund selected customer financing programs, and increase
liquidity to the Company.

On October 13, 1993 the Company concluded a reorganization when the United
States Bankruptcy Court for the District of Delaware confirmed the Company's
Plan of Reorganization (Plan). The Plan provides that holders of allowed general
unsecured claims receive cash payments toward satisfaction of the full amount of
their claims in equal quarterly payments payable on the last business day of
each calendar quarter ending after October 13, 1993 over a five-year period,
together with interest at 5% per annum. Holders of priority tax claims are paid
10% of the allowed claim together with accrued and unpaid interest at 8% per
annum on the then outstanding amount on each anniversary of October 13, 1993
which occurs prior to the sixth anniversary of the date of assessment and the
balances of such claims along with accrued and unpaid interest on the sixth
anniversary. For financial reporting purposes interest on general unsecured
claims has been imputed at 9% per

F-9
<PAGE> 75

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

annum. At July 31, 1996 the Company had $872 of restricted cash which primarily
pertains to the settlement of disputed claims in accordance with the Plan.

As of July 31, 1996, aggregate maturities of total debt, excluding
capitalized leases, are as follows:

<TABLE>
<S> <C>
Due fiscal year ending:
1997....................................................... $13,178
1998....................................................... 4,855
1999....................................................... 1,192
2000....................................................... --
2001....................................................... --
Thereafter................................................. --
</TABLE>

Cash paid for interest was $2,282 during 1996, $1,103 during fiscal 1995,
and $655 for the ten months ended of the Reorganized Company in 1994. The
Predecessor Company paid no interest in the two months ended 1994.

NOTE 4 -- CAPITAL STRUCTURE

The Company's charter authorizes 50 million shares of stock, of which 40
million shares are reserved for issuance as Common Stock and 10 million shares
are reserved for issuance as Preferred Stock. The Board of Directors has
authorized the issuance of 7,010,000 of such shares of $.01 par value Common
Stock. Of these shares, 7,000,000 were issued on the effective date to holders
of claims and interests as described in Note 14. In addition, the Company issued
Warrants on the Effective Date to purchase 1,095,000 shares of Common Stock. The
Warrants were exercisable at $18.00 per share and expired on October 15, 1996.
No warrants were exercised prior to their expiration. As of July 31, 1996 the
Company has not yet issued any Preferred Stock. The Common Stock and all other
equity securities issued under the new charter are voting securities (although
the voting rights of any preferred stock issued would differ from those of the
Common Stock) and will not have any preemptive rights to subscribe for
additional shares. The Common Stock is not subject to conversion or redemption
and when issued is fully paid and non-assessable.

NOTE 5 -- COMMITMENTS AND CONTINGENCIES

The Company received creditor claims during its bankruptcy proceedings
which the Company believes are duplicative, erroneous or exaggerated and to
which the Company believes it has valid defenses. The Company has filed
objections to these disputed claims in the United States Bankruptcy Court in
Delaware. As of July 31, 1995 and July 31, 1996, disputed claims amounted to
$50,700 and $31,300, respectively. The disputed claims are primarily comprised
of environmental and product liability claims. The Company has been notified of
various environmental matters in connection with certain current or former
Company locations in Illinois, Ohio, Indiana, Pennsylvania, and Rhode Island. In
the third quarter of 1996 the Company recorded a $2,800 favorable adjustment due
to the resolution of legal disputes which had been previously reserved.

The Company is also involved in various other administrative and legal
proceedings incidental to its business, including product liability and general
liability lawsuits against which the Company is partially insured. The disputed
claims are in many cases in excess of recorded reserves. At the present time, it
is management's opinion, based on information available to the Company and
management s experience in such matters, that the resolution of these legal
proceedings is not expected to have a material adverse effect on the Company's
financial condition, results of operations or liquidity.

F-10
<PAGE> 76

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

NOTE 6 -- INCOME TAXES

The components of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR
----------------------------------------------- COMPANY
------------------
TWELVE MONTHS ENDED TEN MONTHS TWO MONTHS
------------------------------ ENDED ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1994 SEPTEMBER 29, 1993
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
The domestic and foreign components of
income (loss) from continuing
operations are as follows:
Domestic.............................. $ (18,857) $(5,302) $ 4,029 $ 21,988
Foreign............................... (1,397) (375) 447 (193)
-------- ------- ------ -------
$ (20,254) $(5,677) $ 4,476 $ 21,795
======== ======= ====== =======
Provision (benefit) for income taxes for
continuing operations:
Domestic.............................. $ -- $(1,744) $ 2,050 $ --
Foreign............................... (97) 218 344 --
-------- ------- ------ -------
$ (97) $(1,526) $ 2,394 $ --
======== ======= ====== =======
A reconciliation of the income tax
expense (benefit) on income (loss) per
the U.S. federal statutory rate to the
reported income tax expense (benefit)
follows:
US Federal statutory rate applied to
pretax income...................... $ (6,886) $(1,930) $ 1,521 $ 7,410
Intangibles with no tax benefit....... 138 240 474 --
Operating loss with no current tax
benefit and varying tax rates of
other national governments......... 6,597 130 192 732
State income tax...................... -- -- 162 --
Non taxable reorganization items...... -- -- -- (8,142)
Other................................. 54 34 45 --
-------- ------- ------ -------
INCOME TAX EXPENSE (RECOVERY)........... $ (97) $(1,526) $ 2,394 $ --
======== ======= ====== =======
</TABLE>

F-11
<PAGE> 77

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standard (SFAS) No. 109. At July 31, 1996 and July 31, 1995 the
approximate amounts of deferred tax assets and deferred tax liabilities
resulting from temporary differences and carryforwards were as follows:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred Tax Assets
Inventory valuation.................................. $ 3,600 $ 2,400
Insurance reserves................................... 6,400 7,000
Other................................................ 10,700 10,700
-------- --------
Subtotal............................................... 20,700 20,100
Domestic tax operating loss carryforwards limited by
Sec 382.............................................. 21,000 21,000
Domestic tax operating loss carryforwards.............. 49,800 37,400
Foreign tax operating loss carryforwards............... 2,700 2,400
AMT credit carryforward................................ 1,800 1,800
-------- --------
Deferred Tax assets.................................... 96,000 82,700
Valuation allowance............................... (96,000) (82,700)
-------- --------
Net deferred tax asset................................. $ -- $ --
======== ========
</TABLE>

The Sec. 382 ownership change which resulted from the 1993 bankruptcy
reorganization imposed a limitation on the usage of pre-reorganization domestic
tax operating loss carryforwards. Usage of this loss carryforward is limited to
$3,689 per year or $55,335 for a period of 15 years following the ownership
change. In addition, as of July 31, 1996 the Company had domestic tax loss
carryforwards of approximately $131,000 attributable to post-reorganization
periods and therefore not subject to limitation. The domestic tax loss
carryforwards will expire from 1997 to 2011. The AMT credit, although subject to
the Sec. 382 limitation, has no expiration date.

During 1996, the deferred tax asset increased by $13,300 primarily due to
the creation of additional domestic loss carryforwards. Due to the uncertainty
as to the realizability of the deferred tax assets, the Company has established
valuation allowances in accordance with SFAS No. 109 to offset the asset.

To the extent the Company realizes a tax benefit as a result of future
reductions in the valuation allowance related to the utilization of
pre-reorganization deferred tax assets, fresh start accounting rules provide for
the reporting of such benefit first by reducing "Reorganization Value in Excess
of Amounts Allocable to Identifiable Assets" and thereafter increasing Capital
in excess of par value. Although the future recognition of this benefit will
have no impact on net earnings, the Company will realize a cash benefit from
utilization of the "Pre-Reorganization Benefits" against any future tax
liabilities.

NOTE 7 -- DEFERRED COMPENSATION

The Company's 1994 Long Term Incentive Plan provides for the issuance of
1,400,000 shares of new $.01 par value Common Stock. Options to purchase the
Common Stock are awarded at a price not less than 100% of the market price on
the date of grant, which becomes exercisable at various dates generally from one
to four years after the date of grant, and expire ten years after the date of
grant. In the event a holder of options is no longer employed by the Company,
the unvested shares are canceled upon the employee's termination and any vested
shares must be exercised within 90 days or they are also canceled. The number of
shares outstanding at the end of 1996 includes 57,200 unvested and 35,336 vested
shares with an option price range of $2.130 -- $9.625 which are held by Sheridan
Systems employees. The unvested shares were canceled

F-12
<PAGE> 78

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

on the date of the Sheridan Systems sale, August 27, 1996, and the vested shares
may be exercised by no later than November 25, 1996.

<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
OPTION PRICE OPTION PRICE
NUMBER OF RANGE NUMBER OF RANGE
SHARES PER SHARE SHARES PER SHARE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
OUTSTANDING AT BEGINNING OF THE YEAR........ 598,417 $8.750-12.125 376,000 $9.625-11.500
Granted..................................... 91,236 $2.130- 8.125 277,917 $8.750-12.125
Exercised................................... -- -- -- --
Canceled.................................... (183,500) $2.130-12.125 (55,500) $9.625-10.000
------- ------------- ------- -------------
OUTSTANDING AT END OF PERIOD................ 506,153 $8.750-12.125 598,417 $8.750-12.125
======= ============= ======= =============
EXERCISABLE AT END OF PERIOD................ 205,600 $8.125-12.125 127,900 $9.125-11.500
======= ============= ======= =============
</TABLE>

NOTE 8 -- UNUSUAL ITEMS

During 1996, the Company committed to certain restructuring actions in an
effort to realign the operations with established strategic objectives. The
restructuring actions are summarized as follows:

<TABLE>
<S> <C>
Change in Control Payments........................................... $1,250
Corporate Restructuring.............................................. 1,595
Bankruptcy of Canadian Subsidiary.................................... 3,561
Exit of Manufacturing Operations and Office Closures................. 626
------
Total Restructuring Costs............................................ $7,032
======
</TABLE>

On August 27, 1996 the Company completed the sale of substantially all the
assets of its Sheridan Systems division. As a result of the event, "Change in
Control" provisions included within employment agreements of certain Company
executives were activated. Total charges pertaining to such provisions amounted
to $1,250 and were paid in the first quarter of fiscal 1997.

In conjunction with the Sheridan Systems sale and in an effort to reduce
costs, management committed to a plan to close its Corporate headquarters and
consolidate certain functions within the AM Multigraphics operations. This
decision ultimately will result in the termination of seven employees, including
three officers. Severance and benefits associated with these terminations
amounted to $1,595.

During the fourth quarter, the Company committed to a plan to exit its
Canadian subsidiary. On October 17, 1996 the subsidiary filed for a voluntary
assignment in bankruptcy. In connection with the exit plan, reserves were
established to write-off net assets of the operation. The Canadian subsidiary
had revenues of $9,951, $10,285 and $11,557 in 1996, 1995 and 1994,
respectively.

During the year, management finalized plans to exit the machine
manufacturing business and consolidate its field sales and service facilities.
Costs associated with the exit plan are comprised primarily of facility closure
costs, disposal of manufacturing equipment and severance costs. The Company
began implementation of such plans during the fourth quarter and anticipates all
actions to be completed within one year.

F-13
<PAGE> 79

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

NOTE 9 -- BALANCE SHEET ACCOUNTS

The components of certain balance sheet accounts are as follows:

<TABLE>
<CAPTION>
JULY 31, 1996 JULY 31, 1995
------------- -------------
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Accounts receivable................................................ $20,596 $37,721
Allowance for doubtful accounts.................................... (822) (1,312)
------- -------
Total accounts receivable, net............................. $19,774 $36,409
======= =======
INVENTORIES:
Raw materials...................................................... $ 1,407 $ 1,415
Work-in-process.................................................... 2,959 3,485
Finished goods..................................................... 7,236 23,532
------- -------
Total inventories, net..................................... $11,602 $28,432
======= =======
PROPERTY, PLANT AND EQUIPMENT
Land............................................................... $ -- $ 4,600
Buildings.......................................................... -- 2,101
Machinery and equipment............................................ 13,240 8,699
Leasehold improvements............................................. 3,026 608
------- -------
16,266 16,008
Less accumulated depreciation and amortization....................... (5,399) (3,555)
------- -------
Net property, plant and equipment.......................... $10,867 $12,453
======= =======
</TABLE>

NOTE 10 -- RETIREMENT BENEFIT PLANS

The Company maintains defined contribution retirement plans for domestic
employees comprised of savings plans (401(k)) and a Retirement Accumulation
Plan. Contributions to these plans take the form of (i) company contributions to
match a portion of employee contribution and (ii) contributions made at the
discretion of the Board of Directors. The Company's contributions to the
domestic defined contribution plans were $1,317, $1,778 and $2,019 for the
Reorganized Company in 1996, 1995 and 1994 respectively, and $403 for the
Predecessor Company in 1994.

The Company also maintains defined benefit pension plans for certain U.S.
employees under a Company maintained plan. The components of net periodic
pension cost for these plans are shown below for 1996, 1995 and 1994:

<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
---------------------------------------------------- -------------
TWO MONTHS
TWELVE MONTHS ENDED TEN MONTHS ENDED
-------------------------------- ENDED SEPT. 29,
JULY 31, 1996 JULY 31, 1995 JULY 31, 1994 1993
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Benefits earned during the year.... $ 233 $ 226 $ 92 $ 18
Interest accrued on projected
benefit obligation............... 63 41 41 8
Actual return on assets............ -- -- -- --
Net amortization and deferral...... 12 24 -- 7
---- ---- ---- ---
Net periodic pension cost.......... $ 308 $ 291 $ 133 $ 33
==== ==== ==== ===
</TABLE>

F-14
<PAGE> 80

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

The status of the defined benefit pension plans at July 31 was as follows:

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Plan assets at fair value................................... $ -- $ --
Actuarial present value of benefit obligation
Vested.................................................... 1,069 1,186
Nonvested................................................. -- --
Accumulated Benefit Obligation.............................. 1,069 1,186
Effect of projected future salary increases................. -- 265
------- -------
Projected benefit obligation................................ 1,069 1,451
------- -------
Plan assets in excess of (less than) projected benefit
obligation................................................ (1,069) (1,451)
Unrecognized net transition (asset) obligation.............. -- --
Unrecognized net (gain) loss................................ 190 468
------- -------
Prepaid (accrued) pension cost at year end.................. $ (879) $ (983)
======= =======
</TABLE>

The assumed discount rate on benefit obligations was 7.0% in 1996 and 1995.
The assumed rates of compensation increases were 4.0% in 1996 and 3.3% in 1995.

The Company's operations in Canada and Japan also maintain defined benefit
pension plans. The unfunded benefit obligation for Japan amounted to $3,508 in
1996 and $4,519 in 1995. The prepaid pension cost in Canada was $3,114 in 1996
and $3,015 in 1995. The combined net periodic pension cost was $290 in 1996,
$327 in 1995 and $258 in 1994. Such expenses were $60 for the Predecessor
Company in 1994. As discussed in Note 8 and Note 15, the Company completed the
exit of these operations in the first quarter of 1997.

In addition to pension benefits, the Company provides limited life
insurance and health care benefits to certain domestic retired employees and
provides for certain medical and life insurance benefits for retirees of
previously closed manufacturing locations. The effect of adopting SFAS 106 was
not material.

F-15
<PAGE> 81

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

Net post-retirement life and health care cost includes the following
components:

<TABLE>
<CAPTION> PREDECESSOR
REORGANIZED COMPANY COMPANY
---------------------------------------------- --------------

TWELVE MONTHS ENDED TEN MONTHS TWO MONTHS
----------------------------- ENDED ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1994 SEPT. 29, 1993
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Service Cost -- benefits earned during the
period..................................... $ 5 $ 5 $ 5 $ 1
Interest cost on accumulated post-retirement
benefit obligation......................... 843 846 591 118
----- ----- ---- -----
Total life and health care costs............. $ 848 $ 851 $596 $119
===== ===== ==== =====
</TABLE>

The plans' funded status at July 31, was as follows:

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit
obligations--
Retirees................................ $ 9,617 $10,412
Fully eligible active participants...... 294 269
------- -------
Accumulated postretirement benefit
obligation.............................. 9,911 10,681
Cumulative unrecognized actuarial (gain)
loss.................................... 253 (167)
Plan assets............................... -- --
Accrued post-retirement life and health
care costs.............................. $10,164 $10,514
======= =======
</TABLE>

Assumptions used for the Company's retiree life and health care plans as of
July 31, were as following:

<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Discount rate for determining obligations
and interest cost........................ 8.00% 8.00%
</TABLE>

If the health care cost trend rates were increased 1% for all future years,
the accumulated postretirement benefit obligation would have increased 0.1% at
July 31, 1996. The effect of this change on the aggregate of service and
interest cost would have been an increase of 4.9% for 1996. A 13% increase in
the health care cost trend rate was assumed for retirees under age 65 and an
11.0% increase for those over the age of 65. These rates are assumed to decrease
gradually to 5.5% in the year 2003.

NOTE 11 -- LEASE TRANSACTIONS

The Company leases certain real and personal property and is responsible
for most maintenance, insurance and tax expenses related to leased facilities.
At July 31, 1996, the future lease payments for continuing operating leases are
as follows:

<TABLE>
<S> <C>
1997............................... $ 2,718
1998............................... 1,593
1999............................... 1,060
2000............................... 1,005
2001............................... 949
2002 and thereafter................ 3,642
-------
Total future operating
lease payments.......... $10,967
=======
</TABLE>

Rental expenses for all operating leases were $5,184, $2,437 and $2,457 for
the Reorganized Company in 1996, 1995 and 1994, respectively, and $491 for the
Predecessor Company in 1994.

F-16
<PAGE> 82

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

During 1996, the Company entered into certain capital lease arrangements,
primarily relating to computer hardware and software. Obligations under these
arrangements amount to approximately $3,683 as of July 31, 1996 and extend for
periods of three to five years.

NOTE 12 -- GEOGRAPHIC SEGMENTS

The Company's operations are conducted through AM Multigraphics, its sole
continuing business segment. AM Multigraphics is a leading distributor and to a
lesser degree a manufacturer of equipment and service to the graphics arts
industry. Its principal operations are in North America. The Company also
distributes internationally through foreign dealers and a majority owned
subsidiary in Japan. In September 1996, the Company sold all of its interest in
its AM Japan subsidiary.

<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
------------------------------------------------- --------------
TWELVE MONTHS TWELVE MONTHS TEN MONTHS TWO MONTHS
ENDED ENDED ENDED ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1994 SEPT. 29, 1993
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues
North America....................... $ 137,981 $ 157,440 $ 137,047 $ 22,820
Japan............................... 30,071 34,045 26,769 3,712
-------- -------- -------- -------
Total....................... $ 168,052 $ 191,485 $ 163,816 $ 26,532
======== ======== ======== =======
Operating Profit (Loss)*
North America....................... $ (15,221) $ 1,278 $ 9,292 $ 1,221
Japan............................... (442) 911 1,847 (292)
-------- -------- -------- -------
Total....................... $ (15,663) $ 2,189 $ 11,139 $ 929
======== ======== ======== =======
Assets**
North America....................... $ 45,675 $ 69,555 $ 71,314 $ 60,495
Japan............................... 7,698 20,284 19,383 17,552
-------- -------- -------- -------
Total....................... $ 53,373 $ 89,839 $ 90,697 $ 78,047
======== ======== ======== =======
</TABLE>

- ---------------

* Before Corporate expenses and unusual items

** Excludes Corporate assets primarily consisting of cash and assets of
discontinued operations.

F-17
<PAGE> 83

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

NOTE 13 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

A summary of quarterly financial information for fiscal 1996, 1995 and 1994
is as follows:

<TABLE>
<CAPTION>
QUARTER
----------------------------------------------------------
1996 1ST 2ND 3RD 4TH TOTAL YEAR
- ------------------------------------------------------------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $42,994 $40,886 $44,340 $39,832 $168,052
Gross Profit................................................. 10,889 9,400 11,321 6,021 37,631
Net income (loss) from continuing operations................. (3,460) (4,329) 2,493 (14,861) (20,157)
Net income (loss) from discontinued operations............... (310) (4,401) (1,163) (19,468) (25,342)
------- ------- ------- -------- --------
Net income (loss)............................................ (3,770) (8,730) 1,330 (34,329) (45,499)
======= ======= ======= ======== ========
Per Common Share (2):
Net income (loss) from continuing operations............... $ (0.49) $ (0.62) $ 0.36 $ (2.12) $ (2.88)
Net income (loss) from discontinued operations............. (0.04) (0.63) (0.17) (2.78) (3.62)
------- ------- ------- -------- --------
Total.................................................... $ (0.54) $ (1.25) $ 0.19 $ (4.90) $ (6.49)
======= ======= ======= ======== ========
Closing Market Price
High................................................. $ 8.375 $ 7.500 $ 4.688 $ 3.063 $ 8.375
Low.................................................. $ 7.250 $ 4.688 $ 1.875 $ 1.875 $ 1.875
</TABLE>

<TABLE>
<CAPTION>
QUARTER
----------------------------------------------------------
1995 1ST 2ND 3RD 4TH TOTAL YEAR
- ------------------------------------------------------------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $43,532 $47,697 $47,095 $53,161 $191,485
Gross Profit................................................. 12,392 12,787 13,203 14,351 52,733
Net income (loss) from continuing operations................. (1,442) (1,400) (557) (752) (4,151)
Net Income (loss) from discontinued operations............... 1,741 1,656 730 4,637 8,764
------- ------- ------- -------- -------
Net Income (loss)............................................ 299 256 173 3,885 4,613
======= ======= ======= ======== =======
Per Common Share (2):
Net income (loss) from continuing operations............... $ (0.20) $ (0.20) $ (0.08) $ (0.11) $ (0.59)
Net income (loss) from discontinued operations............. 0.24 0.24 0.10 0.66 1.25
------- ------- ------- -------- -------
Total.................................................... $ 0.04 $ 0.04 $ 0.02 $ 0.55 $ 0.66
======= ======= ======= ======== =======
Closing Market Price
High................................................... $12.250 $10.125 $ 9.250 $9 .250 $ 12.250
Low.................................................... $10.000 $ 8.875 $ 8.625 $ 8.125 $ 8.125
</TABLE>

F-18
<PAGE> 84

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PREDECESSOR
COMPANY REORGANIZED COMPANY
-------------- -------------------------------------------------------------------
AUG. 1, 1993 SEPT. 30, 1993 QUARTER
THROUGH THROUGH ------------------------------------------------
1994 SEPT. 29, 1993 OCT. 30, 1993 2ND 3RD 4TH TOTAL PERIOD
- -------------------------------------- -------------- -------------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $26,532 $19,030 $44,375 $47,121 $53,290 $163,816
Gross Profit.......................... 7,006 4,548 13,751 15,401 17,721 51,421
Net income (loss) from continuing ops
(1)................................. 21,795 (1,277) 191 1,196 1,972 2,082
Net income (loss) from discontinued
operations.......................... (27,810) 1,506 1,166 1,477 421 4,570
------- ------- ------- ------- ------- --------
Net income (loss)..................... (6,015) 229 1,357 2,673 2,393 6,652
======= ======= ======= ======= ======= ========
Per Common Share (2):
Net income (loss) from continuing
operations........................ N/A(3) ($0.18) $ 0.03 $ 0.17 $ 0.28 $ 0.30
Net income (loss) from discontinued
operations........................ N/A(3) 0.21 0.16 0.21 0.06 .65
------- ------- ------- ------- ------- --------
Total............................. N/A(3) $ 0.03 $ 0.19 $ 0.38 $ 0.34 $ 0.95
======= ======= ======= ======= ======= ========
Closing Market Price:
High.......................... N/A(4) N/A(4) $10.250 $10.875 $11.875 $ 11.875
Low........................... N/A(4) N/A(4) $ 9.500 $ 9.125 $ 8.750 $ 8.750
</TABLE>

- ---------------

(1) Net loss excludes $58,704 of Extraordinary Gain.

(2) Sum of quarters may not equal the total for the year due to changes in the
number of share outstanding during the year.

(3) The net income (loss) per common share for the Predecessor Company has not
been presented because it is not comparable.

(4) Trading of Predecessor Company Common Stock and Preferred Stock was
suspended on May 21, 1993. Periods prior to this date are not presented as
they are not comparable.

NOTE 14 -- PLAN OF REORGANIZATION AND FRESH START REPORTING

The United States Bankruptcy Court for the District of Delaware confirmed
the Company's Plan of Reorganization (the Plan) on September 29, 1993 (the
Confirmation Date), which allowed the Company to emerge from Chapter 11
Bankruptcy effective October 13, 1993 (the Effective Date). The Company operated
under the protection of Chapter 11 following a voluntary petition for
reorganization filed May 17, 1993. The Plan provided for the issuance of
approximately seven million new shares of common stock and distributions to
major creditors and shareholders. The holders of the Company's 12% senior
subordinated debentures received nearly 97% of the new common stock with the
balance of the new common stock distributed to preferred stock and common stock
holders. General unsecured creditors receive quarterly cash payments for five
years with payments commencing December 31, 1993. All distributions were made in
accordance with the plan provisions.

The distribution of shares of the new Common Stock and Warrants commenced
on October 13, 1993. The new Common Stock and new Warrants became listed on the
American Stock Exchange on December 6, 1993.

Fresh Start Reporting

As of the Confirmation Date, the Company adopted Fresh Start Reporting in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7 (SOP 90-7) -- "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." Fresh Start Reporting resulted in

F-19
<PAGE> 85

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

material changes to the consolidated balance sheet, including valuation of
assets and liabilities at fair market value and valuation of equity based on the
appraised reorganization value of the ongoing business.

The Company recorded a reorganization value of $36,000 (the approximate
fair value) which was based on the consideration of many factors and various
valuation methods, including discounted cash flows and price/earnings and other
applicable ratios and valuation techniques believed by management and its
financial advisors to be representative of the Company's business and industry.
The excess of the reorganization value over the fair value of net assets and
liabilities is reported as excess reorganization value and is amortized over a
twenty year period.

The Reorganization and the adoption of Fresh Start Reporting resulted in
the following adjustments to the Company's Consolidated Statement of Operations
for the period ended September 29, 1993:

Reorganization Items:
<TABLE>
<CAPTION>
INCOME/(EXPENSE)
----------------------------
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS
----------- ------------
<S> <C> <C>
Fair Market Value Adjustments to tangible Assets
and Liabilities, net....................................... $ 8,024 $ (9,680)
Write-off existing Goodwill.................................. -- (39,840)
Accrue Professional Fees to complete reorganization
process.................................................... (10,100) --
Reorganization Value in excess of Fair Market Value tangible
Assets and Liabilities..................................... 26,022 39,471
Certain foreign entities with Reorganization Value Less than
Fair Value of tangible Assets and Liabilities.............. -- (17,000)
-------- --------
Total Reorganization Items......................... $ 23,946 $(27,049)
======== ========
Extraordinary Gain:

<CAPTION>
INCOME/(EXPENSE)
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS
-------- --------
<S> <C> <C>
Carrying Value of 12% Senior Subordinated Debentures plus
accrued interest........................................... $ 93,624 $ --
Fair Value of Equity exchanged for Debt per the Plan......... (34,920)
-------- --------
Total Extraordinary Gain..................................... $ 58,704 $ --
======== ========
</TABLE>

NOTE 15 -- SUBSEQUENT EVENTS

During the fourth quarter of 1996, the Company committed to sell all of its
ownership interest in its majority owned Japanese subsidiary. On September 20,
1996 the Company completed the sale of its 2,148,000 shares of AM Japan Co.,
Ltd, and the Company received proceeds of approximately $10,600, net of certain
costs. At July 31, 1996, the Company's investment in the subsidiary amounted to
$7,698 and is reflected as "Net assets held for sale" in the Consolidated
Balance Sheet. This amount consists primarily of receivables, inventory,
property and equipment, intangible assets, net of accounts payable and accrued
liabilities. A gain of approximately $2,600 will be recorded by the Company in
the first quarter of fiscal 1997 as a result of the sale.

On October 29, 1996 the Company entered into a definitive Merger Purchase
Agreement with a corporation newly formed by affiliates of Pacholder Associates,
Inc., a Cincinnati-based provider of investment management, financial advisory
and investment banking services to institutional clients. The agreement

F-20
<PAGE> 86

AM INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED AND PER SHARE AMOUNTS)

provides for the merger of a subsidiary of purchaser with and into the Company
pursuant to which the current shareholders of the Company will receive $5.00 per
common share and the Company will become a wholly-owned subsidiary of the
purchaser. The transaction is conditioned upon the purchaser finalizing a credit
facility within 30 days. The transaction is subject to a number of additional
conditions, including approval by a majority of the shareholders of the Company
at a meeting tentatively scheduled for January, 1997.

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

F-21
<PAGE> 87

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and the
Board of Directors of
AM International, Inc.

We have audited the accompanying consolidated balance sheets of AM
International, Inc. (Reorganized Company) and subsidiaries as of July 31, 1996
and 1995 and the related consolidated statements of operations, shareholders'
equity and cash flows for the years ended July 31, 1996 and 1995, and the period
from September 30, 1993 through July 31, 1994. We have also audited the related
consolidated statements of operations, shareholders' equity and cash flows of AM
International, Inc. (Predecessor Company) and subsidiaries for the period from
August 1, 1993 through September 29, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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, the financial statements referred to above present fairly,
in all material respects, the financial position of AM International, Inc.
(Reorganized Company) and subsidiaries as of July 31, 1996 and 1995 and the
results of their operations and cash flows for the years ended July 31, 1996 and
1995, and for the period from September 30, 1993 through July 31, 1994 and the
results of operations and cash flows of AM International, Inc. (Predecessor
Company) for the period from August 1, 1993 through September 29, 1993, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

October 29, 1996
Chicago, Illinois

F-22
<PAGE> 88

FIVE YEAR FINANCIAL SUMMARY -- Financial information has been restated to
reflect the Sheridan Systems and the Multigraphics -- International operations
as discontinued operations.

- ---------------

(1) Trading of Reorganized Company Common Stock commenced on December 6, 1993.

(2) The net income per common share and average number of common shares and
equivalents for the Company has not been presented as this information is
not comparable.

(3) Trading of Predecessor Company Common Stock and Preferred Stock was
suspended on May 21, 1993. Periods prior to this date are not presented as
they /are not comparable.

See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" for explanations of significant factors affecting
comparability of the above dates.

F-23
<PAGE> 89

APPENDIX I

MERGER PURCHASE AGREEMENT
AMONG

AM INTERNATIONAL, INC.,

8044 ACQUISITION, INC.
AND
8044 ACQUISITION SUB INC.
DATED AS OF OCTOBER 29, 1996
<PAGE> 90

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
1. Definitions........................................................................ 1
2. Basic Transaction.................................................................. 3
(a) The Merger..................................................................... 3
(b) The Closing.................................................................... 3
(c) Actions at the Closing and on the Closing Date................................. 3
(d) Effect of Merger............................................................... 3
(e) Procedure for Payment.......................................................... 4
(f) Closing of Transfer Records.................................................... 5
3. Representations and Warranties of the Target....................................... 5
(a) Organization, Qualification, and Corporate Power............................... 5
(b) Capitalization................................................................. 5
(c) Authorization of Transaction................................................... 6
(d) Noncontravention............................................................... 6
(e) Filings with the SEC........................................................... 6
(f) Financial Statements........................................................... 7
(g) Events Subsequent to July 31, 1996............................................. 7
(h) Undisclosed Liabilities........................................................ 7
(i) Brokers' Fees.................................................................. 7
(j) Insurance...................................................................... 7
(k) Litigation..................................................................... 7
(l) Product Warranty............................................................... 8
(m) Product Liability.............................................................. 8
(n) Employees...................................................................... 8
(o) Employee Benefits.............................................................. 8
(p) Guaranties..................................................................... 10
(q) Environment, Health and Safety................................................. 10
(r) Disclosure..................................................................... 10
(s) Opinion of Financial Advisor................................................... 10
4. Representations and Warranties of the Buyer and the Transitory Subsidiary.......... 10
(a) Organization................................................................... 10
(b) Financing...................................................................... 11
(c) Authorization of Transaction................................................... 11
(d) Noncontravention............................................................... 11
(e) Brokers' Fees.................................................................. 11
(f) Disclosure..................................................................... 11
(g) Litigation..................................................................... 12
(h) Solvency....................................................................... 12
(i) Undertaking.................................................................... 12
5. Covenants.......................................................................... 12
(a) General........................................................................ 12
(b) Notices and Consents........................................................... 12
(c) Regulatory Matters and Approvals............................................... 12
(d) Financing...................................................................... 13
(e) Operation of Business.......................................................... 13
(f) Access......................................................................... 14
(g) Notice of Developments......................................................... 14
(h) Exclusivity.................................................................... 14
(i) Insurance and Indemnification.................................................. 15
(j) Target Stock Options........................................................... 15
</TABLE>

i
<PAGE> 91

<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
(k) Deferred Compensation Shares................................................... 15
6. Conditions to Obligation to Close.................................................. 16
(a) Conditions to Each Party's Obligation To Effect the Merger..................... 16
(b) Conditions to Obligation of the Buyer and the Transitory Subsidiary............ 16
(c) Conditions to Obligation of the Target......................................... 17
7. Termination........................................................................ 18
(a) Termination of Agreement....................................................... 18
(b) Effect of Termination.......................................................... 19
8. Miscellaneous...................................................................... 19
(a) Survival....................................................................... 19
(b) Press Releases and Public Announcements........................................ 19
(c) No Third Party Beneficiaries................................................... 19
(d) Entire Agreement............................................................... 19
(e) Successors and Assignment...................................................... 19
(f) Counterparts................................................................... 20
(g) Headings....................................................................... 20
(h) Notices........................................................................ 20
(i) Governing Law.................................................................. 20
(j) Amendments and Waivers......................................................... 20
(k) Severability................................................................... 21
(l) Expenses....................................................................... 21
(m) Construction................................................................... 21
(n) Incorporation of Exhibits and Schedules........................................ 21
</TABLE>

ii
<PAGE> 92

LIST OF EXHIBITS

<TABLE>
<S> <C> <C>
Exhibit A -- Certificate of Merger
Exhibit B -- Permitted Investments for Payment Fund
Exhibit C -- Legal Opinion of Counsel to the Target
Exhibit D -- Legal Opinion of Counsel to the Buyer
</TABLE>

iii
<PAGE> 93

MERGER PURCHASE AGREEMENT

THIS MERGER PURCHASE AGREEMENT ("Agreement") is entered into as of October
29, 1996 among AM INTERNATIONAL, INC., a Delaware corporation (the "Target"),
8044 ACQUISITION, INC., a Delaware corporation (the "Buyer"), and 8044
ACQUISITION SUB INC., a Delaware corporation and a wholly-owned Subsidiary of
the Buyer (the "Transitory Subsidiary"). The Buyer, the Transitory Subsidiary
and the Target are individually referred to as a "Party" and collectively as the
"Parties."

R E C I T A L S:

This Agreement contemplates a transaction in which the Buyer will acquire
all of the outstanding capital stock of the Target for cash through a reverse
subsidiary merger of the Transitory Subsidiary with and into the Target.

Now, therefore, in consideration of the premises and the mutual covenants
and undertakings contained hereinafter, and the Parties agree as follows.

1. Definitions.

Unless the context otherwise requires, capitalized terms used in this
Agreement shall have the respective meanings ascribed to them in this Section 1.

"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.

"Buyer" has the meaning set forth in the preface above.

"Buyer-owned Share" means any Target Share that the Buyer or the Transitory
Subsidiary owns of record or beneficially.

"Certificate of Merger" has the meaning set forth in Section below.

"Certificates" has the meaning set forth in Section 2(e) below.

"Closing" has the meaning set forth in Section 2(e) below.

"Closing Date" has the meaning set forth in Section 2(b) below.

"Code" means the Internal Revenue Code of 1986, as amended.

"Confidential Information" means any information concerning the businesses
and affairs of the Target and its Subsidiaries that is not already available to
the public or generally known in the businesses in which the Target and its
Subsidiaries are engaged.

"Confidentiality Agreement" has the meaning set forth in Section 5(f)
below.

"Controlled Group of Corporations" has the meaning set forth in Section
1563 of the Code.

"Deferred Compensation Consideration" has the meaning set forth in Section
5(k) below.

"Deferred Compensation Shares" has the meaning set forth in Section 3(b)
below.

"Definitive Financing Agreements" has the meaning set forth in Section 5(d)
below.

"Definitive Proxy Materials" means the definitive proxy materials relating
to the Special Meeting.

"Delaware General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended.

"Disclosure Schedule" has the meaning set forth in Section 3 below.

"Dissenting Share" means any Target Share held of record by a stockholder
who or which has exercised his or its appraisal rights under the Delaware
General Corporation Law.
<PAGE> 94

"Effective Time" has the meaning set forth in Section 3 below.

"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.

"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
3(2).

"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(1).

"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, each as amended, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and foreign governments (and all
agencies thereof) concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"Fairness Opinion" has the meaning set forth in Section 3(s) below.
"Financing Commitments" has the meaning set forth in Section 5(d) below.
"Financing Proposals" has the meaning set forth in Section 4(b) below.

"GAAP" means United States generally accepted accounting principles as in
effect from time to time.

"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.

Indemnified Parties" has the meaning set forth in Section 5(i) below.

"Knowledge" means, with respect to Target, the actual knowledge of Jerome
Brady, Thomas Rooney, Gregory Knipp, David Rutherford and Steven Andrews after
reasonable investigation (unless stated otherwise).

"Merger" has the meaning set forth in Section below.

"Merger Consideration" has the meaning set forth in Section 2(d)(v) below.

"1996 10-K" has the meaning set forth in Section 3(e) below.

"Option Consideration" has the meaning set forth in Section 5(j) below.

"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).

"Party" and "Parties" have the respective meanings set forth in the preface
above.

"Paying Agent" has the meaning set forth in Section 2(e) below.

"Payment Fund" has the meaning set forth in Section 2(e) below.

"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or a governmental entity (or any
department, agency or political subdivision thereof).

"Public Reports" has the meaning set forth in Section 3(e) below.

"Requisite Stockholder Approval" means the affirmative vote of the holders
of a majority of the outstanding Target Shares entitled to vote thereon in
respect of this Agreement and the Merger.

2
<PAGE> 95

"SEC" means the Securities and Exchange Commission.

"SEC Filings" has the meaning set forth in Section 5(c)(i) below.

"Securities Act" means the Securities Act of 1933, as amended.

"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.

"Security Interest" means any mortgage, pledge, lien, encumbrance, charge
or other security interest, excepting only (a) mechanic's, materialman's and
similar liens, (b) liens for taxes not yet due and payable or for taxes that the
taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens securing rental payments under capital lease arrangements,
and (d) other liens arising in the Ordinary Course of Business and not incurred
in connection with the borrowing of money.

"Solvency Opinion" has the meaning set forth in Section 6(a)(iv) below.

"Special Meeting" has the meaning set forth in Section 5(c)(ii) below.

"Subsidiary" means any corporation with respect to which a specified Person
(or a Subsidiary thereof) owns a majority of the common stock or has the power
to vote or direct the voting of securities entitled to vote generally in the
election of directors sufficient to elect a majority of the directors.

"Surviving Corporation" has the meaning set forth in Section 2(a) below.

"Target" has the meaning set forth in the preface above.

"Target Preferred Stock" has the meaning set forth in Section 3(b) below.

"Target Share" means any share of the Common Stock, $.01 par value per
share, of the Target.

"Target Stock Options" has the meaning set forth in Section 3(b) below.

"Target Stockholder" means any Person who or which is a holder of record of
any Target Shares.

"Third Party Offer" has the meaning set forth in Section 5(h) below.

"Transitory Subsidiary" has the meaning set forth in the preface above.

2. Basic Transaction.

(a) The Merger. On and subject to the terms and conditions of this
Agreement, the Transitory Subsidiary shall merge with and into the Target (the
"Merger") at the Effective Time. The Target shall be the corporation surviving
the Merger (in this capacity, the "Surviving Corporation").

(b) The Closing. The closing of the Merger (the "Closing") shall take place
at the offices of Sidley & Austin, One First National Plaza, Chicago, Illinois
60603, commencing at 9:00 a.m. local time on the second business day following
the satisfaction or waiver of all conditions set forth in Section 6 (other than
conditions with respect to actions the respective Parties will take at the
Closing itself) or such other date as the Parties may mutually determine in
writing (the "Closing Date").

(c) Actions at the Closing and on the Closing Date. At the Closing, (i) the
Target will deliver to the Buyer and the Transitory Subsidiary the certificates,
instruments and documents referred to in Section 6(b) below, (ii) the Buyer and
the Transitory Subsidiary will deliver to the Target the certificates,
instruments and documents referred to in Section 6(c) below. On the Closing
Date, (i) the Target and the Transitory Subsidiary will file with the Secretary
of State of the State of Delaware a Certificate of Merger in the form attached
hereto as Exhibit A (the "Certificate of Merger"), and (ii) the Buyer will
deliver the Payment Fund to the Paying Agent in the manner provided below in
this Section.

(d) Effect of Merger.

(i) General. The Merger shall become effective at the time (or at such
later time as the Parties shall agree and specify in the Certificate of
Merger) (the "Effective Time") the Target and the Transitory Subsidiary
file the Certificate of Merger with the Secretary of State of the State of
Delaware.

3
<PAGE> 96

The Merger shall have the effects set forth in the Delaware General
Corporation Law. Subject to the terms and conditions of this Agreement, the
Surviving Corporation may, at any time after the Effective Time, take any
action (including executing and delivering any document) in the name and on
behalf of either the Target or the Transitory Subsidiary in order to carry
out and effectuate the transactions contemplated by this Agreement.

(ii) Certificate of Incorporation. The Certificate of Incorporation of
the Surviving Corporation shall be amended and restated at and as of the
Effective Time to be identical to the Certificate of Incorporation of the
Transitory Subsidiary immediately prior to the Effective Time except that
the name of the Surviving Corporation will be changed to "Multigraphics,
Inc.". Bylaws. The Bylaws of the Surviving Corporation shall be amended and
restated at and as of the Effective Time to be identical to the Bylaws of
the Transitory Subsidiary immediately prior to the Effective Time except
that the name of the Surviving Corporation will be changed to
"Multigraphics, Inc.".

(iii) Directors and Officers. The directors of the Transitory
Subsidiary shall become the directors of the Surviving Corporation at and
as of the Effective Time (retaining their respective positions and terms of
office). The officers of the Target shall, subject to Section 6(b)(vii)
hereof, become the officers of the Surviving Corporation at and as of the
Effective Time.

(iv) Conversion of Target Shares. At and as of the Effective Time, (A)
each Target Share then issued and outstanding (other than any Dissenting
Share or Buyer-owned Share) shall be converted into the right to receive an
amount equal to Five Dollars ($5.00) in cash (without interest) (the
"Merger Consideration") (B) each Dissenting Share shall be converted into
the right to receive payment from the Surviving Corporation with respect
thereto to the extent provided by, and in accordance with, the provisions
of the Delaware General Corporation Law, and (C) each Buyer-owned Share
shall be canceled; provided, however, that the Merger Consideration shall
be subject to equitable adjustment in the event of any stock split, stock
dividend, reverse stock split, or other change in the number of Target
Shares outstanding. After the Effective Time, no Target Share shall be
deemed to be outstanding or to have any rights other than those set forth
above in this Section.

(v) Conversion of Capital Stock of the Transitory Subsidiary. At and
as of the Effective Time, each share of Common Stock, $.01 par value per
share, of the Transitory Subsidiary shall be converted into one share of
Common Stock, $.01 par value per share, of the Surviving Corporation.

(e) Procedure for Payment.

(i) Immediately after the Effective Time, (A) the Buyer will deposit
with a commercial bank or such other Person as shall be reasonably
acceptable to the Target (the "Paying Agent") a corpus (the "Payment Fund")
consisting of cash sufficient in the aggregate for the Paying Agent to make
full payment of the Merger Consideration to the holders of record
immediately prior to the Effective Time of all of the outstanding Target
Shares (other than any Dissenting Shares and Buyer-owned Shares) and (B)
the Buyer will cause the Paying Agent to mail a letter of transmittal in
customary and reasonable form (which shall specify that delivery shall be
effected, and risk of loss and title to the certificates (the
"Certificates") which represented his or its Target Shares shall pass only
upon actual delivery thereof to the Paying Agent and shall contain
instructions for use in effecting the surrender of such Certificates in
exchange for the Merger Consideration). Upon surrender of a Certificate to
the Paying Agent for cancellation, together with a duly executed letter of
transmittal and such other documents as may be reasonably requested by the
Paying Agent, the holder of such Certificate shall be entitled to receive
in exchange therefor the amount of cash, without interest, into which the
Target Shares theretofore represented by such Certificate shall have been
converted at the Effective Time pursuant to Section 2(d)(v); and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Target Shares that is not registered in the
transfer records of the Surviving Corporation, payment may be made to a
person other than the person in whose name the Certificate so surrendered
is registered if such Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment shall
pay any transfer or other taxes required by reason of the payment to a
person other than the registered holder of such Certificate or establish to
the satisfaction of the

4
<PAGE> 97

Surviving Corporation that such tax has been paid or is not applicable.
Until surrendered as contemplated by Section 2(e)(i), each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the amount of cash, without interest,
into which the Target Shares theretofore represented by such Certificate
shall have been converted at the Effective Time pursuant to this Section
2(d)(v). No interest will accrue or be paid to the holder of any
outstanding Target Shares.

In the event a Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by Buyer or
the Surviving Corporation, upon the posting by such person of a bond in
such amount as Buyer or the Surviving Corporation may reasonably direct as
indemnity against any claim that may be made against it with respect to
such Certificate and upon such person's compliance with the other
requirements set forth in this Section 2(e)(i), the Paying Agent will issue
in respect of such lost, stolen or destroyed Certificate, the Merger
Consideration to be received by virtue of the Merger with respect to the
Target Shares represented thereby.

(ii) The Buyer may cause the Paying Agent to invest the Payment Fund
in one or more of the permitted investments set forth on Exhibit B attached
hereto; provided, however, that the terms and conditions of the investments
shall be such as to permit the Paying Agent to make prompt payment of the
Merger Consideration as necessary. The Buyer may cause the Paying Agent to
pay over to the Surviving Corporation any net earnings with respect to the
investments, and the Buyer will deposit promptly with the Paying Agent any
portion of the Payment Fund which is lost through investments.

(iii) The Buyer may cause the Paying Agent to pay over to the
Surviving Corporation any portion of the Payment Fund (including any
earnings thereon) remaining one hundred eighty (180) days after the
Effective Time, and thereafter all former stockholders shall be entitled to
look to the Surviving Corporation (subject to abandoned property, escheat,
and other similar laws) as general creditors thereof with respect to the
cash payable upon surrender of their certificates.

(iv) The Buyer shall pay all charges and expenses of the Paying Agent.

(f) Closing of Transfer Records. After the close of business on the Closing
Date, transfers of Target Shares outstanding prior to the Effective Time shall
not be made on the stock transfer books of the Surviving Corporation.

3. Representations and Warranties of the Target. The Target represents and
warrants to the Buyer and the Transitory Subsidiary that the statements
contained in this Section are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section), except as set forth in the disclosure
schedule delivered by the Target simultaneously with the execution and delivery
of this Agreement and initialed by the Parties (the "Disclosure Schedule"). The
Disclosure Schedule will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this Section 3.

(a) Organization, Qualification, and Corporate Power. Each of the Target
and its Subsidiaries is a corporation duly organized, validly existing and in
good standing (or the local law equivalent) under the laws of the jurisdiction
of its incorporation. Each of the Target and its Subsidiaries is duly authorized
to conduct business and is in good standing (or the local law equivalent) under
the laws of each jurisdiction where such qualification is required except where
the lack of such qualification would not have a material adverse effect on the
financial condition of the Target and its Subsidiaries taken as a whole or on
the ability of the Parties to consummate the transactions contemplated by this
Agreement. Each of the Target and its Subsidiaries has full corporate power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it.

(b) Capitalization. The entire authorized capital stock of the Target
consists of 40,000,000 Target Shares and 10,000,000 shares of Preferred Stock,
$.01 par value per share ("Target Preferred Stock"). As of the date hereof,
7,010,000 Target Shares are issued and outstanding and 1,579 Target Shares are
held in treasury. As of the date hereof, no shares of Target Preferred Stock are
outstanding. All of the issued and

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outstanding Target Shares have been duly authorized and are validly issued,
fully paid and non-assessable. Other than the Target's EICP deferred
compensation awards ("Deferred Compensation Shares") described in the Disclosure
Schedule and as set forth in the Disclosure Schedule, which sets forth
information regarding options to purchase 396,000 Target Shares ("Target Stock
Options") issued pursuant to the Target's stock option and similar benefit
plans, there are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could require the Target to issue, sell, or
otherwise cause to become outstanding any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Target.

(c) Authorization of Transaction. The Board of Directors of the Target, at
a meeting duly called and held, has duly adopted resolutions approving this
Agreement and the Merger, determining that the terms of the Merger are fair to,
and in the best interests of the Target's stockholders and recommending that the
Target's stockholders approve and adopt this Agreement and the Merger. The
Target has full power and authority (including full corporate power and
authority) to execute and deliver this Agreement and to perform its obligations
hereunder; subject to approval and adoption of this Agreement and the Merger by
the Requisite Stockholder Approval. The execution, delivery and performance of
this Agreement and the consummation by the Target of the Merger and of the other
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Target and no other corporate proceedings on
the part of the Target are necessary to authorize this Agreement or to
consummate the transactions so contemplated (in each case, other than, with
respect to this Agreement and the Merger, the Requisite Stockholder Approval).
This Agreement has been duly executed and delivered by the Target and, assuming
this Agreement constitutes a valid and binding obligation of the Buyer and the
Transitory Subsidiary, constitutes a valid and binding obligation of the Target
enforceable against the Target in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights generally and to general principles of equity.

(d) Noncontravention. Except as set forth in of the Disclosure Schedule,
except for filings, permits, authorizations, consents and approvals as may be
required under, and other applicable requirements of, the Securities Exchange
Act (including the filing with the SEC of Definitive Proxy Materials relating to
the Requisite Stockholder Approval), the Hart-Scott-Rodino Act, the laws of the
State of Delaware, the laws of other states in which the Target is qualified to
do or is doing business and state takeover laws, and except for the Requisite
Stockholder Approval and the filing with the Secretary of State of the State of
Delaware and the Recorder of Deeds of the applicable county in the State of
Delaware of the Certificate of Merger following receipt of the Requisite
Stockholder Approval, neither the execution and the delivery of this Agreement
nor the consummation of the transactions contemplated hereby, will (i) violate
any constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government, governmental
agency, or court to which any of the Target and its Subsidiaries is subject or
any provision of the charter or bylaws of any of the Target and its Subsidiaries
or (ii) conflict with, result in a breach of, constitute a default under, result
in the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which any of the Target and its
Subsidiaries is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Security Interest upon any of its
assets), except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation, failure to give notice, or Security
Interest would not have a material adverse effect on the financial condition of
the Target and its Subsidiaries taken as a whole or on the ability of the
Parties to consummate the transactions contemplated by this Agreement.

(e) Filings with the SEC. Since May 17, 1993, the Target has made all
filings with the SEC that it has been required to make under Sections 13(a) and
14(a) of the Securities Exchange Act (collectively, including the Target Annual
Report on Form 10-K for the fiscal year ended July 31, 1996 (the "1996 10-K"),
the "Public Reports"). At the time filed with the SEC, each of the Public
Reports complied in all material respects with the Securities Exchange Act and
the applicable rules and regulations of the SEC thereunder. At the time filed
with the SEC, the Public Reports, as of their respective filing dates, did not
include an untrue

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<PAGE> 99

statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. The Target has delivered to the Buyer a correct
and complete copy of each Public Report (together with all exhibits and
schedules thereto and as amended to date).

(f) Financial Statements. The Target has filed the 1996 10-K with the SEC.
The financial statements included in or incorporated by reference into the 1996
10-K (including the related notes and any schedule(s)) complied as to form in
all material respects with the applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby (except as may be indicated therein or in the notes
thereto), and present fairly the financial condition of the Target and its
Subsidiaries as of the indicated dates and the results of operations and cash
flows of the Target and its Subsidiaries for the indicated periods.

(g) Events Subsequent to July 31, 1996. Except as disclosed in the Public
Reports, since July 31, 1996 there has not been any material adverse change in
the business, financial condition, operations or results of operations of the
Target and its Subsidiaries, taken as a whole.

(h) Undisclosed Liabilities. Except as set forth in the Disclosure
Schedule, none of the Target and its Subsidiaries has any material liability
(whether known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated and
whether due or to become due), including any material liability for taxes,
except for (i) liabilities set forth in the Public Reports or for which
reasonable reserves are maintained and (ii) liabilities which have arisen after
July 31, 1996 in the Ordinary Course of Business.

(i) Brokers' Fees. Except as set forth in the Disclosure Schedule, none of
the Target and its Subsidiaries has any liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.

(j) Insurance. Section 3(j) of the Disclosure Schedule sets forth the
following information with respect to each insurance policy in effect on the
date hereof (including policies providing property, casualty, liability and
workers' compensation coverage and bond and surety arrangements) to which any of
the Target and its Subsidiaries is a party, a named insured or otherwise the
beneficiary of coverage.

(i) the name, address and telephone number of the agent;

(ii) the name of the insurer, the name of the policyholder and the
name of each covered insured;

(iii) the policy number and the period of coverage;

(iv) the scope (including an indication of whether the coverage was on
a claims made, occurrence or other basis) and amount (including a
description of how deductibles and ceilings are calculated and operate) of
coverage; and

(v) a description of any retroactive premium adjustments or other
loss-sharing arrangements.

With respect to each such insurance policy, to the Target's Knowledge: (A) the
policy is legal, valid, binding, enforceable and in full force and effect; (B)
the policy will continue to be legal, valid, binding, enforceable and in full
force and effect on identical terms following the consummation of the Merger;
(C) neither any of the Target and its Subsidiaries nor any other party to the
policy is in material breach or default (including with respect to the payment
of premiums or the giving of notices) and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification or acceleration, under the policy; and (D) no
party to the policy has repudiated any provision thereof. Each of the Target and
its Subsidiaries has been covered since May 17, 1993 by insurance in scope and
amount customary and reasonable for the businesses in which it has engaged
during the aforementioned period. Section 3(j) of the Disclosure Schedule
describes any self-insurance arrangements affecting any of the Target and its
Subsidiaries.

(k) Litigation. Section 3(k) of the Disclosure Schedule sets forth, as of
the date hereof, each instance in which any of the Target and its Subsidiaries
(i) is subject to any outstanding injunction, judgment, order,

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<PAGE> 100

decree, ruling or charge or (ii) is a party or is, to the Target's Knowledge,
threatened to be made a party to any action, suit, proceeding, hearing or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local or foreign jurisdiction or before any
arbitrator. None of the actions, suits, proceedings, hearings and investigations
set forth in Section 3(k) of the Disclosure Schedule is reasonably expected to
result in any material adverse change in the business, financial condition,
operations or results of operations of the Target and its Subsidiaries, taken as
a whole. The Target has no reason to believe that any action, suit, proceeding,
hearing or investigation that could reasonably be expected to result in any such
material adverse change may be brought or threatened against any of the Target
and its Subsidiaries.

(l) Product Warranty. Except as set forth in the Disclosure Schedule, none
of the Target and its Subsidiaries has any liabilities in excess of the
liabilities set forth in the Public Reports or for which reasonable reserves are
maintained for any guaranty, warranty or other indemnity arising from products
manufactured, sold, leased or delivered by any of the Target and its
Subsidiaries, except for (i) liabilities which are not reasonably expected to
result in any material adverse change in the business, financial condition,
operations or results of operations of the Target and its Subsidiaries, taken as
a whole, and (ii) liabilities which have arisen after July 31, 1996 in the
Ordinary Course of Business.

(m) Product Liability. Except as reserved for in the financial statements
contained in the 1996 10-K, to the Target's Knowledge, none of the Target and
its Subsidiaries has any liability arising out of any injury to individuals or
property as a result of the ownership, possession or use of any product
manufactured, sold, leased or delivery by any of the Target and its Subsidiaries
except for any such liabilities which are not reasonably expected to result in
any material adverse change in the business, financial condition, operations or
results of operations of the Target and its Subsidiaries, taken as a whole.

(n) Employees. Except as set forth in the Disclosure Schedule, to Target's
Knowledge, no executive, key employee or group of employees has any plans to
terminate employment with any of the Target and its Subsidiaries other than such
terminations, the effect of which is not reasonably expected to result in any
material adverse change in the business, financial condition, operations or
results of operations of the Target and its Subsidiaries, taken as a whole. None
of the employees of Target or its Subsidiaries are subject to any collective
bargaining agreement. Since May 17, 1993, none of the Target and its
Subsidiaries has committed any unfair labor practice (as such term is defined in
Federal labor law) or experienced any strikes, claims of unfair labor practices
or other collective bargaining disputes, except for any such practices, strikes,
claims or disputes which are not reasonably expected to result in any material
adverse change in the business, financial condition, operations or results of
operations of the Target and its Subsidiaries, taken as a whole. The Target has
no Knowledge of any organizational effort presently being made or threatened by
or on behalf of any labor union with respect to employees of any of the Target
and its Subsidiaries.

(o) Employee Benefits.

(i) Section 3(o) of the Disclosure Schedule lists each Employee
Benefit Plan that any of the Target and its Subsidiaries maintains or to
which any of the Target and its Subsidiaries contributes.

(A) Each such Employee Benefit Plan (and each related trust,
insurance contract or fund) substantially complies in form and in
operation in all respects with the applicable requirements of ERISA, the
Code and other applicable laws.

(B) All required reports and descriptions (including Form 5500
Annual Reports, Summary Annual Reports, PBGC-1s and Summary Plan
Descriptions) have been filed or distributed appropriately with respect
to each such Employee Benefit Plan. The requirements of Part 6 of
Subtitle B of Title 1 of ERISA and of Code Section 4980B have materially
been met with respect to each such Employee Benefit Plan which is an
Employee Welfare Benefit Plan.

(C) All contributions (including all employer contributions and
employee salary reduction contributions) which are due prior to the date
of this Agreement have been paid to each such Employee Benefit Plan
which is an Employee Pension Benefit Plan and all contributions which
are due for any period ending on or before the Closing Date will have
been paid on or before the Closing

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<PAGE> 101

Date to each such Employee Pension Benefit Plan or will have been
accrued in accordance with the past custom and practice of the Target
and its Subsidiaries. All premiums or other payments which are due for
all periods ending on or before the Closing Date will have been paid on
or before the Closing Date with respect to each such Employee Benefit
Plan which is an Employee Welfare Benefit Plan.

(D) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan substantially meets the requirements of a "qualified plan"
under Code Section 401(a) and has received a favorable determination
letter form the Internal Revenue Service or has pending an application
for a determination letter which was timely filed.

(E) The market value of assets under each such Employee Benefit
Plan which is an Employee Pension Benefit Plan (other than any
multiemployer plan) equals or exceeds (or does not fail by an amount
which is material to the Target to equal or exceed) the present value of
all vested and nonvested liabilities thereunder determined in accordance
with PBGC methods, factors and assumptions applicable to an Employee
Pension Benefit Plan terminating on the date for determination.

(F) The Target has delivered to the Buyer correct and complete
copies of the plan documents and summary plan description, the most
recent determination letter received from the Internal Revenue Service,
the most recent Form 5500 Annual Report, and all related trust
agreements, insurance contracts and other funding agreements which
implement each such Employee Benefit Plan.

(ii) With respect to each Employee Benefit Plan that any of the
Target, its Subsidiaries and the Controlled Group of Corporations which
includes the Target and its Subsidiaries maintains or ever has maintained,
within the seven years ending on the Closing Date, or to which any of them
contributes, contributed within the seven years ending on the Closing Date,
or ever has been required to contribute, within the seven years ending on
the Closing Date.

(A) No such Employee Benefit Plan which is an Employee Pension
Benefit Plan (other than any Multiemployer Plan) has been completely or
partially terminated or been the subject of a Reportable Event as to
which notices would be required to be filed with the PBGC (except for
Reportable Events for which PBGC has waived the 30 day notice
requirement). No proceeding by the PBGC to terminate any such Employee
Pension Benefit Plan (other than any Multiemployer Plan) has been
instituted or, to the Target's Knowledge, threatened.

(B) There have been no prohibited transactions (as defined in ERISA
Section 406 and Code Section 4975) with respect to any such Employee
Benefit Plan. No Fiduciary (as defined in ERISA Section 3(21)) has any
liability for breach of fiduciary duty or any other failure to act or
comply in connection with the administration or investment of the assets
of any such Employee Benefit Plan. No action, suit, proceeding, hearing
or investigation with respect to the administration or the investment of
the assets of any such Employee Benefit Plan (other than routine claims
for benefits) is pending or, to the Target's Knowledge, threatened. The
Target has no Knowledge of any basis for any such action, suit,
proceeding, hearing or investigation.

(C) None of the Target and its Subsidiaries has incurred, and the
Target and has no reason to expect that any of the Target and its
Subsidiaries will incur, any liability to the PBGC (other than PBGC
premium payments) or otherwise under Title IV of ERISA (including any
withdrawal liability) or under the Code with respect to any such
Employee Benefit Plan which is an Employee Pension Benefit Plan.

(iii) None of the Target, its Subsidiaries and the other members of
the Controlled Group of Corporations that includes the Target and its
Subsidiaries contributes to, has, within the seven years ending on the
Closing Date, contributed to, or been required to contribute to any
multiemployer plan or has any liability (including withdrawal liability)
under any multiemployer plan.

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(iv) None of the Target and its Subsidiaries contributes or is
required to contribute to any Employee Welfare Benefit Plan providing
medical, health or life insurance or other welfare-type benefits for
current or future retired or terminated employees, their spouses or their
dependents (other than in accordance with Code Section 4980B).

(p) Guaranties. Except as set forth in the Disclosure Schedule or the
Public Reports, none of the Target and its Subsidiaries is a guarantor or
otherwise is liable for any material liability or obligation (including
indebtedness) of any other Person.

(q) Environment, Health and Safety.

(i) Each of the Target and its Subsidiaries are in compliance in all
material respects with all Environmental, Health and Safety Laws. Without
limiting the generality of the preceding sentence, each of the Target and
its Subsidiaries has obtained and since May 17, 1993 been in compliance in
all material respects with the terms and conditions of all permits,
licenses and other authorizations which are required under, and has
complied in all material respects with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules
and timetables which are contained in, all Environmental, Health and Safety
Laws.

(ii) To the Target's Knowledge, none of the Target and its
Subsidiaries has any material liability for damage to any site, location or
body of water (surface or subsurface), for any illness of or personal
injury to any employee or other individual, or for any reason under any
Environmental, Health and Safety Law.

(iii) To the Target's Knowledge, all properties and equipment used in
the business of the Target and its Subsidiaries have been free of asbestos,
PCBs, methylene chloride, trichloroethylene, 1,2-trans-dichloroethylene,
dioxins, dibenzofurans and Extremely Hazardous Substances (as defined in
Section 302 of the Emergency Planning and Community Right-to-Know Act of
1986, as amended) except for such uses, the effect of which is not
reasonably expected to result in any material adverse change in the
business, financial condition, operations or results of operations of the
Target and its Subsidiaries, taken as a whole.

(r) Disclosure. The Definitive Proxy Materials will comply in all material
respects with the Securities Exchange Act and the applicable rules and
regulations thereunder. None of the information that the Target will supply that
is included in the Definitive Proxy Materials will, at the time the Definitive
Proxy Materials are first mailed to the Target's stockholders or at the time of
the Special Meeting, include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they will be made, not misleading;
provided, however, that the Target makes no representation or warranty with
respect to any information that the Buyer and the Transitory Subsidiary supply
that is included in the Definitive Proxy Materials.

(s) Opinion of Financial Advisor. The Target has received the opinion of
Bear Stearns & Co., Inc., dated the date of this Agreement, to the effect that,
as of the date of this Agreement, the Merger Consideration to be paid in the
Merger is fair, from a financial point of view, to the stockholders of the
Target (other than the Buyer and its affiliates) (the "Fairness Opinion"), and
the Fairness Opinion has not been withdrawn.

4. Representations and Warranties of the Buyer and the Transitory
Subsidiary. Each of the Buyer and the Transitory Subsidiary represents and
warrants to the Target that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 4),
except as set forth in the Disclosure Schedule delivered by the Buyer
simultaneously with the execution and delivery of this Agreement and initialed
by the Parties. The Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Section
4.

(a) Organization. Each of the Buyer and the Transitory Subsidiary is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Buyer and the Transitory

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Subsidiary were each formed solely for the purpose of engaging in the
transactions contemplated hereby, have engaged in no other business activities
and have conducted their operations only as contemplated hereby.

(b) Financing. The Buyer has furnished to the Target correct and complete
copies of a written proposal or proposals from third parties (the "Financing
Proposals") proposing to provide the Buyer and the Transitory Subsidiary with
all of the financing necessary to purchase all of the Target Shares pursuant to
the Merger, pay all fees and expenses related to the transactions contemplated
by this Agreement and fund the working capital needs of the Surviving
Corporation and its Subsidiaries after the Closing. As of the date hereof, the
Buyer and the Transitory Subsidiary, in the aggregate, have valid and binding
cash and funding undertakings (copies of which have been delivered to the
Target) of at least $2.0 million and equity (assuming the funding undertakings
are performed) of at least $2.0 million. At the Closing Date, the Buyer and the
Transitory Subsidiary, in the aggregate, will have equity of at least $2.0
million.

(c) Authorization of Transaction. Each of the Buyer and the Transitory
Subsidiary has full power and authority (including full corporate power and
authority) to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement by the
Buyer and the Transitory Subsidiary and the consummation by the Buyer and the
Transitory Subsidiary of the Merger and of the other transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Buyer and the Transitory Subsidiary and no other corporate proceedings on
the part of the Buyer and the Transitory Subsidiary are necessary to authorize
this Agreement or to consummate the transactions so contemplated. No further
vote of the Buyer's stockholders is required to approve this Agreement or the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Buyer and the Transitory Subsidiary and, assuming this
Agreement constitutes a valid and binding obligation of the Target, constitutes
a valid and binding obligation of each of the Buyer and the Transitory
Subsidiary enforceable against the Buyer and the Transitory Subsidiary in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights generally and to
general principles of equity.

(d) Noncontravention. Except as set forth in the Disclosure Schedule,
except for filings, permits, authorizations, consents and approvals as may be
required under, and other applicable requirements of, the Securities Exchange
Act (including the filing with the SEC of the Definitive Proxy Materials
relating to the Requisite Stockholder Approval), the Hart-Scott-Rodino Act, the
laws of the State of Delaware, the laws of other states in which the Target is
qualified to do or is doing business and state takeover laws, and except for the
Requisite Stockholder Approval and the filing with the Secretary of State of the
State of Delaware and the Recorder of Deeds of the applicable county in the
State of Delaware of the Certificate of Merger following receipt of the
Requisite Stockholder Approval neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which either the Buyer or the Transitory
Subsidiary is subject or any provision of the charter or bylaws of either the
Buyer or the Transitory Subsidiary or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument or other arrangement
to which either the Buyer or the Transitory Subsidiary is a party or by which it
is bound or to which any of its assets is subject, except where the violation,
conflict, breach, default, acceleration, termination, modification,
cancellation, or failure to give notice would not have a material adverse effect
on the ability of the Parties to consummate the transactions contemplated by
this Agreement.

(e) Brokers' Fees. Neither the Buyer nor the Transitory Subsidiary has any
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement for which
any of the Target and its Subsidiaries could become liable or obligated.

(f) Disclosure. None of the information that the Buyer and the Transitory
Subsidiary will supply specifically for use in the Definitive Proxy Materials
will contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they will be made, not misleading.

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(g) Litigation. As of the date of this Agreement, there is no suit, claim,
action, proceeding or investigation pending or, to the knowledge of the Buyer
and the Transitory Subsidiary, threatened against Buyer or any of its
Subsidiaries that could reasonably be expected to prevent or materially delay
the consummation of the Merger. As of the date of this Agreement, neither the
Buyer nor any of its Subsidiaries is subject to any outstanding order, writ,
injunction or decree that could reasonably be expected to prevent or materially
delay the consummation of the Merger.

(h) Solvency. Assuming that the representations and warranties in Section 3
above are true and correct as of the Effective Time, (i) the Surviving
Corporation and its Subsidiaries will be solvent on the date of the Effective
Time, (ii) neither the Surviving Corporation nor any of its Subsidiaries will
become insolvent as a result of the Merger and the payment of the Merger
Consideration, (iii) at the time of the payment of the Merger Consideration, the
Surviving Corporation will not be engaged in a business or transaction, or about
to engage in a business or transaction, for which the property remaining with
the Surviving Corporation constitutes an unreasonably small capital and (iv) the
Surviving Corporation does not, and at the time of the payment of the Merger
Consideration will not, intend to incur, or believe that it would incur, debts
that would be beyond its ability to pay as such debts mature.

(i) Undertaking. The Buyer and the Transitory Subsidiary have received an
Undertaking dated the date hereof from PM Delaware Inc. and Pacholder Associates
Inc. relating to a covenant and undertaking to invest in, or otherwise provide
equity contributions or funds in the form of equity for, the Buyer and the
Transitory Subsidiary in an amount equal to Two Million Dollars ($2,000,000). A
correct and complete copy of such Undertaking has been delivered by the Buyer to
the Target. Each of PM Delaware Inc. and Pacholder Associates Inc. has full
power and authority (including full corporate power and authority) to execute
and deliver the Undertaking and to perform its obligations thereunder. The
execution, delivery and performance of the Undertaking by PM Delaware Inc. and
Pacholder Associates Inc. of the Undertaking have been duly authorized by all
necessary corporate action on the part of PM Delaware Inc. and Pacholder
Associates Inc. The Undertaking has been duly executed and delivered by PM
Delaware Inc. and Pacholder Associates Inc. and constitutes a valid and binding
obligation of each of PM Delaware Inc. and Pacholder Associates Inc. enforceable
against each of PM Delaware Inc. and Pacholder Associates Inc. in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights generally and to general
principles of equity.

5. Covenants. The Parties agree as follows with respect to the period from
and after the execution of this Agreement.

(a) General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 6 below).

(b) Notices and Consents. The Target will give any notices (and will cause
each of its Subsidiaries to give any notices) to third parties and will use its
reasonable best efforts to obtain (and will cause each of its Subsidiaries to
use its reasonable best efforts to obtain) any third party consents, that the
Buyer reasonably may request in connection with the matters referred to in
Section (d) above.

(c) Regulatory Matters and Approvals. Each of the Parties will (and the
Target will cause each of its Subsidiaries to) give any notices to, make any
filings with, and use its reasonable best efforts to obtain any authorizations,
consents, and approvals of governments and governmental agencies in connection
with the matters referred to in Section 3(d) and Section 4(d) above. Without
limiting the generality of the foregoing:

(i) Securities Exchange Act. The Parties will promptly after the
execution of this Agreement prepare and file with the SEC preliminary proxy
materials and any other statements or filings required under the Securities
Exchange Act relating to the Special Meeting and the transactions
contemplated hereunder (the "SEC Filings"). The Target will use its
reasonable best efforts to respond to the comments of the SEC thereon and
will make any further filings (including amendments and supplements) in
connection therewith that may be necessary, proper or advisable. The Buyer
and the Transitory Subsidiary will provide the Target, and the Target will
provide the Buyer and the Transitory Subsidiary,

12
<PAGE> 105

with whatever information and assistance in connection with the SEC Filings
that Target, the Buyer or the Transitory Subsidiary reasonably may request.
Each of the Target, the Buyer and the Transitory Subsidiary shall correct
promptly any information specifically provided by it which is included in
the Definitive Proxy Materials and SEC Filings which shall have become
false or misleading in any material respect. Each of the Target, the Buyer
and the Transitory Subsidiary shall take all steps necessary to file or to
cause to be filed with the SEC and have cleared by the SEC any amendment or
supplement to the Definitive Proxy Materials so as to correct the same and
to cause the Definitive Proxy Materials as so corrected to be disseminated
to the Target Stockholders, in each case as and to the extent required by
applicable law.

(ii) Delaware General Corporation Law. The Target will call a special
meeting of its stockholders (the "Special Meeting"), as soon as reasonably
practicable in order that the stockholders may consider and vote upon the
adoption of this Agreement and the approval of the Merger in accordance
with the Delaware General Corporation Law. The Target will mail the
Definitive Proxy Materials to its stockholders as soon as reasonably
practicable after clearance thereof by the SEC. The Target shall, through
its Board of Directors, recommend to its stockholders adoption of this
Agreement and approval of the Merger and shall not withdraw such
recommendation; provided, however, that Target's Board of Directors shall
not be required to make and shall be entitled to withdraw such
recommendation if Target's Board of Directors reasonably concludes in good
faith after consultation with, and based on the advice of, its outside
counsel, that the making of or the failure to withdraw, such recommendation
would be inconsistent with the fiduciary obligations of Target's Board of
Directors under applicable law.

(iii) Hart-Scott-Rodino Act. If required, each of the Parties will
file (and the Target will cause each of its Subsidiaries to file) any
Notification and Report Forms and related material that it may be required
to file with the Federal Trade Commission and the Antitrust Division of the
United States Department of Justice under the Hart-Scott-Rodino Act, will
use its reasonable best efforts to obtain (and the Target will cause each
of its Subsidiaries to use its reasonable best efforts to obtain) an early
termination of the applicable waiting period, and will make (and the Target
will cause each of its Subsidiaries to make) any further filings pursuant
thereto that may be necessary, proper, or advisable.

(d) Financing. During the thirty (30) day period beginning on the date this
Agreement is executed and delivered by all Parties hereto, the Buyer and the
Transitory Subsidiary shall use their reasonable best efforts to obtain a
written commitment or commitments from third parties (the "Financing
Commitments") committing, subject only to customary closing conditions, to
provide the Buyer and the Transitory Subsidiary with all of the financing
necessary to purchase all of the Target Shares pursuant to the Merger, pay all
fees and expenses related to the transactions contemplated by this Agreement and
fund the working capital needs of the Surviving Corporation and its Subsidiaries
after the Closing. The Buyer shall furnish correct and complete copies of the
Financing Commitments to the Target no later than November 29, 1996. Thereafter,
the Buyer and the Transitory Subsidiary will use their reasonable best efforts
to enter into definitive agreements (the "Definitive Financing Agreements") as
soon as reasonably practicable on terms and conditions substantially in
accordance with the Financing Commitments. The Buyer will furnish correct and
complete copies of the Definitive Financing Agreements to the Target. In the
event any or all of the financing becomes unavailable for any reason, the Buyer
will use its reasonable best efforts to obtain replacement financing on
substantially equivalent terms and conditions from alternative sources. Any
provision of this Agreement to the contrary notwithstanding, the Target will not
have any obligation to mail the Definitive Proxy Materials to its stockholders
until the Buyer has delivered copies of the Definitive Financing Agreements to
the Target.

(e) Operation of Business. The Target will (and will cause its Subsidiaries
to) engage only in practices, and only take actions, or enter into transactions
in the Ordinary Course of Business. During the period from the date of this
Agreement through the Effective Time, the Target will not (and will not cause or
permit any of its Subsidiaries to) do any of the following without, in each
instance, the prior written consent of the Buyer (which consent shall not be
withheld unreasonably):

(i) none of the Target and its Subsidiaries will authorize or effect
any change in its charter or bylaws;

13
<PAGE> 106

(ii) none of the Target and its Subsidiaries will grant any options,
warrants, or other rights to purchase or obtain any of its capital stock or
issue, sell, or otherwise dispose of any of its capital stock (except upon
the conversion or exercise of options, warrants, and other rights currently
outstanding);

(iii) none of the Target and its Subsidiaries will declare, set aside,
or pay any dividend or distribution with respect to its capital stock
(whether in cash or in kind), or redeem, repurchase, or otherwise acquire
any of its capital stock;

(iv) none of the Target and its Subsidiaries will issue any note,
bond, or other debt security or, other than in the Ordinary Course of
Business, create, incur, assume or guarantee any indebtedness for borrowed
money or capitalized lease obligation;

(v) none of the Target and its Subsidiaries will impose (or permit or
cause to be imposed) any Security Interest upon any of its assets outside
the Ordinary Course of Business;

(vi) none of the Target and its Subsidiaries will make any capital
investment in, make any loan to, or acquire the securities or assets of any
other Person;

(vii) none of the Target and its Subsidiaries will make any change in
employment terms, policies or practices for any of its directors or
officers or make any change in employment terms, policies or practices for
its non-officer employees outside the Ordinary Course of Business;

(viii) none of the Target and its Subsidiaries will commit to any of
the foregoing.

Notwithstanding anything to the contrary elsewhere in this Section 5(e), the
Target shall be permitted to take the action set forth in the Disclosure
Schedule and such action shall not constitute a breach of this Agreement.

(f) Access. The Target will (and will cause each of its Subsidiaries to)
permit representatives of the Buyer to have reasonable access at reasonable
times upon reasonable notice to all premises, properties, personnel, books,
records (including tax records), contracts, and documents of or pertaining to
each of the Target and its Subsidiaries. All information obtained by the Buyer
or the Transitory Subsidiary pursuant to this Agreement shall be kept
confidential in accordance with the Confidentiality Agreement dated January 3,
1996 between Bear, Stearns & Co. Inc., on behalf of the Target, and Winton
Associates, Inc. (the "Confidentiality Agreement"). Each of the Target, the
Buyer and the Transitory Subsidiary hereby expressly affirms the terms of, and
acknowledges that it is bound by such Confidentiality Agreement and agrees and
acknowledges that such terms and the Confidentiality Agreement shall survive the
termination of this Agreement.

(g) Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Section 3 and Section 4 above. No
disclosure by any Party pursuant to this Section 5(g), however, shall be deemed
to amend or supplement the Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.

(h) Exclusivity. The Target will not (and will not cause or permit any of
its Subsidiaries to) solicit, initiate, or encourage the submission of any
proposal or offer from any Person relating to a tender or exchange offer, a
merger, consolidation or other business combination involving the Target or any
of its Subsidiaries or any proposal to acquire in any manner a substantial
equity interest in, or substantial portion of the assets of, the Target or any
of its Subsidiaries (a "Third Party Offer")); provided, however, that the
Target, its Subsidiaries, and their directors and officers may engage in
discussions or negotiations with, or furnish information concerning the Target
and its properties, assets and business to any Person which makes a Third Party
Offer if the Board of Directors of the Target reasonably concludes in good faith
after consultation with, and based on the advice of, its outside counsel, that
the failure to take such action would be inconsistent with the fiduciary
obligations of such Board of Directors under applicable law; and provided
further, that notwithstanding anything to the contrary herein contained, the
Board of Directors of the Target may take and disclose to the Target's
stockholders a position contemplated by Rule 14e-2 promulgated under the
Securities Exchange Act, comply with Rule 14d-9 thereunder and make all
disclosures required by applicable law in

14
<PAGE> 107

connection therewith and such actions shall not be considered a breach of this
Section 5(h) or any other provision of this Agreement. The Target shall promptly
(but in no case later than 48 hours) notify the Buyer (i) of the receipt of any
Third Party Offer (providing the Buyer with a summary of the material terms
thereof) or (ii) of a decision by the Target to engage in discussions or
negotiations with, or furnish information concerning the Target or its
properties, assets or business to, any Person.

(i) Insurance and Indemnification. The Buyer will provide each individual
who served as a director or officer of the Target at any time prior to the
Effective Time with liability insurance providing coverage for events occurring
at or prior to the Effective Time for a period of six (6) years after the
Effective Time no less favorable in coverage and amount that the insurance in
effect immediately prior to the Effective Time.

The charter and bylaws of the Surviving Corporation shall contain the
provisions with respect to indemnification set forth in the Certificate of
Incorporation and Bylaws of the Target on the date of this Agreement, which
provisions shall not be amended, repealed or otherwise modified for a period of
six (6) years after the Effective Time in any manner that would adversely affect
the rights thereunder of Persons who at any time prior to the Effective Time
were prospective indemnitees under the Certificate of Incorporation or Bylaws of
the Target in respect of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement), unless such modification is required by law.

From and after the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless the present and former officers, directors,
agents and employees of the Target and its Subsidiaries (collectively, the
"Indemnified Parties") against all losses, expenses, claims, damages,
liabilities or amounts that are paid in settlement of, with the approval of
Buyer and the Surviving Corporation (which approval shall not be unreasonably
withheld), or otherwise in connection with, any claim, action, suit, proceeding
or investigation, based in whole or in part on the fact that such Person is or
was such an officer, director, agent or employee of the Target or any Subsidiary
and arising out of actions or omissions occurring at or prior to the Effective
Time (including the transactions contemplated by this Agreement), in each case
to the fullest extent permitted under the laws of the State of Delaware (and,
from and after the Effective Time, shall pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
fullest extent permitted by the laws of the State of Delaware).

(j) Target Stock Options. On the Closing Date and in accordance with the
Target's 1994 Long-Term Incentive Plan, each holder of a then outstanding Target
Stock Option, whether or not then exercisable, shall, in settlement thereof and
without any action by such holder, be deemed to have made a disposition of such
Target Stock Option to the Target and shall receive from the Target for each
Target Share subject to such Target Stock Option an amount (subject to any
applicable withholding tax) in cash equal to the excess, if any, of the Merger
Consideration over the per Target Share exercise price of such Target Stock
Option (such amount being hereinafter referred to as the "Option
Consideration"). Upon receipt of the Option Consideration, the related Target
Stock Option shall be automatically canceled.

(k) Deferred Compensation Shares. On the Closing Date, each holder of a
Deferred Compensation Share, whether or not then vested, shall, in settlement
thereof and without any action by such holder, be deemed to have made a
disposition of such Deferred Compensation Share to the Target and shall receive
from the Target for each Deferred Compensation Share an amount (subject to any
applicable withholding tax) in cash equal to the Merger Consideration (such
amount being hereinafter referred to as the "Deferred Compensation
Consideration"). Upon receipt of the Deferred Compensation Consideration, the
related Deferred Compensation Share shall be automatically canceled. Prior to
the Closing Date, the Target shall obtain all necessary consents or releases
from holders of Deferred Compensation Shares and to take all such other lawful
action as may be necessary to give effect to the transactions contemplated by
this Section 5(k) (except for such action that may require the approval of the
Target's stockholders).

(l) Buyer and Transitory Subsidiary Equity. The Buyer and the Transitory
Subsidiary shall take such actions as may be necessary to ensure that the Buyer
and the Transitory Subsidiary shall, in the aggregate, have at least $2.0
million in equity at the Closing Date.

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<PAGE> 108

6. Conditions to Obligation to Close.

(a) Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each Party to effect the Merger shall be subject to the
satisfaction of the following conditions:

(i) the Requisite Stockholder Approval shall have been obtained;

(ii) the waiting period (and any extension thereof) applicable to the
consummation of the Merger under the Hart-Scott-Rodino Act shall have
expired or been terminated;

(iii) no statute, rule, regulation, executive order, decree, temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other governmental entity
or other legal restraint or prohibition preventing the consummation of the
Merger shall be in effect; provided, however, that each of the Parties
shall have used reasonable efforts to prevent the entry of any such
injunction or other order and to appeal as promptly as possible any
injunction or other order that may be entered;

(iv) each of the Parties shall have received a solvency opinion (the
"Solvency Opinion") from a nationally recognized valuation firm reasonably
acceptable to each of the Parties, dated the date of the Effective Time, in
a form reasonably acceptable to each of the Parties; and

(v) There shall not have been instituted or be pending, or threatened,
any suit, action or proceeding by any governmental entity as a result of
this Agreement or any of the transactions contemplated hereby which, if
such governmental entity were to prevail, would reasonably be expected to
prevent the consummation of the Merger or have a material adverse effect on
the business, financial condition or results of operations of the Target
and its Subsidiaries, taken as a whole.

(b) Conditions to Obligation of the Buyer and the Transitory
Subsidiary. The obligation of each of the Buyer and the Transitory Subsidiary to
consummate the Merger is subject to satisfaction of the following conditions:

(i) the Target and its Subsidiaries shall have procured all of the
third party consents specified on the date of this Agreement pursuant to
Section 5(b) above;

(ii) the representations and warranties set forth in Section 3 above
shall be true and correct in all material respects (other than
representations and warranties having materiality qualifiers, which shall
be true and correct in all respects) at and as of the Closing Date (other
than to the extent that any such representation and warranty is, by its
terms, expressly limited to a specific date, in which case such
representation and warranty shall be true and correct as of such date);

(iii) the Target shall have performed and complied with all of its
covenants hereunder required to be performed or complied with on or prior
to the Closing Date in all material respects through the Closing;

(iv) since the date of this Agreement, there shall not have been or
occurred any material adverse change in the business, financial condition
or results of operations of the Target and its Subsidiaries, taken as a
whole, other than changes relating to the Target's industry or the economy
in general and not specifically related to the Target and its Subsidiaries.
Each of the Buyer and the Transitory Subsidiary acknowledges that there may
be disruptions to the Target's business as a result of the announcement of
the Merger and any changes primarily attributable to the announcement of
the Merger shall not constitute a material adverse change;

(v) the Target shall have delivered to the Buyer and the Transitory
Subsidiary a certificate to the effect that each of the conditions
specified above in Section 6(b)(i)-(iv) is satisfied in all respects;

(vi) the Buyer and the Transitory Subsidiary shall have received from
counsel to the Target an opinion in form and substance substantially as set
forth in Exhibit C attached hereto, addressed to the Buyer and the
Transitory Subsidiary, and dated as of the Closing Date;

16
<PAGE> 109

(vii) the Buyer and the Transitory Subsidiary shall have received the
resignations, effective as of the Closing, of each director of the Target
and of each of the officers of the Target and its Subsidiaries set forth in
Paragraph 6(b)(vii) of the Disclosure Schedule delivered by Buyer to the
Target;

(viii) all Target Stock Options and all Deferred Compensation Shares
shall have been canceled; and

(ix) the Target shall have furnished to the Buyer and the Transitory
Subsidiary such other customary documents, certificates or instruments as
Buyer may reasonably request evidencing compliance by the Target with the
terms of this Agreement.

The Buyer and the Transitory Subsidiary may waive any condition
specified in this Section 6(b) if they execute a writing so stating at or
prior to the Closing.

(c) Conditions to Obligation of the Target. The obligation of the Target to
consummate the Merger is subject to satisfaction of the following conditions:

(i) the representations and warranties set forth in Section 4 above
shall be true and correct in all material respects (other than
representations and warranties having materiality qualifiers, which shall
be true and correct in all respects), at and as of the Closing Date (other
than to the extent that any such representation and warranty is, by its
terms, expressly limited to a specific date, in which case such
representation and warranty shall be true and correct as of such date);

(ii) each of the Buyer and the Transitory Subsidiary shall have
performed and complied with all of its covenants hereunder required to be
performed or complied with on or prior to the Closing Date in all material
respects through the Closing;

(iii) the Buyer, the Transitory Subsidiary and the other parties
thereto shall have executed and delivered the Definitive Financing
Statements;

(iv) each of the Buyer and the Transitory Subsidiary shall have
delivered to the Target a certificate to the effect that each of the
conditions specified above in Section 6(c)(i)-(iii) and is satisfied in all
respects;

(v) the Fairness Opinion shall not have been withdrawn;

(vi) the Target shall have received from counsel to the Buyer and the
Transitory Subsidiary an opinion in form and substance substantially as set
forth in Exhibit D attached hereto, addressed to the Target, and dated as
of the Closing Date; and

(vii) the Buyer and the Transitory Subsidiary shall have furnished to
the Target such other customary documents, certificates or instruments as
Target may reasonably request evidencing compliance by the Buyer and the
Transitory Subsidiary with the terms of this Agreement.

The Target may waive any condition specified in this Section 6(c) if
it executes a writing so stating at or prior to the Closing.

(d) Notwithstanding anything contained herein but subject to Section
7(a)(vii), no condition involving performance of covenants, the accuracy of the
representations and warranties as of the Closing Date or the furnishing of
officers' certificates or legal opinions shall be deemed not fulfilled, and the
party to whom such condition runs shall not be entitled to terminate this
Agreement on such basis, if the respects in which such covenants have not been
performed, or the representations and warranties are untrue, or the certificates
or opinions do not conform to what is prescribed by this Agreement, in the
aggregate, are not materially adverse to the business, financial condition,
operations or results of operations of the Target (including the Surviving
Corporation) and its Subsidiaries, taken as a whole, or the consummation of the
transactions contemplated hereby, provided, however, that the foregoing shall
not constitute a waiver of any other rights a party may have in such
circumstances.

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<PAGE> 110

7. Termination.

(a) Termination of Agreement. This Agreement may be terminated at any time
prior to the Effective Time (whether before or after the Requisite Stockholder
Approval) by:

(i) the Parties by mutual written consent;

(ii) the Buyer and the Transitory Subsidiary by giving written notice
to the Target (A) in the event the Target has breached any material
representation, warranty, or covenant contained in this Agreement in any
material respect, the Buyer or the Transitory Subsidiary has notified the
Target of the breach, and the breach has continued without cure for a
period of 30 days after the notice of breach or (B) if the Closing shall
not have occurred on or before April 30, 1997, unless the failure to
consummate the Merger results from the failure to satisfy conditions set
forth in Section 6(c)(i)-(iii);

(iii) the Target by giving written notice to the Buyer and the
Transitory Subsidiary (A) in the event the Buyer or the Transitory
Subsidiary has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, the Target has
notified the Buyer and the Transitory Subsidiary of the breach, and the
breach has continued without cure for a period of 30 days after the notice
of breach or (B) if the Closing shall not have occurred on or before April
30, 1997, unless the failure to consummate the Merger results from the
failure to satisfy the conditions set forth in Section 6(b)(ii)-(iii);

(iv) the Target, if notwithstanding the Target's compliance with
Section 5(h) hereof, the Target receives and accepts prior to the Closing
Date a Third Party Offer; provided, however, that, in the event of such
acceptance of a Third Party Offer the Target shall immediately pay to the
Buyer the sum of the Expenses and One Million and 00/100 Dollars
($1,000,000.00) as liquidated damages and not as a penalty, any such
payment to be made in immediately available funds;

(v) the Target or the Buyer notwithstanding the Target's compliance
with Section 5(h) hereof, if the Target's Board of Directors prior to the
Closing Date withdraws its recommendation to the Target's stockholders of
this Agreement and the Merger; provided, however, that in the event of such
withdrawal the Target shall immediately pay to the Buyer the Expenses; in
addition, if within twelve (12) months after such termination, the Target
shall consummate a Third Party Offer, the Target shall pay the Buyer the
additional sum of One Million and 00/100 Dollars ($1,000,000.00), as
liquidated damages and not as a penalty, any such payment to be made in
immediately available funds;

(vi) any Party by giving written notice to the other Parties (A) at
any time after the Special Meeting in the event this Agreement and the
Merger fail to receive the Requisite Stockholder Approval or (B) if any
governmental entity shall have issued an order, decree or ruling or taken
any other action permanently enjoining, restraining or otherwise
prohibiting the consummation of the Merger and such order, decree or ruling
or other action shall have become final and nonappealable; or

(vii) any Party by giving written notice to the other Parties at any
time during the period commencing November 29, 1996 through 5:00 p.m.,
Chicago time, Friday, December 6, 1996 in the event Buyer and the
Transitory Subsidiary shall not have entered into the Financing Commitments
or the Buyer shall not have furnished copies of the Financing Commitments
to Target in accordance with Section 5(d) (except to the extent that such
failure to obtain and enter into the Financing Commitments is materially
attributable to a breach by Target of any warranty or representation herein
or any material adverse change after October 29, 1996 in the business
financial condition, operations or results of operations of the Target and
its Subsidiaries, taken as a whole, in which event the liquidated damages
provisions in the following provisos shall be inapplicable); provided,
however, that in the event the Buyer and the Transitory Subsidiary (or
either of them) shall be the Party giving the notice of termination, the
notice of termination shall not be effective unless the Buyer and the
Transitory Subsidiary shall concurrently with such notice of termination
(or in any event no later than 5:00 p.m., Chicago time, Friday, December 6,
1996) pay to the Target the sum of Five Hundred Thousand and 00/100 Dollars
($500,000) as liquidated damages and not as a penalty, any such payment to
be made in immediately available funds; provided, further, that in the
event the Target shall be the Party giving the notice of

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<PAGE> 111

termination, the Buyer and the Transitory Subsidiary shall within two (2)
business days after receipt of such notice of termination, pay to the
Target the sum of Five Hundred Thousand and 00/100 Dollars ($500,000) as
liquidated damages and not as a penalty, any such payment to be made in
immediately available funds.

"Expenses" shall mean documented out-of-pocket fees and expenses of the
Buyer and the Transitory Subsidiary: (i) up to an aggregate One Hundred Twenty
Five Thousand and 00/100 Dollars ($125,000.00) incurred or paid after the date
hereof but prior to any termination of this Agreement if the termination occurs
prior to the time that the Buyer and/or the Transitory Subsidiary pay fees to
third parties with respect to the Financing Commitments; and (ii) up to an
aggregate of Three Hundred Seventy Five Thousand and 00/100 Dollars
($375,000.00) incurred or paid after the date hereof but prior to any
termination of this Agreement if the termination occurs after the time that the
Buyer and/or the Transitory Subsidiary pay fees to third parties with respect to
the Financing Commitments, in the case of each of (i) and (ii), in connection
with the Merger or the consummation of any of the transactions contemplated by
this Agreement, including all fees and expenses of law firms, commercial banks,
investment banking firms, accountants, experts and consultants to the Buyer or
the Transitory Subsidiary. In no event shall more than one termination fee be
payable.

(b) Effect of Termination. If any Party terminates this Agreement pursuant
to Section 7(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except for any
liability of any Party then in breach or as set forth in Section 7(a));
provided, however, that Section 3(i), the last sentence of Section 4(b), Section
4(e), the confidentiality provisions contained in Section 5(f), Section 5(l),
this Section 7(b) and Section 8 shall survive any such termination.

8. Miscellaneous.

(a) Survival. None of the representations, warranties and covenants of the
Parties (other than the provisions in Section 2 above concerning payment of the
Merger Consideration, the provisions in Section 5(i) above concerning insurance
and indemnification and any covenant which by its terms contemplates performance
after the Effective Time) will survive the Effective Time.

(b) Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement without the prior written approval of the other Parties; provided,
however, that any Party may make any public disclosure it believes in good faith
is required by applicable law or by any listing or trading agreement concerning
its publicly-traded securities (in which case the disclosing Party will use its
reasonable best efforts to advise the other Party prior to making the
disclosure).

(c) No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that (i) the provisions in
Section 2 above concerning payment of the Merger Consideration are intended for
the benefit of, and shall be enforceable by the Target Stockholders, their heirs
and their respective legal representatives and (ii) the provisions in Section
5(i), Section 5(j) and Section 5(k) above are intended for the benefit of, and
shall be enforceable by the individuals specified therein and their heirs and
their respective legal representatives and, with respect to the foregoing
clauses (i) and (ii), shall be binding on the Buyer, the Transitory Subsidiary,
the Surviving Corporation, their respective Subsidiaries and their respective
successors and assigns.

(d) Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior or contemporaneous understandings, agreements or representations by or
among the Parties, written or oral, to the extent they related in any way to the
subject matter hereof.

(e) Successors and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties provided, however, that the Buyer may assign its rights
hereunder to an affiliated entity without

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<PAGE> 112

the prior written consent of the Target provided Buyer executes a written
guarantee of the obligations of any such assignee in a form reasonably
acceptable to Target.

(f) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.

(g) Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.

(h) Notices. All notices, requests, demands, claims and other
communications hereunder will be in writing. Any notice, request, demand, claim
or other communication hereunder shall be addressed to the intended recipient as
set forth below:

<TABLE>
<S> <C>
If to the Target: AM International, Inc.
9899 West Higgins
Suite 900
Rosemont, Illinois 60018
Attention: Steven R. Andrews
Vice President, General Counsel & Secretary
With a required copy to: SIDLEY & AUSTIN
One First National Plaza
Chicago, Illinois 60603
Attention: Jim L. Kaput, Esq.
If to the Buyer or the
Transitory Subsidiary: c/o Pacholder Associates, Inc.
8044 Montgomery Road
Suite 382
Cincinnati, Ohio 45236
Attention: James P. Shanahan, Jr.
Copy to: KEATING, MUETHING & KLEKAMP
1800 Provident Tower
One East Fourth Street
Cincinnati, Ohio 45202
Attention: J. David Rosenberg, Esq.
</TABLE>

Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using personal delivery, expedited courier, messenger service, telecopy, telex,
registered mail, certified mail, ordinary mail, or electronic mail, but no such
notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.

(i) Governing Law. This Agreement shall be governed by and construed in
accordance with the internal substantive laws of the State of Delaware without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Delaware or any other jurisdiction) that would cause or result in the
application of the laws of any jurisdiction other than the State of Delaware.

(j) Amendments and Waivers. The Parties may mutually amend any provision of
this Agreement at any time prior to the Effective Time with the prior
authorization of their respective Boards of Directors; provided, however, that
any amendment effected subsequent to obtaining the Requisite Stockholder
Approval will be subject to the restrictions contained in the Delaware General
Corporation Law; provided, further, that any decrease in the Merger
Consideration per Target Share shall be submitted to the Target's stockholders
for approval. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
by any Party of any default, misrepresentation or breach of

20
<PAGE> 113

warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.

(k) Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.

(l) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.

(m) Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation.

(n) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.

* * * * *

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date and year first above written.

AM INTERNATIONAL, INC.

By /s/ Jerome D. Brady

------------------------------------
Name: Jerome D. Brady
Title: Chairman, CEO and President

8044 ACQUISITION INC.

By /s/ James P. Shanahan, Jr.

------------------------------------
Name: James P. Shanahan, Jr.
Title: Treasurer

8044 ACQUISITION SUB INC.

By /s/ James P. Shanahan, Jr.

------------------------------------
Name: James P. Shanahan, Jr.
Title: Treasurer

21
<PAGE> 114

Bear Stearns Letterhead

APPENDIX II

October 29, 1996

AM International, Inc.
9399 West Higgins Road
Rosemont, IL 60018

Attention: Jerome D. Brady
Chairman, President and
Chief Executive Officer

Dear Sirs:

We understand that AM Acquisition, Inc. (the "Buyer"), a corporation formed by
affiliates of Pacholder Associates, Inc. intends to acquire all outstanding
shares of common stock of AM International, Inc. ("AMI") in exchange for cash
consideration of $5.00 per share (the "Acquisition Consideration"). You have
provided us with the Merger Agreement among AM Acquisition, Inc., Acquisition
Sub. Co. and AMI in substantially final form (the "Merger Agreement") which
provides for the merger of Acquisition Sub. Co. with and into AMI (the
"Merger").

You have asked us to render our opinion as to whether the Acquisition
Consideration to be paid in the Merger is fair, from a financial point of view,
to the stockholders of AMI (other than the Buyer and its affiliates, including
shareholders of the Buyer).

In the course of our analyses for rendering this opinion we have:

1. reviewed the Merger Agreement;

2. reviewed AMI's Annual Report to Shareholders and Annual Report on Form
10-K for the fiscal year ended July 31, 1995; Quarterly Reports on
Form 10-Q for the periods ended October 28, 1995; January 27, 1996 and
April 27, 1996; the Form 8-K filed by AMI dated August 27, 1996; the
Form 8-K filed by AMI dated September 20, 1996; the Proxy Statement
filed by AMI dated August 2, 1996; and the Proxy Statement Amendment
filed by AMI dated August 12, 1996;

3. reviewed a draft of AMI's Form 10-K for the fiscal year ended July 31,
1996;

4. reviewed certain financial projections provided to us by management;

5. reviewed AMI's recent balance sheets, including the current and
non-current liabilities reflected therein;

6. reviewed AMI's preliminary Fiscal 1997 budget provided to us by
management;

7. reviewed certain other operating and financial information provided to
us by management relating to AMI's business and prospects;

8. reviewed the trading history, including recent trading prices, for
AMI's common stock;

9. met with certain members of AMI's senior management to discuss its
operations, historical financial statements and future prospects;
<PAGE> 115

10. visited AMI's facilities in Arlington Heights, IL; Mt. Prospect, IL and
Rosemont, IL;

11. reviewed publicly available financial data and stock market performance
data of companies which we deemed generally comparable to AMI;

12. reviewed the terms of recent acquisitions of companies which we deemed
generally comparable to AMI;

13. solicited indications of interest from companies and other parties that
we believed may have an interest in acquiring AMI; and

14. considered and conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.

In the course of our review, we have relied upon and assumed the accuracy and
completeness of the financial and other information provided to us by AMI. With
respect to the projections provided to us, we determined not to rely on the
estimates of AMI's future financial performance in our analyses because of,
among other factors, the inherent uncertainty of projections, the changes in
strategic focus at AMI, the numerous revisions made by management to their
projections for fiscal 1996 and the fact that actual results for fiscal year
1996 have differed materially from past projections for such periods for AMI. We
have not assumed any responsibility for the information provided to us and we
have further relied upon the assurances of the management of AMI that they are
unaware of any facts that would make the information provided to us incomplete
or misleading. In arriving at our opinion, we have not performed or obtained any
independent appraisal of the assets of AMI. Our opinion is necessarily based on
economic, market and other conditions, and the information made available to us,
as of the date hereof.

Based on the foregoing, it is our opinion that the Acquisition Consideration to
be paid in the Merger is fair, from a financial point of view, to the
stockholders of AMI (other than the Buyer and its affiliates).

In the past we have acted as financial advisor to AMI, have provided investment
banking services to AMI, and we have been paid fees for such services. In
addition, we have also provided investment banking services for affiliates of
Lion Advisors, L.P. and AIF II, L.P., significant stockholders of AMI, which may
be deemed to be affiliates of AMI, and we have been paid fees for such services.

It is understood that this letter is intended for the benefit and use of the
Board of Directors of AMI and does not constitute a recommendation to AMI
stockholders as how to vote on the Merger. This letter may be included in its
entirety in any proxy statement or other document distributed to shareholders of
AMI in connection with the solicitation of proxies in favor of the Merger (but
any reference to or description of the opinion expressed herein in any such
proxy statement or other document or any other public reference to this letter
shall be subject to our prior written consent).

This letter is not to be used for any other purpose, or reproduced,
disseminated, quoted or referred to at any time, in whole or in part, without
our prior written consent.

Very truly yours,

BEAR, STEARNS & CO. INC.

By:
/s/ STEVEN WINOGRAD

-------------------
Senior Managing
Director
<PAGE> 116

APPENDIX III

DELAWARE CODE ANNOTATED
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION

sec.262 Appraisal rights.

(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.

(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:

(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec.251 of this title.

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sec.sec.251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:

a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;

b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;

c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or

d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
<PAGE> 117

(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.

(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or

(2) If the merger or consolidation was approved pursuant to sec. 228 or
sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within twenty days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given; provided that, if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective

2
<PAGE> 118

date, the record date shall be the close of business on the day next preceding
the day on which the notice is given.

(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.

(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.

(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.

(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as

3
<PAGE> 119

the Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.

(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.

(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.

4
<PAGE> 120

<TABLE>
<S><C>
AM INTERNATIONAL, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE COMPANY FOR THE SPECIAL MEETING ON _____________ ____, 1997

The undersigned hereby constitutes and appoints Jerome D. Brady, Thomas D. Rooney and Steven R. Andrews
and each of them, his true and lawful agents and proxies with full power of substitution in each, to
represent the undersigned at the Special Meeting of Stockholders of AM INTERNATIONAL, INC., to be held
P at _____________________________, __________________________, Illinois on __________________ ___, 1997,
and at any adjournment or postponement thereof, on all matters coming before said meeting.
R

O COMMENTS: (change of address)
___________________________________________
X ___________________________________________
___________________________________________
Y ___________________________________________
(If you have written in the above space, please mark the corresponding
box on the reverse side of this card.)

You are encouraged to specify your choice by marking the appropriate box ON THE REVERSE SIDE. If you do not mark any box,
your proxy will be voted in accordance with the Board of Directors' recommendation. The Proxies cannot vote your shares
unless you sign and return this card.

SEE REVERSE
SIDE
- ------------------------------------------------------------------------------------------------------------------------------------

/X/ Please mark your
vote as in the example.

This proxy when properly executed will be voted in the manner directed herein. If no direction is made, this proxy will be
voted FOR the proposal to approve and adopt the Merger Agreement and the Merger.

- ------------------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSAL
TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE MERGER
- ------------------------------------------------------------------------------------------------------------------------------------

FOR AGAINST ABSTAIN
1. Approval of the / / / / / / Change of Address/ / /
proposal to approve Comments on Reverse Side
and adopt the
Merger Agreement
and the Merger

Please mark this Box if / /
you will personally be
attending the meeting.

- ------------------------------------------------------------------------------------------------------------------------------------

Please date and sign exactly as name appears hereon. Joint owners
should each sign. When signing as attorney, executor, administrator,
name of guardian, please give full title as such.

_____________________________________________________

_____________________________________________________
SIGNATURE(S) DATE
</TABLE>