AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONSOLIDATED GRAPHICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
TEXAS 76-0190827 2750
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
5858 WESTHEIMER, STE. 200
HOUSTON, TEXAS 77057
(713) 787-0977
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOE R. DAVIS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5858 WESTHEIMER, STE. 200
HOUSTON, TEXAS 77057
(713) 787-0977
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
R. CLYDE PARKER, JR., ESQ. ANITA J. FINKELSTEIN, ESQ.
WINSTEAD SECHREST & MINICK P.C. VENABLE, BAETJER, HOWARD & CIVILETTI, LLP
910 TRAVIS, SUITE 2400 1201 NEW YORK AVE., N.W., SUITE 1000
HOUSTON, TEXAS 77002 WASHINGTON, D.C. 20005
(713) 650-2753 (202) 962-4905
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value........... N/A(1) N/A(1) $16,000,000 $4,448
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Rule 457(o), the registrant has calculated the registration fee
on the basis of the maximum aggregate offering price of the class of
securities registered.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC.
4590 GRAPHICS DRIVE
WHITE PLAINS, MARYLAND 20695
November , 1998
To Our Stockholders and ESOP Participants:
Automated Graphic Systems, Inc. ("AGS") will hold a special meeting of
AGS stockholders on December , 1998, at 9:00 a.m. local time at the law
offices of Venable, Baetjer and Howard, LLP, 1800 Mercantile Bank and Trust
Building, 2 Hopkins Plaza, Baltimore, Maryland 21201.
At this meeting, AGS stockholders will be asked to adopt an Agreement and
Plan of Reorganization, dated as of September 28, 1998 (as amended, the "Merger
Agreement"), by and among AGS, Consolidated Graphics, Inc., a Texas corporation
("CGX"), AGS Acquisition Co., a Maryland corporation ("Newco"), the
individual stockholders of AGS and the trustees of the Automated Graphic
Systems, Inc. Employee Stock Ownership Plan (the "ESOP"), and to approve the
merger of AGS into Newco, as well as related actions and transactions under the
Merger Agreement.
If the merger is completed, AGS will merge with Newco and will cease to
exist, and Newco will continue to operate AGS' business as a wholly owned
subsidiary of CGX. In the merger, each outstanding share of AGS stock will be
canceled in exchange for the following consideration:
SHARES THAT ARE HELD DIRECTLY
If you are a direct stockholder of AGS, you will receive the following
consideration for each AGS share that you hold directly:
o CASH CONSIDERATION. The exact amount of cash consideration per share
payable to you will be determined by starting with $1,278.1164 and
subtracting the per share portion (based on a total of 12,611 shares
of AGS stock on a fully diluted basis considering stock options and
stock appreciation rights as common stock equivalents for this
purpose) of:
(1) AGS' transaction costs in connection with the merger since
June 30, 1998 (which management estimates will be
approximately $300,000 in the aggregate, or $24 per share);
and
(2) $3,100,000 (approximately $246 per share). These funds will
be held in an interest-bearing escrow account for 36 months
following the merger, primarily as a fund to pay any damages
suffered by CGX or Newco as a result of any breach of the
Merger Agreement by AGS, the individual stockholders or the
ESOP. If any portion of these funds has not been spent at
the end of the escrow period, the remainder will be
distributed pro rata to the former AGS stockholders, ESOP
participants and holders of stock appreciation rights and
stock options.
o SHARES OF CGX COMMON STOCK. The exact number of CGX shares issuable
to you for each share of AGS stock will be determined by (FIRST)
dividing $16,000,000 by the average of the closing prices per share of
CGX common stock on the New York Stock Exchange on the fourth, fifth
and sixth trading days before the closing of the merger and (SECOND)
dividing the result by 11,705 (the number of shares of AGS stock
actually outstanding).
SHARES THAT ARE HELD BY THE ESOP
Merger consideration, consisting of cash and shares of CGX common stock,
will be paid with respect to shares of AGS common stock held by the ESOP on the
same basis as described above for shares that are directly held. If you are an
ESOP participant your account will be credited with a pro rata portion of the
merger consideration based upon the number of shares of AGS stock allocated to
your account as of October 31, 1998.
The prospectus/proxy statement that you have received along with this
letter describes the merger and related matters in greater detail. You should
read all of the enclosed materials completely and carefully before deciding how
to vote.
<PAGE>
If you hold shares of AGS stock directly (that is, not through
participation in the ESOP), you may vote your shares either by completing and
returning the enclosed green proxy card or by voting in person at the meeting.
If you are an ESOP participant, you may tell the ESOP trustees how to vote the
AGS shares allocated to your ESOP account. To instruct the ESOP trustees how to
vote, you should complete and return the enclosed blue voting instruction no
later than the day before the meeting. If the ESOP trustees receive a properly
completed voting instruction covering shares allocated to your account, they
will vote those shares as you direct. If the ESOP trustees do not receive a
voting instruction covering your shares, they will vote those shares in the
manner that they believe complies with their duties as trustees. At least 7,804
shares of AGS stock (66 2/3% of the 11,705 AGS shares actually outstanding) must
vote in favor of the proposed merger for it to be approved. Each share of AGS
common stock will be entitled to one vote on each matter considered by the
stockholders at the meeting.
THE BOARD OF DIRECTORS OF AGS HAS UNANIMOUSLY APPROVED THE MERGER WITH
NEWCO AND ADOPTED THE MERGER AGREEMENT. THE AGS BOARD ALSO HAS UNANIMOUSLY
RECOMMENDED THAT THE STOCKHOLDERS OF AGS VOTE TO APPROVE THE PROPOSED MERGER.
It is important that your shares are voted. If you hold your AGS shares
directly, please complete, sign and date and return the enclosed green proxy
card.
If you are an ESOP participant, please complete, sign, date and return the
enclosed blue voting instruction. ESOP participants must provide voting
instructions to the ESOP trustees no later than the day before the AGS
stockholders meeting. Due to the nature of the voting process, only direct
stockholders may attend the meeting and vote in person. Therefore, if you are an
ESOP participant, please remember that the ESOP trustees can only vote your ESOP
shares as you desire if you provide them with a voting instruction.
Sincerely,
/s/ JOHN F. GREEN
John F. Green
Chairman
2
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC.
4590 GRAPHICS DRIVE
WHITE PLAINS, MARYLAND 20695
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER , 1998
------------------------
Automated Graphic Systems, Inc. ("AGS") will hold a special meeting of
stockholders (together with any adjournments, postponements or reschedulings
thereof, the "AGS Meeting") on December , 1998, at 9:00 a.m. local time at
the law offices of Venable, Baetjer and Howard, LLP, 1800 Mercantile Bank and
Trust Building, 2 Hopkins Plaza, Baltimore, Maryland 21201.
The Board of Directors of AGS has called the AGS Meeting so that AGS'
stockholders may consider and vote on the following matters:
THE MERGER PROPOSAL
The Merger Proposal is a proposal to approve an Agreement and Plan of
Reorganization, dated as of September 28, 1998 (as amended, the "Merger
Agreement"), by and among AGS, Consolidated Graphics, Inc., a Texas corporation
("CGX"), AGS Acquisition Co., a Maryland corporation ("Newco"), each of the
individual stockholders of AGS (the "Individual Stockholders") and John F.
Green and Edward Pittman in their capacity as trustees of the Automated Graphic
Systems, Inc. Employee Stock Ownership Plan (the "ESOP") and the merger of AGS
into Newco and related transactions called for by the Merger Agreement (the
"Merger"). A copy of the Merger Agreement appears at Appendix A to the
prospectus/proxy statement that accompanies this Notice.
If the Merger is completed, AGS will merge with Newco and will cease to
exist, and Newco will continue to operate AGS' business as a wholly owned
subsidiary of CGX. In the Merger, each outstanding share of AGS stock (other
than any shares the holders of which have properly perfected their dissenters'
rights) will be canceled in exchange for the following consideration:
SHARES THAT ARE HELD DIRECTLY
If you are a direct stockholder of AGS, you will be entitled to receive the
following consideration for each AGS share that you hold directly:
o CASH CONSIDERATION. The exact amount of cash consideration per
share will be determined by starting with $1,278.1164 and
subtracting from it the per share portion (based on a total of
12,611 shares of AGS stock on a fully diluted basis, considering
stock options and stock appreciation rights as common stock
equivalents for this purpose) of:
(1) AGS' transaction costs in connection with the Merger
since June 30, 1998 (which management estimates will be
approximately $300,000 in the aggregate, or $24 per
share); and
(2) $3,100,000 (approximately $246 per share) (the
"Escrowed Funds"). The Escrowed Funds will be held in
an interest-bearing escrow account for 36 months
following the Merger, primarily as a fund to pay any
damages suffered by CGX or Newco as a result of any
breach of the Merger Agreement by AGS, the Individual
Stockholders or the ESOP and to pay legal fees,
administrative fees and expenses and certain bona fide
claims against the ESOP. If any portion of the Escrowed
Funds has not been spent at the end of the escrow
period, the remainder will be distributed pro rata to
the former AGS stockholders, ESOP participants and
holders of stock appreciation rights and stock options.
o SHARES OF CGX COMMON STOCK. The exact number of CGX shares
issuable to you for each share of AGS stock will be determined by
(FIRST) dividing $16,000,000 by the average of the closing prices
per share of CGX common stock on the New York Stock Exchange on
the fourth, fifth and sixth trading days before the closing of
the Merger and (SECOND) dividing the result by 11,705 (the number
of shares of AGS stock actually outstanding).
SHARES THAT ARE HELD BY THE ESOP
Merger consideration, consisting of cash and shares of CGX common stock,
will be paid with respect to shares of AGS common stock held by the ESOP on the
same basis as described above for shares that are held directly by AGS
stockholders. If you are an ESOP participant your account will be credited with
a pro rata portion of the merger consideration based upon the number of shares
of AGS stock allocated to your account as of October 31, 1998.
<PAGE>
THE ADJOURNMENT PROPOSAL
If the Adjournment Proposal is adopted, the AGS Meeting may be adjourned,
and action on the Merger Proposal postponed, if, at the time of the AGS Meeting,
AGS has in hand less than the minimum number of votes (7,804) necessary to
approve the Merger Proposal. Such an adjournment would permit AGS management to
seek additional votes in favor of the Merger Proposal.
OTHER MATTERS
Stockholders and ESOP participants also will be asked to authorize the
designated proxies or the ESOP trustees, as the case may be, to vote as they
believe appropriate on any other matters that may properly be submitted to the
stockholders at the AGS Meeting.
* * *
Under Maryland law, direct stockholders generally have the right to dissent
from a merger and demand payment of the fair value of their shares. The full
text of the Maryland statute governing these so-called "dissenters' rights"
appears at Appendix B to the accompanying prospectus/proxy statement. The
Individual Stockholders, by signing the Merger Agreement, have agreed, and have
granted to CGX an irrevocable proxy, to vote their shares in favor of the Merger
Proposal. Therefore, the Individual Stockholders will not be able to exercise
dissenters' rights. ESOP participants will not have dissenters' rights; such
rights may be exercised only by the ESOP trustees. Except in limited
circumstances, the ESOP trustees have agreed not to exercise the ESOP's
dissenters' rights.
You will be entitled to vote at the AGS Meeting if you directly owned AGS
stock as of the close of business (5:00 p.m. local time) on November , 1998.
However, since all of the direct stockholders have granted an irrevocable proxy
to CGX, if you are a direct stockholder and you do not vote in favor of the
Merger Proposal in person or by proxy, CGX will do so. If you are an ESOP
participant, you will be entitled to direct the trustees how to vote AGS shares
allocated to your account as of October 31, 1998. Due to the nature of the
voting process, however, only direct stockholders may attend the AGS Meeting and
vote in person. Each share of AGS stock is entitled to one vote on each matter
considered by the stockholders at the AGS Meeting.
IT IS IMPORTANT THAT YOU RETURN YOUR VOTING MATERIALS PROMPTLY.
THEREFORE, PLEASE COMPLETE, SIGN AND RETURN THE APPROPRIATE VOT- ING
DOCUMENTS AS FOLLOWS:
IF YOU ARE A DIRECT HOLDER OF AGS STOCK, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED GREEN PROXY CARD AND RETURN IT IN THE GREEN POSTAGE PAID
ENVELOPE ENCLOSED FOR THAT PURPOSE, WHETHER OR NOT YOU PLAN TO ATTEND
THE AGS MEETING.
IF YOU ARE A PARTICIPANT IN THE ESOP, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED BLUE VOTING INSTRUCTION AND RETURN IT IN THE BLUE POSTAGE
PAID ENVELOPE ENCLOSED FOR THAT PURPOSE.
By Order of the Board of Directors
/s/ KENNETH LEMMERT
Kenneth Lemmert
Secretary
November , 1998
THE AGS BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND
ADOPTED THE MERGER AGREEMENT. THE AGS BOARD ALSO HAS UNANIMOUSLY
RECOMMENDED THAT THE STOCKHOLDERS OF AGS VOTE IN FAVOR OF THE MERGER
PROPOSAL.
2
<PAGE>
CONSOLIDATED GRAPHICS, INC. AUTOMATED GRAPHIC
SYSTEMS, INC.
$16,000,000 SPECIAL MEETING
IN SHARES OF COMMON STOCK OF STOCKHOLDERS
$.01 PAR VALUE DECEMBER , 1998
PROSPECTUS PROXY STATEMENT
The Boards of Directors of Consolidated Graphics, Inc., a Texas corporation
(as the context requires, together with its subsidiaries, "CGX"), and
Automated Graphic Systems, Inc., a Maryland corporation (as the context
requires, together with its subsidiaries, "AGS"), have unanimously approved a
merger (the "Merger") of AGS into AGS Acquisition Co. ("Newco"), a wholly
owned subsidiary of CGX formed to accomplish the Merger. CGX is a leading
printing industry consolidator and one of the largest sheetfed commercial
printers in the United States. AGS provides a complete range of printing and
communication services largely in the Washington, D.C. Metropolitan Area, the
state of Ohio and the New York Tri-State Region.
AGS is delivering this prospectus/proxy statement to the stockholders of
AGS as its proxy statement in connection with a special meeting called to seek
approval of the Merger. The special meeting will be held on December , 1998 at
9:00 a.m., local time, at the law offices of Venable, Baetjer and Howard, LLP,
1800 Mercantile Bank & Trust Building, 2 Hopkins Plaza, Baltimore, Maryland. If
you are a participant in the AGS Employee Stock Ownership Plan (the "ESOP"),
you have received this prospectus/proxy statement in connection with your right
to direct the ESOP trustees how to vote the shares allocated to your account. If
the stockholders approve the Merger, it is expected to occur within three
business days after the special meeting. After the Merger, AGS will no longer
exist and Newco will continue the business of AGS under the name of Automated
Graphic Systems as a wholly owned subsidiary of CGX. CGX will pay for your
shares of AGS common stock partly in cash and partly in shares of CGX common
stock. See "The Merger -- Structure of and Consideration for the Merger" on
page 16 for a more detailed description of the price to be paid.
CGX is delivering this prospectus/proxy statement to you as its prospectus
with respect to the shares of CGX common stock that you will be entitled to
receive if the Merger occurs either as a direct stockholder or as an ESOP
participant. The total number of shares of CGX common stock that will be issued
if the Merger occurs will be less than five percent of the outstanding shares of
CGX common stock, both in number and in voting power. The common stock of CGX is
listed on the New York Stock Exchange (the "NYSE") under the symbol "CGX."
Before the Merger occurs, CGX must apply for and obtain approval from the NYSE
for the listing of the shares of CGX common stock to be issued to you.
This prospectus/proxy statement is first being mailed or delivered to
stockholders of AGS and the participants in the ESOP on or about November ,
1998.
THE BACKGROUND, STRUCTURE AND TERMS OF THE MERGER ARE DISCUSSED IN DETAIL
IN THIS PROSPECTUS/PROXY STATEMENT. BECAUSE THE PROPOSED MERGER IS A COMPLEX
TRANSACTION, YOU SHOULD READ THE ENTIRE PROSPECTUS/PROXY STATEMENT AND ITS
APPENDICES CAREFULLY, ESPECIALLY THE RISK FACTORS BEGINNING ON PAGE 10, BEFORE
YOU DECIDE HOW TO VOTE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE CGX COMMON STOCK TO BE ISSUED IN
CONNECTION WITH THE MERGER OR DETERMINED IF THIS PROSPECTUS/PROXY STATEMENT IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU INFORMATION THAT DIFFERS FROM THE
INFORMATION IN THIS PROSPECTUS/PROXY STATEMENT. IF YOU RECEIVE ANY DIFFERENT
INFORMATION, YOU SHOULD NOT RELY ON IT.
The information contained in this prospectus/proxy statement speaks as of
the date below. You should not imply that the information has not changed since
that date.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS , 1998.
<PAGE>
TABLE OF CONTENTS
PAGE
------
SUMMARY.............................. 3
RISK FACTORS......................... 10
THE AGS MEETING...................... 13
THE MERGER........................... 16
BUSINESS OF THE COMPANIES............ 29
SELECTED FINANCIAL DATA.............. 33
CGX UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION..... 35
CGX MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 36
AGS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 43
DESCRIPTION OF CGX SECURITIES........ 49
MANAGEMENT OF CGX.................... 50
OWNERSHIP OF CGX SECURITIES.......... 52
EXECUTIVE COMPENSATION............... 53
COMPARATIVE RIGHTS OF SHAREHOLDERS... 55
LEGAL MATTERS........................ 59
EXPERTS.............................. 59
AVAILABLE INFORMATION................ 59
INDEX TO FINANCIAL STATEMENTS........ F-1
APPENDIX A--AGREEMENT AND PLAN OF
REORGANIZATION (AS AMENDED)........ A-1
APPENDIX B--MARYLAND STATUTE--RIGHTS
OF OBJECTING STOCKHOLDERS............ B-1
APPENDIX C--CGX 401(K) PLAN
INVESTMENT FUND ALTERNATIVES....... C-1
2
<PAGE>
SUMMARY
CERTAIN OF THE INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IS
SUMMARIZED BELOW. BECAUSE THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF
THE TRANSACTION AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ THIS ENTIRE PROSPECTUS/PROXY STATEMENT AND ITS
APPENDICES CAREFULLY, AS WELL AS THE ADDITIONAL DOCUMENTS WE REFER YOU TO. SEE
"AVAILABLE INFORMATION" ON PAGE 59.
CGX AND NEWCO
CGX, headquartered in Houston, Texas, is one of the fastest growing
commercial printing companies in the United States. As a leading printing
industry consolidator and one of the largest sheetfed commercial printers in the
United States, CGX has expanded its operations to include 42 printing companies
nationwide as of September 30, 1998. Each printing business has an established
operating history (ranging from 11-120 years), experienced management, solid
customer relationships and a reputation for providing quality service and
products. The printing businesses of CGX sell to a broadly diversified customer
base, including many major corporations. All of the printing businesses provide
general commercial printing services and other related services, including, in
many cases, electronic media services. Each printing business has its own sales,
estimating, customer service, pre-press, production, post-press and accounting
departments. The headquarters of CGX provides its printing businesses with
certain administrative services, such as purchasing and human resources support,
and maintains centralized risk management, treasury, investor relations and
consolidated financial reporting activities.
CGX follows a strategy of generating growth in sales and profits through an
aggressive acquisition program coupled with internal growth and operational
improvements at its existing businesses. CGX provides its acquired businesses
with cost savings through master purchasing arrangements, access to technology
and capital, strategic counsel and a commitment to training through a unique,
comprehensive management development program.
At September 30, 1998 CGX had approximately 3,300 employees. The principal
executive offices of CGX are located at 5858 Westheimer, Suite 200, Houston,
Texas 77057 and the telephone number of CGX at such location is (713) 787-0977.
Newco was incorporated by CGX in Maryland in September 1998. Newco has
minimal assets and no business and has carried on no activities that are not
directly related to its formation and entering into the Agreement and Plan of
Reorganization dated as of September 28, 1998 (as amended, the "Merger
Agreement") negotiated in connection with the proposed Merger. The mailing
address of Newco is 5858 Westheimer, Suite 200, Houston, Texas 77057 and its
telephone number is (713) 787-0977.
AGS
AGS was founded in 1975 to provide computer typesetting services to the
Washington, D.C. Metropolitan Area. Soon after it commenced operations, AGS
identified an underserved niche for books and directories and adopted a plan to
fill this niche. Although AGS has continued to provide traditional commercial
printing services, the book and directory portion of its business has continued
to expand and ultimately has become AGS' primary business. Over time, AGS has
continued to upgrade its technology in order to maintain its market niche and
support continued growth. In particular, AGS has expanded its operations to
include a complete range of printing and communication services including
design, typesetting, desktop publishing, database management, CD-ROM production,
World Wide Web publishing, diskette replication, technical support, conventional
and electronic pre-press, on-demand printing, quick copying, binding, mailing,
storage and fulfillment.
Currently, AGS serves customers in the states of Maryland, North Carolina,
Virginia, Pennsylvania, Ohio and Illinois, as well as the New York Tri-State
Region and Washington, D.C. AGS is headquartered in White Plains, Maryland,
where it maintains its principal printing facility. AGS also operates a service
3
<PAGE>
bureau and copy center in Washington, D.C. and a printing facility in Macedonia,
Ohio. The consolidated operations of Automated Graphic Systems, Inc. include its
wholly owned subsidiaries, Automated Graphic Imaging, Inc. and Automated Graphic
Systems-Ohio, Inc.
The principal executive offices of AGS are located at 4590 Graphics Drive,
White Plans, Maryland 20695. The telephone number of such offices is (301)
843-1800.
STRUCTURE OF AND CONSIDERATION FOR THE MERGER
Pursuant to the Merger Agreement, AGS will merge into Newco, and each share
of AGS common stock that is outstanding at the time of the Merger will be
converted into the right to receive (A) that amount of cash determined by
subtracting from $1,278.1164 (1) the ratable portion of AGS' transaction costs
incurred after June 30, 1998 (estimated to be approximately $300,000) and (2)
the ratable portion of $3,100,000 to be held in an interest-bearing escrow
account as the sole source for payment of indemnification claims for 36 months
following the Merger and (B) the ratable portion of that number of shares of CGX
common stock determined by dividing $16,000,000 by the average of the closing
prices per share of CGX common stock on the NYSE on the three trading days
immediately preceding the third trading day before the Closing Date (as defined
in the Merger Agreement). See "The Merger -- Structure of and Consideration for
the Merger."
THE AGS MEETING
DATE, TIME AND PLACE OF THE AGS MEETING
AGS will hold a special meeting of stockholders (together with any
adjournments, postponements or reschedulings thereof, the "AGS Meeting") on
December , 1998, at 9:00 a.m. local time at the law offices of Venable,
Baetjer and Howard, LLP, 1800 Mercantile Bank and Trust Building, 2 Hopkins
Plaza, Baltimore, Maryland 21201.
PURPOSE OF THE AGS MEETING
At the AGS Meeting, direct holders of AGS common stock (including the ESOP
trustees) will vote on the proposal (the "Merger Proposal") to (1) adopt the
Merger Agreement and (2) approve the Merger. In addition, direct AGS
stockholders will vote, if necessary, on the proposal (the "Adjournment
Proposal") to permit adjournment of the AGS Meeting and postponement of a vote
on the Merger Proposal if, at the time of the AGS Meeting, AGS does not have in
hand enough votes to approve the Merger Proposal.
RECORD DATE
You will be entitled to vote at the AGS Meeting if you directly owned AGS
shares as of the close of business (5:00 p.m. local time) on November , 1998
(the "Record Date"). On the Record Date there were a total of 11,705 shares of
AGS common stock entitled to vote at the AGS Meeting. If you are an ESOP
participant, you will be entitled to instruct the ESOP trustees how to vote the
shares of AGS stock allocated to your account as of October 31, 1998.
QUORUM
The holders of at least a majority of the outstanding shares of AGS stock
(at least 5,853 shares) (a quorum) must be present at the AGS Meeting, either in
person or through representation by proxy, in order to hold a valid vote on the
Merger Proposal. If, as expected, one or both of the ESOP trustees are present
at the AGS Meeting, all of the AGS shares held by the ESOP will be counted and
thus a quorum will be present.
MATTERS RELATING TO VOTING
At least 7,804 shares of AGS stock (66 2/3% of the 11,705 AGS shares
actually outstanding) must be voted in favor of the Merger Proposal for it to
pass. Each share of AGS common stock is entitled to one vote on the Merger
Proposal and each other matter considered by the stockholders at the AGS
Meeting.
4
<PAGE>
The vote required to approve the Merger Proposal is a percentage of the
total number of shares of AGS stock outstanding. The Individual Stockholders,
who are all of the direct holders of AGS common stock, by signing the Merger
Agreement, have agreed, and have granted to CGX an irrevocable proxy, to vote
their shares in favor of the Merger Proposal. Therefore, if you are a direct
stockholder and you do not vote in favor of the Merger Proposal in person or by
proxy, CGX will do so. If you are an ESOP participant, the ESOP trustees will
vote shares allocated to your account in accordance with your instructions. If
the ESOP trustees do not receive a voting instruction covering your shares, they
will vote those shares in the manner that they believe complies with their
duties as trustees. Therefore, if you do not direct the ESOP trustees how to
vote the shares allocated to your account, your action may, but will not
necessarily, have the effect of a vote against the Merger Proposal.
As of the Record Date, the direct stockholders of AGS (consisting of
certain AGS directors, officers and employees) directly held 1,194 shares of AGS
stock, or approximately 10.20% of the total number of outstanding shares. The
holders of all of these shares have agreed, and have granted to CGX an
irrevocable proxy, to vote their shares in favor of the Merger Proposal. These
stockholders also have indicated that, if necessary, they intend to vote their
shares IN FAVOR of the Adjournment Proposal. See "Business of the
Companies -- Business of AGS -- Ownership of AGS Common Stock" on page 32.
RECOMMENDATION OF THE AGS BOARD
The Board of Directors of AGS (the "AGS Board") has determined that the
Merger Agreement and the Merger are advisable and in the best interests of AGS
and the AGS stockholders. The AGS Board has unanimously adopted the Merger
Agreement, approved the Merger and directed that the Merger Proposal be
submitted to a vote of the stockholders. The AGS Board also has unanimously
recommended that the stockholders vote IN FAVOR of the Merger Proposal.
In taking such actions, the AGS Board considered, among other things, the
information received from CGX and other potential acquisition partners, as well
as the following factors:
o that there is no public market for AGS stock and that, as a
consequence, AGS stockholders, including the ESOP, cannot readily
sell their shares;
o that the ESOP currently is invested 100% in AGS stock, but that
the ESOP participants would, as soon as practicable after the
Merger, be able to direct investment of their account balances
among a number of investment options and thereby diversify their
ESOP investments;
o that after the Merger and as a wholly owned subsidiary of CGX,
AGS is likely to enjoy improved access to capital resources and
technology;
o that after the Merger and as a wholly owned subsidiary of CGX,
AGS is likely to benefit from economies of scale; and
o that current market conditions are more favorable for a sale of
AGS than has been the case historically.
THE AGS BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND ADOPTED THE
MERGER AGREEMENT. THE AGS BOARD ALSO HAS UNANIMOUSLY RECOMMENDED THAT
THE AGS STOCKHOLDERS VOTE IN FAVOR OF THE MERGER PROPOSAL.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of AGS have interests in the
Merger that are different from and in addition to yours as stockholders and/or
ESOP participants. Those interests are as follows:
o In order to develop and maintain a strong management team and to
provide continuing incentives for members of AGS management for
future growth and security, John F. Green, Kevin Cassis, Kenneth
Lemmert, Christopher Carpenter, each of whom is a director and/or
5
<PAGE>
officer of AGS, as well as a direct and (as an ESOP participant)
indirect stockholder, together with certain other key management
employees of AGS, will be entitled to receive options to purchase
shares of CGX common stock having an aggregate exercise price
(based on the market value of such shares at the time of the
Merger) of $2,000,000;
o Messrs. Cassis, Lemmert and Carpenter will receive total cash
payments of approximately $840,000 (net of the ratable portion of
AGS' transaction costs since June 30, 1998 and participation in a
ratable portion of the escrowed funds) in payment for certain
stock appreciation rights previously issued by AGS as part of its
management incentive program;
o Messrs. Lemmert and Carpenter will receive total cash payments of
approximately $195,000 (net of the ratable portion of AGS'
transaction costs since June 30, 1998 and participation in a
ratable portion of the escrowed funds) as payment for certain
stock options previously issued by AGS as part of its management
incentive program;
o The lease on AGS' White Plains facility has been amended to
provide for five five-year renewal options at the election of CGX
upon expiration of its current term. John F. Green, the Chairman,
President and Chief Executive Officer of AGS, is a partner in the
general partnership that owns this facility.
The AGS Board recognized these differing interests and took them into
account in considering the Merger. The AGS Board has determined that the Merger
Agreement and the Merger are advisable and in the best interests of AGS and the
AGS stockholders and has recommended that AGS stockholders vote IN FAVOR of the
Merger Proposal.
RIGHT TO DISSENT AND TO APPRAISAL
If you hold shares of AGS stock directly, under Maryland law you may elect
to have a Maryland court determine the "fair value" (as provided under
Maryland law) of those shares through an appraisal process and to receive that
"fair value" in place of the consideration provided under the Merger
Agreement. In order to exercise these so-called "dissenters' rights" you must
strictly follow the procedures required by Maryland law and you must not vote in
favor of the Merger. Any deviation from these requirements may result in loss of
your dissenters' rights. The Individual Stockholders, who are all of the direct
holders of AGS stock, by signing the Merger Agreement, have granted to CGX an
irrevocable proxy to vote their shares in favor of the Merger. Therefore, if you
are a direct stockholder you will not be able to exercise dissenters' rights.
If you are an ESOP participant, you will not have dissenters' rights. The
trustees of the ESOP have the sole right to exercise dissenters' rights with
respect to shares of AGS stock held by the ESOP and, except in limited
circumstances, have agreed not to exercise such rights. See "The
Merger -- Rights of Dissent and Appraisal."
RISK FACTORS
A number of factors, including the short-term nature of most printing
projects, the ability of CGX to continue its acquisition and operational
strategies, competition and governmental regulation, may affect the
implementation of the Merger and the performance of CGX and the surviving
corporation after the Merger. You should review carefully "Risk Factors"
beginning on page 10.
REGULATORY MATTERS
CGX and AGS are prohibited by U.S. antitrust laws from completing the
Merger until after they have furnished certain information to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and a
required waiting period has ended. Each filed the required forms and requested
early termination of the waiting period. On September 22, 1998, the Federal
Trade Commission granted early termination of the waiting period. The Department
of Justice and the Federal Trade Commission continue,
6
<PAGE>
however, to have the authority to challenge the Merger on antitrust grounds
before or after the Merger is completed.
TAX CONSIDERATIONS
CGX and AGS have concluded that the Merger will qualify as a reorganization
for federal income tax purposes. Thus, the recipients of the consideration in
the Merger who are subject to paying federal income taxes will recognize gain
realized as a result of the Merger only to the extent of the cash consideration
received in the Merger. Neither CGX nor AGS is obtaining a ruling from the
Internal Revenue Service as to the tax consequences of the Merger, and neither
can assure you that such conclusion would be accepted by the Internal Revenue
Service. CGX will receive an opinion of counsel from counsel to CGX as to the
material federal income tax consequences of the Merger. In general, a retirement
plan qualified under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the
"Code"), including, an employee stock ownership plan, is not subject to paying
income taxes and a participant in such plan will generally not incur any federal
income tax liability solely as a result of a transaction such as the Merger. See
"The Merger -- Material Federal Income Tax Consequences of the Merger" on page
27.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER
WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX
ADVISERS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
OTHER TERMS OF THE MERGER
In addition to the foregoing matters, the Merger Agreement contains certain
other terms and conditions, including the receipt by the parties of certain
customary legal opinions, certificates, consents, resolutions and reports. CGX
and AGS intend to consummate the Merger as soon as practicable following
satisfaction or waiver of the conditions to the Merger. See "The
Merger -- Other Conditions to the Merger" on page 21. The Merger Agreement also
prohibits AGS and its affiliates from soliciting or encouraging the submission
of inquiries, proposals or other offers regarding any acquisition of or merger
with AGS. If, however, the AGS Board decides after considering advice of outside
counsel and financial advisers that it is consistent with its fiduciary
responsibilities to the AGS stockholders to approve or recommend another
transaction and so withdraws or modifies its recommendation of the Merger, AGS
may enter into an agreement with respect to such a proposal, if it first
terminates the Merger Agreement and pays to CGX a termination fee of $1,000,000
in cash (the "Termination Fee"). See "The Merger -- No Solicitation of
Transactions; Termination Fee" on page 26.
7
<PAGE>
COMPARATIVE SHARE DATA
Set forth below are book value, cash dividends declared and earnings from
continuing operations per common share data of CGX and AGS on both historical
and pro forma combined bases and on a per share equivalent pro forma basis for
AGS. The equivalent pro forma combined data per share of AGS common stock are
based upon a conversion ratio of 53.234 shares of CGX common stock for each
share of AGS common stock according to the provisions of the Merger Agreement,
estimated based on the closing price of CGX common stock on October 26, 1998 of
$49.6875 per share. Such conversion ratio excludes the 5,656 shares of AGS
common stock which are deemed to be acquired for the cash portion of the merger
consideration. The information set forth below should be read in conjunction
with the audited and unaudited consolidated financial statements of CGX and AGS
included elsewhere in this prospectus/proxy statement.
THREE MONTHS ENDED YEAR ENDED
JUNE 30, 1998 MARCH 31, 1998
------------------ --------------
CGX -- Historical:
Book value......................... $ 9.44 $ 8.13
Cash dividends declared............ -- --
Basic earnings from continuing
operations....................... .50 1.46
Diluted earnings from continuing
operations....................... .48 1.40
THREE MONTHS ENDED YEAR ENDED
JUNE 30, 1998 MARCH 31, 1998
------------------- -----------------
AGS -- Historical:
Book value...................... $1,016.49 $1,007.44
Cash dividends declared......... -- --
Basic and diluted earnings from
continuing operations........... 41.98 134.93
THREE MONTHS ENDED YEAR ENDED
JUNE 30, 1998 MARCH 31, 1998
------------------- -----------------
Pro Forma Combined:
Book value...................... $ 10.40 $ 9.14
Cash dividends declared......... -- --
Basic earnings from continuing
operations...................... .52 1.54
Diluted earnings from continuing
operations.................... .50 1.48
THREE MONTHS ENDED YEAR ENDED
JUNE 30, 1998 MARCH 31, 1998
------------------- -----------------
Equivalent Pro Forma Combined Per AGS
Common Share:
Book value...................... $553.63 $486.56
Cash dividends declared......... -- --
Basic earnings from continuing
operations...................... 27.68 81.98
Diluted earnings from continuing
operations.................... 26.62 78.79
MARKET PRICE INFORMATION
The CGX common stock is traded on the NYSE (symbol: CGX). Before January
29, 1997, the CGX common stock was listed on the Nasdaq National Market (symbol:
COGI). As of September 30, 1998, there were 150 shareholders of record and,
based on security position listings, CGX believes that it has in excess of 3,500
beneficial owners.
8
<PAGE>
The table below reflects the range of the high and low sales prices for the
CGX common stock by quarter, after giving effect as applicable to a two-for-one
stock split on January 10, 1997.
HIGH LOW
--------- ---------
FISCAL 1997 -- QUARTER ENDED:
June 30, 1996...................... $ 13.375 $ 8.313
September 30, 1996................. 12.750 9.125
December 31, 1996.................. 29.000 11.375
March 31, 1997..................... 34.250 24.500
HIGH LOW
--------- ---------
FISCAL 1998 -- QUARTER ENDED:
June 30, 1997...................... $ 43.250 $ 23.875
September 30, 1997................. 53.500 38.625
December 31, 1997.................. 56.188 43.188
March 31, 1998..................... 59.250 36.375
HIGH LOW
--------- ---------
FISCAL 1999 -- QUARTER ENDED:
June 30, 1998...................... $ 63.875 $ 49.500
September 30, 1998................. 67.125 35.125
December 31, 1998 (through October
26)................................ 50.750 31.500
CGX currently intends to retain all future earnings to finance the
continuing development of its business and does not anticipate paying cash
dividends on the CGX common stock in the foreseeable future. Any payment of cash
dividends in the future will depend upon the financial condition, loan
covenants, capital requirements and earnings of CGX, as well as other factors
the Board of Directors of CGX (the "CGX Board") may deem relevant.
There is no public trading market for AGS common stock.
9
<PAGE>
RISK FACTORS
BEFORE YOU VOTE ON THE MERGER PROPOSAL, YOU SHOULD BE AWARE THAT THERE ARE
VARIOUS RISKS OF OWNERSHIP OF CGX STOCK, INCLUDING THOSE DESCRIBED BELOW. YOU
SHOULD CONSIDER CAREFULLY THESE RISK FACTORS TOGETHER WITH ALL OF THE OTHER
INFORMATION INCLUDED IN THIS PROSPECTUS/PROXY STATEMENT BEFORE YOU DECIDE HOW TO
VOTE.
SOME OF THE INFORMATION IN THIS PROSPECTUS/PROXY STATEMENT MAY CONTAIN
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "CONTINUE" OR OTHER SIMILAR WORDS. THESE
STATEMENTS DISCUSS FUTURE EXPECTATIONS, MAKE VARIOUS ASSUMPTIONS, CONTAIN
PROJECTIONS OF RESULTS OF OPERATIONS OR OF FINANCIAL CONDITION OR STATE OTHER
"FORWARD-LOOKING" INFORMATION. WHEN CONSIDERING SUCH FORWARD-LOOKING
STATEMENTS, YOU SHOULD KEEP IN MIND THE RISK FACTORS AND OTHER CAUTIONARY
STATEMENTS IN THIS PROSPECTUS/PROXY STATEMENT. THE RISK FACTORS NOTED IN THIS
SECTION AND OTHER FACTORS NOTED THROUGHOUT THIS PROSPECTUS/PROXY STATEMENT COULD
CAUSE CGX'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY
FORWARD-LOOKING STATEMENT.
NATURE OF PRINTING BUSINESS; PROJECT-BY-PROJECT SALES
CGX competes primarily in the general commercial printing sector of the
printing industry. This sector is characterized by individual orders from
customers for specific printing jobs rather than long-term contracts, with
continued work from such customers being dependent upon the customers'
satisfaction with the services provided. Therefore, CGX is unable to predict,
for more than a few weeks in advance, the number, size and profitability of
printing jobs in a given period. Quarterly operating results may fluctuate as a
result of overall trends in the economy, acquisitions of new businesses and
customer buying patterns. As a result, quarterly operating results may vary
significantly from quarter to quarter.
IMPLEMENTATION OF ACQUISITION STRATEGY; COMPETITION; PRICE; INTEGRATION
A key component of CGX's growth strategy is accomplished by acquiring
companies located throughout the United States. While there are many such
companies, CGX may not always be able to identify and acquire companies meeting
its acquisition criteria on terms acceptable to CGX. Moreover, financing to
complete significant acquisitions may not always be available on satisfactory
terms in the future. Additionally, competition for acquisition candidates may
further develop.
Even if CGX is able to continue to identify and acquire suitable
businesses, CGX may experience difficulty in profitably managing additional
businesses or successfully integrating acquired businesses without substantial
costs, delays or other operational or financial problems. Further, acquisitions,
including the Merger, involve a number of special risks, including possible
adverse effects on the operating results of CGX, diversion of management's
attention, failure to retain key acquired personnel, risks associated with
unanticipated events or liabilities, some or all of which could have a material
adverse effect on the business, financial condition and results of operations of
CGX.
An acquisition may also have an adverse effect upon the operating results
of CGX while the acquired business is adopting the management practices of CGX.
Although CGX has so far been generally successful in integrating its
acquisitions, CGX may not in all circumstances be able to establish, maintain or
increase profitability of an acquired entity.
NUMEROUS COMPETITORS
The printing industry is extremely competitive and fragmented. CGX competes
with numerous large and small printing companies, some of which have greater
financial resources than CGX. CGX competes on the basis of ongoing customer
service, quality of finished products and price.
DEPENDENCE UPON CONTINUED AVAILABILITY OF KEY PERSONNEL
CGX believes that its continued success will depend to a significant extent
upon its senior management, particularly Joe R. Davis, the founder, President
and Chief Executive Officer of CGX. The loss of the
10
<PAGE>
services of Mr. Davis or other key personnel could have a material adverse
effect on the business and prospects of CGX. The continued success of CGX also
will depend, in part, upon its ability to attract and retain qualified
employees.
SIGNIFICANT CONCENTRATION OF VOTING INFLUENCE
Based upon the latest information available to CGX, Joe R. Davis
beneficially owns approximately 10.4% and Jeffrey N. Vinik, et al. ("Vinik")
beneficially own approximately 9.1% of the outstanding CGX common stock. As a
result, although Mr. Davis and Vinik have never acted together in the past, if
they acted together, they would have the ability to substantially influence the
election of persons to the Board of Directors of CGX and the outcome of other
matters requiring shareholder approval.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS; POTENTIAL IMPACT OF CHANGES IN
LAWS
CGX handles numerous non-toxic and a limited number of toxic materials, and
is subject to the environmental laws and regulations of the United States and
the states in which it has operations concerning emissions into the air,
discharges into waterways and the generation, handling and disposal of waste
materials. While CGX believes that through selection of qualified contractors,
management and employee training and adherence to adequate procedures it is
currently in substantial compliance with these laws and regulations, future
changes in such laws and regulations may require CGX to incur significant costs
to remain in compliance. Such expenditures could have a material adverse effect
on the operations of CGX.
DIVIDEND POLICY -- NO DIVIDENDS FOR FORESEEABLE FUTURE
CGX currently intends to retain all future earnings to finance the
continuing development of its business and does not anticipate paying cash
dividends on the CGX common stock in the foreseeable future.
YEAR 2000 COMPLIANCE
CGX has undertaken a Year 2000 compliance program to ensure that it will be
Year 2000 compliant by December 31, 1999. While CGX believes substantially all
of the equipment utilized in its printing operations will not be affected by the
Year 2000 issue, certain of its management information systems and associated
computer equipment are not currently Year 2000 compliant. While CGX is
scheduling upgrades to its hardware and software where necessary to address this
issue and anticipates that substantially all such systems will be made Year 2000
compliant, there can be no assurance that this will be accomplished on a timely
basis. The ability of third parties with which CGX transacts business to address
their Year 2000 issue is outside CGX's control. Although Year 2000 problems with
any one customer or supplier should not have a material adverse effect on CGX,
the disruption of a significant number of businesses could materially and
adversely affect CGX. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
SHARES ELIGIBLE FOR FUTURE SALE; RESTRICTED SECURITIES; OTHER REGISTRATIONS;
PREFERRED STOCK
AUTHORIZED
CGX has issued a significant number of shares of common stock in
acquisition transactions or under other circumstances, including shares issuable
upon exercise of certain stock purchase options that have been or may be granted
under the existing incentive stock option plan of CGX. Certain of these shares
constitute either "restricted securities" as such term is defined in Rule 144
promulgated under the Securities Act of 1933 (the "Securities Act") or are
held by "affiliates" of CGX and consequently are subject to the resale
limitations of Rule 144. Future sales of significant numbers of shares of CGX
common stock in the public market could adversely affect the prevailing market
price of the common stock and could also impair the ability of CGX to raise
capital through subsequent offerings of securities with the Securities and
Exchange Commission (the "Commission").
CGX has on file with the Commission several effective registration
statements under the Securities Act pursuant to which shares of CGX common stock
that were issued as restricted securities in connection with
11
<PAGE>
business acquisitions may be resold. CGX also has an effective registration
statement covering two million shares of its common stock for use in future
acquisitions.
In addition, the CGX Board, without further action by the shareholders, is
authorized to issue up to five million shares of preferred stock in one or more
series and to fix and determine as to any series all the relative rights and
preferences of shares in such series, including preferences, redemption rights,
conversion rights, voting rights, dividend rights and preferences on
liquidation. The dividend, liquidation and voting rights of any preferred stock
issued could be superior to the rights of the holders of common stock. The
issuance of shares of preferred stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal
that some, or a majority, of the shareholders might believe to be in the best
interests of CGX or in which shareholders might receive a premium for their
stock over the then market price of such stock. Also, under certain
circumstances, the issuance of preferred stock could adversely affect the voting
power of the holders of the common stock.
12
<PAGE>
THE AGS MEETING
DATE, TIME AND PLACE OF THE MEETING
AGS will hold a special meeting of stockholders on December , 1998, at
9:00 a.m. local time at the law offices of Venable, Baetjer and Howard, LLP,
1800 Mercantile Bank and Trust Building, 2 Hopkins Plaza, Baltimore, Maryland
21201.
PURPOSE OF THE AGS MEETING
At the AGS Meeting, direct holders of AGS common stock (including the ESOP
trustees) will vote on the Merger Proposal, which is a proposal to (1) adopt the
Merger Agreement and (2) approve the Merger. In addition, if necessary, direct
AGS stockholders will vote on the Adjournment Proposal, which is a proposal to
permit adjournment of the AGS Meeting and postponement of a vote on the Merger
Proposal if, at the time of the AGS Meeting, AGS does not have enough votes to
approve the Merger Proposal.
RECORD DATE; VOTING RIGHTS
By action of the AGS Board, you will be entitled to vote at the AGS meeting
if you owned AGS shares of record as of the close of business (5:00 p.m. local
time) on November , 1998 (the "Record Date"). However, since all of the
direct stockholders, have granted an irrevocable proxy to CGX, if you are a
direct stockholder and you do not vote in favor of the Merger Proposal in person
or by proxy, CGX will do so. If you are an ESOP participant, you will be
entitled to instruct the ESOP trustees how to vote the shares of AGS stock
allocated to your account as of October 31, 1998. Due to the nature of the
voting process, however, only direct stockholders may attend the AGS Meeting and
vote in person. Each share of AGS common stock will be entitled to one vote on
each matter considered by the stockholders at the AGS Meeting.
On the Record Date, 11,705 shares of common stock of AGS were outstanding
and entitled to vote at the AGS Meeting. Of these shares, 10,511 shares (or
approximately 89.80% of the AGS shares outstanding) (the "ESOP Shares"), were
held of record by the ESOP. All of the shares held by the ESOP were allocated to
the accounts of specific ESOP participants.
VOTING PROCEDURES
How you vote depends on how you own your AGS shares. The following are the
procedures that you should follow if you are (A) a direct stockholder or (B) an
ESOP participant.
PLEASE FOLLOW THESE PROCEDURES CAREFULLY.
DIRECT STOCKHOLDERS
If you hold shares of AGS stock directly in your own name (that is, not
through the ESOP) a green proxy card and return envelope should accompany this
mailing. You may vote at the AGS Meeting either in person or by granting a
proxy. Properly completed proxies received prior to the AGS Meeting will be
voted in accordance with any instructions contained therein. If a proxy is
executed and returned without instructions, it will be voted IN FAVOR of the
Merger Proposal, and, if necessary, IN FAVOR of the Adjournment Proposal.
Proxies will be voted in the discretion of the persons to whom they are granted
if any other business properly comes before the AGS Meeting. Individual
Stockholders, by signing the Merger Agreement, have agreed, and have granted to
CGX an irrevocable proxy, to vote their shares IN FAVOR of the Merger Proposal.
13
<PAGE>
If you wish to vote by proxy, you should complete, sign and date the
enclosed green proxy card. You should then return the proxy card in the green
return envelope to the Secretary of AGS at the address indicated below, so that
it is received prior to the AGS Meeting:
Kenneth Lemmert
Secretary
Automated Graphic Systems, Inc.
4590 Graphics Drive
White Plains, Maryland 20695
If you return your proxy and you later change your mind, you may revoke the
proxy at any time before a vote is taken at the AGS Meeting in any of the
following three ways:
(1) by informing the Secretary of AGS in writing that you are
revoking the proxy;
(2) by completing, executing and delivering a proxy card
bearing a later date; or
(3) by voting in person at the AGS Meeting.
ESOP PARTICIPANTS
If you are an ESOP participant, a blue voting instruction, indicating the
number of AGS shares allocated to your account as of October 31, 1998, and a
blue return envelope should accompany this mailing. Because the terms of the
ESOP provide for so-called "pass-through" voting, you are permitted to
instruct the ESOP trustees how to vote the AGS shares allocated to your account.
If the ESOP trustees receive a properly completed voting instruction covering
shares allocated to your account before the day of the AGS Meeting, they will
vote those shares as you direct. If the ESOP trustees do not receive a voting
instruction covering your shares, they will vote those shares in the manner that
they believe complies with their duties as trustees.
To instruct the ESOP trustees how to vote the AGS shares allocated to your
account, you should complete, sign and date the enclosed blue voting
instruction. Then, you should return the voting instruction to the ESOP trustees
at the address indicated below so that it is received prior to the date of the
AGS Meeting:
Automated Graphic Systems, Inc. ESOP
c/o Edward Pittman, Trustee
4590 Graphics Drive
White Plains, MD 20695
If you return your voting instruction and later decide to change your
instruction, you may do so by completing, dating and signing a later dated
voting instruction and returning it so that it is received at the above address
no later than the day before the AGS Meeting. Due to the nature of the voting
process, however, only direct stockholders may attend the AGS Meeting and vote
in person. Mr. Pittman has been instructed to treat voting instructions
confidentially and to not disclose individual voting instructions to any other
person.
SOLICITATION OF PROXIES AND VOTING INSTRUCTIONS
AGS initially will bear the costs of soliciting proxies and voting
instructions. AGS' costs will be reimbursed from the aggregate consideration
payable by CGX in the Merger. Therefore, the cash amount payable to AGS
stockholders in the Merger will be reduced by the amount of such costs.
Solicitation will be primarily by mail. However, directors and officers of AGS
also may solicit proxies and voting instructions in person or by telephone,
telegram, facsimile, e-mail or other means. AGS directors and officers will not
receive additional compensation for such solicitation but may be reimbursed for
their out-of-pocket expenses.
QUORUM
The holders of at least a majority of the outstanding shares of AGS stock
(at least 5,853 shares)
(a "quorum") must be present at the AGS Meeting, either in person or through
representation by proxy, in
14
<PAGE>
order to conduct any business at that Meeting. Because the ESOP holds 10,511
shares of AGS stock, the presence, at the AGS Meeting, of one or both of the
ESOP trustees will be sufficient to establish a quorum. It is expected that at
least one of the ESOP trustees will attend the AGS Meeting.
REQUIRED VOTE
At least 7,804 shares of AGS stock (66 2/3% of the 11,705 AGS shares
actually outstanding) must vote in favor of the Merger Proposal for it to pass.
If the ESOP trustees receive a properly completed voting instruction covering
AGS shares allocated to the account of an ESOP participant no later than the day
before the AGS Meeting, they will vote such shares as instructed. If the ESOP
trustees do not receive instructions as to shares allocated to a particular
account, such shares will be voted in the manner that the ESOP trustees believe
complies with their duties as trustees.
The vote required to approve the Merger Proposal is a percentage of the
total number of shares of AGS stock outstanding. The Individual Stockholders,
who are all of the direct holders of AGS common stock, by signing the Merger
Agreement, have agreed, and have granted to CGX an irrevocable proxy, to vote
their shares in favor of the Merger Proposal. Therefore, if you are a direct
stockholder and you do not vote in favor of the Merger Proposal in person or by
proxy, CGX will do so. If you are an ESOP participant and you do not direct the
ESOP trustees how to vote the shares allocated to your account, your inaction
may have the effect of a vote against the Merger Proposal.
As of the Record Date, the Individual Stockholders (consisting of certain
AGS directors, officers and employees) directly held 1,194 shares of AGS stock,
or approximately 10.20% of the total number of outstanding AGS shares. The
holders of all of these shares have agreed, and have granted to CGX an
irrevocable proxy, to vote their shares in favor of the Merger Proposal. The
Individual Stockholders also have indicated that, if necessary, they intend to
vote their shares IN FAVOR of the Adjournment Proposal.
RECOMMENDATION OF THE AGS BOARD OF DIRECTORS
The AGS Board has determined that the Merger Agreement and the Merger are
advisable and in the best interests of AGS and the AGS stockholders. The AGS
Board has unanimously adopted the Merger Agreement, approved the Merger and
directed that the Merger Proposal be submitted to a vote of the stockholders.
The AGS Board also has unanimously recommended that the stockholders vote IN
FAVOR of the Merger Proposal.
THE MATTERS TO BE VOTED UPON AT THE AGS MEETING ARE OF GREAT
IMPORTANCE. CONSEQUENTLY, AGS STOCKHOLDERS AND ESOP PARTICIPANTS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION CONTAINED IN
THIS PROSPECTUS/PROXY STATEMENT AND TO COMPLETE, SIGN AND PROMPTLY
RETURN A PROXY OR VOTING INSTRUCTION, AS APPROPRIATE, IN THE
ENCLOSED POSTAGE PAID ENVELOPE.
15
<PAGE>
THE MERGER
THE DETAILED TERMS OF AND CONDITIONS TO THE CONSUMMATION OF THE MERGER ARE
CONTAINED IN THE MERGER AGREEMENT, WHICH IS ATTACHED AS APPENDIX A AND
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING DISCUSSION SETS FORTH A
DESCRIPTION OF CERTAIN MATERIAL TERMS AND CONDITIONS OF THE MERGER AND THE
MERGER AGREEMENT AND IS QUALIFIED BY AND MADE SUBJECT TO THE MORE COMPLETE
INFORMATION SET FORTH IN THE MERGER AGREEMENT.
STRUCTURE OF AND CONSIDERATION FOR THE MERGER
On September 28, 1998, CGX and Newco, on the one hand and, on the other
hand, AGS, the Individual Stockholders and the ESOP trustees entered into the
Merger Agreement.
Pursuant to the Merger Agreement, AGS will merge into Newco, a newly
formed, wholly owned subsidiary of CGX, and each share of AGS common stock that
is outstanding at the time of the Merger (other than any AGS shares the holders
of which have properly perfected their dissenters' rights) will be converted
into the right to receive (A) that amount of cash determined by subtracting from
$1,278.1164 (1) the ratable portion of AGS' transaction costs incurred after
June 30, 1998 (estimated to be approximately $300,000) and (2) the ratable
portion of $3,100,000 (the "Escrowed Funds") to be held in an interest-bearing
escrow account for 36 months following the Merger and (B) the ratable portion of
that number of shares of CGX common stock determined by dividing $16,000,000 by
the average of the closing prices per share of CGX common stock on the NYSE on
the three trading days immediately preceding the third trading day before the
Closing Date (the aggregate of (A) and (B), the "Merger Consideration").
The Escrowed Funds and any interest thereon (the "Escrow Earnings") are
being held as the sole source of payment of indemnification claims, if any, that
may be raised within 36 months following the Merger, as well as for the payment
of legal fees, certain administrative fees and expenses and claims against the
ESOP. See "-- Effects of the Merger on ESOP Participants."
BACKGROUND OF THE MERGER
AGS is a privately held corporation with six stockholders, consisting of
the five Individual Stockholders and the ESOP. Of these, the largest is the
ESOP, which owned approximately 89.80% of the outstanding AGS common stock as of
the Record Date. The ESOP trustees are John F. Green, AGS' Chairman, President
and Chief Executive Officer, and Edward Pittman, a member of the AGS Board.
Except for his position as a director, Mr. Pittman has no other relationship
with AGS. As of October 31, 1998, the ESOP had approximately 275 participants,
all of whom are employees or former employees of AGS. The remaining 10.20% of
the outstanding AGS common stock is held by the five Individual Stockholders,
all of whom are employees of AGS, and four of whom also serve as directors
and/or officers of AGS. See "Business of the Companies -- Business of AGS."
Since its founding in 1975, AGS' growth has been financed primarily through
reinvestment of funds generated by the business and, to a lesser extent, through
bank financing. AGS' growth has been primarily internal, through expansion of
its workforce, additions to its service offerings and establishment of
additional facilities. In addition, AGS expanded into the Ohio market through
the acquisition of certain of the assets of an independent printing company
operating in that market.
As AGS has grown, the printing industry has expanded and evolved. The
advent of electronic media, including the internet, e-mail and other electronic
services, and increased use of CD-ROM technology for advertising, directories,
product catalogues, technical materials and other literature, have increased the
demand for such materials and expanded the focus from print media to include
electronic formats as well. In addition, printing technology has advanced
significantly. Functions previously performed by trade
typesetters -- keyboarding and formatting text -- are now increasingly performed
by consumers of printing services, and enhanced digital technologies are
eliminating the use of photographic film. The application of such advanced
technologies ultimately results in cost savings both for printing concerns like
AGS and for their customers. These technologies also are opening new markets by
permitting affordable, very short production runs of high-quality, full-color
printed products. Adoption of such technologies requires
16
<PAGE>
substantial investments in new equipment, software and related materials.
Further, technologies are evolving so rapidly, the ongoing cost of maintaining
its advantage in the state-of-the-art technologies necessary to compete
effectively is relatively high. Finally, many of the materials -- including
papers, film, ink, chemicals and solvents -- used by the commercial printing
industry have implications for the environment. Federal, state and local
environmental regulations have raised compliance costs as printing concerns
address issues of recycling, waste disposal, water purification and air
filtration in connection with the use and disposal of both toxic and nontoxic
materials.
As has been the case in a number of industries, the printing industry
recently has experienced significant consolidation, and several companies
recently have been actively engaged in acquiring printing concerns. In the
Spring of 1998, John F. Green, Chairman and Chief Executive Officer of AGS,
received inquiries from several such companies expressing interest in a possible
acquisition of AGS. Mr. Green believed that these companies were expressing
genuine interest in pursuing a business combination and, consequently, solicited
proposals from each of them. Although the AGS Board had not, at that time, acted
to solicit such offers, Mr. Green believed that, in the circumstances, it was
consistent with his duties to test what others might pay for AGS.
On May 18, 1998, Mr. Green met with representatives of CGX. During that
meeting, the CGX representatives toured the main AGS plant in White Plains,
Maryland, asked questions about AGS, its business and operations, and received
answers to those questions. While the representatives from CGX understood that
other companies had indicated a preliminary interest in acquiring AGS, subject
to that understanding, to approval by the AGS Board, and to AGS' continuing
right to seek other acquisition partners, Mr. Green conducted negotiations with
the aim of arriving at the terms of an acquisition of AGS by CGX. Toward the end
of the May 18 meeting, CGX made an oral offer to acquire AGS for aggregate
consideration of $32 million, consisting of 50% in cash and 50% in shares of CGX
common stock. CGX and AGS negotiated the terms of CGX's proposal prior to CGX
submitting to AGS a letter of intent.
At a meeting of the AGS Board on May 22, 1998, Mr. Green informed the AGS
Board that he had received CGX's oral offer. In addition, Mr. Green reported
that he had received preliminary indications of interest in a business
combination with AGS from three other printing concerns, all of which, like CGX,
were substantially larger than AGS. The AGS Board discussed the status of AGS as
an independent business, its future prospects alone or in combination with
another, larger entity, and various procedural, financial and fiduciary aspects
of a potential sale or other business combination. In evaluating the rationale
for a possible sale, the AGS Board considered, among other things, (1) the
financial and other terms of a potential merger or other business combination;
(2) the potential benefits of a business combination to AGS' stockholders,
employees and customers, including the facts that the ESOP currently is invested
exclusively in AGS stock and that a combination would be likely to result in
beneficial diversification; (3) that a combination with a larger entity would
facilitate access to capital for investment in technology and other
improvements; and (4) that market conditions appeared to be favorable for a
current sale of AGS. Based upon that discussion, by unanimous action the AGS
Board directed Mr. Green to obtain as many indications of interest or offers
from realistic candidates as possible, to pursue discussions that might lead to
a sale of AGS and to begin the appropriate diligence and consultation with
advisers that would be required in connection with an ultimate sale.
After the May 22 AGS Board meeting, Mr. Green carried out the AGS Board's
mandate and, by the time the AGS Board met again on June 4, 1998, AGS had
received indications of interest from a total of five potential acquirers (the
four referred to by Mr. Green on May 22, plus one new entrant). In addition, a
venture capital group that, in the interim, had evidenced some interest, had
withdrawn from the bidding process. CGX had submitted a written offer on May 28,
calling for $32 million of consideration consisting of 50% cash and 50% CGX
common stock with the cash consideration subject to downward adjustment for
outstanding stock appreciation rights ("SARs"), and setting forth certain
other proposed non-price terms. Each of the other indications of interest
contemplated all cash merger consideration, ranging from $26 million to $29
million, in certain instances subject to downward adjustment for the net excess
of AGS'
17
<PAGE>
indebtedness over cash on hand and for SARs. In addition, the $26 million bid
contemplated additional consideration of up to $4 million as an "earn out" on
unspecified terms.
The AGS Board considered the relative merits of the bids, including the
absolute dollar amount, form and timing of consideration, as well as non-price
terms. The AGS Board also considered the relative merits of each of the bidders,
including opportunities for cross-selling and other synergies, as well as the
range and terms of employee benefit programs offered by each. The AGS Board
directed Mr. Green, with the assistance of counsel, to continue negotiations
with each bidder and, to the extent feasible, to continue to seek additional
indications of interest.
After reviewing the bidding, the AGS Board discussed the benefits of
retaining a financial adviser to assist in evaluating the various offers. After
discussion, the AGS Board voted unanimously to retain a financial adviser who
had been recommended by counsel. The credentials of this financial adviser
previously had been presented to and reviewed by the AGS Board.
The AGS Board met again on June 12 to discuss the then-current status of
bidding and to consider future actions. As of that time, Mr. Green reported that
one bidder had withdrawn and that the financial terms of the other bids remained
substantially unchanged, although there were some refinements in the offers.
At the June 12 meeting, the AGS Board considered again the relative merits
of each of the then-current bids and bidders. The AGS Board also reviewed the
bidding process and confirmed that all parties had had access to the same body
of information concerning AGS, that this information fully and accurately
depicted its business, operations and financial condition and that all bidders
had been treated fairly. The AGS Board also discussed its obligation to proceed
in a manner that would result in the best transaction possible for the
stockholders, but was concerned that the then-strongest bid not be lost due to
that process. Based upon that discussion the AGS Board unanimously directed Mr.
Green to endeavor to avoid loss of the then-strongest transaction (CGX) through
protracted negotiations with other bidders or potential bidders. In this regard,
Mr. Green reported the possible future entrance of a new bidder. In light of the
circumstances, including the number of bona fide offers "on the table," the
fact that this potential bidder had not directly indicated its interest and that
it was a private concern as to which no financial or other information was
publicly available, the AGS Board voted unanimously to table further discussion
pending further events and the next meeting of the AGS Board.
The AGS Board next met on June 16. At that meeting, counsel discussed with
the AGS Board its so-called "Revlon duties" -- the legal duty imposed on the
AGS Board to obtain the best possible price at such time, if any, as it makes a
decision that AGS should be sold. With the assistance of counsel, the AGS Board
also discussed certain aspects of a proposed sale, including exclusivity
provisions and "break up fees" in the event that a transaction was not
ultimately consummated, as well as the mechanics of a transaction. Counsel to
the ESOP then discussed with the AGS Board various issues relating to the ESOP
in the context of a potential sale.
Following this discussion, Mr. Green reported that the economic terms of
the CGX offer remained unchanged, that the economic terms of two of the three
other offers had not changed substantially and that the last offer had been
improved to $31 million in cash, less the excess of AGS' debt over cash on hand,
estimated to be $2 million to $3 million, for a net of $28 million to $29
million. Based on the status and the course of the negotiations, and its view of
the attractiveness of the various bidders and their bids, the AGS Board directed
Mr. Green to end active discussions with the two bidders whose offers had not
changed substantially, while leaving open the possibility of consideration of an
improved offer from either of them, but to continue to negotiate with CGX and
with the bidder whose offer had been improved.
On June 25, 1998, the AGS Board met again to consider the then-current
status of negotiations. By this time, two additional bidders had dropped out of
the process and only CGX and one other bidder remained engaged in active
negotiations with AGS. The AGS Board concluded, based upon the course of
negotiations and statements of these remaining bidders, that the economic terms
of their respective offers were unlikely to change in the course of further
negotiations.
18
<PAGE>
AGS' financial adviser verbally reported that he had conducted an informal
evaluation of AGS and its merger prospects. In that evaluation, the financial
adviser considered nine public companies, including CGX and two of the other
bidders, of which four ultimately were deemed non-comparable. The financial
adviser determined that the price offered by CGX for AGS compared favorably with
the market value for the remaining five companies based upon statistical
analysis and considering the fact that AGS is a private company. The financial
adviser also reviewed a number of transactions involving privately held
companies and concluded that, in his view, the proposed CGX transaction was
favorable to AGS.
The AGS Board then reviewed the bidding and negotiation process and
discussed whether to sell AGS at all. Following that discussion, the AGS Board
agreed unanimously that AGS should be sold and that the process for such a sale
should move forward. The AGS Board next considered whether it should accept the
then-current offer from CGX. After a thorough discussion of the then-current
terms of the CGX offer, the evolution of that offer and that further net
improvements were not likely, the Board voted unanimously to accept the CGX
offer. The AGS Board then directed Mr. Green, on behalf of AGS, to negotiate and
enter into a letter of intent with CGX on substantially the terms reviewed and
approved by the AGS Board.
Between June 25 and June 29, 1998, negotiations continued among AGS, the
ESOP and CGX concerning the terms of a definitive letter of intent. On June 29,
AGS, the ESOP, the Individual Stockholders and CGX entered into a letter of
intent.
Following execution of the letter of intent, the parties negotiated the
terms of the definitive Merger Agreement, which was finalized and executed on
September 28, 1998. The Merger Agreement contains, in addition to financial
terms, representations, warranties, indemnification provisions and related
matters defining the nature and extent of the indemnities to be provided, and
sets out in detail the other customary terms and provisions of a merger
transaction. The Merger Agreement also reflects the agreement of the parties as
to the treatment of the ESOP and the AGS 401(k) plan, as described at
"-- Effects of the Merger on ESOP Participants." A copy of the Merger
Agreement is included as Appendix A to this prospectus/proxy statement.
RECOMMENDATION OF THE AGS BOARD; AGS REASONS FOR THE MERGER
THE AGS BOARD HAS DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER ARE
ADVISABLE AND IN THE BEST INTERESTS OF AGS AND THE AGS STOCKHOLDERS. THE AGS
BOARD HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT, APPROVED THE MERGER AND
DIRECTED THAT THE MERGER PROPOSAL BE SUBMITTED TO A VOTE OF THE STOCKHOLDERS.
THE AGS BOARD ALSO HAS UNANIMOUSLY RECOMMENDED THAT THE STOCKHOLDERS VOTE IN
FAVOR OF THE MERGER PROPOSAL.
In reaching its decision to approve the Merger Agreement and the Merger, to
submit the Merger Proposal to a vote of the AGS stockholders, and to recommend
adoption of the Merger Proposal, the AGS Board considered, among other things,
the following factors:
o The AGS Board's familiarity with, and review of, AGS' business,
financial condition, results of operations and prospects, including,
but not limited to, its potential growth, development, productivity
and profitability and associated business risks;
o That there is no market for AGS common stock, and that the ESOP
currently is invested entirely in AGS common stock, but that the
proposed Merger and related transactions would result in receipt by
the stockholders of readily marketable CGX common stock and would
permit ESOP participants to, as soon as practicable after the Merger,
direct the investment of their account balances among a number of
investment options and thereby diversify their ESOP investments;
o Potential limitations on the ability of AGS to continue to grow and
expand on the basis of internally generated capital and the potential
for enhanced access to capital as a consequence of the proposed
Merger;
o The current and prospective competitive environment in which AGS
operates, including increasing use of electronic media, advances in
technology and the related capital costs and the highly competitive
environment for commercial printing services;
19
<PAGE>
o Current market conditions favoring a sale of AGS and increasing
consolidation in the printing industry generally;
o Potential business and strategic advantages of a combination of AGS
with a larger entity such as CGX;
o Information concerning the business, financial condition, results of
operations, asset quality and prospects of CGX, including the future
growth prospects of CGX subsequent to the Merger, the potential
synergies expected from the proposed Merger and the associated
business risks;
o Information about other potential acquisition partners obtained in the
course of the bidding process;
o The potential for appreciation in the value of CGX common stock
following the proposed Merger; and
o The financial and other significant terms of the proposed Merger,
including the terms and conditions of the Merger Agreement.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the AGS Board did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination.
The AGS Board also considered certain potentially negative effects of the
Merger, including loss of management autonomy and the inherent market risks to
stockholders from holding stock in a publicly traded company. However, the AGS
Board concluded that, in its business judgment, the potential benefits of the
proposed Merger outweighed its potential detriments.
CGX REASONS FOR THE MERGER
In reaching its decision to approve the Merger, the Merger Agreement and
payment of the Merger Consideration, including the issuance of CGX common stock,
the Executive Committee of the CGX Board (the "Executive Committee") consulted
with management and considered various factors as discussed below. CGX
management also consulted with its legal advisers. As part of its strategy for
growth, CGX seeks to acquire profitable, well-established companies in
attractive local markets, and a review of AGS led to a determination by CGX
management, and ultimately the Executive Committee, that an acquisition of AGS
would further that strategy. The CGX management and the Executive Committee also
believe that CGX will be able to add value to AGS by providing to it the
financial and operational resources, management support and technological
advantages available to CGX as a much larger organization. It is anticipated
that combining the service and responsiveness of AGS to its local markets with
the resources available to CGX should contribute to greater profits for both
companies.
The Executive Committee also reviewed with management a number of other
factors relevant to the Merger, including among other things (1) information
concerning the respective businesses, prospects, financial performances,
financial conditions and operations of CGX and AGS, (2) an analysis of the
respective contributions to revenues, operating profits and net profits of the
combined companies, (3) the compatibility of the managements of CGX and AGS, (4)
the terms of the Merger Agreement and (5) reports from management on the results
of the due diligence investigation of AGS. Because these factors are
interrelated and were thus considered together for their anticipated beneficial
impact on the combined operations over a period of time following consummation
of the Merger, the Executive Committee did not quantify or assign a relative
weight to each factor independently. THE EXECUTIVE COMMITTEE HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND BELIEVES THE MERGER TO BE IN THE BEST
INTERESTS OF CGX AND ITS SHAREHOLDERS.
The Executive Committee also considered potentially negative factors,
including certain of the risks set forth under "Risk Factors" above, the risk
that combined revenues might not equal the anticipated separate revenues of CGX
and AGS and the risk that other benefits sought to be obtained by the Merger
would not be obtained. In the view of the Executive Committee, these
considerations were not sufficient, either individually or collectively, to
outweigh the potential advantages of the Merger.
20
<PAGE>
EFFECTIVE TIME OF THE MERGER
The Merger will become effective at the time (the "Effective Time") and
on the date (the "Effective Date") the Articles of Merger are filed for record
with and accepted for record by the Maryland Department of Assessments and
Taxation. Unless CGX and AGS otherwise agree, the Merger will be consummated as
soon as practicable following receipt of AGS stockholder and necessary
regulatory approvals and satisfaction or waiver of the other conditions to the
Merger. It is currently expected that the Merger will become effective as soon
as practicable following the AGS Meeting. See " -- Regulatory Matters" and
" -- Other Conditions to the Merger."
REGULATORY MATTERS
The obligations of AGS and CGX to consummate the Merger are subject to the
expiration or termination of the requisite waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). Under
the HSR Act and the rules promulgated thereunder by the Federal Trade Commission
(the "FTC"), the Merger may not be consummated until notifications have been
given and certain information has been furnished to the FTC and the United
States Department of Justice (the "DoJ") and specific waiting period
requirements have been satisfied. CGX and AGS each made the required initial
filings under the HSR Act in August 1998 regarding the Merger. Under the HSR
Act, the required waiting periods are 30 days after the date of the filings, and
20 days after the receipt of any additional information requested by the FTC or
the DoJ. CGX and AGS each requested early termination of the waiting period by
the FTC. On September 22, 1998 the FTC granted early termination of the waiting
period. As a practical matter, however, as discussed below, the DoJ or FTC has
the right to seek to enjoin the Merger at any time before its consummation.
Before the consummation of the Merger, the DoJ or the FTC could take such
action under the antitrust laws as it deems necessary or desirable and in the
public interest, including seeking to enjoin the consummation of the Merger.
Additionally, the DoJ or the FTC could, in connection with its review under the
HSR Act or at any time following consummation of the Merger, seek the
divestiture of substantial assets of CGX or AGS. At any time before or after the
consummation of the Merger, and notwithstanding that the HSR Act waiting period
has expired, any state could take such action under the antitrust laws as it
deems necessary or desirable in the public interest. Such action could include
seeking to enjoin the consummation of the Merger or seeking divestiture of AGS
or businesses of CGX or AGS. Private parties may also seek to take legal action
under the antitrust laws under certain circumstances.
Based on information available to them, CGX and AGS believe that the Merger
can be effected without the divestiture of assets or the imposition of any other
material condition on CGX or AGS. There can be no assurance, however, that a
challenge to the consummation of the Merger on antitrust grounds will not be
made or that, if such a challenge were made, CGX and AGS would prevail.
OTHER CONDITIONS TO THE MERGER
In addition to AGS stockholder and regulatory approval, the respective
obligations of CGX and AGS to consummate the Merger are subject to the
satisfaction of certain conditions, including the following: (i) the
representations and warranties of CGX, Newco, the Individual Stockholders, the
ESOP trustees, and AGS contained in the Merger Agreement being true and correct
as of the Closing Date, and the covenants of each of the parties to the Merger
Agreement having been duly performed or waived; (ii) the shares of CGX common
stock to be issued pursuant to the Merger Agreement having been approved for
listing on the NYSE, subject to official notice of issuance; (iii) the receipt
by the parties of customary legal opinions, certificates, covenants, consents,
approvals and reports from the other parties and from third parties, as
applicable; (iv) the absence of any event or circumstance from the date of the
Merger Agreement to the Closing Date constituting a loss that would result in a
material adverse change in the business of AGS; (v) cancellation of all AGS SARs
and options in connection with a settlement thereof between AGS and the holders
of such SARs and options; (vi) the absence of any pending or threatened suit,
action or proceeding seeking to restrain, prevent or change the transactions
contemplated in the Merger Agreement; (vii) appropriate corporate authorization
by CGX, Newco and AGS to execute, deliver and perform the
21
<PAGE>
obligations under the Merger Agreement and to consummate the Merger; (viii)
receipt by CGX of noncompetition agreements from certain stockholders of AGS;
and (ix) receipt by CGX and Newco of a legal opinion regarding the ESOP. No
assurance can be given as to when all of the conditions to the Merger can or
will be satisfied or waived by the party required or permitted to do so, but CGX
and AGS anticipate that such conditions will be satisfied prior or as soon as
practicable following the AGS Meeting.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the AGS Board with respect to the
Merger Proposal, AGS stockholders and ESOP participants should be aware that, in
order to ensure continuity of management, certain directors and executive
officers of AGS have interests in the Merger that are different from and in
addition to the interests of AGS stockholders generally. The AGS Board was aware
of these interests when it considered and approved the Merger Proposal.
In order to maintain a strong management team and provide continuing
incentives for future growth and security to the existing key members of AGS
management, and pursuant to the Merger Agreement, John F. Green, Kevin Cassis,
Kenneth Lemmert and Christopher Carpenter, each of whom is a director and/or
officer of AGS, as well as a direct and (as an ESOP participant) indirect
stockholder, together with certain other key management employees of AGS, will
be entitled to receive, in the aggregate, options to purchase up to a number of
shares of CGX common stock equal to $2,000,000 divided by the closing price of
CGX common stock on the NYSE on the trading day immediately preceding the
Closing Date, which options will be exercisable at that closing price. These
options will vest over a five-year period and will expire five and one-half
years subsequent to the Closing Date. The allocation of such options among the
designated recipients will be made by mutual agreement of John F. Green and the
Chairman of the Board of CGX. Based upon the closing price $49.6875 of CGX
common stock on October 26, 1998, options to issue a total of 40,252 shares of
CGX common stock would be issuable to persons who are presently directors,
officers and key management employees of AGS.
In order to maintain a strong management team and provide continuing
incentives for future growth and security to the existing key members of AGS
management, AGS previously has granted SARs to each of Messrs. Cassis, Lemmert
and Carpenter. According to their terms, such SARs are payable in cash upon a
change in control of AGS (as defined). The Merger would constitute such a change
in control. The amount payable at Closing to Messrs. Cassis, Lemmert and
Carpenter in respect of the SARs will be approximately $840,000 in total, net of
the ratable portion attributable to the SARs of AGS' transaction costs after
June 30, 1998 and subject to the holdback of a ratable portion of the Escrowed
Funds attributable to the SARs. As a condition to the Merger, AGS has agreed to
take all necessary steps, including making such payments as are necessary, to
cause these SARs to be surrendered and canceled. In addition, Messrs. Lemmert
and Carpenter hold options to purchase AGS common stock, which options will be
accelerated and canceled at Closing in return for cash payments of approximately
$195,000 in total, net of the ratable portion attributable to the options of
AGS' transaction costs after June 30, 1998 and subject to the holdback of a
ratable portion of the Escrowed Funds, attributable to such options. In
connection with the Merger, certain members of AGS management have entered into
extended (18 months to three years) covenants not to compete with Newco.
John F. Green, the Chairman, President and Chief Executive Officer of AGS,
is a partner in the DeMarr Partnership, the general partnership that owns the
AGS headquarters facility, which currently consists of 85,000 square feet of
administrative and factory space, and surrounding real property. Whether or not
the Merger is consummated, AGS has agreed to extend this lease (which currently
is scheduled to expire in 2005) for a term of ten years from the completion date
of an ongoing expansion of the facility, and to cover an additional 15,600
square feet of space currently being constructed, at the same rental rate per
square foot as is applicable to the administrative space in the existing
facility. As so amended, the lease will provide for annual rent in the
approximate amount of $8.30 per square foot, subject to annual adjustment
effective October 31 of each year based upon any increase in the Consumer Price
Index during the prior year. At the request of CGX, in connection with the
Merger, the lease, has been further amended to provide for five five-year
renewal terms at the election CGX. In addition, the lease will be amended to
provide that
22
<PAGE>
CGX will guarantee payments thereunder, and to effect certain additional,
technical changes to the lease terms.
Each of Messers. Green, Cassis, Lemmert, and Carpenter will continue as
management of Newco following the Merger, Mr. Green as President, at
substantially the same compensation levels as existed at AGS.
EFFECT OF THE MERGER ON ESOP PARTICIPANTS
AMENDMENTS TO THE ESOP
Prior to the Effective Time, AGS intends to amend the ESOP. These
amendments will include the following:
(a) a provision effecting 100% vesting in current account balances by
all ESOP participants who are former employees of AGS;
(b) a provision permitting all ESOP participants to direct the
investment of their account balances and providing that the
investment alternatives available to ESOP participants will be
identical (to the maximum extent possible) to the alternatives
available pursuant to the CGX 401(k) plan as set forth on Appendix C
to this prospectus/proxy statement; and
(c) certain other technical amendments required by recent federal
legislation necessary to preserve the tax-free status of the ESOP.
These amendments will be conditioned upon the consummation of the Merger.
After completion of the Merger, ESOP participants will be permitted to direct
the investment of their respective account balances as described in paragraph
(b) above. As a consequence of permitting participants to self-direct the
investment of their account balances, the ESOP will be converted into a stock
bonus plan.
TERMINATION OF THE ESOP AND THE AGS 401(K) PLAN; MERGER OF THE UNDERLYING
TRUSTS
As soon as practicable after the Merger, CGX and Newco intend to terminate
both the ESOP and the AGS 401(k) plan. In preparation for such termination, CGX
and Newco will seek a determination from the Internal Revenue Service that the
ESOP will be qualified upon its termination. Upon receipt of a favorable
determination letter covering the ESOP, the ESOP trust will be merged into the
trust for the CGX 401(k) plan. As soon as practicable after the Merger, the AGS
401(k) plan and its associated trust will be merged into the CGX 401(k) plan and
its associated trust. Upon completion of each merger of the ESOP trust and the
AGS 401(k) plan and its associated trust respectively, into the CGX 401(k) plan
and its associated trust, each participant in the ESOP or the AGS 401(k) plan,
as applicable, will have a transferred account balance in the CGX 401(k) plan
and its associated trust and will be 100% vested in such transferred account
balance. These transferred account balances initially will consist of each ESOP
participant's account balance in the ESOP and/or the AGS 401(k) plan at the time
of each merger of the trusts, which will have been transferred to and will be
held under the trust for the CGX 401(k) plan. Subsequent to the mergers of the
trusts, ESOP and AGS 401(k) participants, respectively, will continue to have
the ability to direct the investment of their account balances among such
investment alternatives as are then available under the CGX 401(k) plan.
Pending the termination of the ESOP and the merger of the ESOP trust, and
the merger of the AGS 401(k) plan and its associated trust into the trust for
the CGX 401(k) plan, the ESOP and the AGS 401(k) plan will continue to be
governed by their respective governing documents (except to the extent that the
ESOP is amended as described above and the AGS 401(k) plan is similarly amended)
and to be administered by their respective current trustees.
ESCROWED FUNDS
The Escrowed Funds are being held as a source of payment of any
indemnification claims by CGX and Newco that may be raised within 36 months
following the Merger, as well as for the payment of legal fees, certain
administrative fees and claims resulting from the administration of or actions
taken with regard to the ESOP. Indemnification claims could be raised as a
result of (1) a misrepresentation, breach of warranty or nonfulfillment of a
covenant in the Merger Agreement by the Individual Stockholders, the ESOP
trustees or AGS (collectively, the "Sellers"); (2) the creation and operation
of or arising in connection with the ESOP arising from actions or inactions on
the part of the ESOP trustees prior to the merger of the ESOP trust into CGX's
401(k) plan; (3) liabilities or obligations of the Individual Stockholders
(unless CGX is
23
<PAGE>
obligated to indemnify them for such liabilities or obligations); and (4) legal
actions, including attorneys' fees, incident to the foregoing. Pursuant to the
Merger Agreement, and subject to certain conditions and limitations, the
Escrowed Funds and the Escrow Earnings would be sole source of damages available
to CGX and Newco for any of the foregoing.
The Escrowed Funds will initially be in the amount of $3,100,000, and the
Escrow Earnings will accrue during the three-year period commencing with the
effectiveness of the Merger. The Escrowed Funds will be provided by deducting
from the amount otherwise payable under the Merger Agreement with respect to
each fully diluted share of AGS common stock (outstanding shares plus shares
underlying stock options and SARs outstanding immediately prior to the Merger)
the ratable portion of $3,100,000 (that is, deducting approximately $246 per
share on a fully diluted basis) and depositing that amount in an escrow account
with an independent escrow agent.
Except for matters relating to the ESOP, to "golden parachute" payments
pursuant to Section 280G of the Code and excise tax penalties above $50,000
pursuant to Section 4978 of the Code on recent purchases of AGS shares by the
ESOP pursuant to Section 1042 of the Code (the "Non-Basket Items"), CGX and
Newco must incur damages in excess of the sum of (1) the tax savings that would
accrue to AGS if its pending application to be taxed under Subchapter S of the
Code is accepted ("Tax Savings") PLUS (2) $400,000, before seeking such
recourse.
Pursuant to the Merger Agreement, CGX and Newco must offset any damages
first against the Tax Savings and then against the $400,000 amount. Any damages
less than the sum of the Tax Savings and $200,000 will not be recoverable.
However, if CGX and Newco incur damages in excess of the sum of the Tax Savings
PLUS $400,000, then CGX and Newco will be entitled to recover the amount in
excess of the Tax Savings plus $200,000, up to the amount of the Escrowed Funds
and Escrow Earnings thereon. For example, if the Tax Savings were equal to
$1,000,000 and CGX and Newco suffered aggregate damages for Non-Basket Items in
the amount of $1,500,000, they would be entitled to draw against the Escrowed
Funds and Escrow Earnings to the extent of $300,000 (total damages of $1,500,000
MINUS the Tax Savings of $1,000,000 and MINUS $200,000).
Under the Merger Agreement, any damages incurred by CGX or Newco as a
consequence of the Non-Basket Items must first be offset against any Tax Savings
and then may be recovered from the Escrowed Funds and Escrow Earnings on a
dollar-for-dollar basis, without regard to the $200,000 and $400,000 limitations
described above.
In addition to providing a fund for the payment of damages for breaches of
the Merger Agreement by the Sellers, the parties have agreed that the Sellers
may withdraw amounts from the Escrow Earnings to cover expenses and
administrative fees incurred in connection with certain post-closing matters,
including termination of the ESOP and merger of the ESOP trust and the AGS
401(k) plan and trust into the CGX 401(k) plan and associated trust. The parties
also have agreed that the ESOP trustees may withdraw up to $1,000,000 from
Escrowed Funds and Escrow Earnings in order to pay any BONA FIDE claims
resulting from the administration of or actions taken with regard to the ESOP,
to the extent such claims are not otherwise covered by insurance.
The Sellers have appointed John F. Green as their agent to resolve certain
items under the Merger Agreement, including any disputes with respect to the
Escrowed Funds and Escrow Earnings.
To the extent that, as of the third anniversary of the Effective Date, (A)
all or any portion of the Escrowed Funds and Escrow Earnings have not been
applied to the payment of damages, expenses and administrative fees and ESOP
claims as described above and (B) there are at that time no pending claims
against the Escrowed Funds and Escrow Earnings, the remainder of the Escrowed
Funds and Escrow Earnings shall be distributed ratably to the Individual
Stockholders, the former ESOP participants and the former holders of the SARs
and AGS stock options in respect of their ratable portion of the AGS shares
(calculated on a fully diluted basis including outstanding shares and shares of
common stock underlying stock options and SARs outstanding immediately prior to
the Merger) as of the Effective Time of the Merger. To the extent that there are
pending claims as of the third anniversary of the Merger, all or a portion of
the Escrowed Funds and Escrow Earnings may be retained in escrow and
distributed, as described above, at such time as such claims have been resolved.
24
<PAGE>
RIGHTS OF DISSENT AND APPRAISAL
GENERAL; DIRECT STOCKHOLDERS
Under the Maryland General Corporation Law (the "MGCL"), each AGS
stockholder of record (which does not include ESOP participants, who are not
stockholders of record) would be entitled to demand and receive payment of the
"fair value" of his shares in cash, if he or she (1) prior to or at the AGS
Meeting, files with AGS a written objection to the Merger; (2) does not vote in
favor of the Merger Proposal; and (3) within 20 days after Articles of Merger
have been accepted for record by the Maryland State Department of Assessment and
Taxation, makes written demand on CGX for payment of his or her shares, stating
the number of shares for which payment is demanded.
BECAUSE THE INDIVIDUAL STOCKHOLDERS ALL SIGNED THE MERGER AGREEMENT AND,
THEREBY, GRANTED TO CGX AN IRREVOCABLE PROXY TO VOTE THEIR SHARES IN FAVOR OF
THE MERGER PROPOSAL, NO DIRECT STOCKHOLDER WILL BE ABLE TO EXERCISE DISSENTERS'
RIGHTS.
IF YOU ARE A DIRECT STOCKHOLDER AND
YOU RETURN A SIGNED PROXY BUT FAIL TO
PROVIDE INSTRUCTIONS AS TO THE MANNER
IN WHICH YOUR SHARES ARE TO BE VOTED,
YOU WILL BE DEEMED TO HAVE VOTED IN
FAVOR OF THE MERGER PROPOSAL. IF YOU
DO NOT RETURN A SIGNED PROXY, OR IF
YOU ATTEMPT TO VOTE AGAINST THE
MERGER PROPOSAL, CGX HAS THE RIGHT
TO, AND WILL, EXERCISE ITS RIGHTS
UNDER THE IRREVOCABLE PROXY GRANTED
UNDER THE MERGER AGREEMENT AND VOTE
YOUR SHARES IN FAVOR OF THE MERGER
PROPOSAL. THEREFORE, YOU WILL NOT BE
ABLE TO DISSENT FROM THE MERGER.
ESOP PARTICIPANTS AND THE ESOP TRUSTEES
ESOP participants will have no right to dissent from the Merger and
exercise appraisal rights with respect to their allocable portion of the ESOP
Shares. The ESOP trustees, however, on behalf of the ESOP as the record holder
of the ESOP Shares, may exercise dissenters' and appraisal rights with respect
to the ESOP Shares if (A) the ESOP trustees, in the exercise of their fiduciary
duty, determine to vote against the Merger Proposal and exercise such rights in
respect of ALL ESOP Shares; (B) the failure to vote against the Merger Proposal
and exercise such rights would result in a violation of the ESOP; or (C) the
failure to vote against the Merger Proposal and exercise such rights would
result in a non-exempt prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code.
RESALES OF CGX COMMON STOCK
The shares of CGX common stock to be issued to the holders of AGS common
stock as partial consideration pursuant to the Merger Agreement are being
registered under the Securities Act pursuant to a Registration Statement on Form
S-4, of which this prospectus/proxy statement is a part. Therefore, generally
such shares of CGX common stock will not be subject to transfer restrictions and
may be freely resold. Holders of the AGS common stock who are affiliates of AGS
(such as officers, directors and other control persons) will not, however, be
able to resell the CGX common stock received by them in the Merger unless the
CGX common stock is registered for resale under the Securities Act, is sold in
compliance with Rule 145 under the Securities Act or is sold in compliance with
another exemption from the registration requirements of the Securities Act.
Pursuant to Rule 145 under the Securities Act, the sale of CGX common stock
held by former affiliates of AGS will be subject to certain restrictions. Such
persons may sell CGX common stock under Rule 145 only if (i) CGX has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act") during the preceding twelve months, (ii) such
CGX common stock is sold in a "broker's transaction," which is defined in Rule
144 under the Securities Act as a sale in which (a) the seller does not solicit
or arrange for orders to buy the securities, (b) the seller does not make any
payment other than to the broker, (c) the broker does no more than execute the
order and receive a normal commission and (d) the broker does not solicit
customer orders to buy the securities, and (iii) such sale and all other sales
made by such person within the preceding three months do not exceed the greater
of (x) one
25
<PAGE>
percent of the outstanding shares of CGX common stock or (y) the average weekly
trading volume of CGX common stock on the NYSE during the four-week period
preceding the sale. Any affiliate of AGS who is not an affiliate of CGX after
the Merger may sell CGX common stock without restriction following the second
anniversary of the Effective Date.
CONDUCT OF BUSINESS BY AGS PENDING THE MERGER
The Merger Agreement provides that until the Closing Date AGS shall
generally operate its business only in the ordinary course, use its best efforts
to preserve its assets and business organization, keep available the services of
its officers and employees and preserve its present relationships with
customers, suppliers and others having relationships with it. AGS has further
agreed not to increase salaries or wages except as consistent with past
practice, sell or make any other disposition of any asset out of the ordinary
course, make any capital expenditure above a set amount or mortgage or otherwise
encumber any asset, forgive any debt, amend or terminate any agreement to which
it is a party outside the ordinary course, materially breach any such agreement,
issue any capital stock, incur any liabilities except in the ordinary course,
waive or release any right or claim, borrow money outside the ordinary course,
make any payment of officer perquisites inconsistent with past practice or
expenses insufficiently documented, engage in any transactions with or make any
payments to related parties, including stockholders, except for ordinary
salaries and expense reimbursements, certain tax reimbursements and lease
payments to DeMarr Partnership, make any commitment adversely affecting AGS,
except under certain conditions incur any expenses in connection with the Merger
after June 30, 1998, make any discretionary contributions to employee plans or
agree to do any of the foregoing.
NO SOLICITATION OF TRANSACTIONS; TERMINATION FEE
The Merger Agreement prohibits AGS, the Individual Stockholders and the
ESOP trustees from, directly or indirectly, through any officer, director,
employee, representative or agent, soliciting or encouraging the initiation or
submission of any inquiries, proposals or offers regarding any acquisition,
merger, takeover bid, sale of all or substantially all of the assets of or sales
of shares of capital stock of AGS or similar transactions involving AGS.
If the AGS Board, after duly considering advice of outside counsel and
financial advisers, determines in good faith that it is consistent with its
fiduciary responsibilities to approve or recommend (and in connection therewith
withdraw or modify its approval or recommendation of the Merger Agreement and
the transactions contemplated thereby) a Superior Proposal (as defined below),
then, notwithstanding any such approval or recommendation (i) AGS may not enter
into any agreement with respect to the Superior Proposal and (ii) any other
obligation of AGS under the Merger Agreement shall not be affected unless the
Merger Agreement is terminated in accordance with its terms before or
simultaneously with the grant of such approval or the making of such
recommendation and AGS, within three business days following such termination,
pays CGX the Termination Fee of $1,000,000 in cash. A "Superior Proposal" is
defined to mean a BONA FIDE proposal made by a third party to acquire AGS
pursuant to a tender or exchange offer, a merger, a sale of all or substantially
all of its assets or other proposal that the AGS Board determines in its good
faith judgment to be more favorable to the holders of AGS common stock than the
transactions contemplated by the Merger Agreement, after considering advice of
its professional advisers. In making a determination of whether a Superior
Proposal is more favorable, the AGS Board is required pursuant to the Merger
Agreement to consider not only the price offered by the third party as compared
to the total consideration set forth in the Merger Agreement, but also to
compare the market liquidity of the CGX common stock to the liquidity of the
consideration offered by the third party, to compare the tax consequences of the
Merger to the tax consequences of the transaction proposed by the third party,
to determine whether the transaction proposed by the third party has any
financing or other conditions or contingencies, and to make any other meaningful
comparison of the relative benefits offered to the AGS stockholders by the
Merger as compared to the transaction proposed by the third party.
AMENDMENT, WAIVER AND TERMINATION
The Merger Agreement may be amended at any time before or after its
approval by the stockholders of AGS by written agreement of CGX, AGS, the
Individual Stockholders and the ESOP trustees, except that no amendment may be
made after approval by the stockholders of AGS and the participants in the ESOP
26
<PAGE>
that by law would require further approval by the stockholders of AGS and the
participants in the ESOP unless such further approval is obtained.
Any party to the Merger Agreement may (i) waive any inaccuracies in the
representations and warranties contained in the Merger Agreement or in any
document delivered pursuant to the Merger Agreement or (ii) waive compliance
with any of the agreements or conditions contained in the Merger Agreement other
than the satisfaction of all requirements prescribed by law for consummation of
the Merger.
The Merger Agreement may be terminated at any time before the Effective
Time (i) by the mutual consent of the CGX Board and Board of Directors of Newco,
on the one hand, and the AGS Board, the Individual Stockholders and the ESOP
trustees, on the other hand, or (ii) by CGX and Newco, on the one hand, and AGS,
the Individual Stockholders and the ESOP trustees, on the other hand, if (a)
there has been a material breach by the other party of any representation,
warranty or covenant contained in the Merger Agreement which has not been cured
within thirty days after notice of such breach is given to the breaching party,
(b) the required approval by the stockholders of AGS and the participants in the
ESOP shall not have been obtained at the AGS Meeting, (c) all conditions to
closing have not been met or waived by each party in favor of which such
condition inures by December 31, 1998, if the Registration Statement is not
reviewed by the Commission, or such later time as is necessary for such review,
but no later than February 28, 1999, provided that either date may be extended
by agreement among CGX, Newco, AGS, the Individual Stockholders and the ESOP
trustees without the necessity of seeking further approval of the ESOP
participants (the "Extended Date"), or the Merger has not been consummated by
such Extended Date, unless the party seeking to terminate the Merger Agreement
is, at such time, in willful material violation of any of its representations,
warranties or covenants contained in the Merger Agreement, or (d) any
governmental entity shall have issued an order, decree or ruling or taken any
other action permanently enjoining, restraining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become final
and nonappealable or (iii) by AGS, if the AGS Board withdraws its recommendation
of the Merger to the holders of AGS common stock in connection with its approval
or recommendation to the holders of AGS common stock of a Superior Proposal and
AGS pays the Termination Fee to CGX. See "-- No Solicitation of Transactions;
Termination Fee."
FEES AND EXPENSES
The Merger Agreement provides that whether or not the Merger is
consummated, all fees and expenses incurred in connection with the Merger shall
be paid by the party incurring them, except that all fees and expenses incurred
by the Individual Stockholders before June 30, 1998 have been paid by AGS and
those incurred by AGS after June 30, 1998 shall result in a reduction in the
cash consideration paid by CGX in the Merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
This section summarizes the material anticipated federal income tax
consequences of the Merger to AGS stockholders who hold their AGS common stock
as a capital asset (generally, property held for investment). This summary is
based on the federal income tax laws currently in effect and as currently
interpreted. Such federal income tax laws may, of course, change in the future
through amendments to applicable statutes or regulations or changes in judicial
or administrative rulings. Such changes may have retroactive effect, and may
affect the validity of the statements in this tax discussion.
This summary does not purport to address all aspects of the possible
federal income tax consequences of the Merger that may be relevant to U.S.
stockholders of AGS. The tax discussion set forth below is included for general
information only and should not be construed as tax advice to a particular
stockholder of AGS. In particular, and without limiting the foregoing, this
summary does not address the federal income tax consequences of the Merger to
AGS stockholders in light of their particular circumstances or status
(including, for example, foreign persons, the effect of holding by or through
tax-exempt entities such as employee stock ownership plans, dealers in
securities, insurance companies, corporations, holders who acquired or who have
the right to acquire AGS common stock pursuant to the exercise of an employee
stock option or right or otherwise as compensation, and holders who hold AGS
common stock as part of a hedge, straddle, or conversion transaction). Nor does
this summary address any consequences of the Merger under
27
<PAGE>
any state, local, estate, or foreign tax laws. AGS STOCKHOLDERS, THEREFORE, ARE
URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICATION
AND EFFECT OF FEDERAL, FOREIGN, STATE, LOCAL, AND OTHER TAX LAWS, THE
IMPLICATIONS OF ANY PROPOSED CHANGES IN THE TAX LAWS, AND THE TAX TREATMENT OF
THE ESOP AND DISTRIBUTIONS TO OR FROM THE ESOP.
As of the date of this prospectus/proxy statement, Winstead Sechrest &
Minick P.C., counsel for CGX, has advised CGX that in its opinion:
(a) The Merger will be treated as a reorganization within the meaning
of Section 368(a) of the Code;
(b) AGS, CGX and Newco will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code;
(c) No loss for federal income tax purposes will be recognized by
holders of AGS common stock who exchange all of their AGS common stock for
CGX common stock and other consideration pursuant to the Merger;
(d) Each of the holders of AGS common stock who exchanges AGS common
stock for shares of CGX common stock and cash pursuant to the Merger will
recognize gain equal to the lesser of (i) the excess, if any, of the amount
realized in such exchange over such holder's tax basis in the AGS common
stock exchanged or (ii) the amount of cash received;
(e) The aggregate tax basis of the CGX common stock received by AGS
stockholders who exchange all of their AGS common stock for CGX common
stock and other consideration pursuant to the Merger will be the same as
the aggregate tax basis of the AGS common stock surrendered in exchange
therefor and reduced by cash received in excess of realized gain;
(f) The holding period of CGX common stock received by AGS
stockholders in the Merger will include the period during which the shares
of AGS common stock surrendered in exchange therefor were held, provided
that the AGS common stock was held as a capital asset by the holder at the
Effective Time; and
(g) None of AGS, CGX or Newco will recognize gain or loss as a
consequence of the Merger.
Any gain recognized by an AGS stockholder will constitute capital gain if
such stockholder held his or her AGS common stock as a capital asset at the
Effective Time, and will be a long-term capital gain if the holding period for
such shares was greater than one year at the Effective Time. In the case of an
individual, any such capital gain will be subject to a maximum federal income
tax rate of 20% if the holder's holding period of such stock was more than one
year on the date of the Effective Time.
The tax opinion summarized above is based on facts, representations and
assumptions described in the tax opinion which are consistent with the state of
facts existing at the Effective Time. In rendering the tax opinion, counsel for
CGX relied upon representations in certificates of officers of AGS and CGX. The
tax opinion does not address any state, local, or other tax consequences of the
Merger. In addition, the tax opinion does not bind the Internal Revenue Service
or preclude the Internal Revenue Service from adopting a contrary position.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles. Under this method of
accounting, the purchase price, including costs directly related to the Merger,
will be allocated to the assets acquired (taking into account the liabilities
assumed) based upon their estimated fair values as of the Closing Date, with any
excess consideration allocated to goodwill. The operating results of AGS will be
included with those of CGX from the Closing Date.
28
<PAGE>
BUSINESS OF THE COMPANIES
BUSINESS OF CGX
CGX, headquartered in Houston, Texas, is one of the fastest growing
printing companies in the United States. As a leading printing industry
consolidator and one of the largest sheetfed commercial printers in the United
States, CGX has expanded its operations to include 42 commercial printing
companies throughout the country as of September 30, 1998. Each printing
business has an established operating history (ranging from 11-120 years),
experienced management, solid customer relationships and a reputation for
providing quality service and products. CGX's printing businesses are all
operated as wholly owned subsidiaries.
Commercial printing involves the production of a wide range of marketing,
investor relations and technical materials for a variety of customers including
corporations, mutual fund companies, advertising agencies, graphic design firms
and direct mail and catalog retailers. The services provided by CGX's printing
businesses also include digital imaging, printing and distribution of commercial
and corporate documents, including training manuals, multicolor product and
capability brochures, direct mail pieces, catalogues, shareholder communications
and other information requested by its customers and produced to their
specifications. Most of these projects are recurring in nature.
CGX's printing businesses sell to a broadly diversified customer base,
including many major corporations. CGX believes that its large customer base,
broad geographic coverage of the United States and extensive range of printing
capabilities and services may reduce its exposure to economic fluctuations that
may generally affect segments of the printing industry or any one region of the
country.
INDUSTRY BACKGROUND
The printing industry is one of the largest and most fragmented industries
in the United States, with total annual sales estimated at $103 billion. The
printing services market includes general commercial printing, financial
printing, book printing, quick printing and production of business forms and
greeting cards. Although CGX has operations in each of these sectors, CGX
primarily serves the general commercial printing sector. Based on available
industry data, general commercial printing services generate approximately $73
billion in annual U.S. sales.
Despite its size, the general commercial printing sector is highly
fragmented, with over 35,000 companies in operation in the United States today,
the majority of which are privately owned and locally operated. While these
operations are involved in various aspects of general commercial printing, the
size and fragmented nature of the industry contributed to the development of
CGX's acquisition strategy described below.
BUSINESS STRATEGY
The commercial printing industry is characterized by a significant number
of locally oriented, privately held businesses, many of which are viable
acquisition prospects. Owners' impetus to sell their printing businesses results
from various factors, including the need to increase their personal financial
liquidity, plans to retire or a desire to access the financial capital and other
operating strengths CGX has to offer in order to grow their businesses. Because
there are relatively few buyers with adequate financing and management expertise
who desire to acquire these types of printing companies, CGX has been and
expects to continue to be able to execute its acquisition strategy at prices it
considers to be reasonable.
CGX believes a large part of its success results from its ability to
combine the service and responsiveness of a locally oriented printing company
with the critical mass and economic advantages of a large organization. CGX
plans to continually enhance the competitiveness and profitability of each
acquired printing business through investments in new equipment and technology,
management training, economies of scale and financial strength. Utilizing these
operating resources, CGX's printing businesses continue to operate autonomously,
maintaining and building relationships with buyers of printing services in their
respective markets.
29
<PAGE>
The principal advantages of CGX's strategy are as follows:
o MARGIN IMPROVEMENT. Through the use of company-wide master purchasing
arrangements for principal supplies such as paper, plates, film and
ink, each printing business can receive the benefit of volume
discounts which may significantly improve its gross margin. The
combined purchasing power also results in more favorable pricing for
investments in technology and capital equipment. In addition,
centralization of certain administrative services, such as purchasing
and human resources support, risk management, treasury and information
systems, can further improve operating margins.
o STRATEGIC COUNSEL. Many of the acquisition candidates are privately
held businesses, which by their nature typically place heavy demands
on the management skills of their proprietors. CGX provides strategic
counsel and professional management techniques to the management of
its acquired companies in such areas as planning, organization,
controls, accounting and finance and regulatory compliance, resulting
in improved efficiency and competitive advantages.
o FLEXIBLE SERVICE. The wide range of equipment capabilities of its
various printing businesses provides CGX with greater flexibility to
meet customer needs than is available to a company with a single
operation. From time to time, to meet customers' needs, the various
printing businesses work together when an individual operation does
not have the necessary equipment or capacity to perform a particular
project. This allows one of CGX's printing businesses to compete
economically for a project it might otherwise have been unable to
obtain.
o MANAGEMENT DEVELOPMENT. CGX has historically been committed, beyond
industry custom, to recruiting, training and developing recent college
graduates as printing sales and management professionals. CGX has
designed a structured program to give hands-on experience in all areas
of manufacturing and management, as well as promote the development of
the skills necessary for these professionals to lead CGX's printing
businesses in the future. These professionals are a key factor
contributing to CGX's ability to provide a high degree of quality
customer service and maximize profitability.
By taking advantage of the above benefits, CGX believes its printing
businesses are able to increase operating efficiencies, allowing each to become
one of the lowest-cost providers of quality printing services in the markets it
serves. As such, CGX has historically improved the operating margins of each
printing business it has acquired.
In fiscal 1998, CGX continued to expand nationally by adding 13 new
printing businesses. CGX added 11 new printing businesses in the first six
months of fiscal 1999 and as of September 30, 1998 had signed non-binding
letters of intent to acquire seven additional companies. CGX plans to continue
its acquisition growth strategy.
BUSINESS OF AGS
GENERAL
AGS was founded in 1975 to provide computer typesetting services to the
Washington, D.C. Metropolitan Area. Soon after it commenced operations, AGS
identified an underserved niche for books and directories and adopted a plan to
fill this niche. Although AGS has continued to provide traditional commercial
printing services, the book and directory portion of its business has continued
to expand and ultimately has become AGS' primary business. Over time, AGS has
continued to upgrade its technology in order to maintain its market niche and
support continued growth. In particular, AGS has expanded its operations to
include a complete range of printing and communication services including
design, typesetting, desktop publishing, database management, CD-ROM production,
World Wide Web publishing, diskette replication, technical support, conventional
and electronic pre-press, on-demand printing, quick copying, binding, mailing,
storage and fulfillment.
Over the past five years, AGS has increased its sales by more than 75%. AGS
traditionally has not been, and does not intend to be, a low-price provider of
printing services. In recent years, AGS has
30
<PAGE>
continued to maintain its book and directory niche, and has expanded its
customer base beyond the traditional print and electronic publishing markets, as
AGS has focused its efforts on promoting itself as a "one-stop" provider of
printing and communication services. AGS expects to continue to follow this
strategy and, in addition, to expand the digital printing (books on demand),
CD-ROM and internet publishing elements of its business. In addition, AGS has
identified journal printing as an underserved niche and recently has begun an
effort to market directly to this segment of the market. With its increased
sales, AGS has expanded its services and facilities and increased the size of
its workforce. As of September 30, 1998, AGS had approximately 292 employees.
In 1992, in order to more readily serve its customer base in the
Washington, D.C. Metropolitan Area. AGS expanded its physical operations with
the addition of a service bureau and copying center in Washington, D.C. This
facility has continued to grow, as the ongoing addition of state-of-the-art
technology has permitted AGS to expand the range of its service offerings. This
facility's close geographical proximity to and coordination with AGS' main
Maryland plant permit AGS to offer many of its customers "one-stop shopping"
for printing services.
In 1993, AGS entered the commercial printing business in the state of Ohio
through its purchase of certain of the assets of an existing printing operation,
now operated as Automated Graphic Systems - Ohio, Inc., a wholly owned
subsidiary. This Macedonia, Ohio facility provides AGS with the capability to
provide multi-color (up to six colors) printing and with increased diskette
replication and fulfillment capabilities. In addition, this facility's
commercial printing capacity has permitted AGS to shift a greater portion of
this type of work to Ohio, making available more capacity at the Maryland
facility for its core directory and book business and thereby enhancing the
growth of AGS' overall printing business.
AGS' principal executive offices are located at 4590 Graphics Drive, White
Plains, Maryland 20695. The telephone number of such offices is (301) 843-1800.
COMPETITION
AGS competes with numerous (approximately 30) commercial printers,
primarily in the Maryland and Ohio (and their surrounding areas) markets, some
of which are larger, more established entities and have greater financial and
other resources. AGS maintains its competitive position by differentiating
itself in the areas of quality, turnaround, technology, full-service capability,
flexibility, service and price.
CUSTOMERS
A majority of AGS' business is derived from customers located in Maryland,
Virginia, the District of Columbia, Ohio and the New York Tri-State Region. AGS'
customer base is comprised of associations, non-profit organizations,
corporations, publishing companies, colleges and universities and agencies. It
is not dependent upon a single customer, or a few customers, and the loss of any
one or few customers would not have a material adverse effect on its business.
PROPERTY
AGS' printing facility in White Plains, Maryland, currently is comprised of
approximately 85,000 square feet of space which is leased pursuant to a 15-year
non-cancelable operating lease entered into on August 20, 1990. The lease on
this facility has been extended for an initial term of ten years from the
completion date of an ongoing expansion of the facility and to cover the
additional 15,600 square feet of space currently being constructed, at the same
rental rate per square foot as is applicable to the administrative space in the
existing facility. In connection with the Merger, the lease has been further
amended to provide for five five-year renewal terms at the election CGX. See
"The Merger -- Interests of Certain Persons in the Merger." AG Imaging
conducts its business out of approximately 3,600 square feet of leased space in
Washington, D.C. under an operating lease effective August 1998 for a period of
six years with an option to renew for one additional five-year term. AGS-Ohio
occupies a facility in Macedonia, Ohio, which it leases pursuant to an operating
lease effective August 1997 for a period of ten years and three months with an
option to renew for another five years.
31
<PAGE>
MARKET FOR AGS COMMON STOCK
There is no market for AGS common stock. However, effective as of each
November 1 in 1994, 1995, 1996 and 1997, the ESOP purchased 400 shares of AGS
common stock from the prior holders thereof. All of these purchases were made at
the appraised value of AGS stock for ESOP purposes determined as of the October
31 immediately preceding each purchase.
OWNERSHIP OF AGS COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of shares of AGS common stock as of September 30, 1998, concerning (i)
each person or group known by AGS to beneficially own more than 5% of the
outstanding AGS common stock; (ii) each current director of AGS; (iii) each
executive officer of AGS; and (iv) all directors and executive officers, as a
group.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP(2)
SHARES HELD ------------------
-------------------- TOTAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) DIRECTLY VIA ESOP SHARES OF CLASS
- ---------------------------------------- -------- -------- ------ --------
<S> <C> <C> <C> <C>
Mark Edgar.............................. -0- 785 785 6.71%
2762 Swann Way,
Davidsonville, MD 21035
Automated Graphic Systems, Inc. Employee
Stock Ownership Plan(3)(4)............ 10,511 N/A 10,511 89.80%
Kevin Cassis(5)......................... 130 146 276 2.36%
John F. Green(6)........................ 800 813 1,613 13.78%
Kenneth Lemmert(7)...................... 78 394 472 4.03%
Christopher Carpenter(8)................ 26 10 36 *%
All directors and executive officers as
a group (7 persons)(9)................ 1,034 1,363 2,397 20.48%
</TABLE>
- ------------
* Less than 1%.
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
Automated Graphic Systems, Inc., 4590 Graphics Drive, White Plains, Maryland
20695.
(2) Except as otherwise indicated, each of the parties listed has sole voting
and investment power with respect to all shares of common stock identified
as directly owned thereby.
(3) Includes ESOP Shares allocated to the accounts of following individuals, as
set forth above: Kevin Cassis; John F. Green; Kenneth Lemmert; and
Christopher Carpenter.
(4) The ESOP provides for "pass-through" voting to ESOP participants, pursuant
to which each ESOP participant will be permitted to direct the voting of
such participant's ratable portion of the ESOP Shares. The ESOP trustees
will vote all allocated ESOP Shares as to which they receive voting
instructions in accordance with such instructions. Except in limited
circumstances, allocated ESOP Shares as to which no voting instructions are
received will be voted in the manner that the ESOP trustees believe complies
with their fiduciary duties as trustees. The ESOP trustees will vote those
shares (32 in total) which are not allocated to the account of any
particular ESOP participant in favor of the Merger Proposal. See "The AGS
Meeting -- Required Vote."
(5) Mr. Cassis is the General Manager and a director of AGS.
(6) Mr. Green is the Chairman, President and Chief Executive Officer of AGS.
(7) Mr. Lemmert is the Secretary and a director of AGS. Share ownership does not
give effect to outstanding options to acquire AGS common stock, which
options will be cancelled in connection with the Merger.
(8) Mr. Carpenter is the Vice President of Sales and Marketing and a director of
AGS. Share ownership does not give effect to outstanding options to acquire
AGS common stock, which options will be cancelled in connection with the
Merger.
(9) See notes (5) through (8) above.
32
<PAGE>
SELECTED FINANCIAL DATA
CGX SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of CGX as of and for the preceding five fiscal years ended March 31, 1998
and the three months ended June 30, 1998. The selected consolidated financial
data for the preceding five fiscal years ended March 31, 1998 have been derived
from the audited consolidated financial statements of CGX for such years and
such data for the three months ended June 30, 1998 have been derived from the
unaudited consolidated financial statements of CGX for such period. The
information set forth below should be read in conjunction with "CGX
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of CGX and notes thereto
and other financial information included elsewhere herein or incorporated by
reference into this prospectus/proxy statement.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30, YEAR ENDED MARCH 31,
AMOUNTS IN THOUSANDS, EXCEPT PER -------------- -------------------------------------------------------
SHARE DATA 1998 1998 1997 1996 1995 1994
-------------- ---------- ---------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................................ $ 85,100 $ 231,282 $ 144,082 $ 85,133 $ 57,166 $ 48,643
Cost of sales........................ 58,014 157,906 100,197 61,237 39,821 33,916
-------------- ---------- ---------- --------- --------- ---------
Gross profit......................... 27,086 73,376 43,885 23,896 17,345 14,727
Selling expenses..................... 8,291 22,365 14,223 8,532 5,731 4,923
General and administrative
expenses........................... 6,619 17,628 11,330 6,873 4,313 3,469
Restructuring charge(1).............. -- -- -- 1,500 -- --
-------------- ---------- ---------- --------- --------- ---------
Operating income..................... 12,176 33,383 18,332 6,991 7,301 6,335
Interest expense, net................ 1,471 3,720 2,305 860 427 1,018
-------------- ---------- ---------- --------- --------- ---------
Income before income taxes........... 10,705 29,663 16,027 6,131 6,874 5,317
Income taxes......................... 4,175 11,273 5,927 2,146 2,392 1,806
-------------- ---------- ---------- --------- --------- ---------
Net income........................... 6,530 18,390 10,100 3,985 4,482 3,511
Dividends on Series A preferred stock
and warrants....................... -- -- -- -- 45 210
Accretion in value of redeemable
preferred stock and warrant........ -- -- -- -- -- 347
-------------- ---------- ---------- --------- --------- ---------
Net income available to common
shareholders....................... $ 6,530 $ 18,390 $ 10,100 $ 3,985 $ 4,437 $ 2,954
============== ========== ========== ========= ========= =========
Basic earnings per share(2).......... $ .50 $ 1.46 $ .83 $ .36 $ .46 $ .53
============== ========== ========== ========= ========= =========
Diluted earnings per share(2)........ $ .48 $ 1.40 $ .81 $ .35 $ .45 $ .45
============== ========== ========== ========= ========= =========
AS OF MARCH 31,
AS OF JUNE 30, -------------------------------------------------------
1998 1998 1997 1996 1995 1994
-------------- ---------- ---------- --------- --------- ---------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital...................... $ 39,897 $ 27,869 $ 22,080 $ 18,855 $ 13,797 $ 7,918
Property and equipment, net.......... 172,349 135,892 85,643 50,591 35,504 19,910
Total assets......................... 311,664 237,645 135,720 87,809 60,288 36,809
Long-term debt, net of current
portion............................ 111,176 73,030 39,321 20,105 8,820 13,470
Redeemable preferred stock and
warrant............................ -- -- -- -- -- 3,347
Common shareholders' equity.......... 125,509 105,332 66,447 49,876 38,170 8,981
</TABLE>
- ------------
(1) Relates to direct and incremental costs associated with the merger of two of
Consolidated Graphics, Inc.'s Houston subsidiaries, the net effect of which
was to reduce net income available to common shareholders by $975 after tax
and both basic and diluted earnings per share by $.09.
(2) Restated as applicable for a two-for-one stock split on January 10, 1997.
33
<PAGE>
AGS SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data should be
read in conjunction with "AGS Management's Discussion and Analysis of Financial
Condition and Results of Operations" and AGS' historical financial statements
and the notes thereto, which appear elsewhere in this prospectus/proxy
statement. The Statement of Income Data for the fiscal year ended October 31,
1997 and the Balance Sheet Data as of October 31, 1997 have been derived from
the audited consolidated financial statements of AGS for such year. The
Statement of Income Data for the fiscal years ended October 31, 1996, 1995, 1994
and 1993 and for the nine month periods ended July 31, 1998 and the Balance
Sheet Data as of July 31, 1998, and October 31, 1996, 1995, 1994 and 1993 have
been derived from AGS' unaudited financial statements for such periods. In the
opinion of management of AGS, such unaudited financial statements for the fiscal
years ended October 31, 1996, 1995, 1994 and 1993 present fairly the results of
AGS' operations and its financial position for such periods and as of such
dates. In the opinion of management of AGS, the unaudited interim financial
statements for the nine month interim period ended July 31, 1998 include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for the period presented and of AGS' financial
position as of such date. AGS' business historically has been somewhat seasonal,
with relatively lower sales in the third fiscal quarter typically more than
offset by sales during the last quarter of the fiscal year. For this and other
reasons, operating results for interim periods are not necessarily indicative of
the results that might be expected for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JULY 31, YEAR ENDED OCTOBER 31,
AMOUNTS IN THOUSANDS, EXCEPT PER ----------- -----------------------------------------------------
SHARE DATA 1998 1997 1996 1995 1994 1993
----------- --------- --------- --------- --------- ---------
(UNAUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................ $27,212 $ 34,698 $ 31,812 $ 29,361 $ 24,689 $ 19,441
Cost of sales........................ 16,274 21,033 20,219 18,117 14,180 11,486
----------- --------- --------- --------- --------- ---------
Gross profit on sales................ 10,938 13,665 11,593 11,244 10,509 7,955
Operating expenses:
Administrative and general
expenses...................... 3,177 5,300 3,983 4,455 4,196 2,955
Selling expenses................ 2,803 3,561 3,201 2,853 2,907 2,443
Production planning expenses.... 1,030 1,433 1,138 1,097 947 737
Delivery expenses............... 824 1,090 1,036 897 786 574
----------- --------- --------- --------- --------- ---------
Total operating expenses............. 7,834 11,384 9,358 9,302 8,836 6,709
----------- --------- --------- --------- --------- ---------
Operating income..................... 3,104 2,281 2,235 1,942 1,673 1,246
Other income (expense)............... (44) 1,762 292 429 474 431
Interest expense..................... 351 453 415 273 224 212
Moving expense....................... -- 414 -- -- -- --
----------- --------- --------- --------- --------- ---------
Income before income taxes........... 2,709 3,176 2,112 2,098 1,923 1,465
Provision for income taxes........... 1,025 1,234 754 809 871 568
----------- --------- --------- --------- --------- ---------
Net income........................... $ 1,684 $ 1,942 $ 1,358 $ 1,289 $ 1,052 $ 897
=========== ========= ========= ========= ========= =========
Net income per share (1)............. $ 139 $ 156 $ 108 $ 102 $ 85 $ 73
=========== ========= ========= ========= ========= =========
AS OF JULY 31, AS OF OCTOBER 31,
--------------- -------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------- ---------- --------- --------- --------- ---------
(UNAUDITED) (AUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Working capital...................... $ 3,148 $ 5,936 $ 6,317 $ 4,585 $ 3,229 $ 2,850
Property and equipment, net.......... 7,278 7,572 8,639 6,946 5,300 5,218
Total assets......................... 20,887 23,076 18,909 16,962 13,433 12,215
Long-term debt, net of current
portion............................ 1,273 5,023 5,465 3,326 1,961 2,451
Shareholders' equity................. 12,006 11,450 9,475 8,423 7,014 5,882
</TABLE>
- ------------
(1) Based on 12,126 weighted average shares outstanding for the nine month
period ended July 31, 1998 and 12,429, 12,533, 12,589, 12,418, and 12,260
weighted average common shares outstanding for the fiscal years ended
October 31, 1997, 1996, 1995, 1994 and 1993, respectively.
34
<PAGE>
CGX UNAUDITED SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table presents unaudited summary pro forma combined financial
data for CGX, as adjusted to reflect certain pro forma adjustments for the
effects of the Merger. Such data has been summarized from the Unaudited Pro
Forma Combined Financial Statements and the Notes thereto, which are included
elsewhere in this prospectus/proxy statement.
PRO FORMA COMBINED
-------------------------------
THREE MONTHS YEAR
ENDED ENDED
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
INCOME STATEMENT DATA(1):
Sales.............................. $ 94,304 $ 266,380
Cost of sales(2)................... 64,177 181,013
Selling, general and administrative
expense(3)....................... 16,953 48,369
------------- --------------
Operating income................... 13,174 36,998
Interest and other expense,
net(4)........................... 1,735 4,669
------------- --------------
Income before income taxes......... 11,439 32,329
Income taxes(5).................... 4,473 12,425
------------- --------------
Net income......................... $ 6,966 $ 19,904
============= ==============
Earnings per share:
Basic......................... $ 0.52 $ 1.54
Diluted....................... $ 0.50 $ 1.48
Shares used to compute pro forma
combined earnings per share(6):
Basic......................... 13,373,978 12,919,523
Diluted....................... 13,815,594 13,434,036
JUNE 30, 1998
-------------
BALANCE SHEET DATA(7):
Working capital.................... $ 43,218
Total assets....................... 355,387
Long-term debt, net of current
portion.......................... 128,588
Shareholders' equity............... 141,509
- ------------
(1) The unaudited pro forma combined income statement data reflect adjustments
to give effect to the Merger as if it had occurred on April 1, 1997 are not
necessarily indicative of the results which would have occurred if the
Merger had been consummated on that date or of future operating results.
(2) Reflects reduced purchase costs of paper, ink and pre-press supplies on a
pro forma basis based on contractual pricing from CGX vendors versus AGS
historical costs of $178 and $712 for the three month period ended June 30,
1998 and the year ended March 31, 1998, respectively, additional
depreciation expense based on the fair value of property and equipment
acquired of $17 and $69, respectively, and bonuses attributable to
non-recurring sale of real estate of $0 and $85, respectively.
(3) Reflects reduced expenses for certain executive salary costs, key man life
insurance, separation-related costs and directors' fees which would not have
been incurred after the Merger, of $47 and $317 for the three month period
ended June 30, 1998 and the year ended March 31, 1998, respectively, based
on post-Merger management structure and compensation policies as well as
additional amortization of goodwill associated with the Merger of $107 and
$427, respectively.
(4) Includes additional interest expense associated with incremental borrowings
to finance the Merger of $193 and $772 for the three month period ended June
30, 1998 and the year ended March 31, 1998, respectively. Certain
nonrecurring income statement items have been eliminated, including gain on
sale of real estate, ESOP contributions, and moving expenses to relocate
AGS's Ohio facility, amounting to $27 and $113, net, respectively.
(5) Income taxes have been provided on all pro forma adjustments based on a 39%
effective corporate tax rate.
(6) Earnings per share has been calculated based on the sum of the historical
weighted average shares outstanding of CGX for the respective periods, plus
for each period presented on both a basic and diluted basis, 322,013 shares
which are estimated to be issued in the Merger, based on the closing price
for CGX common stock of $49.6875 on October 26, 1998.
(7) The unaudited pro forma combined balance sheet data reflect adjustments to
give effect to the Merger as if it had occurred on June 30, 1998, including
the issuance of 322,013 shares of CGX common stock, par value $.01, at
$49.6875 per share (estimated based on the closing price on October 26,
1998) for total consideration of $16,000, additional borrowings of $16,350
to finance the cash portion of the purchase price, to fund the obligation to
pay $1,035 to discharge the SARs and stock options of AGS and to pay
estimated CGX transaction costs of $350, adjustments to record the fair
value of property and equipment acquired of $5,593, less related deferred
income tax liability of $2,237, and additional goodwill of $17,097.
35
<PAGE>
CGX MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING INFORMATION. READERS ARE
CAUTIONED THAT SUCH INFORMATION INVOLVES RISKS AND UNCERTAINTIES, INCLUDING
THOSE CREATED BY GENERAL MARKET CONDITIONS, COMPETITION AND THE POSSIBILITY THAT
EVENTS MAY OCCUR WHICH LIMIT THE ABILITY OF CGX TO MAINTAIN OR IMPROVE ITS
OPERATING RESULTS OR EXECUTE ITS PRIMARY GROWTH STRATEGY OF ACQUIRING ADDITIONAL
PRINTING BUSINESSES. ALTHOUGH CGX BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, ANY OF THE ASSUMPTIONS COULD BE
INACCURATE, AND THERE CAN THEREFORE BE NO ASSURANCE THAT THE FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN WILL PROVE TO BE ACCURATE. THE INCLUSION OF SUCH
INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION BY CGX OR ANY OTHER
PERSON THAT THE OBJECTIVES AND PLANS OF CGX WILL BE ACHIEVED.
GENERAL
The sales of CGX are derived from the production and sale of customized
printed materials by its printing businesses. All of the printing businesses
provide general commercial printing services relating to the production of
annual reports, training manuals, product and capability brochures, direct mail
pieces, catalogs and other promotional material, all of which tend to be
recurring in nature. Each printing business has its own sales, estimating,
customer service, pre-press, production, post-press and accounting departments.
CGX's headquarters provides its printing businesses with certain administrative
services, such as purchasing and human resources support, and maintains
centralized risk management, treasury, investor relations and consolidated
financial reporting activities.
The strategy of CGX is to generate growth in sales and profits through an
aggressive acquisition program, coupled with internal growth and operational
improvements at its existing businesses. CGX provides its acquired businesses
cost savings through master purchasing arrangements, access to technology and
capital, strategic counsel and a commitment to training through a unique,
comprehensive management development program. As a result, operating income
margins and efficiencies of newly acquired businesses, which may be lower than
those being achieved by the other businesses of CGX, typically improve as the
operational strategies of CGX are fully implemented.
The consolidated financial results of CGX in a given period may be affected
by the timing and magnitude of acquisitions. The consolidated operating income
margins of CGX in the periods following a significant acquisition (or series of
acquisitions) may be lower than historically reported consolidated margins,
depending upon the timing and extent to which an acquired business is able to
adapt to and implement the management practices of CGX.
The printing businesses of CGX compete in the general commercial and
financial printing sectors, which are characterized by individual orders from
customers for specific printing projects rather than long-term contracts.
Continued engagement for successive jobs is dependent upon, among other things,
the customer's satisfaction with the services provided. As such, CGX is unable
to predict, for more than a few weeks in advance, the number, size and
profitability of printing jobs it expects to produce.
36
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth certain historical income statement data of
CGX and the percentage relationship between each item of such data and net sales
for each of the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, YEAR ENDED MARCH 31,
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
(IN MILLIONS) (AS A PERCENTAGE OF SALES)
<S> <C> <C> <C> <C> <C> <C>
Sales................................... $ 231.3 $ 144.1 $ 85.1 100.0% 100.0% 100.0%
Cost of sales........................... 157.9 100.2 61.2 68.3 69.5 71.9
Gross profit............................ 73.4 43.9 23.9 31.7 30.5 28.1
Selling expenses........................ 22.4 14.2 8.5 9.7 9.9 10.0
General and administrative expenses..... 17.6 11.4 6.9 7.6 7.9 8.1
Restructuring charge.................... -- -- 1.5 -- -- 1.8
Operating income........................ 33.4 18.3 7.0 14.4 12.7 8.2
Interest expense, net................... 3.7 2.3 0.9 1.6 1.6 1.0
Income before income taxes.............. 29.7 16.0 6.1 12.8 11.1 7.2
Income taxes............................ 11.3 5.9 2.1 4.9 4.1 2.5
Net income.............................. 18.4 10.1 4.0 7.9 7.0 4.7
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(AS A PERCENTAGE
OF SALES)
(IN MILLIONS)
<S> <C> <C> <C> <C>
Sales................................... $ 85.1 $ 50.7 100.0% 100.0%
Cost of sales........................... 58.0 34.8 68.2 68.6
Gross profit............................ 27.1 15.9 31.8 31.4
Selling expenses........................ 8.3 4.9 9.7 9.7
General and administrative expenses..... 6.6 3.9 7.8 7.7
Operating income........................ 12.2 7.1 14.3 14.0
Interest expense........................ 1.5 .9 1.7 1.7
Income before income taxes.............. 10.7 6.2 12.6 12.3
Income taxes............................ 4.2 2.3 4.9 4.7
Net income.............................. 6.5 3.9 7.7 7.6
</TABLE>
Acquisitions in fiscal 1996, 1997, 1998 and 1999 are the primary causes of
the absolute increases in revenues and expenses in each period since fiscal
1996. Each of the acquisitions of CGX in fiscal 1996, 1997, 1998 and 1999 were
accounted for under the purchase method of accounting; accordingly, the
consolidated income statements reflect revenues and expenses of acquired
businesses only for post-acquisition periods. In each fiscal year shown above,
acquisitions affected the consolidated financial results of CGX, when compared
to the prior fiscal year, for the portion of the year following their respective
dates of acquisition. Similarly, acquisitions in each fiscal year affected the
consolidated financial results of CGX in the fiscal years which followed their
respective year of acquisition because the acquired businesses were under the
ownership of CGX for a full fiscal year.
37
<PAGE>
The following table sets forth the fiscal 1996, 1997, 1998 and 1999
(through June 30) acquisitions and indicates the period in which each business
was acquired.
FISCAL 1996 ACQUISITIONS
Clear Visions..............................................August 1995
Heritage Graphics.......................................September 1995
Emerald City Graphics....................................February 1996
Precision Litho..........................................February 1996
Tulsa Litho.................................................March 1996
FISCAL 1997 ACQUISITIONS
Bridgetown Printing..........................................June 1996
Garner Printing..............................................July 1996
Eagle Press..................................................July 1996
Mobility..................................................October 1996
Theo Davis Sons...........................................January 1997
Direct Color..............................................January 1997
FISCAL 1998 ACQUISITIONS
Tucker Printers.............................................April 1997
The Etheridge Company........................................July 1997
Georges and Shapiro........................................August 1997
Austin Printing.........................................September 1997
Geyer Printing............................................October 1997
Superior Colour Graphics..................................October 1997
The Otto Companies........................................October 1997
Walnut Circle Press......................................November 1997
Columbia Color............................................January 1998
StorterChilds Printing....................................January 1998
Heath Printers............................................January 1998
Fittje Bros. Printing....................................February 1998
Courier Printing............................................March 1998
FISCAL 1999 ACQUISITIONS
Tursack, Inc................................................April 1998
Image Systems.................................................May 1998
Printing, Inc................................................June 1998
Wetzel Brothers..............................................June 1998
Graphic Communications.......................................June 1998
FISCAL 1998 COMPARED WITH FISCAL 1997
Sales increased 61% to $231.3 million in 1998 from $144.1 million in 1997.
This increase is due to the incremental revenue contribution of the 1997
Acquisitions and 1998 Acquisitions (together, the "1997/98 Acquired
Businesses") and internal growth at the other printing businesses of CGX. The
internal growth resulted primarily from investments in equipment and technology,
which increased production capacity at certain locations, combined with
marketing efforts at all locations to increase market share.
Gross profit increased 67% to $73.4 million in 1998 from $43.9 million in
1997, primarily due to the addition of the 1997/98 Acquired Businesses. Gross
profit as a percentage of sales increased to 31.7% in 1998 from 30.5% in 1997.
This improvement generally reflects increased operating efficiencies from the
capital investments of CGX and cost savings generated by the greater purchasing
power of CGX.
Selling expenses increased 57% to $22.4 million in 1998 from $14.2 million
in 1997 due to the increased sales levels discussed above. Selling expenses as a
percentage of sales improved to 9.7% in 1998
38
<PAGE>
from 9.9% in 1997. This improvement reflects a lower average commission
percentage incurred by the 1997/98 Acquired Businesses as compared to the
historical percentage of CGX and an increase in non-commissioned sales at
certain locations.
General and administrative expenses increased 56% to $17.6 million in 1998
from $11.4 million in 1997 due primarily to the addition of the 1997/98 Acquired
Businesses. General and administrative expenses as a percentage of sales
improved to 7.6% in 1998 from 7.9% in 1997. This improvement is due to the
previously mentioned increase in sales exceeding the increase in the amount of
overhead expenses necessary to support such additional sales, and also reflects
the ongoing efficiency initiatives of CGX.
Interest expense increased to $3.7 million in 1998 from $2.3 million in
1997 due to a net increase in borrowings under the revolving credit facility of
CGX. Such borrowings were a supplement to cash flow to finance the cash portion
of the purchase prices of the 1997/98 Acquired Businesses.
Effective income tax rates increased to 38% in 1998 from 37% in 1997 due to
continued growth by acquisition into states with higher income tax rates than
those states in which CGX previously operated.
FISCAL 1997 COMPARED WITH FISCAL 1996
Sales increased 69% to $144.1 million in 1997 from $85.1 million in 1996,
primarily due to the incremental revenue contributions of the 1996 Acquisitions
and the 1997 Acquisitions (together, the "1996/97 Acquired Businesses").
Internal growth at the existing printing businesses of CGX also contributed to
the overall increase in 1997 sales, offset partially by lower web printing sales
resulting from and immediately prior to the consolidation of certain Houston
operations in late 1996.
Gross profit increased 84% to $43.9 million in 1997 from $23.9 million in
1996, primarily due to the addition of the 1996/97 Acquired Businesses. Gross
profit as a percentage of sales increased to 30.5% in 1997 from 28.1% in 1996.
This increase is attributable to operating efficiencies gained through economies
of scale, investments in equipment and technology and a reduction in
lower-margin web printing sales.
Selling expenses increased 67% to $14.2 million in 1997 from $8.5 million
in 1996 due to increased sales levels as discussed above. Selling expenses as a
percentage of sales improved slightly to 9.9% in 1997 from 10.0% in 1996.
General and administrative expenses increased 65% to $11.4 million in 1997
from $6.9 million in 1996, primarily due to the addition of the 1996/97 Acquired
Businesses and an increase in CGX's corporate staffing. In 1997, CGX increased
its corporate staff in order to focus the resources necessary to quickly
implement the benefits of its master purchasing arrangements and other operating
efficiencies at its acquired businesses. General and administrative expenses as
a percentage of sales improved to 7.9% in 1997 from 8.1% in 1996 primarily
because the increased sales contributed by the 1996/97 Acquired Businesses and
internal growth was greater than the corresponding increase in overhead
necessary to sustain such increased sales levels.
Interest expense increased to $2.3 million in 1997 from $.9 million in 1996
due to additional borrowings under the revolving credit facility of CGX to
finance, in part, the cash portion of the purchase prices of the 1996/97
Acquired Businesses, debt assumed in connection therewith and debt incurred to
finance certain capital expenditures.
Effective income tax rates increased to 37% in 1997 from 35% in 1996 due to
growth by acquisition into states with higher income tax rates than those states
in which CGX previously operated.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
Sales increased 68% to $85.1 million for the three months ended June 30,
1998, from $50.7 million for the three months ended June 30, 1997. This increase
is due to the addition of the 1998 Acquisitions and 1999 Acquisitions (together
the "1998/99 Acquired Businesses") and internal growth at the existing
printing businesses of CGX. The internal growth resulted primarily from ongoing
capital investments in new equipment and technology, which have added production
capacity at certain locations, and in some cases, expanded the range of services
available to meet customer needs.
39
<PAGE>
Gross profit increased 70% to $27.1 million for the three months ended June
30, 1998, from $15.9 million for the three months ended June 30, 1997, primarily
due to the addition of the 1998/99 Acquired Businesses. Gross profit as a
percentage of sales increased to 31.8% for the three months ended June 30, 1998,
from 31.4% in the corresponding period of the prior year. This improvement
generally reflects increased operating efficiencies from investments in
equipment and technology and cost savings generated by the national purchasing
advantages of CGX.
Selling expenses increased 68% to $8.3 million for the three months ended
June 30, 1998, from $4.9 million for the three months ended June 30, 1997, due
to the increased sales levels as discussed above. Selling expenses as a
percentage of sales remained consistent at 9.7% when compared to the
corresponding period of the prior year.
General and administrative expenses increased 71% to $6.6 million for the
three months ended June 30, 1998, from $3.9 million for the three months ended
June 30, 1997. This increase is due to the addition of the 1998/99 Acquired
Businesses and an increase in the corporate infrastructure to manage the
accelerated acquisition program of CGX. General and administrative expenses as a
percentage of sales increased slightly to 7.8% for the three months ended June
30, 1998, as compared to 7.7% in the corresponding period of the prior year.
Interest expense increased to $1.5 million for the three months ended June
30, 1998, from $.9 million for the three months ended June 30, 1997, primarily
due to a net increase in borrowings under the revolving credit facility of CGX
to finance, in part, the cash portion of the purchase prices of the 1998/99
Acquired Businesses.
Effective income tax rates increased to 39% for the three months ended June
30, 1998, from 38% in the prior year due to growth by acquisition into states
with higher income tax rates than those states in which CGX previously operated.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The primary cash uses of CGX are for acquisitions, capital expenditures and
payments on long-term debt incurred to finance certain equipment purchases or
assumed in connection with certain acquisitions. Cash utilized to complete
acquisitions totaled $42.5 million in the three months ended June 30, 1998,
$42.8 million in fiscal 1998, $17.5 million in fiscal 1997 and $10.2 million in
fiscal 1996. Cash utilized for capital expenditures, which relate primarily to
the purchase of new equipment, was $6.1 million in the three months ended June
30, 1998, $10.6 million in fiscal 1998, $10.2 million in fiscal 1997, and $6.0
million in fiscal 1996. Payments on long-term debt totaled $.7 million in the
three months ended June 30, 1998, $5.3 million in fiscal 1998, $2.7 million in
fiscal 1997 and $1.2 million in 1996. In total, cash requirements for
acquisitions, capital expenditures and debt service were $49.3 million in the
three months ended June 30, 1998, $58.7 million in fiscal 1998, $30.4 million in
fiscal 1997 and $17.4 million in fiscal 1996.
CGX financed its capital requirements through internally generated funds
and borrowings under its revolving credit facility. Cash flow generated from
operations (net income plus depreciation, amortization and deferred tax
provision) was $11.2 million in the three months ended June 30, 1998, $31.6
million in fiscal 1998, $16.9 million in fiscal 1997 and $9.3 million in fiscal
1996. Net incremental borrowings under its revolving credit facility were $35.9
million in the three months ended June 30, 1998, $26.2 million in fiscal 1998,
$12.4 million in fiscal 1997 and $11.3 million in fiscal 1996. Debt incurred
directly to finance equipment purchases was $3.1 million in the three months
ended June 30, 1998, $6.3 million in fiscal 1998 and $6.8 million in fiscal
1997.
In connection with the acquisition of certain printing businesses, CGX
issued 248,210 shares of its common stock in the three months ended June 30,
1998, 317,713 shares in fiscal 1998, 355,560 shares in fiscal 1997 and 849,316
shares in fiscal 1996. Additionally, pursuant to certain acquisitions, CGX
assumed or issued debt totaling $6.3 million, in fiscal 1998, $4.1 million in
fiscal 1997 and $1.1 million in fiscal 1996.
40
<PAGE>
CAPITAL RESOURCES
In June 1997, CGX entered into a $100 million revolving credit agreement,
which was amended in August 1998 to increase the facility to $200 million (as
amended, the "Credit Agreement"), with a nine-member banking group (following
the amendments). Loans outstanding under the Credit Agreement are unsecured and
accrue interest, at the option of CGX, at (1) the London Interbank Offered Rate
(LIBOR) plus .50% to 1.50% based upon the Debt to Pro Forma EBITDA ratio as
defined, redetermined quarterly, or (2) an alternate base rate based upon the
agent bank's prime lending rate or Federal Funds effective rate. The Credit
Agreement also provides for a commitment fee on available but unused amounts
ranging from .10% to .35% per annum. The Credit Agreement matures on July 31,
2001, at which time all amounts outstanding thereunder are due. At June 30,
1998, outstanding borrowings under the Credit Agreement were $90.1 million and
were subject to an average interest rate of 6.3% per annum.
CGX is subject to certain covenants and restrictions and must meet certain
financial tests pursuant to and as defined in the Credit Agreement. CGX believes
that these restrictions do not adversely affect its acquisition or operating
strategies, and that it was in compliance with such financial tests and other
covenants at June 30, 1998.
In 1996, CGX entered into an agreement with Komori America Corporation (the
"Komori Agreement"), pursuant to which CGX may, but is not obligated to,
purchase up to $50 million of printing presses over its term. The Komori
Agreement provides certain volume purchase incentives and long-term financing
options. In May 1998, CGX agreed to purchase 12 new printing presses for an
aggregate of $19 million, net of trade-in allowances, pursuant to the Komori
Agreement. As of June 30, 1998, CGX was obligated on term notes related to the
Komori Agreement totaling $15.1 million. These term notes provide for fixed
monthly principal and interest payments through 2007 at an average interest rate
of 8.1%, and are secured by the purchased presses. CGX is not subject to any
significant financial covenants or restrictions in connection with these
obligations.
CGX expects to make additional equipment capital expenditures in fiscal
1999 using cash flow from operations and borrowings under the Credit Agreement.
The remaining debt obligations of CGX generally consist of mortgages,
capital leases, promissory notes, an industrial revenue bond and two $5 million
auxiliary revolving credit agreements, some of which contain financial covenants
and restrictions. The most significant of these place certain restrictions on
future borrowings and acquisitions above specified levels. CGX believes these
restrictions do not adversely affect its acquisition or operating strategies.
Pursuant to earnout agreements entered into in connection with certain
acquisitions, as of March 31, 1998, CGX was contingently obligated at certain
times and under certain circumstances through 2003 to issue up to 110,421 shares
of its common stock and to make additional cash payments of up to $4.6 million
for all periods in the aggregate.
During the three months ended June 30, 1998, CGX acquired five printing
businesses. To complete these acquisitions, in the aggregate, CGX issued 248,210
shares of its common stock and paid cash of $42.5 million. Between June 30, and
September 30, 1998, CGX completed the acquisition of six printing businesses and
at September 30, 1998, had signed non-binding letters of intent to acquire seven
additional companies.
CGX intends to continue to actively pursue acquisitions opportunities,
utilizing cash flow from operations, borrowings under the Credit Agreement or
the issuance of its common stock. There can be no assurance that CGX will be
able to acquire additional business on acceptable terms in the future. In
addition, there can be no assurance that CGX will be able to establish, maintain
or increase the profitability of an acquired business.
YEAR 2000
The Year 2000 issue results from the historical use in computer software
programs of a two-digit abbreviation in date fields to represent the year.
Certain computer programs, including programs embedded
41
<PAGE>
in various equipment, may fail to properly function when confronted with dates
which contain the two-digit year "00". These processing errors have the
potential to cause system failures or disrupt normal operations.
CGX has reviewed and is continuing to review its business risks associated
with the Year 2000 issue. CGX believes that substantially all of the equipment
used in its printing operations, including its pre-press and press equipment and
its equipment used to finish and deliver its products, will not be materially
affected by the Year 2000 issue. Certain of CGX's management information systems
and associated computer equipment are not currently Year 2000 compliant. The
majority of these management information systems are maintained by third-party
vendors and employ software that is specifically designed for the printing
industry. Substantially all of these vendors have recently released software
versions which are Year 2000 compliant. CGX is scheduling upgrades of its
hardware and software to implement the Year 2000 compliant versions and
presently anticipates that substantially all such systems will be Year 2000
compliant as early as Summer 1999 but in any event no later than December 31,
1999. While the upgrades may be implemented at an accelerated pace as a result
of the Year 2000 issue, the cost of implementing these software upgrades is not
expected to be materially in excess of CGX's recurring investment in management
information systems.
In addition, CGX is in the process of assessing its exposure to business
disruptions as a result of the Year 2000 issues of its suppliers and customers.
CGX has communicated with many of its suppliers to assess each such supplier's
Year 2000 readiness. Based on responses received to date, and because there are
many suppliers of paper, ink and other materials used in printing operations,
CGX does not believe that it is materially dependent on any one supplier and
that it will be able to obtain materials to continue its operations without
significant disruption after the Year 2000.
CGX has a large and diversified customer base comprised of thousands of
customers in locations throughout the United States and is not dependent on any
one customer or group of customers for its revenues. As such, CGX does not
anticipate that the demand for its commercial printing services would be
materially adversely affected as a result of Year 2000 issues unless such issues
had a widespread effect on its customer base.
Like many manufacturing companies, the operation of CGX's businesses is
dependent upon the operation of many other businesses, the disruption of any one
or even a number of which as a result of the Year 2000 issue would not have a
material effect on the business of CGX. However, should a significant number of
such businesses suffer disruptions as a result of the Year 2000 issue, CGX's
operations could be adversely affected.
As part of its ongoing review of the Year 2000 issue, CGX evaluates and
addresses Year 2000 issue for its acquisition targets and implements aggregate
remedial action as necessary for acquired companies.
42
<PAGE>
AGS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES BOTH STATEMENTS OF HISTORICAL FACT AND
"FORWARD-LOOKING STATEMENTS." THIS FORWARD-LOOKING INFORMATION CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING EXPRESSIONS SUCH AS "BELIEVES,"
"EXPECTS," "MAY," "WILL," "SHOULD" OR "ANTICIPATES," THE NEGATIVES OF
THESE EXPRESSIONS OR OTHER PHRASES HAVING SIMILAR MEANINGS, AND INCLUDE
STATEMENTS AS TO THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF AGS AND ITS
MANAGEMENT WITH RESPECT TO THE FUTURE OPERATIONS, PERFORMANCE OR POSITION OF
AGS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON A VARIETY OF ASSUMPTIONS
RELATING TO THE BUSINESS OF AGS, INCLUDING ASSUMPTIONS AS TO MARKET AND
COMPETITIVE CONDITIONS, WHICH, ALTHOUGH CONSIDERED REASONABLE BY AGS, MAY NOT BE
REALIZED. BECAUSE OF THE NUMBER AND RANGE OF THE ASSUMPTIONS UNDERLYING AGS'
FORWARD-LOOKING STATEMENTS, AND THE NUMBER OF THESE ASSUMPTIONS THAT ARE SUBJECT
TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES BEYOND THE REASONABLE CONTROL OF
AGS, SOME OF THESE ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE. IN ADDITION,
THERE ARE EVENTS AND CIRCUMSTANCES THAT ARE NOT CURRENTLY ANTICIPATED AND THAT
ARE NOT, THEREFORE, REFLECTED IN AGS' CURRENT ASSUMPTIONS, THAT MAY OCCUR AFTER
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT. THEREFORE, THE ACTUAL FUTURE
EXPERIENCE OF AGS AND ITS FUTURE RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE
ANTICIPATED. CONSEQUENTLY, THE INCLUSION OF FORWARD-LOOKING STATEMENTS SHOULD
NOT BE REGARDED AS A REPRESENTATION BY AGS OR ANY OTHER PERSON THAT THESE
EXPECTATIONS WILL BE REALIZED.
GENERAL
AGS was founded in 1975 to provide computer typesetting services to the
Washington, D.C. Metropolitan Area. Soon after it commenced operations, AGS
identified an underserved niche for books and directories and adopted a plan to
fill this niche. Although AGS has continued to provide traditional commercial
printing services, the book and directory portion of its business has continued
to expand and ultimately has become AGS' primary business. AGS is headquartered
in White Plains, Maryland, where it maintains its principal printing facility.
AGS also operates a service bureau and copy center in Washington, D.C. and a
printing facility in Macedonia, Ohio.
Over time, AGS has continued to upgrade its technology in order to maintain
its market niche and support continued growth. In particular, AGS has expanded
its operations to include a complete range of printing and communication
services including design, typesetting, desktop publishing, database management,
CD-ROM production, World Wide Web publishing, diskette replication, technical
support, conventional and electronic pre-press, on-demand printing (quick
copying), binding, mailing, storage and fulfillment.
Over the past five years, AGS has increased its sales by more than 75%. AGS
traditionally has not been, and does not intend to be, a low-price provider of
printing and publishing services. In recent years, AGS has continued to maintain
its book and directory niche and has expanded its customer base to the
traditional print and electronic publishing markets, as it has focused its
efforts on promoting itself as a "one-stop" provider of printing and
communication services. AGS expects to continue to follow this strategy and, in
addition, to expand the digital printing (books on demand), CD-ROM and internet
publishing elements of its business. In addition, AGS has identified journal
printing as an underserved niche and recently has begun to market directly to
this segment of the industry. As of September 30, 1998, AGS had approximately
292 employees.
In 1992, in order to more readily serve its customer base in the
Washington, D.C. Metropolitan Area, AGS expanded its physical operations with
the addition of a service bureau and copying center in Washington, D.C. This
facility has continued to grow, and the ongoing addition of state-of-the-art
technology has permitted AGS to expand the range of its service offerings. This
facility's close geographical proximity to, and coordination with, AGS' main
Maryland plant permit AGS to offer many of its customers "one-stop shopping"
for printing services.
In 1993, AGS entered the commercial printing business in the state of Ohio
through its purchase of certain of the assets of an existing printing company,
now operated as Automated Graphic Systems - Ohio, Inc., a wholly owned
subsidiary of AGS. This facility provides AGS with the ability to provide
multi-color printing (up to six colors) and increased diskette replication and
fulfillment capabilities. In addition, this
43
<PAGE>
facility's commercial printing capacity has permitted AGS to shift a portion of
this work to Ohio, thereby making available capacity at the Maryland facility
for its core directory and book business, and enhancing the growth of AGS'
overall printing business.
AGS believes that its future business and growth prospects are good, and
that such prospects will be enhanced if the Merger is consummated. AGS believes
that there remains substantial potential for growth in its core business as well
as non-core areas, including sales of digital printing, CD-ROM, internet and
journal printing services. In addition, as has been its historical practice, AGS
expects to continue to evaluate the market for printing, publishing and related
services in order to identify underserved or otherwise attractive competitive
niches and to enter those areas when it believes that it can do so profitably.
RESULTS OF OPERATIONS
The following tables set forth material items from the historical
statements of income of AGS and the percentage relationship between each of
those items and net sales for each of the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
OCTOBER 31, OCTOBER 31,
------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
(AS A PERCENTAGE OF
NET SALES)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 34.7 $ 31.8 $ 29.3 100.0% 100.0% 100.0%
Cost of sales........................ 21.0 20.2 18.1 60.5 63.5 61.8
Gross profit on sales................ 13.7 11.6 11.2 39.5 36.5 38.2
Administrative and general
expenses........................... 5.3 4.0 4.5 15.3 12.6 15.2
Selling expenses..................... 3.6 3.2 2.8 10.4 10.1 9.6
Production planning expenses......... 1.4 1.2 1.1 4.0 3.8 3.8
Delivery expenses.................... 1.1 1.0 0.9 3.2 3.1 3.1
Operating income..................... 2.3 2.2 1.9 6.6 6.9 6.5
Other income (expense)............... 1.4 0.3 0.4 4.0 0.9 1.3
Interest expense..................... 0.5 0.4 0.2 1.4 1.2 0.7
Income before income taxes........... 3.2 2.1 2.1 9.2 6.6 7.1
Provision for income taxes........... 1.3 0.7 0.8 3.7 2.2 2.7
Net income........................... 1.9 1.4 1.3 5.5 4.4 4.4
</TABLE>
NINE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(AS A PERCENTAGE OF
NET SALES)
(IN MILLIONS)
Net sales........................ $ 27.2 $ 25.5 100.0% 100.0%
Cost of sales.................... 16.3 15.1 59.9 59.2
Gross profit on sales............ 10.9 10.4 40.1 40.8
Administrative and general
expenses....................... 3.2 4.2 11.8 16.5
Selling expenses................. 2.8 2.6 10.3 10.2
Production planning expenses..... 1.0 0.9 3.7 3.5
Delivery expenses................ 0.8 0.8 2.9 3.1
Operating income................. 3.1 1.9 11.4 7.5
Other income (expense)........... -- 1.6 -- 6.3
Interest expense................. 0.4 0.4 1.3 1.6
Income before income taxes....... 2.7 3.1 9.9 12.2
Provision for income taxes....... 1.0 1.1 3.7 4.4
Net income....................... 1.7 2.0 6.2 7.8
44
<PAGE>
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1996
Net sales for the fiscal year ended October 31, 1997 ("Fiscal 1997")
increased by $2.9 million, or 9%, over net sales for the fiscal year ended
October 31, 1996 ("Fiscal 1996"). This increase is primarily attributable to
AGS' ability to cross-sell its complete line of services, especially digital
printing, CD-ROM and internet publishing services, as a complement to AGS'
conventional ink on paper printing services. This ability to offer complementary
printing services continues to differentiate AGS from its competitors, and to
enhance its marketing efforts in its core business.
Cost of sales for Fiscal 1997 increased by $0.8 million, or 4%, over cost
of sales for Fiscal 1996, but decreased to 61% of net sales for Fiscal 1997 as
compared to 64% of net sales for Fiscal 1996. The absolute increase in cost of
sales is attributable to AGS' increased net sales for Fiscal 1997. The decrease
in cost of sales as a percentage of net sales in Fiscal 1997 is due to AGS'
effort, during Fiscal 1997, to control costs through more effective paper
purchasing, reduced use of outside services as a result of improved scheduling,
reduced spoilage due to enhanced quality control procedures and reduced medical
costs due to reduced claims under AGS' self-insurance plan with stop loss
provisions.
As a consequence of the foregoing increases in net sales and cost of sales
for Fiscal 1997 as compared to Fiscal 1996, gross profit increased by $2.1
million, or 18%, for Fiscal 1997 as compared to Fiscal 1996, and gross profit as
a percentage of sales rose to 39% in Fiscal 1997 from 36% for Fiscal 1996.
Administrative and general expenses, which consist primarily of
labor-related expenses for administrative supervisory and executive personnel
and accounting, administrative and secretarial services, as well as ESOP
contributions and certain general items, increased by $1.3 million, or 33%, in
Fiscal 1997 as compared to Fiscal 1996. Certain of the personnel whose
compensation expenses are included in administrative and general expenses are
subject to incentive compensation arrangements. Pursuant to these arrangements,
compensation increases more than in proportion to increases in net sales in
years in which AGS meets or exceeds performance targets set in connection with
these arrangements, and less than in proportion to net sales in years in which
AGS does not meet such performance targets. Administrative and general expenses
represented 15% of net sales for Fiscal 1997, as compared to 13% of net sales in
Fiscal 1996, which is consistent with these incentive compensation arrangements.
Selling expenses, which consist primarily of labor-related expenses for
AGS' sales and sales support personnel, as well as outlays for marketing and
sales-related travel, increased by $0.4 million, or 11%, in Fiscal 1997 as
compared to Fiscal 1996, but remained substantially unchanged as a percentage of
sales. The absolute increase in selling expenses is attributable to increased
selling activity in connection with increased sales during Fiscal 1997.
Production planning expenses, which consist of labor-related and other
expenses associated with AGS' customer service and production management
functions (which coordinate the processing of each order between the customer
and AGS' production staff and oversees the quality and timeliness of AGS'
services) increased by $0.3 million, or 26%, in Fiscal 1997 as compared to
Fiscal 1996. This increase is attributable primarily to increased production
associated with increased sales in Fiscal 1997, as well as a greater commitment
of resources to customer service.
Other income, which consists of non-operating items such as net gains on
sales of property, equipment and scrap paper, and interest earnings on cash and
investment balances, increased by $1.5 million, or 503%, for Fiscal 1997 as
compared to Fiscal 1996. During Fiscal 1997, AGS sold land and a building and
realized a gain of $1.3 million on that sale, offset in part by $0.4 million for
moving expenses in connection with the move of its Ohio facility. The remainder
of the increase is attributable to interest on increased cash and investment
balances in Fiscal 1997 as compared to Fiscal 1996.
The provision for income taxes for Fiscal 1997 increased by $0.4 million,
or 64%, from the income tax provision for Fiscal 1996. The increase in the
income tax provision for Fiscal 1997 is due to increased pre-tax income in that
year, as compared to Fiscal 1996, which in turn resulted from increased net
sales and the gain on sale of real property described above.
45
<PAGE>
FISCAL YEAR ENDED OCTOBER 31, 1996 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1995
Net sales for Fiscal 1996 increased by $2.5 million, or 8%, over net sales
for the fiscal year ended October 31, 1995 ("Fiscal 1995"). This increase is
primarily attributable to increased, focused marketing efforts in all areas of
AGS' business, partially offset by a loss of sales as a small number of AGS'
substantial publishing customers shifted to low-price providers. Because such
low-price production generally is not compatible with AGS' business or strategy,
AGS chose not to attempt to retain all of this business. In addition, sales
during Fiscal 1996 were adversely affected by changes in the composition of AGS'
sales force, as a consequence of attrition among existing sales personnel and
changes in AGS' product mix, which necessitated a change in the sales force's
mix of skills and knowledge.
Cost of sales for Fiscal 1996 increased by $2.1 million, or 12%, over cost
of sales for Fiscal 1995, and increased to 64% of net sales for Fiscal 1996 from
62% of net sales for Fiscal 1995. The absolute increase in cost of sales is
attributable to AGS' increased net sales for Fiscal 1996 and the increase in
cost of sales as a percentage of net sales is due in part to AGS accepting jobs
with relatively lower margins in order to counteract the effects of the loss of
work that shifted to low-price providers.
As a consequence of the foregoing increases in net sales and cost of sales
for Fiscal 1996 as compared to Fiscal 1995, gross profit increased by $0.3
million, or 3%, for Fiscal 1996 as compared to Fiscal 1995, and gross profit as
a percentage of sales declined to 36% in Fiscal 1996 from 38% for Fiscal 1995.
Administrative and general expenses declined by $0.5 million, or 11%, in
Fiscal 1996 as compared to Fiscal 1995. Administrative and general expenses
represented 12% of net sales for Fiscal 1996, as compared to 15% of net sales in
Fiscal 1995. These results reflect the incentive compensation arrangements for
certain of the personnel whose compensation is included in this category.
Selling expenses increased by $0.3 million, or 12%, in Fiscal 1996 as
compared to Fiscal 1995, but remained substantially unchanged as a percentage of
sales. The absolute increase in selling expenses is attributable to increased
selling activity in connection with increased sales during Fiscal 1996.
Other income decreased by $0.1 million, or 32%, for Fiscal 1996 as compared
to Fiscal 1995, as a consequence of lower scrap paper prices from recyclers.
Interest expense for Fiscal 1996 increased by $0.1 million, or 51%, over
interest expense for Fiscal 1995. The increase in interest expense for Fiscal
1996 is primarily due to increased borrowings during Fiscal 1996 to finance
corporate expansion.
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1997
Net sales for the nine-month period ended July 31, 1998 (the "1998 Interim
Period") increased by $1.7 million, or 7%, over net sales for the nine-month
period ended July 31, 1997 (the "1997 Interim Period"). This increase is
primarily attributable to AGS' continued emphasis on cross-selling of its entire
line of services, particularly digital printing, CD-ROM and internet publishing
services, as a complement to AGS' conventional ink on paper business.
Cost of sales for the 1998 Interim Period increased by $1.1 million, or 8%,
over cost of sales for the 1997 Interim Period, but remained substantially
unchanged as a percentage of sales. The absolute increase in cost of sales is
attributable to AGS' increased net sales for the 1998 Interim Period.
As a consequence of the foregoing increases in net sales and cost of sales
for the 1998 Interim Period as compared to the 1997 Interim Period, gross profit
increased by $0.5 million or 5%, for the 1998 Interim Period as compared to the
1997 Interim Period, and gross profit as a percentage of sales was substantially
unchanged between the two Interim Periods.
Administrative and general expenses decreased by $1.0 million, or 24%, for
the 1998 Interim Period as compared to the 1997 Interim Period, and decreased to
12% of net sales for the 1998 Interim Period from 16% of net sales for the 1997
Interim Period. These absolute and relative decreases in administrative and
general expenses are due primarily to the fact that AGS has not made an ESOP
contribution during the 1998 Fiscal Period.
46
<PAGE>
Selling expenses increased by $0.2 million, or 9%, in the 1998 Interim
Period as compared to the 1997 Interim Period, but remained substantially
unchanged as a percentage of sales. The absolute increase in selling expenses is
attributable to increased selling activity in connection with increased sales
during the 1998 Interim Period.
Production planning expenses increased by $0.1 million, or 11%, in the 1998
Interim Period as compared to the 1997 Interim Period, but remained
substantially unchanged as a percentage of sales. This increase is attributable
primarily to increased production associated with increased sales in the 1998
Interim Period, as well as to a greater commitment of resources to customer
service.
Other income decreased by $1.6 million. or 103%, in the 1998 Interim
Period, primarily as a consequence of the one-time gain of $1.3 million on the
sale of real property in July 1997 (offset in part by $0.4 million for moving
expenses in connection with the move of AGS' Ohio facility).
The provision for income taxes for the 1998 Interim Period decreased by
$0.1 million, or 8%, from the income tax provision for the 1997 Interim Period.
The decrease in the income tax provision for the 1998 Interim Period is due to
decreased pre-tax income in that Interim Period, as compared to the 1997 Interim
Period, as a consequence of the one-time gain on sale of real property in the
1997 Interim Period described above, partially offset by increased operating
income.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1997, AGS had current assets of $12.1 million and current
liabilities of $6.2 million, resulting in working capital of $5.9 million. As of
that date, AGS also had investments in securities in the amount of $3.1 million
and an available line of credit for $3.0 million from Mellon Bank. As of July
31, 1998, AGS' current assets had been reduced to $10.3 million and its current
liabilities had increased to $7.2 million, resulting in working capital of $3.1
million, a decrease of $2.8 million from October 31, 1997. The principal reason
for this decrease was the classification as a current liability of a $3.1
million note payable to Mellon Bank discussed below that is due in March 1999.
At July 31, 1998 AGS' investment in securities had decreased by $0.1 million, to
3.0 million, and the line of credit had expired.
Capital expenditures for new equipment (totaling $2.1 million for Fiscal
1997 and $1.0 million for the 1998 Interim Period) have been required. During
Fiscal 1997, AGS applied $0.6 million to the repayment of outstanding
indebtedness.
AGS generates cash from operations and, to a lesser extent, from
third-party borrowings and the capital lease of equipment and believes that it
can generate sufficient resources from these sources to meet its liquidity needs
for the foreseeable future. AGS also anticipates, however, that consummation of
the Merger will facilitate the ready availability of capital.
AGS is indebted to Mellon Bank pursuant to a note payable dated March 24,
1996 in the principal amount of $2.0 million and due March 1, 2000. This note,
which had an outstanding principal balance of $1.2 million as of July 31, 1998,
requires monthly principal payments of $20,833, plus interest on the outstanding
balance equal to 2% above Mellon Bank's Overnight Money Market Rate. This note
is secured by certain of AGS' assets.
AGS also is indebted to Mellon Bank pursuant to a note payable in the
principal amount of $4.4 million, dated March 1996 and due in March 1999. This
note, which had an outstanding principal balance of $3.1 million as of July 31,
1998, requires monthly payments pursuant to a specified payment schedule (with
monthly payments of approximately $80,000 from November 1998 through maturity
including interest on the outstanding balance at the rate of 7.15%). This note
is secured by substantially all of AGS' assets, and contains certain financial
covenants.
AGS is obligated to make certain ongoing payments to two former employees
in connection with the repurchase of AGS stock. In one case, AGS' total
obligation is for $169,000, payable commencing November 1, 1996 in five annual
installments of $34,000, plus interest on the unpaid balance at the rate of 6%
per annum. In the second case, AGS' total obligation is for $132,000, payable
commencing July 1, 1997, in five annual installments of $33,500, which includes
interest at the rate of 8.25% per annum.
47
<PAGE>
YEAR 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Certain
computer programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of normal business activities.
AGS has prepared a formal plan to address Year 2000 issues as they relate
to its present and anticipated business and operations. In accordance with that
plan, AGS has evaluated all internal hardware and software used in its
operations, including those used to support AGS' printing and publishing
activities, as well as administrative functions such as accounting and payroll.
In the ordinary course of business, AGS has replaced a significant amount of its
hardware and software with Year 2000 compliant systems. A replacement schedule
has been prepared for its remaining non-compliant systems and an ongoing
monitoring program and contingency procedures in the event of unanticipated
non-compliance problems have been established. AGS has also identified all
significant external relationships, mainly suppliers and customers, and mailed
each entity an internally prepared questionnaire regarding Year 2000 issues.
Approximately 35% of the questionnaires have been returned and indicate that
they are Year 2000 compliant. AGS estimates that it will complete its plan,
including remedial actions, by March 31, 1999, and is not aware of any material
contingencies or costs that will be incurred.
48
<PAGE>
DESCRIPTION OF CGX SECURITIES
GENERAL
The authorized capital stock of CGX consists of 100,000,000 shares of
common stock, par value $.01 per share, and 5,000,000 shares of preferred stock,
par value $.01 per share. At September 30, 1998 there were 13,994,155 shares of
common stock and no shares of preferred stock outstanding.
The following discussion is qualified in its entirety by reference to the
Articles of Incorporation and the Bylaws of CGX, which are included as exhibits
to the Registration Statement of which this prospectus/proxy statement is a
part.
CGX COMMON STOCK
Holders of CGX common stock are entitled to one vote per share on any
matter submitted to the vote of shareholders. Subject to preferential rights
with respect to preferred stock and any other stock ranking prior to CGX common
stock as to dividends, holders of CGX common stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the CGX
Board out of funds legally available therefor. In the event of any liquidation,
dissolution or winding up of CGX, whether voluntary or involuntary, holders of
CGX common stock are entitled to share ratably in all assets remaining after
payment of the debts and other liabilities and the liquidation preference of any
stock ranking prior to CGX common stock. Holders of CGX common stock have no
preemptive rights to purchase shares of stock of CGX. Shares of CGX common stock
are not subject to any redemption or sinking fund provisions and are not
convertible into any other securities of CGX. In addition, the rights of the
holders of CGX common stock will be subject to, and may be adversely affected
by, the rights of any holders of preferred stock which may be issued in the
future and that may be senior to the rights of the holders of CGX common stock.
The shares of CGX common stock presently outstanding are, and the shares of CGX
common stock to be issued in connection with the Merger when issued will be,
fully paid and nonassessable.
PREFERRED STOCK
Subject to the provisions of the Articles of Incorporation of CGX and
limitations prescribed by law, the CGX Board is expressly authorized to issue
one of more series of preferred stock, to fix by resolution with respect to the
issue of each series the preferences, limitations and relative rights of such
series including without limitation, the following: (i) the number of shares of
any series and to change the number of shares constituting any series, (ii) the
dividend rights of any series, the preferences, if any, over any other class or
series of stock, or of any other class or series of stock over such series, as
to dividends, the extent, if any to which shares of any series will be entitled
to participate in dividends with shares of any other series or class of stock,
whether dividends on shares of any series will be fully, partially or
conditionally cumulative, or a combination thereof, and limitations or
restrictions thereof, (iii) the rights of any series, and the preferences, if
any, over any other class or series, or of any other class or series over such
series, in the event of any voluntary or involuntary liquidation, dissolution or
winding up of CGX and the extent to which shares of any series will be entitled
to participate with any other series or class; (iv) the terms of conversion or
exchangeability rights, and (v) the voting powers of any series. CGX has no
current plans to issue any shares of preferred stock.
One of the effects of undesignated preferred stock may be to enable the CGX
Board to render more difficult or to discourage an attempt to obtain control of
CGX by means of a tender offer, proxy contest, merger or otherwise, and thereby
to protect the continuity of the management of CGX. The issuance of shares of
preferred stock pursuant to the authority of the CGX Board described above may
adversely affect the rights of the holders of CGX common stock. For example,
preferred stock issued by CGX may rank prior to the CGX common stock as to
dividend rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of CGX common stock. Accordingly, the
issuance of shares of preferred stock may discourage bids for the CGX common
stock or may otherwise adversely affect the market price of the CGX common
stock.
49
<PAGE>
MANAGEMENT OF CGX
BOARD OF DIRECTORS
JOE R. DAVIS has been the President, Chief Executive Officer and Chairman
of the Board of CGX since he founded it in 1985. Prior to forming CGX, Mr. Davis
was Vice President of Finance and Administration for a division of International
Paper Company. Prior thereto, he served as a partner with Arthur Andersen LLP,
an accounting firm, where he was active in the mergers and acquisitions
practice. Mr. Davis is a certified public accountant. Mr. Davis serves on the
Executive Committee and is 55 years of age.
LARRY J. ALEXANDER retired from the San Antonio Spurs in May 1996, where he
had been the Vice President -- Administration and Communications since 1994.
Prior to joining the Spurs, he spent 27 years with SBC Communications Inc. in
various positions including Senior Vice President -- External Affairs from 1993
to 1994 and Senior Vice President -- Corporate Communications from 1990 to 1993.
Mr. Alexander has been a director of CGX since 1995 and is 56 years of age.
BRADY F. CARRUTH has been President of Gulf Coast Capital Corporation, a
commercial landscaping business, since 1987. He also serves on the board of
directors of American General Corporation, a diversified insurance company. Mr.
Carruth has been a director of CGX since 1985 and serves on the Audit Committee.
Mr. Carruth is 41 years of age.
CLARENCE C. COMER has served as President and Chief Executive Officer of
Southdown, Inc., a cement and ready-mix concrete producer, since 1987. He is
also a director of Southdown, Inc. Mr. Comer has been a director of CGX since
1993 and serves on the Audit Committee. Mr. Comer is 50 years of age.
GARY L. FORBES has been a Vice President of Equus Capital Management
Corporation and affiliates, including Equus II Incorporated, a public investment
company, since 1991. Mr. Forbes serves on the boards of directors of several
public companies, including NCI Building Systems, Inc., a manufacturer of
prefabricated metal buildings, Drypers Corporation, a manufacturer of disposable
diapers and related products and Advanced Technical Products, Inc., a
manufacturer of high-performance composites. Mr. Forbes is a certified public
accountant and has been a director of CGX since 1993. He serves on the Executive
Committee and is 54 years of age.
W. D. HAWKINS, a private investor since 1980, founded Industrial Towel &
Uniform Co., a company which he developed through acquisitions into a major
industrial laundry in Texas. That company was sold to Cintas Corporation in
1980. Mr. Hawkins has been a director of CGX since 1985 and serves on the
Compensation Committee. Mr. Hawkins is 85 years of age.
JAMES H. LIMMER has been a partner with the law firm of Tekell, Book,
Matthews & Limmer, L.L.P., in Houston, Texas, which specializes in all phases of
insurance defense, since 1973. Mr. Limmer has been a director of CGX since 1985
and serves on the Compensation Committee. Mr. Limmer is 56 years of age.
THOMAS E. SMITH has been President of High Island Oil Corp., an oil and gas
exploration and production company, since 1992. He has also served as a Vice
President of Smith Investments, an investment company with interests in mortgage
banking, oil and gas, and other businesses, since 1986. Mr. Smith has been a
director of CGX since 1993 and serves on the Audit Committee. Mr. Smith is 41
years of age.
DR. HUGH N. WEST, M.D., retired from his diagnostic radiology practice in
1996. For more than the prior five years he was in private practice in Houston,
Texas. Dr. West has been a director of CGX since 1985 and serves on the
Compensation Committee. Dr. West is 53 years of age.
50
<PAGE>
EXECUTIVE OFFICERS
Set forth below are the executive officers of CGX, together with their
positions and ages:
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------
Joe R. Davis....................... 55 Chairman and Chief Executive
Officer
G. Christopher Colville............ 41 Executive Vice President -- Mergers
and Acquisitions and Secretary
Randall D. Keys.................... 39 Vice President -- Finance, Chief
Financial and Accounting Officer
and Assistant Secretary
JOE R. DAVIS. See "-- Board of Directors."
G. CHRISTOPHER COLVILLE joined CGX in September 1994 as Vice
President -- Mergers and Acquisitions and was appointed to the additional
position of Chief Financial and Accounting Officer in January 1996. He served in
that capacity until September 1997 and again from February 1998 until June 1998.
He was appointed Secretary of CGX in April 1998. He served as Financial
Accounting and Reporting Manager for Trident NGL Holding, Inc. for three years
prior to joining CGX and prior thereto as an accounting and audit manager for
Arthur Andersen LLP. Mr. Colville is a certified public accountant.
RANDALL D. KEYS was elected Vice President -- Finance, Chief Financial
Officer and Assistant Secretary of CGX in June 1998. Prior to joining CGX, Mr.
Keys served as Vice President of Finance and Chief Financial Officer for 3DX
Technologies, Inc. from 1997 to June 1998. He served as Treasurer for the U.S.
operations of Norcen Energy Resources Limited from 1994 to 1997. From 1987
through 1994, Mr. Keys served in various financial management roles with Santa
Fe Energy Resources, Inc. and one of its predecessor companies. Mr. Keys is a
certified public accountant and began his career with the public accounting firm
of KPMG Peat Marwick LLP.
51
<PAGE>
OWNERSHIP OF CGX SECURITIES
The following table sets forth as of September 30, 1998 information with
respect to the beneficial ownership of shares of CGX common stock by (i) the
chief executive officer and each of the other executive officers of CGX, (ii)
each of the directors of CGX, (iii) all persons known to CGX to be the
beneficial owners of 5% or more thereof and (iv) all officers and directors as a
group. All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated. The address of each of the owners named
below other than Jeffrey N. Vinik, et al., is 5858 Westheimer, Suite 200,
Houston, Texas 77057.
AMOUNT OF
BENEFICIAL OWNERSHIP(1)
---------------------------
NUMBER OF PERCENTAGE
NAME OF BENEFICIAL OWNER SHARES(2) OF CLASS(3)
- ------------------------------------- ---------- -----------
Joe R. Davis......................... 1,454,500 10.4%
Jeffrey N. Vinik, et al.(4).......... 1,271,600 9.1
Hugh N. West......................... 175,000 1.3
James H. Limmer...................... 122,500 *
Brady F. Carruth..................... 53,770 *
Gary L. Forbes....................... 42,548 *
G. Christopher Colville.............. 33,600 *
Clarence C. Comer.................... 36,100 *
Thomas E. Smith...................... 11,000 *
Larry J. Alexander................... 8,000 *
W.D. Hawkins......................... 5,980 *
All directors and executive officers
as a group (11 persons,
including the directors and
executive officers named above).... 1,942,998 13.9
- ------------
* Less than 1%.
(1) In accordance with the Commission regulations, shares are deemed to be
"beneficially owned" by a person if such person directly or indirectly
has or shares the power to vote or dispose of the shares, regardless of
whether such person has any economic interest in the shares. In addition,
a person is deemed to own beneficially any shares of which such person has
the right to acquire beneficial ownership within 60 days, including upon
exercise of a stock option or conversion of a convertible security.
(2) Shares shown do not include shares held through CGX's 401(k) plan. The
shares beneficially owned include options to purchase shares of CGX's
common stock exercisable within 60 days of September 30, 1998, as follows:
Mr. Davis, 200 shares; Mr. Forbes, 18,000 shares; Mr. Colville, 2,972
shares; Mr. Smith, 7,000 shares; and Mr. Alexander, 6,000 shares.
(3) The percentage of class owned by each person has been calculated using the
13,994,155 shares outstanding at September 30, 1998 plus any shares
issuable upon exercise of options owned by such person exercisable within
60 days and deemed to be outstanding pursuant to Rule 13d-3(d)(1) of the
Exchange Act.
(4) Based on information filed with the Commission. The address for Jeffrey N.
Vinik, et al. is 260 Franklin Street, Boston, Massachusetts 02110. Vinik
Partners L.P., a Delaware limited partnership ("Vinik Partners"), owns
570,900 shares of common stock. VGH Partners, L.L.C., a Delaware limited
liability company ("VGH"), is the general partner of Vinik Partners and
as such may be deemed to beneficially own the shares owned by Vinik
Partners. Vinik Overseas Fund Ltd. owns 700,700 shares of common stock.
Pursuant to an investment management agreement, Vinik Asset Management,
L.L.C., a Delaware limited liability company ("VAM LLC"), as general
partner of Vinik Asset Management, L.P. ("VAM LP"), has investment
authority over such 700,700 shares of common stock and as such VAM LLC and
VAM LP may be deemed to beneficially own such shares of common stock.
Jeffrey N. Vinik is the senior managing member of VGH and VAM LLC, and
Michael S. Gordon and Mark D. Hostetter are managing members of such
entities, and as such those individuals share the voting and dispositive
power over such shares and may be deemed to beneficially own such shares.
52
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE.
The following table sets forth certain information regarding the
compensation earned by or awarded to the Chief Executive Officer of CGX and the
other applicable executive officers of CGX for each of the three fiscal years
ended March 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
----------------------------- SHARES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
- ---------------------------------------- ----- -------- -------- -------------------
<S> <C> <C> <C> <C>
Joe R. Davis............................ 1998 $228,000 $ -- --
President and Chief Executive 1997 228,000 -- --
Officer 1996 228,000 -- --
G. Christopher Colville................. 1998 101,250 100,000 15,000
Executive Vice President -- 1997 82,832 80,000 30,000
Mergers and Acquisitions and 1996 70,528 50,000 15,000
Secretary(1)
</TABLE>
- ------------
(1) Mr. Colville also served as Chief Financial and Accounting Officer from
January 1996 to September 1997 and from February 1998 to June 1998.
STOCK OPTION GRANTS TABLE.
The following table shows information concerning the grant of stock options
pursuant to the Incentive Plan during the fiscal year ended March 31, 1998 to
the executive officers named in the Summary Compensation Table.
OPTIONS GRANTED IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL
SHARES OPTIONS EXERCISE OF RATES
UNDERLYING GRANTED TO BASE PRICE PER OF STOCK PRICE
OPTIONS EMPLOYEES IN SHARE EXPIRATION APPRECIATION
NAME GRANTED FISCAL 1998 ($/SHARE)(2) DATE FOR OPTION TERM(1)
- ------------------------------------- ---------- ------------ -------------- ---------- ----------------------
5% 10%
---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
G. Christopher Colville.............. 15,000 5.9% $37.13 12/17/02 $ 171,300 $ 383,700
</TABLE>
- ------------
(1) The potential realizable value through the expiration date of options has
been determined on the basis of the per share market price at the time the
options were granted, compounded annually over the life of the option, net
of the exercise price. These values have been determined based upon assumed
rates of appreciation and are not intended to forecast the possible future
appreciation, if any, of the price or value of CGX common stock.
(2) The exercise price per share for all options granted is equal to the market
price of the underlying CGX common stock as of the date of grant.
53
<PAGE>
STOCK OPTION EXERCISES AND YEAR-END VALUES TABLE.
The following table shows, for executive officers named in the Summary
Compensation Table, information with respect to stock options exercised during
the fiscal year ended March 31, 1998 and the unexercised options to purchase CGX
common stock granted under the Incentive Plan and held as of March 31, 1998.
OPTION EXERCISES IN FISCAL 1998
AND VALUE OF OPTIONS AT MARCH 31, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS HELD AT IN-THE-MONEY OPTIONS
MARCH 31, 1998 AT MARCH 31, 1998(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joe R. Davis......................... -- $ -- 200 -- $10,450 $ --
G. Christopher Colville.............. 21,000 890,250 200 39,000 10,450 1,443,750
</TABLE>
- ------------
(1) Options are "in-the-money" if the closing market price of CGX common stock
exceeds the exercise price of the options. The value of unexercised options
represents the difference between the exercise price of such options and the
closing market price of CGX common stock on March 31, 1998 ($57.88).
INCENTIVE PLAN
In March 1994, the CGX Board and the shareholders of CGX approved the
adoption of the Consolidated Graphics, Inc. Long-Term Incentive Plan (including
amendments thereto, the "Incentive Plan"). Pursuant to the Incentive Plan,
employees of CGX and directors who are not serving on the Compensation Committee
are eligible to receive awards consisting of stock options, stock appreciation
rights, restricted or nonrestricted stock, cash or any combination of the
foregoing. Stock options granted pursuant to the Incentive Plan may either be
incentive stock options within the meaning of Section 422 of the Code, or
nonqualified stock options. To date, long-term incentive compensation has been
awarded only in the form of stock options. An aggregate of 3,435,000 shares of
CGX common stock have been reserved for issuance pursuant to the Incentive Plan,
of which 2,101,262 shares were available for issuance pursuant to the Incentive
Plan as of September 30, 1998.
OPTIONS FORFEITED OR EXPIRED REVERT TO SHARES AVAILABLE UNDER THE PLAN.
The Incentive Plan is administered by the Compensation Committee of the CGX
Board. Subject to the provisions of the Incentive Plan, the Compensation
Committee is authorized to determine the type or types of awards made to each
participant and the terms, conditions and limitations applicable to each award.
In addition, the Compensation Committee has the exclusive power to interpret the
Incentive Plan, to grant waivers of restrictions thereunder and to adopt such
rules and regulations as it may deem necessary or appropriate in keeping with
the objectives of the Incentive Plan.
DIRECTOR COMPENSATION
Each director who is not an employee of CGX is paid $250 for each meeting
attended and is reimbursed for expenses incurred in attending meetings of the
CGX Board and committee meetings of the CGX Board. Directors who are not members
of the Compensation Committee are eligible to receive grants under the Incentive
Plan.
54
<PAGE>
COMPARATIVE RIGHTS OF SHAREHOLDERS
As a result of the Merger, the stockholders of AGS will become shareholders
of CGX and their rights as shareholders will be governed by Texas law and by
CGX's articles of incorporation (the "Texas Articles of Incorporation") and
bylaws (the "Texas Bylaws"), rather than by Maryland law and AGS's articles of
incorporation (the "Maryland Articles of Incorporation") and bylaws (the
"Maryland Bylaws"). A copy of the Texas Articles of Incorporation and the
Texas Bylaws are filed as exhibits hereto. The Maryland Articles of
Incorporation and Maryland Bylaws are available for inspection at the principal
executive offices of AGS and will be sent to stockholders of AGS upon request.
A discussion of the material similarities and differences to AGS
stockholders resulting from the Merger appears below. This discussion is not
intended to be complete and is qualified in its entirety by reference to the
Texas Articles of Incorporation, Texas Bylaws, Maryland Articles of
Incorporation and Maryland Bylaws and to the Business Corporation Act of the
State of Texas and the General Corporation Law of the State of Maryland.
CAPITAL STOCK
AUTHORIZED CAPITAL
The Texas Articles of Incorporation authorize 105,000,000 shares of capital
stock and specifically designate 100,000,000 shares of capital stock as common
stock, par value of $.01 per share, and 5,000,000 shares of capital stock as
preferred stock, par value of $1.00 per share. The Maryland Articles of
Incorporation authorizes an aggregate of 20,000 shares of capital stock, no par
value, all of one class. The Texas Articles of Incorporation permits the CGX
Board to issue preferred stock from time to time in one or more series, to
specify the number of shares of such series and to determine the applicable
voting powers, designations, preferences, special rights, qualifications,
limitations or restrictions thereof. Each CGX shareholder is entitled to one
vote for each share of CGX common stock held on all matters submitted to a vote
of the shareholders.
REDEMPTION AND RETIREMENT
Under Texas law, a corporation may not make a distribution involving a
purchase or redemption of its own shares if such distribution would cause the
corporation to be insolvent or the distribution exceeds the surplus of the
corporation. Notwithstanding such limitation, Texas law provides that a
corporation may make a distribution involving a purchase or redemption of any of
its own shares if such purchase or redemption is made by the corporation to (i)
eliminate fractional shares; (ii) collect or compromise indebtedness owed by or
to the corporation; (iii) pay dissenting shareholders entitled to such payment;
or (iv) effect the purchase or redemption of redeemable shares in accordance
with the Texas Business Corporation Act. Under Maryland law, a corporation is
permitted to purchase or redeem shares of its own stock, unless the corporation
would not be able to pay its debts as they become due in the usual course of
business or the corporation's total assets would be less than the sum of the
corporation's total liabilities plus, unless the certificate of incorporation
permit otherwise, the amount that would be needed, if the corporation were to be
dissolved at the time such purchase or redemption, to satisfy the preferential
rights upon dissolution of stockholders whose preferential rights on dissolution
are superior to those whose shares are purchased or redeemed.
DIVIDENDS
Under Texas law, a corporation may not pay a dividend, if after giving
effect to such dividend the corporation would be insolvent or the dividend
exceeds the surplus of the corporation. Maryland law permits the payment of
dividends unless the corporation would not be able to pay its debts as they
become due in the usual course of business or the corporation's total assets
would be less than the sum of the corporation's total liabilities plus, unless
the articles of incorporation permit otherwise, the amount that would be needed,
if the corporation were to be dissolved at the time of payment of such
dividends, to satisfy the preferential rights upon dissolution of stockholders
whose preferential rights on dissolution are superior to those receiving the
dividends.
55
<PAGE>
SHAREHOLDERS/STOCKHOLDERS
INSPECTION RIGHTS
Texas law allows any person who has been a shareholder for at least six
months immediately preceding such shareholder's making a demand, or who holds at
least five percent of all outstanding shares of a corporation, upon written
demand to the corporation to examine at any reasonable time for any proper
purpose the corporation's books and records of account, minutes and share
transfer records, and to make extracts therefrom. Any such demand must state a
"proper purpose" as provided by Texas law. Additionally, Texas law allows any
shareholder to inspect the shareholders' list during usual business hours during
the ten days preceding a shareholders' meeting and during the whole time of the
meeting. Under Maryland law, any stockholder has the right to inspect and copy
the bylaws, minutes of the proceedings of stockholders, the annual statement of
affairs of the corporation and voting trust agreements on file at the
corporation's principal office. In addition, any stockholder or stockholders who
together are, and for at least six months have been, holders of record of at
least five percent of the outstanding stock of any class of the corporation may
inspect and copy during usual business hours the corporation's books of account,
stock ledger or stockholders' list and may require the corporation to produce a
verified statement of affairs.
SPECIAL MEETINGS
Pursuant to the Texas Bylaws, a special meeting of the shareholders of CGX
may be called by the Chief Executive Officer, the Secretary or by the CGX Board,
and must be called by the Chief Executive Officer at the request of the holders
of not less than one-tenth ( 1/10th) of all outstanding shares of CGX entitled
to vote at the meeting. Under the Maryland Bylaws, a special meeting of the
stockholders may be called by the President or by a majority of the AGS Board,
either by vote or in writing, and must be called by the Secretary or Assistant
Secretary upon any written request for a special meeting by the holders of a
majority of all outstanding shares of AGS entitled to vote at the meeting.
Additionally, Maryland law provides that special meetings of the stockholders
may be called by the secretary of a corporation on the written request of
stockholders holding at least twenty-five percent of all votes entitled to be
cast at such meeting; provided, however, that Maryland law also provides that
unless requested by stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted on at any
special meeting of the stockholders held during the preceding twelve months.
ACTION WITHOUT A MEETING
Under Texas law, shareholders have the right to take any action without a
meeting which may be taken at any annual or special meeting provided that a
written consent has been signed by the holders of all the shares entitled to
vote with respect to the action that is the subject of the consent. Under
Maryland law, any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting provided that a unanimous written
consent setting forth the action to be taken is signed by each stockholder
entitled to vote on the matter and filed with the records of stockholders'
meetings and, if applicable, a written waiver of any right to dissent is signed
by each stockholder entitled to notice of the meeting but not entitled to vote
on the matter.
PREEMPTIVE RIGHTS
Shareholders of CGX do not have any preemptive right to acquire additional,
unissued, or treasury shares of CGX, or securities of CGX convertible into or
carrying a right to subscribe to or acquire shares or other securities of CGX.
The Maryland Articles of Incorporation provides that the AGS Board may authorize
the issuance, reissuance or sale of AGS stock to persons as the AGS Board may
see fit and no AGS stockholder shall have any preemptive right to subscribe for
or purchase AGS stock except as such right may be accorded to AGS stockholders
by resolution of the AGS Board. The Maryland Bylaws, which were adopted by
resolution of the AGS Board, provide that all stockholders of AGS have the right
to subscribe for and purchase a portion of any additional shares of stock that
may be issued by AGS equal to the pro rata share of stock then owned by such
stockholder.
56
<PAGE>
RESTRICTIONS ON TRANSFER
There are no restrictions on the transferability of CGX common stock
provided in the Texas Articles of Incorporation or Texas Bylaws. The Maryland
Bylaws provide that should any stockholder desire to sell any of such
stockholder's shares in AGS, such stockholder must first offer to sell such
stock to AGS at its fair book value (as computed by the certified public
accountant for AGS) and if AGS does not accept such offer within sixty days
after receipt, then such stockholder is permitted to sell such stocks to any
other person or persons. Additionally, the Maryland Articles of Incorporation
provides that in the event of the death of any stockholder of AGS, the remaining
stockholders of AGS have the option, for a period of one-hundred twenty days
from the date of such death, to buy from the estate of such deceased stockholder
all of the decedent's shares of stock in AGS at a price to be determined by
three appraisers, one to be chosen by the surviving stockholders, the second to
be chosen by the estate of the deceased and the third to be chosen by the two
first chosen. The purchase price for such stock must be paid in cash within six
months after exercise of the option.
VOTE FOR REORGANIZATIONS
Under the Texas Business Corporation Act, a plan of merger or exchange must
be approved by the holders of at least two-thirds of the outstanding shares of
the corporation entitled to vote thereon and the affirmative vote of the holders
of at least two-thirds of the outstanding shares within each class or series of
shares entitled to vote thereon as a class or service, unless the board of
directors conditions its submission to shareholders of a plan of merger or
exchange by requiring a greater vote. Maryland law also requires that any
merger, consolidation, share exchange or transfer be approved by the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter.
BOARD OF DIRECTORS
NUMBER AND CUMULATIVE VOTING
The Texas Bylaws provide that the number of directors which shall
constitute the entire CGX Board shall be determined from time to time by
resolution of the CGX Board. CGX currently has nine directors who are all
elected yearly at the annual meeting of shareholders. The Maryland Articles of
Incorporation provides that the number of directors which shall constitute the
entire AGS Board shall by a vote of the entire AGS Board be increased to a
number not exceeding fifteen or decreased to a number not less than three and
all AGS Directors are elected at the annual meeting of stockholders of AGS.
The Texas Articles of Incorporation expressly prohibit cumulative voting in
the election of directors. Under Maryland Law, stockholders do not have
cumulative voting rights unless the charter provides otherwise and the Maryland
Articles of Incorporation contains no such provisions.
REMOVAL AND VACANCIES
The Texas Bylaws provide that at any meeting of CGX shareholders at which a
quorum is present and called expressly for the purpose of removing a director, a
director may be removed, with or without cause, by the affirmative vote of the
holders of a majority of the shares then entitled to vote at an election of
directors. The Maryland Articles of Incorporation and Maryland Bylaws provide
that a director may be removed, with or without cause, by the affirmative vote
of the holders of a majority of the shares of outstanding stock then entitled to
vote at an election of directors. The Texas Bylaws provide that vacancies on the
CGX Board may be filled by a majority of the total number of directors then in
office, whether or not a quorum is present. The Maryland Articles of
Incorporation require the affirmative vote of a majority of the remaining
directors, even though less than a quorum, to fill a vacancy on the AGS Board.
Under the Texas Bylaws, any vacancy occurring by reason of an increase in the
number of directors may be filled by the CGX Board for a term continuing only
until the next annual meeting of shareholders and, in no event, shall the CGX
Board fill more than two directorships during the period between any two
successive annual meetings of shareholders. Under the Maryland Articles of
Incorporation, any vacancy on the AGS Board resulting from an increase in the
number of directors will be filled by the affirmative vote of a majority of the
entire AGS Board as constituted before such increase, and the directors so
elected by the AGS Board to
57
<PAGE>
fill such vacancies shall hold office until the next succeeding annual meeting
of stockholders and thereafter until their successors shall be elected and
qualified.
ANTI-TAKEOVER PROVISIONS
SPECIAL VOTING REQUIREMENTS FOR CERTAIN BUSINESS COMBINATIONS
Pursuant to Maryland law, AGS is governed by special procedures that apply
to certain business combinations between a corporation and interested
stockholders. The purpose of such provisions is to protect the corporation and
its stockholders against hostile takeovers by requiring that certain criteria
are satisfied. These criteria include prior approval by the board of directors,
prior approval by a majority or supermajority vote of disinterested stockholders
and requirements that a "fair price" be paid to the disinterested
stockholders. CGX is not subject to any similar provisions.
Maryland law limits the circumstances under which a Maryland corporation
may engage in a "business combination" with an "interested stockholder." An
"interested stockholder" is defined, in essence, as any person owning
beneficially, directly or indirectly, ten percent or more of the outstanding
voting stock of a Maryland corporation. Unless an exemption applies, AGS may not
engage in any business combination with an interested stockholder for a period
of five years after the interested stockholder became an interested stockholder,
and thereafter may not engage in a business combination unless it is recommended
by the AGS Board and approved by the affirmative vote of at least (i) eighty
percent of the votes entitled to be cast by the holders of all outstanding
voting stock of AGS, voting together as a single voting group and (ii)
two-thirds of the votes entitled to be cast by all holders of outstanding shares
of voting stock other than voting stock held by the interested stockholder. The
voting requirements do not apply at any time to business combinations with an
interested stockholder or its affiliates if approved by the board of directors
of the corporation prior to the time the interested stockholder first became an
interested stockholder. Additionally, if the business combination involves the
receipt of consideration by the stockholders in exchange for the corporation's
stock, the voting requirements do not apply if certain "fair price" conditions
are met.
CONTROL SHARE ACQUISITIONS
Maryland law, but not Texas law, provides for the elimination of the voting
rights of shares held by any person who makes a "control share acquisition"
except to the extent that such acquisition is exempt or is approved by at least
two-thirds of all votes entitled to be cast on the matter, excluding shares of
capital stock owned by the acquirer or by officers or directors who are
employees of the corporation whose shares were acquired. A "control share
acquisition" is the direct or indirect acquisition by any person of ownership
of, or the power to direct the exercise of voting power with respect to, shares
of voting stock ("control shares") that would, if aggregated with all other
voting stock owned by such person, entitle such person to exercise voting power
in electing directors within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third; (ii) one-third or more but less than
a majority; or (iii) a majority or more of voting power.
A person who has made or proposes to make a control share acquisition, upon
the satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an acquiring
person statement as permitted by the statute, then, subject to certain
conditions and limitations, the corporation may redeem any or all of the control
shares (except those for which voting rights have previously been approved) for
fair value determined, without regard to voting rights, as of the date of the
last control share acquisition or as of the date of any meeting of stockholders
at which the voting rights of such shares are considered and not approved.
If voting rights for control shares are approved at a stockholders meeting
and the acquirer becomes entitled to vote a majority of the shares entitled to
vote, all other stockholders may exercise appraisal rights.
58
<PAGE>
The fair value of the stock as determined for purposes of such appraisal rights
may not be less than the highest price per share paid in the control share
acquisition, and certain limitations and restrictions otherwise applicable to
the exercise of dissenters' rights do not apply in the context of a control
share acquisition. The control share acquisition statute does not apply to the
Merger. Thus, Maryland law makes it more difficult than Texas law for a change
in control to occur, even though such change in control may be the best
interests of the corporation's stockholders.
LEGAL MATTERS
The validity of the issuance of the shares of CGX common stock offered
hereby will be passed upon for CGX by Winstead Sechrest & Minick P.C., Houston,
Texas. Venable, Baetjer & Howard, LLP, Baltimore, Maryland, is acting as counsel
for AGS in connection with certain legal matters relating to the Merger
Agreement, the Merger and the transactions contemplated thereby.
EXPERTS
The audited consolidated financial statements of CGX included in this
prospectus/proxy statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The audited consolidated financial statements of AGS included in this
prospectus/proxy statement have been audited by Watkins, Meegan, Drury &
Company, L.L.C., independent public accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
AVAILABLE INFORMATION
CGX files annual, quarterly and current reports, proxy statements and other
information with the Commission. You may read and copy any reports, statements
or other information that CGX files at the Commission's public reference room at
450 Fifth Street N.W., Washington, D.C. 20549 or at its regional public
reference rooms in New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the operations and
locations of the public reference rooms. The public filings of CGX are also
available to the public from commercial document retrieval services and at the
Internet World Wide Web site maintained by the Commission at
"http://www.sec.gov." Reports, proxy statements and other information
concerning CGX may also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
CGX has filed a Registration Statement to register with the Commission the
shares of common stock of CGX to be issued in the Merger. This prospectus/proxy
statement is a part of the Registration Statement and constitutes the prospectus
of CGX with respect to the shares of CGX common stock offered hereby and the
proxy statement of AGS with respect to the AGS Meeting. As allowed by the rules
of the Commission, this prospectus/proxy statement does not contain all of the
information that can be found in the Registration Statement or the exhibits to
the Registration Statement.
59
<PAGE>
The Commission allows CGX to "incorporate by reference" information into
this prospectus/proxy statement, which means that CGX can disclose important
business and financial information to you that is not included in or delivered
with this prospectus/proxy statement by referring you to another document filed
separately with the Commission. The information incorporated by reference
becomes part of the prospectus/proxy statement, except for any information
superseded by information contained directly in the prospectus/proxy statement.
The documents set forth below are documents that CGX has previously filed with
the Commission which are incorporated by reference into this prospectus/proxy
statement. These documents contain important business and financial information
about CGX and its financial condition.
1. Annual Report on Form 10-K for the fiscal year ended March 31, 1998;
2. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998;
3. The description of the capital stock of CGX set forth in its Form 8-A
filed with the Commission on January 8, 1997; and
4. Current Reports on Forms 8-K filed July 2, July 9, July 21, July 29,
August 5, August 17, August 26, September 2, 1998, September 21, 1998,
September 28, 1998, October 8, 1998, October 13, 1998, October 23,
1998, and October 28, 1998.
This prospectus/proxy statement also incorporates by reference additional
documents that CGX may file with the Commission between the date of this
prospectus/proxy statement and the date of the AGS Meeting. These include
periodic reports, such as annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K.
Documents incorporated by reference may be obtained as described above and
are also available from CGX without charge, excluding all exhibits unless
specifically incorporated by reference as an exhibit to the prospectus/proxy
statement. You may obtain documents incorporated by reference in the
prospectus/proxy statement by requesting them in writing or by telephone from
CGX at the following address and telephone number:
Consolidated Graphics, Inc.
5858 Westheimer, Suite 200
Houston, Texas 77057
Attention: Corporate Secretary
Telephone: (713) 787-0977
If you would like to request documents from CGX, please do so by
, 1998 to receive them before the AGS Meeting. If you request any
incorporated documents from CGX, CGX will mail them to you by first-class mail
or other equally prompt means within one business day of its receipt of your
request.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Consolidated Graphics, Inc. Unaudited
Pro Forma Combined Financial
Statements
Introduction to Unaudited Pro
Forma Combined Financial
Statements..................... F-2
Unaudited Pro Forma Combined
Balance Sheet.................. F-3
Unaudited Pro Forma Combined
Income Statements.............. F-4
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-6
Consolidated Graphics, Inc. Audited
and Unaudited Historical
Consolidated Financial Statements
Report of Independent Public
Accountants.................... F-8
Consolidated Balance Sheets..... F-9
Consolidated Income
Statements..................... F-10
Consolidated Statements of
Shareholders' Equity........... F-11
Consolidated Statements of Cash
Flows.......................... F-12
Notes to Consolidated Financial
Statements..................... F-13
Automated Graphic Systems, Inc.
Audited and Unaudited Historical
Consolidated Financial Statements
Report of Independent Public
Accountants.................... F-23
Consolidated Balance Sheets..... F-24
Consolidated Statements of
Income......................... F-26
Consolidated Statements of
Shareholders' Equity........... F-27
Consolidated Statements of Cash
Flows.......................... F-28
Notes to Consolidated Financial
Statements..................... F-29
F-1
<PAGE>
CONSOLIDATED GRAPHICS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial information should be
read in conjunction with the consolidated financial statements and notes thereto
of Consolidated Graphics, Inc. and subsidiaries ("CGX") and Automated Graphic
Systems, Inc. and subsidiaries ("AGS"), which are included elsewhere in this
prospectus/proxy statement. The pro forma information is presented in accordance
with the assumptions set forth below and in the accompanying Notes to Unaudited
Pro Forma Combined Financial Statements for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated in accordance with such
assumptions, nor is it necessarily indicative of future operating results or
financial position.
The unaudited pro forma combined balance sheet at June 30, 1998 has been
compiled from the unaudited balance sheets of CGX and AGS, both dated June 30,
1998, and reflects adjustments to give effect to the Merger as if it had
occurred on that date. The unaudited pro forma combined income statements for
the year ended March 31, 1998 and the three-month period ended June 30, 1998
have been prepared from unaudited income statements of CGX and AGS for such
periods and reflects adjustments to give effect to the Merger as if it had
occurred on April 1, 1997. In the case of AGS, the unaudited financial
statements for the periods presented have been conformed to the fiscal periods
of CGX.
F-2
<PAGE>
CONSOLIDATED GRAPHICS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
CGX AGS ADJUSTMENTS COMBINED
---------- --------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ 6,238 $ 593 $-- $ 6,831
Accounts receivable, net........ 65,308 8,398 -- 73,706
Inventories..................... 20,094 1,469 -- 21,563
Prepaid expenses................ 2,873 90 -- 2,963
Deferred income taxes........... -- 119 -- 119
---------- --------- ----------- ----------
Total current assets....... 94,513 10,669 -- 105,182
PROPERTY AND EQUIPMENT, net.......... 172,349 7,457 5,593(c) 185,399
GOODWILL, net........................ 42,961 -- 17,097(d) 60,058
INVESTMENT IN SECURITIES............. -- 2,784 -- 2,784
OTHER ASSETS......................... 1,841 123 -- 1,964
---------- --------- ----------- ----------
$ 311,664 $ 21,033 $22,690 $355,387
========== ========= =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt.......................... $ 2,649 $ 3,952 $-- $ 6,601
Capital lease
obligations -- current........ -- 95 -- 95
Accounts payable................ 20,786 1,319 -- 22,105
Accrued liabilities............. 28,153 1,506 -- 29,659
Income taxes payable............ 3,028 310 -- 3,338
Other current liabilities....... -- 166 -- 166
---------- --------- ----------- ----------
Total current
liabilities............. 54,616 7,348 -- 61,964
LONG-TERM DEBT, net of current
portion............................ 111,176 1,062 16,350(b) 128,588
CAPITAL LEASE OBLIGATIONS............ -- 279 -- 279
DEFERRED INCOME TAXES................ 20,363 447 2,237(c) 23,047
COMMITMENTS AND CONTINGENCIES........ -- -- -- --
SHAREHOLDERS' EQUITY:
Unrealized gains on
investments................... -- 1 (1)(c) --
Common stock.................... 132 604 (604)(e) 135
3(a)
Additional paid-in capital...... 73,302 -- 15,997(a) 89,299
Retained earnings............... 52,075 11,292 (11,292)(e) 52,075
---------- --------- ----------- ----------
Total shareholders'
equity.................. 125,509 11,897 4,103 141,509
---------- --------- ----------- ----------
$ 311,664 $ 21,033 $22,690 $355,387
========== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
F-3
<PAGE>
CONSOLIDATED GRAPHICS, INC.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
CGX AGS ADJUSTMENTS COMBINED
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
SALES................................ $ 231,282 $ 35,098 $-- $ 266,380
COST OF SALES........................ 157,906 23,835 69(a) 181,013
(712)(d)
(85)(e)
---------- --------- ----------- ---------
Gross profit.................... 73,376 11,263 728 85,367
SELLING EXPENSES..................... 22,365 3,660 (67)(e) 25,958
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 17,628 4,606 427(b) 22,411
(250)(e)
---------- --------- ----------- ---------
Operating Income................ 33,383 2,997 618 36,998
INTEREST EXPENSE..................... 3,844 452 772(c) 5,068
INTEREST INCOME...................... 124 -- -- 124
OTHER (INCOME)/EXPENSE............... -- (388) 113(e) (275)
---------- --------- ----------- ---------
Income before income taxes...... 29,663 2,933 (267) 32,329
INCOME TAXES......................... 11,273 1,256 (104)(f) 12,425
---------- --------- ----------- ---------
NET INCOME........................... $ 18,390 $ 1,677 $ (163) $ 19,904
========== ========= =========== =========
BASIC EARNINGS PER SHARE(g).......... $ 1.46 $ 1.54
========== =========
DILUTED EARNINGS PER SHARE(g)........ $ 1.40 $ 1.48
========== =========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-4
<PAGE>
CONSOLIDATED GRAPHICS, INC.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
CGX AGS ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
SALES................................ $ 85,100 $ 9,204 $-- $94,304
COST OF SALES........................ 58,014 6,324 17(a) 64,177
(178)(d)
-- (e)
--------- --------- ----------- ---------
Gross profit.................... 27,086 2,880 161 30,127
SELLING EXPENSES..................... 8,291 998 -- 9,289
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,619 985 107(b) 7,664
(47)(e)
--------- --------- ----------- ---------
Operating income................ 12,176 897 101 13,174
INTEREST EXPENSE..................... 1,484 126 193(c) 1,803
INTEREST INCOME...................... 13 -- -- 13
OTHER (INCOME)/EXPENSE............... -- (82) 27(e) (55)
--------- --------- ----------- ---------
Income before income taxes...... 10,705 853 (119) 11,439
INCOME TAXES......................... 4,175 344 (46)(f) 4,473
--------- --------- ----------- ---------
NET INCOME........................... $ 6,530 $ 509 $ (73) $ 6,966
========= ========= =========== =========
BASIC EARNINGS PER SHARE(g).......... $ 0.50 $ 0.52
========= =========
DILUTED EARNINGS PER SHARE(g)........ $ 0.48 $ 0.50
========= =========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
F-5
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
Pro forma adjustments to the accompanying unaudited pro forma combined
balance sheet reflect the estimated purchase price allocation of the Merger as
if it had occurred on June 30 1998, under the purchase method of accounting,
including:
(a) The issuance of an estimated 322,013 shares of CGX common stock, par
value $.01 per share, at $49.6875 per share (based on the closing
price of CGX common stock on October 26, 1998) for total consideration
of $16,000.
(b) Borrowings of $16,350 to finance the cash portion of the purchase
price, to fund the obligation to pay $1,035 to discharge the stock
appreciation rights and options of AGS and to pay CGX transaction
costs of $350.
(c) Adjustments to record the estimated fair value of property and
equipment and investments acquired and the related deferred income tax
liability.
(d) Goodwill based on the excess of the total consideration paid over the
fair value of assets and liabilities acquired.
(e) The elimination of the historical common stock and retained earnings
of AGS.
2. UNAUDITED PRO FORMA COMBINED INCOME STATEMENT ADJUSTMENTS:
YEAR ENDED MARCH 31, 1998
Pro forma adjustments to the accompanying unaudited pro forma combined
income statement for the year ended March 31, 1998 reflect the income statement
effects of the estimated purchase price allocation of the Merger as if it had
occurred on April 1, 1997, under the purchase method of accounting, including:
(a) Additional depreciation expense based on the fair value of the
property and equipment acquired.
(b) Amortization of additional goodwill based on a forty-year amortization
period.
(c) Additional interest expense on incremental borrowings, less cash and
marketable securities acquired, based on an average interest rate of
6.25%.
(d) Reduced purchase costs of paper, ink and pre-press supplies based on
contractual pricing from CGX vendors versus AGS historical costs.
(e) To eliminate nonoperating and/or nonrecurring income statement items,
including (1) gain on sale of real estate, less related cash bonuses,
(2) ESOP contribution which would not have been incurred after the
Merger, (3) moving expenses to relocate the Ohio facility, and (4)
certain executive salary costs, key man life insurance,
separation-related costs and directors fees which would not have been
incurred after the Merger based on post-Merger management structure
and compensation policies.
(f) Tax effects of the above adjustments based on a 39% effective
corporate tax rate.
(g) The weighted average number of common shares outstanding used in the
calculation of basic and diluted earnings per share reflect the
historical share amounts for CGX of 12,597,510 and 13,112,023 shares,
respectively plus, in each case, 322,013 shares which are estimated to
be issued in the Merger (based on the $49.6875 closing price of CGX
common stock on October 26, 1998).
F-6
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, 1998
Pro forma adjustments to the accompanying unaudited pro forma combined
income statement for the three-month period ended June 30, 1998 reflect the
income statement effects of the estimated purchase price allocation of the
Merger as if it had occurred on April 1, 1997, under the purchase method of
accounting, including:
(a) Additional depreciation expense based on the fair value of the
property and equipment acquired.
(b) Amortization of additional goodwill based on a forty-year amortization
period.
(c) Additional interest expense on incremental borrowings, less cash and
marketable securities acquired, based on an average interest rate of
6.25% per annum.
(d) Reduced purchase costs of paper, ink and pre-press supplies based on
contractual pricing from CGX vendors versus AGS historical costs.
(e) To eliminate nonoperating and/or nonrecurring income statement items,
including certain executive salary costs, key man life insurance,
separation-related costs and directors fees which would not have been
incurred after the Merger based on post-Merger management structure
and compensation policies.
(f) Tax effects of the above adjustments at a 39% effective corporate tax
rate.
(g) The weighted average number of common shares outstanding used in the
calculation of basic and diluted earnings per share reflect the
historical share amounts for CGX of 13,051,965 and 13,493,581 shares,
respectively plus, in each case, 322,013 shares which are estimated to
be issued in the Merger (based on the $49.6875 closing price of CGX
common stock on October 26, 1998).
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Consolidated Graphics, Inc.:
We have audited the accompanying consolidated balance sheets of Consolidated
Graphics, Inc. (a Texas corporation) and subsidiaries as of March 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended March 31, 1998.
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Consolidated Graphics, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 8, 1998
F-8
<PAGE>
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31
JUNE 30, ----------------------
1998 1998 1997
----------- ---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 6,238 $ 5,268 $ 3,636
Accounts receivable, net........ 65,308 51,008 29,347
Inventories..................... 20,094 13,074 8,679
Prepaid expenses................ 2,873 2,129 1,434
----------- ---------- ----------
Total current assets....... 94,513 71,479 43,096
PROPERTY AND EQUIPMENT, net.......... 172,349 135,892 85,643
GOODWILL, net........................ 42,961 28,157 6,085
OTHER ASSETS......................... 1,841 2,117 896
----------- ---------- ----------
$ 311,664 $ 237,645 $ 135,720
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt.......................... $ 2,649 $ 2,438 $ 2,623
Accounts payable................ 20,786 22,276 8,399
Accrued liabilities............. 28,153 18,863 9,927
Income taxes payable............ 3,028 33 67
----------- ---------- ----------
Total current
liabilities............. 54,616 43,610 21,016
LONG-TERM DEBT, net of current
portion............................ 111,176 73,030 39,321
DEFERRED INCOME TAXES................ 20,363 15,673 8,936
COMMITMENTS AND CONTINGENCIES -- -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
20,000,000 shares authorized;
13,288,626, 12,959,932 and
12,450,430 issued and
outstanding................... 132 129 124
Additional paid-in capital...... 73,302 59,658 39,168
Retained earnings............... 52,075 45,545 27,155
----------- ---------- ----------
Total shareholders'
equity.................. 125,509 105,332 66,447
----------- ---------- ----------
$ 311,664 $ 237,645 $ 135,720
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30 YEAR ENDED MARCH 31
-------------------- ---------------------------------
1998 1997 1998 1997 1996
--------- --------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES................................ $ 85,100 $ 50,675 $ 231,282 $ 144,082 $ 85,133
COST OF SALES........................ 58,014 34,745 157,906 100,197 61,237
--------- --------- ---------- ---------- ---------
Gross profit.................... 27,086 15,930 73,376 43,885 23,896
SELLING EXPENSES..................... 8,291 4,931 22,365 14,223 8,532
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,619 3,880 17,628 11,330 6,873
RESTRUCTURING CHARGE................. - - - - 1,500
--------- --------- ---------- ---------- ---------
Operating income................ 12,176 7,119 33,383 18,332 6,991
INTEREST EXPENSE..................... 1,484 905 3,844 2,330 876
INTEREST INCOME...................... (13) (11) (124) (25) (16)
--------- --------- ---------- ---------- ---------
Income before income taxes...... 10,705 6,255 29,663 16,027 6,131
INCOME TAXES......................... 4,175 2,365 11,273 5,927 2,146
--------- --------- ---------- ---------- ---------
NET INCOME........................... $ 6,530 $ 3,860 $ 18,390 $ 10,100 $ 3,985
========= ========= ========== ========== =========
BASIC EARNINGS PER SHARE............. $.50 $.31 $1.46 $.83 $.36
========= ========= ========== ========== =========
DILUTED EARNINGS PER SHARE........... $.48 $.30 $1.40 $.81 $.35
========= ========= ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1995.............. 10,933 $ 109 $ 24,991 $ 13,070 $ 38,170
Common stock
issuance -- acquisition....... 849 8 7,211 - 7,219
Exercise of stock options....... 72 1 501 - 502
Net income...................... - - - 3,985 3,985
------- ------- ---------- --------- ----------
BALANCE, March 31, 1996.............. 11,854 118 32,703 17,055 49,876
Common stock
issuance -- acquisition 356 4 4,130 - 4,134
Exercise of stock options....... 240 2 2,335 - 2,337
Net income...................... - - - 10,100 10,100
------- ------- ---------- --------- ----------
BALANCE, March 31, 1997.............. 12,450 124 39,168 27,155 66,447
Common stock
issuance -- acquisitions...... 330 3 16,559 - 16,562
Exercise of stock options....... 180 2 3,931 - 3,933
Net income...................... - - - 18,390 18,390
------- ------- ---------- --------- ----------
BALANCE, March 31, 1998.............. 12,960 $ 129 $ 59,658 $ 45,545 $ 105,332
Common stock
issuance -- acquisitions...... 262 2 13,075 - 13,077
Exercise of stock options....... 67 1 569 - 570
Net income...................... - - - 6,530 6,530
------- ------- ---------- --------- ----------
BALANCE, June 30, 1998............... 13,289 $ 132 $ 73,302 $ 52,075 $ 125,509
======= ======= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30 YEAR ENDED MARCH 31
------------------------ --------------------------------------
1998 1997 1998 1997 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................... $ 6,530 $ 3,860 $ 18,390 $ 10,100 $ 3,985
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization... 3,573 2,046 10,040 5,814 3,782
Deferred tax provision.......... 1,092 122 3,148 1,029 1,555
Noncash portion of restructuring
charge....................... - - 1,123
Changes in assets and
liabilities, net of effects
of acquisitions --
Accounts receivable....... 1,958 (3,509) (6,242) (2,307) (124)
Inventories............... (1,201) 2,669 2,056 822 (469)
Prepaid expenses.......... (356) 261 (497) (237) (655)
Other assets.............. 490 (341) (931) (173) 85
Accounts payable and
accrued liabilities..... (1,377) 267 3,702 113 (2,136)
Income taxes payable...... 3,063 1,914 322 1,290 (713)
----------- ----------- ------------ ----------- -----------
Net cash provided by
operating
activities........ 13,772 7,289 29,988 16,451 6,433
----------- ----------- ------------ ----------- -----------
INVESTING ACTIVITIES:
Acquisitions of businesses, net of
cash acquired...................... (42,521) (7,633) (42,784) (17,468) (10,181)
Purchases of property and
equipment.......................... (6,054) (3,219) (10,587) (10,196) (6,014)
Proceeds from disposition of
assets............................. 41 948 2,641 741 536
----------- ----------- ------------ ----------- -----------
Net cash used in
investing
activities........ (48,534) (9,904) (50,730) (26,923) (15,659)
----------- ----------- ------------ ----------- -----------
FINANCING ACTIVITIES:
Proceeds from revolving credit
agreement.......................... 106,483 49,865 200,892 73,707 34,420
Payments on revolving credit
agreement.......................... (70,588) (46,813) (174,712) (61,307) (23,120)
Payments on long-term debt........... (665) (671) (5,291) (2,740) (1,197)
Proceeds from exercise of stock
options and other.................. 502 114 1,485 1,362 502
----------- ----------- ------------ ----------- -----------
Net cash provided by
financing
activities........ 35,732 2,495 22,374 11,022 10,605
----------- ----------- ------------ ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 970 (120) 1,632 550 1,379
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 5,268 3,636 3,636 3,086 1,707
----------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 6,238 $ 3,516 $ 5,268 $ 3,636 $ 3,086
=========== =========== ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS:
Consolidated Graphics, Inc. (the "Company"), headquartered in Houston,
Texas, is a leading consolidator in the highly fragmented commercial printing
industry. At March 31, 1998, the Company operated 31 printing companies
nationwide. The Company's printing businesses produce a wide range of
promotional, investor relations and technical materials for a diverse base of
customers, including corporations, mutual fund companies, graphic design firms
and direct mail and catalog retailers. Examples of such promotional material
included annual reports, training manuals and product and capability brochures.
The Company believes that its broad customer base, extensive geographic coverage
of the United States and wide range of printing capabilities and services reduce
the Company's exposure to economic fluctuations that may generally affect
segments of the printing industry or any one geographic area.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION:
ACCOUNTING POLICIES
The accounting policies of the Company reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such accounting policies are described below.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of Consolidated Graphics, Inc., and its wholly
owned subsidiaries. All intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES -- The preparation of the accompanying consolidated
financial statements requires the use of certain estimates and assumptions by
management in determining the Company's assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Because uncertainties with respect to such
estimates and assumptions are inherent in the preparation of financial
statements, actual results could differ from these estimates.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE -- The Company recognizes
revenue upon delivery of each job. Losses, if any, on jobs are recognized at the
earliest date such amount is determinable. The Company derives the majority of
its revenues from sales and services to a broad and diverse group of customers
with no individual customer accounting for more than 10% of the Company's
revenues during the years ended March 31, 1998, 1997 and 1996. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of trade accounts receivable. Accounts receivable in the
accompanying consolidated balance sheets are reflected net of allowance for
doubtful accounts of $1,505 and $1,241 at March 31, 1998 and 1997.
INVENTORIES -- Inventories are valued at the lower of cost or market
utilizing the first-in, first-out method for raw materials and the specific
identification method for work in progress and finished goods. The carrying
values of inventories are set forth below:
MARCH 31
--------------------
1998 1997
--------- ---------
Raw materials........................... $ 4,102 $ 2,735
Work in progress........................ 6,977 4,533
Finished goods.......................... 1,995 1,411
--------- ---------
$ 13,074 $ 8,679
========= =========
GOODWILL -- Goodwill represents the excess of cost over the estimated fair
value of identifiable assets of businesses acquired. Goodwill is stated at cost,
net of accumulated amortization, and is being amortized
F-13
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
over a forty-year life using the straight-line method. Accumulated amortization
of goodwill was $506 and $154 at March 31, 1998 and 1997.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
ACQUISITIONS -- All acquisitions have been accounted for as purchases.
Operations of the businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
The allocation of purchase price to the assets and liabilities acquired is based
on estimates of fair market value. The allocation of purchase price in
connection with certain acquisitions in fiscal 1998 may be revised when
additional information concerning asset and liability valuations is obtained.
RECENT ACCOUNTING PRONOUNCEMENTS -- During 1997 Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," was
issued and requires the presentation of comprehensive income in an entity's
financial statements. Comprehensive income represents all changes in equity of
an entity during the reporting period, including net income and charges directly
to equity that are excluded from net income. Also in 1997 SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," was
issued and provides revised disclosure guidelines for segments of an enterprise
based on a management approach to defining operating segments. Both SFAS No. 130
and No. 131 require compliance for fiscal years beginning after December 15,
1997. In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which is effective
for fiscal years beginning after December 15, 1998. The Company does not expect
the adoption of each of the aforementioned recent accounting pronouncements to
have a material effect on its consolidated financial position or consolidated
results of operations.
OTHER INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION -- The consolidated statements of cash
flows provide information about changes in cash and exclude the effect of
non-cash transactions. Significant non-cash transactions primarily include the
issuance of common stock and the issuance or assumption of debt in connection
with the acquisition of certain printing businesses (see Note 3. Acquisitions).
Additionally, equipment capital expenditures financed by the Company, totaling
$6,286 and $6,835 for the years ended March 31, 1998 and 1997, and the effect of
accounts payable totaling $8,240 as of March 31, 1998, related to the purchase
of certain printing presses, have been eliminated from the accompanying
consolidated statements of cash flows.
The following is a summary of the total cash paid for interest and income
taxes (net of refunds):
YEAR ENDED MARCH 31
-------------------------------
1998 1997 1996
--------- --------- ---------
CASH PAID FOR:
Interest........................... $ 3,482 $ 2,299 $ 876
Income Taxes....................... 7,086 3,287 1,700
F-14
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ACCRUED LIABILITIES -- The significant components of accrued liabilities
were as follows:
MARCH 31
--------------------
1998 1997
--------- ---------
Compensation and benefits............... $ 5,839 $ 3,362
Taxes payable........................... 1,596 1,266
Other................................... 11,428 5,299
--------- ---------
$ 18,863 $ 9,927
========= =========
STOCK SPLIT -- The accompanying financial statements and notes thereto
reflect the effect of a two-for-one stock split paid in the form of a stock
dividend in January 1997.
EARNINGS PER SHARE -- Effective December 15, 1997, the Company adopted the
provisions of SFAS No. 128, "Earnings Per Share," which replaced the
presentation of primary and fully-diluted earnings per share with a presentation
of basic and diluted earnings per share. Basic earnings per share are calculated
by dividing net income by the weighted average number of common shares
outstanding. For the years ended March 31, 1998, 1997 and 1996, the weighted
average number of common shares outstanding were 12,597,510, 12,165,985 and
11,068,360. Diluted earnings per share reflect net income divided by the
weighted average number of common shares and stock options outstanding. For the
years ended March 31, 1998, 1997 and 1996, the diluted weighted average number
of common shares and stock options outstanding were 13,112,023, 12,410,994 and
11,267,764.
RELATED PARTY TRANSACTIONS -- The Company leases, under terms it believes
are comparable to market rates, real estate from certain individuals who
formerly owned an acquired business and are now employed by the Company.
RESTRUCTURING CHARGE -- During fiscal 1996 the Company merged the
operations of two of its Houston subsidiaries. The Company recorded a
restructuring charge of $1,500 ($975 after-tax), which included $377 of direct
and incremental costs associated with the merger and certain pre-existing
contractual obligations, with the remainder recorded as an impairment of
inventory.
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- Financial
instruments which potentially subject the Company to concentrations of credit
risk are primarily cash and cash equivalents and trade receivables. It is the
Company's practice to place its cash and cash equivalents in high-quality
financial institutions. SFAS No. 107, "Disclosures about Fair Values of
Financial Instruments," and SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments," require
disclosure of the fair value of all recognized and unrecognized financial
instruments for which it is practicable to estimate fair value. The Company
believes the fair value of its financial instruments, including its floating
rate revolving credit agreement and other long-term debt, is the same as the
notional value in all material respects.
Certain reclassifications have been made to fiscal 1997 amounts to conform
to the current year presentation.
F-15
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. ACQUISITIONS
The Company completed the following acquisitions in fiscal 1998:
COMPANY PRIMARY MARKET DATE
- ----------------------------- ------------------------------ ---------------
Tucker Printers Rochester, New York April 1997
The Etheridge Company Grand Rapids, Michigan July 1997
Georges and Shapiro Sacramento, California August 1997
Austin Printing Atlanta, Georgia September 1997
Geyer Printing Pittsburgh, Pennsylvania October 1997
Superior Colour Graphics Kalamazoo, Michigan October 1997
The Otto Companies Springfield, Massachusetts October 1997
Walnut Circle Press Greensboro, North Carolina November 1997
Columbia Color Los Angeles, California January 1998
StorterChilds Printing Gainesville, Florida January 1998
Heath Printers Seattle, Washington January 1998
Fittje Bros. Printing Colorado Springs, Colorado February 1998
Courier Printing Nashville, Tennessee March 1998
To complete the aforementioned acquisitions, in the aggregate, the Company
issued 317,713 shares of its common stock, paid cash of $42,784 and assumed debt
of $6,349.
During fiscal 1997, the Company acquired six printing businesses. To
complete these acquisitions, in the aggregate, the Company issued 355,560 shares
of its common stock, paid cash of $17,468 and assumed or issued debt of $4,123.
During fiscal 1996, the Company acquired five printing businesses. To
complete these acquisitions, in the aggregate, the Company issued 849,316 shares
of its common stock, paid cash of $10,181 and assumed or issued debt of $1,143.
The following table sets forth pro forma information assuming that for the
year ended March 31, 1998, the acquisitions in fiscal 1998 were completed on
April 1, 1997, and for the year ended March 31, 1997, each of the acquisitions
in fiscal 1997 and 1998 occurred on April 1, 1996.
YEAR ENDED MARCH 31
----------------------
1998 1997
---------- ----------
Sales................................... $ 286,378 $ 269,302
Net income available to common
shareholders.......................... 21,545 18,221
Diluted earnings per share of common
stock................................. 1.61 1.42
The preceding pro forma financial information does not purport to be
indicative of the Company's consolidated financial position or consolidated
results of operations that would have occurred had the transactions been
completed at the beginning of the periods presented, nor does such pro forma
information purport to indicate the Company's consolidated results of operations
at any future date or for any future period. Certain of the Company's
acquisitions involve contingent consideration typically payable only in the
event that the financial results of an acquired business improve by an equal
amount or more after the acquisition; accordingly, such contingent consideration
has been excluded from the preceding pro forma financial information.
F-16
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, net of accumulated depreciation.
The cost of major renewals and betterments is capitalized; repairs and
maintenance costs are expensed when incurred. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts, with any resulting gain or loss reflected in income.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the various classes of assets.
The following is a summary of the Company's property and equipment and
their estimated useful lives:
MARCH 31
--------------------- ESTIMATED
DESCRIPTION 1998 1997 LIFE IN YEARS
- ------------------------------------- ---------- --------- -------------
Land................................. $ 3,990 $ 4,213 -
Buildings and leasehold
improvements....................... 22,782 15,485 15-40
Printing presses and equipment....... 123,071 76,146 7-20
Computer equipment and software...... 6,169 4,077 2-5
Furniture, fixtures and other........ 4,181 3,163 5-7
---------- ---------
160,193 103,084
Less accumulated depreciation and
amortization....................... (24,301) (17,441)
---------- ---------
$ 135,892 $ 85,643
========== =========
5. LONG-TERM DEBT:
The following is a summary of the Company's long-term debt instruments:
MARCH 31
--------------------
1998 1997
--------- ---------
Revolving credit agreement........... $ 54,881 $ 28,700
Term equipment notes................. 12,997 9,060
Other................................ 7,590 4,184
--------- ---------
75,468 41,944
Less current (2,438) (2,623)
portion..........
--------- ---------
$ 73,030 $ 39,321
========= =========
In June 1997 the Company entered into a $100 million revolving credit
agreement (the "Credit Agreement") with a six-member banking group. The Credit
Agreement matures on May 31, 2000, at which time, all amounts outstanding
thereunder are due. Borrowings outstanding under the Credit Agreement are
unsecured and accrue interest, at the Company's option, at (1) the London
Interbank Offered Rate (LIBOR) plus .50% to 1.50% based upon the Company's Debt
to Pro Forma EBITDA ratio as defined, redetermined quarterly, or (2) an
alternate base rate based upon the bank's prime lending rate or Federal Funds
effective rate. The Credit Agreement also provides for a commitment fee on
available but unused amounts ranging from .10% to .35% per annum. On March 31,
1998, outstanding borrowings under the Credit Agreement were subject to an
average interest rate of 6.25% per annum.
The covenants contained in the Credit Agreement, among other things, limit
the Company's ability to (i) incur secured indebtedness or pledge assets as
collateral in excess of certain levels, (ii) merge, consolidate with or acquire
other companies where the total consideration paid is above certain levels,
(iii) change its primary business, (iv) pay dividends above certain levels, (v)
dispose of assets outside the normal course of business in excess of 10% of the
Company's total tangible assets, and (vi) make capital expenditures (exclusive
of expenditures related to business acquisitions) in excess of 300% of
depreciation.
F-17
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company must also meet certain financial tests defined in the Credit
Agreement, including maintaining a defined Minimum Net Worth and achieving
specific ratios of Debt to Capitalization, Debt to Pro Forma EBITDA and Fixed
Charge Coverage.
The term equipment notes consist of (i) term loans payable to certain
financial institutions, bearing interest at 8.5% to 9.4% and maturing at various
times through 2003, and (ii) term notes payable pursuant to a printing press
purchase and financing agreement between the Company and Komori America
Corporation (the "Komori Agreement"). The notes payable under the Komori
Agreement provide for fixed monthly principal and interest payments through 2007
at an average interest rate of 8.1% and are secured by the purchased presses.
The Company is not subject to any significant financial covenants or
restrictions in connection with these obligations.
The Company's remaining debt obligations generally consist of mortgages,
capital leases, promissory notes, an industrial revenue bond and two $5 million
auxiliary revolving credit agreements, some of which contain financial covenants
and restrictions. The most significant of these place certain restrictions on
future borrowings and acquisitions above specified levels. The Company believes
these restrictions do not adversely affect its acquisition or operating
strategies.
The principal payment requirements by fiscal year under the Company's debt
agreements are $2,438 in 1999, $61,536 in 2000, $1,550 in 2001, $1,540 in 2002,
$1,358 in 2003 and $7,046 thereafter.
6. INCOME TAXES:
The provision for income taxes is composed of the following:
YEAR ENDED MARCH 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Current.............................. $ 7,144 $ 4,898 $ 591
Deferred............................. 4,129 1,029 1,555
--------- --------- ---------
$ 11,273 $ 5,927 $ 2,146
========= ========= =========
A reconciliation of the statutory federal income tax rate to the effective
tax rate follows:
YEAR ENDED MARCH 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Federal income tax, statutory rate... 34.0% 34.0% 34.0%
State and other...................... 4.0 3.0 1.0
--------- --------- ---------
Income tax, effective rate........... 38.0% 37.0% 35.0%
========= ========= =========
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The components of the net
deferred income tax liability are as follows:
MARCH 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Property and equipment............... $ 17,952 $ 10,566 $ 6,421
Other................................ (2,279) (1,630) (1,241)
--------- --------- ---------
Net deferred income tax liability.... $ 15,673 $ 8,936 $ 5,180
========= ========= =========
Due to a tax benefit resulting from the exercise of employee stock options
(see Note 8 - Capital Stock and Stock Options) in fiscal 1998 and 1997, the
Company is expecting refunds from federal and certain
F-18
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
state taxing authorities of approximately $2,090, which has been reflected in
accounts receivable as of March 31, 1998.
7. COMMITMENTS AND CONTINGENCIES:
Operating lease commitments for facilities and equipment require fiscal
year minimum annual payments of $2,684 for 1999, $2,319 for 2000, $2,042 for
2001, $1,829 for 2002, $1,089 for 2003 and $12,971 thereafter. Total rent
expense was $2,729, $1,128 and $414 for the years ended March 31, 1998, 1997 and
1996.
Subsequent to March 31, 1998, the Company entered into a commitment to
purchase 12 new printing presses for approximately $19,000 in the aggregate, net
of trade-in allowances, pursuant to the Komori Agreement (See Note 5. Long-Term
Debt). The Company expects that the installation of such presses will be
completed during fiscal 1999.
In connection with certain acquisitions, the Company has agreed to issue
additional shares of its common stock or make additional cash payments
contingent upon the acquired printing businesses achieving certain operating
profit goals. Pursuant thereto, the Company issued 13,334 shares of its common
stock and paid $350 during fiscal 1998. At March 31, 1998, the Company was
contingently obligated through 2003 to issue up to a total of 110,421 shares of
its common stock and make additional cash payments of up to $4,600 for all
periods in the aggregate.
From time to time, the Company is subject to legal proceedings and claims
that arise in the ordinary course of its business. Currently, there are no legal
proceedings or claims pending against the Company that management believes will
have a material adverse effect upon the Company's consolidated financial
position or consolidated results of operations.
8. STOCK OPTIONS:
Employees of the Company and certain nonemployee members of the Company's
Board of Directors have been or may be granted rights to purchase shares of
common stock of the Company pursuant to the Consolidated Graphics, Inc.
Long-term Incentive Plan (the "Plan"). Options granted pursuant to the Plan
may either be incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or non-qualified stock options.
Options granted under the Plan are at a price not less than the market price of
the stock at the date of grant. The vesting period for options granted under the
Plan is generally five years, except for certain options granted to employees in
connection with the Company's initital public offering in June 1994, all of
which are currently exercisable and expire on June 9, 2004. At March 31, 1998, a
total of 1,432,490 shares were reserved for issuance pursuant to the Plan, of
which 623,442 shares were reserved for options which had not been granted.
The Company accounts for the Plan under the provisions and related
interpretations of APB No. 25, "Accounting for Stock Issued to Employees." No
compensation expense or liability is recognized for such options in the
accompanying financial statements since all options were granted at the fair
market value of the stock at the date of grant.
F-19
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth option transactions under the Plan:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31
------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at April 1............... 794,350 $ 9.91 571,800 $ 6.05 410,000 $5.71
Granted......................... 257,866 41.70 502,000 12.29 269,500 6.62
Exercised....................... (180,460) 8.59 (239,750) 5.98 (72,300) 5.69
Forfeited....................... (62,908) 26.10 (39,700) 8.04 (35,400) 7.31
---------- ---------- ----------
Outstanding at March 31.............. 808,848 19.10 794,350 9.91 571,800 6.05
========== ========== ==========
Shares exercisable at March 31....... 210,590 $ 9.20 233,865 $ 8.52 322,944 $5.83
========== ========== ==========
</TABLE>
Had the Company used the fair value-based method of accounting for the Plan
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," and
charged compensation expense against income over the vesting period based on the
fair value of options at the date of grant, net income and diluted earnings per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31
-----------------------------------------
1998 1997
------------------- ------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------- ------- -------- ------
<S> <C> <C> <C> <C>
Net income........................... $ 18,390 $17,444 $ 10,100 $9,431
Diluted earnings per share........... $ 1.40 $ 1.34 $ .81 $ .77
</TABLE>
The pro forma compensation expense may not be representative of future
amounts because options vest over several years and additional options may be
granted in future years.
The weighted-average grant date fair value of options granted during 1998
and 1997 was $21.17 and $7.40, respectively. The weighted-average grant date
fair value of options was determined by utilizing the Black-Scholes
option-pricing model with the following key assumptions:
1998 1997
--------- ---------
Dividend yield....................... 0% 0%
Expected volatility.................. 50.7% 64.5%
Risk-free interest rate.............. 6.1% 6.3%
Expected life........................ 5.0 yrs 5.0yrs.
The Black-Scholes model used by the Company to calculate the fair value of
options granted, as well as other currently accepted option valuation models,
were developed to estimate the fair value of freely tradeable, fully
transferable options without vesting and/or trading restrictions, which
significantly differ from the provisions associated with the Company's stock
option awards. These models also require highly subjective assumptions,
including future stock price volatility and expected time until exercise, which
greatly affect the calculated values. Accordingly, management does not believe
this model provides a reliable single measure of the fair value of the Company's
stock option awards.
F-20
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. UNAUDITED QUARTERLY FINANCIAL DATA:
The following table contains selected quarterly financial data from the
consolidated income statements for each quarter of fiscal 1998 and 1997. The
Company believes this information reflects all normal recurring adjustments
necessary for a fair presentation of the information for the periods presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 1998:
Sales.............................. $ 66,267 $ 60,977 $ 53,363 $ 50,675
Gross profit....................... 21,217 19,351 16,878 15,930
Net income......................... 5,387 4,868 4,275 3,860
Basic earnings per share........... .42 .38 .34 .31
Diluted earnings per share......... .41 .37 .33 .30
FISCAL 1997:
Sales.............................. $ 43,187 $ 38,186 $ 34,451 $ 28,258
Gross profit....................... 13,411 11,795 10,587 8,092
Net income......................... 3,203 2,792 2,432 1,673
Basic earnings per share........... .26 .23 .20 .14
Diluted earnings per share......... .25 .22 .20 .14
Earnings per share are computed independently for each of the quarters
presented; therefore, the sum of the quarterly earnings per share may not equal
annual earnings per share.
10. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim consolidated financial statements as of June 30, 1998, and for
the three months then ended, are unaudited, and certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the accompanying unaudited
interim consolidated financial statements have been included. Operating results
for the interim period are not necessarily indicative of future operating
results.
For the three months ended June 30, 1998 and 1997, the basic weighted
average shares outstanding were 13,051,965 and 12,454,675. For the three months
ended June 30, 1998 and 1997, the diluted weighted average number of common
shares and stock options outstanding were 13,493,581 and 12,949,018.
For the three months ended June 30, 1998 and 1997, cash paid for interest
was $1,259 and $800. Additionally, cash paid (received), for taxes, net of
refunds, for the three months ended June 30, 1998 and 1997 was ($1,780) and
$208. CGX received a federal tax refund of $1,800 during the three months ended
June 30, 1998, which pertained to a tax benefit resulting from the exercise of
employee stock options in fiscal 1998 and 1997.
Additionally, equipment capital expenditures financed by CGX, totaling
$3,050 for the three months ended June 30, 1998, and the effect of accounts
payable totaling $3,306 as of June 30, 1998, related to the purchase of certain
printing presses, have been eliminated from the accompanying unaudited interim
consolidated statements of cash flows.
F-21
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED)
CGX completed the acquisition of the following printing businesses during
the three months ended June 30, 1998:
COMPANY PRIMARY MARKET DATE
Tursack, Inc.................... Philadelphia, Pennsylvania April 1998
Image Systems................... Milwaukee, Wisconsin May 1998
Printing, Inc................... Wichita, Kansas June 1998
Graphic Communications.......... San Diego, California June 1998
Wetzel Brothers................. Milwaukee, Wisconsin June 1998
To complete the aforementioned acquisitions, in the aggregate, CGX paid
cash of $42,521 and issued 248,210 shares of its common stock valued at $12,962.
Between June 30, and September 30, 1998, CGX completed the acquisition of
six printing businesses and as of September 30, 1998 had signed nonbinding
letters of intent to acquire seven additional companies.
On August 4, 1998, CGX increased the borrowing capacity available under its
$100 million revolving credit facility to $200 million and extended the maturity
date from May 31, 2000 to July 31, 2001. Borrowings outstanding under the credit
facility are unsecured and accrue interest at a variable rate (an average of
6.3% per annum on June 30, 1998).
Effective August 13, 1998, following shareholder approval, CGX amended its
Amended and Restated Articles of Incorporation to increase the number of its
authorized shares of common stock from 20,000,000 to 100,000,000.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Automated Graphic Systems, Inc.
White Plains, Maryland
We have audited the accompanying consolidated balance sheet of Automated
Graphic Systems, Inc. and its subsidiaries as of October 31, 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the year then ended. 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly in all material respects, the consolidated financial position of
Automated Graphic Systems, Inc. and its subsidiaries as of October 31, 1997, and
the consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
WATKINS, MEEGAN, DRURY & COMPANY, L.L.C.
Bethesda, Maryland
August 24, 1998
F-23
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OCTOBER 31,
JULY 31, -----------------------
1998 1997 1996
----------- --------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents.......... $ 584 $ 2,042 $ 570
Receivables........................ 7,913 8,403 7,584
Inventory.......................... 1,653 1,393 1,576
Prepaid Expenses................... 80 175 413
Deferred Income Taxes.............. 88 88 --
----------- --------- -----------
Total Current Assets.......... 10,318 12,101 10,143
PROPERTY AND EQUIPMENT
Land............................... -- -- 325
Building........................... -- -- 1,798
Machinery and Equipment............ 15,225 14,246 12,262
Leasehold Improvements............. 748 779 706
Furniture and Fixtures............. 173 162 147
Property Held Under Capital
Leases.......................... 310 310 130
----------- --------- -----------
16,456 15,497 15,368
Less Accumulated Depreciation...... (9,178) (7,925) (6,729)
----------- --------- -----------
Total Property and Equipment,
Net........................ 7,278 7,572 8,639
OTHER ASSETS
Investments in Securities.......... 2,957 3,092 --
Deposits........................... 71 192 41
Cash Surrender Value of Life
Insurance....................... 70 70 70
Other Receivables.................. 187 36 --
Organization Costs, Start-Up Costs,
and Loan Fees, Net of $47, $41
and $38 Amortization,
Respectively.................... 6 13 16
----------- --------- -----------
Total Other Assets.............. 3,291 3,403 127
----------- --------- -----------
TOTAL ASSETS......................... $20,887 $ 23,076 $18,909
=========== ========= ===========
The Accompanying Notes Are An Integral Part Of These Consolidated Financial
Statements
F-24
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OCTOBER 31,
JULY 31, -----------------------
1998 1997 1996
----------- --------- -----------
(UNAUDITED) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cash Overdraft..................... $-- $ 174 $--
Notes Payable, Current Portion..... 3,952 657 637
Capital Lease Obligations, Current
Portion......................... 84 56 1
Accounts Payable................... 1,781 2,200 1,388
Accrued Liabilities................ 1,330 2,549 1,588
Income Taxes Payable............... (41) 230 22
Unearned Income.................... 64 299 190
----------- --------- -----------
Total Current Liabilities..... 7,170 6,165 3,826
LONG-TERM DEBT
Notes Payable, Less Current
Portion......................... 1,128 4,810 5,465
Capital Lease Obligations,
Less Current Portion............ 145 213 --
----------- --------- -----------
Total Long-Term Debt.......... 1,273 5,023 5,465
DEFERRED INCOME TAXES................ 438 438 143
----------- --------- -----------
Total Liabilities............. 8,881 11,626 9,434
COMMITMENTS AND CONTINGENCIES........ -- -- --
SHAREHOLDERS' EQUITY
Common Stock -- No Par Value;
20,000 Shares Authorized,
11,705, 12,442 and
12,416 Shares Issued and
Outstanding, Respectively....... 604 534 502
Retained Earnings.................. 11,400 10,915 8,973
Unrealized Holding Gains on
Investments..................... 2 1 --
----------- --------- -----------
Total Shareholders' Equity.... 12,006 11,450 9,475
----------- --------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................. $20,887 $ 23,076 $18,909
=========== ========= ===========
The Accompanying Notes Are An Integral Part Of These Consolidated Financial
Statements
F-25
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31 YEAR ENDED OCTOBER 31,
-------------------- ---------------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales............................ $ 27,212 $ 25,550 $ 34,698 $31,812 $29,361
Cost of Sales........................ 16,274 15,136 21,033 20,219 18,117
--------- --------- --------- ----------- -----------
Gross Profit on Sales................ 10,938 10,414 13,665 11,593 11,244
Operating Expenses
Administrative and General...... 3,177 4,161 5,300 3,983 4,455
Selling......................... 2,803 2,582 3,561 3,201 2,853
Production Planning............. 1,030 926 1,433 1,138 1,097
Delivery........................ 824 808 1,090 1,036 897
--------- --------- --------- ----------- -----------
7,834 8,477 11,384 9,358 9,302
--------- --------- --------- ----------- -----------
Operating Income..................... 3,104 1,937 2,281 2,235 1,942
Other Income (Expense)............... (44) 1,534 1,762 292 429
Interest Expense..................... 351 368 453 415 273
Moving Expense....................... -- -- 414 -- --
--------- --------- --------- ----------- -----------
Income Before Income Taxes........... 2,709 3,103 3,176 2,112 2,098
Provision for Income Taxes........... 1,025 1,114 1,234 754 809
--------- --------- --------- ----------- -----------
NET INCOME........................... $ 1,684 $ 1,989 $ 1,942 $ 1,358 $ 1,289
========= ========= ========= =========== ===========
Earnings Per Share................... $ 138.88 $ 160.01 $ 156.23 $108.35 $102.41
========= ========= ========= =========== ===========
Weighted Average Common Shares
Outstanding........................ 12,126 12,433 12,429 12,533 12,589
========= ========= ========= =========== ===========
</TABLE>
The Accompanying Notes Are An Integral Part Of These Consolidated Financial
Statements
F-26
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED JULY 31, 1998 (UNAUDITED)
OCTOBER 31, 1997 (AUDITED), 1996 (UNAUDITED) AND 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
------------------ RETAINED HOLDING GAINS
SHARES AMOUNT EARNINGS ON INVESTMENTS
------- ------- --------- --------------
<S> <C> <C> <C> <C>
Balance November 1, 1994............. 12,530 $ 326 $ 6,663 --$
Net Income........................... -- -- 1,289 --
Sale of Stock........................ 120 145 -- --
------- ------- --------- --------------
Balance, October 31, 1995............ 12,650 471 7,952 --
Net Income........................... -- -- 1,358 --
Sale of Stock........................ 26 31 -- --
Purchase and Retirement of Common
Stock.............................. (260) -- (337) --
------- ------- --------- --------------
Balance, October 31, 1996............ 12,416 502 8,973 --
Net Income........................... -- -- 1,942 --
Sale of Stock........................ 26 32 -- --
Net Change in Unrealized Holding
Gains.............................. -- -- -- 1
------- ------- --------- --------------
Balance, October 31, 1997............ 12,442 534 10,915 1
Net Income........................... -- -- 1,684 --
Sale of Stock........................ 52 70 -- --
Purchase and Retirement of Common
Stock.............................. (789) -- (1,199) --
Net Change in Unrealized Holding
Gains.............................. -- -- -- 1
------- ------- --------- --------------
Balance, July 31, 1998............... 11,705 $ 604 $ 11,400 $ 2
======= ======= ========= ==============
</TABLE>
The Accompanying Notes Are An Integral Part Of These Consolidated Financial
Statements
F-27
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31, YEAR ENDED OCTOBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income....................... $ 1,684 $ 1,989 $ 1,942 $ 1,358 $ 1,289
Adjustment to Reconcile Net
Income to Net Cash Provided by
Operating Activities
Depreciation and
Amortization.............. 1,260 1,248 1,682 1,523 1,157
Bad Debt Expense............ -- -- 175 64 55
Gain on Sale of Property and
Equipment................. -- (1,310) (1,336) (103) --
Noncash Employee Benefit.... -- -- 8 -- --
Deferred Income Taxes....... -- -- 208 206 48
Change in
Receivables................. 339 (212) (1,031) (778) (1,565)
Inventory................... (261) 189 183 207 (757)
Prepaid Expenses............ 95 314 239 (257) (29)
Deposits.................... 122 (1) (152) 36 171
Cash Surrender Value of Life
Insurance................. -- -- -- (2) --
Accounts Payable............ (420) (45) 813 (2) 182
Accrued Liabilities......... (1,218) 113 960 (1,119) 128
Income Taxes Payable........ (271) 475 208 (261) 159
Unearned Income............. (235) 371 109 (114) 39
--------- --------- --------- --------- ---------
Net Cash Provided by Operating
Activities..................... 1,095 3,131 4,008 758 877
CASH FLOWS FROM INVESTING ACTIVITIES
Net Proceeds from Sale of
Property and Equipment......... -- 3,330 3,187 163 28
Purchase of Property and
Equipment...................... (959) (1,333) (2,147) (3,302) (2,823)
Purchase of Securities........... 135 (3,327) (3,090) -- --
Payment of Selling Expenses...... -- (174) -- -- --
--------- --------- --------- --------- ---------
Net Cash Used In Investing
Activities..................... (824) (1,504) (2,050) (3,139) (2,795)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Cash Overdraft..... (174) -- 174 -- --
Proceeds from Issuance of Notes
Payable........................ -- -- -- 2,510 2,019
Payments on Note Payable......... (386) (493) (635) (560) (418)
Loan Fees Paid................... -- -- (17) (16) --
Principal Payments Under Capital
Lease Obligations.............. (40) (1) (40) (2) (13)
Proceeds from Issuance of Common
Stock.......................... 70 31 32 31 144
Purchase of Treasury Stock....... (1,199) -- -- -- --
--------- --------- --------- --------- ---------
Net Cash Provided by (Used in)
Financing Activities............... (1,729) (463) (486) 1,963 1,732
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (1,458) 1,164 1,472 (418) (187)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................ 2,042 570 570 988 1,175
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS END OF
YEAR............................... $ 584 $ 1,734 $ 2,042 $ 570 $ 988
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS
Cash Paid During The Year For
Interest....................... $ 351 $ 368 $ (455) $ (413) $ (197)
Income Taxes..................... 1,025 1,114 (574) (1,073) (810)
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Repurchased 260 Shares of
Automated Graphic Systems, Inc.
Stock and Issued Notes
Payable........................ $ 301
=========
Purchased Equipment Through
Issuance Of Capital Lease
Obligations.................... $ 309
=========
</TABLE>
The Accompanying Notes Are An Integral Part Of These Consolidated Financial
Statements
F-28
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1997 (AUDITED),
1996 (UNAUDITED), AND 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Automated Graphic Systems, Inc. (the Company), is a printing company that
provides a complete range of services to its customers including: design,
database management, consulting, typesetting, desktop publishing, CD-ROM
production, electronic, and conventional prepress, printing, quick copying,
binding, and mailing. With locations in Macedonia, Ohio, White Plains, Maryland,
and Washington, D.C., the Company serves Ohio and the Washington, D.C.
metropolitan areas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Automated
Graphic Systems, Inc., and its wholly owned subsidiaries Automated Graphic
Imaging, Inc., and Automated Graphic Systems -- Ohio, Inc. Intercompany
transactions and balances have been eliminated in the consolidation.
RECOGNITION OF INCOME
Income from jobs in process at year end is recorded using the
percentage-of-completion method of accounting based upon standard billing rates
for costs incurred. This amount may be further adjusted for any known
write-ups/write-downs on specific jobs. Unearned income represents cash received
from customers in advance for work not yet performed.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents. These may
include cash, money market funds, and short-term investments in commercial
paper.
INVENTORY
Inventories of materials and supplies are valued at cost using the
"first-in, first-out" basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided based
on the estimated average useful lives of the assets. Accelerated methods have
been adopted to compute depreciation on certain shop machinery, and the
straight-line method of depreciation is used for all other assets. Improvements
to leased premises are amortized over the estimated useful life of the
improvement. Assets held under capital lease obligations are amortized over
their estimated useful lives and included in total depreciation expense
annually.
Maintenance and repairs are charged to earnings as incurred. Depreciation
expense for the years ended October 31, 1997, 1996, and 1995 was $1,678, $1,520
and $1,154, respectively.
INVESTMENTS IN SECURITIES
Management determines an appropriate classification of securities at the
time of purchase. If management has the intent and ability at the time of
purchase to hold debt securities until maturity or on a long-term basis, they
are classified as long-term investments and carried at amortized historical
cost.
Securities to be held for indefinite periods of time and not intended to be
held to maturity or on a long-term basis are classified as available for sale
and carried at fair value. Securities held for indefinite periods of time
include securities that management intends to use as part of its asset and
liability management
F-29
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
strategy. They may be sold in response to changes in interest rates, resultant
prepayment risk and other factors related to interest rate and resultant
pre-payment risk changes.
Realized gains and losses on dispositions are based on the net proceeds and
the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on marketable securities
available for sale are based on the difference between book value and fair value
of each security. These gains and losses are credited or charged to retained
earnings whereas realized gains and losses flow through the Company's
operations.
ORGANIZATION COSTS AND START-UP COSTS
Organization costs and start-up costs are amortized using the straight-line
method over a period of five years.
INCOME TAXES
Income taxes on pretax accounting income are provided at rates in effect
under existing tax law. The provision for income taxes charged against earnings
relates to all items of revenue and expense recognized for financial accounting
purposes. The actual current tax liability may be different than the charge
against earnings due to the effect of timing differences between financial and
tax accounting, resulting in deferred income taxes.
The principle sources of deferred income taxes represent differences in
depreciation due to different depreciation methods for financial and tax
purposes and timing differences of accrued vacation, differing methods for
recording bad debt expense, and net operating loss carryforwards of
subsidiaries.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was $157 in
1997, $264 in 1996, and $115 in 1995.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise indicated, the fair values of all reported assets and
liabilities which represent financial instruments (none of which are held for
trading purposes) approximate the carrying values of such amounts.
CONSIDERATION OF CREDIT RISK
The Company maintains cash in bank deposit accounts at local financial
institutions. Cash and cash equivalents are invested in short-term liquid
investments. The balances, at times, may exceed federally insured limits. At
October 31, 1997, the Companies exceeded insured limits by approximately $1,202.
Credit risk associated with receivables is limited due to the large number of
customers comprising the Company's customer base.
F-30
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 -- RECEIVABLES
Receivables consist of:
OCTOBER 31,
--------------------
1997 1996
--------- ---------
Trade:
Billed.......................... $ 6,600 $ 5,880
Unbilled........................ 1,846 1,706
Other................................ 189 72
--------- ---------
8,635 7,658
Less: Allowance for Doubtful
Accounts....................... 232 74
--------- ---------
$ 8,403 $ 7,584
========= =========
Bad debt expense was $175 in 1997, $64 in 1996, and $55 in 1995.
NOTE 3 -- INVENTORY
Inventory consists of:
OCTOBER 31,
--------------------
1997 1996
--------- ---------
Materials............................ $ 1,102 $ 1,275
Supplies............................. 291 301
--------- ---------
$ 1,393 $ 1,576
========= =========
NOTE 4 -- INVESTMENTS IN SECURITIES
Following are the market values and original cost of securities classified
as available for sale at October 31, 1997:
UNREALIZED
HOLDING
MARKET COST GAIN (LOSS)
--------- --------- ------------
Equity Securities.................... $ 140 $ 138 $ 2
U.S. Treasury Bills:
Maturing Within One Year........ 502 502 --
Maturing After One Year Through
Five Years.................... 476 476 --
State and Municipal Obligations:
Maturing Within One Year........ 81 81 --
Maturing After One Year Through
Five Years.................... 1,687 1,688 (1)
Maturing After Five Years
Through Ten Years............. 159 159 --
Maturing After Ten Years........ 47 47 --
--------- --------- ---
$ 3,092 $ 3,091 $ 1
========= ========= ===
Debt securities are grouped together by years to maturity. All have been
classified by management as available for sale. At October 31, 1997, money
market and mutual funds of $679 are considered to be cash and cash equivalents.
F-31
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5 -- LONG-TERM DEBT
NOTES PAYABLE
OCTOBER 31,
--------------------
1997 1996
--------- ---------
Mellon Bank, $2,000 note dated March
24, 1996, requires monthly
principal payments of $21 plus
interest at a floating and
fluctuating rate equal to the
overnight Money Market rate plus
2.0% per annum, due March 1, 2000,
secured by Company assets.......... $ 1,354 $ 1,604
Mellon Bank, monthly principal
payments are pursuant to a
specified schedule plus interest at
7.15%, due March, 1999. Secured by
virtually all of the Company's
assets, subject to certain
restricted covenants............... 3,898 4,222
First Virginia Bank, 36 monthly
payments of $.6, interest at 8.74%
per annum, due February, 1998,
secured by equipment............... 2 9
Former Stockholder, repurchase of
stock at $169, paid in five annual
installments of $34 each plus
interest at 6.0% per annum. First
installment was due November 1,
1996, and each November 1,
thereafter......................... 104 135
Former stockholder, repurchase of
stock at $132 paid in five annual
installments of $34 which includes
interest at 8.25% per annum. First
installment due July 1, 1997 and
each July 1, thereafter............ 109 132
--------- ---------
Total........................... 5,467 6,102
Less: Current portion of
long-term debt................. 657 637
--------- ---------
Long-Term Debt.................. $ 4,810 $ 5,465
========= =========
CAPITAL LEASE OBLIGATIONS
Equipment lease, interest rate of
7.6%, $6 due per month beginning,
February 1997...................... $ 316 $ 1
Less: Amount representing
interest....................... 47 --
--
---------
Present value of net minimum lease
payments........................... $ 269 $ 1
========= ==
The total amount of interest cost related to all long-term debt incurred
for 1997, 1996, and 1995 was $453, $416, and $277, respectively, all of which
was charged to operations.
The combined aggregate amounts of maturities for each of the next five
years are as follows:
YEAR ENDED NOTES CAPITAL
OCTOBER 31, PAYABLE LEASES
------------ ------- -------
1998............................... $ 657 $ 74
1999............................... 3,861 74
2000............................... 919 74
2001............................... 30 75
2002............................... -- 19
------- -------
$ 5,467 $ 316
======= =======
F-32
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of:
OCTOBER 31,
--------------------
1997 1996
--------- ---------
Payroll, Commissions, and Earned
Vacation........................... $ 1,597 $ 791
Payroll Taxes........................ 112 106
Sales and Use Taxes.................. 121 90
Interest Payable..................... 14 17
Profit Sharing Contribution.......... 686 533
Other................................ 19 51
--------- ---------
$ 2,549 $ 1,588
========= =========
NOTE 7 -- LEASE COMMITMENTS
AUTOMATED GRAPHIC SYSTEMS, INC.
The Company is obligated under a 15-year related party non-cancelable
operating lease dated August 20, 1990, for the premises and land referred to as
the Automated Graphic Systems, Inc., located at DeMarr Road in White Plains,
Maryland. The building is owned by DeMarr Partnership which is a partnership
between John F. Green and Mark A. Edgar. Mr. Green is an officer and principal
owner of Automated Graphic Systems, Inc. The lease calls for minimum monthly
rental payments of $52. The monthly rental payments are increased on an annual
basis by the percentage increase in the Consumer Price Index from the preceding
year.
The Company also leases delivery trucks and vans under various operating
leases with Ryder Truck Rental, Inc.
AUTOMATED GRAPHIC SYSTEMS -- OHIO, INC.
The Company leases delivery trucks under various operating leases. The
Company entered into an operating lease for its office/warehouse facility
effective August 1997 for a period of ten years and three months with an option
to renew another five years. The lease calls for a monthly fixed rent of $23
with scheduled increases in the years 2000 and 2003. The Company is responsible
for repairs and maintenance, real estate taxes, and special assessments during
the term of the lease.
AUTOMATED GRAPHIC IMAGING, INC.
The Company was obligated under a lease dated August 1992 for equipment
that required 60 monthly payments of $4. Rental expense for this equipment in
1997, 1996 and 1995 was $40, $48, and $47 respectively. During the year ended
October 31, 1997, this lease was paid in full and the equipment was purchased.
The Company entered into a contract subsequent to year end to lease
equipment. The lease term is 60 months and payments will be $3 per month with a
purchase option of $16 at the end of the lease term. Deposits in the amount of
$24 were paid on this lease at October 31, 1997.
The Company was obligated under a non-cancellable five-year operating lease
dated April 1, 1992, for 1,600 square feet of space located in Washington, D.C.
The lease called for monthly payments of $5 plus a pro rata share of operating
and real estate tax expenses and 2.5 percent increases in the base rent
annually. Effective April 1, 1997, this lease was extended for one year. The
lease term calls for monthly payments of $5.
F-33
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Aggregate minimum rentals as of October 31, 1997, for each of the next five
years for all operating leases are as follows:
OCTOBER 31, TOTAL
------------ ---------
1998............................... $ 1,035
1999............................... 1,012
2000............................... 986
2001............................... 984
2002............................... 970
---------
$ 4,987
=========
Rental expense for the years ended October 31, 1997, 1996, and 1995 was
$696, $691, and $654, respectively.
NOTE 8 -- SALE OF PROPERTY AND EQUIPMENT
The Company sold land and building with a combined cost of $2,123 on July
1, 1997, and realized a gain of $1,336 which is included in other income in the
consolidated statement of income.
NOTE 9 -- INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED OCTOBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Current Expense
Federal......................... $ 922 $ 422 $ 626
State........................... 123 126 135
--------- --------- ---------
1,045 548 761
--------- --------- ---------
Deferred Tax Expense
Federal......................... 165 191 41
State........................... 25 15 7
--------- --------- ---------
190 206 48
--------- --------- ---------
Provision for Income Taxes........... $ 1,235 $ 754 $ 809
========= ========= =========
F-34
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Automated Graphic Imaging/Copy Center, Inc., has a state net operating loss
carryforward of approximately $9 at October 31, 1997.
In addition, the Company has a state manufacturing tax credit of $430 from
1996 that may be carried forward and will expire in three years. At October 31,
1997, the state manufacturing tax credit carryforward has been reduced by
valuation allowance against the deferred tax asset. The valuation allowance has
also been reduced at October 31, 1997, by the current year tax benefit of $86.
OCTOBER 31,
--------------------
1997 1996
--------- ---------
Total Deferred Tax Assets,
Noncurrent......................... $ 45 $ 45
Total Deferred Tax Liability,
Noncurrent......................... (483) (188)
--------- ---------
(438) (143)
Total Deferred Tax Assets, Current... 482 480
Total Valuation Allowance............ (394) (480)
--------- ---------
88 --
--------- ---------
Net Deferred Tax Asset (Liability)... $ (350) $ (143)
========= =========
NOTE 10 -- EMPLOYEES STOCK OWNERSHIP PLAN
In 1984, the Board of Directors of Automated Graphic Systems, Inc., adopted
an Employees Stock Ownership Plan. The Company contributes in cash or stock an
amount determined by an appropriate resolution of the Board of Directors. In
1993, the Board of Directors of Automated Graphic Imaging, Inc., and Automated
Graphic Systems-Ohio, Inc., adopted participation in the Automated Graphic
Systems, Inc. Employees Stock Ownership Plan (ESOP). Participants are not
permitted to make contributions. The contributions for the years ended October
31, 1997, 1996, and 1995 were $906, $548, and $722, respectively. All employees
who have completed one year of service are eligible to participate.
NOTE 11 -- TRANSACTIONS WITH RELATED PARTIES
Automated Graphic Systems, Inc., is located in White Plains, Maryland. The
building is owned by a partnership in which an officer of the Company is a
partner. The lease calls for minimum monthly rental payments of $52, with annual
increases based on the increase in the Consumer Price Index over the preceding
year. Rent expense totalled $537, $493, and $505 in 1997, 1996, and 1995,
respectively.
NOTE 12 -- LINE OF CREDIT
The Company has a $3,000 unused line of credit with Mellon Bank bearing
interest at 2 percent above the overnight money market rate. This line of credit
expires June 1999.
NOTE 13 -- SELF-INSURED MEDICAL BENEFITS PLAN
Automated Graphic Systems, Inc. and Automated Graphic Imaging, Inc., are
self-insured for their medical benefits plan, which covers all full-time
employees who have completed 30 days of employment. Participants pay a monthly
charge for individual or family coverage. The Company maintains reinsurance
coverage with individual stop-loss limits of $20 per participant, and an
aggregate stop-loss limit based on the total number of participants in a
calendar year. Medical benefit expenses incurred for the years ended October 31,
1997, 1996, and 1995 were $601, $759 and $627, respectively.
F-35
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 14 -- 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan offered to employees with more
than one year of service. Employees who are eligible may elect to withhold
between 1.0 percent and 15.0 percent of compensation. The plan allows for
employer matching contributions on a discretionary basis. The Company made no
contributions to this plan in either 1997, 1996, or 1995.
NOTE 15 -- COMMITMENTS
Pursuant to an agreement between the Company and certain
shareholder/employees, the Company is obligated to purchase all Automated
Graphic Systems, Inc., shares of common stock of these shareholder/employees
upon termination of employment. There are currently 156 shares outstanding under
the agreement. The value of each share of stock at the last valuation of October
31, 1997, was $1,519.
NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED)
On June 29, 1998, the Company, the Employee Stock Ownership Plan, and the
individual stockholders signed a letter of intent to be acquired by Consolidated
Graphics, Inc., a Texas corporation. Consummation of the transaction is subject,
among other things, to approval by the stockholders of the Company.
NOTE 17 -- INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying interim financial statements as of July 31, 1998 and for
the nine months then ended have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
Article 10 of Regulation S-X. In the opinion of management of AGS, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of results have been included. Results of operations for
interim periods are not necessarily indicative of the results that may be
expected in any future period, including the fiscal year ending October 31,
1998.
F-36
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CONSOLIDATED GRAPHICS, INC.,
AGS ACQUISITION CO.,
AUTOMATED GRAPHIC SYSTEMS, INC.,
THE INDIVIDUAL SHAREHOLDERS OF
AUTOMATED GRAPHIC SYSTEMS, INC.
AND
(FOR THE LIMITED PURPOSES SET FORTH HEREIN)
THE TRUSTEES OF
THE AUTOMATED GRAPHIC SYSTEMS, INC
EMPLOYEE STOCK OWNERSHIP PLAN
Dated September 28, 1998
A-1
<PAGE>
TABLE OF CONTENTS
AGREEMENT AND PLAN OF REORGANIZATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE 1
THE MERGER
1.1 The Merger....................................................... A-7
1.2 The Closing...................................................... A-7
1.3 Conversion of Shares............................................. A-8
1.4 Exchange of Certificates......................................... A-8
1.5 Dissenting Shares................................................ A-9
1.6 Tax Treatment.................................................... A-9
1.7 Public Announcements............................................. A-9
ARTICLE 2
THE SURVIVING CORPORATION................................................ A-9
2.1 Articles of Incorporation........................................ A-9
2.2 Bylaws........................................................... A-9
2.3 Directors and Officers........................................... A-9
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................ A-10
3.1 Organization and Good Standing................................... A-10
3.2 Corporate Records................................................ A-10
3.3 Capitalization of the Company.................................... A-10
3.4 Subsidiaries, Other Ownership Interests and Capitalization
Thereof........................................................ A-10
3.5 Authority of Company............................................. A-11
3.6 No Conflicts..................................................... A-11
3.7 Consents and Approvals........................................... A-11
3.8 Assets and Properties............................................ A-11
3.9 Financial Statements............................................. A-12
3.10 Customary Business Practice....................................... A-13
3.11 Absence of Certain Changes or Events.............................. A-13
3.12 Absence of Defaults............................................... A-15
3.13 Compliance with Laws.............................................. A-15
3.14 Tax Returns and Reports........................................... A-15
3.15 Litigation........................................................ A-16
3.16 Banking Relationships............................................. A-16
3.17 Customers and Suppliers........................................... A-16
3.18 Accounts Receivable and Accounts Payable.......................... A-16
3.19 Inventories....................................................... A-17
3.20 Employee Benefit Matters; ERISA................................... A-17
3.21 Contracts and Commitments......................................... A-21
3.22 Patents, Trademarks and Copyrights................................ A-21
3.23 Insurance......................................................... A-22
3.24 Employees......................................................... A-22
3.25 Labor Agreements; Disputes........................................ A-22
3.26 Regulatory Filings................................................ A-23
3.27 Environmental and Health and Safety Matters....................... A-23
3.28 Brokers........................................................... A-24
A-2
<PAGE>
PAGE
-----
3.29 Company Disclosure................................................ A-24
3.30 Company Information in Registration Statement..................... A-25
3.31 Interests in Customers and Suppliers.............................. A-25
3.32 Transactions With Affiliates...................................... A-25
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS........................... A-25
4.1 Ownership; Voting Rights.......................................... A-25
4.2 Authority of Shareholders......................................... A-26
4.3 No Conflicts...................................................... A-26
4.4 Consents and Approvals............................................ A-26
4.5 Customary Business Practice....................................... A-26
4.6 Shareholder Disclosure............................................ A-26
4.7 Rights Against Company Common Stock............................... A-26
4.8 No Trading in CGX Shares.......................................... A-26
4.9 Company Representations and Warranties............................ A-26
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF TRUSTEES............................... A-27
5.1 Ownership; Voting Rights.......................................... A-27
5.2 Authority of Trustees............................................. A-27
5.3 No Conflicts...................................................... A-27
5.4 Consents and Approvals............................................ A-27
5.5 ESOP Disclosure................................................... A-27
5.6 No Trading in CGX Shares.......................................... A-28
5.7 Litigation........................................................ A-28
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF CGX AND NEWCO.......................... A-28
6.1 Organization and Good Standing.................................... A-28
6.2 Authority of CGX and Newco........................................ A-28
6.3 Capitalization of CGX............................................. A-28
6.4 Capitalization of Newco........................................... A-28
6.5 No Conflicts...................................................... A-28
6.6 Consents and Approvals............................................ A-29
6.7 Brokers........................................................... A-29
6.8 Litigation........................................................ A-29
6.9 Due Authorization................................................. A-29
6.10 Commission Reports................................................ A-29
6.11 CGX Information in Registration Statement......................... A-30
6.12 CGX 401(k) Plan................................................... A-30
ARTICLE 7
COVENANTS OF SHAREHOLDERS, TRUSTEES AND COMPANY.......................... A-31
7.1 Conduct of Business............................................... A-31
7.2 Continued Administration.......................................... A-31
7.3 Records........................................................... A-31
7.4 Maintenance of Insurance.......................................... A-31
7.5 Cooperation in HSR Act Filings and Third Party Consents........... A-32
7.6 Cooperation in Filing Registration Statement...................... A-32
7.7 Voting of Company Stock........................................... A-32
A-3
<PAGE>
PAGE
-----
7.8 No Solicitation................................................... A-32
7.9 Corporate Authority............................................... A-33
7.10 Investigation by CGX and Newco.................................... A-33
7.11 Certain Acts or Omissions......................................... A-33
7.12 Consultation and Reports.......................................... A-34
7.13 Confidentiality................................................... A-34
7.14 Additional Disclosure............................................. A-34
7.15 Required Financial Statements..................................... A-35
7.16 Right of ESOP to Dissent.......................................... A-35
7.17 Termination of Shareholder Agreements............................. A-35
7.18 Tax Treatment..................................................... A-35
7.19 Termination of 401(k) and ESOP Plans, and Merger of the Trusts for
401(k) and ESOP into CGX's 401(k) Plan and Trust................ A-35
7.20 ESOP Amendment.................................................... A-35
ARTICLE 8
COVENANTS OF CGX AND NEWCO............................................... A-36
8.1 Cooperation in HSR Act Filings and Third Party Consents........... A-36
8.2 Registration Statement............................................ A-36
8.3 Compliance with Legal Requirements................................ A-36
8.4 Certain Acts or Omissions......................................... A-36
8.5 ESOP Trustees..................................................... A-36
8.6 ERISA Plan Matters................................................ A-36
8.7 Tax Treatment..................................................... A-37
8.8 Capital Contribution to Newco..................................... A-37
8.9 Shareholder Payments.............................................. A-37
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF CGX AND NEWCO............................... A-37
9.1 Registration, Listing and Approval................................ A-37
9.2 HSR Act........................................................... A-37
9.3 Representations and Warranties.................................... A-37
9.4 Compliance with Agreement......................................... A-37
9.5 Sellers' and Officer's Certificates............................... A-38
9.6 Completion of Due Diligence....................................... A-38
9.7 No Action or Proceeding........................................... A-38
9.8 Consents.......................................................... A-38
9.9 Estoppel Certificates............................................. A-38
9.10 Conveyance of Stock............................................... A-38
9.11 No Material Adverse Change........................................ A-38
9.12 Corporate Action by CGX and Newco................................. A-38
9.13 Shareholder Noncompetition Agreements............................. A-38
9.14 Opinion of Counsel................................................ A-38
9.15 Opinion of ESOP Counsel........................................... A-38
9.16 Stock Options and SARs............................................ A-38
9.17 Certificates of Management........................................ A-39
9.18 Lease Extension................................................... A-39
9.19 Delivery of Other Documents and Instruments....................... A-39
A-4
<PAGE>
PAGE
-----
ARTICLE 10
CONDITIONS TO OBLIGATIONS OF COMPANY, TRUSTEES AND SHAREHOLDERS.......... A-39
10.1 Registration, Listing and Approval................................ A-39
10.2 HSR Act........................................................... A-39
10.3 Representations and Warranties.................................... A-40
10.4 Compliance with Agreement......................................... A-40
10.5 Officer's Certificate............................................. A-40
10.6 No Action or Proceeding........................................... A-40
10.7 Consents.......................................................... A-40
10.8 Corporate Action By CGX and Newco................................. A-40
10.9 Stock Option Agreements........................................... A-40
10.10 Opinion of Counsel................................................ A-40
10.11 Opinion of ESOP Counsel........................................... A-40
10.12 Fairness.......................................................... A-40
10.13 Lease Guaranty.................................................... A-40
10.14 Delivery of Other Documents and Instruments....................... A-41
ARTICLE 11
SURVIVAL OF REPRESENTATIONS AND WARRANTIES............................... A-41
ARTICLE 12
INDEMNIFICATION.......................................................... A-41
12.1 Indemnification of Purchaser Indemnitees.......................... A-41
12.2 Indemnification of Company Indemnitees............................ A-41
12.3 Method of Asserting Claims........................................ A-41
12.4 Payment of Indemnity.............................................. A-43
ARTICLE 13
TERMINATION.............................................................. A-44
13.1 Termination....................................................... A-44
13.2 Termination Remedies.............................................. A-45
ARTICLE 14
NOTICES.................................................................. A-45
ARTICLE 15
MISCELLANEOUS............................................................ A-46
15.1 Incorporation of Schedules and Appendices; Entire Agreement....... A-46
15.2 Waiver............................................................ A-46
15.3 Amendment......................................................... A-46
15.4 Counterparts...................................................... A-46
15.5 Headings.......................................................... A-46
15.6 Governing Law..................................................... A-46
15.7 Binding Effect.................................................... A-46
15.8 Expenses.......................................................... A-47
15.9 Further Assurances................................................ A-47
15.10 Appointment of Agent.............................................. A-47
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION DATED OCTOBER 30, 1998...... A-51
</TABLE>
A-5
<PAGE>
SCHEDULES AND APPENDICES
Schedule 3.3 Capitalization
Schedule 3.6 Conflicts
Schedule 3.7 Consents
Schedule 3.8 Assets
Schedule 3.9 Financial Statements
Schedule 3.10 Customary Business Practice
Schedule 3.11 Certain Changes
Schedule 3.12 Defaults
Schedule 3.14 Taxes
Schedule 3.15 Litigation
Schedule 3.16 Banking Relationships
Schedule 3.17 Customers and Suppliers
Schedule 3.20 Employee Benefit Plans
Schedule 3.21 Contracts
Schedule 3.22 Patents, Trademarks and Copyrights
Schedule 3.23 Insurance
Schedule 3.24 Employees
Schedule 3.27 Environmental and Health and Safety Matters
Schedule 3.32 Affiliate Transactions
Schedule 4.1 Ownership; Voting Rights
Schedule 4.7 Rights Against Company Common Stock
Appendix A Articles of Merger
Appendix B Form of Estoppel Certificate
Appendix C Form of Noncompetition Agreement
Appendix D Form of Opinion of Venable, Baetjer
Appendix E Form of Opinion of Sanders Schnabel
Appendix F Form of Release
Appendix G Form of Stock Option Agreement
Appendix H Form of Opinion of Winstead Sechrest & Minick P.C.
A-6
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization, dated as of September 28, 1998
(together with the appendices and schedules attached hereto, the "Agreement"),
by and among Consolidated Graphics, Inc., a Texas corporation ("CGX"); AGS
Acquisition Co., a Maryland corporation ("Newco"); Automated Graphic Systems,
Inc., a Maryland corporation (the "Company"); John F. Green, Lawrence
Schindel, Kevin Cassis, Kenneth Lemmert and Christopher Carpenter (the
"Shareholders"); and John F. Green and Edward Pittman in their capacity as
trustees (the "Trustees" and, together with the Shareholders, the "Sellers")
of the Automated Graphic Systems, Inc. Employee Stock Ownership Plan (the
"ESOP"), the Sellers being the holders of all of the outstanding shares of the
Company:
W I T N E S S E T H:
WHEREAS, CGX, the Company, the Shareholders and the Trustees executed and
delivered a letter of intent (the "Letter") dated June 29, 1998 pursuant to
which the parties expressed their intent to effect a merger of the Company into
Newco (the "Merger");
WHEREAS, the parties intend that the Merger qualify as a tax-free
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and that this Agreement constitute a plan of
reorganization thereunder; and
WHEREAS, the Trustees and the respective boards of directors of CGX, Newco
and the Company have approved this Agreement;
NOW, THEREFORE, in consideration of the mutual premises, covenants and
agreements and in reliance upon the representations and warranties set forth
herein, the parties agree as follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. On the terms and subject to the conditions contained
herein and at such time as the Articles of Merger attached hereto as APPENDIX A
have been filed for record with and accepted for record by the Maryland
Department of Assessments and Taxation (the "Department") or at such later
time as may be specified in the Articles of Merger (the "Effective Time"), the
Company shall be merged with and into Newco pursuant to this Agreement, Newco
shall be the surviving corporation (after the Effective Time, the "Surviving
Corporation") and the separate corporate existence of the Company shall cease.
The Merger shall have the effects specified in Section 3-114 of the Maryland
General Corporation Law (the "MGCL").
1.2 THE CLOSING. For the purpose of confirming satisfaction or waiver of
all conditions to the Merger, a closing of the transactions contemplated hereby
(the "Closing") shall take place at the offices of Winstead Sechrest & Minick
P.C., in Houston, Texas, at 9:00 a.m. local time, on a date to be mutually
agreed upon between the parties (the "Closing Date"), which shall be no later
than the third business day after satisfaction of the last to occur of:
(a) the approval of the Merger by the participants in the ESOP;
(b) the approval of the Merger by the shareholders of the Company;
(c) the expiration or termination of any waiting period or extension
thereof applicable to the Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act");
(d) the declaration of effectiveness by the Securities and Exchange
Commission (the "Commission") of the Registration Statement on Form S-4
to be filed by CGX covering the shares of common stock of CGX to be issued
to the shareholders of the Company upon consummation of the Merger (the
"Registration Statement"); or
(e) the satisfaction or waiver of each of the other conditions
specified in Articles 9 and 10 below.
A-7
<PAGE>
At the Closing the parties shall deliver fully executed originals of the
documents, certificates and opinions required to be delivered pursuant to
Articles 9 and 10 below. The parties shall further provide proof or indication
of the satisfaction or waiver of each of the conditions set forth in Articles 9
and 10. As soon as practicable after satisfaction or waiver of all conditions to
the Closing, the parties shall cause Articles of Merger to be filed for record
with the Department in accordance with Section 3-107 of the MGCL and shall take
any further actions as may be required by law to effect the Merger. By mutual
agreement of the parties, the Closing may be accomplished by facsimile
transmission to the respective offices of counsel for the parties hereto of the
requisite documents, duly executed where required, with originals to be
delivered by overnight courier service on the next business day following the
Closing.
1.3 CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger
and without any further action on the part of CGX, Newco, the Company or the
Surviving Corporation, or any holder of the following securities, each share of
common stock of Newco issued and outstanding immediately before the Effective
Time shall continue to be issued and outstanding as one share of common stock of
the Surviving Corporation, and the shares of common stock of the Company (the
"Company Common Stock") issued and outstanding at the Effective Time shall be
converted into the right to receive (a) an aggregate amount in cash equal to
$14,960,352.84 reduced by $3,100,000 (adjusted, if necessary, pursuant to
Section 8.8) to be deposited in escrow as set forth in Section 1.4 below and
further reduced by certain transaction costs as set forth in Section 15.8 below
(as so reduced, the "Cash Consideration") and (b) that number of shares of
common stock of CGX (the "CGX Common Stock") determined by dividing
$16,000,000.00 by the average of the closing prices per share of CGX Common
Stock as reported on the New York Stock Exchange on the three trading days
immediately preceding, but not including, the third trading day before the
Closing Date and further dividing such result by 11,705 (such number being the
"Exchange Ratio" and the cash and shares set forth in clauses (a) and (b)
together being the "Merger Consideration"). Upon conversion of the shares of
Company Common Stock into the Merger Consideration, each Seller shall have the
right to receive (i) an amount in cash equal to the product of (1) the Cash
Consideration divided by 11,705 and (2) the number of issued and outstanding
shares of Company Common Stock of which such Seller is the record holder
immediately before the Effective Time and (ii) a certificate representing such
number of shares of CGX Common Stock as is equal to the product of the Exchange
Ratio and the number of issued and outstanding shares of Company Common Stock of
which such Seller is the record holder immediately before the Effective Time,
rounded up to the next whole share. No fractional shares of CGX Common Stock
shall be issued in connection with the Merger, and no certificates for any such
fractional shares shall be issued.
1.4 EXCHANGE OF CERTIFICATES. At the Effective Time, each Seller shall
surrender to CGX for cancellation such Seller's certificates, representing the
shares of Company Common Stock held by such Seller effective as of the Effective
Time, and CGX and/or Newco shall (a) deposit $3,100,000 (the "Escrowed Funds")
from the $14,960,352.84 set forth in Section 1.3 above and the Proportionate
Share (as defined in Section 8.8 herein) into an interest-bearing escrow account
to be held and distributed by an escrow agent pursuant to the terms of an escrow
agreement (the "Escrow Agreement") in such form as shall be agreed upon among
the parties for the purpose of providing a source of payment of indemnity claims
against the Sellers, (b) pay to each Seller such Seller's share of the Cash
Consideration by initiation of one or more wire transfers in immediately
available federal funds to one or more accounts specified by such Seller in a
notice of wire instructions provided to CGX within a reasonable time before the
Effective Time and (c) deliver to each Seller such number of certificates as may
be requested by such Seller representing the aggregate number of CGX Shares to
which such Seller is entitled pursuant to this Agreement. CGX and the Surviving
Corporation (or the transfer or escrow agent on their behalf) shall be entitled
to deduct and withhold from any consideration payable or otherwise deliverable
to any holder or former holder of capital stock of the Company pursuant to this
Agreement or the Escrow Agreement such amounts as CGX or the Surviving
Corporation may be required to deduct or withhold therefrom under the Code or
under any provision of state, local or foreign tax law, if applicable (or in the
alternative CGX or the transfer agent, at the option of CGX, may request tax
information and other documentation to ensure no withholding is necessary). To
the extent such amounts are so deducted or withheld, such amounts shall be
A-8
<PAGE>
treated for all purposes under this Agreement as having been paid to the Seller
to whom such amounts would otherwise have been paid.
1.5 DISSENTING SHARES. Shares held by a Seller that has filed a written
objection to the Merger with the Company ("Dissenting Shares") shall,
notwithstanding anything to the contrary contained in this Agreement, not be
converted into or represent the right to receive the Merger Consideration in
accordance with Section 1.3, and such Seller shall be entitled only to such
rights as may be granted pursuant to applicable law, PROVIDED, HOWEVER, THAT if
such Seller does not comply with the statutory requirements with respect to
Dissenting Shares, then as of the later of the Effective Time or the time such
failure to comply results in such shares no longer qualifying to be treated as
Dissenting Shares, such shares shall automatically be converted into and shall
represent only the right to receive (upon surrender of the certificate or
certificates representing such shares) the Merger Consideration in accordance
with Section 1.3. The Company shall give CGX prompt notice of any written demand
or objection received by the Company before the Effective Time, any withdrawal
of any such demands and any other instruments served pursuant to the MGCL and
received by the Company and shall permit CGX to participate in all negotiations
and proceedings with respect to any Dissenting Shares. The Company shall
cooperate with CGX concerning, and shall not without the prior written consent
of CGX, voluntarily make any payments with respect to or offer to settle or
settle with respect to any Dissenting Shares.
1.6 TAX TREATMENT. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.7 PUBLIC ANNOUNCEMENTS. Before making any public announcements with
respect to this Agreement or the transactions contemplated hereby, CGX, Newco,
the Company and John F. Green, on behalf of the Sellers, shall each consult with
the other parties and use good faith efforts to agree upon the text of a joint
announcement to be made by CGX, Newco, the Company and the Sellers or use good
faith efforts to obtain each such party's approval of the text of any public
announcement to be made on behalf of any one party. Subject to the preceding
sentence, and except as contemplated in this Agreement, required by law or
otherwise agreed in writing by each of CGX, Newco, the Company and the Sellers,
each of CGX, Newco, the Company and the Sellers shall maintain as confidential
the terms and conditions of this Agreement. CGX and the Company shall coordinate
the timing, nature and extent of the disclosures to be made to the employees of
the Company in connection with obtaining approval by the participants in the
ESOP of the Merger.
ARTICLE 2
THE SURVIVING CORPORATION
2.1 ARTICLES OF INCORPORATION. At the Effective Time, the articles of
incorporation of Newco as amended and restated and attached to the Articles of
Merger shall be the articles of incorporation of the Surviving Corporation until
thereafter changed or amended as provided therein or by the MGCL.
2.2 BYLAWS. At the Effective Time, the bylaws of Newco as in effect
immediately before the Effective Time shall be the bylaws of the Surviving
Corporation until thereafter changed or amended as provided therein or by the
MGCL.
2.3 DIRECTORS AND OFFICERS. From and after the Effective Time, until
successors are duly elected or appointed and qualified in accordance with
applicable law, the directors and officers of Newco at the Effective Time shall
become directors and officers of the Surviving Corporation. Nothing in this
Section 2.3 shall be construed to terminate or otherwise affect the status of
any such officer or director as an employee of the Surviving Corporation.
A-9
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to CGX and Newco as set forth below and
as of the date hereof and except as set forth in the schedules numbered to
correspond to the applicable representation or warranty and attached hereto.
Language in this Article 3 and elsewhere in this Agreement limiting any
representation or warranty to the "knowledge of the Shareholders" shall mean
to the actual knowledge of any Shareholder after due inquiry of the other
Shareholders, Stan Ritter and John Allem.
3.1 ORGANIZATION AND GOOD STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland. The Company has all requisite corporate power and authority to own,
hold, use and lease its properties and assets and to conduct its business as it
is now being conducted. The Company is duly qualified as a foreign corporation
and is in good standing in all jurisdictions in which the character of the
properties and assets now owned or leased by it or the nature of the business
now conducted by it requires it to be so qualified.
3.2 CORPORATE RECORDS. The Shareholders and the Company have delivered or
made available to CGX and Newco true, complete and correct copies of (a) the
articles of incorporation and bylaws, as amended to the date of this Agreement,
of the Company and its subsidiaries, Automated Graphic Imaging, Inc., a District
of Colombia corporation ("Imaging"), and Automated Graphics Systems -- Ohio,
Inc., a Maryland corporation ("Ohio" and together with Imaging, the
"Subsidiaries"), (b) the stock records of the Company and the Subsidiaries and
(c) the minutes and other records of the meetings and other proceedings
(including any actions taken by written consent) of the boards of directors and
shareholders of the Company and the Subsidiaries and committees of the boards of
directors. There have been no formal meetings (or other proceedings required
under applicable law to be reflected in the minute books of the Company and the
Subsidiaries) of the boards of directors or shareholders of the Company and the
Subsidiaries or any committee of the boards of directors that are not accurately
reflected in such minutes or other records. There has been no violation of any
of the provisions of the articles of incorporation or bylaws of the Company and
the Subsidiaries, and neither the Company nor either of the Subsidiaries have
taken any action that is inconsistent with any resolution adopted by its
respective stockholders, board of directors or any committee of its board of
directors. The stock records and minute books of the Company and the
Subsidiaries are accurate, up-to-date and complete.
3.3 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the
Company consists of 20,000 shares of common stock, no par value per share, of
which 11,705 shares are issued and outstanding. No other capital stock of the
Company is authorized, issued or outstanding. Of the issued and outstanding
shares of Company Common Stock, 10,511 shares have been issued to and are held
by the Trustees. No other securities of the Company have been issued to or are
held by the Trustees or the ESOP. All of the issued and outstanding shares are
validly issued, fully paid and nonassessable. Except as set forth on Schedule
3.3 attached hereto and except as required by the terms of the ESOP, there are
no outstanding subscriptions, options, rights, warrants, convertible securities,
or other agreements or commitments with respect to the capital stock of any
class of the Company. All issued and outstanding shares of authorized capital
stock of the Company are held of record by the Sellers and beneficially by the
Shareholders and the participants in the ESOP. Schedule 3.3 sets forth the name
of each shareholder of the Company as of the date hereof and the number of
shares of Company Common Stock held by each such shareholder. Such shares have
been issued in compliance with the Company's articles of incorporation and
bylaws and all applicable federal and state laws.
3.4 SUBSIDIARIES, OTHER OWNERSHIP INTERESTS AND CAPITALIZATION
THEREOF. Except with respect to the Subsidiaries, the Company does not own or
control, directly or indirectly, shares of capital stock, debt instruments or
other securities of any corporation or hold, directly or indirectly, any
interest in any trust, partnership, limited partnership, joint venture, business
association, limited liability company, unincorporated business, proprietorship,
business enterprise or other business entity whatsoever. The authorized capital
stock of Imaging consists of 10,000 shares of common stock, $.01 par value per
share, of which 500
A-10
<PAGE>
shares are issued and outstanding. The authorized capital stock of Ohio consists
of 5,000 shares of common stock, $.01 par value per share, of which 100 shares
are issued and outstanding. All of such issued and outstanding shares are
validly issued, fully paid and non-assessable. There are no outstanding
subscriptions, options, rights, warrants, convertible securities or other
agreements or commitments with respect to the capital stock of the Subsidiaries.
All issued and outstanding shares of capital stock of the Subsidiaries are held
of record and beneficially by the Company.
3.5 AUTHORITY OF COMPANY. Subject to obtaining the approval of the
participants in the ESOP and the shareholders of the Company, the Company has
all requisite corporate power and authority to execute and deliver this
Agreement and each agreement, document and instrument required to be executed
and delivered by the Company pursuant to this Agreement (the "Company Closing
Documents"), to consummate the transactions contemplated hereby and thereby and
to perform fully the obligations to be performed by the Company hereunder and
thereunder. The execution and delivery by the Company of this Agreement and each
of the Company Closing Documents and consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action by the Company, except for the obtaining of the approval of the
participants in the ESOP and the shareholders of the Company. This Agreement has
been duly executed and delivered by the Company and constitutes, and each of the
Company Closing Documents when executed and delivered pursuant to this Agreement
will constitute, legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms;
provided, however, that the merger contemplated by this Agreement cannot be
consummated without the approval of the participants in the ESOP and the
shareholders of the Company.
3.6 NO CONFLICTS. The execution and delivery by the Company of this
Agreement and each of the Company Closing Documents and performance by the
Company of its obligations hereunder and thereunder do not, and consummation of
the transactions contemplated hereby and thereby will not, (a) except as set
forth in Section 3.7 below and its related schedule, violate or conflict with
any existing term or provision of any material law, statute, ordinance, rule,
regulation, order, writ, judgment, injunction or decree applicable to the
Company or the Subsidiaries; (b) conflict with or result in a breach of or
default under any of the terms, conditions or provisions of the articles or
certificate of incorporation or bylaws of the Company or the Subsidiaries or,
except as set forth on Schedule 3.6, any agreement or instrument to which the
Company or the Subsidiaries is a party or otherwise subject or by which the
Company or the Subsidiaries or their respective assets or properties may be
bound; (c) except as set forth in Section 3.8 below and its related schedule,
result in the creation or imposition of any encumbrance upon any of the assets
or properties of the Company or the Subsidiaries; (d) except as set forth on
Schedule 3.6, give to others any right of termination, cancellation,
acceleration or modification in or with respect to any agreement or instrument
to which the Company or the Subsidiaries is a party or otherwise subject, or by
which the Company or the Subsidiaries or their respective assets or properties
may be bound; or (e) breach any fiduciary duty owed by the Company or the
Subsidiaries to any person or entity.
3.7 CONSENTS AND APPROVALS. Except with respect to (a) the filing of
Articles of Merger in accordance with the MGCL, (b) compliance with any
applicable requirements of the HSR Act, (c) compliance with any applicable
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and
the Securities Exchange Act of 1934, as amended (the "1934 Act"), (d)
compliance with any applicable rules and regulations of the New York Stock
Exchange and otherwise, (e) obtaining the approval of the participants in the
ESOP and the shareholders of Company and (f) as set forth on Schedule 3.7, the
execution and delivery by the Company of this Agreement and each of the Company
Closing Documents and performance by the Company of its obligations hereunder
and thereunder do not, and consummation by the Company of the transactions
contemplated hereby and thereby, do not require the Company or either of the
Subsidiaries to obtain any consent, approval or action of, make any filings with
or give any notice to any corporation, person, firm or other entity, or any
public, governmental or judicial authority.
3.8 ASSETS AND PROPERTIES. Each of the Company and the Subsidiaries has
good and marketable title to all of its respective properties and assets (the
"Assets") free and clear of all liens, claims, encumbrances, pledges or
security interests of any nature whatsoever, recorded or unrecorded ("Lien"),
except for (a) non-
A-11
<PAGE>
material Assets disposed of in the ordinary course of business, (b) Liens
securing the claims of materialmen, carriers, landlords and similar entities,
all of which are not yet due and payable, (c) Liens for taxes not yet due and
payable or for taxes being contested in good faith by appropriate proceedings,
(d) Liens reflected on the most recent balance sheet of the Company delivered to
CGX or (e) Liens set forth on Schedule 3.8. Schedule 3.8 lists all Assets of the
Company and the Subsidiaries. The Assets have been installed, operated and
maintained in accordance with the Company's ordinary course of business, are, to
the knowledge of the Shareholders free from latent defects or defects of
workmanship or materials, are suitable for the purposes for which they have been
and are being employed in the operation of the business of the Company and the
Subsidiaries and are in good operating condition and repair, ordinary wear and
tear excepted. Schedule 3.8 lists all leases, operating agreements, maintenance
agreements, management agreements, mortgages and other documents or agreements
applicable to the Assets, and copies of each such document have been provided to
CGX. There are no pending or, to the knowledge of the Shareholders, threatened
claims against the Assets that could give rise to a Lien (other than Liens that
would be covered by valid and collectible insurance, including applicable
deductibles), or acts or incidents which could give rise to any such claims,
relating to or arising out of the Assets or the operation of the business of the
Company and the Subsidiaries. All Assets used in the business of the Company and
the Subsidiaries as presently operated by the Company and the Subsidiaries are
owned of record and beneficially or leased by the Company or one of the
Subsidiaries and not by any affiliate of the Company or either of the
Subsidiaries or other party. The contracts covering all such assets leased by
the Company or one of the Subsidiaries are included in the Assets and are set
forth on Schedule 3.8. As to each material contract that constitutes part of the
Assets, such contract is in full force and effect, no notice of cancellation or
termination or default has been received by the Company or either of the
Subsidiaries and no event or condition has occurred or exists which, with notice
or lapse of time or both, would constitute a default thereunder. Except as set
forth on Schedule 3.8, the Merger contemplated hereby will not affect the
validity or enforceability of such contracts. As to each lease or license the
leasehold or licensee's interest in which constitutes part of the Assets, such
lease or license is in full force and effect, no notice of cancellation or
termination under any option or right reserved to the lessor or licensor under
such lease or license or notice of default has been received by the Company or
either of the Subsidiaries and no event or condition has occurred or exists
which, with notice or lapse of time or both would constitute a default
thereunder. Neither the Company nor either of the Subsidiaries has assigned its
interest under any such lease or license or subleased the premises demised
thereby or sublicensed the right or license granted thereby. Except as set forth
on Schedule 3.8, change in ownership of the Company will not affect the validity
or enforceability of the leases and licenses included in the Assets. Each of the
parcels of land a leasehold estate in or fee title to which is included in the
Assets has free and uninterrupted access to and from a dedicated public
right-of-way by reason of the fact that such parcel either adjoins such
dedicated public right-of-way or connects to such right-of-way through a valid
and subsisting easement, and such access is adequate for the use being made of
the parcel being accessed.
3.9 FINANCIAL STATEMENTS. Schedule 3.9 attached hereto contains true and
complete copies of the audited consolidated financial statements of the Company
and the Subsidiaries as of and for the year ended October 31, 1997 (the
"Audited Statements"), and the unaudited consolidated balance sheet of the
Company and the Subsidiaries and related unaudited consolidated statements of
income as of and for the eight months ended June 30, 1998 (the "Unaudited
Statements" and together with the Audited Statements, the "Financial
Statements"). The Audited Statements are true and correct and fairly present,
in accordance with generally accepted accounting principles ("GAAP")
consistently applied, the consolidated financial position of the Company and the
Subsidiaries as of the date indicated and the consolidated results of operations
and cash flows of the Company and the Subsidiaries for the period then ended.
The Unaudited Statements are true and correct and fairly present, subject to
normal and customary year-end adjustments, the nature and extent of which have
been disclosed to CGX prior to the date hereof, in accordance with the
accounting principles consistently applied by the Company, the consolidated
financial position of the Company as of the date indicated and the consolidated
results of operations for the period then ended. All detailed schedules
accompanying the Financial Statements or otherwise provided to CGX with respect
thereto, including without limitation schedules with respect to accounts
payable, accounts receivable,
A-12
<PAGE>
accrued liabilities, inventory, fixed assets, prepaid expenses and other assets
and liabilities, as such schedules may be modified by subsequent disclosures,
including the schedules attached hereto, are true and correct and have been
prepared on a basis consistent with the Company's past practice and with
standard accounting practices. Except as set forth on Schedule 3.9, there are no
liabilities, contingent or definite, and no assets of the Company or the
Subsidiaries that are not reflected in the Financial Statements and such
detailed schedules.
3.10 CUSTOMARY BUSINESS PRACTICE. Except as set forth on Schedule 3.10,
neither the Company nor either of the Subsidiaries has, in connection with the
business of the Company and the Subsidiaries, any unwritten understandings or
relationships with any customers or suppliers that are outside of the ordinary
course of business in the industry or that are inconsistent with customary and
standard practice in the industry.
3.11 ABSENCE OF CERTAIN CHANGES OR EVENTS. There has not been, occurred
or arisen any of the following as they relate to the Company or the Subsidiaries
after October 31, 1997;
(a) except as set forth on Schedule 3.11, any transaction by the
Company or the Subsidiaries except transactions in the ordinary course of
business;
(b) except as set forth on Schedule 3.11, any change in, or any
event, condition or state of facts of any character peculiar to the Assets
or the operation of the business of the Company or the Subsidiaries that
individually or in the aggregate adversely affects the Company, the
Subsidiaries or the Assets, or that affects the validity or enforceability
of this Agreement;
(c) any destruction, damage, or loss suffered by the Company in an
amount in excess of $5,000 or the Subsidiaries or with respect to any Asset
(whether or not covered by insurance);
(d) except as set forth on Schedule 3.11, any increase in the salary
or other compensation including, without limitation, all wages, salary,
deferred payment arrangements, bonus payments and accruals, profit sharing
arrangements, payment in respect of stock options or phantom stock options
or similar arrangements, stock appreciation rights or similar rights,
incentive payments, pension or employment benefit contributions or similar
payments, payable or to become payable by the Company or either of the
Subsidiaries to any of their respective officers, directors or employees,
or the declaration, payment or commitment or obligation of any kind for the
payment by the Company or either of the Subsidiaries of a bonus or
increased or additional salary or compensation to any such person, except
(i) pursuant to existing contractual arrangements or (ii) consistent with
past practice in an aggregate amount not to exceed 5%;
(e) except as set forth on Schedule 3.11, any sale, lease or other
disposition of any Asset, except for sales or dispositions in the normal
course of business;
(f) except as set forth on Schedule 3.11, any capital expenditure or
series of capital expenditures in excess of $5,000;
(g) except as set forth on Schedule 3.11, any mortgage, pledge, or
other encumbrance of any Asset;
(h) any forgiveness of any debt owed to the Company or either of the
Subsidiaries;
(i) except as set forth on Schedule 3.11, any amendment or
termination of any contract, agreement, or license to which the Company or
either of the Subsidiaries is a party or to which any of the Assets are
subject, except in the ordinary course of business;
(j) any material breach of the terms of any contract or agreement
that is connected with the business of the Company or either of the
Subsidiaries;
(k) except as set forth on Schedule 3.11, any commencement, notice of
commencement or, to the knowledge of the Shareholders, threat of
commencement of any litigation or any governmental proceeding against or
investigation of the Company or either of the Subsidiaries or the affairs
of the Company or either of the Subsidiaries;
A-13
<PAGE>
(l) except as set forth on Schedule 3.11, any issuance or sale by the
Company or either of the Subsidiaries of any of their respective capital
stock of any class, or of any other of their respective securities or other
ownership interests, or any commitment, obligation or agreement to do so;
(m) any liabilities that have not been disclosed in the Financial
Statements, other than those incurred in the ordinary course of business
since October 31, 1997;
(n) except as set forth on Schedule 3.11, any waiver or release of
any right or claim of the Company or either of the Subsidiaries outside the
ordinary course of business;
(o) except as set forth on Schedule 3.11, any amendment to any
national, federal, state, municipal, local, foreign or other tax returns or
reports that have been filed by the Company or either of the Subsidiaries
in any jurisdiction;
(p) except as set forth on Schedule 3.11, any labor trouble or claim
of wrongful discharge or other unlawful labor practice or action;
(q) any change by the Company or either of the Subsidiaries in
accounting methods or principles that would be required to be disclosed
under generally accepted accounting principles, except for any changes
resulting from tax election filings;
(r) except as set forth on Schedule 3.11 and otherwise for accounts
payable arising in the ordinary course of business, any borrowing of funds,
agreement to borrow funds or guaranty by the Company, either of the
Subsidiaries or any one or more of the Shareholders affecting or relating
to the Company, either of the Subsidiaries or the Assets or any termination
or amendment of any evidence of indebtedness, contract, agreement, deed,
mortgage, lease, license or other instrument to which the Company, either
of the Subsidiaries or any one or more of the Shareholders is bound or by
which any of the Assets is bound or to which the Company, either of the
Subsidiaries or any of the Assets is subject other than in the ordinary
course of business consistent with past practices;
(s) any payment of officer perquisites of a nature inconsistent with
the past practices of the Company or either of the Subsidiaries or
significantly in excess of historical amounts paid for such perquisites, or
the payment of any expense reports of any officer of the Company or either
of the Subsidiaries not accurately documented by legible and appropriate
receipts, or any direct or indirect distribution of cash or other assets
and benefits to any officer of the Company or, as applicable, either of the
Subsidiaries except for normal payments of salary and other compensation
benefits and reimbursement for business expenses in a manner consistent
with the past practices of the Company or, as applicable, either of the
Subsidiaries;
(t) except as set forth on Schedule 3.11, any transactions with or
payments to any Shareholder or any affiliates or related parties, except,
if applicable, (i) to a Shareholder in the capacity as an employee of the
Company or either of the Subsidiaries for ordinary monthly salary with
respect to which payroll taxes are required to be and have been paid, (ii)
expense reimbursements consistent with past practices accurately documented
by legible and appropriate receipts, (iii) payments pursuant to the lease
between the Company and Demarr Partnership, a general partnership with John
F. Green and Mark Edgar as the two partners, with respect to the White
Plains operations of the Company, (iv) to a Shareholder to compensate such
Shareholder on an after-tax basis for such Shareholder's income tax
liability with respect to the income of the Company attributed to such
Shareholder for the period, if any, in the Company's current fiscal year
during which the Company was a Subchapter S corporation and (v) mandatory
contributions to any employee benefit plan;
(u) except as set forth on Schedule 3.11, any entry into any
commitment of any kind, or the occurrence of any event giving rise to any
contingent liability not covered by the foregoing that would have an
adverse effect on the Company, either of the Subsidiaries, their respective
businesses or the Assets;
A-14
<PAGE>
(v) any payment for expenses of the Company, either of the
Subsidiaries or any Shareholder incurred after June 30, 1998 in connection
with the negotiation or execution of the Letter, this Agreement or the
transactions contemplated hereby or thereby;
(w) any contract, commitment or agreement to do any of the foregoing;
or
(x) except as set forth on Schedule 3.11, any discretionary
contributions to any Employee Plan (as defined below).
3.12 ABSENCE OF DEFAULTS. Except as set forth on Schedule 3.12, neither
the Company nor either of the Subsidiaries is in material default, and no event
has occurred which with notice or lapse of time or both would constitute a
material default, in any way under any term or provision of any agreement or
instrument to which the Company or either of the Subsidiaries is a party or by
which the Company or either of the Subsidiaries is bound or by or to which any
of the Assets is bound or subject that affect the ability of the Company to
consummate the transactions contemplated hereby.
3.13 COMPLIANCE WITH LAWS. The operations and activities of the Company
and the Subsidiaries comply with all applicable laws, regulations, ordinances,
rules and orders of any federal, state or local court or governmental authority.
There has been no failure by the Company or either of the Subsidiaries to comply
with any federal, state or local law, statute, ordinance, rule or regulation in
any respect that could have an adverse effect on the ability of CGX or Newco to
conduct normal operations of the business of the Company or either of the
Subsidiaries after the Closing or that could have an adverse effect on the
ability of the Company to consummate the transactions contemplated hereby.
3.14 TAX RETURNS AND REPORTS. All federal, state, local and foreign
income, excise, property, sales, use, payroll, informational and other tax
returns and reports of the Company and the Subsidiaries (collectively, the "Tax
Returns") have been timely filed (including pursuant to extensions) with the
appropriate governmental agencies in all jurisdictions in which such returns and
reports are required to be filed, and all such returns and reports properly
reflect the taxes of the Company and the Subsidiaries for the periods covered
thereby. All federal income, excise and payroll taxes, and all state, local and
foreign income, excise, property, sales and use taxes, assessments, interest,
penalties, deficiencies, fees and other governmental charges or impositions
which are reflected as due by the Tax Returns, or which are due with respect to
the periods covered thereby, from the Company or either of the Subsidiaries (the
"Taxes"), have been properly accrued or paid. Except as set forth on Schedule
3.14, neither the Company nor either of the Subsidiaries has received any notice
of assessment or proposed assessment by the Internal Revenue Service ("IRS")
or any other taxing authority in connection with any Tax Returns and there are
no pending tax examinations of any Tax Returns of or tax claims in respect of
the Tax Returns asserted against the Company, either of the Subsidiaries or
their respective properties. To the knowledge of the Shareholders, no claim has
been made by an authority in a jurisdiction where the Company and the
Subsidiaries do not file reports or returns that the Company or either of the
Subsidiaries is or may be subject to taxation by that jurisdiction. There has
been no intentional disregard of any applicable statute, regulation, rule,
revenue ruling or other authority in the preparation of any Tax Return
applicable to the Company or either of the Subsidiaries. There are no tax liens
on any of the Assets except for Liens for current taxes not yet due and payable.
There is no reasonable basis for any additional assessment of any Taxes,
penalties or interest with respect to the Company or either of the Subsidiaries.
Neither the Company nor either of the Subsidiaries has waived any law or
regulation fixing, or consented to the extension of, any period of time for
assessment of any Taxes which waiver or consent is currently in effect. All
Taxes required to be paid by the Company or either of the Subsidiaries (whether
or not shown on a Tax Return) or for which the Company or either of the
Subsidiaries is liable, whether to taxing authorities or to other persons under
tax allocation agreements, and the charges, accruals, and reserves for Taxes
due, or accrued but not yet due, relating to its income, properties,
transactions or operations for any period prior to Closing are reflected on the
books (including, without limitation, the Financial Statements) of the Company
and the Subsidiaries and such reserves are adequate in the aggregate to cover
such Taxes. No payment that is owed or may become due to any director, officer,
employee or agent of the Company or either of the Subsidiaries will be
non-deductible to the Company or either of the Subsidiaries or subject to tax
under Section 280G of the Code; nor will any of the
A-15
<PAGE>
Company or the Subsidiaries be required to "gross up" or otherwise compensate
any such person because of the imposition of any excise tax on a payment to such
person.
3.15 LITIGATION. Except as set forth on Schedule 3.15, there are no
actions, claims, suits, investigations, inquiries or proceedings pending against
the Company or either of the Subsidiaries or IN REM against any of the Assets
or, to the knowledge of the Shareholders, threatened against the Company or
either of the Subsidiaries or IN REM against any of the Assets, at law or in
equity, in any court, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or other
instrumentality which could (a) affect the validity or enforceability of this
Agreement or the documents contemplated hereby to be executed by the Company or
any one or more of the Shareholders, (b) restrict the continuing transaction of
business with the customers of Company or either of the Subsidiaries; (c) delay
consummation of the transactions contemplated hereby or (d) establish a Lien
against any of the Assets. Neither the Company nor either of the Subsidiaries is
in violation of any order, decree, judgment, award, determination, ruling or
regulation of any court, governmental department, commission, board, bureau,
agency or other instrumentality, the result of which violation individually or
violations in the aggregate has had or could have an adverse effect on the
Company, either of the Subsidiaries or the Assets or could affect the validity
or enforceability of this Agreement or the documents contemplated to be executed
by the Company, (i) restrict the continuing transaction of business with the
customers of Company or either of the Subsidiaries; (ii) delay consummation of
the transactions contemplated hereby; or (iii) establish a Lien against any of
the Assets or the Company Common Stock.
3.16 BANKING RELATIONSHIPS. Schedule 3.16 sets forth (a) a correct and
complete list of each bank or similar financial institution in which the Company
or either of the Subsidiaries maintains an account or safety deposit box,
including the name, number and location of each such account or safety deposit
box, the name of each person authorized to draw on such account or have access
to such safety deposit box, and the nature and scope of such authority and (b) a
description of all loan agreements, lines of credit and other credit facilities
maintained by the Company or either of the Subsidiaries with banks or similar
financial institutions.
3.17 CUSTOMERS AND SUPPLIERS. Schedule 3.17 lists the names and addresses
of the customers and suppliers of the Company and the Subsidiaries since January
1, 1997. The relationships of the Company and the Subsidiaries with the
customers and suppliers listed in Schedule 3.17 are reasonably satisfactory, and
there are no material unresolved disputes with any of such customers or
suppliers. Except as set forth on Schedule 3.17, since January 1, 1997, no
customer or supplier involving business to the Company and the Subsidiaries in
excess of $50,000 in any calendar year has canceled or notified the Company or
either of the Subsidiaries in writing of its intent to cancel its relationship
with the Company or either of the Subsidiaries, and no customer or supplier has,
except in the normal course of business, modified or given notice of its intent
to modify its relationship with the Company or either of the Subsidiaries.
3.18 ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The accounts and notes
receivable of the Company and the Subsidiaries reflected in the Company's
Financial Statements and all accounts and notes receivable arising thereafter
and on or before the Closing Date arose from BONA FIDE transactions in the
ordinary course of business and are collectible in full without reserve,
allowance, counterclaim or offsetting claim. No counterclaims or offsetting
claims with respect to such accounts and notes receivable are pending or
threatened. Notwithstanding the foregoing, it shall not constitute a breach of
the representations and warranties contained in this Section 3.18 so long as any
uncollected receivables, including as a result of any counterclaim or offsetting
claim, do not exceed the allowance for doubtful accounts set forth in the most
recent Financial Statements. The accounts payable reflected in the Financial
Statements, and all accounts payable arising thereafter and before the date
hereof arose from BONA FIDE transactions in the ordinary course of business, and
all such accounts payable (a) have either been paid, (b) are not yet due and
payable under the standard procedures of the Company and the Subsidiaries for
payment of accounts payable, which procedures have been previously furnished to
CGX, or (c) are being contested by the Company or one of the Subsidiaries in
good faith.
A-16
<PAGE>
3.19 INVENTORIES. As of the Closing Date, the inventories of the Company
and the Subsidiaries consist of raw materials, goods in process and finished
goods saleable in the ordinary course of business of the Company and the
Subsidiaries, and the inventories are not excessive in kind or amount in light
of such business. All inventories are carried on the books of the Company and
the Subsidiaries at the lower of cost or market pursuant to the normal inventory
valuation policy of the Company and the Subsidiaries. No items included in
inventory of the Company or either of the Subsidiaries are or will be pledged as
collateral or are held by the Company or either of the Subsidiaries on
consignment from others. Neither the Company nor either of the Subsidiaries is
committed as of the date hereof, nor will be committed as of the Closing Date,
to purchase inventories in amounts greater than are required in the ordinary
course of its business. With respect to inventories in the hands of suppliers
for which the Company or either of the Subsidiaries will be committed as of the
Closing Date, such inventories on the Closing Date will be usable in the
ordinary course of business as presently being conducted. All such inventories
referred to above are usable within one (1) year of the Closing Date.
3.20 EMPLOYEE BENEFIT MATTERS; ERISA. (a) As used in this Section
3.20(a), all terms appearing in initial capitals shall have the meaning given
them in Section 3.20(b) hereof.
With respect to Pension Plans:
(i) No Pension Plans are or were subject to Title IV of ERISA or
Section 412 of the Code.
(ii) No Pension Plan is "top heavy" within the meaning of Section
416 of the Code.
(iii) Each Pension Plan and each related trust agreement, annuity
contract or other funding instrument is qualified and tax exempt under the
provisions of Sections 401(a) and 501(a) of the Code, and each has been so
determined by the Internal Revenue Service pursuant to a favorable
determination letter considering the Tax Reform Act of 1986, as amended, or
application for such determination has been made and is currently pending.
(iv) Each Pension Plan, related trust agreement, annuity contract or
other funding instrument is in all material respects in compliance with its
terms and, both as to form and in operation, with the requirements
prescribed by any and all Laws which are applicable to such Pension Plan,
including without limitation ERISA and the Code.
With respect to Multiemployer Plans:
There are no Multiemployer Plans, and neither the Company nor any
ERISA Affiliate has ever maintained, contributed to, or participated or
agreed to participate in any Multiemployer Plan. Neither the Company nor
any ERISA Affiliate has ever withdrawn, partially or completely, or
instituted steps to withdraw, whether partially or completely, from any
Multiemployer Plan, nor has any event occurred which would enable a
Multiemployer Plan to give notice of and demand payment of any withdrawal
liability with respect to the Company or any ERISA Affiliate.
With respect to Welfare Plans:
(i) Each Welfare Plan is in all material respects in compliance with
its terms and, both as to form and operation, with the requirements
prescribed by any and all Laws which are applicable to such Welfare Plan,
including without limitation ERISA, the Code, and all applicable state
insurance laws.
(ii) An estimate of the liabilities of the Company and any ERISA
Affiliates for providing retiree life and medical benefits coverage to
active and retired employees of the Company and any ERISA Affiliates has
been made and is reflected on the appropriate balance sheet and books and
records according to Statement of Financial Accounting Standards No. 106.
The Company, or any ERISA Affiliate, has the right to modify or terminate
any Welfare Plans that provide coverage or benefits for either or both
retired and active employees and/or their beneficiaries.
(iii) Each Welfare Plan which is a "group health plan," as defined
in Section 607(1) of ERISA, has been operated in all material respects in
compliance with provisions of Parts 6 and 7 of Title I, Subtitle B of ERISA
and Sections 4980B, 9801-9803, 9811, 9812, and 9831-9833 of the Code at all
times.
A-17
<PAGE>
(iv) All Welfare Plans which are self-insured "multiple employer
welfare arrangements" as such term is defined in Section 3(40) of ERISA
are listed on Schedule 3.20. Company and all ERISA Affiliates may withdraw
from, or terminate, any such plans at any time without incurring any
liability or accelerating the payment of any accrued obligations.
With respect to the ESOP:
The ESOP is duly organized and existing under applicable law, is a
stock bonus plan qualified under Section 401(a) of the Code and is an
"employee stock ownership plan" as defined in Section 4975(e)(7) of the
Code. There have been no loans by or to the ESOP. Neither the Company,
either of the Subsidiaries nor the ESOP is or has been in material breach
or violation of any ESOP transaction document, there are no remaining
unperformed obligations of the Company, either of the Subsidiaries or the
ESOP under any ESOP transaction document, and there are no amounts as to
which the Company, either of the Subsidiaries or the ESOP are or may be
liable under any ESOP transaction documents. Except as set forth on
Schedule 3.20, at the Closing Date, there have been no transactions under
Internal Revenue Code Section 1042 with respect to the ESOP. All legal
requirements applicable to the Company, either of the Subsidiaries, the
Trustees (or any predecessors thereto) and/or any other ESOP fiduciaries
(past or present) requiring prudence of fiduciaries, including without
limitation as to valuation matters and other similar matters relating to
discretionary judgments not involving legal judgments, have been complied
with in all material respects, and neither the Company nor either of the
Subsidiaries is or shall be subject to any liability as a fiduciary or
co-fiduciary under ERISA with respect to matters arising before and through
the Closing Date in connection with the ESOP. Neither the execution and
delivery of this Agreement nor the consummation of the transactions
described herein or any other agreement between or among the parties to
this Agreement, or the performance of the terms hereof or thereof, will
conflict with, violate, or result in a breach of the ESOP plan document,
any ESOP transaction documents or any agreement or other instrument by
which the Company, either of the Subsidiaries, the ESOP trustees or the
ESOP trust may be bound, and will not constitute a breach by any entity
acting as a fiduciary, within the meaning of ERISA, with respect to the
ESOP of any fiduciary responsibility or similar duty or obligation owed by
such entity to the participants of the ESOP under ERISA or otherwise.
With respect to Benefit Arrangements:
Each Benefit Arrangement is in all material respects in compliance
with its terms and with the requirements prescribed by any and all Laws
which are applicable to such Benefit Arrangement including, without
limitation, the Code.
With respect to fiduciary duties and prohibited transactions:
None of the Company, any ERISA Affiliate, any Shareholder or the
Trustees have any liability with respect to any transaction which relates
to any Welfare Plan or Pension Plan and which is in violation of Sections
404 or 406 of ERISA or constitutes a "prohibited transaction," as defined
in Section 4975(c)(1) of the Code, for which no exemption exists under
Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code. None of the
Company, any ERISA Affiliate, any Shareholder or the Trustees have
participated in a violation of Part 4 of Title I, Subtitle B of ERISA by
any plan fiduciary of any Welfare Plan or Pension Plan and/or have any
unpaid civil penalty under Section 502(1) of ERISA.
With respect to litigation:
There is no action, order, writ, injunction, judgment or decree
outstanding or claim, suit, litigation, proceeding, arbitral action,
governmental audit or investigation (including, without limitation, any
such audit or investigation by the Internal Revenue Service, Department of
Labor, or PBGC) relating to or seeking benefits under any Employee Plan
that is pending or, to the knowledge of the Shareholders, threatened or
anticipated against the Company or any ERISA Affiliate other than routine
claims for benefits. Except as set forth on Schedule 3.20, to the knowledge
of the Shareholders, no Employee has any claim against the Company (whether
under federal or state law, any employment
A-18
<PAGE>
agreement, or otherwise) on account of or for (i) overtime pay, other than
overtime pay for the current payroll period; (ii) wages or salary for any
period other than the current payroll period; (iii) vacation, time off,
sick time or pay in lieu of any of the foregoing, other than that earned in
respect of the current fiscal year of the Company; or (iv) any violation of
any statute, ordinance or regulation relating to minimum wages or maximum
hours of work. To the knowledge of the Shareholders, no Employee has any
claim, or basis for any material action or proceeding against the Company
arising under any statute, ordinance or regulation relating to
discrimination in employment or employment practices, occupational safety
and health standards or workers' compensation.
With respect to unpaid contributions:
Neither the Company nor any ERISA Affiliate has any liability for
unpaid contributions with respect to any Pension Plan, Welfare Plan, or
Benefit Arrangement. The Company and all ERISA Affiliates have made all
required contributions and paid all accrued liabilities under each such
plan for all periods through and including the Closing Date. For purposes
of the preceding sentence, accrued liability shall include a pro rata
contribution to each such plan for that portion of a plan year or other
applicable period which precedes the Closing Date, and accrued liabilities
for any portion of a plan year or other applicable period shall be
determined by multiplying the liability for the entire such year or period
by a fraction, the numerator of which is the number of days preceding the
Closing Date in such year or period, and the denominator of which is the
number of days in such year or period, as the case may be.
With respect to change of control payments:
Except as disclosed on Schedule 3.20, the execution of this Agreement
and the consummation of the transactions contemplated hereby will not
result in any payment (whether of separation pay or otherwise) becoming due
from the Company or any ERISA Affiliate to any current or former employee,
director, or consultant, or result in the vesting, acceleration of payment
or increase in the amount of any benefit payable to or in respect of any
such current or former employee, director, or consultant of the Company or
any ERISA Affiliate. Except as disclosed on Schedule 3.20, there is no
contract, agreement, plan or arrangement covering any current or former
employee, director, or consultant of the Company or any ERISA Affiliate
that, individually or collectively, could give rise to the payment of any
amount that would not be deductible pursuant to the terms of Sections
162(a)(1), 162(m), and/or 280G of the Code.
With respect to copies of documentation:
The Company has delivered to CGX pursuant to this Agreement, or shall
provide to CGX within ten (10) business days after the date hereof, a true
and complete set of copies of (10) all Employee Plans and related trust
agreements, annuity contracts or other funding instruments as in effect
immediately prior to the Closing Date, together with all amendments thereto
which shall become effective at a later date; (ii) the latest Internal
Revenue Service determination letter obtained with respect to any such
Employee Plan qualified or exempt under Section 401 or 501 of the Code;
(iii) annual reports (Form 5500 series or the alternative filing, if
applicable, under ERISA Regulation Section 2520.104-23) and certified
financial statements for the most recently completed three fiscal years for
each Employee Plan required to file such form, together with the most
recent actuarial report, if any, prepared by the Employee Plan's enrolled
actuary; (iv) all summary plan descriptions for each Employee Plan required
to prepare, file and distribute summary plan descriptions; (v) if
applicable, all documentation relating to the correction of Pension Plan
defects under the Employee Plans Compliance Resolution System or any
predecessor program thereto, (vi) if applicable, all summaries furnished or
made available to employees, officers and directors of the Company or their
ERISA Affiliates of all incentive compensation, other plans and fringe
benefits for which a summary plan description is not required; (vii) if
applicable, current registration statements on Form S-8 (or any other
applicable registration form) and amendments thereto with respect to any
Employee Plan; and (viii) the notifications to employees of their rights
under COBRA. Schedule 3.20 lists all Employee Plans maintained by the
Company.
A-19
<PAGE>
(b) Each of the following terms shall have the meaning indicated below:
BENEFIT ARRANGEMENT shall mean any employment, consulting, severance
or other similar contract, arrangement or policy and each plan,
arrangement, program, agreement or commitment providing for insurance
coverage (including without limitation any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment
benefits, vacation benefits, retirement benefits, life, health, disability
or accident benefits (including without limitation any "voluntary
employees' beneficiary association" as defined in Section 501(c)(9) of the
Code providing for the same or other benefits) or for deferred
compensation, profit-sharing bonuses, stock options, restricted stock,
phantom stock, stock appreciation rights, stock purchases or other forms of
incentive compensation or post-retirement insurance, compensation or
benefits which (i) is not a Welfare Plan, Pension Plan or Multiemployer
Plan, (ii) is or has been entered into, maintained, contributed to or
required to be contributed to, as the case may be, by the Company or any
ERISA Affiliate, and (iii) covers or covered any current or former
employee, director, or consultant of the Company or any ERISA Affiliate
(with respect to their relationship with such entities).
COBRA shall mean the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended, and the Regulations promulgated thereunder.
COURT shall mean any court, tribunal, or other judicial or arbitral
panel of the United States, any foreign country, or any domestic or foreign
state, and any political subdivision or agency thereof.
EMPLOYEE PLANS shall mean all Benefit Arrangements, Multiemployer
Plans, Pension Plans and Welfare Plans.
ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended, and the Regulations promulgated thereunder.
ERISA AFFILIATE shall mean any entity which is (or at any relevant
time was) a member of a "controlled group of corporations" with, under
"common control" with, or a member of an "affiliated service group"
with the Company or any of the Sellers, as such terms are defined in
Section 414(b), (c), (m) or (o) of the Code, including without limitation
the Subsidiaries.
LAWS shall mean all laws, statutes, ordinances, rulings and
Regulations of the United States, any foreign country, or any domestic or
foreign state, and any political subdivision or agency thereof, including
all decisions of Courts having the effect of law in each such jurisdiction.
MULTIEMPLOYER PLAN shall mean any "multiemployer plan," as defined
in Sections 3(37) or 4001(a)(3) of ERISA, which (i) is or has been entered
into, maintained, administered, contributed to or required to be
contributed to, as the case may be, by the Company or any ERISA Affiliate
and (ii) covers or covered any employee or former employee of the Company
or any ERISA Affiliate (with respect to their relationship with such
entities).
PBGC shall mean the Pension Benefit Guaranty Corporation.
PENSION PLAN shall mean the ESOP and any other "employee pension
benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) which (i) is or has been entered into, maintained,
administered, contributed to or required to be contributed to, as the case
may be, by the Company or any ERISA Affiliate and (ii) covers or covered
any current or former employee, director, or consultant of the Company or
any ERISA Affiliate (with respect to their relationship with such
entities).
REGULATION shall mean any rule or regulation of any governmental
authority having the effect of law.
WELFARE PLAN shall mean any "employee welfare benefit plan" as
defined in Section 3(1) of ERISA, which (i) is or has been entered into,
maintained, administered, contributed to or required to be contributed to,
as the case may be, by the Company or any ERISA Affiliate and (ii) covers
or covered any current or former employee, director, or consultant of the
Company or any ERISA Affiliate (with respect to their relationship with
such entities).
A-20
<PAGE>
3.21 CONTRACTS AND COMMITMENTS. Schedule 3.21 contains a true, complete
and correct list (and the Company has previously delivered to CGX true, complete
and correct copies) of all of the following documents or agreements, or
summaries of material oral agreements or understandings, relating to the
business of the Company or either of the Subsidiaries or to the Assets to which,
on the date of this Agreement, the Company, either of the Subsidiaries or any
one or more of the Shareholders is a party, or which relate to or affect the
Company, either of the Subsidiaries, the business of the Company or either of
the Subsidiaries, the Assets, or any Shareholder or the transactions
contemplated hereby and all documents or agreements which may require any action
or consent in connection with such transactions, as they may have been amended
to the date hereof:
(a) any written employment or consulting agreement, contract or
commitment with any employee, officer or director or any contract or
agreement with other consultants;
(b) any agreement, contract or commitment with any party containing
any covenant limiting the ability of the Company, either of the
Subsidiaries, any one or more of the Shareholders or any employee of the
Company or either of the Subsidiaries to engage in business or to compete
in any location or with any person;
(c) any partnership or joint venture agreement with any party or any
arrangements with any party with respect to the sharing of or in the
profits or revenues of the Company or either of the Subsidiaries, including
without limitation any licensing or royalty agreements;
(d) any agreement or instrument relating to the borrowing of money,
or the direct or indirect guarantee of any obligation for, or an agreement
to service the repayment of, borrowed money or any other contingent
obligations in respect of indebtedness of any other party;
(e) any agreement, contract or commitment relating to the future
disposition or acquisition of any investment in any party or of any
interest in any business enterprise involving the business of the Company
or either of the Subsidiaries or the Assets;
(f) any contract or commitment for capital expenditures or the
acquisition or construction of fixed assets;
(g) any contract or commitment for the sale or furnishing of
materials, supplies, merchandise, equipment or services;
(h) any written agreement, instrument or other arrangement, or any
material unwritten agreement, contract, commitment or other arrangement,
between or among the Company or either of the Subsidiaries and any of the
affiliates of the Company or either of the Subsidiaries;
(i) any contract which grants to any person a preferential right to
purchase any of the Assets;
(j) any contract, agreement or commitment with respect to the
discharge or removal of a Contaminant (as defined in Section 3.27(b) below)
other than in the ordinary course of business; and
(k) any other agreement or instrument not made in the ordinary course
of business.
There is no course of dealing, waiver, side agreement, arrangement or
understanding applicable to any such contract of the Company, either of the
Subsidiaries or any one or more of the Shareholders not disclosed therein or in
Schedule 3.21.
3.22 PATENTS, TRADEMARKS AND COPYRIGHTS. Except as set forth on Schedule
3.22, neither the Company nor either of the Subsidiaries owns or is a licensee
or sublicensee of any patents, trademarks, copyrights or other intellectual
property rights except for such rights that are incorporated by the
manufacturers into the Assets, without granting the Company or either of the
Subsidiaries any specified rights therein. There have been no claims made, and
neither the Company, either of the Subsidiaries or any Shareholder has received
any notice and neither the Company, either of the Subsidiaries nor any
Shareholder otherwise knows or has reason to believe that the operation of the
business of the Company or either of the Subsidiaries or any of the Assets is in
conflict with the rights of others.
A-21
<PAGE>
3.23 INSURANCE. Schedule 3.23 sets forth a true, complete and correct
list of all insurance policies of any kind or nature covering the Company and/or
the Subsidiaries, with respect to the business of the Company, the Subsidiaries
and the Assets, including without limitation policies of life, fire, theft,
employee fidelity, worker's compensation, property and other casualty and
liability insurance, and indicates the type of coverage, name of insured, the
insurer, the premium, the expiration date of each policy and the amount of
coverage for statutory workers' compensation. Schedule 3.23 also sets forth a
list of any currently pending claims and any claims asserted under such policies
or similar policies within the last three (3) years. The premiums for the
insurance policies listed in Schedule 3.23 have been fully paid to the extent
due through the date hereof. The insurance afforded under such policies or
certificates is in full force and effect and will continue to cover the Company
and/or the Subsidiaries, with respect to the business of the Company, the
Subsidiaries and the Assets, through the Closing. True, complete and correct
copies of each such policy have been made available to CGX. Except as set forth
on Schedule 3.23, none of such insurance policies are subject to retroactive
premium adjustment in respect of prior periods or premium calls resulting from
participation in Multiemployer Plans.
3.24 EMPLOYEES. Schedule 3.24 lists all employees of the Company and the
Subsidiaries, the rates of pay for each employee of the Company and the
Subsidiaries, and all commission, bonus or other compensation or expense
reimbursement or allowance arrangements between the Company, the Subsidiaries
and any of their respective employees. Schedule 3.24 lists each management or
employment contract or contract for personal services and a description of any
understanding or commitment between the Company and the Subsidiaries and any
officer, consultant, director, employee, independent contractor or other person
or entity. A true and complete copy of such contracts and a description of such
understandings and commitments has been delivered to CGX. Neither the Company,
either of the Subsidiaries nor any Shareholder has through the date hereof made,
and none will hereafter make, any statement or communication of any kind
regarding whether, or the terms and conditions upon which, any such employee may
continue to be employed by the Company or either of the Subsidiaries without the
prior approval of CGX. Each of the Company and the Subsidiaries has taken all
necessary actions to comply with the Worker Adjustment and Retraining
Notification Act (the "WARN Act") before the Effective Time, to the extent it
is subject to the WARN Act.
3.25 LABOR AGREEMENTS; DISPUTES. Neither the Company nor either of the
Subsidiaries is a party to or has any obligation under any collective bargaining
agreement or other labor union contract, white paper or side agreement with any
labor union or organization, nor any obligation to recognize or deal with any
labor union or organization. To the knowledge of the Shareholders, there are no
overt activities or efforts of any labor union or organization (or
representatives thereof) to organize any employees engaged in the business of
the Company or either of the Subsidiaries, nor of any demands for recognition or
collective bargaining, nor of any strikes, slowdowns, work stoppages or
lock-outs of any kind, or overt threats thereof, by or with respect to any of
its employees, or any actual or claimed representatives thereof, and no such
activities, efforts, demands, strikes, slowdowns, work stoppages or lock-outs
occurred during the three-year period preceding the date hereof. There are no
charges or complaints involving any federal, state or local civil rights
enforcement agency or court; complaints or citations under the Occupational
Safety and Health Act or any state or local occupational safety act or
regulation; unfair labor practice charges or complaints with the National Labor
Relations Board; or other claims, charges, actions or controversies pending, or,
threatened or proposed, involving the Company, either of the Subsidiaries and
any employee, former employee or any labor union or other organization
representing or claiming to represent such employees' interests. Each of the
Company and the Subsidiaries is and has heretofore been in compliance in all
material respects with all laws, rules and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours,
the sponsorship, maintenance, administration and operation of (or the
participation of its employees in) employee benefit plans and arrangements and
occupational safety and health programs, and neither the Company nor either of
the Subsidiaries is engaged in any violation of any law, rule or regulation
related to employment, including unfair labor practices or acts of employment
discrimination, which would adversely affect the business of the Company or the
Subsidiaries.
A-22
<PAGE>
3.26 REGULATORY FILINGS. Each of the Company and the Subsidiaries has
filed all reports, statements, documents, registrations, filings or submissions
required, in connection with the operation of the business of the Company,
either of the Subsidiaries or the Assets, to be filed by the Company or either
of the Subsidiaries with any federal, state, municipal or other governmental
department, commission, board, bureau, agency or other instrumentality. All such
filings complied with applicable law when filed and no deficiencies have been
asserted by any such regulatory authority with respect to such filings or
submissions.
3.27 ENVIRONMENTAL AND HEALTH AND SAFETY MATTERS. (a) In this Section
3.27(a), all terms appearing in initial capitals shall have the meaning given
them in Section 3.27(b) hereof. With respect to the business of the Company, the
Subsidiaries and the Facilities, and except as to those matters identified on
Schedule 3.27 and in the Phase I report(s) prepared by Law Engineering, (i) the
operations of each of the Company and the Subsidiaries comply in all material
respects with all applicable environmental, health and safety statutes,
treaties, conventions, rules, ordinances, and regulations in all jurisdictions
in which the Company or either of the Subsidiaries conducts business, including
without limitation all Environmental Laws applicable to the jurisdictions in
which operations are conducted; (ii) none of the operations of the Company or
either of the Subsidiaries are subject to any judicial or administrative
proceeding alleging the violation of any Environmental Law; (iii) none of the
operations of the Company or either of the Subsidiaries are the subject of any
federal or state investigation evaluating whether any Remedial Action is needed
to respond to a Release of any Contaminant or other substance into the
environment; (iv) neither the Company nor either of the Subsidiaries has filed
any notice under any Environmental Law applicable to the jurisdiction in which
operations of the Company or either of the Subsidiaries are conducted indicating
past or present treatment, storage or disposal of a hazardous waste or reporting
a Release of a Contaminant or other substance into the environment; (v) neither
the Company nor either of the Subsidiaries has any contingent liability in
connection with any Release of any Contaminant or other substance on, into or
from any property owned or leased by either the Company or either of the
Subsidiaries, the environment, including without limitation any contingent
liability for failure to report a Release; (vi) none of the operations of the
Company or the Subsidiaries involve the generation, transportation, treatment or
disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 (in effect
as of the date of this Agreement) or any state equivalent thereof, in violation
of any Environmental Law applicable to the jurisdiction in which operations of
the Company or either of the Subsidiaries are conducted, including without
limitation statutes, regulations and laws pertaining to permits and manifests;
(vii) neither the Company nor either of the Subsidiaries has disposed of any
hazardous waste or substance or other material by placing it in or on the ground
or waters of any premises owned, leased or used by the Company or either of the
Subsidiaries in violation of any Environmental Law applicable to the
jurisdiction in which operations of the Company or either of the Subsidiaries
are conducted nor has any lessee or prior owner; (viii) no underground storage
tanks or surface impoundments are, on any of the locations upon which the
operations of the Company or either of the Subsidiaries are conducted, in
violation of any Environmental Law applicable to the jurisdiction in which
operations of the Company or either of the Subsidiaries are conducted; and (ix)
no Lien in favor of any governmental authority for (1) any liability under
Environmental Laws applicable to the jurisdiction in which operations of the
Company or either of the Subsidiaries with respect to the business of the
Company or either of the Subsidiaries is conducted, or (2) damages arising from
or costs incurred by such governmental authority in response to a release of a
Contaminant or other substance into the environment has been filed or attached
to any of the Assets or any of the locations upon which the operations of the
Company or either of the Subsidiaries with respect to the business of the
Company or either of the Subsidiaries is conducted.
(b) Each of the following terms shall have the meaning indicated below:
CONTAMINANT shall mean those substances or materials that are defined
as hazardous or toxic or that are regulated by or form the basis of
liability under any Environmental Law, including without limitation
asbestos, polychlorinated biphenyls ("PCBs"), and radioactive substances,
or any other material or substance that constitutes a health, safety or
environmental hazard to any person or property.
A-23
<PAGE>
ENVIRONMENTAL CLAIM shall mean any accusation, allegation, notice of
violation, claim, demand, abatement or other order or direction
(conditional or otherwise) by any governmental authority or any person for
personal injury (including sickness, disease or death), tangible or
intangible property damage, damage to the environment, nuisance, pollution,
contamination or other adverse effects on the environment, or for fines,
penalties or restrictions, resulting from or based upon (i) the existence,
or the continuation of the existence, of a Release (including without
limitation sudden or non-sudden, accidental or non-accidental Releases) of
or exposure to any Contaminant, odor or audible noise, into or onto the
environment (including without limitation the air, ground, water or any
surface) at, in, by, from or related to the Facilities, (ii) the
transportation, storage, treatment or disposal of materials in connection
with the operation of the Facilities or (iii) the violation or alleged
violation of any statutes, ordinances, orders, rules, regulations, Permits
or licenses of or from any governmental authority, agency or court relating
to environmental matters connected with the Facilities.
ENVIRONMENTAL LAWS shall mean all federal, state or local laws
relating to health, safety or the environment, including without limitation
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") (42 U.S.C. ^ 9601 ET SEQ.), the Hazardous Material
Transportation Act (49 U.S.C. ^ 1801 ET SEQ.), the Resource Conservation
and Recovery Act (42 U.S.C. ^ 6901 ET SEQ.), the Clean Air Act (42 U.S.C.
^ 7401 ET SEQ.), the Clean Water Act (33 U.S.C. ^ 1251 ET SEQ.), the Toxic
Substances Control Act, as amended (15 U.S.C. ^ 2601 ET SEQ.), the National
Environmental Policy Act (42 U.S.C. ^ 4321 ET SEQ.), the Oil Pollution Act
(33 U.S.C. ^ 2701 ET SEQ.) and the Occupational Safety and Health Act (29
U.S.C. ^ 651 ET SEQ.), as these laws have been amended or supplemented, and
any analogous state or local statutes, rules or ordinances and the
regulations promulgated pursuant thereto.
FACILITIES shall mean real and personal property owned, leased or used
by the Company or either of the Subsidiaries with respect to the business
of the Company and the Subsidiaries, including without limitation the
Assets.
PERMIT shall mean any permit, approval, authorization, license
variance, or permission required from a governmental authority under any
applicable Environmental Laws.
RELEASE shall mean any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching, or migration
into the indoor or outdoor environment, or into or out of any property
owned or leased by the Company or either of the Subsidiaries, including the
movement of any Contaminant through or in the air, soil, surface water,
groundwater, or property and including without limitation the meanings of
such words as set forth in the laws, applicable treaties, rules, ordinances
or regulations or analogous governmental provisions referred to under
Environmental Laws.
REMEDIAL ACTION shall mean all actions required or voluntarily
undertaken to (i) clean up, remove, treat, or in any other way address any
Contaminant in the indoor or outdoor environment; (ii) prevent the Release
or threat of Release, or minimize the further Release of any Contaminant so
it does not migrate or endanger or threaten to endanger public health or
welfare of the indoor or outdoor environment; or (iii) perform pre-remedial
studies and investigations and post-remedial monitoring and care.
3.28 BROKERS. All negotiations with respect to this Agreement and the
transactions contemplated hereby have been carried out by the Shareholders and
the Company directly with CGX and Newco, without the intervention of any person
on behalf of the Company or the Sellers in such manner as to give rise to any
valid claim by any person against CGX, the Company, either of the Subsidiaries
or Newco for a finder's fee, brokerage commission or similar payment.
3.29 COMPANY DISCLOSURE. Information provided by the Company by or
through its officers, employees or other representatives in response to
inquiries in connection with the due diligence performed by representatives of
CGX, as revised or updated by subsequent disclosures and this Agreement, is
complete and accurate. Copies of all documents and other written information
referred to herein or in the
A-24
<PAGE>
schedules that have been delivered or made available to CGX are true, correct
and complete copies thereof and include all amendments, supplements or
modifications thereto or waivers thereunder. Such documents and other written
information do not omit any material facts necessary, in light of the
circumstances under which such information was furnished, to make the statements
set forth therein not misleading. Except as expressly set forth in this
Agreement and the schedules or in the certificates or other documents delivered
pursuant hereto, the Company has no knowledge of any facts which would have an
adverse effect on the value of the business of the Company or either of the
Subsidiaries or the Assets.
3.30 COMPANY INFORMATION IN REGISTRATION STATEMENT. None of the
information that has been or will be supplied by the Company or its
representatives for inclusion (including as a component of the pro forma
financial statements of CGX) in (a) the Registration Statement on Form S-4 (the
"Registration Statement") to be filed by CGX with the Commission in connection
with the CGX Common Stock to be issued in the Merger, (b) the prospectus and
solicitation of authorization to be mailed to the shareholders of the Company
and the participants in the ESOP (the "Prospectus") in connection with the
solicitation of approval by such shareholders and participants and (c) any other
documents to be filed with the Commission or any other regulatory authority in
connection with the transactions contemplated hereby will at the respective
times such documents are filed, and, in the case of the Registration Statement,
when it becomes effective and, with respect to the Prospectus, when first mailed
to such shareholders and participants, be false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to make
the statements therein not misleading or, in the case of the Prospectus or any
amendment thereof or supplement thereto, at the time of any such shareholders'
and participants' meetings, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein in light of the circumstances under which they were made not misleading.
All documents that the Company may be responsible for filing with any regulatory
authority in connection with the transactions contemplated hereby will comply
with the provisions of applicable law. If at any time before the Effective Time
any event relating to the Company, the Subsidiaries or any of their respective
affiliates, officers or directors should be discovered by the Company that
should be set forth in an amendment to the Registration Statement or a
supplement to the Prospectus, the Company shall promptly inform CGX of such
event.
3.31 INTERESTS IN CUSTOMERS AND SUPPLIERS. No officer or director of the
Company or either of the Subsidiaries possesses, directly or indirectly, any
financial interest in, or is a director, officer or employee of, any corporation
or business organization (i) that is a supplier, customer, lessor (except with
respect to John F. Green's interest in the Demarr Partnership, a general
partnership, that leases the White Plains property to the Company), lessee or
competitor or potential competitor of the Company or either of the Subsidiaries
or (ii) that has entered into any contract with the Company or either of the
Subsidiaries.
3.32 TRANSACTIONS WITH AFFILIATES. Except as set forth on Schedule 3.32,
there are no contracts or arrangements (formal or informal, written or oral)
related directly or indirectly to the business of the Company or either of the
Subsidiaries or the Assets between the Company, either of the Subsidiaries or
any one or more of the Shareholders and any persons controlling, under common
control with or controlled by the Company (including the Subsidiaries and the
Shareholders) other than employment arrangements otherwise disclosed pursuant to
the terms of this Agreement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF SHAREHOLDERS
Each of the Shareholders represents and warrants, jointly and severally, to
CGX and Newco that as of the date hereof:
4.1 OWNERSHIP; VOTING RIGHTS. Such Shareholder is the record and
beneficial owner of the issued and outstanding capital stock of the Company as
set forth on Schedule 3.3, free and clear of all Liens, as well as certain other
shares held by the ESOP for the benefit of such Shareholder not set forth on
Schedule 3.3. Except as set forth on Schedule 4.1, there are no shareholder
agreements, voting trusts, proxies or other
A-25
<PAGE>
agreements or understandings with respect to the outstanding shares of capital
stock of the Company owned by such Shareholder to which such Shareholder is a
party.
4.2 AUTHORITY OF SHAREHOLDERS. Such Shareholder has the full right,
power, legal capacity and authority to enter into, execute and deliver this
Agreement and the documents contemplated hereby to be executed by such
Shareholder and to perform the obligations to be performed by such Shareholder
hereunder and thereunder, respectively. This Agreement and all such documents
have been duly executed and delivered by such Shareholder and constitute the
legal, valid and binding obligations of such Shareholder, respectively,
enforceable against such Shareholder in accordance with their respective terms.
4.3 NO CONFLICTS. The execution and delivery by such Shareholder of this
Agreement and the documents contemplated hereby to be executed by such
Shareholder and, subject to the approval of the Merger by the Shareholders and
the participants in the ESOP, the performance by such Shareholder of its
obligations hereunder and thereunder do not, and consummation of the
transactions contemplated hereby and thereby will not, (a) violate or conflict
with any existing term or provision of any material law, statute, ordinance,
rule, regulation, order, writ, judgment, injunction or decree binding upon such
Shareholder or upon the securities, properties or assets of such Shareholder;
(b) conflict with or result in a breach of or default under any of the terms,
conditions or provisions of any agreement or instrument to which such
Shareholder is a party or otherwise subject or by which such Shareholder may be
bound; or (c) require the approval or consent of any federal, state, local or
other governmental or regulatory body or the approval or consent of any other
person.
4.4 CONSENTS AND APPROVALS. Except with respect to (a) the filing of
Articles of Merger in accordance with the MGCL, (b) obtaining the approval of
the ESOP participants and (c) as set forth on Schedule 3.7, the execution and
delivery by such Shareholder of this Agreement and the documents contemplated
hereby to be executed by such Shareholder and performance by such Shareholder of
its obligations hereunder and thereunder do not require such Shareholder to
obtain any consent, approval or action of, make any filings with or give any
notice to any corporation, person, firm or other entity, or any public,
governmental or judicial authority.
4.5 CUSTOMARY BUSINESS PRACTICE. Except as set forth on Schedule 3.10,
such Shareholder has not, in connection with the business of the Company and the
Subsidiaries, instituted or maintained any unwritten understandings or
relationships that are outside of the ordinary course of business in the
industry, or that are inconsistent with customary and standard practice in the
industry.
4.6 SHAREHOLDER DISCLOSURE. Information provided by such Shareholder or
by or through an agent or other representative of such Shareholder in response
to inquiries in connection with the due diligence performed by representatives
of CGX, as revised or updated by subsequent disclosures and this Agreement, was
complete and accurate in all material respects. Except as expressly set forth in
this Agreement and the Schedules or in the certificates or other documents
delivered pursuant hereto, such Shareholder does not have any knowledge of any
facts that will have any adverse effect on the value of the business of the
Company, either of the Subsidiaries or the Assets.
4.7 RIGHTS AGAINST COMPANY COMMON STOCK. Except as set forth on Schedule
4.7, there are no persons who by reason of any past or present relationship with
such Shareholder, including prior or existing marital relationships, may have
any rights or claims with respect to the capital stock of the Company or against
the Company.
4.8 NO TRADING IN CGX SHARES. From and after June 29, 1998 through the
date hereof, such Shareholder has not, directly or indirectly in his or her own
name or beneficially, effected or caused any other person to effect any trading
in the public market for CGX Shares in any way that would benefit such
Shareholder.
4.9 COMPANY REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained herein do not contain any untrue statement
of a material fact and, when taken together, do not omit to state any material
fact necessary to make such representations, warranties and statements, in light
of the circumstances under which they were made, not misleading.
A-26
<PAGE>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF TRUSTEES
The Trustees represent and warrant to CGX and Newco that as of the date
hereof:
5.1 OWNERSHIP; VOTING RIGHTS. The Trustees are the record, and the
participants therein are the beneficial, owners of the issued and outstanding
capital stock of the Company as set forth on Schedule 3.3, free and clear of all
Liens. Except as set forth on Schedule 4.1 and in the ESOP Agreement (defined
below), there are no shareholder agreements, voting trusts, proxies or other
agreements or understandings with respect to the outstanding shares of capital
stock of the Company owned by the Trustees to which the Trustees or the ESOP is
a party.
5.2 AUTHORITY OF TRUSTEES. The Trustees have the capacity under
applicable state law to serve as trustees under the Agreement and Declaration of
Trust executed in connection with the ESOP. The Trustees are the sole trustees
of the ESOP, have delivered to CGX a complete and correct copy of the Agreement
and Declaration of Trust executed in connection with the ESOP, including all
amendments thereto (the "ESOP Agreement"), and, subject to receipt of
direction as required by the ESOP Agreement, have the full right, power and
authority to enter into, execute and deliver this Agreement for the limited
purposes set forth herein and the documents contemplated hereby to be executed
by the Trustees on behalf of the ESOP and to perform the obligations to be
performed by the Trustees on behalf of the ESOP hereunder and thereunder,
respectively. This Agreement and all such documents have been duly executed and
delivered by the Trustees on behalf of the ESOP and upon approval of the Merger
by the participants in the ESOP constitute the legal, valid and binding
obligations of the ESOP, respectively, enforceable against the ESOP in
accordance with their respective terms. No breach of obligations on the part of
the Trustees has occurred and is continuing under the Agreement and Declaration
of Trust executed in connection with the ESOP, the consequences of which breach
would likely have a material adverse effect on the ability of the Trustees to
act as trustees of such Trust or on the properties, activities, condition
(financial or otherwise), or operations of such Trust.
5.3 NO CONFLICTS. The execution and delivery by the Trustees on behalf of
the ESOP of this Agreement and the documents contemplated hereby to be executed
by the Trustees on behalf of the ESOP and, subject to obtaining the approval of
the participants in the ESOP and the shareholders of the Company, consummation
of the transactions contemplated hereby and thereby will not, (a) violate or
conflict with any existing term or provision of any law, statute, ordinance,
rule, regulation, order, writ, judgment, injunction or decree binding upon the
ESOP or upon the securities, properties or assets thereof or (b) conflict with
or result in a breach of or default under the terms of the ESOP or its related
Agreement and Declaration of Trust or any of the terms, conditions or provisions
of any agreement or instrument to which the ESOP is a party or otherwise subject
or by which the ESOP may be bound.
5.4 CONSENTS AND APPROVALS. Except with respect to compliance with any
applicable requirements of the HSR Act and as required by the terms of the ESOP
and the Agreement and Declaration of Trust executed in connection with the ESOP,
the execution and delivery by the Trustees of this Agreement and the documents
contemplated hereby to be executed by the Trustees on behalf of the ESOP do not
require the Trustees to obtain, other than the required approval of the
participants in the ESOP, any consent, approval or action of, make any filings
with or give any notice to any corporation, person, firm or other entity, or any
public, governmental or judicial authority.
5.5 ESOP DISCLOSURE. The plan and trust documents relating to the ESOP
provided by the ESOP or by or through an agent or other representative of the
ESOP or the Trustees in response to inquiries in connection with the due
diligence performed by representatives of CGX, as revised or updated by
subsequent disclosures and this Agreement, were complete and accurate in all
material respects. The representations and warranties of the Company in Section
3.20 above with respect to the ESOP do not contain any untrue statement of a
material fact and do not omit to state any material fact necessary to make such
representations, warranties and statements, in light of the circumstances under
which they were made, not misleading.
A-27
<PAGE>
5.6 NO TRADING IN CGX SHARES. From and after June 29, 1998 through the
date hereof, the Trustees have not, directly or indirectly in his own name, in
the name or on behalf of the ESOP or otherwise, effected or caused any other
person to effect any trading in the public market for CGX Shares in any way that
would benefit the Trustees or the ESOP.
5.7 LITIGATION. There are no actions, suits, or proceedings now pending
or, to the knowledge of the Trustees, threatened against the Trustees, which (i)
involve the Agreement and Declaration of Trust executed in connection with the
ESOP (other than a filing with the Internal Revenue Service for a determination
of the qualified status of such Trust or Domestic Relations Orders) or (ii)
might impair, in any material respect, the validity or enforceability of, or the
ability of the Trustees or such trust to perform their respective obligations
under the Agreement and Plan of Reorganization or such Trust.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
OF CGX AND NEWCO
Each of CGX and Newco represents and warrants to the Company that as of the
date hereof:
6.1 ORGANIZATION AND GOOD STANDING. CGX is a corporation duly organized,
validly existing and in good standing under the laws of the State of Texas.
Newco is a corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland.
6.2 AUTHORITY OF CGX AND NEWCO. Each of CGX and Newco has all requisite
corporate power and authority to enter into this Agreement and each agreement,
document and instrument required to be executed and delivered by CGX and Newco,
as applicable, pursuant to this Agreement (the "CGX Closing Documents"), and
to perform the obligations to be performed by CGX and Newco, respectively,
hereunder and thereunder. The execution, delivery and compliance by CGX and
Newco with the terms of this Agreement and the CGX Closing Documents and the
consummation by CGX and Newco of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action by CGX and
Newco, respectively. This Agreement has been duly executed and delivered by CGX
and Newco. This Agreement constitutes, and the documents contemplated hereby to
be executed by CGX and Newco, respectively, upon their execution and delivery as
herein provided will constitute the legal, valid and binding obligations of CGX
and Newco, respectively, enforceable against the same in accordance with their
respective terms.
6.3 CAPITALIZATION OF CGX. The authorized capital stock of CGX consists
of 100,000,000 shares of common stock, $.01 par value per share, of which
13,293,726 shares were issued and outstanding as of July 31, 1998, and 5,000,000
shares of preferred stock, $1.00 par value per share, of which no shares are
currently issued and outstanding. All of the issued and outstanding shares have
been validly issued, are fully paid and nonassessable and were issued free of
preemptive rights, in compliance with any rights of first refusal and in
compliance with all legal requirements.
6.4 CAPITALIZATION OF NEWCO. The authorized capital stock of Newco
consists of 100,000 shares of common stock, $.01 par value per share, of which
100,000 shares are issued and outstanding and owned by CGX. All of the issued
and outstanding shares have been validly issued, are fully paid and
nonassessable and were issued free of preemptive rights, in compliance with any
rights of first refusal and in compliance with all legal requirements.
6.5 NO CONFLICTS. The execution and delivery by CGX and Newco of this
Agreement and the CGX Closing Documents, compliance by CGX and Newco with the
terms hereof and thereof, and the consummation by CGX and Newco of the
transactions contemplated hereby and thereby will not, (a) subject to obtaining
clearance under the HSR Act and the declaration by the Commission of the
effectiveness of the Registration Statement, violate or conflict with any
existing term or provision of any law, statute, ordinance, rule, regulation,
order, writ, judgment, injunction or decree applicable to CGX or Newco,
respectively, where such violation or conflict could reasonably be expected to
materially and adversely affect the ability of CGX or Newco to consummate the
transactions contemplated hereby; (b) conflict with or result in a
A-28
<PAGE>
breach of or default under any of the terms, conditions or provisions of the
articles of incorporation or bylaws of CGX or Newco, respectively, or any
agreement or instrument to which CGX or Newco, respectively, is a party or by
which CGX or Newco, respectively, or any of the assets or properties thereof may
be bound or subject, where such breach or default could reasonably be expected
to materially and adversely affect the ability of CGX or Newco to consummate the
transactions contemplated hereby; (c) result in the creation or imposition of
any Lien upon the assets or properties of CGX or Newco, where such Lien could
reasonably be expected to materially and adversely affect the ability of CGX or
Newco to consummate the transactions contemplated hereby; (d) give to others any
right of termination, cancellation, acceleration or modification in or with
respect to any agreement or instrument to which CGX or Newco, respectively, is a
party, or by which CGX and Newco, or any of the Assets or properties of the same
may be bound or subject, where such termination, cancellation, acceleration or
modification of any such agreement or instrument could reasonably be expected to
materially and adversely affect the ability of CGX or Newco to consummate the
transactions contemplated hereby; or (e) breach any fiduciary duty of CGX or
Newco to any person or entity, where such breach could reasonably be expected to
materially and adversely affect the ability of CGX or Newco to consummate the
transactions contemplated hereby.
6.6 CONSENTS AND APPROVALS. Except with respect to (a) the filing of the
Articles of Merger with and their acceptance by the Department, (b) compliance
with any applicable requirements of the HSR Act, (c) compliance with any
applicable requirements of the 1933 Act, (d) compliance with any "blue sky" or
other state securities laws, (e) compliance with any applicable rules and
regulations of the New York Stock Exchange and (f) such consents as have been
previously obtained, the execution and delivery by CGX and Newco of this
Agreement and the documents contemplated hereby to be executed by CGX and Newco,
respectively, compliance by CGX and Newco with the terms hereof and thereof, and
the consummation by CGX and Newco of the transactions contemplated hereby and
thereby, do not require CGX or Newco, respectively, to obtain any consent,
approval or action of, or make any filing with or give any notice to (other than
filings and press releases required under applicable securities laws) any
corporation, person or firm or other entity or any public, governmental or
judicial authority, the failure to obtain which could reasonably be expected to
materially and adversely affect the ability of CGX or Newco to consummate the
transactions contemplated hereby.
6.7 BROKERS. All negotiations with respect to this Agreement and the
transactions contemplated hereby have been carried out by CGX and Newco directly
with the Shareholders and the Company, without the intervention of any person on
behalf of CGX or Newco in such manner as to give rise to any valid claim by any
person against the Company, the Subsidiaries or any Shareholder for a finder's
fee, brokerage commission or similar payment.
6.8 LITIGATION. There are no actions, claims, suits, investigations,
inquiries or proceedings pending against CGX or Newco or, to the knowledge of
CGX or Newco, overtly threatened against CGX or Newco, at law or in equity, in
any court, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or other instrumentality which
could reasonably be expected to affect the validity or enforceability of this
Agreement or the documents contemplated hereby to be executed by CGX or Newco
and neither CGX nor Newco is in violation of any order, decree, judgment, award,
determination, ruling or regulation of any court, governmental department,
commission, board, bureau, agency or other instrumentality, where such violation
could reasonably be expected to affect the validity or enforceability of this
Agreement.
6.9 DUE AUTHORIZATION. The CGX Shares to be issued in connection with the
Merger, when issued and delivered in accordance with the terms hereof, will be
duly authorized, validly issued, fully paid and nonassessable, and free of
preemptive rights.
6.10 COMMISSION REPORTS. CGX has timely filed (including any extensions)
all Forms 10-K, 10-Q and 8-K, proxy statements, registration statements and
other reports, schedules and statements required to be filed by the 1933 Act or
the 1934 Act since January 1, 1997 (collectively, "SEC Reports"). Except to
the extent any such SEC Report has been revised or superseded by a later filed
SEC Report, such SEC Reports do not contain any misstatement of a material fact
or omit stating a material fact necessary, in light
A-29
<PAGE>
of the circumstances under which they were made, to make such statements not
misleading. There has been no material adverse change affecting CGX since the
filing of its last SEC Report.
6.11 CGX INFORMATION IN REGISTRATION STATEMENT. None of the information
included in (a) the Registration Statement to be filed by CGX with the
Commission in connection with the CGX Common Stock to be issued in the Merger,
(b) the Prospectus to be mailed to the shareholders of the Company and the
participants in the ESOP in connection with the respective meetings thereof and
(c) any other documents to be filed with the Commission or any other regulatory
authority in connection with the transactions contemplated hereby that has been
or will be supplied by CGX will, at the respective times such documents are
filed, and in the case of the Registration Statement when it becomes effective
and with respect to the Prospectus when first mailed to the shareholders of the
Company and the participants in the ESOP, be false or misleading with respect to
any material fact or omit to state any material fact necessary in order to make
the statements therein not misleading, or in the case of the Prospectus or any
amendment or supplement thereto at the time of the solicitation of the approval
of the shareholders of the Company and the participants in the ESOP, be false or
misleading with respect to any material fact or omit to state any material fact
necessary to make the statements therein in light of the circumstances under
which they were made not misleading. All documents that CGX is responsible for
filing with the Commission or any other regulatory authority in connection with
the transactions contemplated hereby will comply in all material respects with
the provisions of applicable law.
6.12 CGX 401(K) PLAN. All capitalization terms which are not otherwise
defined in this Section shall have the meaning set forth in Section 3.20(b)
hereof.
The Consolidated Graphics, Inc. Employee 401(k) Savings Plan (the "CGX
401(k) Plan") and its related trust agreement, annuity contract or other
funding instrument is in all material respects in compliance with its terms and,
both as to form and in operation, with the requirements prescribed by any and
all laws which are applicable to such Plan, including without limitation ERISA
and the Code. The CGX 401(k) Plan is in the process of being revised from a
standardized prototype document to a non-standardized prototype document and
upon completion of the revision will be qualified and tax exempt under the
provisions of Section 401(a) and 501(a) of the Code, and will be so determined
by the Internal Revenue Service pursuant to a favorable determination letter
issued to CGX, which letter will be received by CGX prior to the merger of the
ESOP, or its successor, as contemplated under Section 7.19.
None of CGX or any ERISA Affiliate of CGX has any liability with respect to
any transaction which relates to the CGX 401(k) Plan and which is in violation
of Sections 404 or 406 of ERISA or constitutes a "prohibited transaction," as
defined in Section 4975(c)(1) of the Code, for which no exemption exists under
Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code. None of the
Company nor any ERISA Affiliate has participated in a violation of Part 4 of
Title I, Subtitle B of ERISA by any plan fiduciary of the CGX 401(k) Plan and/or
has any unpaid civil penalty under Section 502(1) of ERISA.
There is no action, order, writ, injunction, judgment or decree outstanding
or claim, suit, litigation, proceeding, arbitral action, governmental audit, or
investigation (including, without limitation, any such audit or investigation by
the Internal Revenue Service, Department of Labor, or PBGC) relating to or
seeking benefits under the CGX 401(k) Plan that is pending or to the knowledge
of CGX, threatened or anticipated against CGX or any ERISA Affiliate of CGX
other than routine claims for benefits.
Neither CGX nor any ERISA Affiliate of CGX has any liability for unpaid
contributions with respect to the CGX 401(k) Plan. CGX and its ERISA Affiliates
have made all required contributions and paid all accrued liabilities under such
plan for all periods through and including the Closing Date.
CGX has delivered to the Company pursuant to this Agreement, or shall
provide to the Company within ten (10) business days after the date hereof, a
true and complete set of copies of (i) the CGX 401(k) Plan and related trust
agreements, annuity contracts or other funding instruments as in effect
immediately prior to the Closing Date, together with all amendments thereto
which shall become effective at a later date; (ii) the latest Internal Revenue
Service determination letter obtained by the prototype plan sponsor with respect
to the CGX 401(k) Plan; (iii) annual reports (Form 5500 Series) and certified
financial statements
A-30
<PAGE>
for the most recently completed three fiscal years for the CGX 401(k) Plan; (iv)
the summary plan description for the CGX 401(k) Plan; (v) if applicable, all
documentation relating to the correction of CGX 401(k) Plan defects under the
Employee Plans Compliance Resolution System or any predecessor program thereto;
and (vi) if applicable, current registration statements on Form S-8 (or any
other applicable registration form) and amendments thereto with respect to the
CGX 401(k) Plan.
For purposes of this Section, the term "ERISA Affiliate" shall mean any
entity which is a member of a "controlled group of corporations" with, under
"common control" with, or a member of an "affiliated service group" with CGX
as such terms are defined in Section 414(b), (c), (m) or (o) of the Code.
ARTICLE 7
COVENANTS OF SHAREHOLDERS,
TRUSTEES AND COMPANY
The Shareholders, the Trustees (with respect to the applicable portions of
Sections 7.2, 7.5, 7.6, 7.8, 7.11, 7.12, 7.16, 7.17, 7.18, 7.19, 8.6 and 15.10)
and the Company shall, between the date hereof and the Closing Date, comply with
the provisions of this Article 7, except to the extent that CGX may otherwise
consent in writing or to the extent otherwise required or permitted by this
Agreement.
7.1 CONDUCT OF BUSINESS. The Company shall, and the Shareholders shall
cause the Company and the Company shall cause the Subsidiaries to, (a) operate
their respective businesses only in the usual, regular and ordinary manner, (b)
use best efforts to maintain, preserve and protect the Assets and the respective
business organizations of the Company and the Subsidiaries, all in coordination
and cooperation with CGX and Newco, (c) to the extent consistent with reasonable
business practice, keep available the services of their respective present
officers and employees and (d) to the extent consistent with reasonable business
practice, preserve the present relationships with persons having dealings with
the Company, either of the Subsidiaries or any one or more of the Shareholders
as the same relate to the respective businesses of the Company and the
Subsidiaries. None of the Company or any one or more of the Shareholders shall,
nor shall the Company permit or cause either of the Subsidiaries to, take any of
the actions enumerated in Section 3.11 hereof, nor shall the Company or any one
or more of the Shareholders, nor shall the Company permit or cause either of the
Subsidiaries to, authorize, agree to or commit to taking any such action,
PROVIDED, HOWEVER, THAT the Company may make such payments to the Shareholders
as may be necessary to compensate the Shareholders on an after-tax basis for
such Shareholder's income tax liability relating to the Company's income
attributed to such Shareholder for the period of time, if any, before and ending
on the Closing Date during which the Company has effectively elected Subchapter
S Corporation status under the Code.
7.2 CONTINUED ADMINISTRATION. The Company shall, and the Shareholders
shall cause the Company and the Company shall cause the Subsidiaries to,
administer each and every employee benefit plan described in Schedule 3.20
hereto in accordance with the provisions of the Code and ERISA. The Trustees
shall comply with all applicable requirements of the Code and ERISA and shall
take such actions as may be deemed necessary to ensure that the ESOP Agreement
and related documentation complies with all such requirements.
7.3 RECORDS. The Company shall, and the Shareholders shall cause the
Company and the Company shall cause the Subsidiaries to, maintain their
respective books, accounts and records in the usual, regular and ordinary
manner. The Company shall, and the Shareholders shall cause the Company and the
Company shall cause the Subsidiaries to, make the books and records related to
the operation of the respective businesses of the Company and the Subsidiaries
or the Assets available or to deliver copies thereof to CGX and Newco during
normal business hours for any reasonable business purpose.
7.4 MAINTENANCE OF INSURANCE. The Company shall, and the Shareholders
shall cause the Company and the Company shall cause the Subsidiaries to,
maintain in full force and effect all of its presently existing insurance
coverage described in Schedule 3.23 hereto, or insurance comparable to such
existing coverage.
A-31
<PAGE>
7.5 COOPERATION IN HSR ACT FILINGS AND THIRD PARTY CONSENTS. The Company
and each of the Shareholders shall, and shall directly or indirectly, as
applicable, cause the Subsidiaries and, to the extent applicable, the ESOP to,
cooperate in good faith and take all actions reasonably necessary or appropriate
to file and expeditiously and diligently prosecute to a favorable conclusion the
premerger notification and report form required to be filed by the Company in
connection herewith with the Federal Trade Commission (the "FTC") and the
Department of Justice (the "DOJ") pursuant to the HSR Act. The Company and
each Shareholder shall, and shall directly or indirectly, as applicable, cause
the Subsidiaries and the Trustees shall cause the ESOP to, further cooperate
with CGX and Newco and use best efforts to (a) obtain and receive all necessary
and appropriate consents of third parties (other than participants in the ESOP)
to the transactions contemplated hereunder, (b) satisfy all requirements
prescribed by law for, and all conditions set forth in this Agreement to, the
consummation of the Merger and (c) effect the Merger in accordance with this
Agreement at the earliest practicable date. Notwithstanding any other language
herein, neither CGX nor Newco shall be required to make any payment or other
concession or to assume any obligation (other than with respect to contracts of
the Company assumed as a matter of law in the Merger by Newco) in connection
with obtaining such consents.
7.6 COOPERATION IN FILING REGISTRATION STATEMENT. The Company and each
Shareholder shall, and shall directly or indirectly, as applicable, cause the
Subsidiaries and the Trustees shall cause the ESOP to, cooperate in the
preparation of the Registration Statement and the Prospectus and shall, as
promptly as practicable after the date hereof, furnish or cause to be furnished
all such data and information relating to the Company, each Shareholder and the
ESOP as CGX may reasonably request for the purpose of including such data and
information in the Registration Statement and the Prospectus. The Company shall,
as soon as practicable following effectiveness of the Registration Statement,
take all action necessary under the MGCL and its articles of incorporation and
bylaws to convene a special meeting of its shareholders for the purpose of
approving this Agreement and the transactions contemplated hereunder. The
Company and the Trustees shall make all arrangements necessary or appropriate in
accordance with the ESOP to seek the approval of the ESOP participants of this
Agreement and the transactions contemplated hereunder. Subject to Section 7.8
below, the Company shall, through its board of directors, recommend to its
shareholders, and, subject to Section 7.8 below and the requirements of ERISA,
the Company shall recommend to the ESOP participants, approval of this Agreement
and the transactions described herein.
7.7 VOTING OF COMPANY STOCK. Each Shareholder shall vote all shares of
Company Common Stock held by such Shareholder in favor of the approval of this
Agreement and the transactions contemplated hereby and shall not exercise any
rights such Shareholder may have pursuant to Section 3-202 of the MGCL. Each
Shareholder hereby grants to CGX for a period commencing on the date hereof and
continuing so long as this Agreement is in effect an irrevocable proxy, which is
coupled with an interest, to vote such Shareholder's shares of Company Common
Stock to approve this Agreement and the transactions contemplated hereby.
7.8 NO SOLICITATION. (a) Neither the Company, the Trustees (except as
required by the terms of the ESOP relating to distributions in the normal course
to participants and beneficiaries of the ESOP) nor any one or more of the
Shareholders shall, nor shall the Company, the Trustees or any Shareholder
directly or indirectly, as applicable, permit or cause either of the
Subsidiaries or the ESOP to, directly or indirectly, through any officer,
director, employee, representative or agent thereof, solicit or encourage the
initiation or submission of any inquiries, proposals or offers regarding any
acquisition, merger, take-over bid, sale of all or substantially all of the
assets of, or sales of shares of capital stock of the Company or either or both
of the Subsidiaries, whether or not in writing and whether or not delivered to
the shareholders of the Company generally (including without limitation by way
of a tender offer), or similar transactions involving the Company or either of
the Subsidiaries (any of the foregoing inquiries or proposals being referred to
herein as an "Acquisition Proposal"), PROVIDED, HOWEVER, THAT nothing
contained in this Agreement shall prevent the board of directors of the Company
from referring any third party to this Section 7.8. Nothing contained in this
Section 7.8 or any other provision of this Agreement shall prevent the board of
directors of the Company from considering or negotiating an unsolicited BONA
FIDE written Acquisition Proposal. If the board of directors of the Company,
after duly considering advice, written or otherwise, of outside counsel
A-32
<PAGE>
and financial advisors to the Company, determines in good faith that it would be
consistent with its fiduciary responsibilities to approve or recommend (and in
connection therewith withdraw or modify its approval or recommendation of this
Agreement and the transactions contemplated hereby) a Superior Proposal (as
defined below), then, notwithstanding any such approval or recommendation (i)
the Company shall not enter into any agreement with respect to the Superior
Proposal and (ii) any other obligation of the Company under this Agreement shall
not be affected, unless this Agreement is terminated pursuant to Article 13
hereof before or simultaneously with the grant of such approval or the making of
such recommendation and the Company, within three business days following such
termination resulting from such Superior Proposal, pays CGX the Termination Fee
(as defined in Section 13.2 below). As used herein, the term "Superior
Proposal" means a BONA FIDE proposal made by a third party to acquire the
Company pursuant to a tender or exchange offer, a merger, a sale of all or
substantially all of its assets or otherwise that the board of directors of the
Company determines in its good faith judgment to be more favorable to the
shareholders of the Company than the transactions contemplated by this Agreement
(after considering the advice, written or otherwise, of the professional
advisors of the Company). In making a determination of whether a Superior
Proposal is more favorable, the board of directors of the Company shall consider
not only the price offered by the third party as compared to the total
consideration set forth in this Agreement, but shall also compare the market
liquidity of the CGX Common Stock to the liquidity of the consideration offered
by the third party, compare the tax consequences of the Merger to the tax
consequences of the transaction proposed by the third party, determine whether
the transaction proposed by the third party has any financing or other
conditions or contingencies and make any other meaningful comparison of the
relative benefits offered to the shareholders of the Company by the Merger as
compared to the transaction proposed by the third party.
(b) The Company shall immediately notify CGX after receipt of any
Acquisition Proposal or any request for nonpublic information relating to the
Company or either of the Subsidiaries in connection with an Acquisition Proposal
or for access to the properties, books or records of the Company that informs
the board of directors of the Company that the entity making the request is
considering making or has made an Acquisition Proposal. Such notice to CGX shall
be made orally and in writing and shall indicate in reasonable detail the
identity of the offeror and the terms and conditions of such proposal, inquiry
or contact. If the board of directors of the Company receives a request for
material nonpublic information by an entity who makes, or who states in writing
that it intends, subject to satisfactory review of such nonpublic information,
to make, a BONA FIDE Acquisition Proposal, the Company may, subject to the
execution of a confidentiality agreement substantially similar to that then in
effect between the Company and CGX, provide such entity with access to
information regarding the Company.
7.9 CORPORATE AUTHORITY. The Board of Directors of the Company shall
adopt, before the Closing, a resolution ratifying all previous acts of the
officers of the Company.
7.10 INVESTIGATION BY CGX AND NEWCO. From and after the date hereof and
until the Closing Date, the Company shall, and the Shareholders shall cause the
Company and the Company shall cause the Subsidiaries to, permit CGX and Newco
and their counsel, accountants and other representatives reasonable access
during normal business hours to all of its properties, books, contracts,
commitments and other records, including without limitation tax returns,
declarations of estimated tax and tax reports, and during such period the
Company shall furnish promptly to CGX and Newco all other information concerning
the business, properties and personnel of the Company and the Subsidiaries as
CGX or Newco may reasonably request, PROVIDED, HOWEVER, THAT NO INVESTIGATION
PURSUANT TO THIS SECTION 7.10 OR OTHERWISE SHALL AFFECT ANY REPRESENTATIONS OR
WARRANTIES CONTAINED IN THIS AGREEMENT.
7.11 CERTAIN ACTS OR OMISSIONS. Neither the Company nor any of the
Shareholders shall (a) omit to take any action called for by any of their
covenants contained in this Agreement or (b) take any action which they are
required to refrain from taking by any of such covenants. The Company and each
of the Shareholders shall, before the Closing, cure any violation or breach of
any of their representations, warranties or covenants contained in this
Agreement which becomes known, occurs or arises subsequent to
A-33
<PAGE>
the date of this Agreement and shall obtain the satisfaction of all conditions
to Closing set forth in this Agreement. The Trustees shall (i) fulfill all
fiduciary duties to which they are subject and comply with all applicable
requirements of law and the ESOP in connection with the transactions
contemplated herein and (ii) make any and all necessary amendments to the ESOP
in accordance and compliance with all applicable requirements of law; provided,
however, that no such amendments shall be effected without the consent of CGX
and Newco (which consent shall not be unreasonably withheld) and neither CGX nor
Newco shall incur any liability with respect to any such amendments.
7.12 CONSULTATION AND REPORTS. During the period from the date of this
Agreement to the Closing Date, the Company and each of the Shareholders shall,
subject to any applicable legal or contractual restrictions, and shall cause the
Subsidiaries to, confer on a regular and frequent basis with CGX to report
material operational matters and to report on the general status of ongoing
operations. The Company shall notify CGX of any unexpected emergency or other
change in the normal course of the business or in the operation of the
properties of the Company and the Subsidiaries and of any governmental
complaints, investigations, adjudicatory proceedings or hearings or
communications indicating that such may be contemplated and shall permit to
representatives of CGX and Newco access to all materials in connection
therewith. The Company shall, and the Shareholders shall cause the Company and
the Company shall cause the Subsidiaries to, deliver to CGX and Newco copies of
all financial statements, reports or analyses with respect to the business of
the Company and/or the Subsidiaries which are prepared or received between the
date hereof and the Closing Date, other than reports prepared expressly for the
purpose of analyzing and approving the transaction contemplated thereby,
promptly after such preparation or receipt (to the extent normally provided to
management of the Company or either of the Subsidiaries or reasonably requested
by CGX or Newco, including without limitation all internal daily, monthly or
quarterly financial statements, reports and analyses relating to the business of
the Company and/or the Subsidiaries regularly prepared) and regardless of
whether such financial statements, reports or analyses are prepared internally
or by third parties. The Shareholders shall ensure that the Company does, and
the Company shall ensure that the Subsidiaries do, not change the nature and
timing of financial statements, reports and analyses with respect to the Company
and/or the Subsidiaries which have historically been regularly prepared.
7.13 CONFIDENTIALITY. The Shareholders, the Trustees and the Company
shall not, and the Shareholders shall ensure that the Company does not, and the
Company shall ensure that the Subsidiaries do not, before the Closing Date,
disclose or allow any of their respective affiliates to disclose to third
parties (other than agents, advisers or other representatives of the
Shareholders, the Trustees or the Company who are advised or who have been
advised of the confidentiality of the information obtained) any information that
the Company, either of the Subsidiaries, the Trustees or the Shareholders have
obtained from CGX in connection with this Agreement with respect to CGX, Newco
or any of their affiliates, and from and after the Closing Date neither the
Trustees nor any Shareholder shall disclose or allow any of their respective
affiliates to disclose to third parties, and will not use for its or their own
account or allow its or their affiliates to use for their own accounts, any
trade secrets, business secrets or other information relating to the business of
the Company, either of the Subsidiaries or the Assets or any information that
the Company, the Trustees or the Shareholders have obtained from CGX or Newco in
connection with this Agreement with respect to CGX, Newco or any of their
affiliates. Nothing in this Section shall be deemed to prohibit disclosure of
any such information to participants in the ESOP that is a part of the
Registration Statement after it has been declared effective.
7.14 ADDITIONAL DISCLOSURE. From the date of this Agreement to and
including the Closing Date, the Company, the Trustees and each of the
Shareholders, as applicable, shall, and the Shareholders shall cause the Company
to, promptly after the occurrence thereof is known to the Company and/or any one
or more of the Shareholders, as applicable, advise CGX and Newco of each event
subsequent to the date hereof which causes any covenant of the Company, the
Trustees or any one or more of the Shareholders, as applicable, to be breached
or causes any representation or warranty of the Company, the Trustees or any one
or more of the Shareholders, as applicable, contained herein to no longer be
true, correct or complete, PROVIDED, HOWEVER, THAT none of such disclosures
shall be deemed to modify, amend or supplement the
A-34
<PAGE>
representations and warranties of the Company or a Shareholder, unless CGX
consents to such modifications, amendment or supplement in writing; provided,
however, that with respect to the independent Trustee, the representations of
such independent Trustee set forth in this Section 7.14 are based solely on his
actual knowledge without any duty to investigate.
7.15 REQUIRED FINANCIAL STATEMENTS. The Shareholders and the Company
shall, and the Shareholders shall cause the Company and the Company shall cause
the Subsidiaries to, reasonably cooperate with CGX and Newco in the preparation
of any other audited or unaudited balance sheets, income statements, other
financial statements and any other financial information, whether pro forma or
otherwise, with respect to the business of the Company and the Subsidiaries for
such fiscal years and interim periods as may be determined by CGX, upon the
advice of its counsel and independent public accountant, to be required by the
rules and regulations of the Commission in connection with filings that may be
made or may be required to be made by CGX under the 1933 Act, the 1934 Act and
any related rules, regulations or state statutes, rules or regulations.
7.16 RIGHT OF ESOP TO DISSENT. Unless (a) the Trustees determine in the
exercise of their fiduciary duties under ERISA to vote against the Merger and to
exercise and perfect dissenters' rights pursuant to Section 3-202 of the MGCL
with respect to all shares of Company Common Stock held of record by the
Trustees on behalf of the ESOP; (b) required action under this covenant would
result in a violation of the terms of the ESOP; or (c) required action under
this covenant would result in a non-exempt prohibited transaction under Section
406 of ERISA or Section 4975 of the Code, the Trustees shall vote any
unallocated shares in favor of the Merger and any shares with respect to which
no instructions have been given in accordance with the Trustees' fiduciary duty
and shall take no action to exercise and perfect dissenters' rights pursuant to
Section 3-202 of the MGCL with respect to shares the Trustees have been
instructed to vote against the Merger, notwithstanding any notification or other
indication from a participant in the ESOP that such participant desires to
exercise dissenters' rights in such participant's individual capacity with
respect to all or part of such participant's shares of Company Common Stock
allocated to such participant's accounts under the ESOP.
7.17 TERMINATION OF SHAREHOLDER AGREEMENTS. On or before the Closing
Date, the Shareholders and, if applicable, the Trustees, shall take all action
necessary to terminate the Shareholder Agreements listed on Schedule 3.3.
7.18 TAX TREATMENT. The Shareholders, the Trustees and the Company shall
use their reasonable efforts to cause the Merger, and to take no action which
would cause the Merger not, to qualify for treatment as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code for federal
income tax purposes.
7.19 TERMINATION OF 401(K) AND ESOP PLANS, AND MERGER OF THE TRUSTS FOR
401(K) AND ESOP INTO CGX'S 401(K) PLAN AND TRUST. The Trustees shall use their
best efforts to work with the Company, CGX and Newco to terminate the Company's
401(k) and ESOP plans and obtain determination letters from the IRS that such
plans continue to be qualified upon their termination, without CGX or Newco
incurring any liability as a result thereof. After obtaining such determination
letters, the Trustees shall cooperate with CGX and Newco and use their best
efforts to cause the trusts under the Company's 401(k) and ESOP to be merged
with and into CGX's 401(k) trust.
7.20 ESOP AMENDMENT. Prior to the Effective Time, the Company shall cause
the ESOP to be amended (such amendment to be effective immediately following the
Merger) to provide that the participants in the ESOP will be able to direct the
investments of the amounts in their account balances in the ESOP, and the
investment alternatives available to such participants will be identical (to the
maximum extent possible) to those investment alternatives available to the
participants in the CGX 401(k) Plan.
A-35
<PAGE>
ARTICLE 8
COVENANTS OF CGX AND NEWCO
CGX and Newco shall, between the date hereof and the Closing Date, comply
with the provisions of this Article 8, except to the extent that the Company may
otherwise consent in writing or to the extent otherwise required or permitted by
this Agreement.
8.1 COOPERATION IN HSR ACT FILINGS AND THIRD PARTY CONSENTS. CGX and
Newco shall cooperate in good faith with the Company and the Shareholders and
take all actions reasonably necessary or appropriate to file and expeditiously
and diligently prosecute to a favorable conclusion the premerger notification
and report form required to be filed by CGX in connection herewith with the FTC
and the DOJ pursuant to the HSR Act. CGX and Newco shall further cooperate with
the Company and the Shareholders and use its best efforts to (a) assist in
obtaining all necessary and appropriate consents of third parties to the
transactions contemplated hereunder, (b) satisfy all requirements prescribed by
law for, and all conditions set forth in this Agreement to, the consummation of
the Merger and (c) effect the Merger in accordance with this Agreement at the
earliest practicable date. Notwithstanding any other language herein, neither
CGX nor Newco shall be required to make any payment or other concession or to
assume any obligation (other than with respect to contracts of the Company
assumed as a matter of law in the Merger by Newco) in connection with obtaining
such consents.
8.2 REGISTRATION STATEMENT. CGX shall prepare and file the Registration
Statement under the 1933 Act. The Registration Statement shall contain the
Prospectus complying with all of the requirements of the 1933 Act applicable
thereto, for the purpose, among other things, of registering the CGX Common
Stock to be issued to the holders of the Company Common Stock pursuant to the
Merger. CGX shall use commercially reasonable efforts to cause the Registration
Statement to become effective as soon as practicable, to qualify the CGX Common
Stock under the securities or blue sky laws of such jurisdictions as may be
required and to keep the Registration Statement and such qualifications current
and in effect for so long as necessary to consummate the transactions
contemplated hereby. CGX shall further use commercially reasonable efforts to
cause the CGX Common Stock to be issued pursuant to the Merger to be listed on
the New York Stock Exchange and to be tradeable without restrictions except to
the extent any shares of CGX Common Stock received by the shareholders of the
Company are subject to the provisions of Rule 145 of the Commission or are
subject to applicable rules related to tax-free reorganizations.
8.3 COMPLIANCE WITH LEGAL REQUIREMENTS. CGX and Newco shall use
reasonable commercial efforts to comply promptly with all requirements which
federal or state law may impose on them or any of their affiliates with respect
to the transactions contemplated by this Agreement and will promptly cooperate
with and furnish information to the Company in connection with any such
requirements imposed upon them in connection therewith. CGX shall use reasonable
efforts to comply with all of its filing obligations under the 1934 Act.
8.4 CERTAIN ACTS OR OMISSIONS. Neither CGX nor Newco shall (a) omit to
take any action called for by any of its covenants in this Agreement or (b) take
any action which it is required to refrain from taking by any of such covenants.
Each of CGX and Newco shall use all reasonable efforts to cure, before the
Closing, any violation or breach of any of their representations, warranties or
covenants contained in this Agreement which becomes known, occurs or arises
subsequent to the date of this Agreement and to obtain the satisfaction of all
conditions to Closing set forth in this Agreement.
8.5 ESOP TRUSTEES. Neither CGX nor Newco shall take any action to remove
either Trustee as trustee of the ESOP.
8.6 ERISA PLAN MATTERS. Until the determination letters are received as
contemplated by Section 7.19 hereof and after Closing, CGX will not cause Newco
to and Newco will not amend the Company's 401(k) and/or the ESOP, except as
required to by applicable law without John Green's consent (such consent not to
be unreasonably withheld). Upon receipt of such favorable determination letters
issued by the IRS, the Company's 401(k) and ESOP will be merged into the CGX
401(k) Plan. At the time of said merger, the CGX 401(k) Plan will be qualified
and tax exempt under the provisions of Section 401(a) and
A-36
<PAGE>
501(a) of the Code and will authorize any participants in such plan, including
the participants whose balances are being transferred from the ESOP, to invest
in the common stock of CGX and the CGX 401(k) Plan shall further accommodate the
ownership of any rights or units the ESOP participants might have in the
Escrowed Funds described in Section 1.4 herein. It is specifically provided,
however, that any failure of CGX to accomplish the merger of the ESOP into the
CGX 401(k) Plan shall not constitute a breach hereof to the extent such failure
arises out of the failure by the Trustees or any persons acting on behalf of the
ESOP as record keepers or otherwise to cooperate in connection with
accomplishing such merger.
8.7 TAX TREATMENT. Each of CGX and Newco shall use its reasonable efforts
to cause the Merger, and to take no action which would cause the Merger not, to
qualify for treatment as a "reorganization" for federal income tax purposes
within the meaning of Section 368(a) of the Internal Revenue Code.
8.8 CAPITAL CONTRIBUTION TO NEWCO. CGX shall cause to be made to Newco a
capital contribution on or before the Closing Date in the amount of
$1,039,647.16 plus an amount equal to transaction costs incurred after June 30,
1998 that were paid by the Company and have been deducted from the Merger
Consideration in accordance with the terms set forth in Section 15.8. Of the
total capital contribution made by CGX to Newco pursuant hereto, an amount equal
to (i) the proportionate share that the holders of the options and SARS shall be
required to contribute to the Escrowed Funds plus (ii) the proportionate share
such holders shall be required to bear of the Transaction Costs ((i) and (ii)
collectively, the "Proportionate Share") shall be used to fund the $3,100,000
to be placed into escrow as required by Section 1.3 hereof and the $3,100,000
referred to in Section 1.3 hereof shall be reduced by the same amount.
8.9 SHAREHOLDER PAYMENTS. In the event the Company's election to become a
Subchapter S Corporation is approved by the IRS after Closing, CGX shall cause
Newco and Newco shall make payments to a Shareholder in the same manner as
provided by Section 3.11(t)(iv) hereof.
ARTICLE 9
CONDITIONS TO OBLIGATIONS
OF CGX AND NEWCO
Except as may be waived in writing by CGX and Newco, the obligations of CGX
and Newco to consummate this Agreement and the transactions to be consummated by
CGX and Newco hereunder on the Closing Date shall be subject to the following
conditions:
9.1 REGISTRATION, LISTING AND APPROVAL. The Registration Statement shall
have become effective with the Commission, no stop order suspending the
effectiveness of the Registration Statement shall have been issued nor any
proceedings for that purpose instituted by the Commission, the Prospectus
included in the Registration Statement shall have been mailed to the
shareholders of the Company and the participants in the ESOP, the shares of CGX
Common Stock to be issued pursuant to the Merger shall have been approved for
listing on the New York Stock Exchange, subject to official notice of issuance,
and the required approval of the shareholders of the Company and the
participants in the ESOP shall have been obtained.
9.2 HSR ACT. The waiting periods (and any extensions thereof) applicable
to the Merger under the HSR Act shall have been terminated or shall have
expired, and no condition with respect to obtaining such termination shall have
been imposed on CGX, Newco or the Company.
9.3 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company and the Sellers contained in this Agreement or in any certificate or
document executed and delivered to CGX or Newco by the Company and/or any one or
more of the Sellers pursuant to this Agreement shall have been true and correct
on and as of the Closing Date as though such representations and warranties were
made at and as of such date.
9.4 COMPLIANCE WITH AGREEMENT. On and as of the Closing Date, the Company
and Sellers shall have performed and complied with the covenants and agreements
required by this Agreement to be performed and complied with by the Company and
the Sellers on or before the Closing Date.
A-37
<PAGE>
9.5 SELLERS' AND OFFICER'S CERTIFICATES. The Sellers shall deliver to CGX
and Newco a certificate and the Company shall deliver to CGX and Newco a
certificate signed on behalf of the Company by the president of the Company,
each certificate dated the Closing Date and certifying the fulfillment of the
conditions specified in Sections 9.3 and 9.4 hereof.
9.6 COMPLETION OF DUE DILIGENCE. CGX shall have completed to its
satisfaction its due diligence review of the Company and shall have received a
report of the Phase I environmental review of the Company's operating locations
that is reasonably satisfactory to CGX.
9.7 NO ACTION OR PROCEEDING. On the Closing Date, no action or proceeding
by any public authority or any other person shall be pending before any court or
administrative body or overtly threatened to restrain, enjoin or otherwise
prevent the consummation of this Agreement or the transactions contemplated
hereby, and no action or proceeding by any public authority or private person
shall be pending before any court or administrative body or overtly threatened
to recover any damages or obtain other relief as a result of this Agreement or
the transactions contemplated herein or as a result of any agreement entered
into in connection with or as a condition precedent to the consummation thereof,
which action or proceeding could result in a decision, ruling or finding which
would have a material adverse effect on the business of the Company, either of
the Subsidiaries or the Assets or the ability of the Company or either of the
Subsidiaries to conduct normal operations after the Closing.
9.8 CONSENTS. All orders, consents, permits, authorizations, approvals
and waivers of every governmental entity or third party required for the
consummation of the transactions contemplated hereby or to permit the continued
operation of the business of the Company and the Subsidiaries in substantially
the same manner after the Closing Date as before, and all filings, registrations
and notifications to or with all governmental entities required with respect to
the consummation of such transactions, shall have been obtained or given.
9.9 ESTOPPEL CERTIFICATES. CGX shall have received on or before the
Closing Date an estoppel certificate substantially in the form attached as
APPENDIX B and, if applicable, a nondisturbance agreement with respect to each
property leased by the Company or either of the Subsidiaries.
9.10 CONVEYANCE OF STOCK. Each Seller shall surrender to CGX for
cancellation the certificates representing their shares of the Company Common
Stock.
9.11 NO MATERIAL ADVERSE CHANGE. No incident or event shall have occurred
resulting in the destruction, damage to, or loss of any Asset or diminution in
the value of the business of the Company or either of the Subsidiaries (whether
or not covered by insurance) that constitutes a material adverse change in the
business of the Company or either of the Subsidiaries.
9.12 CORPORATE ACTION BY CGX AND NEWCO. All action necessary to authorize
the execution, delivery and performance by CGX and Newco of this Agreement shall
have been duly and validly taken by the respective boards of directors or
executive committee thereof of CGX and Newco.
9.13 SHAREHOLDER NONCOMPETITION AGREEMENTS. Each of John F. Green, Kevin
Cassis, Kenneth Lemmert and Christopher Carpenter shall have delivered to CGX
and Newco an executed counterpart of the Noncompetition Agreement applicable to
such individual, in substantially the form attached as APPENDIX C hereto, as an
inducement for CGX and Newco to enter into this Agreement and consummate the
transactions contemplated hereby.
9.14 OPINION OF COUNSEL. CGX and Newco shall have received from Venable,
Baetjer and Howard, LLP, counsel to the Company and the Shareholders, an opinion
in substantially the form set forth on APPENDIX D attached hereto.
9.15 OPINION OF ESOP COUNSEL. CGX and Newco shall have received from
Sanders, Schnabel, Brandenburg & Zimmerman, P.C., counsel to the ESOP, an
opinion in substantially the form set forth on APPENDIX E attached hereto.
9.16 STOCK OPTIONS AND SARS. The Company shall have taken such steps as
are satisfactory to CGX to cause all outstanding options and stock appreciation
rights, as set forth on Schedule 3.3, to have
A-38
<PAGE>
been surrendered and canceled by the holders thereof so that on the Closing Date
there are no outstanding subscriptions, options, rights, warrants, convertible
securities or other agreements or commitments with respect to the capital stock
of any class of the Company.
9.17 CERTIFICATES OF MANAGEMENT. Counsel for CGX shall have received on
or before the Closing Date such representations and covenants of management of
the Company as such counsel may deem necessary to support the delivery of its
opinion relating to the treatment of the Merger as a "reorganization" under
the Code.
9.18 LEASE EXTENSION. The lease agreement with Demarr Partnership shall
have been amended in a manner reasonably acceptable to CGX, and shall include,
among others, amendments to provide five five-year extension options and the
terms governing expansion of the leased property.
9.19 DELIVERY OF OTHER DOCUMENTS AND INSTRUMENTS. The following
additional documents shall have been executed and/or delivered by the Company
and the Shareholders (and their respective spouses, where applicable):
(a) copies of all required consents and approvals;
(b) a release and spousal waiver in substantially the form attached
hereto as APPENDIX F of each Shareholder and his or her spouse of any and
all claims each such person may have against the Company, Newco or CGX,
except as may arise hereunder or under any documents executed in connection
herewith;
(c) a Certificate of Secretary for the Company attesting as to the
current form of the articles of incorporation and bylaws, the current
effectiveness of the resolutions of the board of directors and shareholders
of the Company approving this Agreement and the transactions contemplated
hereby, the incumbency and the signature specimens with respect to the
officers of the Company executing the Agreement and any other document
delivered pursuant to the Agreement by or on behalf of such entity and
attesting to such other instruments and documents as counsel for CGX shall
reasonably request;
(d) resignations of all officers and directors of each of the Company
and the Subsidiaries; and
(e) such further instruments and documents, in form and content
reasonably satisfactory to counsel for CGX and Newco, as may be reasonably
necessary or reasonably appropriate more fully to consummate the
transactions contemplated hereby.
ARTICLE 10
CONDITIONS TO OBLIGATIONS
OF COMPANY, TRUSTEES AND SHAREHOLDERS
Except as may be waived in writing by the Company, the Shareholders and
Trustees, the obligations of the Company, the Shareholders and Trustees to
consummate this Agreement and the transactions to be consummated by the Company,
the Shareholders and Trustees hereunder on the Closing Date shall be subject to
the following conditions:
10.1 REGISTRATION, LISTING AND APPROVAL. The Registration Statement shall
have become effective with the Commission, no stop order suspending the
effectiveness of the Registration Statement shall have been issued nor any
proceedings for that purpose instituted by the Commission, the Prospectus
included in the Registration Statement shall have been mailed to the
shareholders of the Company and the participants in the ESOP, the shares of CGX
Common Stock to be issued pursuant to the Merger shall have been approved for
listing on the New York Stock Exchange, subject to official notice of issuance,
and the required approval of the shareholders of the Company and the
participants in the ESOP shall have been obtained.
10.2 HSR ACT. The waiting periods (and any extensions thereof) applicable
to the Merger under the HSR Act shall have been terminated or shall have
expired, and no condition with respect to obtaining such termination shall have
been imposed on CGX, Newco or the Company.
A-39
<PAGE>
10.3 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of CGX and Newco contained in this Agreement or in any certificate or document
executed and delivered by CGX and Newco to the Company and the Shareholders
pursuant to this Agreement shall have been true and correct and shall be true
and correct on and as of the Closing Date as though such representations and
warranties were made at and as of such date.
10.4 COMPLIANCE WITH AGREEMENT. On and as of the Closing Date, CGX and
Newco shall have performed and complied with the covenants and agreements
required by this Agreement to be performed and complied with by CGX or Newco on
or before the Closing Date.
10.5 OFFICER'S CERTIFICATE. Each of CGX and Newco shall have delivered to
the Company and the Shareholders an officer's certificate, dated the Closing
Date and signed on behalf of CGX and Newco, respectively, by the president or a
vice president of such company, certifying the fulfillment of the conditions
specified in Sections 10.3 and 10.4 hereof.
10.6 NO ACTION OR PROCEEDING. On the Closing Date, no action or
proceeding by any public authority or any other person shall be pending before
any court or administrative body or overtly threatened to restrain, enjoin or
otherwise prevent the consummation of this Agreement or the transactions
contemplated hereby, and no action or proceeding by any public authority or
private person shall be pending before any court or administrative body or
overtly threatened to recover any damages or obtain other relief as a result of
this Agreement or the transactions contemplated herein or as a result of any
agreement entered into in connection with or as a condition precedent to the
consummation thereof, which action or proceeding could result in a decision,
ruling or finding which would have a material adverse effect on the ability of
CGX and Newco to fulfill their obligations under this Agreement.
10.7 CONSENTS. All orders, consents, permits, authorizations, approvals
and waivers of every governmental entity or third party required for the
consummation of the transactions contemplated hereby, and all filings,
registrations and notifications to or with all governmental entities required
with respect to the consummation of such transactions, shall have been obtained
or given; PROVIDED, HOWEVER, THAT any third-party consent not obtained by the
Company or the Shareholders, but waived by CGX and Newco, shall not be an
unfulfilled condition hereunder.
10.8 CORPORATE ACTION BY CGX AND NEWCO. All action necessary to authorize
the execution, delivery and performance by CGX and Newco of this Agreement shall
have been duly and validly taken by CGX and Newco.
10.9 STOCK OPTION AGREEMENTS. Messrs. Green, Cassis, Lemmert, Carpenter
and certain other top management employees shall each have been granted stock
options in the form attached as APPENDIX G with respect to an aggregate number
of shares of CGX Common Stock not to exceed that number of full shares of CGX
Common Stock calculated by dividing $2,000,000 by the closing price per share of
CGX Common Stock as reported on the New York Stock Exchange on the trading day
immediately preceding the Closing Date. Allocation of the options with respect
to such shares shall be made by mutual agreement of Mr. Green and the Chairman
of the Board of CGX.
10.10 OPINION OF COUNSEL. The Sellers shall have received from Winstead
Sechrest & Minick P.C., counsel to CGX and Newco, an opinion in substantially
the form set forth on APPENDIX H attached hereto.
10.11 OPINION OF ESOP COUNSEL. The Company shall have received from
Sanders, Schnabel, Brandenburg & Zimmerman, P.C., counsel to the ESOP, an
opinion in substantially the form set forth on APPENDIX E attached hereto.
10.12 FAIRNESS. The Trustees shall have exercised their fiduciary duties
with respect to their determination of the adequacy and fairness of the
consideration received by the ESOP pursuant to the terms of this Agreement.
10.13 LEASE GUARANTY. The lease agreement with Demarr Partnership shall
have been amended so that CGX shall guaranty the obligations of the lessee
thereunder.
A-40
<PAGE>
10.14 DELIVERY OF OTHER DOCUMENTS AND INSTRUMENTS. The following
additional documents shall have been executed and delivered by CGX and Newco:
(a) a Certificate of Secretary for each of CGX and Newco attesting as
to the current form of the articles of incorporation and bylaws, the
current effectiveness of the resolutions of the board of directors and
shareholders of CGX and Newco, respectively, approving this Agreement and
the transactions contemplated hereby, the incumbency and the signature
specimens with respect to the officers of CGX and Newco, respectively,
executing the Agreement and any other document delivered pursuant to the
Agreement by or on behalf of such entity and attesting to such other
instruments and documents as counsel for the Company shall reasonably
request;
(b) the Escrow Agreement; and
(c) such further instruments and documents, in form and content
reasonably satisfactory to counsel for the Company, as may be reasonably
necessary or reasonably appropriate more fully to consummate the
transactions contemplated hereby.
ARTICLE 11
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The respective representations and warranties made by the parties in this
Agreement or in any certificate or document executed and delivered by either
party to the other party pursuant to this Agreement shall survive the Closing
Date and the consummation of the transactions contemplated hereby for a period
of thirty-six months.
ARTICLE 12
INDEMNIFICATION
12.1 INDEMNIFICATION OF PURCHASER INDEMNITEES. The Sellers agree, jointly
and severally, to indemnify and hold the Purchaser Indemnitees (as defined
below) harmless from and against:
(a) any and all liabilities, obligations, damages, deficiencies and
expenses resulting from any misrepresentation, breach of warranty or
non-fulfillment of any covenant or agreement on the part of the
Shareholders, the Trustees or the Company (before the Closing) under the
terms of this Agreement;
(b) any and all liabilities, obligations, damages, deficiencies and
expenses resulting from the creation and operation of or arising in
connection with the ESOP arising from actions or inactions on the part of
the Trustees or the Company prior to the merger of the ESOP into CGX's
401(k) Plan;
(c) any and all liabilities or obligations of the Shareholders except
to the extent CGX is obligated to indemnify such Shareholders as provided
herein; and
(d) all actions, suits, proceedings, demands, assessments, judgments,
costs and expenses, including reasonable attorneys' fees, incident to the
foregoing.
12.2 INDEMNIFICATION OF COMPANY INDEMNITEES. CGX agrees to indemnify and
hold the Company Indemnitees (as defined below) harmless from and against:
(a) any and all liabilities, obligations, damages, deficiencies and
expenses resulting from any misrepresentation, breach of warranty or
non-fulfillment of any covenant or agreement on the part of CGX under the
terms of this Agreement; and
(b) all actions, suits, proceedings, demands, assessments, judgments,
costs and expenses, including reasonable attorneys' fees, incident to the
foregoing.
12.3 METHOD OF ASSERTING CLAIMS. The items listed in Section 12.1 and
Section 12.2 are sometimes collectively referred to herein as "Damages";
PROVIDED, HOWEVER, THAT such reference shall be understood to mean the
respective damages from and against which CGX and its officers, directors,
stockholders, agents and attorneys or the Company (post closing) (the
"Purchaser Indemnitees") or the Shareholders and their respective agents and
attorneys (the "Company Indemnitees"), as the case may be, are indemnified as
the
A-41
<PAGE>
context requires. The person claiming indemnification hereunder, whether a
Purchaser Indemnitee or a Company Indemnitee, is sometimes referred to as the
"Indemnified Party" and the party against whom such claims are asserted
hereunder is sometimes referred to as the "Indemnifying Party." All claims for
indemnification by an Indemnified Party under Section 12.1 or Section 12.2
hereof, as the case may be, shall be asserted and resolved as follows:
(a) If any claim or demand for which an Indemnifying Party would be
liable for Damages to an Indemnified Party hereunder is overtly asserted
against or sought to be collected from such Indemnified Party by a third
party (a "Third Party Claim"), such Indemnified Party shall with
reasonable promptness (but in no event later than thirty (30) days after
the Third Party Claim is so asserted or sought against the Indemnified
Party) notify in writing the Indemnifying Party of such Third Party Claim
enclosing a copy of all papers served, if any, and specifying the nature of
and specific basis for such Third Party Claim and the amount or the
estimated amount thereof to the extent then feasible, which estimate shall
not be conclusive of the final amount of such Third Party Claim (the
"Claim Notice"). For this purpose the commencement of any audit or other
investigation respecting Taxes shall constitute a Third Party Claim.
Notwithstanding the foregoing, failure to so provide a Claim Notice as
provided above shall not relieve the Indemnifying Party from its obligation
to indemnify the Indemnified Party with respect to any such Third Party
Claim except to the extent that a failure to so notify the Indemnifying
Party in reasonably sufficient time prejudices the Indemnifying Party's
ability to defend against the Third Party Claim. The Indemnifying Party
shall have thirty (30) days from delivery of the Claim Notice (the "Notice
Period") to notify the Indemnified Party (i) whether or not the
Indemnifying Party disputes the liability of the Indemnifying Party to the
Indemnified Party hereunder with respect to such Third Party Claim and (ii)
whether or not the Indemnifying Party desires, at the sole cost and expense
of the Indemnifying Party, to defend the Indemnified Party against such
Third Party Claim.
(i) If the Indemnifying Party notifies the Indemnified Party
within the Notice Period that the Indemnifying Party does not dispute
its liability to the Indemnified Party (without admitting or denying any
liability to third parties) and that the Indemnifying Party desires to
defend the Indem-nified Party with respect to the Third Party Claim
pursuant to this Article 12, then the Indemnifying Party shall have the
right to defend, at its sole cost and expense, such Third Party Claim by
all appropriate proceedings, which proceedings shall be diligently
prosecuted by the Indemnifying Party to a final conclusion or settled at
the discretion of the Indemnifying Party (but only if the Indemnifying
Party is liable hereunder to the Indemnified Party for the full amount
of, and all obligations under, such settlement; otherwise, no such
settlement shall be agreed to without the prior written consent of the
Indemnified Party). If the Indemnifying Party is liable hereunder to the
Indemnified Party for the full amount of such Third Party Claim, the
Indemnifying Party shall have full control of such defense and
proceedings, including any compromise or settlement thereof; PROVIDED,
HOWEVER, THAT the Indemnified Party is hereby authorized, at the sole
cost and expense of the Indemnifying Party (but only if the Indemnified
Party is actually entitled to indemnification hereunder or if the
Indemnifying Party assumes the defense with respect to the Third Party
Claim), to file during the Notice Period any motion, answer or other
pleadings which the Indemnified Party shall deem necessary or
appropriate to protect its interests or those of the Indemnifying Party
and not prejudicial to the Indemnifying Party (it being understood and
agreed that if an Indemnified Party takes any such action which is
prejudicial and conclusively causes a final adjudication which is
adverse to the Indemnifying Party, the Indemnifying Party shall be
relieved of its obligations hereunder with respect to such Third Party
Claim); and PROVIDED FURTHER, that if requested by the Indemnifying
Party, the Indemnified Party agrees, at the sole cost and expense of the
Indemnifying Party, to cooperate with the Indemnifying Party and its
counsel in contesting any Third Party Claim which the Indemnifying Party
elects to contest, or, if appropriate and related to the Third Party
Claim in question, in making any counterclaim against the person
asserting the Third Party Claim, or any cross-complaint against any
person. The Indemnified Party may participate in, but not control
(except if the Indemnifying Party is not
A-42
<PAGE>
liable hereunder to the Indemnified Party for the full amount of such
Third Party Claim, in which case whichever of the Indemnifying Party or
the Indemnified Party is liable for the largest amount of Damages with
respect to the Third Party Claim shall control), any defense or
settlement of any Third Party Claim with respect to which the
Indemnifying Party is participating pursuant to this Section 12.3 , and
except as provided in the preceding sentence, the Indemnified Party
shall bear its own costs and expenses with respect to such
participation.
(ii) If the Indemnifying Party fails to notify the Indemnified
Party within the Notice Period as provided in subsection (i) above or
notifies the Indemnified Party that the Indemnifying Party disputes its
liability to the Indemnified Party, then the Indemnified Party shall
have the right to defend, at the sole cost and expense of the
Indemnifying Party if it is determined that the Indemnifying Party is
liable for indemnification of the Indemnified Party, the Third Party
Claim by all appropriate proceedings, which proceedings shall be
promptly and vigorously prosecuted by the Indemnified Party to a final
conclusion or settled. The Indemnified Party shall have full control of
such defense and proceedings, including any compromise or settlement
thereof; PROVIDED, HOWEVER, THAT if requested by the Indemnified Party,
the Indemnifying Party agrees, at the sole cost and expense of the
Indemnifying Party, to cooperate with the Indemnified Party and its
counsel in contesting any Third Party Claim which the Indemnified Party
is contesting, or, if appropriate and related to the Third Party Claim
in question, in making any counterclaim against the person asserting the
Third Party Claim, or any cross-complaint against any person.
Notwithstanding the foregoing provisions of this Section 12.3, if the
Indemnifying Party has timely notified the Indemnified Party that the
Indemnifying Party disputes its liability to the Indemnified Party and
if such dispute is resolved in favor of the Indemnifying Party by final,
non-appealable order of a court of competent jurisdiction, the
Indemnifying Party shall not be required to bear the costs and expenses
of the Indemnified Party's defense pursuant to this Section 12.3 or of
the Indemnifying Party's participation therein at the Indemnified
Party's request and the Indemnified Party shall reimburse the
Indemnifying Party in full for all costs and expenses of such
litigation. The Indemnifying Party may participate in, but not control,
any defense or settlement controlled by the Indemnified Party pursuant
to this Section 12.3 (other than a dispute as to the Indemnifying
Party's liability to the Indemnified Party) and the Indemnifying Party
shall bear its own costs and expenses with respect to such
participation.
(iii) If any Indemnified Party should have a claim against any
Indemnifying Party hereunder which does not involve a Third Party Claim,
the Indemnified Party shall notify the Indemnifying Party, in writing,
of such claim by the Indemnified Party, specifying the nature of and
specific basis for such claim and the amount of the estimated amount of
such claim (the "Indemnity Notice"). If the Indemnifying Party does
not notify the Indemnified Party within thirty (30) days from delivery
of the Indemnity Notice that the Indemnifying Party disputes such claim,
the amount or estimated amount of such claim specified by the
Indemnified Party shall be conclusively deemed a liability of the
Indemnifying Party hereunder. If the Indemnifying Party has timely
disputed such claim, as provided above, such dispute shall be resolved
by litigation in an appropriate court of competent jurisdiction or as
the parties otherwise at such time agree.
12.4 PAYMENT OF INDEMNITY. Any claims made pursuant to this Article 12
shall be paid in cash by the Indemnifying Party to the Indemnified Party;
PROVIDED, HOWEVER, that neither Purchaser Indemnitees nor Company Indemnitees
shall be entitled to indemnification hereunder unless the aggregate amount of
claims by such Purchaser Indemnitees or Company Indemnitees exceeds $400,000, in
which event such Purchaser Indemnitees or Company Indemnitees, as applicable,
shall be entitled to indemnification for the full amount of all such claims in
excess of $200,000 (such amounts, collectively, the "Basket"); AND PROVIDED
FURTHER that indemnification by Sellers shall be limited to and provided solely
from the Escrowed Funds and no indemnification shall be required from CGX or
Newco in excess of an aggregate amount of $3,100,000 plus interest earned
thereon not otherwise distributed pursuant to the Escrow Agreement. In
determining the amount of any indemnity, there shall be taken into account by
the party to be indemnified any tax benefit, insurance proceeds or other similar
recovery or offset realized, directly or indirectly, as a result of such
A-43
<PAGE>
indemnification. Further, claims of Purchaser Indemnitees shall first be offset
against any tax benefit received in connection with the Company's election to be
an S Corporation, if applicable. Notwithstanding the foregoing, any claims by
Purchaser Indemnitees arising as a result of a breach of the representations and
warranties in Section 3.20 or otherwise arising in connection with the ESOP
resulting from the creation and operation of or arising in connection with the
ESOP arising from actions or inactions on the part of the Trustees or the
Company prior to the merger of the ESOP into CGX's 401(k) Plan shall not, after
taking into account the tax benefit received in connection with such S
Corporation election, be subject to the Basket.
ARTICLE 13
TERMINATION
13.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated herein abandoned at any time before the Effective Time, whether
before or after approval by the shareholders of the Company and the participants
in the ESOP:
(a) by the written mutual consent of boards of directors of CGX and
Newco, on the one hand, and the board of directors of the Company and the
Sellers, on the other hand;
(b) by CGX and Newco, upon notice of termination of their obligation
to consummate the transaction delivered to the Company or the Sellers if
CGX and Newco have determined that there has been any material breach of
any representation, warranty or covenant of the Company or any one or more
of the Sellers, stating in particularity the default or defaults on which
the notice is based; PROVIDED, HOWEVER, THAT the Company or any Seller
shall, after receipt of such notice, have thirty (30) days in which to cure
such breach and, if so cured, CGX and Newco shall, for that reason, have no
right to terminate this Agreement;
(c) by the Company and the Sellers, upon notice of termination of
their obligation to consummate the transaction delivered to CGX and Newco,
if the Company and the Sellers have determined that there has been any
material breach of any representation, warranty or covenant of CGX or
Newco, stating in particularity the default or defaults on which the notice
is based; PROVIDED, HOWEVER, THAT CGX and Newco shall, after receipt of
such notice, have thirty (30) days in which to cure such breach and, if so
cured, the Company and the Sellers shall, for that reason, have no right to
terminate this Agreement;
(d) by either CGX and Newco on the one hand or the Company and the
Sellers on the other hand upon written notification to the non-terminating
party if (i) all conditions of the Closing required by Articles 9 and 10
hereof have not been met or waived by November 30, 1998, if the
Registration Statement is not reviewed by the Commission, or such later
time as is necessary for the Commission to review the Registration
Statement, but no later than January 31, 1999, provided, however, that
either date may be extended by mutual agreement among CGX, Newco, the
Company and the Sellers without the necessity of seeking the further
approval of the ESOP participants (the "Extended Date") or (ii) the
Merger has not occurred by such Extended Date, PROVIDED, HOWEVER, THAT
neither CGX and Newco on the one hand nor the Company and the Sellers on
the other hand shall be entitled to terminate this Agreement pursuant
hereto if such party is in willful and material violation of any of its
representations, warranties or covenants contained in this Agreement;
(e) by either CGX and Newco on the one hand or the Company and the
Sellers on the other hand upon written notification to the non-terminating
party if any governmental authority shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable;
(f) by either CGX and Newco on the one hand or the Company and the
Sellers on the other hand upon written notification to the non-terminating
party if any required approval of the shareholders of the Company or the
participants in the ESOP shall not have been obtained by reason of the
failure to
A-44
<PAGE>
obtain the required vote of such shareholders and participants at the
meeting held or other arrangements made for such purpose; PROVIDED,
HOWEVER, that if the Agreement is terminated pursuant hereto and the
Company or the Sellers enter into a letter of intent or other similar
understanding to sell or otherwise dispose of all or substantially all of
the assets, securities or real property of the Company within one year
after the date of such termination and such transaction or reasonable
equivalent thereof is ultimately consummated, then the Company shall pay to
CGX the Termination Fee on the date of consummation of the proposed
transaction or the reasonable equivalent thereof; or
(g) by the Company if it has received and accepts a Superior Proposal
pursuant to Section 7.8 and pays the Termination Fee.
13.2 TERMINATION REMEDIES. If this Agreement is terminated pursuant to
Section 13.1(a), (b), (c), (d), (e) or (f), subject to the conditions contained
in subsection (f) above, such termination shall be without liability of any
party, or any director, officer, employee, agent, consultant or representative
of such party, to any other party to this Agreement by either CGX and Newco or
the Company and the Sellers, except as specifically provided in this Agreement.
If this Agreement is terminated (a) pursuant to Section 13.1(f) and the terms
and conditions of the proviso of such Section 13.1(f) are applicable or (b)
pursuant to Section 13.1(g), the Company shall be obligated to pay to CGX a fee
(the "Termination Fee") in cash in an amount equal to $1,000,000. Such amount
shall include all expenses incurred by CGX in connection with the negotiation
and preparation of this Agreement and the transactions contemplated herein. Such
Termination Fee shall be paid within ten business days following such
termination.
ARTICLE 14
NOTICES
All notices, requests, claims, demands and other communications hereunder
shall be in writing and shall be given (and shall be deemed to have been duly
received within 5 days if posted and otherwise when received, if so given) by
personal delivery, telegram, telecopy, or telex, or by registered or certified
mail, postage prepaid, return receipt requested, to the parties at the following
addresses:
If to the Shareholders or the Company (before the Merger), to each:
c/o Automated Graphic Systems, Inc.
4590 Graphic Drive
White Plains, Maryland 20695-3111
Attention: John F. Green
If to the Shareholders (after the Merger):
c/o John F. Green
11630 Bachelor Hope Court
Issue, Maryland 20645
With a copy to:
David M. Fleishman, Esq.
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, MD 21201-2978
If to the Trustees:
Trustees of the Automated Graphic Systems, Inc.
Employee Stock Ownership Plan
c/o John F. Green
11630 Bachelor Hope Court
Issue, Maryland 20645
A-45
<PAGE>
With a copy to:
Dan S. Brandenburg, Esq.
Sanders, Schnabel, Brandenburg & Zimmerman, P.C.
900 Seventeenth Street, N.W., Suite 900
Washington, DC 20006-2501
If to Newco or CGX or the Company (after the Merger), to:
Consolidated Graphics, Inc.
5858 Westheimer, Suite 200
Houston, Texas 77057
Attention: Joe R. Davis, Chief Executive Officer
With a copy to:
R. Clyde Parker, Jr., Esq.
Winstead Sechrest & Minick P.C.
910 Travis, Suite 2400
Houston, Texas 77002-5895
Any party from time to time may change its address for the purpose of notices to
that party by giving a similar notice specifying a new address, but no such
notice shall be deemed to have been given until it is actually received by the
party sought to be charged with the contents.
ARTICLE 15
MISCELLANEOUS
15.1 INCORPORATION OF SCHEDULES AND APPENDICES; ENTIRE AGREEMENT. This
Agreement supersedes all prior discussions and agreements among the parties with
respect to the subject matter of this Agreement, and this Agreement, including
the Appendices and Schedules hereto to be delivered in connection herewith,
contains the sole and entire agreement among the parties hereto with respect to
the subject matter hereof.
15.2 WAIVER. Any term or condition of this Agreement may be waived at any
time by the party which is entitled to the benefit thereof; such waiver shall be
in writing and shall be executed by the chairman, president or a vice president
of each of the parties or by such party individually, as applicable. A waiver on
one occasion shall not be deemed to be a waiver of the same or any other matter
on a future occasion.
15.3 AMENDMENT. This Agreement may be modified or amended only by a
writing duly executed by or on behalf of all the parties hereto. This Agreement
may be amended by the parties at any time before or after any required approval
of matters presented in connection with the Merger by the shareholders of the
Company and the participants in the ESOP, PROVIDED, HOWEVER, THAT after any such
approval, there shall be made no amendment that by law requires further approval
by such shareholders or participants without the further approval of such
shareholders or participants.
15.4 COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
15.5 HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
15.6 GOVERNING LAW. This Agreement and all rights and obligations
hereunder, including matters of construction, validity and performance shall be
governed by the laws of the State of Maryland, without giving effect to the
principles of conflicts of laws thereof.
15.7 BINDING EFFECT. Subject to the terms and conditions hereof, this
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns; PROVIDED, HOWEVER, THAT this Agreement
or any right or part hereunder shall not be voluntarily assigned by any party
hereto
A-46
<PAGE>
without the prior written consent of the other parties hereto, except that CGX
or Newco may assign its rights and obligations hereunder to a wholly owned,
direct or indirect, subsidiary of CGX or Newco; PROVIDED, HOWEVER, THAT CGX and
Newco shall remain liable for their obligations hereunder.
15.8 EXPENSES. The Sellers shall pay all transactional, legal and other
professional expenses and broker's fees, if any, incurred by them or the
Company, including without limitation fees of legal, financial and other
advisers engaged by the Sellers or the Company in connection with the letter,
this Agreement and the documents to be executed in connection herewith,
PROVIDED, HOWEVER, THAT the Company may pay legal and professional expenses
incurred by such parties in connection herewith through June 30, 1998, AND
PROVIDED FURTHER THAT the Company may pay such legal and professional expenses
incurred after June 30, 1998 that are part of the transaction costs, but only to
the extent any such payments, including payments made with respect to legal and
professional expenses of the ESOP, are deducted from the cash consideration to
be paid pursuant to Section 1.3 of this Agreement. CGX shall pay the expenses of
CGX and Newco in connection with the letter of intent, this Agreement and the
transactions contemplated hereby, including without limitation all fees of legal
counsel engaged by CGX and Newco and all costs of CGX's due diligence review,
including a Phase I Environmental Study and inspections of machinery and
equipment, in connection with the letter of intent, this Agreement and the
documents to be executed in connection herewith.
15.9 FURTHER ASSURANCES. CGX, Newco and the Shareholders, at any time
after the Closing Date, shall promptly execute, acknowledge and deliver any
further assignments, conveyances and other assurances, documents and instruments
of transfer reasonably requested by CGX, Newco or the Shareholders, and
necessary for such parties to comply with the representations, warranties and
covenants contained herein and will take any action consistent with the terms of
this Agreement that may reasonably be requested by CGX, Newco or the
Shareholders.
15.10 APPOINTMENT OF AGENT. Sellers hereby appoint John F. Green
("Green") to be their agent, with full power to act on their behalf, to
perform any and all calculations necessary to implement the terms of this
Agreement and to make any and all decisions and agreements with respect to or
required to be made by Sellers pursuant to the Escrow Agreement or Section 8.6
hereof or as contemplated in Article 12 hereof. Sellers agree to indemnify and
hold Green harmless from any liability of any kind or nature, including
reasonable attorney's fees, arising from Green's actions as such agent (with
respect to the Trustees, neither of the Trustees shall have any personal
liability under this Section 15.10, but the ESOP shall be liable to Green to the
extent of its interest in the funds held pursuant to the Escrow Agreement and as
permitted under ERISA), except as may arise from Green's willful misconduct or
fraud. Furthermore, Sellers acknowledge and agree that CGX and Newco are
entitled to rely on the authority of Green as the Sellers' authorized agent and
representative and that the actions and representations made by Green on the
Sellers' behalf shall be binding on the Sellers.
A-47
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the 28th day of September, 1998.
CGX:
CONSOLIDATED GRAPHICS, INC.
By: /s/ JOE R. DAVIS
JOE R. DAVIS, CHIEF EXECUTIVE
OFFICER
NEWCO:
AGS ACQUISITION CO.
By: /s/ JOE R. DAVIS
JOE R. DAVIS, CHIEF EXECUTIVE
OFFICER
AUTOMATED GRAPHIC SYSTEMS, INC.
By: /s/ JOHN F. GREEN
JOHN F. GREEN, CHIEF EXECUTIVE
OFFICER
A-48
<PAGE>
SHAREHOLDERS:
/s/ JOHN F. GREEN
JOHN F. GREEN
/s/ LAWRENCE SCHINDEL
LAWRENCE SCHINDEL
/s/ KEVIN CASSIS
KEVIN CASSIS
/s/ KENNETH LEMMERT
KENNETH LEMMERT
/s/ CHRISTOPHER CARPENTER
CHRISTOPHER CARPENTER
A-49
<PAGE>
ACKNOWLEDGED AND AGREED TO FOR
THE PURPOSE OF ARTICLES 1, 2, 5 AND
SECTIONS 7.2, 7.5, 7.6, 7.8, 7.11,
7.12, 7.16, 7.17, 7.18, 7.19, 8.6 and
15.10
ESOP:
THE AUTOMATED GRAPHIC SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
By: /s/ JOHN F. GREEN
JOHN F. GREEN, SOLELY IN HIS
CAPACITY AS
TRUSTEE UNDER THE ESOP
ACKNOWLEDGED AND AGREED TO FOR
THE PURPOSE OF ARTICLES 1, 2, 5 AND
SECTIONS 7.2, 7.5, 7.6, 7.8, 7.11,
7.12, 7.16, 7.17, 7.18, 7.19, 8.6 and
15.10
ESOP:
THE AUTOMATED GRAPHIC SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
By: /s/ EDWARD PITTMAN
EDWARD PITTMAN, SOLELY IN HIS
CAPACITY AS
TRUSTEE UNDER THE ESOP
A-50
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
This Amendment to Agreement and Plan of Reorganization, dated as of October
30, 1998, by and among Consolidated Graphics, Inc., a Texas corporation; AGS
Acquisition Co., a Maryland corporation; Automated Graphic Systems, Inc., a
Maryland corporation; John F. Green, Lawrence Schindel, Kevin Cassis, Kenneth
Lemmert and Christopher Carpenter; and John F. Green and Edward Pittman, in
their capacity as the trustees of the Automated Graphic Systems, Inc. Employee
Stock Ownership Plan which amends the Agreement and Plan of Reorganization by
and among the aforementioned parties dated September 28, 1998 (the
"Agreement") (capitalized terms used but not defined herein shall have the
meaning assigned to them in the Agreement):
WITNESSETH:
WHEREAS, CGX, the Company, the Shareholders and the Trustees executed the
Agreement on September 28, 1998 with the intention being that the transaction
would close on or prior to November 30, 1998 (unless the Registration Statement
is reviewed by the Commission); and
WHEREAS, while the parties have acted in good faith to meet such deadlines,
it has become necessary to extend such dates;
NOW, THEREFORE, in consideration of the mutual premises, covenants and
agreements and in reliance upon the representations and warranties set forth
herein, the parties agree as follows:
TERMINATION. Subparagraph (d) of Section 13.1 shall be deleted and
replaced in its entirety with the following:
(d) by either CGX and Newco on the one hand or the Company and the
Sellers on the other hand upon written notification to the non-terminating
party if (i) all conditions of the Closing required by Articles 9 and 10
hereof have not been met or waived by December 31, 1998, if the
Registration Statement is not reviewed by the Commission, or such later
time as is necessary for the Commission to review the Registration
Statement, but no later than February 28, 1999, provided, however, that
either date may be extended by mutual agreement among CGX, Newco, the
Company and the Sellers without the necessity of seeking the further
approval of the ESOP participants (the "Extended Date") or (ii) the
Merger has not occurred by such Extended Date, PROVIDED, HOWEVER, THAT
neither CGX and Newco on the one hand nor the Company and the Sellers on
the other hand shall be entitled to terminate this Agreement pursuant
hereto if such party is in willful and material violation of any of its
representations, warranties or covenants contained in this Agreement;
A-51
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the 30th day of October, 1998.
CGX:
CONSOLIDATED GRAPHICS, INC.
By: __________________________________
JOE R. DAVIS, CHIEF EXECUTIVE
OFFICER
NEWCO:
AGS ACQUISITION CO.
By: __________________________________
JOE R. DAVIS, CHIEF EXECUTIVE
OFFICER
AUTOMATED GRAPHIC SYSTEMS, INC.
By: __________________________________
JOHN F. GREEN, CHIEF EXECUTIVE
OFFICER
A-52
<PAGE>
SHAREHOLDERS:
______________________________________
JOHN F. GREEN
______________________________________
LAWRENCE SCHINDEL
______________________________________
KEVIN CASSIS
______________________________________
KENNETH LEMMERT
______________________________________
CHRISTOPHER CARPENTER
ESOP:
THE AUTOMATED GRAPHIC SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
By: _________________________________
JOHN F. GREEN
By: _________________________________
EDWARD PITTMAN
A-53
<PAGE>
APPENDIX B
MARYLAND GENERAL CORPORATION LAW
TITLE 3. CORPORATIONS IN GENERAL
EXTRAORDINARY ACTIONS
SUBTITLE 2. RIGHTS OF OBJECTING STOCKHOLDERS
3-201.
(a) In this subtitle, except as provided in subsection (b) of this section,
"successor" includes a corporation which amends its charter in a way
which alters the contract rights, as expressly set forth in the charter, of
any outstanding stock, unless the right to do so is reserved by the charter
of the corporation.
(b) When used with reference to a share exchange, "successor" means the
corporation the stock of which was acquired in the share exchange.
3-202.
(a) Except as provided in subsection (c) of this section, a stockholder of a
Maryland corporation has the right to demand and receive payment of the
fair value of the stockholder's stock from the successor if:
(1) the corporation consolidates or merges with another corporation;
(2) the stockholder's stock is to be acquired in a share exchange;
(3) the corporation transfers its assets in a manner requiring action
under 3-105(d) of this title;
(4) the corporation amends its charter in a way which alters the contract
rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholder's rights,
unless the right to do so is reserved by the charter of the
corporation; or
(5) the transaction is governed by 3-602 of this title or exempted by
3-603(b) of this title.
(b) (1) Fair value is determined as of the close of business:
(i) With respect to a merger under 3-106 of this title of a 90
percent or more owned subsidiary into its parent, on the day
notice is given or waived under 3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value may
not include any appreciation or depreciation which directly or
indirectly results from the transaction objected to or from its
proposal.
(3) In any transaction governed by 3-602 of this title or exempted by
3-603(b) of this title, fair value shall be value determined in
accordance with the requirements of 3-603(b) of this title.
(c) Unless the transaction is governed by 3-602 of this title or is exempted
by 3-603(b) of this title, a stockholder may not demand the fair value of
his stock and is bound by the terms of the transaction if:
(1) The stock is listed on a national securities exchange or is designated
as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.:
(i) With respect to a merger under 3.106 of this title of a 90
percent or more owned subsidiary into its parent, on the date
notice is given or waived under 3-106;
(ii) With respect to any other transaction on the record date for
determining stockholders entitled to vote on the transaction
objected to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as expressly
set forth in the charter, and the charter does not reserve the
right to do so; or
B-1
<PAGE>
(ii) The stock is to be changed or converted in whole or in part in
the merger into something other than either stock in the
successor or cash, scrip, or other rights or interests arising
out of provisions for the treatment of fractional shares of stock
in the successor; or
(3) The stock is that of an open-end investment company registered with
the Securities and Exchange Commission under the Investment Company
Act of 1940 and the value placed on the stock in the transaction is
its net asset value.
3-203.
Procedure by stockholder.
(a) Specific duties -- A stockholder of a corporation who desires to receive
payment of the fair value of his stock under this subtitle:
(1) Shall file with the corporation a written objection to the proposed
transaction:
(i) With respect to a merger under 3-106 of this title of a 90
percent or more owned subsidiary into its parent, within 30 days
after notice is given or waived under 3-106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be
considered;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for record,
shall make a written demand on the successor for payment for his
stock, stating the number and class of shares for which he demands
payment.
(b) Failure to comply with section -- A stockholder who fails to comply with
this section is bound by the terms of the consolidation, merger, share
exchange, transfer of assets, or charter amendment.
3-204.
Effect of demand on dividend and other rights. A stockholder who demands
payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of
business on the day as at which fair value is to be determined under
3-202 of this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that stock,
except the right to receive payment of its fair value.
3-205.
Withdrawal of demand. A demand for payment may be withdrawn only with the
consent of the successor.
3-206.
Restoration of dividend and other rights.
(a) When rights restored. -- The rights of a stockholder who demands payment
are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required by
this subtitle;
(3) A court determines that the stockholder is not entitled to relief; of
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration. -- The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he
would have received if he had not demanded payment for his stock. However,
the restoration does not prejudice any corporate proceedings taken before
the restoration.
B-2
<PAGE>
3-207.
(a) (1) The successor promptly shall notify each objecting stockholder in
writing of the date the articles are accepted for record by the
Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each
offer shall be accompanied by the following information relating to
the corporation which issued the stock:
(i) A balance sheet as of a date not more than six months before the
date of the offer;
(ii) A profit and loss statement for the 12 months ending on the date
of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) The successor shall deliver the notice and offer to each objecting
stockholder personally or mail them to him by certified mail, return
receipt requested, bearing a postmark from the United States Postal
Service, at the address he gives the successor in writing, or, if none, at
his address as it appears on the records of the corporation which issued
the stock.
3-208.
Petition for appraisal; consolidation of proceedings; joinder of objectors.
(a) Petition for appraisal. -- Within 50 days after the Department accepts the
articles for record, the successor or an objecting stockholder who has not
received payment for his stock may petition a court of equity in the county
where the principal office of the successor is located or, if it does not
have a principal office in this State, where the resident agent of the
successor is located, for an appraisal to determine the fair value of the
stock.
(b) Consolidation of suits; joinder of objectors.
(1) If more than one appraisal proceeding is instituted, the court shall
direct the consolidation of all the proceedings on terms and
conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.
3-209.
Notation on stock certificate.
(a) Submission of certificate -- At any time after a petition for appraisal is
filed, the court may require the objecting stockholders parties to the
proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to
him or grant other appropriate relief.
(b) Transfer of stock bearing notation -- If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name
of the original objecting stockholder. The transferee of this stock does
not acquire rights of any character with respect to the stock other than
the rights of the original objecting stockholder.
3.210.
Appraisal of fair value.
(a) Court to appoint appraisers. -- If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint
three disinterested appraisers to determine the fair value of the stock on
terms and conditions the court considers proper. Each appraiser shall take
an oath to discharge his duties honestly and faithfully.
(b) Report of appraisers -- Filing. -- Within 60 days after their appointment,
unless the court sets a longer time, the appraisers shall determine the
fair value of the stock as of the appropriate date and file a report
stating the conclusion of the majority as to the fair value of the stock.
B-3
<PAGE>
(c) Same -- Contents. -- The report shall state the reasons for the conclusion
and shall include a transcript of all testimony and exhibits offered.
(d) Same -- Service; objection. --
(1) On the same day that the report is filed, the appraisers shall mail a
copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to it
and request a hearing.
3-211.
Action by court on appraisers' report.
(a) Order of court. -- The court shall consider the report and, on motion of
any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) Procedure after order.
(1) If the appraisers' report is confirmed or modified by the order,
judgment shall be entered against the successor and in favor of each
objecting stockholder party to the proceeding for the appraised fair
value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or
(ii) Remit the proceedings to the same or other appraisers on terms
and conditions it considers proper.
(c) Judgment includes interest.
(1) Except as provided in paragraph (2) of this subsection, a judgment for
the stockholder shall award the value of the stock and interest from
the date as at which fair value is to be determined under 3-202 of
this subtitle.
(2) The court may not allow interest if it finds that the failure of the
stockholder to accept an offer for the stock made under 3-207 of this
subtitle was arbitrary and vexatious or not in good faith. In making
this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(d) Cost of proceedings.
(1) The costs of the proceedings, including reasonable compensation and
expenses of the appraisers, shall be set by the court and assessed
against the successor. However, the court may direct the costs to be
apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer for
the stock made under 3-207 of this subtitle was arbitrary and
vexatious or not in good faith. In making this finding, the court
shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorneys' fees or expenses. The reasonable fees
and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under 3-207 of
this subtitle; or
B-4
<PAGE>
(ii) The value of the stock determined in the proceeding materially
exceeds the amount offered by the successor.
(e) Effect of judgment. -- The judgment is final and conclusive on all parties
and has the same force and effect as other decrees in equity. The judgment
constitutes a lien on the assets of the successor with priority over any
mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
3-212.
Surrender of stock. The successor is not required to pay for the stock of
an objecting stockholder or to pay a judgment rendered against it in a
proceeding for an appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it,
endorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the certificates
and sufficient indemnity bond are furnished.
3-213.
Rights of successor with respect to stock.
(a) General rule. -- A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to
holders of record of that stock on a record date after the close of
business on the day as at which fair value is to be determined under 3-202
of this subtitle.
(b) Successor in transfer of assets. -- After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all
the rights of an owner of the stock.
(c) Success in consolidation, merger, or share exchange. -- Unless the articles
provide otherwise, stock in the successor of a consolidation, merger, or
share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of
the successor. However, a proceeding for reduction of the capital of the
successor is not necessary to retire the stock or to reduce the capital of
the successor represented by the stock.
B-5
<PAGE>
APPENDIX C
INVESTMENT FUND ALTERNATIVES
UNDER THE
CONSOLIDATED GRAPHICS, INC. EMPLOYEE 401(K) SAVINGS PLAN
Consolidated Graphics, Inc. Common Stock
Janus Worldwide Fund
Global Resources Fund
Bonnel Growth Fund
Dreyfus S&P 500 Index Fund
Janus Flexible Income Fund
U.S. Government Securities Savings Fund
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act ("TBCA") provides
that a corporation may indemnify any director or officer who was, is or is
threatened to be made a named defendant or respondent in a proceeding because he
is or was a director or officer, provided that the director or officer (i)
conducted himself in good faith, (ii) reasonably believed (a) in the case of
conduct in his official capacity, that his conduct was in the corporation's best
interests, and (b) in all other cases, that his conduct was at least not opposed
to the corporation's best interests and (iii) in the case of any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. Subject
to certain exceptions, a director or officer may not be indemnified if the
person is found liable to the corporation or if the person is found liable on
the basis that he improperly received a personal benefit. Under Texas law,
reasonable expenses incurred by a director or officer may be paid or reimbursed
by the corporation in advance of a final disposition of the proceeding after the
corporation receives a written affirmation by the director or officer of his
good faith belief that he has met the standard of conduct necessary for
indemnification and a written undertaking by or on behalf of the director or
officer to repay to the corporation if it is ultimately determined that the
director or officer is not entitled to indemnification by the corporation. The
TBCA requires a corporation to indemnify an officer or director against
reasonable expenses incurred in connection with the proceeding in which he is
named defendant or respondent because he is or was a director or officer if he
is wholly successful in defense of the proceeding.
Texas law also permits a corporation to purchase and maintain insurance or
another arrangement on behalf of any person who is or was a director or officer
against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person, whether or not the
corporation would have the power to indemnify him against that liability under
Article 2.02-1.
CGX's By-Laws, as amended (the "By-Laws"), provide for the
indemnification of its officers and directors, and the advancement to them of
expenses in connection with proceedings and claims, to the fullest extent
permitted under the TBCA. Such indemnification may be made even though directors
and officers would not otherwise be entitled to indemnification under other
provisions of the By-Laws. CGX has entered into indemnification agreements with
its directors and certain of its officers that contractually provide for
indemnification and expense advancement. Both the By-Laws and the agreements
include related provisions meant to facilitate the indemnitees' receipt of such
benefits. These provisions cover, among other things: (i) specification of the
method of determining entitlement to indemnification and the selection of
independent counsel that will in some cases make such determination, (ii)
specification of certain time periods by which certain payments or
determinations must be made and actions must be taken and (iii) the
establishment of certain presumptions in favor of an indemnitee. The benefits of
certain of these provisions are available to an indemnitee only if there has
been a change in control (as therein defined). In addition, CGX may, in the
future, purchase directors and officers liability insurance policies for its
directors and officers.
The above discussion of Article 2.02-1 of the TBCA and of CGX's By-laws is
not intended to be exhaustive and is respectively qualified in its entirety by
such statute and the By-laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C> <C>
2.1 -- Agreement and Plan of Reorganization dated September 28, 1998, as amended, by and among
CGX, AGS Acquisition Co., Automated Graphic Systems, Inc., the individual shareholders of
Automated Graphic Systems, Inc., and the Trustees of the Automated Graphic Systems, Inc.
Employee Stock Ownership Plan (included as Appendix A to the Prospectus/Proxy Statement).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
2.2 -- Form of Escrow Agreement to be entered into by and among CGX, the individual shareholders
of Automated Graphic Systems, Inc., the Trustees of the Automated Graphic Systems, Inc.
Employee Stock Ownership Plan and an independent escrow agent.
*3.1 -- Restated Articles of Incorporation of the Company filed with the Secretary of State of the
State of Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994) SEC
File No. 0-24068, Exhibit 4(a)).
*3.2 -- Articles of Amendment to the Restated Articles of Incorporation of CGX dated as of July
29, 1998. (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998) SEC File No. 0-24068,
Exhibit 3.1).
*3.3 -- By-Laws of CGX dated as of May 31, 1995 (Consolidated Graphics, Inc. Form 10-K (March 31,
1995) SEC File No. 0-24068, Exhibit 3.2).
*3.4 -- Amendment to the By-Laws of CGX dated July 3, 1996 (Consolidated Graphics, Inc. Form 10-Q
(June 30, 1997) SEC File No. 0-24068, Exhibit 3.2).
*3.5 -- Amendment to the By-Laws of CGX dated April 27, 1998 (Consolidated Graphics, Inc. Form
10-K (March 31, 1998) SEC File No. 0-24068, Exhibit 3.4).
*3.6 -- Amendment to the By-Laws of CGX dated September 17, 1998 (Consolidated Graphics, Inc. Form
8-K (October 13, 1998) SEC File No. 0-24068, Exhibit 31).
*4 -- Specimen Common Stock Certificate (Consolidated Graphics, Inc., Form 10-K (March 31, 1998)
SEC File No. 0-24068, Exhibit 4.1).
5 -- Opinion and Consent of Winstead Sechrest & Minick P.C. regarding the legality of the
securities being offered.
8 -- Opinion and Consent of Winstead Sechrest & Minick P.C. regarding federal income tax
matters.
*10.1 -- Revolving Credit Agreement among CGX and Texas Commerce Bank National Association as Agent
and Bank One of Texas, N.A. as Co-agent, dated as of June 5, 1997 (Consolidated Graphics,
Inc. Form 10-K (March 31, 1997) SEC File No. 0-24068, Exhibit 10-8).
*10.2 -- First Amendment to the Revolving Credit Agreement among CGX and Chase Bank of Texas as
Agent and Bank One of Texas, N.A. as Co-Agent, dated August 4, 1998 (Consolidated
Graphics, Inc. Form 10-Q (June 30, 1998) SEC File No. 0-24068, Exhibit 10.1).
*10.3 -- 1994 CGX Long-Term Incentive Plan (Consolidated Graphics, Inc. Registration Statement on
Form S-1 (Reg. No. 333-77468), Exhibit 10.14).
*10.4 -- First Amendment to Consolidated Graphics, Inc. Long-Term Incentive Plan (reflecting an
increase in the number of shares of Common Stock authorized to be issued thereunder from
367,500 to 967,500) (Consolidated Graphics, Inc. Registration Statement on Form S-8 (Reg.
No. 333-66019, Exhibit 4.2).
*10.5 -- Second Amendment to Consolidated Graphics, Inc. Long-Term Incentive Plan, as amended
(reflecting an increase in the number of shares of Common Stock authorized to be issued
thereunder from 1,935,000 (as a result of a 2-1 stock split) to 3,435,000) (Consolidated
Graphics, Inc. Registration Statement on Form S-8 (Reg. No. 333-66019, Exhibit 4.3)
*10.6 -- Form of Indemnification Agreement covering the directors and officers of Consolidated
Graphics, Inc. (Consolidated Graphics, Inc. Registration Statement on Form S-1 (Reg. No.
333-77468), Exhibit 10.15).
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Winstead Sechrest & Minick P.C. (included in opinions set forth as Exhibits 5
and 8).
23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Watkins, Meegan, Drury & Company L.L.C.
24 -- Powers of Attorney (included herein on signature page).
99.1 -- Form of Automated Graphic Services, Inc. Proxy in connection with special meeting of
stockholders to be held December , 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
99.2 -- Form of Voting Instructions for participants in Automated Graphic Systems, Inc., Employee
Stock Ownership Plan in connection with special meeting of Automated Graphic Systems, Inc.
stockholders to be held December , 1998.
</TABLE>
- ------------
* Incorporated by reference.
The schedules and appendices of CGX and the other parties to the Agreement
and Plan of Reorganization and Escrow Agreement referred to as Exhibits 2.1 and
2.2 above, are not submitted to the Commission herewith. Upon request, CGX
undertakes to furnish to the Commission a copy of any omitted schedule or
appendix.
(b) Financial Statement Schedules -- Not Applicable.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(c) The registrant undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described in Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 3, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, THE STATE OF
TEXAS, ON OCTOBER 30, 1998.
CONSOLIDATED GRAPHICS, INC.
By: /s/ JOE R. DAVIS
JOE R. DAVIS
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE
BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joe R. Davis and Randall D. Keys, and each one of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REPORT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ----------------------- ----------------------------------- -----------------
/s/JOE R. DAVIS President, Chief Executive October 30, 1998
(JOE R. DAVIS) Officer and Director
(Principal Executive Officer)
/s/RANDALL D. KEYS Vice President -- Finance October 30, 1998
(RANDALL D. KEYS) and Chief Financial and
Accounting Officer
/s/LARRY J. ALEXANDER Director October 30, 1998
(LARRY J. ALEXANDER)
/s/BRADY F. CARRUTH Director October 30, 1998
(BRADY F. CARRUTH)
/s/CLARENCE C. COMER Director October 30, 1998
(CLARENCE C. COMER)
/s/GARY L. FORBES Director October 30, 1998
(GARY L. FORBES)
/s/W. D. HAWKINS Director October 30, 1998
(W. D. HAWKINS)
/s/JAMES H. LIMMER Director October 30, 1998
(JAMES H. LIMMER)
/s/THOMAS E. SMITH Director October 30, 1998
(THOMAS E. SMITH)
/s/HUGH N. WEST Director October 30, 1998
(HUGH N. WEST)
II-4
EXHIBIT 2.2
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is executed this ___th day
of __________, 1998 by and among Consolidated Graphics, Inc., a Texas
corporation ("Buyer"); and John F. Green, Lawrence Schindel, Kevin Cassis,
Kenneth Lemmert and Christopher Carpenter (collectively, "Shareholders"); and
John F. Green and Edward Pittman in their capacity as trustees (the "Trustees"
and, together with the Shareholders, the "Sellers") of the Automated Graphic
Systems, Inc. Employee Stock Ownership Plan (the "ESOP"), and _________________
as Escrow Agent (the "Escrow Agent").
WHEREAS, pursuant to that certain Agreement and Plan of
Reorganization dated _____________, 1998 by and among the Buyer, the Sellers,
AGS Acquisition Co. ("Newco"), and Automated Graphic Systems, Inc. ("AGS") (the
"Reorganization Agreement"), AGS will be merged into Newco on the terms and
conditions specified therein (the "Merger"); and
WHEREAS, pursuant to Section 1.4 of the Reorganization Agreement,
the parties hereto have agreed to deposit $3,100,000 with the Escrow Agent to be
held and distributed by the Escrow Agent on the terms and conditions contained
herein so as to secure the full and prompt payment of all amounts due pursuant
to Sections 12.1 and 12.4 of the Reorganization Agreement; and
WHEREAS, the Escrow Agent is willing to hold such funds in escrow
upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants
and agreements set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. RECITALS. The foregoing recitals are made a part of this
Agreement.
2. DEFINITIONS; SECTION REFERENCES. Capitalized terms not otherwise
defined herein shall have the respective meanings set forth in the
Reorganization Agreement.
<PAGE>
3. APPOINTMENT OF ESCROW AGENT. ____________________ is hereby
appointed and designated as the Escrow Agent for the purposes set forth herein,
and the Escrow Agent hereby accepts such appointment subject to the provisions
hereof.
4. DELIVERIES TO ESCROW AGENT. With the execution of this
Agreement, Buyer is depositing with Escrow Agent cash in the amount of
$3,100,000 (the "Deposited Amount" and as increased by any earnings thereon
("Escrow Earnings") and as reduced by any disbursements or amounts withdrawn
under Section 6 hereof, the "Escrow Fund"). Escrow Agent acknowledges receipt
thereof. All such funds in the Escrow Fund will be held in escrow by the Escrow
Agent and will subsequently be transferred only in accordance with the terms and
provisions of this Agreement.
5. INVESTMENT OF FUNDS. Except as otherwise expressly provided
herein, or as Buyer and Sellers may from time to time jointly instruct Escrow
Agent in writing, the Escrow Fund shall be invested from time to time, to the
extent possible, in direct obligations of the United States Government or any
agency or instrumentality thereof, which are backed by the full faith and credit
of the United States Government.
6. CLAIMS FOR ESCROWED FUNDS.
(a) From time to time on or after five (5) days following the
Merger but no more than once a month, John F. Green, on behalf of Sellers, may
submit to the Escrow Agent invoices, bills or other evidences of obligations due
for services rendered by legal or other professionals on behalf of the Sellers
(to the extent not paid by Buyer, AGS and/or Newco) in connection with the
Reorganization Agreement and the transactions contemplated thereby ("Fee
Statements"). With respect to each such Fee Statement submitted, Escrow Agent
shall disperse, on behalf of the Sellers, an amount from the Escrow Fund
sufficient to cover the amount indicated as due on such Fee Statement with said
disbursements being paid to John F. Green and with him to make disbursement to
such professionals; provided however, that, the total amount that may be
withdrawn with respect to such Fee Statements shall in no event exceed the then
amount of Escrow Earnings and further provided that John F. Green shall have
obtained the prior consent of Buyer, which shall not be unreasonably withheld,
with respect to each submission of any such invoices or bills to Escrow Agent
before their submission to the Escrow Agent. The Escrow Agent shall be entitled
to rely upon any submission from John F. Green provided to Escrow Agent as
contemplated hereinabove.
(b) From time to time on or after five (5) days following the
Merger but no more than once a month, John F. Green, may submit to the Escrow
Agent a claim (an "ESOP Claim") with respect to an amount determined to be due
as a result of the administration of or actions taken with regard to the ESOP
prior to its merger into Buyer's 401(k) plan not otherwise covered and paid by
any insurance policy then in effect; provided, however, that in no event shall
the aggregate amount of all such claims
-2-
<PAGE>
exceed the sum of $1,000,000.00 plus any undisbursed (as permitted by Section
6(a) hereinabove or to pay the fees of the Escrow Agent) amount of the Escrow
Earnings and further provided that John F. Green shall have obtained the prior
consent of Buyer, which shall not be unreasonably withheld, with respect to each
submission of an invoice for an ESOP claim to the Escrow Agent before their
submission to the Escrow Agent. Any such ESOP Claim submitted shall specify the
circumstances under which such ESOP Claim resulted and any information or
documents relevant to such ESOP Claim and shall be offset by the full amount of
insurance available to cover such ESOP Claim. The calculation of such offset
shall be set forth in the ESOP Claim. The Escrow Agent shall dispense, on behalf
of the Sellers, an amount from the Escrow Fund sufficient to cover the amount
indicated as due on the ESOP Claim less any available insurance as also
reflected thereon by disbursing funds to John F. Green who shall subsequently
disburse such funds as otherwise required. The Escrow Agent shall be entitled to
rely upon any submission from John F. Green, provided to Escrow Agent as
contemplated hereinabove.
(c) From time to time on or before ____________, Buyer may
give notice (a "First Notice") to Sellers specifying in reasonable detail the
nature and dollar amount of any claim (a "Claim") it may have under Section 12.1
of the Reorganization Agreement. Within 30 days after submitting a First Notice
with respect to any Claim, Buyer shall submit a Second Notice to Sellers
specifying in detail and with appropriate backup the fixed dollar amount and
nature of the claim and including all such information as Buyer is required to
provide in its "Claim Notice" pursuant to Section 12.3 of the Reorganization
Agreement and including calculations with respect to the aggregate amount of
claims by Buyer, any tax benefits, insurance proceeds or other similar recovery
or offset realized and the effect of the "Basket" limitations set forth in
Section 12.4 of the Reorganization Agreement. If Sellers give notice to Buyer
disputing any Claim (a "Counter Notice") within 30 days following receipt by
Sellers of the Second Notice regarding such Claim, such Claim shall be resolved
as provided in Section 6(d) hereof. If no Counter Notice is received by Buyer
within such 30 day period, then the dollar amount of damages claimed by Buyer as
set forth in its Second Notice shall be deemed established for purposes of this
Escrow Agreement and, at the end of such 30-day period, Buyer shall send to
Escrow Agent, with a copy to Sellers, a letter ("Buyer's Letter") certifying
that Buyer has complied with the provisions of this subsection 6(c), that
Sellers have not provided a Counter Notice and that Buyer is entitled to
withdraw from the Escrow Fund a specified sum. After five (5) business days
after receipt by Escrow Agent of Buyer's Letter, Escrow Agent shall pay to Buyer
the dollar amount claimed in Buyer's Letter from (and only to the extent of) the
Escrow Fund. Escrow Agent shall not inquire into or consider whether a Claim
complies with the requirements of the Reorganization Agreement and may rely upon
Buyer's Letter.
(d) If a Counter Notice is given with respect to a Claim, Escrow
Agent shall make payment with respect thereto only in accordance with (i) joint
written instructions of Buyer and Sellers or (ii) a final non-appealable order
of a court of competent jurisdiction. Any court order shall be accompanied by a
legal opinion of
-3-
<PAGE>
counsel for the presenting party satisfactory to Escrow Agent to the effect that
the order is final and non-appealable. Escrow Agent shall act on such court
order and legal opinion without further question.
7. TERMINATION OF ESCROW. On _____________________, Escrow Agent
shall pay and distribute the then amount of the Escrow Fund to each of the
Sellers in the percentages as reflected on Schedule A attached hereof, unless
(i) any Claims are then pending, in which case an amount equal to the aggregate
amount of such Claims (as shown in the Notices of such Claims) shall be retained
by Escrow Agent in the Escrow Fund and the balance paid to Sellers or (ii) Buyer
has given notice to Sellers and Escrow Agent specifying in reasonable detail the
nature of any other claim it may have under Section 12.1 of the Reorganization
Agreement with respect to which it is unable to specify the amount of such
claim, in which case the entire Escrow Fund shall be retained by Escrow Agent,
in either case until it receives joint written instructions of Buyer and Sellers
or a final non-appealable order of a court of competent jurisdiction as
contemplated by Section 6(d) with respect to the dispersement of the retained
funds.
8. ESCROW AGENT COMPENSATION. The Escrow Agent shall receive a fee
as set forth on Schedule A, which is attached hereto and made a part hereof, for
the services rendered hereunder and shall also be reimbursed for any reasonable
out-of-pocket expenses actually incurred in connection with his duties under
this Agreement. Buyer and Sellers agree that the entire cost of the Escrow
Agent, or any person or organization acting on his behalf, including such
expenses and other costs as may be reasonably incurred by the Escrow Agent in
discharging his duties hereunder, shall be paid out of the Escrow Fund.
9. APPOINTMENT OF AGENT FOR SELLERS. Each Seller hereby irrevocably
appoints John F. Green as his or its agent, with full power and authority to act
for him or it, for the purpose of performing the administrative duties to be
performed under this Agreement, including, without limitation, delivering and
receiving notices on behalf of the Sellers, submitting (or refraining to submit,
if appropriate) Fee Statements, ESOP Claims or Counterclaims to the Escrow Agent
in accordance with Section 6(a), (b) or (c) hereof, executing joint written
instructions with the Buyer in accordance with Section 6(d) hereof, agreeing to
extend any of the dates by which certain events must occur, and such other
administrative activities as are described in this Agreement. Buyer and Newco
are hereby authorized to rely upon any written documents executed by John Green
in his capacity as Agent for the Sellers.
10. DUTIES AND STANDARD OF CARE FOR ESCROW AGENT; INDEMNIFICATION.
10.1 ACCEPTANCE; RELIANCE. The Escrow Agent, by its signature
affixed hereto, agrees to accept the duties and obligations of Escrow Agent as
defined in this Agreement and acknowledges that it has received a copy of the
Reorganization
-4-
<PAGE>
Agreement. The Escrow Agent shall be entitled to rely and shall be protected in
acting in good faith reliance upon any provision of this Escrow Agreement, and
shall be entitled to treat as genuine, and as the document it purports to be,
any letter, paper or other document furnished to him by Buyer or Sellers, and
believed by him in good faith to be genuine and signed by the appropriate party.
10.2 STANDARD OF CARE. Escrow Agent shall not be under any
duty to give the Escrow Fund held by it hereunder any greater degree of care
than it gives its own similar property and shall not be required to invest any
funds held hereunder except as directed in this Agreement.
10.3 COMPLIANCE. The parties hereto agree, and the Escrow
Agent is hereby expressly authorized, to comply with and obey any and all orders
of any court, and any and all judgments and decrees of any court, and the Escrow
Agent shall not be liable to any of the parties hereto or to any other person,
firm, or corporation by reason of such compliance.
10.4 INDEMNIFICATION. Buyer, on the one hand, and Sellers, on
the other hand, agree to indemnify and hold harmless the Escrow Agent from and
against the amount of any and all liability, damages, claims, costs or expense
arising out of the performance by the Escrow Agent of its duties and obligations
pursuant to the terms of this Agreement, except those arising out of or
resulting from its own gross negligence, willful malfeasance or fraud.
10.5 DISPUTES; RIGHT OF INTERPLEADER. Notwithstanding any
provision hereof to the contrary, if the Escrow Agent shall be unable at any
time to determine to whom the monies placed in escrow pursuant to this Agreement
belong or if a dispute should develop between the parties concerning to whom
such monies belong, then the Escrow Agent shall have the right by Bill of
Interpleader to place the monies into a court and interplead the Buyer and
Sellers with respect thereto, and thereafter the Escrow Agent shall be
discharged of all obligations in connection with this Agreement. The written
non-appealable decision of the court shall be binding, final and conclusive upon
the parties. All cost incurred by the Escrow Agent in participating in any such
dispute shall be borne by the nonprevailing party.
11. SUCCESSOR AGENT. Escrow Agent (and any successor Escrow Agent)
may at any time resign as such by delivering the Escrow Fund to any successor
Escrow Agent jointly designated by Buyer and John Green in writing, or to any
court of competent jurisdiction, whereupon Escrow Agent shall be discharged of
and from any and all further obligations arising in connection with this
Agreement. The resignation of Escrow Agent will take effect on the earlier of
(a) the appointment of a successor (including a court of competent jurisdiction)
or (b) the day which is 30 days after the date of delivery of its written notice
of resignation to the other parties hereto. If at that time Escrow Agent has not
received a designation of a successor Escrow Agent, Escrow
-5-
<PAGE>
Agent's sole responsibility after that time shall be to retain and safeguard the
Escrow Fund until receipt of a designation of successor Escrow Agent or a joint
written disposition instruction by the other parties hereto or a final
non-appealable order of a court of competent jurisdiction.
12. NOTICES. All payments, checks, notices, letters, requests,
demands, and other communications required hereunder shall be in writing and
shall be deemed to be duly given if delivered or mailed by registered or
certified mail, postage prepaid, return receipt requested to the following
addresses or such other address as the appropriate party may from time to time
advise each other party hereto:
(a) If the Buyer:
Consolidated Graphics, Inc.
5858 Westheimer, Suite 200
Houston, Texas 77057
Attention: Joe R. Davis, Chief Executive Officer
With a copy to:
R. Clyde Parker, Jr., Esq.
Winstead Sechrest & Minnick P.C.
910 Travis, Suite 2400
Houston, Texas 77002-5895
(b) If the Sellers:
c/o John F. Green
______________________________________
______________________________________
______________________________________
With a copy to:
Venable, Baetjer & Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201-2978
Attention: David M. Fleishman
(c) If the Escrow Agent:
______________________________________
______________________________________
______________________________________
______________________________________
-6-
<PAGE>
13. MISCELLANEOUS.
13.1 WAIVER. Any failure of a party to promptly exercise its
rights under this Agreement shall not constitute a waiver of such rights.
13.2 BENEFIT AND ASSIGNMENT. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns. No person or entity other than the parties hereto is or
shall be entitled to bring any action to enforce and provisions of this
Agreement against any of the parties hereto, and the covenants and agreements
set forth in this Agreement shall be solely for the benefit of, and shall be
enforceable only by, the parties hereto or their respective successors and
assigns.
13.3 FURTHER ASSURANCES. Each of the parties hereto hereby
agrees to take or cause to be taken such further actions, and to execute,
deliver and file or cause to be executed, delivered and filed such further
documents and instruments, as may be reasonably necessary in order to fully
effectuate the purposes, terms and conditions of this Agreement.
13.4 HEADINGS. The section headings in this Agreement have
been inserted for convenience of reference only and shall not be given any
effect in the construction or interpretation, of this Agreement.
13.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland (without regard
to principles of conflict of laws).
13.6 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, and all of
which together shall constitute one and the same instrument.
13.7 AMENDMENT. This Agreement may only be amended by a
written agreement executed by all of the parties hereto and delivered to the
Escrow Agent, and any such amendment shall not be effective until and unless
such a fully executed amended agreement has been so delivered to the Escrow
Agent.
[THIS SPACE IS INTENTIONALLY LEFT BLANK]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.
WITNESS: AUTOMATED GRAPHIC SYSTEMS, INC.
___________________ By: _______________________
Name:
Title:
SHAREHOLDERS:
___________________ _______________________________
John F. Green
___________________ _______________________________
Lawrence Schindel
___________________ _______________________________
Kevin Cassis
___________________ _______________________________
Kenneth Lemmert
___________________ _______________________________
Christopher Carpenter
-8-
<PAGE>
AUTOMATED GRAPHIC SYSTEMS,
INC. EMPLOYEE STOCK OWNERSHIP PLAN
___________________ By: _______________________
John F. Green, Trustee
___________________ By: _______________________
Edward Pittman, Trustee
___________________________
___________________________
___________________ By: _______________________
Name:
Title:
-9-
<PAGE>
SCHEDULE A
$________ a year plus any customary bank charges for any banking activity,
such as , for example, fees to maintain a checking account, purchase of
investments and wire transfers.
EXHIBIT 5
Direct Dial: 713/650-2753
[email protected]
October 30, 1998
Consolidated Graphics, Inc.
5858 Westheimer, Suite 200
Houston, Texas 77057
Gentlemen:
You have requested our opinion as to the legality of the issuance of up to
400,000 shares (the "Shares") of the common stock, par value $.01 per share, of
Consolidated Graphics, Inc. (the "Company"), which are the subject of a
registration statement on Form S-4 (the "Registration Statement") filed by the
Company with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended. You have requested our opinion as to whether the Shares
to be issued will, when issued, be duly and validly issued, fully paid and
nonassessable.
We have examined the Articles of Incorporation of the Company, the Bylaws
and such other corporate records, documents and proceedings and the resolutions
adopted by the Board of Directors of the Company in connection with the
issuance, sale and delivery of the Shares as we have deemed necessary for the
purposes of this opinion.
On the basis of the foregoing, it is our opinion that the Shares to be
issued and sold by the Company pursuant to the Registration Statement have been
duly and validly authorized by all necessary corporate action of the Company and
each of such Shares, when issued, will be duly and validly issued, fully paid
and nonassessable shares of the common stock of the Company.
We consent to the use of this opinion as an exhibit to the Registration
Statement. We further consent to the reference to our firm under the caption
"Legal Matters" in the prospectus which is a part of the Registration Statement.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
EXHIBIT 8
October 30, 1998
Consolidated Graphics, Inc.
5858 Westheimer, Suite 200
Houston, Texas 77057
Re: Merger of Automated Graphic Systems, Inc., a Maryland corporation
(the "Company"), with and into AGS Acquisition Co., a Maryland
corporation ("Newco")
Dear Sirs:
You have requested our opinion concerning certain issues relating to the
federal income taxation of the proposed merger (the "Merger") of the Company
with and into Newco, a wholly owned subsidiary of Consolidated Graphics, Inc., a
Texas corporation ("CGX"), pursuant to that certain Agreement and Plan of
Reorganization dated as of September 28, 1998 by and among the Company, CGX, and
Newco (the "Agreement"). Capitalized terms not otherwise defined herein have the
meanings as defined in the Agreement.
BASIS OF OPINION
Our opinion is based upon (1) the assumptions listed below, and (2) our
review of the following documents:
1. the Agreement;
2. a Certificate of Officer of Automated Graphic Systems, Inc.;
3. a Certificate of Officer of Consolidated Graphics, Inc.; and
4. such other documents relating to the Merger as we have deemed
necessary or appropriate.
Except for the review of such documents, we have not undertaken any independent
investigation of any matters material to the opinion expressed herein, the truth
or completeness of any warranty or
<PAGE>
Consolidated Graphics, Inc., Inc.
October 30, 1998
Page 2
representation contained in any of the documents listed above, or the validity
of any of the assumptions listed below.
In rendering our opinion, we have assumed (1) that each of the warranties,
representations, and statements made in each of the documents referred to above
are complete and accurate and will be complete and accurate as of the Effective
Time of the Merger, (2) that the Agreement correctly and completely embodies the
terms of the Merger and that the Merger will be effected as provided in the
Agreement, (3) the authenticity of all documents submitted to us as originals,
(4) the conformity to the originals of all documents submitted to us as
photostatic, certified, or conformed copies, and (5) the due authorization,
execution, and delivery of all of the documents referred to above.
The opinion expressed herein is rendered as of the date hereof and is
based upon the existing Internal Revenue Code of 1986, as amended (the "Code"),
existing final and proposed Treasury regulations promulgated pursuant thereto
("Regulations"), existing published Revenue Rulings, Revenue Procedures, and
other announcements issued by the Internal Revenue Service, and existing
judicial and administrative decisions and rulings, all of which are subject to
change.
OPINION
Based on and subject to the documents, assumptions, qualifications, and
limitations set forth herein, it is our opinion that:
1. the Merger will be treated as a tax-free reorganization within
the meaning of Section 368(a) of the Code;
2. the Company, CGX and Newco will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code;
3. no loss will be recognized by the Company shareholders who
exchange all of their common stock of the Company (the "Company Common
Stock") for shares of CGX common stock ("CGX Common Stock") and other
consideration pursuant to the Merger;
4. each of the holders of the Company Common Stock who exchange
Company Common Stock for shares of CGX Common Stock and cash pursuant to
the Merger will recognize gain equal to the lesser of (i) the excess, if
any, of the amount realized in such exchange over such holder's tax basis
in the Company Common Stock exchanged or (ii) the amount of cash received;
5. the aggregate tax basis of the CGX Common Stock received by the
Company shareholders who exchange all of their Company Common Stock for
CGX Common Stock
<PAGE>
Consolidated Graphics, Inc., Inc.
October 30, 1998
Page 3
and other consideration pursuant to the Merger will be the same as the
aggregate tax basis of the Company Common Stock surrendered in exchange
therefor;
6. the holding period of CGX Common Stock received by the Company
shareholders in the Merger will include the period during which the shares
of the Company Common Stock surrendered in exchange therefor were held,
provided that the Company Common Stock was held as a capital asset by the
holder at the Effective Time; and
7. neither the Company, CGX nor Newco will recognize gain or loss as
a consequence of the Merger.
LIMITATIONS ON OPINION
Our opinion is limited to that expressly stated herein. The opinion
expressed herein represents only our legal judgment, and has no binding effect
or official status of any kind. No assurance can be given that the Internal
Revenue Service would concur in the conclusion reached in this opinion or that
the conclusion reached in this opinion would be sustained by a court if
contested by the Internal Revenue Service. Any contest or challenge to a tax
position taken by a participant in the Merger could have material adverse tax
consequences to such participant.
Our opinion is limited to that expressly set forth above. No opinion is
expressed as to any transaction other than the Merger, including any transaction
undertaken in connection with the Merger. In addition, we express no opinion as
to any estate, gift, excise, state, local, or foreign tax consequences of the
Merger. In particular, we express no opinion regarding: (1) the amount,
existence, or availability after the Merger of any of the federal income tax
attributes of CGX, Newco or the Company (including, without limitation, net
operating loss carryovers, if any, of CGX, Newco or the Company); (2) the tax
consequences of any disposition of stock of CGX; or (3) the tax treatment of any
disposition of any stock or other securities of the Company in any transaction
other than in exchange for CGX stock pursuant to the Merger.
EFFECT OF CHANGES
The opinions expressed herein are based upon the documents,
representations, decisions, rulings, Code, Regulations, and Internal Revenue
Service publications referred to above, all as of the date of this letter. No
opinion can be expressed at this time as to the likelihood of any change,
amendment, modification, or repeal of, or addition to, any such decisions,
rulings, Code, Regulations, or Internal Revenue Service publications, or as to
the possible impact on the tax treatment of the Merger or the participants in
the Merger of any such change or any change in the documents or representations
or facts underlying the assumptions referred to above. Any such change could
adversely affect the tax treatment of the Merger and the participants in the
Merger, and could have retroactive effect. We undertake no responsibility to
advise you of any changes to any
<PAGE>
Consolidated Graphics, Inc., Inc.
October 30, 1998
Page 4
such documents, representations, decisions, rulings, Code, Regulations, Internal
Revenue Service publications, or facts, or as to the impact, if any, of any such
change on the tax treatment of the Merger or the participants in the Merger.
REGISTRATION STATEMENT
In addition to your request for our opinion on the specific issues of
federal income tax law addressed above, you have asked us to review the
discussion of federal income tax issues contained in the Registration Statement
on Form S-4 to be filed with the Securities and Exchange Commission by CGX in
connection with the Merger on or about October 30, 1998 (the "Registration
Statement"). We have reviewed the discussion entitled "Material Federal Income
Tax Consequences of the Merger" contained in the Registration Statement and
believe, based on and subject to the documents, assumptions, qualifications, and
limitations set forth herein, that such information fairly presents the current
federal income tax law applicable to the Merger, and the material tax
consequences to the Company and its shareholders as a result of the Merger. We
hereby consent to the use of our name in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
WINSTEAD SECHREST & MINICK P.C.
lsd
<PAGE>
EXHIBIT "A"
CERTIFICATE OF OFFICER OF
AUTOMATED GRAPHIC SYSTEMS, INC.
The undersigned officer of AUTOMATED GRAPHIC SYSTEMS, INC. (the
"Company"), in the undersigned's capacity as an officer of the Company, hereby
represents to Winstead Sechrest & Minick P.C. on behalf of the Company in
connection with the proposed merger of the Company with and into AGS Acquisition
Co. ("Newco"), a Maryland corporation and a wholly owned subsidiary of
Consolidated Graphics, Inc. ("CGX"), pursuant to that certain Agreement and Plan
of Reorganization dated as of September 28, 1998 among the Company, CGX, and
Newco (the "Merger"), that the following statements are true as of the date of
this Certificate and will be true as of the effective time of the Merger unless
the undersigned provides a written statement to Winstead Sechrest & Minick P.C.
to the contrary prior to the effective time of the Merger:
1. The Merger will be effected for bona fide business purposes.
2. The persons who held shares of the Company prior to any sale, exchange,
or other disposition (a "Transfer") of the Company stock in connection with or
in contemplation of the Merger (the "Historic Company Shareholders") (1) prior
to the Merger will not have Transferred a number of shares of the Company stock,
and (2) have no plan or intention to Transfer to CGX or a Related Person
(defined below) a number of shares of CGX stock received in the Merger, that
singly or in the aggregate would cause the Historic Company Shareholders to own
a number of shares of CGX stock having a value, as of the date of the Merger, of
less than 50% of the value, as of the date of the Merger, of the stock of the
Company held by the Historic Company Shareholders prior to any Transfer of the
Company stock in connection with or in contemplation of the Merger. For purposes
of this paragraph, "Related Person" means a corporation of which CGX owns,
directly or indirectly, 50% of the stock.
3. The Company and the shareholders of the Company will pay their
respective expenses, if any, incurred in connection with the Merger.
4. There is no intercorporate indebtedness existing between CGX and the
Company or between Newco and the Company that was issued, acquired, or will be
settled at a discount.
5. The Company is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as amended.
6. The fair market value of the CGX stock and other consideration received
by each shareholder of the Company will be approximately equal to the fair
market value of the Company stock surrendered in exchange therefor.
-1-
<PAGE>
7. Newco will acquire at least 90% of the fair market value of the net
assets and at least 70% of the fair market value of the gross assets held by the
Company immediately prior to the Merger, taking into account amounts paid for
Merger expenses by the Company, amounts paid by the Company to its shareholders
who receive cash or other property, and all redemptions and distributions made
by the Company immediately preceding the Merger as assets of the Company
immediately prior to the Merger.
8. On the date of the Merger, the fair market value of the assets of the
Company transferred to Newco will equal or exceed the sum of its liabilities
assumed by Newco, plus the amount of liabilities, if any, to which the
transferred assets are subject.
9. The Company is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Internal Revenue
Code of 1986, as amended.
10. The Merger will be the product of bona fide arm's length negotiations.
11. The liabilities of the Company assumed by Newco and the liabilities to
which the transferred assets of the Company are subject were incurred by the
Company in the ordinary course of its business.
12. None of the shares of CGX stock to be received by any shareholder of
the Company in the Merger will be separate consideration for, or allocable to,
any employment agreement, consulting agreement, or covenant not to compete of
such shareholder.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
-2-
<PAGE>
The undersigned acknowledges that Winstead Sechrest & Minick P.C. will
rely upon the foregoing representations in evaluating the federal income tax
consequences of the Merger and in rendering its opinion relating to certain
federal income tax consequences of the Merger.
DATED: ______________, 1998.
___________________________________________
John F. Green, Chief Executive Officer of
Automated Graphic Systems, Inc.
[SIGNATURE PAGE TO CERTIFICATE OF OFFICER]
<PAGE>
EXHIBIT "B"
CERTIFICATE OF OFFICER OF
CONSOLIDATED GRAPHICS, INC.
The undersigned officer of CONSOLIDATED GRAPHICS, INC. ("CGX"), in the
undersigned's capacity as an officer of CGX, hereby represents to Winstead
Sechrest & Minick P.C. on behalf of CGX in connection with the proposed merger
of Automated Graphic Systems, Inc., a Maryland corporation (the "Company"), with
and into AGS Acquisition Co., a Maryland corporation and a wholly owned
subsidiary of CGX ("Newco"), pursuant to that certain Agreement and Plan of
Reorganization dated as of September 28, 1998 among the Company, CGX, and Newco
(the "Merger"), that the following statements are true as of the date of this
Certificate and will be true as of the effective time of the Merger unless the
undersigned provides a written statement to Winstead Sechrest & Minick P.C. to
the contrary prior to the effective time of the Merger:
1. The Merger will be effected for bona fide business purposes.
2. Prior to the Merger, CGX will own stock of Newco possessing at least
80% of the total combined voting power of all classes of stock entitled to vote
and at least 80% of the total number of shares of all other classes of stock of
Newco.
3. Following the Merger, Newco will not issue additional shares of its
stock that will result in CGX failing to own stock of Newco possessing at least
80% of the total combined voting power of all classes of stock entitled to vote
and at least 80% of the total number of shares of all other classes of stock of
Newco.
4. CGX has no plan or intention to reacquire any of its stock issued in
the Merger.
5. CGX has no plan or intention to: (1) liquidate Newco; (2) merge Newco
with or into another corporation; (3) sell or otherwise dispose of the stock of
Newco except for transfers of stock to corporations controlled by CGX; or (4)
cause Newco to sell or otherwise dispose of any of its assets or any of the
assets acquired from Newco, except for dispositions made in the ordinary course
of business or transfers of assets to a corporation controlled by Newco.
6. Following the Merger, Newco will continue the historic business of the
Company or use a significant portion of the Company's business assets in a
business.
7. CGX and Newco will each pay its own expenses, if any, incurred in
connection with the Merger. Neither CGX nor Newco will pay any expenses incurred
in connection with the Merger by the Company or any shareholder of the Company.
-1-
<PAGE>
8. There is no intercorporate indebtedness existing between CGX and the
Company or between Newco and the Company that was issued, acquired, or will be
settled at a discount.
9. Neither CGX nor Newco is an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as amended (the
"Code").
10. The fair market value of the CGX stock and other consideration
received by each shareholder of the Company will be approximately equal to the
fair market value of the Company stock surrendered in exchange therefor.
11. Following the Merger, Newco will acquire at least 90% of the fair
market value of the net assets and at least 70% of the fair market value of the
gross assets held by the Company immediately prior to the Merger, taking into
account amounts paid for Merger expenses by the Company, amounts paid by the
Company to its shareholders who receive cash or other property, and all
redemptions and distributions made by the Company immediately preceding the
Merger as assets of the Company immediately prior to the Merger.
12. The Merger will be the product of bona fide arm's length negotiations.
13. No stock of Newco will be issued in the Merger.
14. None of the shares of CGX stock to be received by any shareholder of
the Company in the Merger will be separate consideration for, or allocable to,
any employment agreement, consulting agreement, or covenant not to compete of
such shareholder.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
-2-
<PAGE>
The undersigned acknowledges that Winstead Sechrest & Minick P.C. will
rely upon the foregoing representations in evaluating the federal income tax
consequences of the Merger and in rendering its opinion relating to certain
federal income tax consequences of the Merger.
DATED: _____________, 1998.
___________________________________________
Joe R. Davis, Chief Executive Officer of
Consolidated Graphics, Inc.
[SIGNATURE PAGE TO CERTIFICATE OF OFFICER]
EXHIBIT 21.1
LIST OF SUBSIDIARIES
JURISDICTION OF
SUBSIDIARY INCORPORATION
---------- ---------------
Arts and Crafts Press, Inc............................ California
Austin Printing Company, Inc.......................... Georgia
Bridgetown Printing Co................................ Texas
CGML General Partner, Inc. ........................... Delaware
Chas. P. Young Company ............................... Texas
Chas. P. Young Company, Inc........................... New York
Clear Visions, Inc. .................................. Texas
Columbia Color, Inc................................... California
Consolidated Eagle Press, Inc......................... Texas
Consolidated Graphics Management, Inc................. Delaware
Consolidated Graphics Management II, Inc.............. Delaware
Consolidated Graphics Properties, Inc................. Texas
Consolidated Graphics Properties II, Inc.............. Texas
Consolidated Image, Inc............................... Wisconsin
Consolidated Mobility, Inc............................ Texas
Courier Printing Company.............................. Tennessee
Digital Direct........................................ Pennsylvania
Direct Color, Inc..................................... California
Emerald City Graphics, Inc............................ Washington
Fittje Bros. Printing Company Inc..................... Colorado
Frederic Printing Company............................. Colorado
Garner Publishing Company............................. Iowa
GCI Acquisition Company............................... California
Georges & Shapiro Lithograph, Inc..................... California
Geyer Printing Company, Inc........................... Pennsylvania
Gilprin Acquisition................................... Kansas
Gritz-Ritter Graphics, Inc............................ Colorado
Grover Printing Company............................... Texas
Gulf Printing Company................................. Texas
Heath Printers, Inc................................... Washington
Heritage Graphics, Inc................................ Texas
Ironwood Acquisition, Inc............................. Arizona
Lincoln Acquisition Company........................... Indiana
Mercury Web Printing, Inc............................. Kansas
Paragraphics, Inc..................................... California
Precision Litho, Inc.................................. Texas
Pride Acquisition Company............................. Massachusetts
Printing Corporation of America....................... Maryland
Printing, Inc......................................... Kansas
Rush Press, Inc....................................... California
Serco Forms, LLC...................................... Kansas
StorterChilds Printing Company, Inc................... Florida
Superb Printing Company............................... Texas
Superior Colour Graphics, Inc......................... Michigan
Tewell Warren Printing Company........................ Texas
The Etheridge Company................................. Michigan
The Jarvis Press, Inc................................. Texas
The John C. Otto Company, Inc......................... Massachusetts
Theo Davis Sons, Inc.................................. North Carolina
Tucker Printers, Inc.................................. Texas
Tulsa Litho Company................................... Oklahoma
Tursack Printing, Inc................................. Pennsylvania
Walnut Circle Press, Inc.............................. North Carolina
Web Graphics, Inc..................................... Kansas
Western Lithograph Company............................ Texas
Wetzel Acquisition Company............................ Wisconsin
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated May 8, 1998 on the March 31, 1998 consolidated financial statements of
Consolidated Graphics, Inc. (and to all references to our firm) included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
October 30, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use of our report, dated August 24, 1998, on the
financial statements of Automated Graphic Systems, Inc. and Subsidiaries
included in this Registration Statement on Form S-4 and to the reference to our
Firm under the caption "Experts" in the Prospectus.
/s/ WATKINS, MEEGAN, DRURY & COMPANY, L.L.C.
WATKINS, MEEGAN, DRURY & COMPANY, L.L.C.
Bethesda, Maryland
October 30, 1998
EXHIBIT 99.1
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF AUTOMATED GRAPHIC SYSTEMS, INC.
IN CONNECTION WITH A
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER __, 1998
The undersigned stockholder of Automated Graphic Systems, Inc., a Maryland
corporation ("AGS"), hereby appoints John F. Green and Kenneth Lemmert, and each
of them, as lawful attorneys and proxies, with several power of substitution,
for and in the name of the undersigned to represent, and vote, as designated
below, all shares of the common stock of AGS which the undersigned is entitled
to vote at the Special Meeting of Stockholders of AGS to be held on November __
1998, 9:00 a.m. local time, or at any adjournment, postponement or rescheduling
thereof (collectively, the "AGS Meeting"). The undersigned hereby revokes any
and all previous proxies with respect to the matters covered by this proxy and
the voting of such shares at the AGS Meeting.
A. MANAGEMENT PROPOSALS
PROPOSAL 1: To approve a proposal (the "Merger Proposal") to adopt the
Agreement and Plan of Reorganization, dated as of September
28, 1998, to which AGS, Consolidated Graphics, Inc., a Texas
corporation, AGS Acquisition Co., a Maryland corporation
("Newco"), certain stockholders of AGS and the trustees of
the Automated Graphic Systems, Inc. Employee Stock Ownership
Plan are parties, and to approve the transactions
contemplated by the Merger Agreement including, without
limitation, the merger of AGS into Newco.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
PROPOSAL 2: To approve a proposal to authorize adjournment of the AGS
Meeting, if necessary, to obtain sufficient votes for
approval of the Merger Proposal.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
B. DISCRETIONARY AUTHORITY
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the AGS Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE.
THIS PROXY, WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED HEREIN. TO THE
EXTENT THAT NO INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED BY THIS PROXY WILL
BE VOTED "IN FAVOR" OF PROPOSAL NO. 1 AND PROPOSAL NO. 2, AND IN THE DISCRETION
OF THE PROXY HOLDERS AS TO OTHER MATTERS.
PLEASE DATE AND SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS HEREON.
_____________________ ____________________________________________
Date Signature of Owner
____________________________________________
Additional Signature of Joint Owner (if any)
If stock is jointly held, each joint owner
should sign. When signing as
attorney-in-fact, executor, administrator,
trustee, guardian, corporate officer or
partner, please give full title.
TO VOTE IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS, JUST
SIGN, DATE AND RETURN THIS PROXY--NO BOXES NEED BE CHECKED.
EXHIBIT 99.2
VOTING INSTRUCTION
AUTOMATED GRAPHIC SYSTEMS, INC. EMPLOYEE STOCK OWNERSHIP PLAN
TO THE TRUSTEES FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER __, 1998.
As a participant in the Automated Graphic Systems, Inc.. Employee Stock
Ownership Plan (the "ESOP"), you have the right to give written instructions to
the ESOP Trustees as to the voting of those shares of the Common Stock of
Automated Graphic Systems, Inc. ("AGS") allocated to your account at the Special
Meeting of the Stockholders of AGS to be held on December __ 1998, 9:00 a.m.
local time, or at any adjournment, postponement or rescheduling thereof
(collectively, the "AGS Meeting"). In this connection, please indicate your
voting choices on this Voting Instruction, sign and date it, and return this
voting instruction prior to the date of the AGS Meeting in the postage paid
envelope provided for that purpose.
ALL SHARES OF STOCK ALLOCATED TO MY ACCOUNT:
A. MANAGEMENT PROPOSALS
PROPOSAL 1: To approve a proposal (the "Merger Proposal") to adopt the
Agreement and Plan of Reorganization, dated as of September
28, 1998, as amended, to which AGS, Consolidated Graphics,
Inc., a Texas corporation, AGS Acquisition Co., a Maryland
corporation ("Newco"), certain stockholders of AGS and the
trustees of the ESOP are parties, and to approve the
transactions contemplated by the Merger Agreement including,
without limitation, the merger of AGS into Newco provided
for therein.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
PROPOSAL 2: To approve a proposal to authorize adjournment of the AGS
Meeting, if necessary, to obtain sufficient votes for
approval of the Merger Proposal.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
B. DISCRETIONARY AUTHORITY
The ESOP Trustees are authorized to vote, in their discretion, upon such
other business as may properly come before the AGS Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS VOTING INSTRUCTION PROMPTLY IN THE
ENCLOSED ENVELOPE.
THE SHARES ALLOCATED TO THE ACCOUNT OF THE ESOP PARTICIPANT EXECUTING THIS
VOTING INSTRUCTION WILL BE VOTED IN THE MANNER INDICATED BY THE PARTICIPANT. TO
THE EXTENT THAT NO INSTRUCTIONS ARE GIVEN, SUCH SHARES WILL BE VOTED IN THE
MANNER THAT THE TRUSTEES BELIEVE COMPLIES WITH THEIR FIDUCIARY DUTY AS TRUSTEES.
PLEASE DATE AND SIGN THIS VOTING INSTRUCTION EXACTLY AS YOUR NAME APPEARS
HEREON.
_____________________ _____________________________________________
Date Signature of Participant
When signing as attorney-in-fact, executor, administrator, trustee, guardian,
corporate officer or partner, please give full title.
