-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kn9DMnBErOS1GXN9vGmt6Cw152SdefRcaRhv/LzQnTXWRDTazjPUBLgcQ1jGFGQv 7kNomjqnBVUDLizilXaJfQ== 0001006030-98-000002.txt : 19980330 0001006030-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0001006030-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED GRAPHICS TECHNOLOGIES INC CENTRAL INDEX KEY: 0001006030 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MAILING, REPRODUCTION, COMMERCIAL ART & PHOTOGRAPHY [7330] IRS NUMBER: 133864004 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28208 FILM NUMBER: 98576896 BUSINESS ADDRESS: STREET 1: 28 W 23RD ST STREET 2: 11TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2129294111 MAIL ADDRESS: STREET 2: 463 BARELL AVE CITY: CARLSTADT STATE: NJ ZIP: 07072 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to_____ Commission File Number 0-28208 APPLIED GRAPHICS TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 13-3864004 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 28 WEST 23RD STREET NEW YORK, NY (Address of principal executive offices) 10010 (Zip Code) 212-929-4111 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Title of each class Common Stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of registrant's voting stock held by non-affiliates as of February 28, 1998 was $763,864,610. The number of shares of the registrant's Common Stock outstanding as of February 28, 1998, was 17,904,486 shares. The following documents are hereby incorporated by reference into this Form 10-K: (1) Portions of the 1998 Proxy Statement/Prospectus included as part of the Registrant's Registration Statement on Form S-4 to be filed with the Securities and Exchange Commission (Part III). TABLE OF CONTENTS PAGE ITEM PART I 1. Business 1 2. Properties 8 3. Legal Proceedings 8 4. Submission of Matters to a Vote of Security Holders 8 Executive Officers of the Company 9 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 11 6. Selected Financial Data 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 8. Financial Statements and Supplementary Data 16 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 39 PART III 10. Directors and Executive Officers of the Registrant 40 11. Executive Compensation 40 12. Security Ownership of Certain Beneficial Owners and Management 40 13. Certain Relationships and Related Transactions 40 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41 Signatures 44 PART I Certain statements made in this Annual Report on Form 10-K are "forward-looking" statements (within the meaning of the Private Securities Litigation Reform Act of 1995). Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include the following: the trend toward electronic distribution of content; the efficiency of competitors or customers of the Company; the trend toward outsourcing ancillary functions; the rate of expansion of services under the agreement with General Motors; the securing of additional, or the renewal of existing, on-site arrangements; the expansion of on-line distribution services; the growth of the market for advanced digital imaging services; the Company's expansion into broadcast media distribution services; generating additional business from on-site customers; the successful entry into the event-driven and retail digital photography markets; market acceptance of the Company's digital photography product line; the rate of expansion of the Company's sales force; cross-selling the Company's services; the rate of opening additional facilities; the rate and level of capital expenditures; and the securing of additional credit facilities. Item 1. BUSINESS. General Applied Graphics Technologies, Inc. (the "Company") is an independent provider of digital prepress services to magazine publishers, advertising agencies, entertainment companies, automobile manufacturers, and retailers. The Company's largest customers in each of these categories include McGraw-Hill, Newsweek and Conde Nast; The InterPublic Group of Companies and Team One Advertising; The Walt Disney Company and Time Warner; General Motors; The Home Depot and Sears Roebuck & Company. The Company provides its services on an outsourcing basis either in the Company's own facilities or onsite at the customer's location, emphasizing its ability to provide a full range of services more effectively and economically than its customers could internally. In 1994, the Company began to provide advanced digital imaging services to meet the evolving needs of its customers. Digital archiving and distribution services are now being provided to customers including General Motors, Time Warner's Time Picture Collection, CBS, ABC, Citibank, the American Society of Media Photographers and the United States Holocaust Memorial Museum. The scope of the Company's services and the range of customers that can make use of these services have expanded with the emergence of electronic distribution channels and the ability to create digital archives. "Prepress services" combine text with black and white and full-color pictures and graphics into page layout format, and have traditionally been used to prepare content for reproduction in print. A similar process is required to digitize information for electronic distribution, such as on the World Wide Web and for CD-ROM. Publishers, advertising agencies, entertainment companies and others are increasingly exploiting these new distribution channels for marketing and promotion, for targeting individual or groups of customers or for reselling their graphic images in a cost-effective manner. The Company uses its Digital Link System and other commercially available systems to provide digital imaging services. The Digital Link System uses an integrated suite of software applications that allows the Company to offer customers the ability to capture, edit, store, archive, retrieve, and distribute their content in a digital environment. Technological advances in desktop publishing and graphics software have heightened differences between image-intensive "full service" users of prepress services and other customers with less demanding needs, whose paramount concern is price. The Company believes that its primary customers, which are full service users, are recognizing production complexities, the increasing use of color and the need to remain abreast of technological developments and, accordingly, are increasingly relying on outsourced digital prepress and digital imaging services. The Company intends to continue to expand its base of traditional prepress service users by emphasizing its ability to provide a full range of high quality digital prepress and digital imaging services. In December 1996, the Company acquired the assets of SpotLink, Inc. ("SpotLink"), a subsidiary of Western International Media Corporation ("Western"), which is owned by The InterPublic Group of Companies. In September 1997, the Company acquired the broadcast media distribution business of Winkler Video Associates, Inc. ("Winkler"). Through the SpotLink and Winkler acquisitions, the Company provides volume duplication and distribution of radio and television advertisements, a service known as "dub and ship," to broadcast stations. With the expansion into the broadcast media distribution business, the Company increased its service offerings to existing customers, including The Walt Disney Company and General Motors. The Company currently maintains a network of twenty-three principal digital prepress facilities located in metropolitan areas to provide localized services to its customers, many of which have offices nationwide. Additionally, the Company provides its on-site services at eighteen customer locations, often under multi-year contracts. The Company believes that performing its services on-site strengthens its relationship with its customers and broadens their demand for the range and volume of the Company's services. Four of these on-site service locations also perform services for other customers. The Company was incorporated in Delaware on December 12, 1995. On April 16, 1996, upon the Company's Registration Statement on Form S-1 under the Securities Act of 1933 being declared effective, the Company acquired substantially all of the assets and certain related liabilities relating to the prepress, digital imaging services, and related businesses of Applied Printing Technologies, L.P. ("Applied Printing"). Services The Company provides a full range of digital prepress, outsourced facilities management, advanced digital imaging, and broadcast media distribution services. Digital Prepress Services. Digital prepress services are necessary to combine text with black and white and full-color picture and graphic content into page format for publication in print and distribution on the World Wide Web, e-mail, proprietary on-line services, and CD-ROM. In general, the prepress services provided by the Company begin with scanning the customer's content into digital format. Scanning separates color content into component colors and converts them into colors used in the printing process - cyan, magenta, yellow, and black. Once the image is separated, two file formats of the image are produced - high resolution for final output and low resolution for customer design and/or layout. The low resolution file is sent to the customer on-line or on a computer disk, and the customer can position the low resolution file into its page on its own desktop system and size and crop the image as desired. Simultaneously, the Company personnel compare the "separated" image on the high resolution file to the original picture and use specialized computer software to refine the colors and to make enhancements to the image as the customer requests. Throughout this process, the Company works closely with the creative and artistic directors of the customer. Often, multiple iterations of the image are exchanged by the Company and the customer before the final, high resolution image is set in the page. The Company personnel then replace the low resolution image and perform certain technical processes (such as masking and trapping) to enhance the quality of the final product. The page is then output to four separate color files (film or transmission) that when processed will generate four pieces of film used to create four printing plates per page. The image is generated in print by the cumulative effect of the plates. Similarly, content to be distributed on-line is output to three colors (red, green, and blue) which is converted from the final high resolution file. In performing prepress services, the Company frequently uses the Digital Link System, which performs several prepress functions efficiently. See "- Technology." Capitalizing on these services, the Company established a Magazine Ad Management Division and Newspaper Ad Management Division to provide comprehensive digital prepress and print content management services to magazines and newspapers. The Magazine Ad Management Division provides digital advertising storage management and electronic transmission services to magazine publishers, advertising agencies, and printers nationwide using the Digital Link System. The Company has a multi-year agreement with Time, Inc., to provide a variety of digital ad management services to People, Time, Sports Illustrated, Entertainment Weekly, Fortune, and Life and also has a multi-year agreement with U.S. News & World Report, L.P., to provide such services. The Newspaper Ad Management Division provides services to the New York Daily News and the Newark (New Jersey) Star-Ledger, including electronic design, digital advertising composition, and transmission of display advertising. During 1997, the Company acquired the operations of several prepress companies, including all of the assets of MBA Graphics, Inc. ("MBA"), an unaffiliated provider of prepress production, direct mailing, and brokered commercial printing services primarily to The Home Depot at its four facilities. Pursuant to the acquisition agreement with MBA, the Company may be required to make additional payments, in a combination of cash and the Company's common stock, based upon MBA's financial performance for calendar years 1997, 1998, and 1999. The Company also acquired certain assets of Star Graphic Arts Co., Inc., an unaffiliated prepress company in Northern California, and all of the assets of Vancor Color, Inc. ("Vancor"), an unaffiliated provider of prepress services in Southern California. Pursuant to the acquisition agreement with Vancor, the Company may be required to make additional payments to Vancor in shares of the Company's common stock based upon Vancor's financial performance for the calendar years ended December 31, 1997, 1998, and 1999. Outsourced Facilities Management Services. In response to demands of certain customers, the Company performs services at a customer's location rather than at one of the Company's facilities. In addition, the Company may perform services at a primary customer's location for other customers as capacity allows. Contracts with customers for on-site work are often for three years or more and for a base amount of services, although the Company believes its on-site presence generates additional business in the form of digital imaging services and more prepress work from that customer. If the primary customer's work flow is high, or if there is an equipment failure at that location, the Company augments on-site staff and equipment by working on the primary customer's projects at the Company's other facilities. The Company's on-site services vary according to the customer's needs. For some publications, such as Newsweek, US. News & World Report, and BusinessWeek, the Company is responsible for operating, maintaining, and staffing the on-site prepress equipment and for performing all prepress services for editorial content. Performing work on-site permits the Company to better understand its customers' preferences and workflow demands. On-site work also reduces the time needed to approve or discuss revisions with the customer and to deliver the final product to the customer. These advantages enable the Company to be more responsive and to increase the level and type of service it provides. For example, when performing prepress work on-site, the Company has the ability to introduce the customer to its archiving and other digital imaging services. Advanced Digital Imaging Services. The Company's Digital Imaging Services Division ("DISD") commenced work on the Digital Link System in 1995 as a project for the New York Daily News to assist the newspaper with its demanding prepress and related image storage and retrieval functions. Using integrated equipment and proprietary software, the Digital Link System offers a cost-effective, easy-to-use method to store, manipulate, repurpose, and distribute digital images. The open architecture of the Digital Link System enables the Company to tailor the system to each customer's digital imaging needs. The Company uses the Digital Link System to provide advanced digital imaging services, such as archiving and online distribution to both traditional prepress and new groups of customers. These customers are increasingly looking to distribute their content digitally through traditional media channels and to exploit new distribution methods, such as the World Wide Web, e-mail, proprietary on-line services, and CD-ROM, all of which use digitized content. The Company uses its Digital Link System to create digital archives of photographic prints, slides, film, and other images. Archiving images provides the customer with an organized, easily accessible digital format in which its images can be retrieved, distributed, substituted, and re-edited. Because the archived images are in digital form, they may be reused without having to be rescanned, thereby saving time and money, and are in a format suitable for print or on-line distribution. The Company's archiving services are tailored to each customer by evaluating the content and the customer's needs and provided to the customer as an open system archive. Once the images are digitized, the Company customizes a database that allows the customer to quickly access images using keywords, text searches, or bar-codes. The archive may be created at the customer's location or the Company's facilities depending on the size of the library. The Company's archiving services are provided under long term contracts, are typically related to millions of images, and are usually priced on a per image basis according to the Company's evaluation of the customer's images and the scope of services to be provided. The Company has developed a family of digital photography systems, including a digital portrait system and a portable digital events system. These systems integrate a suite of proprietary Digital Link software applications with specialized hardware and are based on an open architecture that supports the leading digital cameras and printers. The Company recently consummated the acquisition of two digital events photography businesses and now provides complete digital event photography services at various locations, including sporting events, stadiums, and resorts. To date the Company has not derived significant revenues from these services. Broadcast Media Distribution Services. Through the SpotLink and Winkler acquisitions, the Company entered the broadcast media distribution business in which the Company receives a master copy of a commercial on video or audiotape, duplicates the tape, and ships the copies via air freight to radio and television stations for rebroadcast. As part of the SpotLink acquisition, the Company entered into a multi-year contract under which Western is obligated to direct all of its broadcast media distribution business to the Company. The Company has agreed to provide broadcast media distribution services to General Motors under its contract to act as General Motors' digital content manager. Related Services At its facility in Los Angeles, California, the Company provides printing services performed principally for entertainment customers, such as The Walt Disney Company. The Company prints movie posters, CD covers, video covers, and promotional materials. Revenues from these printing services represented less than 10% of the Company's revenues in 1997. The Company also licenses software and sells hardware related to the Digital Link System. Technology The Company aggressively implements technological advances in order to improve and expand its prepress and advanced digital imaging and digital imaging related services. This commitment is demonstrated by its Digital Link System and its internal communications and satellite transmission capabilities. The Digital Link System. The Digital Link System is a suite of proprietary software applications that integrates a wide variety of digital imaging hardware. Operating over large area networks, including the World Wide Web, this networked set of applications is used to capture, edit, store, archive, retrieve, and distribute large numbers of digital assets, including images, video, and audio. Its features include zooming, enlarging, side-by-side comparison, sorting, categorizing, and text annotations, as well as a variety of image optimization tools including cropping and retouching. Images that are archived using the system may be easily retrieved through text and key word searches, manipulated by computer, and distributed through both conventional print as well as electronic distribution channels that require digitized content. To date, this system has been used predominantly to process graphic images, although it also is capable of capturing, storing, and retrieving audio and video files. The Digital Link System uses software to integrate a variety of different image capture devices such as digital cameras, drum and flatbed scanners, wire services, and other suitable high capacity storage devices. Optional software from the Company's suite of applications may be added to suit each customer's image management needs. For example, a customer may add a Photo CD Gateway, which interfaces with a scanner to capture images. A customer may also select the Digital Link Photo Editor that categorizes, reviews, and selects images stored in the Digital Link System. The Digital Link System includes customized software that permits the system to interface with virtually any equipment the customer may already have, such as a proprietary or "closed" prepress system or existing desktop systems. The software used in the Digital Link System was created by a team headed by Scott A. Brownstein, Executive Vice President, Digital Imaging Services Division of the Company. Mr. Brownstein played a major role in the development of many of the technologies used in Kodak's patented Photo CD system. The Digital Link System enhances the delivery of prepress services. For example, the system enables a user to quickly and easily retrieve an image, and then enlarge, reposition, and retouch the image as if using stand-alone prepress computer equipment. Communications Networks. Many of the Company's facilities are connected by a data network system that enables the Company to allocate prepress work among its facilities for timely completion. The Company has also established communications links among its facilities and customer sites at which the Company is providing services. Additionally, the Company uses a satellite system to deliver final prepress work in digital form to eleven printing plants of eight unaffiliated printing companies. The Company leases transmission time on three frequencies on a year-round basis and has installed satellite transmitting equipment at its facilities and receiving equipment at the printing sites. This system was established originally to assist magazine publishers in meeting their demanding production cycles but has been expanded to include transmissions for other publications. The connection to multiple printing sites allows these publications to be printed at several locations in order to meet distribution schedules. The Company personnel working at the printing plants on this network produce the film required to create printing plates and receive digital data used to drive computer to plate equipment. In addition, the Company personnel coordinate and calibrate the receiving equipment in an effort to ensure consistency in the final product among the various printing sites. Customers The Company's customer base encompasses a wide variety of enterprises and organizations, including leading publishers, advertising agencies, entertainment companies, automobile manufacturers, and catalog and other businesses focused on quality print and graphic images and the distribution of advertising content. In 1997, the Interpublic Group of Companies produced approximately $19.1 million in revenues, or 10.3%, of the Company's total revenues, through its various advertising agencies, including the work provided to the broadcast media distribution business under the multi-year contract associated with the acquisition of SpotLink. The Company's twenty largest nonaffiliated customers accounted for approximately 53.4% of the Company's revenues in 1997. Revenues from many of the Company's large customers, however, are an aggregation of revenues for services provided by the Company to different groups or publications within a customer. For example, the Company provides services to twelve divisions of The Walt Disney Company, each of which plays a major role in the selection of a prepress vendor. In 1997, approximately 9.1% of the Company's total revenues came from business with affiliates. Such affiliates include U.S. News & World Report, L.P., Daily News, L.P., and Applied Printing, companies beneficially owned by Mr. Mortimer B. Zuckerman, the Chairman of the Board of Directors of the Company, and Mr. Fred Drasner, Chairman, Chief Executive Officer, and a director of the Company, as well as with Snyder Communications, Inc., of which both Messrs. Zuckerman and Drasner are members of the Board of Directors and in the aggregate own approximately 13% of the outstanding common stock. An additional 34.8% of the Company's revenues were under multi-year contracts or arrangements with nonaffiliated customers. As is customary in the prepress industry, in most cases there is no contractual arrangement that would prevent prepress customers from selecting a competitor of the Company to perform some or all of their prepress work. Sales and Marketing To date, the Company has relied primarily on its senior officers, general managers and regional sales organizations to market its prepress and digital imaging services. Because they have conducted business together over several years, personnel at each facility have established strong working relationships with particular customer industries that are prevalent around its location. For instance, personnel at the Los Angeles facilities have strong relationships with the entertainment industry, at the Detroit facility with the automotive industry, and at the New York facilities with the publishing industry. These relationships also extend to advertising agencies that perform work for these customers. This specialization within certain industries developed over the Company's years of service performing prepress work. The Company continues to expand its sales force to focus on on-site and outsourcing arrangements for customers currently performing all or a portion of their prepress work in-house. Because such a decision to outsource is made at a level higher than prepress vendor selection decisions, the Company believes that a separate sales force is more conducive to obtaining such business. The Company is also is in the process of expanding its sales force to market digital imaging services to traditional and new groups of customers. Prior to the latter half of 1996, such services have been marketed only by several senior officers of the Company. The Company is also expanding the sales force of its SpotLink division. The Company believes its long-term agreement with Western, the largest media buyer in the U.S., under which Western will direct its "dub & ship" business to the Company, creates a significant sales opportunity. Additionally, the Company's sales force has begun cross-selling the broad range of its services. Vendor Arrangements The Company is a major purchaser of certain types of products. Because of the dollar amount of the products it purchases, the Company has been in a position to enter into arrangements with vendors pursuant to which the vendors pay rebates to the Company based upon a specified dollar volume of products purchased by the Company over a given time period. Competition Prepress services are performed primarily by three types of businesses: (i) independent providers that typically do not also offer commercial printing services as a principal part of their overall business, (ii) commercial printers that provide prepress and other image management services as an adjunct to their printing businesses, and (iii) customers that perform certain services themselves using available desktop publishing technologies. The industry currently is extremely fragmented and serviced by a large number of regional and local businesses and few national enterprises. Commercial printers providing prepress services generally compete on the basis of the convenience of "one-stop shopping" for prepress and printing services, and on the basis of price by bundling the cost of prepress services with the printing cost or by substantially discounting the separate prepress services. A customer might prefer services by a printer where price is the primary consideration and quality of and control over the artistic process are not key concerns. Independent providers, such as the Company, generally are able to offer a higher level of specialization, customization, and individualized service and also provide customers with the flexibility to select the printer of their choice, thus giving the customer greater leverage in negotiating for printing services. A customer would look to perform its own prepress services internally if the customer believed that control over the process was advantageous and quality of the product was not paramount. Customers typically provide for themselves only a portion of the prepress services they need, augmenting their own capabilities, as needed, with third-party services usually from independent prepress providers. The Company competes for prepress work on the basis of quality of service, price of service, and the ability to satisfy demanding customers. The Company believes that not every prepress provider can meet the demands of the types of customers served by the Company. Among this smaller group, the Company competes primarily based on historical reliability of service and on price. The Company believes it maintains competitive prices by efficiently implementing new technologies in its digital imaging and prepress businesses. Additionally, the Company believes that it is able to maintain competitive prices by coordinating its customers' in-house capabilities with its own equipment, thereby minimizing redundant processes and lowering customer costs. In addition, the Company competes for prepress work based on its ability to provide other digital imaging services. For example, the Company provides digital archiving services for prepress customers at a lower cost than if purchased on a stand-alone basis because of the Company's ability to efficiently integrate the prepress and archiving processes. Independent prepress providers typically provide services based upon a customer's request for which the provider is paid on a per-job basis. In most cases, there is no contractual arrangement that would prevent a customer from changing prepress providers on a per-project basis except for the Company's typical on-site arrangement for which a multi-year contract is obtained. In the publication area, the Company competes with numerous regional prepress companies, such as Spectragraphics in the New York area, TSI Graphics in St. Louis, and NEC in Tennessee. The Company competes nationally for publication business with American Color. Additionally, the Company competes with large commercial printers, such as R. R. Donnelley & Sons, Co., World Color Press, Inc., and Quad/Graphics, Inc. These commercial printers typically offer major price incentives through multi-year contracts for publications to do both their printing and prepress work at that printer's facilities. The Company's primary national competitor for advertising agency business is Wace, U.S.A., headquartered in Chicago, and a number of smaller regional prepress companies. The Company competes with many vendors in providing advanced digital imaging services, including Wace, U.S.A. and R. R. Donnelley & Sons, Co. In the area of digital imaging and archiving, the Company competes with a small number of software-development companies marketing products to manage image databases. The Company believes, however, that the breadth of service (i.e., associated scanning and output options) provided by the Company through its Digital Link System surpasses that of these other products. For example, Cascade and SRA are competing database software products; however, in both cases, the Company has secured ancillary business (e.g., scanning services and archiving) with enterprises using these competing products. T-l is a production and archiving alternative developed specifically for the newspaper market, and is in direct competition with the Company's Digital Link System for customers in the newspaper-publishing industry. The Company believes that its fully-integrated system offers greater flexibility than its competitors' systems, which are primarily stand-alone databases. In the area of retail photography and events imaging, competition to the Company's offerings is mainly in the form of small software shops offering digital solutions, such as EPS, Castleworks, and ANSI. The Company believes that its ability to effectively market its products and support its installations surpasses the ability of its competitors. Various larger companies, such as Polaroid and Kodak, compete with the Company as equipment vendors and offer more fully equipped systems that utilize hardware components manufactured by their respective parent companies, unlike the Company's offerings for retail photography and events imaging, which are modular and capable of integrating equipment (e.g., digital cameras and dye-sublimation printers) from virtually any leading manufacturer. In the broadcast media distribution business, the Company competes with many local and/or regional suppliers as well as national suppliers, such as Vyvx, Inc., a subsidiary of The Williams Companies, Inc., Digital Generation Systems, Inc., and VDI Media. These services are typically provided on a per-job basis. The Company generally has no contractual arrangements that would prevent a customer from changing providers. The Company believes competition is based on quality of duplication, speed, and reliability of distribution as well as price. Employees As of December 31, 1997, the Company had approximately 1,757 full-time employees, approximately 608 of whom are salaried employees and approximately 1,149 of whom are hourly employees. Approximately 144 of the Company's employees at two facilities, one each in Chicago and Los Angeles, primarily in the area of production, are covered by two collective bargaining agreements with the Graphic Communications International Union that expire August 31, 1999, and December 31, 1999, respectively. The Company has never experienced a work stoppage and believes that its relationships with its employees, both unionized and nonunionized, are satisfactory. Intellectual Property The Company has a copyright in the software comprising the Digital Link(R) System. Copyrights do not preclude competitors from developing comparable software. The Company does not currently have any patents. The Company owns the registered trademarks "Applied Graphics Technologies," "Digital Link," "AGT," and other marks used in its business. Recent Developments In February 1998, the Company entered into a definitive agreement to merge Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal year ended March 31, 1997, Devon had total assets, revenues, and operating income of $163.8 million, $209.5 million, and $29.1 million, respectively. Under the terms of the agreement, which is subject to regulatory approval and the approval of the Company's and Devon's stockholders, the Company will pay $30 per share in cash and distribute 0.6 share of the Company's common stock in exchange for each outstanding share of Devon common stock. The total consideration to be paid is estimated to be $450 million including transaction costs. To fund the cash portion of the merger consideration, estimated to be approximately $230 million including the transaction costs, the Company has a fully-underwritten commitment from a commercial bank that would increase its borrowing capacity to $250 million. This commitment expires on June 15, 1998. The Company is also contemplating other financing alternatives to fund all or part of the cash portion of the merger consideration. In January 1998, the Company acquired all of the assets of Flying Color Graphics, Inc. ("Flying Color") in exchange for $18.9 million, 68,103 shares of the Company's common stock, and the assumption of certain liabilities. Flying Color was an unaffiliated provider of prepress services to various retailers, including Spiegel, with 1997 revenues of approximately $18.7 million. Flying Color operates five facilities located throughout the Midwest. Item 2. PROPERTIES The Company leases its corporate headquarters in New York City and operates twenty-three principal digital prepress facilities at the locations indicated below. Four of these facilities are on-site facilities that also provide services to other customers as capacity allows. New York City Northern New Jersey (3 facilities) (3 facilities) Atlanta, Georgia Central Illinois (3 facilities) Boulder, Colorado Rochester, New York Chicago, Illinois San Diego, California (2 facilities) San Francisco, California Detroit, Michigan metropolitan area (2 facilities) (2 facilities) Los Angeles, California Washington, D.C. metropolitan area (2 facilities) Indianapolis, Indiana The Company also provides on-site services at fourteen other customer locations in New York City, New Jersey, Connecticut, California, and Illinois. At these on-site facilities, services are performed for a single customer. In addition, the Company maintains broadcast media distribution centers in New York City, Los Angeles, and Wilmington, Ohio, and operates digital photography businesses at two customer locations in Florida. Except for one of the Los Angeles and two of the Central Illinois prepress facilities, which are owned by the Company, the prepress and broadcast media distribution facilities are operated under leases that expire in 1998 through 2002. The Company believes that its facilities are adequate to meet its needs. Item 3. LEGAL PROCEEDINGS. The Company is not subject to any material litigation, nor to the Company's knowledge is any material litigation currently threatened against the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1997. EXECUTIVE OFFICERS OF THE COMPANY The following table lists the executive officers of the Company. Officers are appointed by the Board of Directors and serve at the discretion of the Board Name Age Position Fred Drasner.......... 55 Chairman and Chief Executive Officer, Director Melvin A. Ettinger.... 57 Vice Chairman and Chief Operating Officer, Director Diane Romano.......... 47 President Scott A. Brownstein... 49 Executive Vice President, Digital Imaging Services Division Martin D. Krall....... 57 Executive Vice President, Chief Legal Officer and Secretary, Director Louis Salamone, Jr.... 51 Senior Vice President and Chief Financial Officer Georgia L. McCabe..... 43 Senior Vice President, Digital Imaging Services Division Fred Drasner, Chairman and Chief Executive Officer and a director of the Company, has been the Chief Executive Officer of Daily News, L.P. and Co-Publisher of the New York Daily News since 1993, the Chief Executive Officer of U.S. News & World Report, L.P. since 1985, and President of U.S. News & World Report, L.P. from 1985 to February 1997, the Chairman and Chief Executive Officer of Applied Printing since 1986, and the Vice-Chairman and Chief Executive Officer of The Atlantic Monthly Company since 1986. Mr. Drasner also was senior counsel to Shaw, Pittman, Potts & Trowbridge until his resignation in April 1996. Mr. Drasner also serves as a Director of Snyder Communications, Inc. Melvin A. Ettinger, Vice Chairman, Chief Operating Officer and a director of the Company, joined the Company in April 1996. From January 1994 to March 1996, he served as President and Chief Executive Officer of Xerox Graphic Systems, which conducts research and development of products to replace film. He also served as Senior Vice President of Sun Chemical Corporation and President and Chief Executive Officer of its subsidiary, Polychrome Corporation, a supplier of lithographic plates, from 1990 to 1994. Diane Romano, President of the Company, served as Executive Vice President of Applied Printing from 1993 to 1995 where she had overall responsibility for prepress and digital imaging services, sales, operations and technical developments. Ms. Romano served as Senior Vice President of the Publication and Catalog Division of Applied Printing from 1988 to 1993. Scott A. Brownstein, Executive Vice President, Digital Imaging Services Division, was the Senior Vice President and General Manger of DISD from 1993 to 1995 where he was responsible for developing, manufacturing and marketing the Company's digital imaging services. Prior to joining the Company, Mr. Brownstein served from 1988 to 1993 as Manager of Advanced Development CD Imaging Division at the Eastman Kodak Company, where he was responsible for the design, development and implementation of Kodak's Photo CD technology and end user technology for Photo CD. Martin D. Krall, Executive Vice President, Chief Legal Officer, Secretary and a director of the Company, has been since January 1995 Executive Vice President and the Chief Legal Officer of the Daily News, L.P., Applied Printing, The Atlantic Monthly Company, and U.S. News & World Report, L.P. Prior to 1995, Mr. Krall was a partner in the law firm of Shaw, Pittman, Potts & Trowbridge where he was a member of the Management Committee from 1978 to 1994, and the Vice-Chairman of such Committee from 1991 to 1994. From 1995, Mr. Krall also was senior counsel to Shaw, Pittman, Potts & Trowbridge until his resignation in April 1996. Louis Salamone, Jr., Senior Vice President and Chief Financial Officer of the Company, joined the Company in 1996. He previously served as Vice President and Chief Financial Officer of Nextel Communications, Inc., a provider of wireless communications services, from September 1994 through May 1996. He was a partner in Deloitte & Touche LLP, an international accounting and consulting firm, from June 1980 through September 1994. Georgia L. McCabe, Senior Vice President, Digital Imaging Services Division, was the Senior Vice President, Marketing and Business Development of DISD at the Company from 1993 to 1995 where she was responsible for developing the overall business and marketing strategies for the division. Prior to joining the Company, Ms. McCabe served from 1991 to 1993 as Worldwide Director of Marketing, Commercial CD Imaging at the Eastman Kodak Company, where she was responsible for developing and implementing corporate strategies for marketing Photo CD products. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of the Company commenced trading on April 17, 1996, the date of its initial public offering. The Company's common stock is traded on the Nasdaq National Market. The following table sets forth the high and low sales price for each full quarterly period during which the common stock was traded. 1997 1996 -------------------- ------------------- High Low High Low --------- ---------- --------- --------- First quarter 35 3/8 25 1/8 Second quarter 39 3/4 28 3/8 Third quarter 57 7/8 36 1/4 16 10 1/2 Fourth quarter 61 1/4 43 3/4 29 1/8 14 3/4 As of March 20, 1998, there were 3,309 holders of record of the Company's common stock. No dividends have been paid since the date of the initial public offering. The Company currently intends to retain any future earnings for use in the operation of its business for the foreseeable future. There is no restriction on the payment of dividends under the Company's revolving credit facility other than obtaining approval of the financial institution. Item 6. SELECTED FINANCIAL DATA. The following financial data was prepared in accordance with the basis of presentation discussed in Note 1 to the financial statements. No dividends have been paid on the Company's common stock.
December 31, 1997(b) 1996 1995 (a) 1994 (a) 1993 - -------------------------------------------------- ----------- ----------- ----------- ----------- ----------- (In thousands of dollars, except per-share amounts) Revenues $184,993 $132,725 $117,802 $115,986 $103,973 Income (loss) before provision for income taxes 22,707 10,820 (7,812) (8,757) 798 Net income (loss) 13,567 9,955 (7,812) (8,757) 798 Earnings per common share (c): Basic 0.88 0.79 Diluted 0.83 0.77 Total assets 224,793 72,147 44,809 53,859 57,506 Long-term obligations: Long-term debt 812 6,005 853 2,394 3,821 Obligations under capital lease 2,011 1,265 2,415 3,017 4,056 ----------- ----------- ----------- ----------- ----------- Total $ 2,823 $ 7,270 $ 3,268 $ 5,411 $ 7,877 =========== =========== =========== =========== =========== (a) Amounts for 1995 and 1994 include reorganization charges of $3,060 and $6,668, respectively (see Note 21 to the financial statements). (b) Amounts in 1997 include a charge of $2,487 related to the Chapter 11 bankruptcy filing of one of the Company's on-site facilities management customers, Nobody Beats the Wiz. (c) Amounts in 1996 have been restated in accordance with Statement of Financial Accounting Standards No. 128,"Earnings per Share."
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS On April 16, 1996 (the "Initial Offering Date"), the Company commenced the initial public offering (the "Initial Offering") of its common stock. Concurrent with the Initial Offering, the Company acquired substantially all of the assets and certain liabilities relating to the prepress, digital imaging services, and related businesses of Applied Printing (collectively, the "Prepress Business"). The acquisition of the Prepress Business has been accounted for in a manner similar to a pooling of interests. Accordingly, the financial statements of the Company reflect the combined results of operations of the Prepress Business through the Initial Offering Date and the results of the Company thereafter. On September 3, 1997, the Company's Registration Statement on Form S-3 under the Securities Act of 1933, as amended, relating to an offering of the Company's common stock (the "Offering"), was declared effective. As part of the Offering, the Company sold 3,000,000 shares of common stock, generating proceeds, net of underwriters' discount and transaction expenses, of $121,700,000. Also as part of the Offering, an additional 3,900,000 shares were sold by certain stockholders of the Company, of which 3,650,000 shares were sold by Applied Printing. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto. Results of Operations Year Ended December 31, 1997, Compared with 1996 Revenues in 1997 increased $52,268,000 or 39.4% over 1996. This increase was primarily due to $13,102,000 of revenues generated from the operations of additional on-site facilities management contracts during 1997 that were in effect for none or only a portion of 1996, $8,675,000 of increased revenues from broadcast media distribution operations that have been acquired since 1996, increased revenues of $6,016,000 in the digital imaging services division from equipment and software license sales, archiving services, and digital photography operations, $22,475,000 of additional revenues from the traditional prepress business, and receipt of a nonrefundable payment of $2,000,000 related to an agreement with one of the Company's major suppliers. Traditional prepress revenues increased primarily from an overall increase in business at various facilities, the results of MBA Graphics, Inc. ("MBA"), whose operations were acquired in July 1997, increased business at the Foster City facility resulting from the acquisition of the operations of Star Graphics Arts Co., Inc. ("Star Graphics"), in May 1997, and additional revenue generated at the Detroit facility as a result of the contract entered into with General Motors to provide prepress services. The revenues from the contract with General Motors have not been received at the pace originally anticipated. The Company has assigned a senior executive to oversee this arrangement and plans certain capital expenditures to further expand this business. The gross profit percentage in 1997 was 35.1% as compared to 30.5% in 1996. Gross profit increased $24,492,000 or 60.5% in 1997 as a result of the additional revenues for the period as discussed above, increased business in higher margin work, and the reduction of costs due to favorable pricing negotiated with certain suppliers. Selling, general, and administrative expenses in 1997 were $11,625,000 higher than in 1996 and as a percent of revenue increased slightly to 21.7% in 1997 from 21.5% in 1996. Although improvements were achieved from the increase in revenues discussed above and increased business from on-site facilities management contracts, which require less sales support than the traditional prepress business, such improvements were offset by additional corporate expenses incurred related to being a publicly-traded company, additional expenses incurred as part of the Company's expansion and development of a national sales force to better market its services, and expanded business at certain operations. In 1997, the Company incurred a charge of $2,487,000 primarily for uncolledtable receivables related to the Chapter 11 bankruptcy filing of one of its on-site facilities management customers, Nobody Beats the Wiz. Interest expense in 1997 was $799,000 less than in 1996 primarily due to the repayment of debt in April 1996 with the proceeds from the Initial Offering and the repayment of borrowings under the Company's line of credit in September 1997 with the proceeds from the Offering. Interest income in 1997 was $1,227,000 higher than in 1996 due to investment earnings on the proceeds of the Offering. The effective rate of the provision for income taxes increased in 1997 due to the lower than would be expected rate in 1996 as a result of a reversal of $4,070,000 of deferred tax asset valuation allowances in 1996 as compared to the reversal of $881,000 of deferred tax asset valuation allowances in 1997. In addition to its ongoing relationship with Applied Printing, the Company also transacts business with other affiliates, including the Daily News, L.P. and U.S. News & World Report, L.P., both of which are beneficially owned by the Chairman of the Board of Directors of the Company (the "Chairman") and the Chief Executive Officer of the Company (the "CEO"), as well as with Snyder Communications, Inc., a provider of outsourced marketing services, of which both the Chairman and the CEO are members of the Board of Directors and in the aggregate own approximately 13% of the outstanding common stock. Sales to related parties for the years ended December 31, 1997, 1996, and 1995, totaled $16,845,000, $11,610,000, and $7,901,000, respectively, representing 9.1%, 8.8%, and 6.7%, respectively, of the Company's revenues. Year Ended December 31, 1996, Compared with 1995 Revenues in 1996 were $14,923,000 higher than in 1995 primarily due to increased digital imaging services, additional on-site facilities management contracts, and revenue from the ad management business that commenced in 1996. Additional gross profit of $8,977,000 in 1996 resulted from the additional revenues for the year as well as from an increase in the higher margin digital business and improved gross profit in the traditional prepress business as a result of the Company shedding low margin business and implementing more cost effective production workflows in certain of its facilities. These improvements resulted in an increase in the gross profit percentage to 30.5% in 1996 as compared to 26.7% in 1995. Selling, general, and administrative expenses decreased $4,975,000 in 1996 and represented 21.5% of revenue as compared to 28.5% in 1995. This decrease was principally the result of non-recurring charges incurred in 1995 relating to closed facilities and the reversal of certain bad debt and state sales tax reserves no longer required in 1996. The sales tax reserve was established for potential exposure with respect to an issue that was not raised by the governmental authority within the statute of limitations period, which expired in 1996. The reduction in the bad debt reserve reflects the results of an improved collection effort in 1996. These decreases were partially offset by increased costs associated with the new on-site facilities management contracts and the ad management business. Selling, general, and administrative expenses in 1996 include $1,534,000 of costs allocated from related parties. Prior to the Initial Offering, Applied Printing and other related parties provided general management, treasury, financial reporting, and legal services. These expenses were allocated to the Prepress Business on the basis of either specific identification or an allocation methodology that management believes to be reasonable. Operating income in 1996 was $17,012,000 higher than in 1995 primarily due to the improvements discussed above and the effects of a reorganization charge of $3,060,000 incurred in 1995 with no corresponding charge incurred in 1996. Interest expense in 1996 was $1,499,000 less than in 1995 primarily due to the repayment of debt with the proceeds from the Initial Offering. Prior to the Initial Offering, the Prepress Business was treated as a partnership for Federal and state income tax purposes and was not subject to income tax. A provision for income taxes is included for 1996 only for the results of operations subsequent to the Initial Offering Date. Liquidity and Capital Resources In September 1997, the Company received $121,700,000 in proceeds, net of underwriters' discount and transaction expenses, from the Offering. Of such proceeds, approximately $22,700,000 were used to repay the amount then outstanding under the Company's revolving line of credit. The remaining proceeds of approximately $99,000,000 were invested in marketable securities. The Company plans to use a significant portion of the proceeds from the Offering to further expand its business through acquisitions. During the remainder of 1997, the Company used approximately $5,100,000 of the proceeds for acquisitions. Although the Company continues to evaluate acquisition opportunities on an ongoing basis, there is no assurance that the Company will successfully complete additional acquisitions. See below for a discussion of acquisitions completed and pending in 1998. The Company also received $5,641,000 from the exercise of 486,700 stock options in 1997. During 1997, the Company repaid the remaining $1,600,000 of the Applied Printing Note with the proceeds from the maturity of marketable securities. In 1997, the Company entered into several sale and leaseback arrangements that generated proceeds of $3,469,000. Such arrangements resulted in immaterial gains that have been deferred and are being recognized as credits against future rental expense. In November 1997, the Company renegotiated its existing revolving line of credit, increasing its borrowing capacity to an aggregate of $60,000,000, consisting of a $35,000,000 revolving line of credit (the "Revolver") and a $25,000,000 acquisition line of credit (the "Acquisition Line"). The amount available to be borrowed under the Revolver may be limited by outstanding eligible receivables. Amounts borrowed under either the Revolver or the Acquisition Line are collateralized primarily by receivables and inventory. The Revolver and the Acquisition Line have repayment terms that run through November 13, 2000, and December 1, 2003, respectively. Interest rates on funds borrowed under the Revolver and the Acquisition Line vary from the lower of prime less 1.00% or LIBOR plus 0.50%, to the greater of prime plus 0.125% or LIBOR plus 1.375%. Under the terms of these facilities, the Company must comply with certain covenants related to earnings, funded debt ratios, and fixed charge coverage ratios. At December 31, 1997, the Company was in compliance with all covenants. There are no borrowings currently outstanding under either of these facilities. Cash flows from operating activities during 1997 increased by $2,173,000 as compared to 1996 due primarily to cash generated from additional income and the timing of vendor payments offset by increased accounts receivable resulting from additional business, increased rebates due from certain suppliers, and additional tax payments. In addition to the cash generated and used as part of the capital transactions described above, during 1997 the Company invested $15,232,000 in equipment, including $1,235,000 financed with a capital lease obligation, paid $10,533,000 related to acquisitions, and repaid $4,805,000 of debt and lease obligations with the proceeds from the Offering, the sale and leaseback transactions, and the exercise of stock options. Working capital increased $115,440,000 during 1997 primarily from the proceeds from the Offering, increased receivables, including amounts due from affiliates, resulting from additional business at existing facilities, and from acquired operations. The Company also recorded a tax benefit in the amount of $6,407,000 associated with the exercise of stock options that reduced the cash requirement for taxes in 1997. Long-term debt decreased $5,193,000 due primarily to the repayment of amounts previously borrowed under the line of credit with a portion of the proceeds from the Offering. The Company expects to expend approximately $16,800,000 over the course of the next twelve months for capital improvements, essentially all of which is for modernization and growth, including a $3,200,000 capital investment to further expand the General Motors business, a $5,000,000 investment in new information systems, and $1,400,000 for expansion to handle additional business from The Home Depot. The Company intends to finance a substantial portion of these expenditures under operating leases, sale and leaseback arrangements, or with working capital, including the proceeds from the Offering. The investment in new information systems referred to above, which includes replacing and upgrading the Company's internal financial and operational systems, will result in such systems being Year 2000 compliant. The Company expects to have these new systems implemented by the second quarter of 1999. In addition, the Company has performed a review of its production systems and, based on this review, believes that such systems are Year 2000 compliant. Some of the Company's suppliers and customers may face Year 2000 issues. The Company has not fully evaluated the impact of Year 2000 issues with respect to its customers and suppliers. In January 1998, the Company acquired Flying Color Graphics, Inc., a prepress company with five facilities throughout the midwest, for approximately $22,000,000. The purchase price was paid for with approximately $18,900,000 in cash from the Company's working capital and 68,103 shares of the Company's common stock. In February 1998, the Company entered into a definitive agreement to merge Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal year ended March 31, 1997, Devon had total assets, revenues, and operating income of $163,751,000, $209,522,000, and $29,063,000, respectively. Under the terms of the agreement, which is subject to regulatory approval and the approval of the Company's and Devon's stockholders, the Company will pay $30 per share in cash and distribute 0.6 share of the Company's common stock in exchange for each outstanding share of Devon common stock. The total consideration to be paid is estimated to be $450,000,000 including transaction costs. To fund the cash portion of the merger consideration, estimated to be $230,000,000 including the transaction costs, the Company has a commitment from a commercial bank that would increase its borrowing capacity to $250,000,000. This commitment expires on June 15, 1998. The Company is also contemplating other financing alternatives to fund all or part of the cash portion of the merger consideration. The Company believes that the cash flow from operations, proceeds from the Offering, its revolving credit facility, and its potential ability to obtain funding from other financing sources will be sufficient to fund its cash needs for the foreseeable future. Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued in June 1997 and is effective for financial statements for periods beginning after December 15, 1997. This statement establishes standards for the way public companies report information about operating segments in annual and interim financial statements. The Company believes its current reporting systems will enable it to comply with the implementation of SFAS No. 131. Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued in October 1997 and is effective for transactions entered into in fiscal years beginning after December 15, 1997. This statement establishes standards for recognizing revenue on software transactions and supersedes Statement of Position (SOP) 91-1, "Software Revenue Recognition." A proposed Statement of Position was issued in February 1998 that, if issued, would postpone certain provisions of SOP 97-2 for one year. The Company does not expect the implementation of SOP 97-2 or the proposed SOP, if issued, to have a material effect on its results of operations. The Company does not believe that inflation has had a material impact on its business. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Applied Graphics Technologies, Inc. We have audited the accompanying consolidated balance sheets of Applied Graphics Technologies, Inc. and subsidiaries ("the Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and owners' deficit, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP March 23, 1998 New York, New York REPORT OF INDEPENDENT ACCOUNTANTS To the Owners of the Predecessor Group: We have audited the accompanying combined statements of operations, cash flows and changes in owners' equity (deficit) of the Predecessor Group to Applied Graphics Technologies, Inc. for the year ended December 31, 1995. These financial statements are the responsibility of the Predecessor Group's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined results of operations and cash flows of the Predecessor Group for the year ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. New York, New York March 8, 1996 APPLIED GRAPHICS TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands of dollars, except per-share amounts) December 31, ---------------------- 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents .......................... $ 12,584 $ 2,567 Marketable securities .............................. 90,150 1,600 Trade accounts receivable (net of allowances of $3,989 in 1997 and $472 in 1996) ............ 43,025 29,584 Due from affiliates ................................ 5,561 Inventory .......................................... 6,234 4,639 Prepaid expenses and other current assets .......... 7,881 2,485 Deferred income taxes .............................. 3,016 705 --------- --------- Total current assets ........................ 168,451 41,580 Property, plant, and equipment - net .................. 31,020 20,544 Goodwill (net of amortization of $1,289 in 1997 and $552 in 1996) .................................. 22,229 7,121 Deferred income taxes ................................. 1,384 1,644 Other assets .......................................... 1,709 1,258 --------- --------- Total assets ................................ $ 224,793 $ 72,147 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses .............. $ 27,264 $ 19,630 Applied Printing Note .............................. 1,600 Current portion of long-term debt .................. 606 507 Current portion of obligations under capital leases 1,697 1,354 Due to affiliates .................................. 923 354 Other current liabilities .......................... 6,793 2,407 --------- --------- Total current liabilities ................... 37,283 25,852 Long-term debt ........................................ 812 6,005 Obligations under capital leases ...................... 2,011 1,265 Other liabilities ..................................... 1,190 3,142 --------- --------- Total liabilities ........................... 41,296 36,264 --------- --------- Commitments and contingencies Stockholders' Equity: Preferred stock (no par value, 10,000,000 shares authorized; no shares outstanding) Common stock ($0.01 par value, 40,000,000 shares authorized; shares issued and outstanding: 17,836,383 in 1997 and 14,349,683 in 1996) .......................... 178 143 Additional paid-in capital ......................... 159,627 25,584 Unrealized investment loss ......................... (31) Retained earnings .................................. 23,723 10,156 --------- --------- Total stockholders' equity ...................... 183,497 35,883 --------- --------- Total liabilities and stockholders' equity ..... $ 224,793 $ 72,147 ========= ========= See Notes to Consolidated Financial Statements APPLIED GRAPHICS TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per-share amounts) For the years ended December 31, 1997 1996 1995 --------- --------- --------- Revenues ................................. $ 184,993 $ 132,725 $ 117,802 Cost of revenues ......................... 120,018 92,242 86,296 --------- --------- --------- Gross profit ............................. 64,975 40,483 31,506 --------- --------- --------- Selling, general, and administrative expenses .............. 40,179 28,554 33,529 Charge for customer bankruptcy ........... 2,487 Reorganization charge .................... 3,060 --------- --------- --------- Total operating expenses ............... 42,666 28,554 36,589 --------- --------- --------- Operating income (loss) ................ 22,309 11,929 (5,083) Interest expense ......................... (1,034) (1,833) (3,332) Interest income .......................... 1,724 497 Other income (expense) - net ............. (292) 227 603 --------- --------- --------- Income (loss) before provision for income taxes ...................... 22,707 10,820 (7,812) Provision for income taxes ............... 9,140 865 --------- --------- --------- Net income (loss) ........................ $ 13,567 $ 9,955 $ (7,812) ========= ========= ========= Earnings per common share: Basic .................................. $ 0.88 $ 0.79 Diluted ................................ $ 0.83 $ 0.77 Weighted average number of common shares: Basic .................................. 15,475 12,660 Diluted ................................ 16,430 12,924 Pro Forma Net Income Data: Income (loss) before provision for income taxes, as reported ......................... $ 10,820 $ (7,812) Pro forma provision for income taxes.... 785 115 --------- --------- Pro forma net income (loss) ............ $ 10,035 $ (7,927) ========= ========= Pro forma earnings (loss) per common share: Basic .................................. $ 0.79 $ (0.80) Diluted ................................ $ 0.78 $ (0.80) Pro forma weighted average number of common shares: Basic .................................. 12,660 9,930 Diluted ................................ 12,924 9,930 See Notes to Consolidated Financial Statements APPLIED GRAPHICS TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) For the years ended December 31, 1997 1996 1995 --------- --------- --------- Cash flows from operating activities: Net income (loss) ........................ $ 13,567 $ 9,955 $ (7,812) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization ...... 6,222 4,932 5,359 Deferred taxes ..................... (1,591) (2,349) Gain on insurance settlement ....... (18) (2,023) Reorganization charge .............. 3,060 Charge for customer bankruptcy ..... 2,487 Other .............................. 644 (40) 1,012 Changes in Operating Assets and Liabilities, net of effects of acquisitions: Trade accounts receivable .......... (13,779) (11,442) 3,772 Due from/to affiliates ............. (4,991) 1,917 (981) Inventory .......................... (1,285) (937) (422) Other assets ....................... (1,042) 2,452 1,401 Accounts payable and accrued expenses ........................ 1,139 (413) 1,387 Other liabilities .................. 2,268 (2,591) 204 --------- --------- --------- Net cash provided by operating activities ............................ 3,639 1,466 4,957 --------- --------- --------- Cash flows from investing activities: Investment in available-for- sale securities .................. (320,553) (1,600) Proceeds from sale of available- for-sale securities ............. 231,072 Proceeds from maturities of held- to-maturity securities .......... 1,600 Property, plant, and equipment expenditures .................... (13,997) (14,851) (3,455) Proceeds from the sale of fixed assets .................... 12 1,099 1,483 Net proceeds from insurance claims .......................... 243 1,782 Entities purchased, net of cash acquired ................... (10,533) 350 (69) --------- --------- --------- Net cash used in investing activities .... (112,399) (14,759) (259) --------- --------- --------- Cash flows from financing activities: Proceeds from sale of common stock ........................... 121,700 46,103 Proceeds from exercise of stock options ......................... 5,641 Borrowings (repayments) under revolving credit line - net ..... (5,628) 5,628 Proceeds from sale/leaseback transactions .................... 3,469 4,093 558 Repayment of Applied Printing Note ............................ (1,600) (14,400) Repayment of notes and capital lease obligations ............... (4,805) (2,662) (4,020) Increase in (repayments of) intercompany borrowings - net ... (18,000) 3,789 Distributions to Applied Printing - net .................. (5,568) (4,449) --------- --------- --------- Net cash provided by (used in) financing activities .................. 118,777 15,194 (4,122) --------- --------- --------- Net increase in cash and cash equivalents ........................... 10,017 1,901 576 Cash and cash equivalents at beginning of year ..................... 2,567 666 90 --------- --------- --------- Cash and cash equivalents at end of year ........................... $ 12,584 $ 2,567 $ 666 ========= ========= ========= See Notes to Consolidated Financial Statements APPLIED GRAPHICS TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' DEFICIT (In thousands of dollars, except per-share amounts)
Additional Unrealized Common Paid-in- Investment Retained Owners' Stock Capital Loss Earnings Deficit ----------- ------------- ------------- ----------- ------------ Balance at January 1, 1995 $ (7,120) Net loss (7,812) Distribution (4,449) ------------ Balance at December 31, 1995 (19,381) Issuance of 9,309,900 common shares in exchange for assets of Prepress Business $ 93 Issuance of 4,500,000 common shares in a public offering at $12.00 per share 45 $ 46,058 Issuance of 539,683 shares in an acquisition at $15.75 per share 5 8,495 Net income (loss) $ 10,156 (201) Distribution (9,387) Conveyance (28,969) 28,969 ----------- ------------- ----------- ------------ Balance at December 31, 1996 143 25,584 10,156 $ 0 ============ Issuance of 3,000,000 common shares in a public offering at $43.00 per share 30 121,670 Granting of 19,000 warrants to purchase common shares 330 Issuance of 486,700 common shares upon exercise of stock options 5 5,636 Income tax benefit associated with exercise of stock options 6,407 Unrealized loss on investments in available-for-sale securities $ (31) Net income 13,567 ----------- ------------- ------------- ----------- Balance at December 31, 1997 $ 178 $ 159,627 $ (31) $ 23,723 =========== ============= ============= ===========
See Notes to Consolidated Financial Statements APPLIED GRAPHICS TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars, except per-share amounts) 1. ORGANIZATION AND BASIS OF PRESENTATION Applied Graphics Technologies, Inc. and its subsidiaries (the "Company") provide digital prepress services to magazine publishers, advertising agencies, entertainment companies, automobile manufacturers, and catalog retailers. In addition, the Company provides outsourced, on-site prepress and related services to third parties and advanced digital imaging services, such as digital archiving and distribution services and duplication and distribution services of advertising content for the broadcast industry. The Company was incorporated in Delaware on December 12, 1995. Applied Printing Technologies, L.P. ("Applied Printing"), an entity beneficially owned by the Chairman of the Board of Directors of the Company (the "Chairman") and the Chief Executive Officer of the Company (the "CEO"), was issued 100 shares of common stock and became the Company's sole stockholder. On April 16, 1996 (the "Initial Offering Date"), the Company's Registration Statement on Form S-1 under the Securities Act of 1933, as amended, relating to the initial public offering (the "Initial Offering") of the Company's common stock, was declared effective. Upon the offering being declared effective, the Company acquired substantially all of the assets and certain related liabilities relating to the prepress, digital imaging services, and related businesses of Applied Printing (collectively, the "Prepress Business") in exchange for 9,309,900 shares of the Company's common stock and $37,000 of additional consideration ("Additional Consideration") comprised of (i) the assumption by the Company of the principal amount of collateralized senior indebtedness to Applied Printing's primary institutional lender (the "Institutional Senior Indebtedness") of $21,000 and (ii) the issuance of a promissory note by the Company to Applied Printing (the "Applied Printing Note") of $16,000. The Company received net proceeds of $46,103 from the Initial Offering, of which $21,000 was used to repay Institutional Senior Indebtedness and $16,000 was used to invest in short-term investments to support a standby letter of credit that collateralized the Applied Printing Note. At December 31, 1997, Applied Printing owned approximately 28% of the Company's outstanding common stock. The acquisition of the Prepress Business was accounted for in a manner similar to a pooling of interests. Accordingly, the financial statements of the Company reflect the combined results of operations of the Prepress Business through the Initial Offering Date and the results of the Company thereafter. The statements of operations and cash flows covering the periods through the Initial Offering Date have been prepared by combining the results of operations and cash flows of the specific divisions that comprised the Prepress Business. Prior to the Initial Offering Date, these specific divisions operated as separate business units and maintained their own books and records. Through the Initial Offering Date, Applied Printing managed the cash and financing requirements of all of its divisions centrally and, as such, the interest expense and related intercompany borrowing up until that date represent an allocation of Applied Printing's interest expense and the related debt. As discussed in Note 10, this allocation of debt is presented as an intercompany borrowing. Additionally, prior to the Initial Offering Date, Applied Printing and other related parties provided certain corporate, general, and administrative services to the Prepress Business, including general management, treasury, financial reporting, and legal services. Accordingly, the financial statements include an allocation of expenses for such services. The combined results of operations and cash flows for the years ended December 31, 1996 and 1995, may have differed had the Company operated as an independent entity during those entire periods. On September 3, 1997, the Company's Registration Statement on Form S-3 under the Securities Act of 1933, as amended, relating to an offering of the Company's common stock (the "Offering"), was declared effective. As part of the Offering, the Company sold 3,000,000 shares of common stock, generating proceeds, net of underwriters' discount and transaction expenses, of $121,700. Also as part of the Offering, an additional 3,900,000 shares were sold by certain stockholders of the Company, of which 3,650,000 shares were sold by Applied Printing. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The Consolidated Financial Statements include the accounts of the Company and all of its subsidiaries. All intercompany accounts and transactions have been eliminated in the Consolidated Financial Statements. Cash and Cash Equivalents: Cash and cash equivalents include all cash balances and highly liquid investments having original maturities of three months or less. Marketable Securities: The Company has classified its investments in marketable securities at December 31, 1997, as "available for sale" and has recorded them at fair market value. Marketable securities at December 31, 1996, were classified as "held to maturity" and were recorded at amortized cost. Inventory: Raw materials are valued at the lower of cost (cost being determined on a weighted average basis) or market. Work-in-process, consisting of labor, materials, and overhead on partially completed projects, is recorded at cost (specific identification) but not in excess of net realizable value. Property, Plant, and Equipment: Property, plant, and equipment is stated at cost. Depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which generally range from 30 years for buildings to three years for computer software and vehicles. Leasehold improvements and amounts recorded under capital leases are amortized on the straight-line method over the terms of the leases or their estimated useful lives. Revenue recognition: Revenue is recognized at the time projects are shipped or transmitted to the customer. Revenue for digital archiving services is recognized on a per-image basis as items are prepared and scanned. Revenue from the licensing of software and the sale of digital equipment is recognized upon the later of delivery or satisfaction of significant obligations. Goodwill: Goodwill is being amortized on the straight-line method over periods ranging from 7 to 30 years. Income taxes: The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The Prepress Business was treated as a partnership for Federal and state income tax purposes prior to the Initial Offering Date and was not subject to tax. A provision for income taxes is included in the Company's Consolidated Statements of Operations only for the periods subsequent to the Initial Offering Date. Earnings per Share of Common Stock: The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," in December 1997. In accordance with the provisions of SFAS No. 128, earnings per share of common stock for prior periods, including pro forma amounts, have been restated. Long-lived assets: The Company evaluates the recoverability of its long-lived assets by comparing their carrying value to the expected future cash flows to be generated from such assets when events or circumstances indicate that an impairment may have occured. Recently Issued Accounting Standards: Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued in June 1997 and is effective for financial statements for periods beginning after December 15, 1997. This statement establishes standards for the way public companies report information about operating segments in annual and interim financial statements. The Company believes its current reporting systems will enable it to comply with the implementation of SFAS No. 131. Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued in October 1997 and is effective for transactions entered into in fiscal years beginning after December 15, 1997. This statement establishes standards for recognizing revenue on software transactions and supersedes Statement of Position (SOP) 91-1, "Software Revenue Recognition." A proposed Statement of Position was issued in February 1998 that, if issued, would postpone certain provisions of SOP 97-2 for one year. The Company does not expect the implementation of SOP 97-2 or the proposed SOP, if issued, to have a material effect on its results of operations. Estimates: The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification of Prior Years' Financial Statements: Certain prior-year amounts in the accompanying financial statements have been reclassified to conform with the 1997 presentation. 3. ACQUISITIONS In May 1997, the Company completed the purchase of certain assets of Star Graphic Arts Co., Inc., a prepress company. In June 1997, the Company acquired certain assets of Digital Imagination, Inc. ("DI"), a digital events photography business, and also acquired certain rights from a former joint venture partner. In July 1997, the Company acquired all of the assets of MBA Graphics, Inc. ("MBA"), a provider of prepress production, direct mailing, and brokered commercial printing services. In September 1997, the Company acquired certain assets of the broadcast media distribution business of Winkler Video Associates, Inc. In December 1997, the Company acquired the assets of another prepress company, Vancor Color, Inc., and the stock of another digital events photography business, Amusematte Corp. For such acquisitions, the Company paid an aggregate of $11,024 from amounts borrowed under its line of credit and from proceeds of the Offering, assumed $10,850 of liabilities, and granted warrants to purchase a minimum of 19,000 shares of its common stock with an approximate value of $330. In addition, the Company will make contingent payments in the form of cash or shares of common stock in the amount of $3,174 as additional consideration for certain of the acquisitions based on 1997 performance. Any additional consideration will be determined based upon the future financial performance of the acquired operations and will be recorded as additional purchase price at the time the necessary conditions are satisfied. Such additional consideration may be in the form of cash, shares of common stock, or warrants to purchase shares of common stock. On December 3, 1996, the Company acquired the assets of SpotLink, Inc. ("SpotLink"), a company that reproduces and distributes commercials to broadcast and cable media, for a purchase price of approximately $8,500. The assets, consisting primarily of duplication equipment, were acquired for 539,683 shares of the Company's common stock. The acquisitions were accounted for using the purchase method of accounting. Accordingly, the assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired in 1997 and 1996 was $15,818 and $6,716, respectively, and has been recorded as goodwill, which is being amortized on the straight-line method over periods ranging from 20 to 30 years. The results of operations of these acquisitions have been included in the Consolidated Statements of Operations subsequent to the respective dates of the acquisitions. At the time of the acquisition of DI, the Company intended to dispose of the portion of the business related to photography at golf courses and retain the portion of the business that related to photography at events and fixed-based locations. The projected cash loss for the golf course operations from the date of acquisition through the anticipated date of disposal totaled $1,068 and is included as part of the purchase price. During the period June 6, 1997, the date of acquisition, through December 31, 1997, the golf course operations incurred cash losses of approximately $800. Such losses have been excluded from the consolidated results of operations for the year ended December 31, 1997. The following unaudited pro forma information combines the results of operations of the Company and the acquisitions for the years ended December 31, 1997 and 1996, calculated as if the acquisitions had occurred on January 1, 1996. The pro forma information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations that would have occurred had the acquisitions been consummated at the beginning of 1996 or of results which may occur in the future. Unaudited 1997 1996 ----------- ----------- Total revenues $ 199,658 $ 164,338 Income before provision for income taxes $ 22,156 $ 9,085 Net income $ 13,238 $ 9,067 Earnings per common share: Basic $ 0.86 $ 0.72 Diluted $ 0.81 $ 0.70 4. MARKETABLE SECURITIES The Company has classified its investments in marketable securities at December 31, 1997, as "available for sale" and has recorded them at fair market value. Marketable securities at December 31, 1996, were classified as "held to maturity" and were recorded at amortized cost. Marketable securities at December 31 consisted of the following:
1997 1996 ----------------------------------- ------------------------------------- Amortized Amortized Market Value Cost Market Value Cost ----------------- -------------- ---------------- ---------------- Debt issued by municipalities and their subdivisions: Maturing within 1 year $ 400 $ 400 Maturing after 1 year through 5 years 1,600 1,600 Maturing after 5 years through 10 years 3,675 3,675 Maturing after 10 years 9,400 9,400 Corporate debt securities maturing within 1 year 55,341 55,372 Certificates of Deposit maturing within 1 year 4,498 4,498 Corporate Equity Fund 1,000 1,000 U.S. Government Treasury Fund 14,236 14,236 U.S. Government Securities $ 1,600 $ 1,600 ----------------- -------------- ---------------- ---------------- Total $ 90,150 $ 90,181 $ 1,600 $ 1,600 ================= ============== ================ ================
At December 31, 1997, all marketable securities held by the Company were available for current operations and are therefore classified in the Consolidated Balance Sheets as current assets. Unrealized holding gains and losses on available-for-sale securities, which were not material at December 31, 1997, are reflected as a separate component of Stockholders' Equity. Proceeds from sales of available-for-sale securities during the twelve month period ended December 31, 1997, totaled $231,072 and resulted in no realized gain or loss. Realized gains and losses are determined based on a specific identification basis. 5. INVENTORY The components of inventory at December 31 were as follows: 1997 1996 ----------- ----------- Work-in-Process $ 2,721 $ 2,596 Raw Materials 3,513 2,043 ----------- ----------- Total $ 6,234 $ 4,639 =========== =========== 6. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31 consisted of the following: 1997 1996 ----------- ----------- Land $ 1,360 $ 1,360 Machinery and equipment 32,490 23,843 Leasehold improvements 8,423 7,019 Buildings and improvements 7,119 6,893 Computer software 2,687 1,651 Furniture and fixtures 2,165 1,531 Construction in progress 3,289 203 ----------- ----------- Total 57,533 42,500 Less accumulated depreciation and amortization 26,513 21,956 ---------- ----------- Net $ 31,020 $ 20,544 =========== =========== Interest capitalized on construction of buildings and improvements during 1996 was $130. Depreciation and amortization of property, plant, and equipment charged to expense for the years ended December 31, 1997, 1996, and 1995, was $6,055, $4,785 and $5,106, respectively. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31 consisted of the following: 1997 1996 ----------- ----------- Accounts payable $ 13,098 $ 7,694 Salaries and benefits 5,207 4,329 Income taxes 54 2,449 Commissions 1,640 1,374 Other operating accruals 7,265 3,784 ----------- ----------- Total $ 27,264 $ 19,630 =========== =========== 8. APPLIED PRINTING NOTE On April 16, 1996, as part of the acquisition of the assets of the Prepress Business, the Company issued a promissory note to Applied Printing in the amount of $16,000. A principal payment in the amount of $14,400 was made during 1996. The remaining balance of $1,600 was repaid in February 1997. This obligation, which bore interest at the rate of 4.145% per annum, was collateralized by a letter of credit. The Company incurred interest charges of $8 and $295 during the years ended December 31, 1997 and 1996, respectively. 9. LONG-TERM DEBT Long-term debt at December 31 consisted of the following: 1997 1996 ----------- ----------- 8% - Prime plus 1% notes payable due 1999 through 2002 $ 812 $ 377 Variable rate revolving credit line 5,628 ----------- ----------- Total $ 812 $ 6,005 =========== =========== At December 31, 1997, the Company had a revolving line of credit aggregating $60,000, consisting of a $35,000 revolving line of credit (the "Revolver") and a $25,000 acquisition line of credit (the "Acquisition Line"). The amount available to be borrowed under the Revolver may be limited by outstanding eligible receivables. Amounts borrowed under either the Revolver or the Acquisition Line are collateralized primarily by receivables and inventory. The Revolver and the Acquisition Line are with a major financial institution and have repayment terms that run through November 13, 2000, and December 1, 2003, respectively. Interest rates on funds borrowed under the Revolver and the Acquisition Line vary from the lower of prime less 1.00% or LIBOR plus 0.50%, to the greater of prime plus 0.125% or LIBOR plus 1.375%. Under the terms of the facilities, the Company must comply with certain covenants related to earnings, funded debt ratios, and fixed charge coverage ratios. At December 31, 1997, the Company was in compliance with all covenants and there were no outstanding borrowings under either the Revolver or the Acquisition Line. The average variable rate on revolving credit facility borrowings during 1997 and 1996 was 7.50% and 8.25%, respectively. There is no restriction on the payment of dividends other than obtaining approval of the financial institution. Principal payments on the long-term debt are as follows: 1998 $ 606 1999 399 2000 259 2001 111 2002 43 ----------- Total 1,418 Less current portion 606 ----------- Total long-term debt $ 812 =========== 10. INTERCOMPANY BORROWINGS Prior to the Initial Offering Date, the Prepress Business had been financed principally through advances from Applied Printing. Historically, Applied Printing had financed all of its operations, including those of the Prepress Business, with Institutional Senior Indebtedness, borrowings from the Daily News, L.P. (the "Daily News") (see Note 15), and borrowings from the majority limited partner (collectively, "Borrowings"). Prior to the Initial Offering Date the financial statements include an allocation of Applied Printing's interest expense and related Borrowings. Applied Printing's interest expense related to the Borrowings had been allocated to the Prepress Business based on the ratio of net assets of the Prepress Business, before an allocation of intercompany debt, to the sum of the total consolidated net assets of Applied Printing plus the Applied Printing debt that is not directly attributable to specific divisions within Applied Printing. The intercompany borrowing amounts represented derived amounts which have been computed by applying Applied Printing's weighted average interest rate to the allocated interest expense, calculated using the methodology discussed above. The weighted average interest rates during the period ended April 16, 1996, and the year ended December 1995, were 10.8% and 8.9%, respectively. The Company incurred interest charges of $944 and $2,683 for the period ended April 16, 1996, and the year ended December 31, 1995, respectively. 11. LEASES The Company leases certain property and equipment used in its operations under agreements that are classified as both capital and operating leases. Such agreements generally include provisions for inflation-based rate adjustments and, in the case of leases for buildings and office space, payments of certain operating expenses and property taxes. Future minimum rental payments required under capital leases and operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows: Capital Operating Leases Leases ------------ ------------ 1998 $ 1,991 $ 7,320 1999 1,061 6,396 2000 428 2,659 2001 289 1,724 2002 168 1,600 Later years 387 4,925 ------------ ------------ Total minimum lease payments 4,324 $ 24,624 ============ Less imputed interest 616 ------------ Present value of minimum lease payments 3,708 Less current portion 1,697 ------------ Long-term obligation under capital leases $ 2,011 ============ Assets recorded under capital leases are included in property, plant, and equipment as follows: 1997 1996 ------------- ----------- Buildings $ 4,768 $ 4,768 Machinery and equipment 13,179 11,431 ------------- ----------- Total 17,947 16,199 Less accumulated depreciation 9,766 8,660 ------------- ----------- Net $ 8,181 $ 7,539 ============= =========== Total rental expense under operating leases amounted to $10,002, $7,578, and $12,106 for the years ended December 31, 1997, 1996, and 1995, respectively. The Company enters into sale and leaseback arrangements that are recorded as operating leases. The gain from these sale and leaseback arrangements is deferred and recognized as credits against future rental expenses over the terms of the related leases. At December 31, 1997, the remaining balance of the deferred gain totaling $377 is included in "Other liabilities", both current and noncurrent, in the accompanying Consolidated Balance Sheets. 12. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires the asset and liability method of accounting for income taxes. Under this method, deferred taxes are recognized based on the expected future tax consequences of events that have been included in the financial statements or tax returns by applying currently enacted statutory tax rates applicable to future years to differences between the financial statement and tax bases of assets and liabilities. The Prepress Business was treated as a partnership for Federal and state income tax purposes prior to the Initial Offering Date and was not subject to tax. At the date of the Initial Offering, the Company recorded the applicable deferred tax assets related to the differences between financial statement and tax basis of the assets and liabilities of the Prepress Business. These deferred tax assets were entirely offset by a valuation allowance. A provision for income taxes is included in the Company's Consolidated Statements of Operations only for the periods subsequent to the Initial Offering Date. The components of the provision for income taxes were as follows: 1997 1996 ------------ ------------ Current: Federal $ 3,018 $ 2,287 State 1,187 927 ------------ ------------ Total current 4,205 3,214 ------------ ------------ Deferred: Federal (430) (2,349) State (1,161) ------------ ------------ Total deferred (1,591) (2,349) ------------ ------------ Tax benefits not impacting provision: Federal 4,650 State 1,876 ------------ Total tax benefits not impacting provision 6,526 ------------ Total provision for income taxes $ 9,140 $ 865 ============ ============ The provision for income taxes varied from the Federal statutory income tax rate due to the following: 1997 1996 ------------ ------------ Taxes at statutory rate $ 7,720 $ 3,679 State income taxes, net of Federal tax benefit 1,256 612 Change in valuation allowance for Federal deferred tax assets (3,870) Permanent items 158 252 Other - net 6 192 ------------ ------------ Provision for income taxes $ 9,140 $ 865 ============ ============ Federal statutory rate 34.00% 34.00% Effective rate 40.25% 8.00% The components of the net deferred tax asset at December 31 were as follows: 1997 1996 ------------- ------------- Deferred tax assets: Accounts receivable $ 1,978 $ 221 Property, plant, and equipment 837 679 Accrued expenses 349 1,193 Obligations under capital leases 460 639 Other liabilities 262 300 Other assets 514 198 ------------- ------------- Total deferred tax assets 4,400 3,230 Valuation allowance (881) ------------- ------------- Net deferred tax asset $ 4,400 $ 2,349 ============== ============ There were no deferred tax liabilities at December 31, 1997 and 1996. A valuation allowance was established at the date of initially recording the deferred tax assets associated with the acquisition of the Prepress Business. Due to the Prepress Business having historically incurred losses, the valuation allowance was deemed necessary due to the uncertainty relating to the Company's ability to utilize these benefits in the future. During the year ended December 31, 1997, the Company reduced the valuation allowance for state deferred tax assets by $881. During the period ended December 31, 1996, the Company reduced the valuation allowance by $3,870 for Federal and $200 for state deferred tax assets. Based on operating earnings subsequent to the Initial Offering Date and the Company's expectations of future earnings from established contracts and relationships, the Company believes that it is more likely than not that the benefit associated with Federal and state deferred tax assets will be realized in the future and therefore has not established a valuation allowance for deferred tax assets at December 31, 1997. 13. STOCK OPTIONS In 1996, the Board of Directors and stockholders approved a Stock Option Plan (the "Employee Plan") and a Non-employee Directors' Nonqualified Stock Option Plan (the "Directors' Plan"). Under the Employee Plan, options are granted to key employees of the Company to purchase common stock of the Company. Options granted under the Employee Plan, which have a term of ten years, become exercisable over a five year period in varying amounts, but in no event less than 5% or more than 25% in any year for any individual optionee. Under the Directors' Plan, options are granted to members of the Board of Directors who are not employees of the Company. Options initially granted under the Directors' Plan become exercisable over a two year period and have a term of ten years. The Directors' Plan also provides for an additional 5,000 options to be granted to non-employee directors on each subsequent anniversary date of having first become a member of the Board of Directors. Such future option grants will have an exercise price equal to the fair market value of the common stock on the date of grant and are fully vested at grant. The two plans call for a combined maximum of 4,200,000 shares of the Company's common stock to be available for issuance upon exercise of options. At December 31, 1997, 1,504,100 shares were reserved for the issuance of stock options. Information relating to activity in the Company's stock option plans is summarized as follows: Weighted Weighted Number of Average Average Shares Exercise Price Fair Value -------------- ----------------- --------------- Options granted on Initial Offering Date 2,475,000 $12.00 $17,489 Additional options granted 54,000 $15.61 $ 496 Options forfeited (38,000) $12.37 -------------- Options outstanding at December 31, 1996 (none exercisable) 2,491,000 $12.07 Options granted 255,500 $45.15 $ 6,858 Options exercised (486,700) $12.03 Options forfeited (50,600) $12.79 -------------- Options outstanding at December 31, 1997 2,209,200 $15.89 ============== Options exercisable at December 31, 1997 72,500 $18.29 ============== Information relating to options outstanding at December 31, 1997, is summarized as follows: Outstanding Exercisable --------------------------------------- ----------------------- Range of Weighted Avg. Weighted Avg. Weighted Avg. Exercise Prices Options Exercise Price Remaining Life Options Exercise Price - --------------- --------- -------------- -------------- ------- -------------- $12.00 - $16.63 1,953,700 $12.07 8.29 52,500 $12.31 $34.00 - $39.25 60,000 $37.50 9.38 20,000 $34.00 $47.50 195,500 $47.50 9.83 0 The Company accounts for the issuance of stock options under the provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," which requires compensation cost to be measured at the date of grant based on the intrinsic value of the options granted. The intrinsic value of an option is equal to the difference between the market price of the common stock on the date of grant and the exercise price of the option. There was no compensation cost recognized by the Company on the options granted in 1997 and 1996. In 1995, Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," was issued. SFAS No. 123 provides for an alternative measurement of compensation cost based on the fair value of the options granted. The fair value of an option is based on the intrinsic value as well as the time value of the option. The fair value of stock options granted was estimated on the grant dates using the Black-Scholes option-pricing model. The following weighted average assumptions were used in calculating the fair value of options granted: 1997 1996 --------- --------- Risk-free interest rate 6.20% 6.75% Expected life 6 years 6 years Expected volatility 0.5606 0.5394 Expected dividend yield 0% 0% Had the Company elected to account for the issuance of stock options under SFAS No. 123, the compensation cost would have been $3,957 and $2,511 for the years ended December 31, 1997 and 1996, respectively. The pro forma net income and earnings per share for the years ended December 31, 1997 and 1996, calculated as if the Company had elected to account for the issuance of stock options under SFAS No. 123, were as follows: 1997 1996 ------- ------- Net Income $11,203 $ 8,298 Basic Earnings per Share $ 0.72 $ 0.66 Diluted Earnings per Share $ 0.70 $ 0.66 14. EARNINGS PER SHARE The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," in December 1997. SFAS No. 128 requires the presentation of both basic and diluted earnings per share as opposed to primary and fully diluted earnings per share, which were required under the previous standard, Accounting Principles Board Opinion No. 15. In accordance with the provisions of SFAS No. 128, prior period earnings per share data has been restated. Basic earnings per share of common stock are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share of common stock are computed by giving effect to all dilutive potential shares. There were no reconciling items to net income to arrive at income available to common stockholders for the years ended December 31, 1997, 1996, and 1995. The number of common shares used in the computation of basic and diluted earnings per share for the years ended December 31, 1997, 1996, and 1995, including pro forma computations, are summarized as follows: 1997 1996 1995 -------------- -------------- ------------- Basic: Weighted average shares outstanding 15,475,000 12,660,000 9,930,000 Effect of Dilutive Securities: Stock options and warrants 946,000 264,000 Contingently issuable common shares 9,000 -------------- -------------- ------------- Diluted: Weighted average shares outstanding 16,430,000 12,924,000 9,930,000 ============== ============== ============= 15. RELATED PARTY TRANSACTIONS In addition to the business it transacts with Applied Printing, the Company also does business and shares services with entities beneficially owned by the Chairman and the CEO, including the Daily News and U.S. News & World Report, L.P. ("U.S. News"), and occasionally utilizes an aircraft owned by ZWA, Inc., an entity owned by the Chairman. The Company also does business with Snyder Communications, Inc. and its subsidiaries, a provider of outsourced marketing services, of which both the Chairman and the CEO are members of the Board of Directors and in the aggregate own approximately 13% of the outstanding common stock. Due to/from affiliates - Affiliates owed the Company $5,561 and $46 at December 31, 1997 and 1996, respectively, representing trade receivables. The Company owed affiliates $923 and $400 at December 31, 1997 and 1996, respectively. Affiliate sales and purchases - The Company has entered into Production Services Agreements with U.S. News and the Daily News pursuant to which it will provide prepress services. The agreement with U.S. News, which expires on December 31, 2000, is renewable annually thereafter by mutual agreement of the parties. The agreement with the Daily News commenced in October 1995 and is renewable annually by mutual agreement of the parties. In 1995, the Company entered into a two-year agreement to digitize the entire library of photographs of an affiliate. In addition, the Company occasionally provides services to and purchases services from related parties that are negotiated on an arms-length basis. Sales to and purchases from related parties for the years ended December 31, 1997, 1996, and 1995, were as follows: 1997 1996 1995 ------------ ------------ ------------ Affiliate sales $ 16,845 $ 11,610 $ 7,901 Affiliate purchases $ 4,683 $ 3,097 $ 421 Sales to affiliates represented 9.1%, 8.8%, and 6.7% of the Company's revenues for the years ended December 31, 1997, 1996, and 1995, respectively. Allocated costs - Prior to the Initial Offering Date, Applied Printing and other related parties provided to the Company certain administrative services that included cash management, financial reporting, legal, and other similar services. The costs allocated to the Company were based on either specific identification of expenses attributable to the Prepress Business, where practicable, or an allocation of the total costs incurred. For such services, the Company incurred charges of $1,534 and $6,645 for the period ended April 16, 1996, and for the year ended December 31, 1995, respectively. In the opinion of management, such allocated costs have been made on a basis that is considered to be reasonable; however, these costs are not necessarily indicative of the total costs that the Company would have incurred had it operated on a stand-alone basis. Shared costs - Pursuant to shared services agreements, the Company receives certain legal and computer services from the Daily News and U.S. News. For such services, the Company incurred charges of $308, $303, and $150 for the years ended December 31, 1997, 1996, and 1995, respectively. In 1995, the shared costs are included as part of the allocated costs. Technology development agreement - Under an arrangement with the Daily News, the Company was reimbursed for the costs incurred in the development of certain digital technologies. Such reimbursements totaled $100 and $1,184 in the years ended December 31, 1996, and 1995, respectively. There was no reimbursement in the year ended December 31, 1997. Leases - The Company leases office space in Washington, D.C. from U.S. News. The charges incurred for the lease were $301, $293, and $281 for the years ended December 31, 1997, 1996, and 1995, respectively. In addition, the Company leases office space in New York City from Applied Printing and incurred charges of $385 and $289 for the years ended December 31, 1997 and 1996, respectively. The Company also leases a facility from the Daily News and incurred charges of $72 and $53 for the years ended December 31, 1997 and 1996, respectively. Vendor Agreement - The Company is a party to an agreement originally entered into in January 1992 by Applied Printing with a vendor and its affiliate. Pursuant to such agreement, the Company and Applied Printing are obligated to purchase a specified cumulative annual minimum amount of the vendor's products provided that the prices are market competitive and that the products meet technological and customer specifications. The Company receives a significant rebate from the vendor that varies based on the volume of products purchased. In addition, in 1995, the vendor prepaid to the Company $2,745 of the rebate expected to be earned in future periods. If the Company does not earn the full amount of the prepaid rebate in future periods, it would be required to repay the difference to the vendor along with interest accrued since 1995. At December 31, 1997, "Other current liabilities" in the Company's Consolidated Balance Sheet include approximately $2,917 related to prepaid rebates, of which approximately $2,621 represents an amount expected to be applied to this obligation based on purchases made during 1997. Such amount to be applied is also included as part of the total rebate receivable from the vendor included in "Other current assets" in the Consolidated Balance Sheet at December 31, 1997. The Chairman is a guarantor of the Company's contingent repayment obligation. In connection with the agreement, the vendor's affiliate loaned $15,000 to the Chairman. The loan, which matures on December 31, 1998, bears interest at the lender's commercial paper rate. The Company believes that the terms for its purchases of the products covered by this agreement are no less favorable to the Company than those that could be obtained from another vendor. 16. RETIREMENT PLANS The Company has a defined contribution plan in which employees are eligible to participate upon the completion of six months of service and the attainment of 21 years of age. Participants can contribute into the plan on both a pre-tax and after-tax basis. In addition, the Company can make discretionary contributions into the plan. Participants vest 100% in the Company's discretionary contribution upon the completion of five years of service. The Company did not make any discretionary contributions for the years ended December 31, 1997, 1996, and 1995. 17. COMMITMENTS AND CONTINGENT LIABILITIES The Company is contingently liable as a result of transactions arising in the ordinary course of business and is involved in certain legal proceedings in which damages and other remedies are sought. In the opinion of Company management, after review with counsel, the ultimate resolution of these matters will not have a material effect on the Company's Consolidated Financial Statements. Applied Printing and its corporate general partner are defendants in litigation arising out of Applied Printing's business. The Company is not a defendant in any such litigation, and does not believe there is a sustainable basis for the Company to be named as a defendant in any of such litigation. If the Company were to be named or held responsible in connection with any of such litigation, the Company is indemnified by Applied Printing. 18. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and trade receivables. The Company maintains cash balances and cash equivalents with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. The Company provides credit to customers on an uncollateralized basis after evaluating customer credit worthiness. The Company's customers are not concentrated in any specific geographic region, but are concentrated in the publishing, advertising agency, entertainment, and catalog retailing businesses. The Company's largest customer, a group of commonly owned advertising agencies, accounted for approximately $19,120, or 10.3%, of revenues for the year ended December 31, 1997. The Company's five largest customers, excluding related parties, comprise 33%, 35%, and 37% of revenues for the years ended December 31, 1997, 1996, and 1995, respectively. In addition, amounts due from these customers represent 26% and 29% of trade accounts receivable as of December 31, 1997 and 1996, respectively. Any termination or significant disruption of the Company's relationships with any of its principal customers could have a material adverse effect on the Company's business, financial condition, results of operations, and cash flows. 19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Payments of interest and income taxes were as follows: 1997 1996 1995 ---------- ---------- ---------- Interest paid (net of amounts capitalized) ............... $1,138 $702 $905 Income taxes paid ..................... $4,847 $766 Noncash investing and financing activities were as follows: 1997 1996 1995 ---------- ---------- ---------- Notes payable issued in connection with an acquisition ..... $ 488 Increase in additional paid-in capital from income tax benefit associated with exercise of stock options .......... $ 6,407 Reduction of goodwill from amortization of excess tax deductible goodwill ................ $ 119 Acquisition of property, plant, and equipment in exchange for obligations under capital leases ............... $ 1,235 $ 480 Additions to goodwill for contingent purchase price adjustments .................. $ 3,174 $ 69 Conversion of intercompany borrowing into Applied Printing Note .............. $16,000 Distribution to Applied Printing in the form of increased intercompany borrowing ... $ 3,819 Common stock issued in exchange for the Prepress Business .......... $ 93 Common stock issued for acquisition ... $ 8,500 Acquisitions: Fair value of assets acquired ......... $22,204 $ 8,600 Cash paid ............................. (11,024) Fair value of common stock and warrants issued .................... (330) (8,500) ---------- ---------- Liabilities assumed ................... $10,850 $ 100 ========== ========== 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying amount and estimated fair values of financial instruments at December 31 are summarized as follows: 1997 1996 --------------------- --------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Assets: Cash and cash equivalents .... $12,584 $12,584 $2,567 $2,567 Marketable securities ........ $90,150 $90,150 $1,600 $1,600 Other assets ................. $ 5,995 $ 5,995 $1,470 $1,470 Liabilities: Applied Printing Note ........ $1,600 $1,600 Long-term debt ............... $ 1,418 $ 1,263 $6,512 $6,400 Obligations under capital leases ............ $ 3,708 $ 3,629 $2,619 $2,557 The following methods and assumptions were used to estimate the fair value of financial instruments presented above: Cash and cash equivalents - the carrying amount is a reasonable approximation of fair value. Marketable securities - the fair value of marketable securities is based on quoted market prices or dealer quotes. Other assets - the carrying amount of non-trade accounts receivables is a reasonable approximation of fair value. Applied Printing Note - due to the short-term nature of the obligation, the carrying amount is a reasonable approximation of fair value. Long-term debt - the fair value of notes payable, including the current portion, is estimated by discounting the future streams of payments using the rate at which the Company can currently obtain funds under its revolving credit line. The carrying amount of the revolving credit line is a reasonable approximation of fair value since it is a variable-rate obligation. Obligations under capital leases - the fair value of obligations under capital leases, including the current portion, is estimated by discounting the future streams of payments using the rate at which the Company can currently obtain funds under its revolving credit line. 21. REORGANIZATION CHARGES During 1995, the Company reorganized its operations in response to the operational impact of acquisitions and the technological changes within the industry. As part of the reorganization, the Company consolidated several operations during 1995 in an effort to gain operational and administrative efficiencies. The Consolidated Statements of Operations include reorganization charges of $3,060 for the year ended December 31, 1995. Such charges were comprised primarily of the write off of assets, including leasehold improvements that are no longer utilized in the Company's business, and contractual lease obligations for facilities and equipment that provide no further benefit to the Company. The Company utilized a discount rate of 10% to determine the present value of the contractual lease payments. The balance of the reorganization liability, which was fully paid by December 31, 1997, was $409 as of December 31, 1996. 22. SUBSEQUENT EVENTS In January 1998, the Company acquired Flying Color Graphics, Inc., a prepress company with five facilities throughout the midwest, for approximately $22,000. The purchase price was paid for with approximately $18,900 in cash from the Company's working capital and 68,103 shares of the Company's common stock. In February 1998, the Company entered into a definitive agreement to merge Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal year ended March 31, 1997, Devon had total assets, revenues, and operating income of $163,751, $209,522, and $29,063, respectively. Under the terms of the agreement, which is subject to regulatory approval and the approval of the Company's and Devon's stockholders, the Company will pay $30 per share in cash and distribute 0.6 shares of the Company's common stock in exchange for each outstanding share of Devon common stock. The total consideration to be paid is estimated to be $450,000 including transaction costs. To fund the cash portion of the merger consideration, estimated to be $230,000 including the transaction costs, the Company has a commitment from a commercial bank that would increase its borrowing capacity to $250,000. This commitment expires on June 15, 1998. The Company is seeking stockholder approval at the Special Meeting in lieu of Annual Meeting relating to the merger with Devon to increase the number of authorized shares of its common stock from 40,000,000 shares to 150,000,000 shares. 23. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) Prior to the Initial Offering Date, the Company was treated as a partnership for Federal and state income tax purposes and was not subject to tax. The Pro Forma Net Income Data in the Consolidated Statements of Operations presents what the provision for income taxes, net income, and earnings per common share for the years ended December 31, 1996 and 1995, would have been had the Company been treated as a C Corporation for the periods prior to the Initial Offering Date. 24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 1997 Quarter Ended March 31 June 30 September 30 December 31(1) ------- ------- ----------- ----------- (In thousands of dollars, except per-share amounts) Revenues ....................... $39,761 $41,311 $50,416 $53,505 Gross profit ................... $12,940 $15,261 $18,634 $18,140 Income before provision for income taxes ................. $ 4,259 $ 5,382 $ 6,995 $ 6,071 Net income ..................... $ 2,598 $ 3,283 $ 4,142 $ 3,544 Earnings per common share: Basic ........................ $ 0.18 $ 0.23 $ 0.27 $ 0.20 Diluted ...................... $ 0.17 $ 0.21 $ 0.25 $ 0.19 1996 Quarter Ended March 31 June 30 September 3 December 31 ------- ------- ----------- ----------- (In thousands of dollars, except per-share amounts) Revenues ....................... $30,598 $30,988 $35,177 $35,962 Gross profit ................... $ 8,269 $ 9,352 $11,542 $11,320 Income before provision for income taxes ................. $ 146 $ 2,096 $ 4,216 $ 4,362 Net income ..................... $ 146 $ 2,033 $ 4,005 $ 3,771 Earnings per common share: Basic ........................ $ 0.01 $ 0.16 $ 0.29 $ 0.27 Diluted ...................... $ 0.01 $ 0.15 $ 0.29 $ 0.26 (1) Includes a pretax charge of $2,487 related to the Chapter 11 bankruptcy filing of one of the Company's on-site facilities management customers, Nobody Beats the Wiz. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The information required by this item was previously reported on the Company's Form 8-K filed with the Securities and Exchange Commission on October 4, 1996. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Directors. - The information with respect to directors required by this item is incorporated herein by reference to the 1998 Proxy Statement/Prospectus included as part of the Company's Registration Statement on Form S-4 to be filed with the Securities and Exchange Commission by April 30, 1998. (b) Executive Officers. - The information with respect to officers required by this item is included at the end of Part I of this document under the heading Executive Officers of the Company. Item 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference to the 1998 Proxy Statement/ Prospectus included as part of the Company's Registration Statement on Form S-4 to be filed with the Securities and Exchange Commission by April 30, 1998. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated herein by reference to the 1998 Proxy Statement/ Prospectus included as part of the Company's Registration Statement on Form S-4 to be filed with the Securities and Exchange Commission by April 30, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated herein by reference to the 1998 Proxy Statement/ Prospectus included as part of the Company's Registration Statement on Form S-4 to be filed with the Securities and Exchange Commission by April 30, 1998. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Listed below are the documents filed as a part of this report: 1. Financial Statements and the Independent Auditors' Reports: Independent Auditors' Reports. Consolidated Balance Sheets. Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996, and 1995. Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995. Consolidated Statements of Stockholders' Equity and Owners' Deficit for the Years Ended December 31, 1997, 1996, and 1995. Notes to Financial Statements. 2. Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for the year ended December 31, 1997. 3. Exhibits: 2.1 Asset Purchase Agreement by and among Applied Graphics Technologies, Inc., and Flying Color Graphics, Inc. and its Shareholders dated January 16, 1998 (Incorporated by reference to Exhibit No. 2.1 forming part of the Registrant's Report on Form 8-K (File No. 0-28208) filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, on January 30, 1998). 2.2 Agreement and Plan of Merger, dated as of February 13, 1998, by and among Devon Group, Inc., Applied Graphics Technologies, Inc., and AGT Acquisition Corp. 3.1 Certificate of Incorporation (Incorporated by reference to Exhibit No. 3.1 forming part of the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 3.2 Amended and Restated By-Laws of Applied Graphics Technologies, Inc. (Incorporated by reference to Exhibit No. 3.2 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 4 Specimen Stock Certificate (Incorporated by reference to Exhibit No. 4 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 10.2 Applied Graphics Technologies, Inc. 1996 Stock Option Plan (Incorporated by reference to Exhibit No. 10.2 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 10.3 Applied Graphics Technologies, Inc. Non-Employee Directors Nonqualified Stock Option Plan (Incorporated by reference to Exhibit No. 10.3 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 10.4* Loan and Purchase Agreement, dated January 8, 1992, as amended (Incorporated by reference to Exhibit No. 10.4 forming part of Registrant's Report on Form 10-K/A (File No. 0-28208) filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1996). 10.4(a)* Second Amendment to Loan and Purchase Agreement dated April 19, 1996 (Incorporated by reference to Exhibit No. 10.4(a) forming part of the Registrant's Report on Form 10-K/A (File No. 0-28208) filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1996). 10.4(b)* Third Amendment to Loan and Purchase Agreement dated June 30, 1997. (Incorporated by reference to Exhibit No. 10.4(b) forming part of the Registrant's Report on Form 10-Q/A (File No. 0-28208) filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, for the quarterly period ended June 30, 1997). 10.5 Agreement, dated May 1, 1979, between WAMM Associates and Publisher Phototype International, L.P., as amended (Incorporated by reference to Exhibit No. 10.5 forming part of Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 10.6(a) Employment Agreement, effective as of April 1, 1996, between the Company and Diane Romano (Incorporated by reference to Exhibit No. 10.6 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 10.6(b) Employment Agreement, effective as of April 1, 1996, between the Company and Georgia L. McCabe (Incorporated by reference to Exhibit No. 10.6 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 10.6(c) Employment Agreement, effective as of March 13, 1996, between the Company and Melvin A. Ettinger (Incorporated by reference to Exhibit No. 10.6 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 10.6(d) Employment Agreement, effective as of April 1, 1996, between the Company and Scott A. Brownstein (Incorporated by reference to Exhibit No. 10.6 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 10.6(e)(i) Employment Agreement, effective as of June 1, 1996, between the Company and Louis Salamone, Jr. (Incorporated by reference to Exhibit No. 10.6(e) forming part of the Registrant's Report on Form 10-Q (File No. 0-28208) filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, for the quarterly period ended March 31, 1997). 10.6(e)(ii) Noncompetition, Nonsolicitation, and Confidentiality Agreement, effective as of June 1, 1996, between the Company and Louis Salamone, Jr. (Incorporated by reference to Exhibit No. 10.6(e) forming part of the Registrant's Report on Form 10-K (File No. 0-28208) filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1996). 10.7 Form of Registration Rights Agreement (Incorporated by reference to Exhibit No. 10.7 forming part of Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (File No. 333-00478) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended). 16 Letter regarding Change in Certifying Accountant (Incorporated by reference to the Registrant's Report on Form 8-K (File No. 0-28208) filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, on October 4, 1996). 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Coopers & Lybrand L.L.P 27.1 Financial Data Schedule (EDGAR filing only). 27.2 Restated Financial Data Schedule - 1996 Restatements (EDGAR Filing only). 27.3 Restated Financial Data Schedule - 1997 Restatements (EDGAR Filing only). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- * Confidential portions omitted and supplied separately to the Securities and Exchange Commission. (b) The Registrant did not file any reports on Form 8-K during the quarter ended December 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED GRAPHICS TECHNOLOGIES, INC. (Registrant) By: /s/ Fred Drasner _____________________________ March 27, 1998 Fred Drasner Director, Chairman, and Chief Executive Officer (Duly authorized officer) Date: March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 27, 1998. Signature Title /s/ Fred Drasner Director, Chairman, and Chief Executive Officer Fred Drasner (Principal Executive Officer) /s/ Melvin A. Ettinger Vice Chairman, Chief Operating Officer, and Director Melvin A. Ettinger /s/ Diane Romano President Diane Romano /s/ Louis Salamone, Jr. Senior Vice President and Chief Financial Officer Louis Salamone, Jr. (Principal Financial and Accounting Officer) /s/ Martin D. Krall Executive Vice President, Chief Legal Officer, Martin D. Krall Secretary and Director /s/ Mortimer B. Zuckerman Chairman of the Board of Directors Mortimer B. Zuckerman /s/ John R. Harris Director John R. Harris /s/ Edward H. Linde Director Edward H. Linde /s/ Howard Stringer Director Howard Stringer /s/ Linda J. Wachner Director Linda J. Wachner APPLIED GRAPHICS TECHNOLOGIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the year ended December 31, 1997 (In thousands)
Additions ------------------------------------ Balance at beginning Charged to costs Charged to other Balance at Description of period and expenses accounts (1) Deductions (2) end of period - -------------------------------- -------------- ------------------ ------------------ ---------------- --------------- Allowances deducted in the balance sheetfrom assets to which they apply: Allowance for doubtful accounts $ 472 $ 3,990 $ 308 $ (781) $ 3,989 (1) Represents allowances for doubtful accounts recorded in connection with acquisitions. (2) Represents uncollectible accounts written off.
EX-2.2 2 AGREEMENT AND PLAN OF MERGER Exhibit 2.2 AGREEMENT AND PLAN OF MERGER AMONG APPLIED GRAPHICS TECHNOLOGIES, INC., AGT ACQUISITION CORP. AND DEVON GROUP, INC. TABLE OF CONTENTS Page ARTICLE 1 THE MERGER..............................3 SECTION 1.1. The Merger...................................................3 SECTION 1.2. Effective Time...............................................3 SECTION 1.3. Closing of the Merger........................................4 SECTION 1.4. Effects of the Merger........................................4 SECTION 1.5. Certificate of Incorporation and Bylaws......................4 SECTION 1.6. Directors....................................................4 SECTION 1.7. Officers.....................................................4 ARTICLE 2 CONVERSION OF SHARES; MERGER CONSIDERATION..............4 SECTION 2.1. Conversion of Shares.........................................4 SECTION 2.2. Exchange of Certificates and Cash............................6 SECTION 2.3. Stock Options................................................7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................8 SECTION 3.1. Organization and Qualification...............................8 SECTION 3.2. Capitalization of the Company and its Subsidiaries...........8 SECTION 3.3. Authority Relative to this Agreement.........................9 SECTION 3.4. SEC Reports; Financial Statements...........................10 SECTION 3.5. Information Supplied........................................10 SECTION 3.6. Consents and Approvals; No Violations.......................11 SECTION 3.7. No Default..................................................11 SECTION 3.8. No Undisclosed Liabilities; Absence of Changes..............12 SECTION 3.9. Litigation..................................................12 SECTION 3.10. Compliance with Applicable Law..............................12 SECTION 3.11. Employee Plans..............................................13 SECTION 3.12. Environmental Matters.......................................14 SECTION 3.13. Tax Matters.................................................16 SECTION 3.14. Intellectual Property.......................................18 SECTION 3.15. Opinion of Financial Advisor................................19 SECTION 3.16. Brokers.....................................................19 SECTION 3.17. Material Contracts..........................................19 SECTION 3.18. Labor Matters...............................................20 SECTION 3.19. Insurance...................................................20 SECTION 3.20. Customers...................................................20 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF AGT AND ACQUISITIONS......................20 SECTION 4.1. Organization and Qualification..............................20 SECTION 4.2. Capitalization of AGT and its Subsidiaries..................21 SECTION 4.3. Authority Relative to this Agreement........................22 SECTION 4.4. SEC Reports; Financial Statements...........................22 SECTION 4.5. Information Supplied........................................23 SECTION 4.6. Consents and Approvals; No Violations.......................23 SECTION 4.7. No Default..................................................24 SECTION 4.8. No Undisclosed Liabilities; Absence of Changes..............24 SECTION 4.9. Litigation..................................................24 SECTION 4.10. Compliance with Applicable Law..............................24 SECTION 4.11. Employee Plans..............................................25 SECTION 4.12. Environmental Matters.......................................26 SECTION 4.13. Tax Matters.................................................27 SECTION 4.14. Intellectual Property.......................................29 SECTION 4.15. Material Contracts..........................................29 SECTION 4.16. Labor Matters...............................................30 SECTION 4.17. Insurance...................................................30 SECTION 4.18. Customers...................................................30 SECTION 4.19. No Prior Activities.........................................30 SECTION 4.20. Opinion of Financial Advisor................................30 SECTION 4.21. Brokers.....................................................30 SECTION 4.22. Ownership of Company Common Stock...........................30 ARTICLE 5 COVENANTS.............................31 SECTION 5.1. Conduct of Business.........................................31 SECTION 5.2. Preparation of S-4 and the Joint Proxy Statement............34 SECTION 5.3. No Solicitation.............................................34 SECTION 5.4. Letters of the Company's and AGT's Accountants..............36 SECTION 5.5. Meetings....................................................36 SECTION 5.6. Access to Information.......................................37 SECTION 5.7. Additional Agreements; Reasonable Best Efforts..............37 SECTION 5.8. Antitrust Reviews...........................................38 SECTION 5.9. Public Announcements........................................38 SECTION 5.10. Indemnification; Directors' and Officers' Insurance.........38 SECTION 5.11. Notification of Certain Matters.............................39 SECTION 5.12. Tax-Free Reorganization Treatment...........................39 SECTION 5.13. Company Employee Benefits...................................40 SECTION 5.14. Certain Payment of Deferred Compensation and Bonuses........40 SECTION 5.15. Stock Options...............................................40 SECTION 5.16. SEC Filings.................................................40 SECTION 5.17. Guarantee of Performance....................................40 ARTICLE 6 CONDITIONS TO CONSUMMATION OF THE MERGER...........................40 SECTION 6.1. Conditions to Each Party's Obligations to Effect............ the Merger..................................................40 SECTION 6.2. Conditions to the Obligations of the Company................41 SECTION 6.3. Conditions to the Obligations of AGT and Acquisition........42 ARTICLE 7 TERMINATION; AMENDMENT; WAIVER...................42 SECTION 7.1. Termination.................................................42 SECTION 7.2. Effect of Termination.......................................43 SECTION 7.3. Fees and Expenses...........................................43 SECTION 7.4. Amendment...................................................44 SECTION 7.5. Extension; Waiver...........................................44 ARTICLE 8 MISCELLANEOUS...........................45 SECTION 8.1. Nonsurvival of Representations and Warranties...............45 SECTION 8.2. Entire Agreement; Assignment................................45 SECTION 8.3. Notices.....................................................45 SECTION 8.4. Governing Law...............................................46 SECTION 8.5. Descriptive Headings........................................46 SECTION 8.6. Interpretive Provisions; Certain Definitions................46 SECTION 8.7. Parties in Interest.........................................46 SECTION 8.8. Severability................................................46 SECTION 8.9. Specific Performance........................................46 SECTION 8.10. Brokers.....................................................46 SECTION 8.11. Counterparts................................................47 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of February 13, 1998 (the "Agreement"), is among APPLIED GRAPHICS TECHNOLOGIES, INC., a Delaware corporation ("AGT"), AGT ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of AGT ("Acquisition"), and DEVON GROUP, INC., a Delaware corporation (the "Company"). WHEREAS, the respective Boards of Directors of AGT, Acquisition and the Company have determined that the Merger (as defined in Section 1.1) is fair to and in the best interests of their respective stockholders and have approved the Merger in accordance with this Agreement; WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, concurrently with the execution hereof, certain holders of Shares (as defined in Section 2.1) are entering into an agreement (the "Stockholders Agreement") providing for certain matters with respect to their Shares, a copy of which is attached hereto as Exhibit A; WHEREAS, the Company has delivered to AGT a letter identifying all persons (each, a "Company Affiliate") who are, at the date hereof, "affiliates" of the Company for purposes of Rule 145 under the Securities Act of 1933, as amended (the "Securities Act"), and each Company Affiliate has delivered to AGT a letter (each, an "Affiliate Letter") relating to (i) the transfer, prior to the Effective Time (as defined in Section 1.2), of the Shares beneficially owned by such Company Affiliate on the date hereof and (ii) the transfer of the shares of AGT Common Stock (as defined in Section 2.1(d)) to be received by such Company Affiliate in the Merger; and WHEREAS, AGT, Acquisition and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger. NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements herein contained, AGT, Acquisition and the Company hereby agree as follows: ARTICLE 1 THE MERGER SECTION 1.1. The Merger. At the Effective Time and upon the terms and subject to the conditions of this Agreement and in accordance with the Delaware General Corporation Law (the "DGCL"), the Company shall be merged with and into Acquisition (the "Merger"). Following the Merger, Acquisition shall continue as the surviving corporation (the "Surviving Corporation") and the separate corporate existence of the Company shall cease. SECTION 1.2. Effective Time. Subject to the provisions of this Agreement, AGT, Acquisition and the Company shall cause the Merger to be consummated by filing an appropriate Certificate of Merger or other appropriate documents (the "Certificate of Merger") with the Secretary of State of the State of Delaware in such form as required by, and executed in accordance with, the relevant provisions of the DGCL, as soon as practicable on or after the Closing Date (as defined in Section 1.3). The Merger shall become effective upon such filing or at such time thereafter as is provided in the Certificate of Merger (the "Effective Time"). SECTION 1.3. Closing of the Merger. The closing of the Merger (the "Closing") will take place at a time and on a date to be specified by the parties, which shall be the third business day after satisfaction or waiver of the conditions set forth in Article 6 (the "Closing Date"), at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, unless another time, date or place is agreed to in writing by the parties hereto. SECTION 1.4. Effects of the Merger. The Merger shall have the effects set forth in the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and Acquisition shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Acquisition shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 1.5. Certificate of Incorporation and Bylaws. The Certificate of Incorporation of Acquisition in effect at the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation until amended in accordance with applicable law. The Bylaws of Acquisition in effect at the Effective Time shall be the Bylaws of the Surviving Corporation until amended in accordance with applicable law. SECTION 1.6. Directors. The directors of Acquisition at the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation until such director's successor is duly elected or appointed and qualified. On or prior to the Closing Date, the number of directors of AGT shall be increased by two and the vacancies created thereby shall be initially filled by Marne Obernauer, Jr. and a designee to be determined jointly by the Company and AGT. SECTION 1.7. Officers. The officers of the Company at the Effective Time shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation until such officer's successor is duly elected or appointed and qualified. ARTICLE 2 CONVERSION OF SHARES; MERGER CONSIDERATION SECTION 2.1. Conversion of Shares. At the Effective Time, by virtue of the Merger and without any action on the part of any of the parties hereto or any holder of shares of the Company's common stock, par value $.01 per share (the "Company Common Stock"): (a) Common Stock of Acquisition. Each issued and outstanding share of common stock, par value $0.01 per share, of Acquisition shall be converted into one share of common stock, par value $0.01 per share, of the Surviving Corporation. (b) Cancellation of Treasury Shares and AGT-Owned Shares. Each Share (as defined in Section 2.1(c)) that is owned by the Company, or by AGT, Acquisition or any other subsidiary of AGT shall automatically be cancelled and retired and shall cease to exist, and no cash or other consideration shall be delivered or deliverable in exchange therefor. (c) Common Stock of the Company. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (each, a "Share"), other than Shares to be cancelled in accordance with Section 2.1(b) and any Dissenting Shares (as defined in Section 2.1(e)), shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each certificate evidencing any such Shares shall thereafter represent the right to receive, upon the surrender of such certificate in accordance with the provisions of Section 2.2, the Merger Consideration (as defined in Section 2.1(d)) multiplied by the number of Shares evidenced by the cancelled certificate. The holders of such certificates previously evidencing such Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided herein or by law. (d) Merger Consideration. The term "Merger Consideration" means (i) a cash payment in an amount equal to $30.00 (the "Per Share Cash Amount") and (ii) .6 fully paid and nonassessable shares of common stock, par value $.01 per share of AGT ("AGT Common Stock"). (e) Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, Shares issued and outstanding immediately prior to the Effective Time held by a holder (if any) who has the right to demand, and who properly demands, an appraisal of such Shares in accordance with Section 262 of the DGCL (or any successor provision) ("Dissenting Shares") shall not be converted into a right to receive the Merger Consideration, unless such holder fails to perfect or otherwise loses such holder's right to such appraisal, if any. If, after the Effective Time, such holder fails to perfect or loses any such right to appraisal, each such Share of such holder shall be treated as a Share that had been converted as of the Effective Time into the right to receive the Merger Consideration. At the Effective Time, any holder of Dissenting Shares shall cease to have any rights with respect thereto, except the rights provided in Section 262 of the DGCL (or any successor provision) and as provided in the immediately preceding sentence. The Company shall give prompt notice to AGT of any demands received by the Company for appraisal of Shares, and AGT shall have the right to participate in and direct all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of AGT, make any payment with respect to, or settle or offer to settle, any such demands. (f) Adjustment. If, based on the Merger Consideration payable pursuant to Section 2.1(d), the tax opinions referred to in Sections 6.2(c) and 6.3(f) hereof cannot be delivered as a result of the Merger potentially failing to satisfy continuity of interest requirements under applicable federal income tax principles relating to reorganizations under Section 368(a) of the Code (as reasonably determined by Weil, Gotshal & Manges LLP and O'Sullivan Graev & Karabell, LLP, such determination to be made (x) taking into account Dissenting Shares and cash issued in lieu of fractional shares, if any, (y) using the Closing Date Price as the measure of value of the shares of AGT Common Stock issued as Merger Consideration and (z) requiring that the total value of such AGT Common Stock issued as Merger Consideration represent no less than 45% of the total consideration issued and to be issued in the Merger to all holders of Shares), then the Merger Consideration shall be adjusted by reducing, to the extent necessary to enable the tax opinions to be rendered, the amount of cash to be delivered to the holders of Shares, for each Share converted, and in lieu thereof delivering to such holders such number of shares of AGT Common Stock equal to (x) the amount by which the cash component of the Merger Consideration is reduced, pursuant to this clause, in order to enable the rendering of the tax opinions, divided by (y) the Closing Date Price. For purposes hereof, the "Closing Date Price" of a share of AGT Common Stock shall be the closing sales price of AGT Common Stock as reported on the Nasdaq National Market ("NASDAQ") as of the close of the trading day immediately prior to the Closing Date. SECTION 2.2. Exchange of Certificates and Cash. (a) Exchange Agent. On the Effective Date, AGT shall deposit, or shall cause to be deposited, with or for the account of a bank or trust company designated by AGT, which shall be reasonably satisfactory to the Company (the "Exchange Agent"), for the benefit of the holders of Shares (other than Dissenting Shares), for exchange in accordance with this Article 2, through the Exchange Agent, (i) certificates evidencing the whole shares of AGT Common Stock issuable pursuant to Sections 2.1(d) and 2.1(f), to the extent applicable, in exchange for outstanding Shares, (ii) cash in the aggregate amount required to be exchanged for Shares pursuant to Sections 2.1(d) and 2.1(f), to the extent applicable, and (iii) cash in an amount sufficient to permit payment of cash payable in lieu of fractional shares pursuant to Section 2.2(d) (the cash described in (ii) and (iii) is hereafter collectively referred to as the "Exchange Cash Consideration" and such certificates for shares of AGT Common Stock, together with any dividends or distributions with respect thereto, and the Exchange Cash Consideration are hereafter collectively referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions, deliver the Merger Consideration to holders of Shares. Except as contemplated by Section 2.2(d) hereof, the Exchange Fund shall not be used for any other purpose. Any interest, dividends or other income earned on the investment of cash or other property held in the Exchange Fund (except for dividends on shares of AGT Common Stock) shall be for the account of AGT. (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, AGT will instruct the Exchange Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time evidenced outstanding Shares (the "Certificates"), other than Dissenting Shares, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as AGT may reasonably specify) and (ii) instructions to effect the surrender of the Certificates in exchange for the certificates evidencing shares of AGT Common Stock and cash. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration, multiplied by the number of Shares evidenced by such Certificate, and the Certificate so surrendered shall forthwith be cancelled. In the event of a transfer of ownership of Shares which is not registered in the transfer records of the Company, shares of AGT Common Stock and cash may be issued and paid in accordance with this Article 2 to a transferee if the Certificate evidencing such Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to evidence only the right to receive upon such surrender the Merger Consideration, multiplied by the number of Shares previously evidenced by such Certificate. (c) Distributions With Respect to Unexchanged Shares of AGT Common Stock. No dividends or other distributions with respect to shares of AGT Common Stock, with a record date after the Effective Time, shall be paid to the holder of any unsurrendered Certificate with respect to the shares of AGT Common Stock they are entitled to receive until the holder of such Certificate shall surrender such Certificate. (d) Fractional Shares. No fraction of a share of AGT Common Stock shall be issued in the Merger. In lieu of any such fractional shares, each holder of Shares entitled to receive shares of AGT Common Stock in the Merger, upon surrender of a Certificate for exchange pursuant to this Section 2.2, shall be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying (x) the per share closing price of a share of AGT Common Stock on the NASDAQ on the date of the Effective Time (or the last bid price in the absence of a trade) by (y) the fractional interest in AGT Common Stock to which such holder would otherwise be entitled (after taking into account all Shares then held of record by such holder). (e) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the holders of Shares for six months after the Effective Time shall be delivered to AGT, upon demand, and any holders of Shares who have not theretofore complied with this Article 2 shall thereafter look only to AGT for the Merger Consideration to which they are entitled pursuant to this Article 2. (f) No Liability. Neither AGT nor the Company shall be liable to any holder of Shares for any such shares of AGT Common Stock (or dividends or distributions with respect thereto) or cash from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) Withholding Rights. AGT or the Exchange Agent shall be entitled to deduct and withhold, from the consideration otherwise payable pursuant to this Agreement to any holder of Shares, such amounts as AGT or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by AGT or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Shares in respect of which such deduction and withholding was made by AGT or the Exchange Agent. SECTION 2.3. Stock Options. At the Effective Time, each holder of a then outstanding option to purchase Shares (collectively, "Options") under the Company's Non-Qualified Stock Option Plan, 1993 Non-Qualified Stock Option Plan or 1995 Non-Qualified Stock Option Plan (collectively, the "Stock Option Plans"), whether or not then exercisable or fully vested, in settlement thereof, shall be entitled to receive from the Company for each Share subject to such Option (whether or not then exercisable) an amount in cash equal to the difference between $60.00 and the per share exercise price of such Option, to the extent $60.00 is greater than the per share exercise price of such Option and all such Options under the Stock Option Plans shall be cancelled and cease to exist and the Stock Option Plans shall be terminated. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to each of AGT and Acquisition as follows: SECTION 3.1. Organization and Qualification. (a) The Company and each of its subsidiaries (as defined in Section 3.1(b)) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have or constitute a Material Adverse Effect (as defined below) on the Company. When used in any clause of this Agreement in connection with any party hereto, the term "Material Adverse Effect" means (i) a material adverse effect, or any development that is reasonably likely to result in a material adverse effect, on the business, financial condition or results of operations of such party and its subsidiaries, taken as whole, or (ii) an event, change, effect or development that is reasonably likely to materially impair or materially delay the ability of such party to consummate the transactions contemplated hereby. (b) Except as set forth in Section 3.1(b) of the Disclosure Schedule previously delivered by the Company to AGT (the "Company Disclosure Schedule"), the Company has no subsidiaries and does not own, directly or indirectly, beneficially or of record, any shares of capital stock or other security of any other entity or any other investment in any other entity. The term "subsidiary" shall mean, when used with reference to any party to this Agreement, any entity more than fifty percent (50%) of either the outstanding voting securities or the value of the outstanding equity securities or interests (including membership interests) of which are owned directly or indirectly by such party. (c) The Company and each of its subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have or constitute a Material Adverse Effect on the Company. (d) The Company has heretofore delivered to AGT accurate and complete copies of the certificate of incorporation and by-laws, as currently in effect, of the Company and each of its subsidiaries. SECTION 3.2. Capitalization of the Company and its Subsidiaries. (a) The authorized capital stock of the Company consists of: (i) 30,000,000 shares of Company Common Stock, of which, as of December 31, 1997, 7,358,817 shares were issued and outstanding and 1,099,500 shares were held in treasury and (ii) 5,000,000 shares of Preferred Stock, par value $.01 per share, 24,060 shares of Redeemable Preferred Stock - Series A, par value $1.00 per share and 21,940 shares of Redeemable Preferred Stock - Series B, par value $1.00 per share, no shares of which were issued and outstanding. All of the issued and outstanding shares of Company Common Stock have been validly issued, and are fully paid, nonassessable and free of preemptive rights. As of December 31, 1997, 842,500 shares of Company Common Stock were reserved for issuance and issuable upon or otherwise deliverable in connection with the exercise of outstanding Options issued pursuant to the Stock Option Plans. Since December 31, 1997, no shares of the Company's capital stock have been issued other than pursuant to the exercise of Options already in existence on such date and, since December 31, 1997, no stock options have been granted. Except as set forth above in this Section 3.2(a), as of the date hereof, there are outstanding (i) no shares of capital stock or other voting securities of the Company, (ii) no securities of the Company or its subsidiaries convertible into or exchangeable for shares of capital stock or voting securities of the Company, (iii) no options or other rights to acquire from the Company or its subsidiaries, and no obligations of the Company or its subsidiaries to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company, and (iv) no equity equivalents, interests in the ownership or earnings of the Company or its subsidiaries or other similar rights (including stock appreciation rights) (collectively, "Company Securities"). There are no outstanding obligations of the Company or its subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. Except as set forth in Section 3.2(a) of the Company Disclosure Schedule and except as contemplated by this Agreement, there are no stockholder agreements, voting trusts or other agreements or understandings to which the Company is a party or to which it is bound relating to the voting of any shares of capital stock of the Company. (b) Except as set forth in Section 3.2(b) of the Company Disclosure Schedule, all of the outstanding capital stock of the Company's subsidiaries is owned by the Company, directly or indirectly, free and clear of any Lien (as defined below) or any other limitation or restriction (including any restriction on the right to vote or sell the same, except as may be provided as a matter of law). There are no securities of the Company or its subsidiaries convertible into or exchangeable for, no options or other rights to acquire from the Company or its subsidiaries, and no other contract, understanding, arrangement or obligation (whether or not contingent) providing for the issuance or sale, directly or indirectly of, any capital stock or other ownership interests in, or any other securities of, any subsidiary of the Company. There are no outstanding contractual obligations of the Company or its subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other ownership interests in any subsidiary of the Company. For purposes of this Agreement, "Lien" means, with respect to any asset (including, without limitation, any security) any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. SECTION 3.3. Authority Relative to this Agreement. (a) The Company has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company (the "Company Board") and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than, with respect to the Merger, the approval and adoption of this Agreement by the holders of a majority of the then outstanding shares of Company Common Stock). This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). (b) The Company Board has, by unanimous vote of those present, duly and validly approved, and taken all corporate actions required to be taken by the Company Board for the consummation of, the transactions contemplated hereby, including the Merger, and resolved to recommend that the stockholders of the Company approve and adopt this Agreement. The action of the Company Board in approving this Agreement and the transactions contemplated hereby, including the Merger, is sufficient to render inapplicable to the Merger and this Agreement the provisions of Section 203 of the DGCL and, to the knowledge of the Company, no Delaware or other State takeover statute or similar statute or regulation applies to the Merger, this Agreement or any of the transactions contemplated hereby. SECTION 3.4. SEC Reports; Financial Statements. (a) The Company has filed all required forms, reports and documents with the Securities and Exchange Commission (the "SEC") since April 1, 1995, each of which has complied in all material respects with all applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), each as in effect on the dates such forms, reports and documents were filed. The Company has heretofore delivered to AGT, in the form filed with the SEC (including any amendments thereto), (i) its Annual Reports on Form 10-K for each of the fiscal years ended March 31, 1997 and March 31, 1996, (ii) all definitive proxy statements relating to the Company's meetings of stockholders (whether annual or special) held since April 1, 1995 and (iii) all other reports or registration statements filed by the Company with the SEC since April 1, 1995 (the "Company SEC Reports"). None of such forms, reports or documents, including, without limitation, any financial statements or schedules included or incorporated by reference therein, contained, when filed, any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company included in the Company SEC Reports complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and fairly presented, in conformity with United States generally accepted accounting principles ("GAAP") applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). Since April 1, 1997, except as set forth in the Company SEC Reports, there has not been any change, or any application or request for any change, by the Company or any of its subsidiaries in accounting principles, methods or policies for financial accounting or tax purposes (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). (b) The Company has heretofore made available to AGT a complete and correct copy of any material amendments or modifications, which have not yet been filed with the SEC, to agreements, documents or other instruments which previously had been filed by the Company with the SEC pursuant to the Exchange Act. SECTION 3.5. Information Supplied. None of the information supplied or to be supplied by the Company in writing for inclusion or incorporation by reference in (i) the registration statement on Form S-4 to be filed with the SEC by AGT in connection with the issuance of shares of AGT Common Stock in the Merger (the "S-4") will, at the time the S-4 is filed with the SEC and at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) the proxy statement relating to the meetings of the Company's stockholders and AGT's stockholders to be held in connection with the Merger (the "Joint Proxy Statement") will, at the date mailed to stockholders of the Company and AGT and at the times of the meetings of stockholders of the Company and AGT to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time, any event with respect to the Company, its officers and directors or any of its subsidiaries should occur which is required to be described in an amendment of, or a supplement to, the S-4 or the Joint Proxy Statement, the Company shall promptly so advise AGT and such event shall be so described, and such amendment or supplement (which AGT and the Company shall have a reasonable opportunity to review) shall be promptly filed with the SEC and, as required by law, disseminated to the stockholders of the Company. The Joint Proxy Statement, insofar as it relates to the meeting of the Company's stockholders to vote on the Merger, will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. SECTION 3.6. Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, state securities or blue sky laws, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the filing and recordation of the Certificate of Merger as required by the DGCL and as otherwise set forth in Section 3.6 to the Company Disclosure Schedule, no filing with or notice to, and no permit, authorization, consent or approval of, any court or tribunal or administrative, governmental or regulatory body, agency or authority (a "Governmental Entity") is necessary for the execution and delivery by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have a Material Adverse Effect on the Company. Except as set forth in Section 3.6 to the Company Disclosure Schedule, neither the execution, delivery and performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the respective certificate or articles of incorporation or bylaws (or similar governing documents) of the Company or any of its subsidiaries, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound, or (iii) violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Company or any of its subsidiaries or any of their respective properties or assets, except in the case of (ii) for violations, breaches or defaults which would not have a Material Adverse Effect on the Company. SECTION 3.7. No Default. None of the Company or its subsidiaries is in default or violation (and no event has occurred which with or without due notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (i) its certificate or articles of incorporation or bylaws (or similar governing documents), (ii) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company or any of its subsidiaries is now a party or by which any of them or any of their respective properties or assets may be bound or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Company, its subsidiaries or any of their respective properties or assets, except in the case of (ii) or (iii) for violations, breaches or defaults which would not have or constitute a Material Adverse Effect on the Company. SECTION 3.8. No Undisclosed Liabilities; Absence of Changes. Except as and to the extent publicly disclosed by the Company in the Company SEC Reports filed prior to the date of this Agreement or disclosed in Section 3.8 of the Company Disclosure Schedule, since April 1, 1997, (a) neither the Company nor its subsidiaries has incurred any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, and whether due or to become due or asserted or unasserted, which in the aggregate would have a Material Adverse Effect on the Company, (b) the business of the Company and its subsidiaries has been carried on only in the ordinary course consistent with past practices, (c) the Company has not paid any dividend or distribution in respect of, or redeemed or repurchased any Company Securities, (d) other than consistent with past practices, the Company has not entered into or consummated any transaction with any officer, director or affiliate of the Company or any person known by the Company to be an affiliate of any of them and (e) the Company has not changed its methods of accounting. SECTION 3.9. Litigation. Except as publicly disclosed by the Company in the Company SEC Reports or disclosed in Section 3.9 of the Company Disclosure Schedule, there is no suit, claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries or any of their respective properties or assets which (a) individually or in the aggregate, would have a Material Adverse Effect on the Company or (b) questions the validity of this Agreement or any action to be taken by the Company in connection with the consummation of the transactions contemplated hereby or could otherwise prevent or materially delay the consummation of the transactions contemplated by this Agreement. Except as publicly disclosed by the Company in the Company SEC Reports, none of the Company or its subsidiaries is subject to any outstanding order, writ, injunction or decree which would have a Material Adverse Effect on the Company. SECTION 3.10. Compliance with Applicable Law. Except as publicly disclosed by the Company in the Company SEC Reports, the Company and its subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary for the lawful conduct of their respective businesses (the "Company Permits"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals which would not have a Material Adverse Effect on the Company. Except as publicly disclosed by the Company in the Company SEC Reports, the Company and its subsidiaries are in compliance with the terms of the Company Permits, except where the failure so to comply would not have a Material Adverse Effect on the Company. Except as publicly disclosed by the Company in the Company SEC Reports, the businesses of the Company and its subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity except that no representation or warranty is made in this Section 3.10 with respect to Environmental Laws (as defined and addressed in Section 3.12(a)) and except for violations or possible violations which would not have a Material Adverse Effect on the Company. Except as publicly disclosed by the Company in the Company SEC Reports or as disclosed in Section 3.10 of the Company Disclosure Schedule, no investigation or review by any Governmental Entity with respect to the Company or its subsidiaries is pending or, to the knowledge of the Company, threatened, nor, to the knowledge of the Company, has any Governmental Entity indicated an intention to conduct the same, other than, in each case, those the outcome of which would not have a Material Adverse Effect on the Company. SECTION 3.11. Employee Plans. (a) Section 3.11(a) of the Company Disclosure Schedule lists all "employee benefit plans," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other employee benefit plans or other benefit arrangements, including executive compensation, directors' benefit, bonus or other incentive compensation, severance and deferred compensation plans and practices which the Company or any of its subsidiaries maintains, is a party to, contributes to or has any obligation to or liability for (each a "Company Benefit Plan" and collectively, the "Company Benefit Plans"). (b) True, correct and complete copies or descriptions of each Company Benefit Plan (and, where applicable, the most recent summary plan description, actuarial report, determination letter, most recent Form 5500 and trust agreement) have been delivered to AGT for review prior to the date hereof. (c) As of the date hereof, except as disclosed on Section 3.11(c) of the Company Disclosure Schedule, (i) all material payments required to be made by or under any Company Benefit Plan, any related trusts, or any collective bargaining agreement have been made; (ii) the Company and its subsidiaries have performed all material obligations required to be performed by them under any Company Benefit Plan; (iii) the Company Benefit Plans have been administered in material compliance with their terms and the requirements of ERISA, the Code and other applicable laws; (iv) there are no actions, suits, arbitrations or claims (other than routine claims for benefit) pending or, to the knowledge of the Company, threatened with respect to any Company Benefit Plan; and (v) the Company and its subsidiaries have no liability as a result of any "prohibited transaction" (as defined in Section 406 of ERISA and Section 4975 of the Code) for any excise tax or civil penalty. (d) Except as disclosed on Section 3.11(d) of the Company Disclosure Schedule, none of the Company Benefit Plans is subject to Title IV of ERISA. (e) Except as set forth on Section 3.11(e) of the Company Disclosure Schedule, the Company and its subsidiaries have not incurred any unsatisfied withdrawal liability with respect to any multiemployer plan as defined in Section 4001(a)(3) of ERISA. (f) Section 3.11(f) of the Company Disclosure Schedule sets forth a list of all "employee pension plans," as defined on Section 3(2) of ERISA, maintained by the Company or any of its subsidiaries on any trade or business (whether or not incorporated) which are under control, or which are treated as a single employer, with the Company under Section 414(b), (c), (m) or (o) of the Code (an "ERISA Affiliate"), or to which the Company, its Subsidiaries or any ERISA Affiliate contributed or is obligated to contribute thereunder ("Company Pension Plans"). Except as set forth on Section 3.11(f) of the Company Disclosure Schedule, each of the Pension Plans which is intended to be "qualified" within the meaning of Section 401(a) and 401(k), if applicable, and 501(a) of the Code has been determined by the Internal Revenue Service to be so "qualified" and, to the knowledge of the Company, there is no fact which would adversely affect the qualified status of any such Company Pension Plan. (g) Except as set forth on Section 3.11(g) of the Company Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment becoming due, or increase the amount of compensation due, to any current or former employee of the Company or any of its subsidiaries; (ii) increase any benefits otherwise payable under any Company Benefit Plan; or (iii) result in the acceleration of the time of payment or vesting of any such benefits. (h) If and to the extent applicable, no Company Benefit Plan has or has incurred an accumulated funding deficiency within the meaning of Section 302 of ERISA or Section 412 of the Code, nor has any waiver of the minimum funding standards of Section 302 of ERISA and Section 412 of the Code been requested of or granted by the IRS with respect to any Company Benefit Plan, nor has any lien in favor of any such plan arisen under Section 412(n) of the Code or Section 302(f) of ERISA. Except as indicated on Schedule 3.11(h) of the Company Disclosure Schedule, no Company Benefit Plan is self funded by the Company. Except as disclosed on Schedule 3.11(h) of the Company Disclosure Schedule, with respect to any insurance policy providing funding for benefits under any Company Benefit Plan, there is no liability of the Company in the nature of a retroactive rate adjustment, loss sharing arrangement, or other actual or contingent liability, and there will be no such liability arising wholly or partially out of events occurring prior to the execution of this Agreement, nor would there be any such liability if the Company cancelled such policy as of the date hereof. SECTION 3.12. Environmental Matters. (a) As used in this Agreement: (1) "Environmental Law" means any applicable federal, state or local law, statute, code, ordinance, policy, rule, regulation or other governmental requirement from any U.S. or foreign jurisdiction concerning the Release (as defined herein), handling, storage, processing, transportation or other use of any solid waste, industrial waste or Hazardous Substance (as defined herein) including, by way of example but not limitation, the Comprehensive Environmental Response, Compensation and Liability Act (43 U.S.C. ss. 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Clean Water Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (33 U.S.C. ss. 2601 et seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss. 136 et seq.) and the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), as such laws have been amended, and the regulations promulgated pursuant thereto, and any applicable and analogous state or local statutes, codes, policies or related requirements of governmental entities of foreign jurisdictions. (2) "Environmental Claim" means any allegation, notice of violation, action, claim, lien, demand, order, injunction, judgment, decree, ruling, assessment or arbitration award or directive (conditional or otherwise) by any court, arbitrator or governmental entity or any person for personal injury (including sickness, disease or death), tangible or intangible property damage, diminution in value, damage to the environment or natural resources, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions resulting from or based upon (a) the existence, or the continuation of the existence, of a Release (including, without limitation, sudden or non-sudden accidental or non-accidental Release) of, or exposure to, any Hazardous Substance, odor, audible noise or any solid or industrial waste; (b) the transportation, storage, treatment or disposal of solid waste, industrial waste or Hazardous Substances, in connection with the past or present operations of the Company, any of its subsidiaries or any of their respective predecessors or assigns; or (c) the violation, or alleged violation, of any Environmental Laws, orders, injunctions, judgments, decrees, rulings, assessments, arbitration awards, Environmental Permits or rulings, orders or decisions of any court arbitrator or Government Entity relating to environmental matters. (3) "Environmental Permit" means any permit, approval, authorization, license, variance, registration, permit application, notification, program development and implementation, or permission required under any applicable Environmental Law. (4) "Hazardous Substance" means any substance, material or waste which is regulated under any Environmental Law or by any applicable governmental entity, governmental entity in the jurisdictions in which the Company or any subsidiary or any of their respective predecessors or assigns conducts or has conducted business, or the United States, including, without limitation, any material or substance which is defined as a "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste" or "restricted hazardous waste," "subject waste," "contaminant," "toxic waste," "toxic substance" or "residual waste'" under any Environmental Law, including, but not limited to, radioactive materials, petroleum products, asbestos and polychlorinated biphenyls. (5) "Property" means any land, facility or operations currently or previously owned, leased, subleased or otherwise used by the Company, any of its subsidiaries or any of their respective predecessors or assigns. (6) "Release" means any intentional or unintentional, continuous or intermittent release, spill, emission, seepage, leaking, pumping, uncontrolled loss, injection, deposit, disposal, discharge, dispersal, leaching or migration into the environment, or any building surface, or onto or from any Property of any Hazardous Substance, including the movement of any Hazardous Substance through or in the air, soil, surface water, ground water or otherwise. (7) "Remedial Action" means all actions, including, without limitation, any capital expenditures, required or voluntarily undertaken to (i) clean up, remove, treat, or in any other way address any Hazardous Substance or any other material required pursuant to applicable Environmental Law; (ii) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Substance or any other material required pursuant to applicable Environmental Law, (iii) perform pre-remedial studies and investigations or post-remedial monitoring and care including the conduct of risk assessments and negotiation with applicable governmental entities regarding Hazardous Substance or any other material required pursuant to applicable Environmental Law; or (iv) bring the Properties into compliance with all applicable Environmental Laws and Environmental Permits. (b) Except as disclosed in Section 3.12(b) of the Company Disclosure Schedule, the Company and each of its subsidiaries, with respect to its use of and operations at each Property, is in compliance in all respects with all applicable Environmental Laws, except where the failure to so be in compliance would not, individually or in the aggregate, have a Material Adverse Effect on the Company. (c) Except as disclosed in Section 3.12(c) of the Company Disclosure Schedule or as disclosed in any Company SEC document filed with the SEC prior to the date hereof, as of the date hereof, neither the Company nor any of its subsidiaries or any of their respective predecessors has received any written communication form a court, arbitrator or governmental entity or any other person that alleges that the Company or any such subsidiary or predecessor is not in compliance, in any respect, with any Environmental Law or has liability thereunder, except, in each case it is reasonably unlikely, individually or in the aggregate, to have a Material Adverse Effect on the Company. (d) Except as disclosed in Section 3.12(d) of the Company Disclosure Schedule, none of the operations or Properties of the Company or any of its subsidiaries or any of their respective predecessors or assigns is the subject of investigation by any governmental entity whether U.S., State, local or foreign, respecting (A) Environmental Laws, (B) Remedial Action or (C) any Environmental Claim arising from a Release or otherwise of any Hazardous Substance or any other substance regulated under any Environmental Law, which in each case would, individually or in the aggregate, have a Material Adverse Effect on the Company. (e) Except as disclosed in Section 3.12(e) of the Company Disclosure Schedule, the Company, each of its subsidiaries and any of their respective predecessors have filed all notices required to be filed under all Environmental Laws reporting any Release, except where failure to file such notices would not, individually or in the aggregate, have a Material Adverse Effect on the Company. (f) Except as disclosed in Section 3.12(f) of the Company Disclosure Schedule, or as disclosed in any Company SEC Report, neither the Company nor any of its subsidiaries has any contingent liabilities with respect to its business or that of its predecessors in connection with any Hazardous Substance or Environmental Law that would, individually or in the aggregate, have a Material Adverse Effect on the Company. (g) Except as disclosed in Section 3.12(g) of the Company Disclosure Schedule, or as disclosed in any Company SEC Report, as of the date hereof, underground storage tanks are not located on or under any Property and there have been no Releases of Hazardous Substances on, in or under any Property or other real property for which the Company or any of its subsidiaries would be responsible or potentially responsible and that would have a Material Adverse Effect on the Company. (h) Except as disclosed in Section 3.12(h) of the Company Disclosure Schedule, or as disclosed in any Company SEC Report filed with the SEC prior to the date hereof, neither the Company nor any of its subsidiaries or any of their respective predecessors is subject to any judicial, administrative or arbitral actions, suits, proceedings (public or private), written claims or governmental proceedings alleging the violation of any Environmental Law or Environmental Permit that is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on the Company. (i) Except as disclosed in Section 3.12(i) of the Company Disclosure Schedule, or as disclosed in any Company SEC Document filed with the SEC prior to the date hereof, neither the Company nor any of its subsidiaries or any of their respective predecessors or assigns, as a result of their respective past and current operations, has caused or permitted any Hazardous Substances to remain or be disposed of, either on or under any Property or on any real property not permitted to accept, store or dispose of such Hazardous Substances, that would, individually or in the aggregate, have a Material Adverse Effect on the Company. SECTION 3.13. Tax Matters. Except as disclosed on Section 3.13 of the Company Disclosure Schedule: (a) The Company and each of its subsidiaries, and each affiliated group (within the meaning of Section 1504 of the Code) of which the Company or any of its subsidiaries is or has ever been a member, has (or, by the Closing Date, will have) timely filed with the appropriate taxing authorities all federal income tax returns and all other material tax returns and reports required to be filed by it through the Closing Date. All such tax returns are (or will be) complete and correct in all material respects. Except to the extent adequately reserved for in accordance with GAAP, the Company and each of its subsidiaries has (or, by the Closing Date, will have) paid (or the Company has paid on its subsidiaries' behalf) all taxes due in respect of the taxable periods covered by such tax returns. The most recent consolidated financial statements contained in the Company SEC Reports reflect an adequate reserve in accordance with GAAP for all taxes payable by the Company and its subsidiaries for all taxable periods and portions thereof through the date of such financial statements. The Company has previously made available or delivered to AGT copies of all income and franchise tax returns filed by the Company and each of its subsidiaries for their taxable years ended in 1995, 1996 and 1997. For purposes of this Agreement, "tax" or "taxes" shall mean all taxes, charges, fees, imposts, levies, gaming or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) and shall include any joint and/or transferee liability in respect of taxes or any liability in respect of taxes imposed by contract, tax sharing agreement, tax indemnity agreement or any similar agreement. "Tax returns" shall mean any report, return, document, declaration or any other information or filing required to be supplied to any taxing authority or jurisdiction (foreign or domestic) with respect to taxes, including, without limitation, information returns, any document with respect to or accompanying payments or estimated taxes, or with respect to or accompanying requests for the extension of time in which to file any such report, return document, declaration or other information. (b) No material deficiencies for any taxes have been proposed, asserted or assessed against the Company or any of its subsidiaries that have not been fully paid or adequately provided for in the appropriate financial statements of the Company and its subsidiaries, no State where the Company or one of its subsidiaries does not file an income or franchise tax return has asserted in writing during the preceding five years that such corporation should be so filing, no requests for waivers of the time to assess any taxes are pending, and no power of attorney with respect to any taxes has been executed or filed with any taxing authority. No material issues relating to taxes have been raised in writing by the relevant taxing authority during any presently pending audit or examination. The federal income tax returns of the Company and each of its subsidiaries consolidated in such tax returns have been reviewed or passed upon by the Internal Revenue Service for all years through March 31, 1994. (c) No material Liens for taxes exist with respect to any assets or properties of the Company or any of its subsidiaries, except for statutory liens for taxes not yet due. (d) None of the Company or any of its subsidiaries is a party to or is bound by any tax sharing agreement, tax indemnity obligation or similar agreement, arrangement or practice with respect to taxes (including any advance pricing agreement, closing agreement or other agreement relating to taxes with any taxing authority) (other than any such tax sharing agreement among the Company and its subsidiaries as set forth in Section 3.13(d) of the Company Disclosure Schedule). (e) None of the Company or any of its subsidiaries has taken, agreed to take or will take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. (f) Neither the Company nor any of its subsidiaries has made, will make, is obligated to make or is party to any employment, severance or termination agreement, other compensation arrangement or Company Benefit Plan currently in effect which provides for the making of any payment (whether in cash or property or the vesting of property) that would not be deductible by reason of Sections 280G or 162(m) of the Code. (g) The Company and its subsidiaries have complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of taxes. (h) No federal, state, local or foreign audits or other administrative proceedings or court proceedings are presently pending or threatened in writing with regard to any federal income or material state, local or foreign taxes or tax returns of the Company or its subsidiaries and neither the Company nor any of its subsidiaries has received a written notice of any pending audit or proceeding. (i) Neither the Company nor any of its subsidiaries has agreed to or is required to make any adjustment under Section 481(a) of the Code. (j) Neither the Company nor any of its subsidiaries has (i) with regard to any assets or property held or acquired by any of them, filed a consent to the application of Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by the Company or any of its subsidiaries, (ii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any similar provision of state, local or foreign law or (iii) received or filed any requests for rulings or determinations in respect of any taxes within the last five years. (k) No property owned by the Company or any of its subsidiaries (i) is property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986; (ii) constitutes "tax exempt use property" within the meaning of Section 168(h)(1) of the Code; or (iii) is "tax exempt bond financed property" within the meaning of Section 168(g) of the Code. (l) The Company and each of its subsidiaries are not currently, have not been within the last five years and do not anticipate becoming a "United States real property holding company" within the meaning of Section 897(c) of the Code. (m) The Company is not a foreign person within the meaning of Section 1445(b)(2) of the Code. (n) No subsidiary of the Company owns any Shares. SECTION 3.14. Intellectual Property. (a) Except as set forth in Section 3.14 of the Company Disclosure Schedule, the Company or one of its subsidiaries owns or possesses (and will own or possess as of the Effective Time) all right, title and interest in and to, or a valid and enforceable license or other right to use all of the Intellectual Property (as defined below), and all of the right, benefits and privileges associated therewith, that is material to the conduct of the business of the Company and its subsidiaries as currently conducted (and as conducted as of the Effective Time). To the knowledge of the Company, neither the Company nor any of its subsidiaries has infringed, misappropriated or otherwise violated any Intellectual Property of any other person. To the knowledge of the Company, no person is materially infringing upon any Intellectual Property right of the Company or any of its subsidiaries. (b) The term "Intellectual Property" means all patents, patent applications and patent disclosures; all inventions (whether or not patentable and whether or not reduced to practice); all trademarks, service marks, trade dress, trade names and corporate names and all the goodwill associated therewith; all mask works; all registered and unregistered statutory and common law copyrights; all registrations, applications and renewals for any of the compositions, know-how, manufacturing and production processes and techniques, research information, drawings, specifications, design plans, improvements, proposals, technical and computer data, documentation and software, financial proposals, technical and computer data, documentation and software, financial business and marketing plans, customer and supplier lists and related proprietary information, marketing materials and all other proprietary rights. SECTION 3.15. Opinion of Financial Advisor. Donaldson, Lufkin & Jenrette Securities Corp. (the "Company Financial Advisor") has delivered to the Company Board its opinion, dated the date of this Agreement, to the effect that, as of such date, the Merger Consideration is fair to the holders of Shares from a financial point of view, and such opinion has not been withdrawn or modified. SECTION 3.16. Brokers. No broker, finder or investment banker (other than the Company Financial Advisor, a true and correct copy of whose engagement agreement has been provided to AGT) is entitled to any brokerage, finder's or other fee or commission or expense reimbursement in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company or any of its affiliates. SECTION 3.17. Material Contracts. (a) The Company has delivered or otherwise made available to AGT true, correct and complete copies of all contracts and agreements (and all amendments, modifications and supplements thereto and all side letters to which the Company is a party affecting the obligations of any party thereunder) to which the Company or any of its subsidiaries is a party or by which any of its properties or assets are bound that are material to the business, properties or assets of the Company and its subsidiaries taken as a whole, including, without limitation, (I) contracts or agreements with any supplier or customer, in each case which could result in the payment or receipt of monies in excess of $2,500,000 in any calendar year period; (II) to the extent any of the following are, individually or in the aggregate, material to the business, properties or assets of the Company and its subsidiaries taken as a whole, all: (i) employment, product design or development, personal services, consulting, non-competition, severance or indemnification contracts (including, without limitation, any contract to which the Company or any of its subsidiaries is a party involving employees of the Company or any of its subsidiaries); (ii) licensing, merchandising or distribution agreements; (iii) contracts granting a right of first refusal or first negotiation; (iv) partnership or joint venture agreements; (v) agreements for the acquisition, sale, lease or other disposition of material properties or assets of the Company or its subsidiaries or predecessors (by merger, purchase or sale of assets or stock or otherwise) entered into since April 1, 1995 and (vi) contracts or agreements with any Governmental Entity and (III) all commitments and agreements to enter into any of the foregoing items in (I) or (II) above (collectively, together with any such contracts entered into in accordance with Section 5.1 hereof, the "Contracts"). (b) Each of the Contracts is valid and enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity), and there is no default under any Contract so listed either by the Company or, to the knowledge of the Company, by any other party thereto, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a default thereunder by the Company or, to the knowledge of the Company, any other party, in any such case in which such default or event would have a Material Adverse Effect on the Company. (c) No party to any such Contract has given notice to the Company of or made a claim against the Company with respect to any breach or default thereunder, in any such case in which such breach or default would have a Material Adverse Effect on the Company. SECTION 3.18. Labor Matters. Except as set forth in Section 3.18 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries is a party to or bound by any employment, severance compensation, labor or collective bargaining agreement pertaining to any current or former directors, officers, employees or consultants of the Company or any of its subsidiaries. No labor organization or group of employees of the Company or any of its subsidiaries has made a pending written demand for recognition or certification. SECTION 3.19. Insurance. Except as set forth in Section 3.19 of the Company Disclosure Schedule, each of the Company and its subsidiaries is, and has been continuously since April 1, 1996, insured with financially responsible insurers in such amounts and against such risks and losses as are customary for companies conducting the business as conducted by the Company and its subsidiaries during such time period. Except as set forth in Section 3.19 of the Company Disclosure Schedule, since April 1, 1996, neither the Company nor any of its subsidiaries has received notice of cancellation or termination (or a denial of coverage) with respect to any material insurance policy of the Company or its subsidiaries. The insurance policies of the Company and its subsidiaries are valid and enforceable policies. SECTION 3.20. Customers. Except as set forth in Section 3.20 of the Company Disclosure Schedule, no customer from which the Company has received revenues of at least $2,500,000 in any of the past three fiscal years has: (a) threatened within the last twelve months to terminate, or to the knowledge of the Company, intends to cancel or otherwise terminate, the relationship of such person with the Company or any of its subsidiaries or (b) has during the last twelve months decreased materially or threatened in writing to decrease or limit materially its usage or purchase of the services or products of the Company or any of its subsidiaries, or, to the knowledge of the Company, intends to modify materially its relationship with the Company or any of its subsidiaries. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF AGT AND ACQUISITION AGT and Acquisition hereby represent and warrant to the Company as follows: SECTION 4.1. Organization and Qualification. (a) AGT is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Material Adverse Effect on AGT. (b) Except as set forth in Section 4.1(b) of the Disclosure Schedule previously delivered by AGT to the Company (the "AGT Disclosure Schedule"), AGT has no subsidiaries and does not own, directly or indirectly, beneficially or of record, any shares of capital stock or other security of any other entity or any other investment in any other entity. (c) AGT is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have or constitute a Material Adverse Effect on AGT. (d) AGT has heretofore made available to the Company accurate and complete copies of the Certificates of Incorporation and Bylaws, as currently in effect, of AGT and Acquisition. SECTION 4.2. Capitalization of AGT and its Subsidiaries. (a) The authorized capital stock of AGT consists of (i) 40,000,000 shares of AGT Common Stock, of which, as of December 31, 1997, 17,836,383 shares were issued and outstanding, and (ii) 10,000,000 shares of preferred stock, no par value, no shares of which were issued and outstanding. All of the issued and outstanding shares of AGT Common Stock have been validly issued, and are fully paid, nonassessable and free of preemptive rights. As of December 31, 1997, 2,209,200 shares of AGT Common Stock were reserved for issuance and issuable upon or otherwise deliverable in connection with the exercise of outstanding options. Except as described in the AGT SEC Reports (as defined in Section 4.4(a)) and except as set forth in Section 4.2(a) of the AGT Disclosure Schedule since December 31, 1997, no shares of AGT's capital stock have been issued other than pursuant to stock options already in existence on such date, and no stock options have been granted. Except (i) as described in the AGT SEC Reports and (ii) as set forth above, as of the date hereof, there are outstanding (A) no shares of capital stock or other voting securities of AGT, (B) no securities of AGT or its subsidiaries convertible into or exchangeable for shares of capital stock or voting securities of AGT, (C) no options or other rights to acquire from AGT or its subsidiaries, and no obligations of AGT or its subsidiaries to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of AGT, and (D) no equity equivalents, interests in the ownership or earnings of AGT or its subsidiaries or other similar rights (including stock appreciation rights) (collectively, "AGT Securities"). There are no outstanding obligations of AGT or any of its subsidiaries to repurchase, redeem or otherwise acquire any AGT Securities. Except as set forth in the AGT SEC Reports, there are no stockholder agreements, voting trusts or other agreements or understandings to which AGT is a party or to which it is bound relating to the voting of any shares of capital stock of AGT. (b) All of the outstanding capital stock of AGT's subsidiaries (including Acquisition) is owned by AGT, directly or indirectly, free and clear of any Lien or any other limitation or restriction (including any restriction on the right to vote or sell the same, except as may be provided as a matter of law). There are no securities of AGT or its subsidiaries convertible into or exchangeable for, no options or other rights to acquire from AGT or its subsidiaries, and no other contract, understanding, arrangement or obligation (whether or not contingent) providing for the issuance or sale, directly or indirectly, of any capital stock or other ownership interests in, or any other securities of, any subsidiary of AGT. There are no outstanding contractual obligations of AGT or its subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other ownership interests in any subsidiary of AGT. SECTION 4.3. Authority Relative to this Agreement. (a) Each of AGT and Acquisition has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Boards of Directors of AGT (the "AGT Board") and Acquisition and by AGT as the sole stockholder of Acquisition, and no other corporate proceedings on the part of AGT or Acquisition are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than, with respect to the issuance of AGT Common Stock as required by the terms of this Agreement (the "Share Issuance"), the approval and adoption of the Share Issuance by the holders of a majority of the total votes cast on the approval and adoption of the Share Issuance at the meeting of AGT's stockholders called for such purpose). This Agreement has been duly and validly executed and delivered by each of AGT and Acquisition and constitutes a valid, legal and binding agreement of each of AGT and Acquisition, enforceable against each of AGT and Acquisition in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). (b) The AGT Board has, by unanimous vote of those present, duly and validly approved, and taken all corporate actions required to be taken by the AGT Board for the consummation of, the transactions contemplated hereby, including the Merger, and resolved to recommend that the stockholders of AGT approve and adopt the Share Issuance. The action of the AGT Board in approving this Agreement and the transactions contemplated hereby, including the Merger, is sufficient to render inapplicable to the Merger and this Agreement the provisions of Section 203 of the DGCL and, to the knowledge of AGT, no Delaware or other State takeover statute or similar statute or regulation applies to the Merger, this Agreement or any of the transactions contemplated hereby. SECTION 4.4. SEC Reports; Financial Statements. (a) AGT has filed all required forms, reports and documents with the SEC since April 16, 1996, each of which has complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act, each as in effect on the dates such forms, reports and documents were filed. AGT has heretofore made available to the Company, in the form filed with the SEC (including any amendments thereto), (i) its Annual Reports on Form 10-K for the fiscal year ended December 31, 1996, (ii) all definitive proxy statements relating to AGT's meetings of stockholders (whether annual or special) held since April 16, 1996 and (iii) all other reports or registration statements filed by AGT with the SEC since April 16, 1996 (the "AGT SEC Reports"). None of such forms, reports or documents, including, without limitation, any financial statements or schedules included or incorporated by reference therein, contained, when filed, any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of AGT included in the AGT SEC Reports complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto and fairly presented, in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of AGT and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). Since January 1, 1997, except as set forth in the AGT SEC Reports, there has not been any change, or any application or request for any change, by AGT or any of its subsidiaries in accounting principles, methods or policies for financial accounting or tax purposes (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). (b) AGT has heretofore made available to the Company a complete and correct copy of any material amendments or modifications, which have not yet been filed with the SEC, to agreements, documents or other instruments which previously had been filed by AGT with the SEC pursuant to the Exchange Act. SECTION 4.5. Information Supplied. None of the information supplied or to be supplied by AGT or Acquisition in writing for inclusion or incorporation by reference in (i) the S-4 will, at the time the S-4 is filed with the SEC and at the time it becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) the Joint Proxy Statement will, at the date mailed to stockholders of the Company and AGT and at the times of the meetings of stockholders of the Company and AGT to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time, any event with respect to AGT, its officers and directors or any of its subsidiaries should occur which is required to be described in an amendment of, or a supplement to, the S-4 or the Joint Proxy Statement, AGT shall promptly so advise the Company and such event shall be so described, and such amendment or supplement (which the Company and AGT shall have a reasonable opportunity to review) shall be promptly filed with the SEC. The S-4 will comply as to form in all material respects with the provisions of the Securities Act and the rules and regulations thereunder. The Joint Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. SECTION 4.6. Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, state securities or blue sky laws, the HSR Act, the filing and recordation of the Certificate of Merger as required by the DGCL and as otherwise set forth in Section 4.6 of the AGT Disclosure Schedule, no filing with or notice to, and no permit, authorization, consent or approval of, any Governmental Entity is necessary for the execution and delivery by AGT or Acquisition of this Agreement or the consummation by AGT or Acquisition of the transactions contemplated hereby, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have or constitute a Material Adverse Effect on AGT. Except as set forth in Section 4.6 of the AGT Disclosure Schedule, neither the execution, delivery and performance of this Agreement by AGT or Acquisition nor the consummation by AGT or Acquisition of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the respective certificate or articles of incorporation or bylaws (or similar governing documents) of AGT or Acquisition or any of AGT's subsidiaries, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which AGT or Acquisition or any of AGT's subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound or (iii) violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to AGT or Acquisition or any of AGT's subsidiaries or any of their respective properties or assets, except in the case of (ii) for violations, breaches or defaults which would not have or constitute a Material Adverse Effect on AGT. SECTION 4.7. No Default. None of AGT or its subsidiaries is in default or violation (and no event has occurred which with or without due notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (i) its certificate or articles of incorporation or bylaws (or similar governing documents), (ii) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which AGT or any of its subsidiaries is now a party or by which any of them or any of their respective properties or assets may be bound or (iii) any order, writ, injunction, decree, law, statute, rule or regulation applicable to AGT, its subsidiaries or any of their respective properties or assets, except in the case of (ii) or (iii) for violations, breaches or defaults which would not have or constitute a Material Adverse Effect on AGT. SECTION 4.8. No Undisclosed Liabilities; Absence of Changes. Except as and to the extent publicly disclosed by AGT in the AGT SEC Reports filed prior to the date of this Agreement, or as set forth in Section 4.8 of the AGT Disclosure Schedule, since January 1, 1997, (a) neither AGT nor its subsidiaries has incurred any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, and whether due or to become due or asserted or unasserted, which would have a Material Adverse Effect on AGT, (b) AGT has conducted its business in the ordinary course consistent with past practices, (c) AGT has not paid any dividend or distribution in respect of, or redeemed or repurchased any AGT Securities, (d) other than consistent with past practices, AGT has not entered into or consummated any transaction with any officer, director or affiliate of AGT or any person known by AGT to be an affiliate of any of them and (e) AGT has not changed its methods of accounting. SECTION 4.9. Litigation. Except as publicly disclosed by AGT in the AGT SEC Reports or disclosed in Section 4.9 of the AGT Disclosure Schedule, there is no suit, claim, action, proceeding or investigation pending or, to the knowledge of AGT, threatened against AGT or any of its subsidiaries or any of their respective properties or assets which (a) individually or in the aggregate, would have or constitute a Material Adverse Effect on AGT or (b) questions the validity of this Agreement or any action to be taken by AGT in connection with the consummation of the transactions contemplated hereby or could otherwise prevent or materially delay the consummation of the transactions contemplated by this Agreement. Except as publicly disclosed by AGT in the AGT SEC Reports, none of AGT or its subsidiaries is subject to any outstanding order, writ, injunction or decree which would have a Material Adverse Effect on AGT. SECTION 4.10. Compliance with Applicable Law. Except as publicly disclosed by AGT in the AGT SEC Reports, AGT and its subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary for the lawful conduct of their respective businesses (the "AGT Permits"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals which would not have a Material Adverse Effect on AGT. Except as publicly disclosed by AGT in the AGT SEC Reports, AGT and its subsidiaries are in compliance with the terms of the AGT Permits, except where the failure so to comply could not reasonably be expected to have a Material Adverse Effect on AGT. Except as publicly disclosed by AGT in the AGT SEC Reports, the businesses of AGT and its subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity except that no representation or warranty is made in this Section 4.10 with respect to Environmental Laws and except for violations or possible violations which would not have a Material Adverse Effect on AGT. Except as publicly disclosed by AGT in the AGT SEC Reports or as disclosed in Section 4.10 of the AGT Disclosure Schedule, no investigation or review by any Governmental Entity with respect to AGT or its subsidiaries is pending or, to the knowledge of AGT, threatened, nor to the knowledge of AGT, has any Governmental Entity indicated an intention to conduct the same, other than, in each case, those the outcome of which would not have a Material Adverse Effect on AGT. SECTION 4.11. Employee Plans. (a) Section 4.11(a) of the AGT Disclosure Schedule lists all "employee benefit plans," as defined in Section 3(3) of the ERISA and all other employee benefit plans or other benefit arrangements, including executive compensation, directors' benefit, bonus or other incentive compensation, severance and deferred compensation plans and practices which AGT or any of its subsidiaries maintains, is a party to, contributes to or has any obligation to or liability for (each an "AGT Benefit Plan" and collectively, the "AGT Benefit Plans"). (b) True, correct and complete copies or descriptions of each AGT Benefit Plan (and, where applicable, the most recent summary plan description, actuarial report, determination letter, most recent Form 5500 and trust agreement) have been made available to the Company for review prior to the date hereof. (c) As of the date hereof, except as disclosed on Section 4.11(c) of the AGT Disclosure Schedule, (i) all material payments required to be made by or under any AGT Benefit Plan, any related trusts, or any collective bargaining agreement have been made; (ii) AGT and its subsidiaries have performed all material obligations required to be performed by them under any AGT Benefit Plan; (iii) the AGT Benefit Plans have been administered in material compliance with their terms and the requirements of ERISA, the Code and other applicable laws; (iv) there are no actions, suits, arbitrations or claims (other than routine claims for benefit) pending or, to the knowledge of AGT, threatened with respect to any AGT Benefit Plan; and (v) AGT and its subsidiaries have no liability as a result of any "prohibited transaction" (as defined in Section 406 of ERISA and Section 4975 of the Code) for any excise tax or civil penalty. (d) Except as disclosed on Section 4.11(d) of the AGT Disclosure Schedule, none of the AGT Benefit Plans is subject to Title IV of ERISA. (e) Except as set forth on Section 4.11(e) of the AGT Disclosure Schedule, AGT and its subsidiaries have not incurred any unsatisfied withdrawal liability with respect to any multiemployer plan as defined in Section 4001(a)(3) of ERISA. (f) Section 4.11(f) of the AGT Disclosure Schedule sets forth a list of all "employee pension plans," as defined on Section 3(2) of ERISA, maintained by AGT or any of its subsidiaries on any trade or business (whether or not incorporated) which are under control, or which are treated as a single employer, with AGT under Section 414(b), (c), (m) or (o) of the Code (an "AGT ERISA Affiliate"), or to which AGT, its Subsidiaries or any AGT ERISA Affiliate contributed or is obligated to contribute thereunder ("AGT Pension Plans"). Except as set forth on Section 4.11(f) of the AGT Disclosure Schedule, each of the AGT Pension Plans which is intended to be "qualified" within the meaning of Section 401(a) and 401(k), if applicable, and 501(a) of the Code has been determined by the Internal Revenue Service to be so "qualified" and, to the knowledge of AGT, there is no fact which would adversely affect the qualified status of any such AGT Pension Plan. (g) Except as set forth on Section 4.11(g) of the AGT Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment becoming due, or increase the amount of compensation due, to any current or former employee of AGT or any of its subsidiaries; (ii) increase any benefits otherwise payable under any AGT Benefit Plan; or (iii) result in the acceleration of the time of payment or vesting of any such benefits. (h) If and to the extent applicable, no AGT Benefit Plan has or has incurred an accumulated funding deficiency within the meaning of Section 302 of ERISA or Section 412 of the Code, nor has any waiver of the minimum funding standards of Section 302 of ERISA and Section 412 of the Code been requested of or granted by the IRS with respect to any AGT Benefit Plan, nor has any lien in favor of any such plan arisen under Section 412(n) of the Code or Section 302(f) of ERISA. Except as indicated on Schedule 4.11(h) of the AGT Disclosure Schedule, no AGT Benefit Plan is self funded by AGT. Except as disclosed on Schedule 4.11(h) of the AGT Disclosure Schedule, with respect to any insurance policy providing funding for benefits under any AGT Benefit Plan, there is no liability of AGT in the nature of a retroactive rate adjustment, loss sharing arrangement or other actual or contingent liability, and there will be no such liability arising wholly or partially out of events occurring prior to the execution of this Agreement, nor would there be any such liability if AGT cancelled such policy as of the date hereof. SECTION 4.12. Environmental Matters. (a) Except as disclosed in Section 4.12(a) of the AGT Disclosure Schedule, AGT and each of its subsidiaries, with respect to its use of and operations at each Property, is in compliance in all respects with all applicable Environmental Laws, except where the failure to so be in compliance would not, individually or in the aggregate, have a Material Adverse Effect on AGT. (b) Except as disclosed in Section 4.12(b) of the AGT Disclosure Schedule or as disclosed in any AGT SEC document filed with the SEC prior to the date hereof, as of the date hereof, neither AGT nor any of its subsidiaries or any of their respective predecessors has received any written communication form a court, arbitrator or governmental entity or any other person that alleges that AGT or any such subsidiary or predecessor is not in compliance, in any respect, with any Environmental Law or has liability thereunder, except, in each case it is reasonably unlikely, individually or in the aggregate, to have a Material Adverse Effect on AGT. (c) Except as disclosed in Section 4.12(c) of the AGT Disclosure Schedule, none of the operations or Properties of AGT or any of its subsidiaries or any of their respective predecessors or assigns is the subject of investigation by any governmental entity whether U.S., State, local or foreign, respecting (A) Environmental Laws, (B) Remedial Action or (C) any Environmental Claim arising from a Release or otherwise of any Hazardous Substance or any other substance regulated under any Environmental Law, which in each case would, individually or in the aggregate, have a Material Adverse Effect on AGT. (d) Except as disclosed in Section 4.12(d) of the AGT Disclosure Schedule, AGT, each of its subsidiaries and any of their respective predecessors have filed all notices required to be filed under all Environmental Laws reporting any Release, except where failure to file such notices would not, individually or in the aggregate, have a Material Adverse Effect on AGT. (e) Except as disclosed in Section 4.12(e) of the AGT Disclosure Schedule, or as disclosed in any AGT SEC Report, neither AGT nor any of its subsidiaries has any contingent liabilities with respect to its business or that of its predecessors in connection with any Hazardous Substance or Environmental Law that would, individually or in the aggregate, have a Material Adverse Effect on AGT. (f) Except as disclosed in Section 4.12(f) of the AGT Disclosure Schedule, or as disclosed in any AGT SEC Report, as of the date hereof, underground storage tanks are not located on or under any Property and there have been no Releases of Hazardous Substances on, in or under any Property or other real property for which AGT or any of its subsidiaries would be responsible or potentially responsible and that would have a Material Adverse Effect on AGT. (g) Except as disclosed in Section 4.12(g) of the AGT Disclosure Schedule, or as disclosed in any AGT SEC Report filed with the SEC prior to the date hereof, neither AGT nor any of its subsidiaries or any of their respective predecessors is subject to any judicial, administrative or arbitral actions, suits, proceedings (public or private), written claims or governmental proceedings alleging the violation of any Environmental Law or Environmental Permit that is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect on AGT. (h) Except as disclosed in Section 4.12(h) of the AGT Disclosure Schedule, or as disclosed in any AGT SEC Document filed with the SEC prior to the date hereof, neither AGT nor any of its subsidiaries or any of their respective predecessors or assigns, as a result of their respective past and current operations, has caused or permitted any Hazardous Substances to remain or be disposed of, either on or under any Property or on any real property not permitted to accept, store or dispose of such Hazardous Substances, that would, individually or in the aggregate, have a Material Adverse Effect on AGT. SECTION 4.13. Tax Matters. Except as disclosed on Section 4.13 of the AGT Disclosure Schedule: (a) AGT and each of its subsidiaries, and each affiliated group (within the meaning of Section 1504 of the Code) of which AGT or any of its subsidiaries is or has ever been a member, has (or, by the Closing Date, will have) timely filed with the appropriate taxing authorities all federal income tax returns and all other material tax returns and reports required to be filed by it through the Closing Date. All such tax returns are (or will be) complete and correct in all material respects. Except to the extent adequately reserved for in accordance with GAAP, AGT and each of its subsidiaries has (or, by the Closing Date, will have) paid (or AGT has paid on its subsidiaries' behalf) all taxes due in respect of the taxable periods covered by such tax returns. The most recent consolidated financial statements contained in AGT SEC Reports reflect an adequate reserve in accordance with GAAP for all taxes payable by AGT and its subsidiaries for all taxable periods and portions thereof through the date of such financial statements. AGT has made available to the Company copies of all income and franchise tax returns filed by AGT and each of its subsidiaries for their taxable years ended in 1995, 1996 and 1997. (b) No material deficiencies for any taxes have been proposed, asserted or assessed against AGT or any of its subsidiaries that have not been fully paid or adequately provided for in the appropriate financial statements of AGT and its subsidiaries, no State where AGT or one of its subsidiaries does not file an income or franchise tax return has asserted in writing during the preceding five years that such corporation should be so filing, no requests for waivers of the time to assess any taxes are pending, and no power of attorney with respect to any taxes has been executed or filed with any taxing authority. No material issues relating to taxes have been raised in writing by the relevant taxing authority during any presently pending audit or examination. The federal income tax returns of AGT and each of its subsidiaries consolidated in such tax returns have not been reviewed or passed upon by the Internal Revenue Service. (c) No material Liens for taxes exist with respect to any assets or properties of AGT or any of its subsidiaries, except for statutory liens for taxes not yet due. (d) None of AGT or any of its subsidiaries is a party to or is bound by any tax sharing agreement, tax indemnity obligation or similar agreement, arrangement or practice with respect to taxes (including any advance pricing agreement, closing agreement or other agreement relating to taxes with any taxing authority) (other than any such tax sharing agreement among AGT and its subsidiaries as set forth in Section 4.13(d) of the AGT Disclosure Schedule). (e) None of AGT or any of its subsidiaries has taken, agreed to take or will take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. (f) Neither AGT nor any of its subsidiaries has made, will make, is obligated to make or is party to any employment, severance or termination agreement, other compensation arrangement or AGT Benefit Plan currently in effect which provides for the making of any payment (whether in cash or property or the vesting of property) that would not be deductible by reason of Sections 280G or 162(m) of the Code. (g) AGT and its subsidiaries have complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of taxes. (h) No federal, state, local or foreign audits or other administrative proceedings or court proceedings are presently pending or threatened in writing with regard to any federal income or material state, local or foreign taxes or tax returns of AGT or its subsidiaries and neither AGT nor any of its subsidiaries has received a written notice of any pending audit or proceeding. (i) Neither AGT nor any of its subsidiaries has agreed to or is required to make any adjustment under Section 481(a) of the Code. (j) Neither AGT nor any of its subsidiaries has (i) with regard to any assets or property held or acquired by any of them, filed a consent to the application of Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by AGT or any of its subsidiaries, (ii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any similar provision of state, local or foreign law or (iii) received or filed any requests for rulings or determinations in respect of any taxes within the last five years. (k) No property owned by AGT or any of its subsidiaries (i) is property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986; (ii) constitutes "tax exempt use property" within the meaning of Section 168(h)(1) of the Code; or (iii) is "tax exempt bond financed property" within the meaning of Section 168(g) of the Code. (l) AGT and each of its subsidiaries are not currently, have not been within the last five years and do not anticipate becoming a "United States real property holding company" within the meaning of Section 897(c) of the Code. (m) AGT is not a foreign person within the meaning of Section 1445(b)(2) of the Code. SECTION 4.14. Intellectual Property. Except as set forth in Section 4.14 of the AGT Disclosure Schedule, AGT or one of its subsidiaries owns or possesses (and will own or possess as of the Effective Time) all right, title and interest in and to, or a valid and enforceable license or other right to use all of the Intellectual Property (as defined below), and all of the right, benefits and privileges associated therewith, that is material to the conduct of the business of AGT and its subsidiaries as currently conducted (and as conducted as of the Effective Time). To the knowledge of AGT, neither AGT nor any of its subsidiaries has infringed, misappropriated or otherwise violated any Intellectual Property of any other person. To the knowledge of AGT, no person is materially infringing upon any Intellectual Property right of AGT or any of its subsidiaries. SECTION 4.15. Material Contracts. (a) AGT has made available to the Company true, correct and complete copies of all contracts and agreements (and all amendments, modifications and supplements thereto and all side letters to which AGT is a party affecting the obligations of any party thereunder) to which AGT or any of its subsidiaries is a party or by which any of its properties or assets are bound that are material to the business, properties or assets of AGT and its subsidiaries taken as a whole, including, without limitation, (I) contracts or agreements with any supplier or customer, in each case which could result in the payment or receipt of monies in excess of $2,500,000 in any calendar year period; (II) to the extent any of the following are, individually or in the aggregate, material to the business, properties or assets of AGT and its subsidiaries taken as a whole, all: (i) employment, product design or development, personal services, consulting, non-competition, severance or indemnification contracts (including, without limitation, any contract to which AGT or any of its subsidiaries is a party involving employees of AGT or any of its subsidiaries); (ii) licensing, merchandising or distribution agreements; (iii) contracts granting a right of first refusal or first negotiation; (iv) partnership or joint venture agreements; (v) agreements for the acquisition, sale, lease or other disposition of material properties or assets of AGT or its subsidiaries or predecessors (by merger, purchase or sale of assets or stock or otherwise) entered into since April 16, 1996 and (vi) contracts or agreements with any Governmental Entity and (III) all commitments and agreements to enter into any of the foregoing items in (I) or (II) above (collectively, together with any such contracts entered into in accordance with Section 5.1 hereof, the "AGT Contracts"). (b) Each of the AGT Contracts is valid and enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity), and there is no default under any AGT Contract so listed either by AGT or, to the knowledge of AGT, by any other party thereto, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a default thereunder by AGT or, to the knowledge of AGT, any other party, in any such case in which such default or event would have a Material Adverse Effect on AGT. (c) No party to any such AGT Contract has given notice to AGT of or made a claim against AGT with respect to any breach or default thereunder, in any such case in which such breach or default would have a Material Adverse Effect on AGT. SECTION 4.16. Labor Matters. Except as set forth in Section 4.16 of the AGT Disclosure Schedule, neither AGT nor any of its subsidiaries is a party to or bound by any employment, severance compensation, labor or collective bargaining agreement pertaining to any current or former directors, senior executive officers or general managers of AGT or any of its subsidiaries. No labor organization or group of employees of AGT or any of its subsidiaries has made a pending written demand for recognition or certification. SECTION 4.17. Insurance. Except as set forth in Section 4.17 of the AGT Disclosure Schedule, each of AGT and its subsidiaries, is, and has been continuously since April 16, 1996 or as to those subsidiaries acquired by AGT subsequent to April 16, 1996, since becoming a subsidiary insured with financially responsible insurers in such amounts and against such risks and losses as are customary for companies conducting the business as conducted by AGT and its subsidiaries during such time period. Except as set forth in Section 4.17 of the AGT Disclosure Schedule, since April 16, 1996 or as to those subsidiaries acquired by AGT subsequent to April 16, 1996, since becoming a subsidiary, neither AGT nor any of its subsidiaries has received notice of cancellation or termination (or a denial of coverage) with respect to any material insurance policy of AGT or its subsidiaries. The insurance policies of AGT and its subsidiaries are valid and enforceable policies. SECTION 4.18. Customers. Except as set forth in Section 4.18 of the AGT Disclosure Schedule, no customer from which AGT has received revenues of at least $2,500,000 in any of the past three fiscal years has: (a) threatened within the last twelve months to terminate, or to the knowledge of AGT, intends to cancel or otherwise terminate, the relationship of such person with AGT or any of its subsidiaries or (b) has during the last twelve months decreased materially or threatened in writing to decrease or limit materially its usage or purchase of the services or products of AGT or any of its subsidiaries, or, to the knowledge of AGT, intends to modify materially its relationship with AGT or any of its subsidiaries. SECTION 4.19. No Prior Activities. Except for obligations incurred in connection with its incorporation or organization or the negotiation and consummation of this Agreement and the transactions contemplated hereby, Acquisition has neither incurred any obligation or liability nor engaged in any business or activity of any type or kind whatsoever or entered into any agreement or arrangement with any person or entity. SECTION 4.20. Opinion of Financial Advisor. Goldman, Sachs & Co. (the "AGT Financial Advisor") has delivered to the AGT Board its opinion, dated the date of this Agreement, to the effect that, as of such date, the Merger Consideration is fair to the holders of AGT Common Stock from a financial point of view, and such opinion has not been withdrawn or modified. SECTION 4.21. Brokers. No broker, finder or investment banker (other than Goldman, Sachs & Co.) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of AGT or Acquisition or any of their affiliates. SECTION 4.22. Ownership of Company Common Stock. AGT does not own any shares of Company Common Stock. ARTICLE 5 COVENANTS SECTION 5.1. Conduct of Business. Except as contemplated by this Agreement, during the period from the date hereof to the Effective Time, each of the Company and AGT will, and will cause each of their respective subsidiaries to, conduct its operations in the ordinary course of business consistent with past practice and, to the extent consistent therewith, with no less diligence and effort than would be applied in the absence of this Agreement, seek to preserve intact its current business organizations, seek to keep available the service of its current officers and employees and seek to preserve its relationships with customers, suppliers and others having business dealings with it to the end that goodwill and ongoing businesses shall be unimpaired at the Effective Time. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement, prior to the Effective Time, neither the Company, nor AGT, nor any of their respective subsidiaries will, without the prior written consent of the other, which consent shall not be unreasonably withheld: (a) amend its certificate or articles of incorporation or bylaws (or other similar governing instrument), except as may be necessary to effectuate the transactions contemplated hereby; (b) other than in connection with a Business Acquisition (as hereinafter defined), authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities or equity equivalents (including, without limitation, any stock options or stock appreciation rights), except for the issuance of options by AGT to employees of AGT and its subsidiaries in the ordinary course of business and the issuance or sale of shares of common stock by the Company or AGT pursuant to outstanding options granted prior to the date hereof; (c) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, make any other actual, constructive or deemed distribution in respect of any shares of its capital stock or otherwise make any payments to stockholders in their capacity as such, or redeem or otherwise acquire any of its securities or any securities of any of its subsidiaries; (d) other than in connection with a Business Acquisition, adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company, AGT or any of their respective subsidiaries (other than the Merger); (e) other than in connection with a Business Acquisition, alter through merger, liquidation, reorganization, restructuring or in any other fashion the corporate structure or ownership of any subsidiary; (f) except as may be required by law or as contemplated by this Agreement, and other than in connection with a Business Acquisition, enter into, adopt or amend or terminate any bonus, profit sharing, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, stock equivalent, stock purchase agreement, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan, fund, award or other arrangement for the benefit or welfare of any director, officer or employee in any manner, or (except as set forth in Section 5.1(f) of the Company Disclosure Schedule or Section 5.1(f) of the AGT Disclosure Schedule and except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to the Company or AGT, as the case may be, and as required under existing agreements or in the ordinary course of business generally consistent with past practice) increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan and arrangement as in effect as of the date hereof (including, without limitation, the granting of stock appreciation rights or performance units); (g) except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting principles or practices used by it; (h) revalue in any material respect any of its assets, including, without limitation, writing down the value of inventory or writing-off notes or accounts receivable other than in the ordinary course of business; (i) make or revoke any tax election or settle or compromise any tax liability material to the Company and its subsidiaries or AGT and its subsidiaries, as the case may be, taken as a whole or change (or make a request to any taxing authority to change) any material aspect of its method of accounting for tax purposes; (j) pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in, or contemplated by, the consolidated financial statements (or the notes thereto) of the Company and its subsidiaries or AGT and its subsidiaries, as the case may be, or incurred in the ordinary course of business consistent with past practice; (k) settle or compromise any pending or threatened suit, action or claim relating to the transactions contemplated hereby; or (l) other than in connection with a Business Acquisition, take, propose to take, or agree in writing or otherwise to take, any of the actions described in Sections 5.1(a) through 5.1(k) or any action which would make any of the representations or warranties of the Company or AGT and Acquisition contained in this Agreement untrue or incorrect in any material respect. In addition, prior to the Effective Time, neither the Company nor any of its subsidiaries will, without the prior written consent of AGT, which consent shall not be unreasonably withheld: (m) enter into or modify in any material respect (i) any agreement which, if in effect on the date hereof, would have been a Contract or (ii) any employment, consulting, non-competition or severance agreement as disclosed in Section 3.18 of the Company Disclosure Schedule. In addition, prior to the Effective Time, neither the Company nor its subsidiaries will, without the prior written consent of AGT: (n) (i) incur or assume any long-term or short-term debt or issue any debt securities except for borrowings under existing lines of credit in the ordinary course of business and in amounts not material to the Company and its subsidiaries, taken as a whole; (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person except in the ordinary course of business consistent with past practice and in amounts not material to the Company and its subsidiaries, taken as a whole, and except for obligations of wholly owned subsidiaries; (iii) make any loans, advances or capital contributions to, or investments in, any other person (other than to wholly owned subsidiaries of the Company or customary loans or advances to employees in the ordinary course of business consistent with past practice and in amounts not material to the maker of such loan or advance); (iv) pledge or otherwise encumber shares of capital stock of the Company or its subsidiaries; or (v) mortgage or pledge any of its material assets, tangible or intangible, or create or suffer to exist any material Lien thereupon; (o) acquire, sell, lease or dispose of any assets outside the ordinary course of business or any assets which in the aggregate are material to the Company and its subsidiaries, taken as a whole, enter into any commitment or transaction outside the ordinary course of business or grant any exclusive distribution rights; (p) (i) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or any equity interest therein; (ii) authorize any new capital expenditure or expenditures which, individually, is in excess of $500,000 or, in the aggregate, are in excess of $2.0 million; provided, that none of the foregoing shall limit any capital expenditure already included in the Company's fiscal 1998 capital expenditure budget provided to AGT prior to the date hereof; or (iv) enter into or amend any contract, agreement, commitment or arrangement providing for the taking of any action that would be prohibited hereunder; or (q)take, propose to take, or agree in writing or otherwise to take, any of the actions described in Sections 5.1(n) through (p). In addition, prior to the Effective Time, neither AGT nor its subsidiaries will, other than in conjunction with this Merger, without the prior written consent of the Company, which consent shall not be unreasonably witheld: (r) enter into or modify in any material respect any agreement which, if in effect on the date hereof, would have been an AGT Contract pursuant to Section 4.15. In addition, prior to the Effective Time, neither AGT nor its subsidiaries will, other than in conjunction with this Merger, without the prior written consent of the Company: (s) (i) incur or assume any long-term or short-term debt or issue any debt securities except for borrowings under existing lines of credit in the ordinary course of business, borrowings in conjunction with Sections (t) and (u) of this Section 5.1; (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person except in the ordinary course of business consistent with past practice, and except for obligations of wholly owned subsidiaries; (iii) make any loans, advances or capital contributions to, or investments in, any other person (other than to wholly owned subsidiaries of AGT or customary loans or advances to employees in the ordinary course of business consistent with past practice and in amounts not material to the maker of such loan or advance); (iv) pledge or otherwise encumber shares of capital stock of AGT or its subsidiaries; or (v) mortgage or pledge any of its material assets, tangible or intangible, or create or suffer to exist any material Lien thereupon; provided, however, that notwithstanding the foregoing provisions of the paragraph (s), AGT shall be permitted to take any action under this paragraph (s), which without this proviso would otherwise require the Company's prior written consent, without the prior written consent of the Company if such actions in the aggregate are in an amount not in excess of $20,000,000; (t) acquire, sell, lease or dispose of any assets outside the ordinary course of business in a transaction or series of transactions for which AGT would be required to amend the Form S-4 filed with the SEC pursuant to Section 5.2 below had the Form S-4 been filed on the date hereof, enter into any commitment or transaction outside the ordinary course of business or grant any exclusive distribution rights; (u) (i) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or any equity interest therein for which AGT would be required to amend the Form S-4 filed with the SEC pursuant to Section 5.2 below had the Form S-4 been filed on the date hereof; (ii) authorize any new capital expenditure or expenditures which, in the aggregate, are in excess of $3,000,000; provided, that none of the foregoing shall limit any capital expenditure already included in AGT's fiscal 1998 capital expenditure budget provided to the Company prior to the date hereof; or (iii) enter into or amend any contract, agreement, commitment or arrangement providing for the taking of any action that would be prohibited hereunder; or (v) take, propose to take, or agree in writing or otherwise to take, any of the actions described in Sections 5.1(s) through (u). For purposes hereof, a "Business Acquisition" shall be any acquisition by AGT or any of its subsidiaries of any assets, capital stock or operating businesses as may be approved by the Board of Directors of AGT and, if required by this Section 5.1, by the Company . SECTION 5.2. Preparation of S-4 and the Joint Proxy Statement. AGT and the Company will, as promptly as practicable, jointly prepare and file with the SEC the Joint Proxy Statement in connection with the vote of the stockholders of the Company with respect to the Merger and the vote of the stockholders of AGT with respect to the Share Issuance. AGT will, as promptly as practicable, prepare and following receipt of notification from the SEC that it has no further comments on the Joint Proxy Statement, file with the SEC the S-4, containing the Joint Proxy Statement and forms of proxy, in connection with the registration under the Securities Act of the shares of AGT Common Stock issuable upon conversion of the Shares and the other transactions contemplated hereby. AGT and the Company will, and will cause their accountants and lawyers to, use all reasonable best efforts to have or cause the S-4 to be declared effective as promptly as practicable, including, without limitation, causing their accountants to deliver necessary or required instruments such as opinions, consents and certificates, and will take any other action required or necessary to be taken under federal or state securities laws or otherwise in connection with the registration process. Each of AGT and the Company will use its reasonable best efforts to cause the Joint Proxy Statement to be mailed to its stockholders at the earliest practicable date after the effectiveness of the S-4. SECTION 5.3. No Solicitation. (a) Until the termination of this Agreement, the Company shall not, and shall not permit any of its subsidiaries, or any of its or its subsidiaries' officers, directors, employees, representatives, agents or affiliates (including, without limitation, any investment banker, financial advisor, attorney, accountant or other representative of the Company or any of its subsidiaries), to, directly or indirectly, initiate, solicit or knowingly encourage (including by way of furnishing non-public information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, an Acquisition Proposal (as defined below), or enter into or maintain or continue discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain an Acquisition Proposal or agree to or endorse any Acquisition Proposal, or authorize or permit any of its officers, directors or employees or any of its subsidiaries or any investment banker, financial advisor, attorney, accountant or other representative of it or any of its subsidiaries to take any such action; provided, however, that this Section 5.3(a) shall not prohibit the Company from furnishing non-public information regarding the Company to, or entering into discussions and negotiations with, any person in response to an unsolicited written Acquisition Proposal submitted by such person if (i) the Company Board concludes in good faith, after having received the advice of its financial advisor, that such Acquisition Proposal, if consummated, could result in a transaction that is more favorable from a financial point of view to the Company's stockholders than the Merger, including as part of the Company Board's determination, that, as to any cash consideration to be paid pursuant to such Acquisition Proposal, the person making the Acquisition Proposal has all requisite funds on hand or has provided customary financing commitments for the requisite funds to consummate the Acquisition Proposal, (ii) not later than 24 hours after receipt of any unsolicited Acquisition Proposal, the Company gives AGT notice (which notice shall be provided orally and in writing and shall identify the person making such Acquisition Proposal and set forth the material terms thereof) of the receipt of such Acquisition Proposal unless the Company Board determines in good faith, after having received the advice of its legal counsel, that giving such notice is inconsistent with the Company Board's fiduciary duties to the Company's stockholders under applicable law, (iii) prior to furnishing any such non-public information to such Person, the Company enters into a confidentiality agreement with terms not materially less favorable to the Company than the Confidentiality Agreement (as defined in Section 5.6(d)) and (iv) prior to furnishing such non-public information to such Person, the Company furnishes such non-public information to AGT to the extent such non-public information has not previously been furnished by the Company to AGT. Notwithstanding anything to the contrary in this Agreement, the Company may give a copy of this Section 5.3 to any person who inquires about submitting an unsolicited Acquisition Proposal. For purposes of this Agreement, "Acquisition Proposal" means any proposal regarding any of the following (other than the transactions contemplated by this Agreement) involving the Company or any of its subsidiaries: (w) any merger, consolidation, share exchange, recapitalization, business combination or other similar transaction; (x) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20 percent or more of the assets of the Company and its subsidiaries, taken as a whole, in a single transaction or series of related transactions; (y) any tender offer or exchange offer that if consummated would result in any person beneficially owning more than 20 percent of the outstanding shares of Company Common Stock or the filing of a registration statement under the Securities Act in connection therewith; or (z) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. (b) Except as set forth in this Section 5.3(b), the Company Board shall not (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to AGT, the approval or recommendation of the Merger and this Agreement by the Company Board, (ii) approve or recommend, or propose to approve or recommend, any Acquisition Proposal or (iii) cause the Company to enter into any agreement (including, without limitation, any letter of intent) with respect to any Acquisition Proposal (any of (i), (ii) or (iii), "Withdraw"); provided, however, that nothing in this Agreement shall prevent the Company Board from withdrawing, amending or modifying its recommendation of the Merger and this Agreement if (i) an unsolicited bona fide written Acquisition Proposal is submitted to the Company, (ii) the Company Board concludes in good faith, after having received the advice of its independent financial advisor, that such Acquisition Proposal would result in a transaction that is more favorable from a financial point of view to the Company's stockholders than the Merger (a "Superior Proposal") and (iii) the Company Board concludes in good faith, after consultation with its legal counsel, that the withdrawal, amendment or modification of such recommendation in connection with the Superior Proposal is consistent with the fiduciary obligations of the Company Board to the Company's stockholders under applicable law. Nothing herein shall prevent the Company Board from recommending that its stockholders accept an unsolicited tender offer or exchange offer commenced by a third party with respect to the Company's Common Stock if (u) such tender offer or exchange offer constitutes an Acquisition Proposal, (v) the Company Board shall have withdrawn its recommendation in favor of the Merger in accordance with and as permitted by the preceding sentence, (w) the Company Board shall have concluded in good faith, after having received the advice of its financial advisor, that such tender offer or exchange offer is a Superior Proposal, (x) the Company Board shall have concluded in good faith, after consultation with legal counsel, that the recommendation in favor of acceptance of such tender offer or exchange offer is consistent with the fiduciary obligations of the Company Board to the Company's stockholders under applicable law, (y) the Company shall have given AGT notice of the Company Board's intention to Withdraw and (z) AGT does not make within five days of AGT's receipt of such notice, an offer which the Company Board, after consultation with its financial advisors, determines is superior to such Superior Proposal. In addition, if the Company Withdraws, it shall concurrently pay, or cause to be paid, to AGT the fee required by Section 7.3(a) hereof. SECTION 5.4. Letters of the Company's and AGT's Accountants. (a) The Company shall use all reasonable best efforts to cause to be delivered to AGT a letter of KPMG Peat Marwick LLP (or its successor firm), the Company's independent auditors, dated a date within two business days before the date on which the S-4 shall become effective and addressed to AGT, in form and substance reasonably satisfactory to AGT and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the S-4. (b) AGT shall use all reasonable best efforts to cause to be delivered to the Company a letter of Deloitte & Touche LLP (or its successor firm), AGT's independent auditors, dated a date within two business days before the date on which the S-4 shall become effective and addressed to the Company, in form and substance reasonably satisfactory to the Company and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the S-4. SECTION 5.5. Meetings. The Company and AGT each shall call a meeting of its stockholders to be held as promptly as practicable for the purpose of voting upon this Agreement and the Merger (with respect to the Company) and the Share Issuance (with respect to AGT). Subject to Section 5.3(b), the Company agrees that its obligations pursuant to the first sentence of this Section 5.5 shall not be affected by the commencement, public proposal, public disclosure or communication to the Company of any Acquisition Proposal. AGT and the Company will, through their respective Boards of Directors, recommend to their respective stockholders approval of this Agreement and the Merger (with respect to the Company) and the Share Issuance (with respect to AGT), subject to the right of the Company Board to modify or withdraw its recommendation pursuant to Section 5.3(b). The Company and AGT shall coordinate and cooperate with respect to the timing of such meetings and each of the Company and AGT shall use its best efforts to hold such meeting as soon as practicable after the date hereof. SECTION 5.6. Access to Information. (a) Between the date hereof and the Effective Time, each of the parties hereto will give the other party hereto and their authorized representatives reasonable access to all its employees, plants, offices, warehouses and other facilities and to all its and its subsidiaries' books and records, will permit the other parties hereto to make such inspections as the other parties may reasonably require and will cause its officers and those of its subsidiaries to furnish the other parties with such financial and operating data and other information with respect its and its subsidiaries' business, properties and personnel as the other parties may from time to time reasonably request, provided that no investigation pursuant to this Section 5.6(a) shall affect or be deemed to modify any of the representations or warranties made by any party hereto. (b) Between the date hereof and the Effective Time, the Company shall furnish to AGT and Acquisition (i) within five business days after the delivery thereof to management, such monthly financial statements and data as are regularly prepared for distribution to Company management and (ii) at the earliest time they are available, such quarterly and annual financial statements as are prepared for the Company's SEC filings, which (in the case of this clause (ii)), shall be in accordance with the books and records of the Company. (c) Between the date hereof and the Effective Time, AGT shall furnish to the Company (i) within five business days after the delivery thereof to management, such monthly financial statements and data as are regularly prepared for distribution to AGT management and (ii) at the earliest time they are available, such quarterly and annual financial statements as are prepared for AGT's SEC filings, which (in the case of this clause (ii)), shall be in accordance with the books and records of AGT. (d) Each of AGT and Acquisition will hold and will cause its consultants and advisors to hold in confidence all documents and information concerning the Company and its subsidiaries furnished to AGT or Acquisition in connection with the transactions contemplated by this Agreement to the extent required by that certain confidentiality agreement entered into between the Company and AGT dated November 25, 1997 (the "Confidentiality Agreement"). SECTION 5.7. Additional Agreements; Reasonable Best Efforts. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, (i) cooperation in the preparation and filing of the Joint Proxy Statement and the S-4, any filings that may be required under the HSR Act, and any amendments to any thereof; (ii) cooperation in obtaining, prior to the Effective Time, the approval for quotation on the NASDAQ, effective upon the official notice of issuance, of the shares of AGT Common Stock into which the Company Common Stock will be converted pursuant to Article I hereof; (iii) the taking of all action reasonably necessary, proper or advisable to secure any necessary consents of all third parties and Governmental Entities, including those relating to existing debt obligations of the Company, AGT and their respective subsidiaries; (iv) contesting any legal proceeding relating to the Merger; and (v) the execution of any additional instruments, including the Certificate of Merger, necessary to consummate the transactions contemplated hereby. Subject to the terms and conditions of this Agreement, AGT and Acquisition agree to use all reasonable efforts to cause the Effective Time to occur as soon as practicable after the shareholder vote with respect to the Merger. In case at any time after the Effective Time any further action is necessary to carry out the purposes of this Agreement, the proper officers and directors of each party hereto shall take all such necessary action. SECTION 5.8. Antitrust Reviews. Each party hereto will use all reasonable efforts (a) to file with the US Department of Justice and US Federal Trade Commission, as soon as practicable after the date hereof, the Notification and Report Form under the HSR Act and any supplemental information or material requested pursuant to the HSR Act, and (b) to comply as soon as practicable after the date hereof with any other laws of any country and the European Union under which any consent, authorization, registration, declaration or other action with respect to the transactions contemplated herein may be required. Each party hereto shall furnish to the other such information and assistance as the other may reasonably request in connection with any filing or other act undertaken in compliance with the HSR Act or other such laws, and shall keep each other timely apprised of the status of any communications with, and any inquiries or requests for additional information from, any Governmental Entity under the HSR Act or other such laws. Each of the Company and AGT shall take any and all action reasonably necessary to prevent the entry of any order, preliminary or permanent injunction, or other legal restraint or prohibition preventing consummation of the Merger or any related transactions contemplated by this Agreement, and to lift, mitigate or rescind the effect of any litigation or administrative proceeding adversely affecting this Agreement or any transactions contemplated herein. SECTION 5.9. Public Announcements. Each of AGT, Acquisition and the Company will consult with one another before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement, including, without limitation, the Merger, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law or by obligations pursuant to any agreement with NASDAQ, as determined by AGT, Acquisition or the Company, as the case may be. SECTION 5.10. Indemnification; Directors' and Officers' Insurance. (a) Indemnification. From and after the Effective Time, AGT shall, to the fullest extent permitted by applicable law, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date hereof, or who becomes prior to the Effective Time, a director, officer or employee of the parties hereto or any subsidiary thereof (each an "Indemnified Party" and, collectively, the "Indemnified Parties") against all losses, expenses (including reasonable attorneys' fees and expenses), claims, damages or liabilities or, subject to the proviso of the next succeeding sentence, amounts paid in settlement, arising out of actions or omissions occurring at or prior to the Effective Time and whether asserted or claimed prior to, at or after the Effective Time that are in whole or in part (i) based on, or arising out of, the fact that such person is or was a director, officer or employee of such party or a subsidiary of such party or (ii) based on, arising out of or pertaining to the transactions contemplated by this Agreement. In the event of any such loss, expense, claim, damage or liability (whether or not arising before the Effective Time), (i) AGT shall pay the reasonable fees and expenses of counsel selected by the Indemnified Parties, which counsel shall be reasonably satisfactory to AGT, promptly after statements therefor are received and otherwise advance to such Indemnified Party upon request reimbursement of documented expenses reasonably incurred, in either case to the extent not prohibited by the DGCL and upon receipt of any affirmation and undertaking required by the DGCL, (ii) AGT will cooperate in the defense of any such matter and (iii) any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under the DGCL and AGT's articles of incorporation or bylaws shall be made by independent counsel mutually acceptable to AGT and the Indemnified Party; provided, however, that AGT shall not be liable for any settlement effected without its written consent (which consent shall not be reasonably withheld). The Indemnified Parties as a group may retain only one law firm with respect to each related matter except to the extent there is, in the opinion of counsel to an Indemnified Party, under applicable standards of professional conduct, a conflict on any significant issue between positions of any two or more Indemnified Parties. (b) Insurance. For a period of six years after the Effective Time, AGT shall cause to be maintained in effect the policies of directors' and officers' liability insurance maintained by the Company for the benefit of those persons who are covered by such policies at the Effective Time (or AGT may substitute therefor policies of at least the same coverage with respect to matters occurring prior to the Effective Time), to the extent that such liability insurance can be maintained annually at a cost to AGT not greater than 150 percent of the premium for the current Company directors' and officers' liability insurance; provided that if such insurance cannot be so maintained or obtained at such costs, AGT shall maintain or obtain as much of such insurance as can be so maintained or obtained at a cost equal to 150 percent of the current annual premiums of the Company for such insurance. (c) Successors. In the event AGT or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity or such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then and in either such case, proper provision shall be made so that the successors and assigns of AGT shall assume the obligations set for in this Section 5.10. (d) Survival of Indemnification. To the fullest extent permitted by law, from and after the Effective Time, all rights to indemnification now existing in favor of the employees, agents, directors or officers of the Company and its subsidiaries with respect to their activities as such prior to the Effective Time, as provided in the Company's articles of incorporation or bylaws, in effect on the date thereof or otherwise in effect on the date hereof, shall survive the Merger and shall continue in full force and effect for a period of the lesser of six years from the Effective Time and the expiration of the applicable statute of limitations. (e) Benefit. The provisions of this Section 5.10 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his or her heirs and his or her representatives. SECTION 5.11. Notification of Certain Matters. The Company shall give prompt notice to AGT and Acquisition, and AGT and Acquisition shall give prompt notice to the Company, of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time, (ii) any material failure of the Company, AGT or Acquisition, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, (iii) any notice of, or other communication relating to, a default or event which, with notice or lapse of time or both, would become a default, received by it or any of its subsidiaries subsequent to the date of this Agreement and prior to the Effective Time, under any contract or agreement material to the financial condition, properties, businesses or results of operations of it and its subsidiaries taken as a whole to which it or any of its subsidiaries is a party or is subject, (iv) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement, or (v) the occurrence of any Material Adverse Effect; provided, however, that the delivery of any notice pursuant to this Section 5.11 shall not cure such breach or non-compliance or limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 5.12. Tax-Free Reorganization Treatment. The Company, Company Affiliates, AGT and Acquisition shall execute and deliver to O'Sullivan Graev & Karabell, LLP, counsel to the Company, and Weil, Gotshal & Manges LLP, counsel to AGT, certificates containing customary representations substantially in the forms agreed to by the parties on or prior to the date hereof (with such changes as may be reasonably requested by such law firms) at such time or times as may be reasonably requested by such law firms in connection with their respective deliveries of opinions, pursuant to Sections 6.2(c) and 6.3(f) hereof, with respect to the tax-free reorganization treatment of the Merger. Prior to the Effective Time, none of the Company, Company Affiliates, AGT or Acquisition shall take or cause to be taken any action which would cause to be untrue (or fail to take or cause not to be taken any action which would cause to be untrue) any of the representations in such previously-agreed upon certificates. SECTION 5.13. Company Employee Benefits. Through December 31, 1998, the employees of the Company shall continue to receive employee benefits substantially comparable in the aggregate to those provided for under Company Benefit Plans (other than the plans being terminated as set forth on Scedule 5.14 of the Company Disclosure Schedule) provided by the Company on the date prior to the Effective Time. SECTION 5.14. Certain Payment of Deferred Compensation and Bonuses. Notwithstanding anything to the contrary herein, the Company shall take such action as necessary (i) to terminate the Company Benefit Plans as indicated on Schedule 5.14 of the Company Disclosure Schedule and (ii) make the payments required to be made or elected by the Company to be made under all Company Benefit Plans as set forth on Schedule 5.14 of the Company Disclosure Schedule on or immediately prior to the Effective Time. SECTION 5.15. Stock Options. The Company shall take any actions required under the terms of the Stock Option Plans, including, but not limited to, obtaining any required written consents of the Option holders, in order to effectuate the provisions of Section 2.3 hereof. SECTION 5.16. SEC Filings. Each of AGT and the Company shall promptly provide the other party (or its counsel) with copies of all filings made by the other party or any of its subsidiaries with the SEC or any other state or federal Governmental Entity in connection with this Agreement and the transactions contemplated hereby. SECTION 5.17. Guarantee of Performance. AGT hereby guarantees the performance by Acquisition of its obligations under this Agreement. ARTICLE 6 CONDITIONS TO CONSUMMATION OF THE MERGER SECTION 6.1. Conditions to Each Party's Obligations to Effect the Merger. The respective obligations of each party hereto to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) this Agreement shall have been approved and adopted by the requisite vote of the stockholders of the Company and, the Share Issuance shall have been approved by the requisite vote of the stockholders of AGT; (b) no statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced by any United States court or United States governmental authority and continued in effect which prohibits, restrains, enjoins or restricts the consummation of the Merger; (c) any waiting period applicable to the Merger under the HSR Act shall have terminated or expired, and any other governmental or regulatory notices or approvals required with respect to the transactions contemplated hereby shall have been either filed or received; (d) the S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order and AGT shall have received all state securities laws or "blue sky" permits and authorizations necessary to issue shares of AGT Common Stock in exchange for the Shares in the Merger; (e) the AGT Common Stock issuable in the Merger shall have been authorized for quotation on the NASDAQ, upon official notice of issuance; and (f) the number of directors of AGT shall have been increased by two, and the vacancies created thereby shall have been initially filled by Marne Obernauer, Jr. and a designee to be determined jointly by the Company and AGT. SECTION 6.2. Conditions to the Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the representations and warranties of AGT and Acquisition contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct in all material respects at and as of the Effective Time with the same effect as if made at and as of the Effective Time, and at the Closing AGT and Acquisition shall have delivered to the Company a certificate to that effect; (b) each of the obligations of AGT and Acquisition to be performed at or before the Effective Time pursuant to the terms of this Agreement shall have been duly performed in all material respects at or before the Effective Time and at the Closing AGT and Acquisition shall have delivered to the Company a certificate to that effect; (c) the opinion of O'Sullivan Graev & Karabell, LLP, dated the Closing Date and addressed to the Company substantially to the effect that (i) the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; (ii) each of AGT, Acquisition and the Company will be a party to the reorganization within the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be recognized by the Company as a result of the Merger or by a stockholder of the Company as a result of the Merger with respect to Shares converted into shares of AGT Common Stock (other than with respect to the Per Share Cash Amount and cash received in lieu of fractional shares of AGT Common Stock), shall have been delivered and such opinion shall not have been withdrawn or modified in any material respect. In rendering such opinion, O'Sullivan Graev & Karabell, LLP shall have received and may rely upon the representations contained in the certificates referred to in Section 5.12; and (d) other than a change in the price of AGT Common Stock, there shall have been no events, changes or effects with respect to AGT or its subsidiaries which would have a Material Adverse Effect on AGT. SECTION 6.3. Conditions to the Obligations of AGT and Acquisition. The respective obligations of AGT and Acquisition to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) the representations and warranties of the Company contained in this Agreement or in any other document delivered pursuant hereto shall be true and correct in all material respects at and as of the Effective Time with the same effect as if made at and as of the Effective Time, and at the Closing the Company shall have delivered to AGT and Acquisition a certificate to that effect; (b) each of the obligations of the Company to be performed at or before the Effective Time pursuant to the terms of this Agreement shall have been duly performed in all material respects at or before the Effective Time and at the Closing the Company shall have delivered to AGT and Acquisition a certificate to that effect; (c) the Dissenting Shares shall constitute not more than ten percent (10%) of the Shares; (d) the Company shall have delivered to AGT and Acquisition all consents or notices necessary to effect valid assignments of the contracts listed on Section 3.18 of the Company Disclosure Schedule, except for the contracts indicated thereon with an asterisk, all in form and substance reasonably acceptable to AGT; (e) there shall have been no events, changes or effects with respect to the Company or its subsidiaries which would have a Material Adverse Effect on the Company; (f) the opinion of Weil, Gotshal & Manges LLP, dated the Closing Date and addressed to AGT, substantially to the effect that (i) the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; (ii) each of AGT, Acquisition and the Company will be a party to the reorganization within the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be recognized by AGT, Acquisition or the Company as a result of the Merger, shall have been delivered and such opinion shall not have been withdrawn or modified in any material respect. In rendering such opinion, Weil, Gotshal & Manges LLP shall have received and may rely upon the representations contained in the certificates referred to in Section 5.12; (g) employment agreements between Black Dot Graphics, Inc., a wholly-owned subsidiary of the Company, and each of Ettore G. Nardulli and Howard A. Fiedler, each dated August 1, 1989, as amended, shall be in full force and effect unless terminated due to death or disability (as defined therein). ARTICLE 7 TERMINATION; AMENDMENT; WAIVER SECTION 7.1. Termination. This Agreement may be terminated at any time prior to the Effective Time: (a) by mutual written consent of AGT, Acquisition and the Company; (b) by AGT and Acquisition or the Company if the Merger has not been consummated by July 31, 1998, provided that no party may terminate this Agreement pursuant to this Section 7.1(b) if such party's failure to fulfill any of its obligations under this Agreement shall have been the reason that the Effective Time shall not have occurred on or before said date; (c) by AGT and Acquisition or the Company if (i) the Company shall have convened a meeting of its stockholders and failed to obtain the requisite vote to approve this agreement and the Merger, (ii) AGT shall have convened a meeting of its stockholders and failed to obtain the requisite vote to approve the Share Issuance, or (iii) the U.S. Department of Justice or U.S. Federal Trade Commission shall have obtained or stated its intention in writing to seek an order, preliminary or permanent injunction, or other legal restraint or prohibition preventing consummation of the Merger or any related transactions contemplated by this Agreement. (d) by the Company if (i) there shall have been a breach of any representation or warranty on the part of AGT or Acquisition set forth in this Agreement, or if any representation or warranty of AGT or Acquisition shall have become untrue, in either case such that the conditions set forth in Section 6.2(a) would be incapable of being satisfied by July 31, 1998 (or as otherwise extended), (ii) there shall have been a breach by AGT or Acquisition of any of their respective covenants or agreements hereunder having or constituting a Material Adverse Effect on AGT or Acquisition, as the case may be, has not cured such breach within 15 days after notice by the Company thereof, or (iii) the Company enters into a definitive agreement relating to a Superior Proposal in accordance with Section 5.3(b), so long as the Company is not then in breach of its obligations under Section 5.3 (provided that such termination shall not be effective until payment of the amount required under Section 7.3(a)); or (e) by AGT and Acquisition if (i) there shall have been a breach of any representation or warranty on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 6.3(a) would be incapable of being satisfied by July 31, 1998 (or as otherwise extended), (ii) there shall have been a breach by the Company of its covenants or agreements hereunder having or constituting a Material Adverse Effect on the Company and the Company has not cured such breach within 15 days after notice by AGT or Acquisition thereof or (iii) the Company Board shall have withdrawn, modified or changed its approval or recommendation of this Agreement or the Merger, shall have recommended to the Company's stockholders any Acquisition Proposal (other than the Merger), shall have failed to call, give notice of, convene or hold a stockholders' meeting to vote upon the Merger, or shall have adopted any resolution to effect any of the foregoing, or the Company shall have entered into a definitive agreement relating to a Superior Proposal. SECTION 7.2. Effect of Termination. In the event of the termination of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party hereto or its affiliates, directors, officers or shareholders, other than the provisions of this Section 7.2 and Sections 5.6(c) and 7.3, and nothing contained in this Section 7.2 shall relieve any party from liability for any breach of this Agreement prior to such termination. SECTION 7.3. Fees and Expenses. (a) In the event that this Agreement shall be terminated pursuant to: (i) Sections 7.1(e)(i) or 7.1(e)(ii), and, within twelve months thereafter, the Company enters into an agreement with respect to any Acquisition Proposal (other than the Merger); or (ii) Sections 7.1(d)(iii) or 7.1(e)(iii), then AGT and Acquisition would suffer direct and substantial damages, which damages cannot be determined with reasonable certainty. To compensate AGT and Acquisition for such damages, the Company shall pay to AGT the amount of $13 million as liquidated damages and not a penalty as follows: (i) in the case of a termination under Sections 7.1(e)(i) or 7.1(e)(ii), such amount shall be paid on the date the Company enters into an agreement with respect to any Acquisition Proposal and (ii) in the case of a termination under Section 7.1(d)(iii) or 7.1(e)(iii), such amount shall be paid concurrently with and, in the case of Section 7.1(d)(iii), as a precondition of, such termination. (b) Upon the termination of this Agreement pursuant to Sections 7.1(c)(i), 7.1(d)(iii), or 7.1(e)(iii), in addition to any amounts that may otherwise be payable under Section 7.3(a), the Company shall reimburse AGT, Acquisition and their affiliates for all actual documented out-of-pocket fees and expenses, not to exceed $3 million, actually incurred by any of them or on their behalf in connection with the Merger and the consummation of all transactions contemplated by this Agreement (including, without limitation, fees payable to investment bankers, counsel to any of the foregoing, and accountants). If AGT or Acquisition shall submit a request for reimbursement hereunder, AGT or Acquisition will provide the Company in due course with invoices or other reasonable evidence of such expenses upon request. The Company shall in any event pay the amount (not to exceed $3 million) within 10 business days from when invoices are received by the Company. (c) Upon the termination of this Agreement pursuant to Section 7.1(c)(ii), AGT shall reimburse the Company for all actual documented out-of-pocket fees and expenses, not to exceed $3 million, actually incurred by the Company or on its behalf in connection with the Merger and the consummation of all transactions contemplated by this Agreement (including, without limitation, fees payable to investment bankers, counsel to any of the foregoing, and accountants). If the Company shall submit a request for reimbursement hereunder, the Company will provide AGT in due course with invoices or other reasonable evidence of such expenses upon request. AGT shall in any event pay the amount (not to exceed $3 million) within 10 business days from when invoices are received by AGT. (d) Except as specifically provided in this Section 7.3, each party shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. The cost of printing the S-4 and the Joint Proxy Statement of filing any required notification under the HSR Act shall be borne equally by the Company and AGT. SECTION 7.4. Amendment. This Agreement may be amended by action taken by the Company, AGT and Acquisition at any time before or after approval of the Merger by the stockholders of the Company and stockholders of AGT but, after any such approval, no amendment shall be made which requires the approval of such stockholders under applicable law without such approval. This Agreement may not be amended except by an instrument in writing signed on behalf of the parties hereto. SECTION 7.5. Extension; Waiver. At any time prior to the Effective Time, each party hereto (for these purposes, AGT and Acquisition shall together be deemed one party and the Company shall be deemed the other party) may (i) extend the time for the performance of any of the obligations or other acts of the other party, (ii) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document, certificate or writing delivered pursuant hereto or (iii) waive compliance by the other party with any of the agreements or conditions contained herein. Any agreement on the part of either party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of either party hereto to assert any of its rights hereunder shall not constitute a waiver of such rights. ARTICLE 8 MISCELLANEOUS SECTION 8.1. Nonsurvival of Representations and Warranties. The representations and warranties made herein shall not survive beyond the Effective Time or a termination of this Agreement. SECTION 8.2. Entire Agreement; Assignment. This Agreement: (a) and the Confidentially Agreement constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof; and (b) shall not be assigned by operation of law or otherwise; provided, however, that Acquisition may assign any or all of its rights and obligations under this Agreement to any direct or indirect wholly-owned subsidiary of AGT, but no such assignment shall relieve Acquisition of its obligations hereunder if such assignee does not perform such obligations. SECTION 8.3. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, facsimile or telex, or by registered or certified mail (postage prepaid, return receipt requested), to the other party as follows: if to AGT or Applied Graphics Technologies, Inc. to Acquisition to: 450 West 33rd Street New York, New York 10001 Attention: Martin D. Krall Louis Salamone, Jr. with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153 Attention: Jeffrey J. Weinberg, Esq. Facsimile: (212) 310-8007 if to the Company to: Devon Group, Inc. 450 Park Avenue New York, New York 10022 Attention: Marne Obernauer, Jr. with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, NY 10112 Attention: Lawrence G. Graev, Esq. Facsimile: (212) 408-2420 or to such other address as the person to whom notice is given may have previously furnished to the other in writing in the manner set forth above. SECTION 8.4. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of law thereof. SECTION 8.5. Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. SECTION 8.6. Interpretive Provisions; Certain Definitions. Whenever used in this Agreement, "to the Company's knowledge" or "to the knowledge of the Company" shall mean the actual knowledge of those persons who are listed on Exhibit 1 and "to AGT's knowledge" or "to the knowledge of AGT" shall mean the actual knowledge of the Persons listed on Exhibit 2. The inclusion of any information on any schedule to this Agreement shall not be deemed to be an admission or acknowledgement by the Company, in and of itself, that such information is required to be listed on such Schedule or is material to or outside the ordinary course of the business of the Company. Nothing contained herein or in any of the exhibits or schedules hereto shall constitute an admission of liability or an admission against the Company's interest. SECTION 8.7. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and its successors and permitted assigns, and except as provided in Sections 5.10 and 8.2 nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 8.8. Severability. If any term or other provision of this Agreement is invalid, illegal or unenforceable, all other provisions of this Agreement shall remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. SECTION 8.9. Specific Performance. The parties hereto acknowledge that irreparable damage would result if this Agreement were not specifically enforced, and they therefore consent that the rights and obligations of the parties under this Agreement may be enforced by a decree of specific performance issued by a court of competent jurisdiction. Such remedy shall, however, not be exclusive and, shall be in addition to any other remedies which any party may have under this Agreement or otherwise. SECTION 8.10. Brokers. Except as otherwise provided in Section 7.3, the Company agrees to indemnify and hold harmless AGT and Acquisition, and AGT and Acquisition agree to indemnify and hold harmless the Company, from and against any and all liability to which AGT and Acquisition, on the one hand, or the Company, on the other hand, may be subjected by reason of any brokers, finder's or similar fees or expenses with respect to the transactions contemplated by this Agreement to the extent such similar fees and expenses are attributable to any action undertaken by or on behalf of the Company, or AGT or Acquisition, as the case may be. SECTION 8.11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf as of the day and year first above written. APPLIED GRAPHICS TECHNOLOGIES, INC. By: Name: Fred Drasner Title: Chief Executive Officer AGT ACQUISITION CORP. By: Name: Fred Drasner Title: Chief Executive Officer DEVON GROUP, INC. By: Name: Marne Obernauer, Jr. Title: Chief Executive Officer Exhibit 1 Marne Obernauer, Jr. Bruce K. Koch Robert H. Donovan Robert A. Frasco Exhibit 2 Fred Drasner Martin D. Krall Louis Salamone, Jr. EX-23.1 3 INDEPENDENT AUDITOR'S CONSENT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-25059 of Applied Graphics Technologies, Inc. on Form S-8 of our report dated March 23, 1998, appearing in this Annual Report on Form 10-K of Applied Graphics Technologies, Inc. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP New York, NY March 23, 1998 EX-23.2 4 CONSENT OF INPEDENDENT ACCOUNTANTS Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Applied Graphics Technologies, Inc. on Form S-8 (File No. 333-25059) of our report dated March 8, 1996, on our audit of the combined statements of operations, cash flows and changes in owners' equity (deficit) of the Predecessor Group to Applied Graphics Technologies, Inc. for the year ended December 31, 1995, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. New York, New York March 23, 1998 EX-27.1 5 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 12,584 90,150 47,014 3,989 6,234 168,451 57,533 26,513 224,793 37,283 2,823 0 0 178 183,319 224,793 184,993 184,993 120,018 120,018 0 2,487 1,034 22,707 9,140 13,567 0 0 0 13,567 0.88 0.83
EX-27.2 6 RESTATED FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF OPERATIONS OF THE COMPANY AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996, AND AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996,AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR 9-MOS DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 DEC-31-1996 SEP-30-1996 2,567 1,216 1,600 1,698 30,056 27,766 472 889 4,639 3,438 41,580 36,241 42,500 39,174 21,956 21,159 72,147 55,892 25,852 21,425 7,270 0 0 0 0 0 143 138 35,740 17,880 72,147 55,892 132,725 96,763 132,725 96,763 92,242 67,600 92,242 67,600 0 0 0 62 1,833 1,688 10,820 6,458 865 303 9,955 6,155 0 0 0 0 0 0 9,955 6,155 0.79 0.51 0.77 0.50
EX-27.3 7 RESTATED FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF OPERATIONS OF THE COMPANY AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 8,719 2,039 2,540 99,419 0 0 45,986 35,350 31,938 738 526 456 6,013 6,194 4,454 170,859 51,782 44,047 52,338 44,564 42,814 26,950 24,290 23,070 212,634 86,155 74,404 28,028 23,797 25,247 2,410 17,403 7,688 0 0 0 0 0 0 178 144 143 179,331 42,214 38,338 212,634 86,155 74,404 131,488 81,072 39,761 131,488 81,072 39,761 84,653 52,871 26,821 84,653 52,871 26,821 0 0 0 0 0 0 921 508 210 16,636 9,641 4,259 6,613 3,760 1,661 10,023 5,881 2,598 0 0 0 0 0 0 0 0 0 10,023 5,881 2,598 0.68 0.41 0.18 0.64 0.39 0.17
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