<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1998
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: 0-15077
SHOREWOOD PACKAGING CORPORATION
(Exact name of registrant as specified in its Charter)
DELAWARE 11-2742734
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(Address of principal executive offices)
(212) 371-1500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
MARCH 1, 1998 18,068,000
Date Number of Shares
Page 1 of 15
<PAGE> 2
SHOREWOOD PACKAGING CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C>
Part I: Financial Statements
Consolidated Balance Sheets
January 31, 1998 (Unaudited) and
May 3, 1997
(Audited) 3
Consolidated Condensed Statements of Earnings
13 weeks ended January 31, 1998 (Unaudited) and
13 weeks ended February 1, 1997 (Unaudited) 4
Consolidated Condensed Statements of Earnings
39 weeks ended January 31, 1998 (Unaudited) and
40 weeks ended February 1, 1997 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows
39 weeks ended January 31, 1998 (Unaudited) and
40 weeks ended February 1, 1997 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements 7 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 13
Part II: Other Information 14
</TABLE>
CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND ELSEWHERE IN THIS FORM 10-Q,
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE TYPICALLY
IDENTIFIED BY THEIR INCLUSION OF PHRASES SUCH AS "THE COMPANY ANTICIPATES," "THE
COMPANY BELIEVES" AND OTHER PHRASES OF SIMILAR MEANING. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS
THAT MAY CAUSE THE 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. SUCH FACTORS INCLUDE,
AMONG OTHERS: GENERAL ECONOMIC AND BUSINESS CONDITIONS; COMPETITION; POLITICAL
CHANGES IN INTERNATIONAL MARKETS; RAW MATERIAL AND OTHER OPERATING COSTS; COSTS
OF CAPITAL EQUIPMENT; CHANGES IN FOREIGN CURRENCY EXCHANGE RATES; CHANGES IN
BUSINESS STRATEGY OR EXPANSION PLANS; THE RESULTS OF CONTINUING ENVIRONMENTAL
COMPLIANCE TESTING AND MONITORING; QUALITY OF MANAGEMENT; AVAILABILITY, TERMS,
AND DEVELOPMENT OF CAPITAL; FLUCTUATING INTEREST RATES; AND OTHER FACTORS
REFERENCED IN THIS FORM 10-Q.
Page 2 of 15
<PAGE> 3
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
JANUARY 31, MAY 3,
1998 1997
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $3,667 $3,153
Accounts receivable, net 32,703 38,998
Inventories 42,698 42,291
Deferred tax assets 885 885
Refundable income taxes 428 4,621
Prepaid expenses and other current assets 7,582 4,584
-------- --------
Total Current Assets 87,963 94,532
Property, Plant and Equipment, net 196,533 156,156
Excess of Cost Over the Fair Value of Net Assets Acquired, net 18,371 19,180
Other Assets 9,493 8,010
-------- --------
$312,360 $277,878
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $22,700 $25,653
Accrued expenses 11,044 12,214
Current maturities of long-term debt 15,000 15,000
-------- --------
Total Current Liabilities 48,744 52,867
Long-Term Debt 133,086 106,856
Deferred Credit and Other Long-Term Liabilities 828 713
Deferred Income Taxes 25,531 20,211
-------- --------
Total Liabilities 208,189 180,647
-------- --------
Temporary Equity Relating to Put Options 1,938 875
Commitments and Contingencies
Stockholders' Equity:
Series A preferred stock, $10 par value; 50,000 shares
authorized, none issued - -
Preferred stock, $10 par value; 5,000,000 shares authorized
none issued - -
Common stock, $.01 par value; 40,000,000 shares authorized;
22,694,134 issued and 18,061,751 outstanding in November and
22,501,342 issued and 18,535,156 outstanding in May 227 225
Additional paid-in capital 50,869 49,456
Retained earnings 115,988 95,681
Cumulative foreign currency translation adjustment (5,304) (2,875)
Treasury stock (4,632,383 and 3,966,186 shares at
cost in November and May) (59,547) (46,131)
-------- --------
Total Stockholders' Equity 102,233 96,356
-------- --------
$312,360 $277,878
======== ========
</TABLE>
Page 3 of 15
<PAGE> 4
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
JANUARY 31, FEBRUARY 1,
1998 1997
------- -------
<S> <C> <C>
Net Sales $96,629 $97,823
------- -------
Costs and Expenses:
Cost of Sales 74,934 76,651
Selling, General and Administrative 11,283 11,116
-------- --------
Earnings from Operations 10,412 10,056
Other Income, net 377 350
Interest Expense (1,857) (2,135)
-------- ---------
Earnings Before Provision for Income Taxes and Loss from
Discontinued Operations 8,932 8,271
Provision for Income Taxes 3,394 3,159
-------- --------
Earnings Before Loss from Discontinued Operations 5,538 5,112
Loss from Discontinued Operations - (247)
-------- --------
Net Earnings $5,538 $4,865
======== ======
EARNINGS PER SHARE INFORMATION:
BASIC
Earnings from Continuing Operations $ .31 $ .28
Loss from Discontinued Operations - (.01)
-------- -------
Net Earnings Per Common and Common Equivalent Share $.31 $.27
======= ======
DILUTED
Earnings from Continuing Operations $ .30 $ .27
Loss from Discontinued Operations - (.01)
-------- -------
Net Earnings Per Common and Common Equivalent Share $.30 $.26
======= ======
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 18,017 18,239
====== ======
DILUTED 18,463 18,821
======= ======
</TABLE>
Page 4 of 15
<PAGE> 5
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS 40 WEEKS
ENDED ENDED
JANUARY 31, FEBRUARY 1,
1998 1997
-------- --------
<S> <C> <C>
Net Sales $312,053 $321,190
-------- --------
Costs and Expenses:
Cost of Sales 240,448 250,552
Selling, General and Administrative 34,195 34,295
-------- --------
Earnings from Operations 37,410 36,343
Other Income, net 1,105 363
Interest Expense (5,762) (6,845)
-------- ---------
Earnings Before Provision for Income Taxes and Loss from
Discontinued Operations 32,753 29,861
Provision for Income Taxes 12,446 11,406
--------- ---------
Earnings Before Loss from Discontinued Operations 20,307 18,455
Loss from Discontinued Operations - (357)
--------- ---------
Net Earnings $20,307 $18,098
========= =======
EARNINGS PER SHARE INFORMATION:
BASIC
Earnings from Continuing Operations $ 1.12 $1.01
Loss from Discontinued Operations - (.02)
-------- -------
Net Earnings Per Common and Common Equivalent Share $1.12 $.99
======== ======
DILUTED
Earnings from Continuing Operations $ 1.10 $ .99
Loss from Discontinued Operations - (.02)
-------- -------
Net Earnings Per Common and Common Equivalent Share $1.10 $.97
======== ======
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 18,066 18,232
======= ======
DILUTED 18,506 18,735
======= ======
</TABLE>
Page 5 of 15
<PAGE> 6
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS 40 WEEKS
ENDED ENDED
JANUARY 31, FEBRUARY 1,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 20,307 $ 18,098
Adjustments to reconcile net earnings to net cash flows
provided from operations:
Depreciation and amortization 13,166 13,061
Deferred income taxes 4,517 3,388
Changes in operating assets and liabilities:
Accounts receivable 5,538 4,211
Inventories (1,197) 358
Prepaid expenses and other current assets (3,066) 166
Other assets (552) (1,715)
Accounts payable, accrued expenses and other
long term liabilities 811 2,506
-------- --------
Net cash flows provided from operating activities 39,524 40,073
-------- --------
Cash Flows from Investing Activities:
Capital Expenditures (54,257) (18,682)
Business Acquisitions -- (5,000)
-------- --------
Net cash flows used in investing activities (54,257) (23,682)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from (repayments of) long-term borrowings 26,710 (15,460)
Purchase of treasury stock (13,416) (3,957)
Issuance of common stock 1,679 2,641
-------- --------
Net cash flows provided from (used in) financing activities 14,973 (16,776)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 274 (4)
-------- --------
(Decrease) Increase in cash and cash equivalents 514 (389)
Cash and cash equivalents at beginning of period 3,153 4,479
-------- --------
Cash and cash equivalents at end of period $ 3,667 $ 4,090
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ 3,789 $ 7,375
======== ========
Income taxes paid $ 6,189 $ 5,872
======== ========
</TABLE>
Page 6 of 15
<PAGE> 7
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position, the
results of operations, and the changes in cash flows at January 31, 1998 and for
all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes included in the
Company's May 3, 1997 Annual Report to Stockholders on Form 10-K as filed with
the Securities and Exchange Commission ("1997 Form 10-K").
The Company's fiscal year ends on the Saturday closest to April 30. Fiscal 1998
will be a 52 week year to end May 2, 1998. The first, second and third quarters
of fiscal 1998 were 13 week periods. Fiscal 1997 was a 53 week year ended May 3,
1997. The first quarter of fiscal 1997 was a 14 week period, and the second and
third quarters were 13 week periods.
The results of operations for the 13 week period and 39 week period ended
January 31, 1998 are not necessarily indicative of the results for the full
year.
2. INCOME TAXES
The effective income tax rate is based on estimates of annual amounts of taxable
income and other factors. These estimates are updated periodically and any
increase or decrease in the provision for income taxes is reflected in the
period in which the estimate is changed. The effective tax rate for fiscal 1997
was 37.9%.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, 1998 MAY 3, 1997
<S> <C> <C>
Raw materials and supplies $17,281 $16,432
Work in process 6,447 8,209
Finished goods 18,970 17,650
-------- -------
$42,698 $42,291
======= =======
</TABLE>
4. OTHER ASSETS
In May 1995, the Company loaned $2.0 million (included in other assets) to its
then Vice Chairman (and now present chairman) of the Board and President (the
"Executive"). The loan is due on May 4, 2000, and bears interest payable
quarterly equal to the Applicable Federal Rate as defined (5.58% at January 31,
1998), adjusted monthly.
Page 7 of 15
<PAGE> 8
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
The Company agreed to guaranty a portion of an $8.5 million loan made by a bank
to the Executive in connection with his purchase of certain real estate. The
Company's maximum liability under the guaranty is $3.0 million. The guaranty
will terminate at such time as $4.3 million of the loan has been repaid by the
Executive provided that: i) the unpaid portion of the loan is less than 75% of
the then fair market value of the related real estate which was mortgaged to
secure the loan; ii) the Executive's annual compensation meets or exceeds the
level of annual compensation at the date of the guaranty; and iii) there are no
defaults under the loan agreement. Pursuant to the terms of the loan agreement,
a prepayment of $2.0 million must be made in each of November 1997, February
1998 and May 1998 and the remaining balance is due August 1998. In consideration
for the Company's guaranty, the Executive agreed to pay to the Company a monthly
fee of 1% per annum of the outstanding guaranty amount and to reimburse the
Company for expenses incurred in connection with the guaranty. In December 1997,
the underlying loan agreement was modified, waiving the November 1997 payment
and increasing the August 1998 payment to $4.5 million from the original amount
of $2.5 million. The February 1998 payment was made.
5. COMMITMENTS AND CONTINGENCIES
a. Treasury Stock
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
DATE OF AUTHORIZATION AUTHORIZED SHARES
January 1993 2.0 million
December 1995 2.0 million
April 1997 1.24 million
Shares are authorized for purchase from time to time in the open market, subject
to the terms of the Company's credit facility. As of January 31, 1998,
approximately 1.84 million shares remain authorized for purchase.
b. Temporary Equity Relating to Put Options
In April 1997, the Company sold common equity put options ("put options") on
50,000 shares of its common stock which were exerciseable six months from the
date of issuance and gave an independent party the right to sell such shares to
the Company at a strike price of $17.50 per share. The put options sold in April
have expired and were not exercised.
During the first quarter of 1998, the Company sold additional put options on
25,000 shares of its common stock which are exerciseable six months from the
date of issuance at a strike price of $18.00. The options sold in the first
quarter of 1998 have expired and were not exercised.
During the second quarter of 1998, the Company sold additional put options on
25,000 shares of its common stock which are exerciseable six months from the
date of issuance at a strike price of approximately $19.63.
During the third quarter of 1998, the Company sold additional put options on
62,000 shares of its common stock which are exerciseable six months from the
date of issuance. The strike price was $22.77 on 26,000 shares and $23.76 on
36,000 shares.
Temporary equity relating to put options on the accompanying consolidated
balance sheets represent the amount the Company would be obligated to pay if all
unexpired put options were exercised.
Page 8 of 15
<PAGE> 9
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
c. New Facility
The Company has committed to building a state-of-the-art manufacturing facility
in the city of Guangzhou, China. The facility and related equipment will require
a capital investment of approximately $35.0 million. Through January 31, 1998,
the Company has invested approximately $24 million. The Company expects to spend
the balance during the fourth quarter of fiscal 1998 and the first quarter of
fiscal 1999. The Company anticipates paying for this investment with funds
generated from operations as well as the existing credit facility.
d. Environmental Matters
On a continuing basis, the Company monitors its compliance with applicable
environmental laws and regulations. As part of this process the Company
cooperates with appropriate governmental authorities to perform any necessary
testing and compliance procedures. The Company is not currently aware of any
environmental compliance matters that it believes will have a material effect on
the consolidated financial statements.
e. 1995 Performance Bonus Plan
In July 1995, the Board of Directors approved the 1995 Performance Bonus Plan
(the "Plan"), applicable to the Executive. Under the Plan, for each of the five
fiscal years of the Company commencing with fiscal year 1996, the Executive will
be entitled to a graduated bonus (the "Performance Bonus") based upon a
comparison of the Company's earnings from operations plus depreciation and
amortization (the "Performance Measure") in that award year with the immediately
preceding fiscal year. The size of the Performance Bonus, if any, is tied to the
level of the Company's performance, as measured by the Performance Measure. The
maximum Performance Bonus payable in respect of any award year under the Plan is
$2.0 million.
6. DISCONTINUED OPERATIONS
In March 1997 the Company announced that it would discontinue its transportation
business ("Transport"), dispose of the related assets and outsource its future
delivery requirements. Transport had provided freight delivery services to the
Company as well as to other non-related customers. The Company believes that
this transaction will enable management to concentrate more on its core business
and reduce the Company's future freight and delivery expenses. During the three
and nine months ended February 1, 1997, Transport's loss from operations was
$247 thousand and $357 thousand (net of income tax benefit of $153 thousand and
$221 thousand), respectively, and revenues to outside customers were $1.5
million and $4.9 million, respectively. The net assets of Transport were not
material to the Company.
7. NEW ACCOUNTING PRONOUNCEMENT
In the third quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share". Basic income per share is
determined using the weighted average number of shares of common stock
outstanding during each period. Diluted income per share further assumes the
issuance of common shares for all dilutive securities including restricted stock
awards, stock options and warrants.
Page 9 of 15
<PAGE> 10
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's fiscal year ends on the Saturday closest to April 30. Fiscal 1998
will be a 52 week year to end May 2, 1998. The first, second and third quarters
of fiscal 1998 were 13 week periods. Fiscal 1997 was a 53 week year ended May 3,
1997. The first quarter of fiscal 1997 was a 14 week period, and the second and
third quarters were 13 week periods.
In March 1997, the Company disposed of its transportation business ("Shorewood
Transport"). The operations of Shorewood Transport have been presented as
"Discontinued" in all prior periods.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three and nine month periods ended January 31, 1998 were $96.6
million and $312.1 million as compared to net sales of $97.8 million and $321.2
million for the corresponding prior periods. After adjusting for the extra week
in the prior period, sales were essentially flat when compared to the prior
year. Flat sales for the three and nine month periods are primarily due to sales
to tobacco industry customers not meeting expectations. The Company believes it
will experience sales growth in the fourth quarter as compared to the
corresponding prior period.
The Company believes that future sales growth will be generated through
continued penetration of its existing markets, and the expanding market of
CD-ROM products, as well as its expansion into China.
Cost of Sales
Cost of sales as a percentage of sales for the three and nine months ended
January 31, 1998 were 77.5% and 77.1% as compared to 78.4% and 78.0% for the
corresponding prior periods. The decrease in this percentage when compared to
the prior year is primarily due to manufacturing efficiencies as well as the
Company's corporate-wide purchasing program which is continuing to show
favorable results. The Company remains sensitive to price competitiveness in the
markets that it serves, and in the areas that are targeted for growth and
believes that the installation of state-of-the-art printing and manufacturing
equipment (and related labor and production efficiencies) will enable it to
continue to compete effectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
three and nine months ended January 31, 1998 was 11.7% and 11.0% as compared to
11.4% and 10.7% for the corresponding prior period. The increase in selling,
general and administrative expenses as a percentage of sales is largely due to
the flat sales described above and the Company's continued development of
corporate-wide shared services.
Investment and Other Income
Investment and other income, net, for the three and nine months ended January
31, 1998 were $377 thousand and $1.1 million, respectively. The net gain for the
three month period was primarily due to net foreign exchange gains of $281
thousand and interest and investment income of $173 thousand. These gains were
partially offset by a loss on the sale of equipment. The net gain for the nine
month period includes a net foreign exchange gain of $437 thousand, interest and
investment income of $413 thousand and a net gain on the sale of equipment of
$255 thousand.
Page 10 of 15
<PAGE> 11
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Investment and other income, net, for the three and nine months ended February
1, 1997 were $350 thousand and $363 thousand, respectively. The net income for
the three month period was primarily due to interest and investment income of
$166 thousand and net foreign exchange gains of approximately $156 thousand. The
net income for the nine month period includes interest and investment income of
approximately $447 thousand, offset by net foreign exchange losses of
approximately $113 thousand.
The Company's exposure to foreign exchange transaction gains or losses relate to
the Company's Canadian facilities which have U.S. dollar denominated net assets.
The Company believes that fluctuations in foreign exchange rates will not have a
material impact on the operations or liquidity of the Company, based upon
current and historical levels of working capital at the Canadian facilities.
Interest Expense
Interest expense for the three and nine months ended January 31, 1998 was $1.9
million and $5.8 million as compared to $2.1 million and $6.8 million for the
corresponding prior periods. The decrease in interest costs is related to
decreases in the Company's effective interest rate during the three and nine
month periods of fiscal 1998 as well as a reduced average level of borrowings,
exclusive of borrowings related to capital expenditures and the China facility
not yet in production ("construction in progress"). Interest cost on borrowings
related to construction in progress is capitalized. Capitalized interest
increased from $177 thousand to $600 thousand for the three month period and
from $393 thousand to $1,258 thousand for the nine month period. The Company
anticipates that the amount of interest to be capitalized in fiscal 1998 will
continue to increase as the Company invests more funds into the construction of
the China facility.
At January 31, 1998, the Company had two outstanding intermediate-term interest
rate swap agreements. Under the first agreement which relates to $35.0 million
of borrowings under the credit facility, the Company pays a fixed rate of 6.19%
and receives a floating rate based on LIBOR, as determined in three-month
intervals. This agreement terminates May 5, 1998. Under the second agreement
which relates to $50.0 million of borrowings under the credit facility, the
Company pays a fixed rate of 5.76% and receives a floating rate based on LIBOR,
as determined in three-month intervals. This agreement terminates November 3,
1998. These transactions effectively change a portion of the Company's interest
rate exposure from a floating-rate to a fixed-rate basis.
In July 1997, the Company entered into a reversion swap agreement relating to
$50.0 million of borrowings under the credit facility. Under the agreement, the
Company pays a fixed rate of 5.73% and receives a floating rate based upon
LIBOR, as determined in three month intervals. This agreement terminates in
April 2002. This transaction effectively changes a portion of the Company's
interest rate exposure from a floating-rate to a fixed-rate basis. After the
first year, however, the fixed rate reverts back to floating for any three month
period during which the LIBOR rate exceeds 6.625%. The rate reverts back to the
fixed rate of 5.73% for any subsequent period for which the LIBOR rate drops
below 6.625%.
In October 1997, the Company entered into an intermediate-term interest rate
swap agreement relating to approximately $35.0 million of borrowings under the
credit facility. Under the agreement, the Company pays a fixed rate of 5.74% and
receives a floating rate based on LIBOR, as determined in three-month intervals.
The agreement begins on May 5, 1998 and terminates May 5, 1999. The agreement
may be extended at the discretion of the financial institution for an additional
year.
The fair value of the interest rate swap agreements are immaterial to the
financial statements of the Company.
The Company has used, and may continue to use, interest rate swaps and caps to
manage its exposure to fluctuating interest rates under its debt agreements.
Page 11 of 15
<PAGE> 12
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Income Taxes
The effective income tax rate for the three and nine month periods ended January
31, 1998 is 38.0% and was 38.2% for the corresponding prior periods. These rates
reflect a blend of domestic and foreign taxes and are adjusted periodically
based upon the estimated annual effective tax rate, which for the entire fiscal
year ended May 3, 1997 was 37.9%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at January 31, 1998 was $3.7 million as compared to
$3.2 million at May 3, 1997, and working capital was $39.2 million as compared
to $41.7 million as of the same dates respectively. The current ratio at January
31, 1998 and May 3, 1997 was 1.8 to one. The Company's cash balances remain
relatively constant as a result of the Company's cash management program whereby
collection of accounts receivable are used to retire revolver obligations, and
payments of accounts payable and accrued expenses are funded through the
revolver obligations.
Cash flow from operating activities for the nine months ended January 31, 1998
was $38.0 million before changes in operating assets and liabilities as compared
to $34.5 million for the corresponding prior period. Cash flows from operations
as well as borrowings under the Company's credit facilities were used to support
$54.3 million in capital investments. In addition, the Company purchased
approximately $13.4 million of treasury stock under the Board of Directors
authorized program described below. The Company is in the process of
constructing its facility in China. The facility and related equipment will
require a capital investment of approximately $35.0 million. Through January 31,
1998, the Company has invested approximately $24 million. The Company expects to
spend the balance during the fourth quarter of fiscal 1998 and the first quarter
of fiscal 1999. The Company anticipates paying for these investments with funds
generated from operations as well as the existing credit facility.
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
DATE OF AUTHORIZATION AUTHORIZED SHARES
January 1993 2.0 million
December 1995 2.0 million
April 1997 1.24 million
Shares are authorized for purchase from time to time in the open market, subject
to the terms of the Company's credit facility. As of January 31, 1998,
approximately 1.84 million shares remain authorized for purchase.
The Board and management of the Company believe the long-term outlook for the
Company to be promising and that the Company's common stock represents an
attractive investment opportunity. The treasury stock purchases will be made
from time to time as market conditions permit.
To fund the China investment, and to facilitate its share repurchase program,
the Company has a credit facility with its lending banks. As of January 31,
1998, the facility consists of $67.5 million of senior term notes and $125.0
million of a long-term revolver which bear interest, at the discretion of the
Company, at either the Bank's prime rate or LIBOR plus between 50 and 100 basis
points depending upon certain financial ratios. The revolving credit is
available, in its entirety, without any borrowing base limitation. At January
31, 1998, the Company had borrowings under the long-term revolver facility of
$80.6 million. The senior term notes will be repaid in equal quarterly
installments of $3.75 million through May, 2002 at which time the revolver will
mature.
Page 12 of 15
<PAGE> 13
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The loan agreement contains covenants related to levels of debt to cash flow,
current assets to current liabilities, fixed charge coverage, net worth and
investments (including investments in the Company's own common stock), and
restricts the amount of retained earnings available for payment of dividends. At
January 31, 1998, there was approximately $14.4 million of retained earnings
available for the payment of dividends.
The Company expects that cash flow from operations together with the borrowing
capacity under the revolving credit facility will be sufficient to meet the
needs of the business.
Page 13 of 15
<PAGE> 14
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
Part II
Item 1 LEGAL PROCEEDINGS
Information concerning legal and environmental matters is incorporated by
reference from Part I, Footnotes 5(d) of Notes to Consolidated
Condensed Financial Statements
Item 2 CHANGES IN SECURITIES
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.113 - Stock Warrant Agreement dated as of May 15, 1997 to purchase
350,000 shares of common stock.
10.114 - Form 8-A for registration of certain classes of securities
incorporated by reference, as filed with the Commission on January 14,
1998, Commission file No. 0-15077.
(b) Reports on Form 8-K
None.
Page 14 of 15
<PAGE> 15
SIGNATURES
Pursuant to the regulations 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.
SHOREWOOD PACKAGING CORPORATION
(Registrant)
by: /s/ Howard M. Liebman
---------------------------
Howard M. Liebman
Executive Vice President and
Chief Financial Officer
Dated: March 16, 1998
Page 15 of 15
<PAGE> 16
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
10.113 - Stock Warrant Agreement dated as of May 15, 1997
to purchase 350,000 shares of common stock.
10.114 - Form 8-A for registration of certain classes of
securities incorporated by reference, as filed with
the Commission on January 14, 1998, Commission file
No. 0-15077.
<PAGE> 1
EXHIBIT 10.113
CONFIDENTIAL TREATMENT REQUESTED
STOCK WARRANT AGREEMENT
STOCK WARRANT AGREEMENT ("Agreement") dated as of May 15, 1997, between
SHOREWOOD PACKAGING CORPORATION, A DELAWARE CORPORATION, with its office at 277
Park Avenue New York, New York 10172, (the "Company") and [*] (the "Holder").
WHEREAS, the Board of Directors of the Company has determined that it is in the
best interest of the Company and its stockholders to grant to the Holder an
option to purchase three hundred fifty thousand (350,000) shares of the Common
Stock, par value $.01 per share (the "Common Stock") of the Company:
NOW, THEREFORE, the parties agree as follows:
1. Grant of Option
1.1. The Company grants to the Holder, on the terms and conditions
hereinafter set forth, an option (the "Option") to purchase three
hundred fifty thousand (350,000) shares of Common Stock of the Company,
subject to adjustment as provided in Section 11 hereof (the "Option
Shares").
1.2. The Option does not qualify for "ISO" treatment to the extent
permitted by Section 422A of the Internal Revenue Code of 1986, as
amended.
1.3. This Option and Option Shares when issued, are not, will not, and,
subject to certain registration rights granted herewith, are not
required to be registered under the Securities Act of 1933, as amended,
(the "Securities Act") but the Option Shares, may, subject to
applicable rules and regulations, be listed upon any securities
exchange upon which the Company's Common Stock is listed at the time of
such issuance and sale.
2. Price for Shares
The exercise price for the Option Shares shall be Eighteen and
thirty-eight one hundredths Dollars ($18.38) per Option Share, subject
to adjustment as provided in Section 11 hereof (the "Exercise Price").
As used herein, the term "Purchase Price" shall mean the then current
[*] [**] Portions of this document have been omitted pursuant to an
Application for Confidential Treatment. Such omissions have been filed
separately with the Securities and Exchange Commission together with
such Application for Confidential Treatment.
<PAGE> 2
Exercise Price multiplied by the then current number of Option Shares
for which the Option is exercisable.
3. Period of Option
This Option will be exercisable, beginning on the date hereof
and expiring on May 14, 2002, at 5 p.m. EDT on such date (the
"Period").
4. Exercise of Option
4.1. The Option herein granted shall be exercisable within the Period
by notice in writing from the Holder to the Company which notice shall
be signed by a duly authorized representative of the Holder. Such
notice shall be accompanied, pursuant to Section 2 hereof, by payment
in full made in cash or certified or bank check payable to the Company
for the full amount of the Purchase Price.
4.2. Upon exercise of the Option, the Company shall promptly issue
stock certificates for the Option Shares purchased and the Holder shall
be deemed to be the holder of record of the Common Stock purchased as
of the date of issuance of certificates for such shares to it. The
Company may delay issuing certificates representing Option Shares for a
reasonable period of time pending listing on any stock exchange;
provided, however, that the Company shall deliver such certificates to
the Holder promptly upon the listing on any such exchange. The Holder
will not be, nor be deemed to be, a holder of any Option Shares unless
and until certificates for such shares are issued to it in accordance
with the terms of this Agreement.
4.3. Subject to Section 6 below, if and when the Option is exercised,
the certificates to be issued evidencing shares of the Company's Common
Stock shall bear a legend substantially as follows:
"The shares evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"). No transfer, sale or other disposition of these
shares may be made except pursuant to Rule 144 under the Securities Act
or unless a registration statement with respect to these shares has
become effective under the Securities Act or the Company is furnished
with an opinion of counsel satisfactory in form and substance to the
Company that such registration is not required."
2
<PAGE> 3
4.4. The Company hereby agrees that at all times there shall be
reserved for issuance and delivery upon exercise of this Option, free
from preemptive rights, such number of authorized but unissued or
treasury shares of its common stock as shall be required for issuance
or delivery upon exercise of this Option.
4.5. The Company further agrees that: (i) it will not by amendment of
its Certificate of Incorporation or through reorganization,
consolidation, merger, dissolution or sale of its assets, or by any
other voluntary act, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be
observed or performed hereunder by the Company; and (ii) it will fully
cooperate with the Holder in preparing any filings or applications and
provide such information to the Holder or any regulatory authority as
may be necessary to obtain any approvals or fulfill any filing
requirements in connection with the Holder's exercise of this Option or
in connection with this Agreement.
5. Transferability of Option
This Option shall not be assignable or transferable in whole
nor in part except (i) with the prior written consent of the Company,
or (ii) to an Affiliate (as herein defined below) of the Holder, or
(iii) to one other non-affiliated person or entity, who shall
hereinafter be referred to as the "Permitted Transferee"). No such
transfer shall be effective as against the Company unless (i) the
Holder first gives written notice thereof to the Company, and (ii) the
transferee executes and delivers to the Company an instrument agreeing
to be bound by this Agreement. Such notice shall set forth the name,
address, phone number and a contact person of the transferee. A
transferee of the Option shall become the Holder thereof. Any transfer
of the Option shall be subject to all state and federal securities
laws.
"Affiliate" means, with respect to any specified person, any
other person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control
with, such specified person. For the purpose of this definition,
"control" (including the terms "controlled by" and "under common
control with"), with respect to the relationship between or among two
or more persons, means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of
the affairs or management of a person, whether through the ownership of
voting securities, as trustee or
3
<PAGE> 4
executor, by contract or otherwise, including, without limitation, the
ownership, directly or indirectly, of securities having the power to
elect a majority of the board of directors or similar body governing
the affairs of such person.
6. Demand Registration
6.1. Upon the written request of the Holder and/or Permitted Transferee
that the Company effect the registration under the Securities Act of
all the Option Shares, the Company will use its best efforts to effect
the registration under the Securities Act of the Option Shares so
requested to be registered. However, the Company shall have no
obligation to effect more than two (2) registrations of the Option
Shares.
6.2. Whenever the Company shall effect a registration pursuant to this
Section 6 in connection with an offering by one or more holders of
registrable securities, no securities other than registrable securities
or securities issuable pursuant to that certain Warrant to Purchase
Common Stock (35,000 shares) dated [**], issued to [**] shall be
included among the securities covered by such registration unless the
managing underwriter, if any, of such offering shall have advised each
selling holder of registrable securities to be covered by such
registration in writing that the inclusion of such other securities
would not adversely affect such offering. In addition, if any of the
registrable securities covered by such registration are to be sold in
an underwritten offering, any other person who wishes to include his
securities in the registration must agree in writing to sell his
securities on the same terms and conditions as apply to the registrable
securities being sold.
6.3. Registration by the Company under this Section shall be on such
appropriate registration form of the Securities and Exchange Commission
("Commission") as shall be selected by the Company.
6.4. The Company will pay all registration costs and expenses in
connection with any registration requested pursuant to this Section by
each of the Holder or the Permitted Transferee which obligation of the
Company to pay all registration costs and expenses shall not exceed two
(2) registrations. Such registrations may include the Option Shares and
other registrable shares of the Company. The cost of any and all
subsequent registrations of the Option
4
<PAGE> 5
Shares shall be borne by the Holder and/or the Permitted Transferee, as
the case may be.
6.5. A registration requested pursuant to this Section shall not be
deemed to have been effected, and the provisions of Section 6.1 shall
not be deemed to have been complied with, (i) unless a registration
statement with respect thereto has become effective, or (ii) if after
it has become effective, such registration is the subject of any stop
order, injunction or other order or requirement of the Commission or
other governmental agency or court for any reason not attributable to
the selling holders and has not thereafter become effective.
6.6. If, in the good faith business judgment of the Board of Directors
of the Company, the Company's ability to consummate (upon favorable
terms and conditions) a significant pending merger, acquisition, sale
of assets or other similar business transaction (each, a "Significant
Event") would be adversely affected by the filing of a registration
statement which was requested pursuant to this section then, in such
event, the Company may elect not to file such registration statement;
provided, however, that such period of delay shall not exceed the
lesser of (i) 90 days, or (ii) the period of time during which the
Significant Event continues to exist.
6.7. If any of the registrable securities covered by a registration
statement which was initiated pursuant to this Section are to be sold
in an underwritten offering, the investment banker or bankers and
manager or managers that will administer the offering will be selected
by the Company; provided, however, that such investment bankers and
managers must be reasonably satisfactory to the holders of a majority
of the registrable securities included in such offering.
7. Registration Expenses
The costs and expenses (other than underwriting discounts and
commissions) of all registrations and qualifications under the
Securities Act, and of all other actions the Company is required to
take or effect, pursuant to Sections 8 and 14 of this Agreement, shall
be paid by the Company (including, without limitation, all registration
and filing fees, printing expenses, fees and expenses of complying with
Blue Sky laws, and fees and disbursements of counsel for the Company
and Company's independent public accountants).
5
<PAGE> 6
8. Registration Procedures
8.1. If and whenever the Company is required to effect the registration
of any Option Shares under the Securities Act as provided in this
Agreement, the Company will promptly:
a. prepare and file with the Commission a registration statement with
respect to such Option Shares and use its best efforts to cause such
registration statement to become effective;
b. prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with
respect to the disposition of all such Option Shares until such time as
all of such Option Shares have been disposed of in accordance with the
intended methods of disposition by the Holder set forth in such
registration statement, but in no event for a period of more than nine
months after such registration statement becomes effective or when in
the opinion of counsel to the Company, which counsel shall be Bryan
Cave LLP or such other law firm of national reputation reasonably
acceptable to the Holder, the Option Shares are permitted to be sold or
disposed of in accordance with Rule 144 under the Securities Act.
c. furnish to the Holder such number of copies of such registration
statement and of each such amendment and supplement thereto, such
number of copies of the prospectus included in such registration
statement, in conformity with the requirements of the Securities Act;
d. use its best efforts to register or qualify the Option Shares
covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions within the United States of America
(including territories and commonwealths thereof) as the Holder shall
request, except that the Company shall not for any such purpose be
required to qualify generally to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified, to subject itself
to taxation in any such jurisdiction or to consent to general service
of process in any jurisdiction;
e. notify the Holder when a prospectus relating to the Option Shares is
required to be delivered under the Securities Act within the period
mentioned in subdivision (b) of this Section 8.1, of the happening of
any event as a
6
<PAGE> 7
result of which the prospectus included in such registration statement
as then in effect, includes any untrue statement of a material fact or
omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made, and upon receipt of such
notice and until a supplemented or amended prospectus is available the
Holder shall not offer or sell any securities covered by such
registration statement and shall return all copies of such prospectus
to the Company if requested to do so by it; and
f. furnish to the Holder at the time of the declaration of
effectiveness by the Commission relating to the registration statement
relating to the Option Shares, a signed copy of an opinion of its
counsel, Bryan Cave LLP (or such other law firm of national reputation
reasonably acceptable to the Holder) to the effect that (i) a
registration statement covering such Option Shares has been filed with
the Commission under the Securities Act and has been made effective by
order of the Commission, (ii) said registration statement and the
prospectus contained therein comply as to form in all material respects
with the requirements of the Securities Act, (iii) no stop order has
been issued by the Commission suspending the effectiveness of such
registration statement and (iv) the applicable provisions of the
securities or Blue Sky laws of each state in which the Company shall be
required, pursuant to subparagraph (d) of this Section 8.1, to register
or qualify such Option Shares, have been complied with, assuming the
accuracy and completeness of the information furnished to such counsel
with respect to each filing relating to such laws; it being understood
that such opinion may contain such qualifications and assumptions as
are customary in the rendering of similar opinions and that such
counsel may rely, as to all factual matters treated therein, on
certificates of the Company.
8.2. The Company may require the Holder to furnish the Company such
information regarding the Holder's identity and its intended
distribution of such Option Shares as the Company may from time to time
reasonably require in writing and as shall be required by law to effect
such registration.
9. Termination of Obligations
The obligations of the Company imposed by Section 6 through 8
above shall cease and terminate, as to any particular Option Shares,
upon the earlier of (a) when such shares shall have been effectively
registered under the Securities Act and disposed of in accordance with
the
7
<PAGE> 8
registration statement covering such securities, or (b) when in the
opinion of counsel for the Company which counsel shall be Bryan Cave
LLP or such other law firm of national reputation reasonably acceptable
to the Holder, such shares are permitted to be distributed pursuant to
Rule 144 under the Securities Act, or (c) May 14, 2002. Whenever such
restrictions shall terminate as to any Option Shares, the Holder shall
be entitled to receive from the Company, without expense to the Holder,
a new certificate or certificates representing such securities not
bearing the legend set forth in Section 4.3 above.
10. Availability of Information
The Company shall comply with the reporting requirements of
Sections 13 and 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), to the extent it shall be required to do
so pursuant to the Exchange Act, and at all times while so required
shall use its best efforts to comply with all other public information
reporting requirements of the Commission (including reporting
requirements which serve as a condition to utilization of Rule 144 or
any other applicable provision under the Securities Act promulgated in
effect and relating to the availability of an exemption from the
Securities Act for the sale of any Option Shares). The Company will
also cooperate with the Holder in supplying such information and
documentation as may be necessary for it to complete and file any
information reporting forms presently or hereafter required by the
Commission as a condition to the availability of an exemption from the
Securities Act for the sale of any Option Shares.
11. Antidilution
In any event of any change in the Common Stock subject to the
Option granted by this Agreement through merger, consolidation,
reorganization, recapitalization, stock split, stock dividend or the
issuance to stockholders of rights to subscribe to stock of the same
class, or in the event of any change in the capital structure, the
Board of Directors of the Company shall on an equitable basis make such
adjustments with respect to the number and/or Exercise Price of Option
Shares.
12. Representation
12.1. The Company represents and warrants that all Option Shares
deliverable upon exercise hereof will be duly authorized and upon
issuance in accordance with the terms
8
<PAGE> 9
hereof will be validly issued, fully paid and non-assessable and duly
listed, or listed upon official notice of issuance on any stock
exchange where other securities of the Company of the same class are
listed.
12.2. The execution, delivery and performance of this Agreement are
within Company's powers (corporate or otherwise) and have been duly
authorized on its part by all requisite action. This Agreement has been
duly executed and delivered by Company.
13. Indemnity and Contribution
13.1. The Company shall indemnify and hold harmless the Holder of the
Option Shares from and against any and all losses, claims, damages and
liabilities caused by any untrue statement or alleged untrue statement
of a material fact contained in a registration statement or any
post-effective amendment thereto or any registration statement under
the securities laws, or any prospectus included therein required to be
filed or furnished by reason of this Agreement or caused by any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or alleged untrue
statement or omission or alleged omission based upon information
furnished or required to be furnished in writing to the Company by such
Holder expressly for use therein, which indemnification shall include
such person, if any, who controls any such Holder within the meaning of
Section 15 of the Securities Act and Section 20 of the Exchange Act.
13.2. The Holder shall at the same time indemnify the Company, its
directors, each officer signing the related registration statement and
each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act and Section 20 of the Exchange Act
from and against any and all losses, claims, damages and liabilities
caused by any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or any prospectus
required to be filed or furnished by reason of this Section or caused
by any omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
insofar as such losses, claims, damages or liabilities are caused by
any untrue statement or alleged untrue statement or omission based upon
information furnished in writing to the Company by any such Holder
expressly for use therein.
9
<PAGE> 10
13.3. If the indemnification provided for in Section 13.1 of this
Agreement is unavailable to the Holder in respect of any loss, claim,
damage and liability referred to therein, then the Company shall, in
lieu of indemnifying the Holder pursuant to Section 13.1, contribute to
the amount paid or payable by the Holder as a result of such loss,
claim, damage and liability (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand
and the Holder on the other hand in connection with the Option Shares
or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and the Holder on the
other hand in connection with the statements or omissions that resulted
in such loss, claim, damage and liability, as well as any other
relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Holder on the other shall be deemed
to be [**]. The relative fault of the Company on the one hand and the
Holder on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or by the Holder
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
13.4. The Company agrees that it would not be just and equitable if
contribution pursuant to Section 13.3 of the Agreement were determined
by pro rata allocation or by any other method of allocation that does
not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by the
Holder as a result of any loss, claim, damage and liability referred to
in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
incurred by the Holder in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this
Agreement, in no event shall the Company be required to contribute any
amount in excess of the amount by which the total price at which the
Option Shares were sold exceeds the amount of any damages that the
Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such
10
<PAGE> 11
fraudulent misrepresentation. For purposes of Section 13.3 of this
Agreement, each person, if any, who controls the Holder within the
meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act, shall have the same rights to contribution as the Holder.
14. Deliveries Upon Sale of Underlying Shares
14.1. Upon the effective date of any registration statement pursuant to
which the Holder and/or Permitted Transferee, intend to resell the
Option Shares, the Company will cause to be delivered to the Holder
and/or Permitted Transferee an opinion of its counsel, Bryan Cave LLP
(or such other law firm of national reputation reasonably acceptable to
the Holder and/or Permitted Transferee), substantially in the form of
the opinion attached hereto as Exhibit A (the "Opinion"). The Opinion
shall relate to, and be dated as of the effective date of, any such
registration statement. Upon each subsequent sale or sales of the
Option Shares pursuant to any such registration statement, the Company
will cause to be delivered to the Holder and/or Permitted Transferee,
an additional opinion (the "Additional Opinion") which Additional
Opinion may be delivered in the form of an update or "bringdown" of the
Opinion. The Company shall cause the Additional Opinion to be delivered
to the Holder and/or Permitted Transferee no later than twenty (20)
days after the request by the Holder and/or Permitted Transferee. The
Additional Opinion shall relate to, and be dated as of, any such
subsequent sale or sales of the Option Shares.
14.2. Upon the effective date of any registration statement pursuant to
which the Holder and/or Permitted Transferee intend to resell the
Option Shares, the Company will cause to be delivered to the Holder
and/or Permitted Transferee a comfort letter from its independent
outside auditors, substantially in the form of the comfort letter
attached hereto as Exhibit B (the "Comfort Letter"). The Comfort Letter
shall relate to, and be dated as of the effective date, of any such
registration statement and shall relate to such registration statement
and the audited financial information included or incorporated by
reference therein. Upon each subsequent sale or sales of the Option
Shares pursuant to any such registration statement, the Company will
cause to be delivered to the Holder and/or Permitted Transferee an
additional Comfort Letter (the "Additional Comfort Letter"), which
Additional Comfort Letter may be in the form of an update or
"bringdown" of the Comfort Letter. The Company shall cause the
Additional Comfort Letter to be delivered to the Holder and/or
Permitted Transferee no later than twenty (20) days after the request
by the Holder and/or
11
<PAGE> 12
Permitted Transferee. The Additional Comfort Letter shall relate to,
and be dated as of, any such subsequent sale or sales of the Option
Shares. The Company's obligation to cause the delivery of the Comfort
Letter shall not apply if, as a result of change in accounting rule or
standards or change in law, such accounting firm is not permitted or
authorized to issue such Comfort Letter under the circumstances
reflected herein; provided, however, that, in any such case, the
Company shall use its best efforts to cause to be delivered such other
instrument based upon a level of review and assurances substantially
identical to the Comfort Letter, as is permitted to be delivered in
accordance with applicable accounting rules and standards, and
applicable laws, then in effect.
15. Default; Remedies
15.1 In the event that the Company materially breaches any provision
of this Agreement and the Company fails to cure such breach after ten
(10) days written notice from the Holder, upon further written notice
(the "Notice") from the Holder to the Company, the Company shall pay
to the Holder via wire transfer of immediately available funds within
five (5) business days of such Notice, an amount equal to the Formula
Amount (as defined below). "Formula Amount" means [**] To the extent
that the Holder exercises any other remedies available to the Holder
hereunder with respect to a material breach of this Agreement, the
Holder hereby agrees that any amounts received by the Holder from the
Company (other than any reimbursement of the Holder for expenses or
attorney's fees) shall be reduced by the Formula Amount actually
received by the Holder from the Company pursuant to this Section 15.1.
15.2 The remedy provided hereunder shall be exclusive to the Holder and
its Affiliates, and shall not be applicable to any Permitted Transferee
or any other assignee or transferee of this Warrant or the Option
Shares. As a condition precedent to the Company's obligation to pay the
Formula Amount, the Holder shall assign, transfer and convey back to
the Company all Option Shares (whether represented by the Option or
certificates) then owned by it and its Affiliates, of record or
beneficially, whereupon all of the Holder's rights to require the
Company to deliver Option Shares or file registration statements or
otherwise cause the Option Shares to be registered shall immediately
terminate and cease to be of any force or effect. The Company shall
have no obligation to pay the Formula Amount to Holder until the Holder
shall have delivered to it the Option or stock certificates (or an
affidavit of lost stock certificate), as
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<PAGE> 13
applicable, representing such Option Shares (in proper form for
transfer) together with such customary instruments of assignment or
conveyance as the Company's counsel may reasonably request in order to
give effect to the preceding sentence.
15.3 To the extent permitted by, and subject to the mandatory
requirements of all applicable laws, rules and regulations, each and
every right, power and remedy herein specifically given to either party
or otherwise in this Agreement shall be cumulative and shall be in
addition to every other right, power and remedy herein specifically
given or now or hereafter existing at law, in equity or by statute, and
the exercise or the beginning of the exercise of any power or remedy
shall not be construed to be a waiver of the right to exercise at the
same time or thereafter any other right, power or remedy. No delay or
omission by either party in the exercise of any right, remedy or power
or in the pursuit of any remedy shall impair any such right, remedy or
power or be construed to be a waiver of any default on the part of such
party or to be an acquiescence therein. No express or implied waiver by
either party of any breach or default hereunder by the other party
shall in any way be, or be construed to be, a waiver of any future or
subsequent breach or default hereunder by such other party.
16. Miscellaneous
16.1. This Agreement shall be governed by the laws of the State of New
York.
16.2. Any and all notices referred to herein shall be sufficient if
furnished in writing and delivered in person or mailed by certified
mail (return receipt requested) or reputable overnight courier service
to the respective parties at their addresses set forth above or to such
other address as either party may from time to time designate in
writing.
16.3. This Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which shall together constitute
one and the same instrument.
16.4. This Agreement embodies the entire agreement of the parties
regarding the subject matter hereof. All prior negotiations and
representations are merged herein. This Agreement may not be altered or
modified, except by an instrument in writing signed by both parties
(which may be in counterpart); nor may any provision be waived by a
party unless in writing signed by such party.
13
<PAGE> 14
16.5. As used in this Agreement, the masculine, feminine or neuter
gender, and the singular and plural number shall each be deemed to
include the others whenever the context so indicates.
IN WITNESS WHEREOF the parties have executed this Agreement as of the date first
above mentioned.
SHOREWOOD PACKAGING CORPORATION
By:_______________________________
Marc P. Shore, President and Chief
Executive Officer
[*]
14
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