<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended May 1, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
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 10172-3000
(Address of principal executive offices)
(212) 371-1500
(Registrants telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class: Name of Each Exchange on which Registered
-------------------- -----------------------------------------
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
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 |_|
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. |_|
As of July 1, 1999, the aggregate market value of the Registrant's common stock
held by non-affiliates of the Registrant was approximately $221.8 million. (This
figure was computed on the basis of the average of the high and low selling
prices for the Registrant's common stock on July 1, 1999). Non-affiliates
include all shareholders of Registrant other than executive officers, directors
and 5% shareholders of the Registrant. As of July 1, 1999, there were 27,561,427
shares of the Registrants common stock, $.01 par value per share, issued and
outstanding.
The information required in Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive proxy statement for the September 22,
1999 annual meeting of stockholders.
The Exhibit Index is located on Page 47. Total Pages: 49
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PART I
ITEM 1. BUSINESS
Shorewood Packaging Corporation and its subsidiaries (collectively, "Shorewood"
or the "Company") print and manufacture high quality paperboard packaging for
the cosmetics, home video, music, software, tobacco, toiletries and general
consumer markets in the United States, Canada and China. Shorewood was
incorporated in November 1967. The Company's principal executive offices are
located at 277 Park Avenue, New York, New York 10172-3000 and its telephone
number is (212) 371-1500.
Shorewood's strategic objectives are (i) continuing to enhance its position as a
leading paperboard packager to the tobacco industry and the home entertainment
market, which includes the music and video industries; (ii) the further
expansion of the Company's markets in the CD-ROM computer software and games
industry and in the cosmetics and toiletries, food, liquor, consumer
electronics, film and hosiery industries; (iii) the expansion into international
markets to meet the global sourcing needs of its customers; and (iv) the
identification of other areas in the general consumer packaging industry that
can most benefit from the Company's ability to produce graphically enhanced high
quality packaging. To achieve these objectives, the Company intends to continue
expanding its printing, packaging and graphic arts capabilities, including the
development and application of advanced manufacturing technologies and the
establishment of manufacturing facilities in strategic international markets.
PACKAGING PRODUCTS
The Company produces high quality specialized packaging, principally folding
cartons and set up boxes, for its customers in the United States, Canada and
China that require sophisticated precision graphic packaging for their products,
including customers in the home entertainment industry, the tobacco industry,
the software industry, the personal care, cosmetic and toiletries industries and
in consumer markets such as the food, liquor, film, hosiery, consumer
electronics and pharmaceutical industries.
The Company is a principal supplier of printed packaging products for the
tobacco industry, producing the hard flip-top cigarette packages as well as the
traditional slide and shell packages. These products are used to package many of
the leading tobacco brands including those ultimately sold in non-United States
markets. The Company believes that it is the primary carton supplier to the
Canadian tobacco industry and a leading manufacturer of paperboard packaging for
the tobacco industry in the United States. See "Tobacco Industry". In the 52
week period ended May 1, 1999 ("fiscal 1999"), Philip Morris, one of Shorewood's
tobacco industry customers, accounted for approximately 22% of the Company's
consolidated net sales. Although Shorewood believes that its relationships with
these customers are excellent, there can be no assurance that their packaging
requirements in the future will continue at the same levels as in fiscal 1999.
For its music and home entertainment industry customers, the Company
manufactures compact disc packaging (including folders, booklets and liners),
prerecorded cassette packaging (including folders and sleeves), and other
printed material and paperboard packaging for all video formats (including DVD,
VHS and laser discs). The Company's music industry customers include many of the
major music production and distribution companies in the United States. The
Company has long standing relationships with many of these companies and in
certain cases also has agreements, typically for five or six year terms, to
supply their packaging products.
The Company is a supplier of paperboard packaging for the cosmetics and
toiletries industry and also produces a wide range of consumer packaging
products. Additionally, the Company manufactures and provides rigid set-up
boxes, principally for customers in the cosmetics and entertainment industries.
Although Shorewood believes that its relationships with these customers are
excellent, there can be no assurance that their packaging requirements in the
future will continue at the same levels as in fiscal 1999.
The Company continues to expand into the CD-ROM computer software and games
industry. In 1996, the Company completed the construction of a manufacturing
facility in the Pacific Northwest with the strategic objective of enhancing its
service capabilities in this and the home entertainment market. The Pacific
Northwest
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is home to many of the leading software manufacturers. The facility has
successfully achieved its original strategic objective and through effective
cross selling has generated increased production and sales of packaging for
CD-ROM computer software and games at several of the Company's east coast
facilities.
Through the acquisition of Queens Group, the Company is now the exclusive
licensed supplier of the patented Q-Pack(R), a CD packaging alternative to the
traditional plastic jewel box which autoloads on standard equipment. The Q-Pack
is a premium package which is being used by an increasing customer base of
marketers of music, children's interactive games, CD-ROM computer software,
movies and other optical disc products. Made of high-impact polystyrene plastic
and paperboard, the Q-Pack is durable, reducing the broken hinges and cracked
cases of the traditional plastic jewel box. It is available in both standard and
custom-colored plastic.
PRODUCTION
The Company generally produces packaging from specifications, art work or film
supplied by its customers. However, the Company from time to time designs and
develops new packaging concepts and structures when requested by its customers.
The Company has a research and development center located on the grounds of its
Newport News ("Williamsburg") plant which is available to its customers to test
run and develop experimental and innovative packaging designs and production
graphics in a secure environment. Several of the Company's customers have
developed packaging concepts at this facility for production in Williamsburg and
other Company facilities. In addition, the Company is expanding its technical
capabilities to handle digital pre-press processes, including direct to plate
graphic work which can eliminate the need for film in the printing process. This
will also facilitate the worldwide transmission of graphics throughout all of
the Company's locations to better serve its global customers.
The Company's productive capacity and capabilities over the past several years
has substantially increased as a result of capital expenditures for plant,
machinery and equipment. The Company's policy is to continue to enhance its
technological capabilities to meet competitive challenges, although there can be
no assurance that it will be able to do so.
The Company's manufacturing facilities are equipped with multi-color sheet
and/or web fed printing presses which provide both gravure and/or lithographic
printing. In addition, the Company developed and currently utilizes a printing
and manufacturing web system, referred to as the "JOSH System", which combines
gravure and lithographic printing in one in-line system. The Company believes
that the JOSH System gives designers of packaging the flexibility to translate
certain graphic concepts into high quality, cost efficient and precisely
manufactured packaging. The Company's manufacturing facilities are equipped with
other equipment necessary to produce packaging, including platemaking equipment,
leaf stamping machines, diecutters/embossers, folders and gluers. Further, the
Company has machine shops which enable it to service and maintain substantially
all of its machinery and equipment, and maintains a full time design and
engineering staff.
MARKETING AND SALES
The Company's sales result primarily from direct solicitation by certain members
of the Company's senior management and 77 sales people, 61 of whom are in the
United States, 12 of whom are in Canada, and 4 of whom are in China.
The Company's marketing and sales efforts emphasize the Company's ability to
print high quality specialized packaging in a timely manner by utilizing the
Company's state-of-the-art manufacturing systems. The Company and its design and
packaging development staff are frequently consulted by customers for assistance
in developing new and alternative packaging concepts. Shorewood has also
assisted its customers in the development and acquisition of automated packaging
equipment which can use the Company's new packaging products. The Company
actively supports the sales effort with a marketing team that is responsible for
researching market trends as well as developing sales promotional materials
which spotlight the Company's
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manufacturing capabilities within specific targeted markets. The Company's
ability to meet the rapid delivery requirements of its customers has enhanced
its competitive position with consumer products companies.
In addition to sales activities conducted from its manufacturing plants, the
Company has sales offices in New York, New York; Los Angeles and Redwood City,
California; Chicago, Illinois; Charlotte and Cornelius, North Carolina;
Fairfield, Connecticut; Fort Lauderdale, Florida; Richmond, Virginia; and
Montreal, Canada.
Part of the Company's business is seasonal. Sales generally increase in the five
months preceding the Christmas holiday season because many of the products for
which it supplies packaging - cosmetics, home video, music, toiletries and toys
- - have higher holiday sales.
Customers are generally billed upon shipment. Jobs are generally completed and
shipped to customers shortly after an order is received for customers in the
music and home video industry, the CD-ROM computer software and games industry,
and the tobacco industry. Jobs are usually completed and shipped within four to
eight weeks for general consumer customers.
COMPETITION
The principal elements of competition in the paperboard packaging industry are
quality, service and price. The Company believes that it competes effectively in
each of these categories. Although the Company believes that it is one of the
leading non-integrated folding carton companies in North America, it faces
substantial competition from different companies in its different industry
areas, some of which are subsidiaries or divisions of companies with much
greater financial resources than those of the Company.
While the Company believes its present competitive position is strong, there can
be no assurance that this will not change. Other packaging companies may develop
technologies which equal or improve upon those of the Company or may have strong
relationships with potential customers which could inhibit the expansion of the
Company's business. Furthermore, because the Company supplies packaging to
consumer industries, it is also subject to the competitive forces affecting its
customers.
EMPLOYEES
At May 1, 1999, the Company employed approximately 3,800 employees, of which
approximately 2,600 individuals were located in the United States, approximately
1,100 individuals were located in Canada and approximately 100 individuals were
located in China.
Approximately 23% of the Companies employees are represented by unions covering
manufacturing personnel in Andalusia, Alabama; Waterbury, Connecticut;
Indianapolis, Indiana; Edison, New Jersey; Smiths Falls, Ontario Canada; and
Toronto (the Shorewood Carton facility only), Ontario Canada . Collective
bargaining contracts are negotiated on an individual plant or union local basis.
The Company's collective bargaining agreements expire at various times from
calendar 1999 to calendar 2001. The Company considers its labor relations to be
satisfactory and it has not experienced any significant work stoppages in its
operating history.
MATERIALS
Although the Company buys a number of different materials, such as paperboard,
paper, ink, coatings, film and plates, the costs associated with the purchase of
paperboard and paper are the most significant. The Company purchases paperboard
and paper from various mills and suppliers and alternate sources are available.
While the Company does not anticipate any significant difficulty in obtaining
supplies of paperboard, paper or other materials in the future, there can be no
assurance that, as the Company's business continues to expand, it will not
encounter difficulty in obtaining its increasing material requirements.
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<PAGE> 5
ACQUISITIONS AND INVESTMENTS
In October 1998, the Company purchased substantially all of the assets and
assumed substantially all of the liabilities of Queens Group, Inc. ("Queens")
for a purchase price of $129.5 million comprised of approximately $113.7 million
in cash including the assumption of debt, and 1.0 million shares of Company
common stock plus transaction expenses. Simultaneously with the closing of the
transaction, the Company repaid all outstanding bank debt of Queens,
approximating $19.0 million. Queens was engaged in the manufacture of value
added printed packaging primarily for the home entertainment industry. The
transaction was financed through a new credit facility.
The Company has completed building a state-of-the-art manufacturing facility in
the city of Guangzhou, China (the "China Facility"), which commenced operations
in the third quarter of fiscal 1999. Through May 1, 1999, the Company has
invested approximately $40 million representing costs associated with the lease
of the related land, construction of the manufacturing facility, purchase of the
necessary machinery and equipment and other expenses associated with the
start-up of the facility. The Company has financed the China Facility with funds
generated from operations as well as the existing credit facility. The facility
in China is capable of manufacturing both gravure and lithographic printed
product, and will have essentially the same capabilities as the Company's North
American facilities. The Company expects that the global sourcing needs of its
customers will result in many existing customers becoming customers of the China
facility. In addition, the Company expects to produce product for Chinese
customers. The Company expects to source the majority of its raw material from
existing suppliers.
On October 28, 1998, the Company entered into a definitive agreement with
Westvaco Corporation to sell to Westvaco a 45% minority interest in its China
Facility. Westvaco is a major producer of paper, paperboard, envelopes,
packaging and specialty chemicals, with manufacturing facilities in the United
States, Brazil and the Czech Republic. The final agreement provided for Westvaco
to pay Shorewood, in cash, 45% of the total costs incurred to date related to
the China Facility plus an additional $5.0 million. Day-to-day management
control of the operation will remain with the Company; however, Shorewood will
work closely with Westvaco on marketing programs and new product development. In
addition, Westvaco will participate in, among other things, decisions regarding
significant acquisitions, divestitures, and expansion through the sale of equity
to third parties.
In the fourth quarter of fiscal 1999 the transaction with Westvaco was
consummated and the Company received proceeds of approximately $22.7 million,
resulting in a gain of approximately $7.6 million.
TOBACCO INDUSTRY
The Company is a principal supplier of printed packaging products for the
tobacco industry in North America. A number of factors have recently weakened
the North American tobacco market, which could adversely affect the Company's
performance. These factors include the effects of ongoing litigation against the
tobacco companies, a recent settlement by the tobacco industry with various
states which, among other things, limits marketing and advertising of tobacco
products (see discussion below), a gradual decrease in consumption, cigarette
taxes in effect or under consideration, and a generally hostile legislative and
regulatory climate in the Unites States and Canada. These factors have a much
greater impact on the North American market than in the export market, where the
a significant percentage of the Company's tobacco related products are sold.
The Company believes that the potential for export markets provide favorable
prospects for the tobacco business. There are three principal factors driving
the favorable outlook for export markets: (i) growth in overseas markets; (ii)
the opening of international markets to free trade in tobacco (especially in
Eastern Europe, the Republics of the former Soviet Union and China) ; and (iii)
increased world demand for American blend cigarettes. The Company's policy is to
continue to aggressively pursue the export tobacco market which provides the
best potential for future sales growth.
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In November, 1998, the major tobacco companies (including customers of the
Company) announced they had entered into a comprehensive settlement with the
attorneys general from many states (the "Settlement"). Tobacco companies have
been the targets of law suits by approximately 40 states wherein the states
sought to recover the medical expenses incurred by them in treating their
residents for the effects of tobacco related illnesses. The claims, in the
aggregate exceeded $50 billion. The settlement puts severe restrictions on the
marketing and advertising of tobacco products. The tobacco companies would also
be required to fund ongoing research and smoking prevention plans and education
programs. Funding for these efforts can be expected to increase the cost of
tobacco products. As prices increase, consumption of these products can be
expected to decline even further. Underage smoking has been made the focus of
many of the preventative measures and restrictions. In return, the tobacco
companies limited their financial exposure to state medical expense
reimbursement claims and received assurances that sales of tobacco products to
adults would remain legal.
Tobacco companies remain at risk for among other things, claims by individuals,
the Federal government, foreign individuals and governments and private
insurance plans and for increases in taxes.
The potential impact of the Settlement and ongoing claims on the tobacco
companies and the Company are unclear at this time. They are, however,
indicative of a politically hostile environment. No portion of the Settlement or
claims are directed at the packaging products manufactured by the Company.
Moreover, the Settlement only affects marketing and sales of tobacco products in
the United States. Marketing and sales of tobacco products in foreign countries
would be unaffected by the Settlement, however other countries have adopted or
are considering adopting, similar measures.
Domestic consumption of cigarettes has been declining in recent years and these
declines can be expected to continue at the same or a more rapid pace as the
impact of the marketing restrictions, higher taxes and higher prices for
cigarettes is felt. As domestic consumption declines the Company can only
maintain it sales levels in this segment by increasing its market share. Should
the Company's market share remain unchanged or decline, it can be expected that
the Company's revenues will be adversely affected, although it can not be
predicted what the exact impact will be.
In addition, much of the Company's tobacco packaging is used in products that
are ultimately sold in the export market. Some of the Company's customer's
products are sold in the Asian market. Recent currency devaluations in that
region have resulted in decreased sales for the products sold by some of the
Company's customers, resulting in corresponding reduction of sales of related
Company product. Although the Company believes that sales of these related
products will return to previous growth trends, there can be no assurance that
this will be the case, or that future currency fluctuations will not have an
adverse impact on the Company's operations.
YEAR 2000
State of Readiness
- ------------------
Independent of Year 2000 concerns, the Company has been focused on replacing
and/or upgrading all of its primary information systems, a project which began
in fiscal 1996. By eliminating the Company's legacy systems and replacing them
with an integrated system of modern information applications, the Company
expects to benefit both by enhancing business capabilities generally and
concurrently eliminating Year 2000 problems. This project is expected to be
completed by the end of calendar 1999.
To specifically address Year 2000 issues and to identify and eliminate Year 2000
problems throughout its operations, the Company has implemented a structured
program encompassing both information and non-information technology systems.
This program includes an internal review of all computer hardware and software,
whether used directly to support business and manufacturing processes or
embedded in components of machinery and other equipment, and a thorough review
of third party relationships.
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With regard to its internal business systems, the Company has been preparing for
Year 2000 since mid-1997. As of May 1, 1999, the Company's assessment is that a
significant proportion of information systems and applications have been
rendered Year 2000 ready. Although the percentages of this work completed vary
across the Company's operations, the Company plans to complete the process of
making all its significant internal information systems Year 2000 ready by
November 1999.
As to third party issues, the Company has contacted key suppliers whose
noncompliance, either individually or cumulatively, could materially impact the
Company's business. Those suppliers who have responded indicate that they will
address Year 2000 issues in a timely manner. The Company is following up with
suppliers who have not responded. The Company is also soliciting and reviewing
on an ongoing basis Year 2000 disclosures of customers having similar
significance to the Company's business. The Company cannot provide assurance
that the Year 2000 compliance plans of its suppliers and customers will be
successfully completed in a timely manner.
Program Costs
- -------------
As at May 1, 1999, cumulative Year 2000 program costs are estimated to be less
than $1 million. This estimate includes internal costs (i.e., related payroll
and required downtime) and external costs (i.e., hiring outside consultants to
assist in compliance efforts). Year 2000 program costs do not include the cost
of major new business system implementations scheduled prior to or independently
from the Company's specific Year 2000 compliance efforts described herein.
Estimated costs would have been substantially greater but for the fact that
recent modernization of many of the Company's business systems discussed above
involved the replacement of legacy software with new software which is Year 2000
compliant. The Year 2000 program costs have been funded by operating cash flow
and expensed as incurred. The Company does not expect a material adverse impact
on its long-term results of operations, liquidity or financial position as a
result of Year 2000 program costs. Cost estimates may be refined as technical
assessment, remediation and testing continue and as compliance status
information becomes available from third-party business associates.
Risks
- -----
As a result of the steps detailed above, the Company does not anticipate that
Year 2000 issues will cause material problems for the Company, or will disrupt
business or result in a decline in earnings. However, if the Company, its
customers and suppliers are unable to adequately resolve Year 2000 issues, the
most likely worst case scenario includes a temporary slowdown or abrupt stoppage
of operations at one or more of the Company's facilities due to the failure of
one or more critical process control elements or business systems. Such failures
could result in interruptions in manufacturing, safety or environmental systems;
or a temporary inability to receive raw materials, ship finished products, or
process orders and invoices. Although not anticipated at this time, if such or
similar scenarios were to occur, they could, depending on their duration, have a
material impact on the Company's results of operations and financial position.
Such theoretical consequences are of a kind and magnitude generally shared with
other manufacturing companies. Assuming the successful completion of its Year
2000 program in a timely manner, the Company expects that any Year 2000
disruptions which may occur will be minor and not material to its business.
Contingency Plans
- -----------------
Contingency plans for business and process control systems began to be
implemented in April 1999. Such plans include the identification of alternate
suppliers; coordination with and support of customers to encourage placement of
orders and subsequent delivery of products in late 1999 rather than in early
2000; accumulation of raw material inventory; identification of manual
alternatives; and identification and implementation of alternative communication
methods. Contingency plans will continue to be reassessed and refined as
additional information becomes available.
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FORWARD LOOKING STATEMENTS
Certain statements under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Legal Proceedings," "Business,"
and elsewhere in this Form 10-K, 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 domestic and
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-K.
ITEM 2. PROPERTIES
The Company owns offices and manufacturing facilities as follows, representing
an aggregate of approximately 1.6 million square feet of office and
manufacturing space:
<TABLE>
<S> <C>
LaGrange, Georgia Andalusia, Alabama
Roanoke, Virginia Springfield, Oregon
Danville, Virginia Williamsburg , Virginia
Edison, New Jersey Louisville, Kentucky
Stanley, North Carolina Weaverville, North Carolina
Smiths Falls, Ontario Brockville, Ontario
Scarborough, Ontario Guangzhou, China
</TABLE>
The Company has a 50 year lease for land in the Peoples Republic of China in the
city of Guangzhou, in Guandong Province. The China Facility contains
approximately 125,000 square feet of manufacturing space. Guangzhou is in
Southeastern China, approximately 120 miles from Hong Kong.
The Company also leases office, manufacturing and warehousing facilities at the
following locations with leases that expire at various times ending in the year
2010, at an annual aggregate net rental cost of approximately $3.2 million for a
total of approximately 900 thousand square feet:
<TABLE>
<S> <C>
New York, New York Farmingdale, New York
Fairfield, Connecticut Waterbury, Connecticut
Watertown, Connecticut Redwood City, California
Hauppauge, New York Los Angeles, California
Montreal, Canada Brockville, Ontario
LaGrange , Georgia Toronto, Ontario
Charlotte, North Carolina Chicago, Illinois
Cornelius, North Carolina Indianapolis, Indiana
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to any material litigation. 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 aware of any environmental compliance
proceeding that will have a material effect on its consolidated financial
statements. During 1999, 1998 and 1997 the Company has been involved, at various
locations, in the correction of certain violations of applicable environmental
laws, rules or regulations.
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Amounts paid during fiscal 1999, fiscal 1998 and
fiscal 1997 involving governmental authorities relating to Federal, State or
local provisions regulating the discharge of materials into the environment were
not material and aggregated less than $200,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no vote of security holders during the fourth quarter of the fiscal
year covered by this report.
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PART II
All share and per share data have been retroactively adjusted to reflect the 3
for 2 stock split effected in May 1998.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Company's Common Stock is traded on the New York
Stock Exchange under the symbol SWD. Prior to January 28, 1998, the Company's
Common Stock was traded in the over-the-counter market on the NASDAQ National
Market System under the symbol SHOR. The following table sets forth, for the
fiscal periods indicated, the high and low sales prices for the Common Stock on
the New York Stock Exchange and the National Market System, as reported by
NASDAQ.
<TABLE>
<CAPTION>
High Low
Fiscal 1999
<S> <C> <C>
First Quarter $ 16.19 $13.00
Second Quarter 16.38 12.13
Third Quarter 20.63 13.13
Fourth Quarter 19.94 16.56
Fiscal 1998
First Quarter $ 15.33 $11.92
Second Quarter 17.67 12.92
Third Quarter 18.58 15.17
Fourth Quarter 18.92 15.75
</TABLE>
The last sale price of the Company's Common Stock on July 1, 1999 was $18.06.
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
<TABLE>
DATE OF AUTHORIZATION AUTHORIZED SHARES
<S> <C>
January 1993 3.0 million
December 1995 3.0 million
April 1997 1.86 million
</TABLE>
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 May 1, 1999, 1.6 million
shares remain authorized for purchase.
(b) Holders. There were 237 record holders of the Company's Common Stock as of
July 1, 1999. The Company believes that, as of such date, there were in excess
of 1,000 beneficial holders of the Company's Common Stock, including those
stockholders whose shares were held of record by certain depository companies.
(c) Cash Dividends. The Company has not paid any cash dividend on its Common
Stock during either of its two most recent fiscal years. The Company anticipates
that its earnings for the foreseeable future will be utilized to reduce debt, to
fund acquisitions or to purchase shares of its Common Stock, or will be retained
for use in its business. Accordingly, the Company believes that it is now
unlikely that any cash dividends will be paid on its Common Stock in the near
future.
The Company's senior term notes and long-term revolver agreement limits the
amount of retained earnings available for the payment of dividends (other than
dividends payable in the Company's Common Stock). At May 1, 1999, there was
approximately $37.8 million of retained earnings available for the payment of
dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information set forth below for and as of
the fiscal year ended May 1, 1999 and for and as of the end of each of the four
preceding fiscal years is derived from, and qualified by reference to, the
audited consolidated financial statements of Shorewood Packaging Corporation and
subsidiaries. The report of Deloitte & Touche LLP, independent auditors, on the
consolidated financial statements as of May 1, 1999 and May 2, 1998 and for the
52 week period ended May 1, 1999, the 52 week period ended May 2, 1998 and the
53 week period ended May 3, 1997 is included elsewhere herein. There were no
cash dividends paid on the Company's Common Stock in any of the periods
indicated below.
SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
52 WEEK PERIOD ENDED
MAY 1, MAY 2, MAY 3, APRIL 27, APRIL 29,
1999 1998 1997(1) 1996 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA (2)
Continuing Operations
Net sales $ 552,194 $ 415,386 $ 425,312 $ 387,845 $ 351,361
Gross profit 131,870 95,658 94,522 84,211 82,807
Selling, general and administrative expenses 71,311 46,410 46,289 42,263 37,635
Write-down of equipment 3,500 -- -- -- --
Earnings from operations 57,059 49,248 48,233 41,948 45,172
Other income, net 1,149 743 795 571 (10)
Gain on the sale of minority interest 7,613 -- -- -- --
Interest expense 13,405 7,649 8,861 8,293 8,979
Earnings before provision for income taxes,
minority interest, extraordinary item and
cumulative effect of a change in accounting
principle 52,416 42,342 40,167 34,226 36,183
Provision for income taxes 18,975 16,047 15,222 12,972 13,685
Earnings before minority interest,
extraordinary item and cumulative effect of
a change in accounting principle 33,441 26,295 24,945 21,254 22,498
Minority interest 903 -- -- -- --
Earnings before extraordinary item and
cumulative effect of a change in accounting
principle 34,344 26,295 24,945 21,254 22,498
Discontinued operations -- -- (1,187) 115 11
Extraordinary item (277) -- (336) (1,365) --
Cumulative effect of a change in accounting
principle (3,040) -- -- -- --
Net earnings 31,027 26,295 23,422 20,004 22,509
BASIC EARNINGS PER SHARE INFORMATION:
Earnings from continuing operations before
extraordinary item and cumulative effect
of a change in accounting principle per
common share 1.28 .97 .91 .75 .80
Net earnings per common share
1.16 .97 .85 .71 .80
DILUTED EARNINGS PER SHARE INFORMATION:
Earnings from continuing operations before
extraordinary item and cumulative effect
of a change in accounting principle per
common share 1.25 .95 .89 .73 .78
Net earnings per common share 1.13 .95 .83 .69 .78
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
BASIC 26,759 27,057 27,402 28,323 28,015
DILUTED 27,553 27,723 28,070 29,160 28,971
</TABLE>
<TABLE>
<CAPTION>
MAY 1, MAY 2, MAY 3, APRIL 27, APRIL 29,
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 23,507 $ 30,992 $ 41,665 $ 30,789 $ 31,948
Property, plant and equipment 243,448 200,293 156,156 153,079 129,153
Total assets 515,463 325,984 277,878 275,914 245,264
Short-term debt 20,000 15,000 15,000 24,000 21,394
Long-term debt excluding current maturities 227,712 126,437 106,856 122,588 99,793
Stockholders' equity 146,472 109,797 96,356 71,436 67,409
</TABLE>
(1) 53 week period
(2) The operations of Transport have been reflected as discontinued
operations for the period ended May 3, 1997 and for all prior periods
Page 11 of 49
<PAGE> 12
ITEM 7. MANAGEMENT'S' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's fiscal year ends on the Saturday closest to April 30. Fiscal 1999
was a 52 week year ended May 1, 1999. Fiscal 1998 was a 52 week year ended May
2, 1998. Fiscal 1997 was a 53 week year ended May 3, 1997.
In connection with the acquisition of the Queens Group described below, the
Company performed a corporate wide strategic review of its machinery and
equipment. As a result of that review it was determined that the Company would
dispose of certain machinery and equipment that was not acquired as part of the
Queens acquisition. Included in fixed assets are assets held for sale of
approximately $4.3 million which when disposed of will result in a loss of
approximately $3.5 million (which was recognized in the fourth quarter of fiscal
1999).
In December 1998, the Company completed its manufacturing facility in Guangzhou,
China (the "China Facility"). Prior to fiscal 1999, certain costs associated
with the build-out of the China Facility had been capitalized as start-up costs.
On May 3, 1998, the Company adopted Statement of Position Number 98-5,
"Reporting on the Costs of Start-Up Activities" and expensed previously
capitalized start-up costs as a cumulative effect of a change in accounting
principle. Since May 3, 1998, all costs associated with the continuation of the
start-up of and commencement of operations of the China Facility have been
reflected in the results of operations of the Company.
On October 28, 1998, the Company entered into a definitive agreement with
Westvaco Corporation to sell to Westvaco a 45% minority interest in its China
Facility. The final agreement provided for Westvaco to pay Shorewood in cash,
45% of the total costs incurred to date related to the China Facility plus an
additional $5.0 million. In the fourth quarter of fiscal 1999 the transaction
with Westvaco was consummated and the Company received proceeds of approximately
$22.7 million, resulting in a gain of approximately $7.6 million.
In October 1998, the Company purchased substantially all of the assets and
assumed substantially all of the liabilities of Queens Group, Inc. ("Queens").
Queens operations are reflected in the results of operations for the 52 weeks
ended May 1, 1999 since the date of acquisition.
RESULTS OF OPERATIONS
Net Sales
- ---------
Net sales for the 52 week period ended May 1, 1999 were $552.2 million compared
to net sales of $415.4 million for the corresponding prior period, an increase
of 32.9%. The increase in sales is primarily attributable to increased demand
for services combined with the acquisition of Queens. Queens facilities produce
many of the same packaging products as other facilities of the Company.
Simultaneously, with the acquisition of Queens, the Company began optimizing the
point of production; therefore it is impossible to identify an amount of sales
related to the former "Queens business." However, the sales value of production
at former Queens facilities approximated $96.1 million for the fiscal year ended
May 1, 1999. In addition to the sales increase related to the former Queens
facilities, the Company experienced increases in the sales in the home
entertainment and the tobacco industries. Tobacco industry increases are due to
the Company having been awarded increased market share during the year.
Net sales for the 52 week period ended May 2, 1998 were $415.4 million compared
to net sales of $425.3 million for the corresponding prior period, a decrease of
2.3%. After adjusting for the extra week in the prior period, sales were
essentially flat when compared to the prior year. Flat sales for the year are
primarily due to sales to tobacco industry customers not meeting expectations.
Tobacco industry sales fell short of expectations primarily due to customers
adjusting inventory levels and reduced sales of product ultimately destined for
the Asian market. Weaknesses in Asian currency impacted the sale of products by
the Company's tobacco customers.
Page 12 of 49
<PAGE> 13
The Company believes that future sales growth will be generated through
continued penetration of its existing markets, as well as its expansion into
China.
Cost of Sales
- -------------
Cost of sales as a percentage of sales for the 52 weeks ended May 1, 1999 were
76.1% as compared to 77.0% for the 52 weeks ended May 2, 1998. The decrease in
cost of sales as a percentage of sales is primarily attributable to increased
sales from the acquisition of Queens, whose sales had a favorable margin when
compared to consolidated margins, favorable product mix, and favorable
absorption of fixed overhead costs as a result of higher sales volume. These
decreases were partially offset by losses on initial sales from its facility in
China.
Cost of sales as a percentage of sales for the 52 weeks ended May 2, 1998 were
77.0% as compared to 77.8% for the 53 weeks ended May 3, 1997. The decrease in
this percentage when compared to the prior year is primarily due to
manufacturing efficiencies resulting from the Company's capital investment
programs.
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) enables it to compete effectively.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses (including the amortization of
excess cost over the fair value of net assets acquired) as a percentage of sales
for the 52 weeks ended May 1, 1999 were 12.9% as compared to 11.2% for the 52
weeks ended May 2, 1998. Included in selling, general and administrative
expenses in fiscal 1999 were approximately $3.6 million of costs relating to the
China Facility. Selling, general and administrative expenses as a percentage of
sales for the former Queens facilities are greater than that of existing
Shorewood facilities.
Selling, general and administrative expenses as a percentage of sales for the 52
weeks ended May 2, 1998 were 11.2% as compared to 10.9% for the 53 weeks ended
May 3, 1997. 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.
The Company anticipates that the China Facility will continue to have a negative
impact on the Company's overall operating margins during the early stages of its
growth during fiscal 2000.
Other Income, net
- -----------------
Other income, net, for the 52 weeks ended May 1, 1999 includes investment income
of $1.9 million, offset by the losses on the disposal of fixed assets of $629
thousand and foreign exchange losses of $140 thousand. Included in the
investment income is the gain, net of related costs, of approximately $1.2
million on the sale of shares of the Field Group plc ("Field"). Field is a
specialty packaging group based in Great Britain. The Company had purchased
shares in Field prior to making what was an unsuccessful bid to acquire their
business. The Company sold the shares during the fourth quarter when it decided
not to increase its offer after Field had received a higher offer from another
company.
Other income, net, for the 52 weeks ended May 2, 1998 includes investment income
of $841 thousand and foreign exchange gains of $377 thousand, offset by losses
on the disposal of fixed assets of $475 thousand.
Other income, net, for the 53 week period ended May 3, 1997 was primarily
related to investment income of $561 thousand, $123 thousand related to gains on
the disposal of fixed assets and $111 thousand related to foreign exchange
gains.
Page 13 of 49
<PAGE> 14
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.
Recently, several Asian currencies have experienced weaknesses which had the
impact of reducing some demand for Company products produced in North America
intended for ultimate use in export markets. The recent investments in the China
Facility expose the Company to foreign exchange risks related to the Renminbi
("Rmb"). At May 1, 1999, the impact of a hypothetical 10% adverse change in
exchange rates of both the Canadian dollar and the Rmb would result in an
approximate $9 million reduction in the net assets of the Company's investment
in its foreign subsidiaries (through the cumulative translation adjustment
account and other comprehensive income). In addition, net operating results
(whether losses or profits) would be reduced. Exposure to foreign exchange
transaction gains or losses in China is expected to be minimal as the Company
expects to make purchases and sales in both Rmb and the US dollar, and
settlement periods on both accounts receivable and accounts payable are expected
to be short.
Interest Expense
- ----------------
Interest expense for the 52 week period ended May 1, 1999 was $13.4 million as
compared to $7.6 million, for the 52 week period ended May 2, 1998. The increase
in interest costs for the 52 week period as compared to the prior year is
primarily attributable to increased borrowings related to financing the
acquisition of Queens and increased borrowings relating to the China Facility.
Capitalized interest for the year ended May 1, 1999 was $1.9 million.
Capitalized interest for the year ended May 2, 1998 was $1.9 million. The
Company anticipates that the amount of interest to be capitalized in fiscal 2000
will be substantially lower due to the completion of the China Facility.
The Company uses interest rate derivatives to manage its exposure to fluctuating
interest rates. These transactions effectively change a portion of the Company's
interest rate exposure from a floating-rate to a fixed-rate basis. The Company's
interest rate derivatives are generally structured for the Company to pay a
fixed rate and receive a floating rate based on LIBOR, as determined in
three-month intervals.
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. 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%. The fair value of the reversion swap
represents a liability of approximately $610 thousand at May 1, 1999.
In addition to the July 1997 swap agreement described above, the Company has the
following swap agreements outstanding at May 1, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT EXPIRING LIBOR RATE APPROXIMATE ASSET (LIABILITY)
- --------------- -------- ---------- -----------------------------
<S> <C> <C> <C>
$100.0 million October 2000 4.84% $ 680,000
$35.0 million May 2000 5.74% $(250,000)
$50.0 million August 1999 5.46% $(110,000)
</TABLE>
On June 16, 1998, the Financial Accounting Standards Board adopted Statement on
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Adoption of SFAS No. 133 is not required at
this time. In July 1999, the Financial Accounting Standards Board adopted SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of SFAS No. 133 -- an amendment of SFAS No. 133."
SFAS 137 defers the effective date of SFAS 133 until June 15, 2000. The adoption
of SFAS No. 133 and SFAS No. 137 are not expected to have a material impact on
the Company's financial statements.
Page 14 of 49
<PAGE> 15
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.
Income Taxes
- ------------
The effective income tax rate for the 52 week period ended May 1, 1999 was 36.2%
as compared to 37.9% for the 52 week period ended May 2, 1998 and the 53 week
period ended May 3, 1997. These rates reflect a blend of domestic and foreign
taxes. The decrease from the prior year is primarily related to savings derived
from the establishment of a Foreign Sales Corporation, plus reduced state income
taxes, offset by the lack of tax benefits on certain foreign losses.
China Facility / Minority Interest
- ----------------------------------
The Company has completed building a state-of-the-art manufacturing facility in
the city of Guangzhou, China (the "China Facility"), which commenced operations
in the third quarter of fiscal 1999. Through May 1, 1999, the Company has
invested approximately $40 million representing costs associated with the lease
of the related land, construction of the manufacturing facility, purchase of the
necessary machinery and equipment and other expenses associated with the
start-up of the facility.
In connection with the start-up of the facility, the Company incurred and
capitalized certain start-up costs aggregating approximately $3.0 million
through May 2, 1998. On April 3, 1998, Statement of Position Number 98-5,
"Reporting on the Costs of Start-Up Activities" was issued by the American
Institute of Certified Public Accountants, which requires the expensing of the
start-up costs when incurred. Although adoption is not required until fiscal
2000, the Company adopted this Statement of Position on the first day of fiscal
1999. Accordingly, the Company recorded a $3.0 million pre-tax charge in its
first quarter of fiscal 1999 as a cumulative effect of a change in accounting
principle. This pre-tax charge has not been offset by a corresponding tax
benefit as these expenses relate to the China Facility which will enjoy a tax
holiday for its first three years of profitable operation. The Company will not
report the tax benefits until realized. Included in net earnings for the 52 week
period ended May 1, 1999 were losses of approximately $3.7 million (of which
approximately $3.6 million, is included in selling, general and administrative
expenses) relating to costs incurred for the China Facility.
On October 28, 1998, the Company entered into a definitive agreement with
Westvaco Corporation to sell to Westvaco a 45% minority interest in its China
Facility. Westvaco is a major producer of paper, paperboard, envelopes,
packaging and specialty chemicals, with manufacturing facilities in the United
States, Brazil and the Czech Republic. The final agreement provided for Westvaco
to pay Shorewood, in cash, 45% of the total costs incurred to date related to
the China Facility plus an additional $5.0 million. Day-to-day management
control of the operation will remain with the Company; however, Shorewood will
work closely with Westvaco on marketing programs and new product development. In
addition, Westvaco will participate in, among other things, decisions regarding
significant acquisitions, divestitures, and expansion through the sale of equity
to third parties.
In the fourth quarter of fiscal 1999 the transaction with Westvaco was
consummated and the Company received proceeds of approximately $22.7 million,
resulting in a gain of approximately $7.6 million.
Extraordinary Items
- -------------------
In connection with the refinancing in fiscal 1999, the Company recorded a net of
tax extraordinary charge of approximately $277 thousand representing the
write-off of previously deferred finance costs incurred in connection with the
former credit facility.
Page 15 of 49
<PAGE> 16
In connection with the establishment of a new credit facility in the fourth
quarter of 1997, the Company recorded a net of tax extraordinary charge of
approximately $336 thousand representing the write-off of previously deferred
finance costs incurred in connection with the former facility.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at May 1, 1999 were $11.8 million as compared to $7.3
million at May 2, 1998, and working capital was $23.5 million as compared to
$31.0 million as of the same dates respectively. The current ratio at May 1,
1999 was 1.2 to one as compared to 1.5 to one as of May 2, 1998. The Company has
a cash management program whereby collections of accounts receivable are used to
retire revolver obligations, and payments of accounts payable and accrued
expenses are funded through the revolving credit facility.
Cash flow from operating activities for fiscal 1999 was $57.6 million before
changes in operating assets and liabilities as compared to $46.3 million for the
corresponding prior period, whereas net cash flows provided from operating
activities was $51.9 million as compared to $57.2 million for the same periods.
Cash flows from operations as well as borrowings under the Company's credit
facilities were used to support $124.0 million for the acquisition of Queens and
$39.2 million in capital investments. In addition, the Company purchased
approximately $16.0 million of treasury stock under the Board of Directors
authorized program described below and received proceeds of approximately $22.7
million in connection with the sale to Westvaco of a minority interest in the
China Facility. Further investment in plant and equipment will be dependent upon
business needs and opportunities. The Company anticipates that capital
expenditures will approximate $32.0 million for all of fiscal 2000.
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
<TABLE>
DATE OF AUTHORIZATION AUTHORIZED SHARES
<S> <C>
January 1993 3.0 million
December 1995 3.0 million
April 1997 1.86 million
</TABLE>
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 May 1, 1999, 1.6 million
shares remain authorized for purchase.
In July 1999, the Company purchased a previously issued warrant to purchase
525,000 shares of its common stock for approximately $4.2 million.
In October 1998, in order to facilitate the acquisition of Queens and other
global opportunities which may arise over the next several years, the Company
entered into a new credit agreement with its lending banks to replace its
existing credit facility. The new credit facility provides for up to $325
million of borrowings and consists of a $100 million term loan to be paid in
equal quarterly installments over five years and a $225 million revolving credit
facility maturing at the end of five years. The revolving credit is available,
in its entirety, without any borrowing base limitation. Borrowings pursuant to
the facility will bear interest at the discretion of the Company, at either the
Bank's prime rate (7.75% at May 1, 1999) or at the LIBOR rate (three month term
of 4.99% at May 1, 1999) plus 62.5 to 125 basis points based upon financial
ratios as defined in the underlying Agreement (125 basis points at May 1, 1999).
Unused commitment fees will range from 20 to 30 basis points (30 basis points at
May 1, 1999), based upon the same financial ratios. At May 1, 1999, the Company
had borrowings under the revolving facility of $157.7 million.
The underlying loan agreement for the borrowings referred to above includes
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 limits the amount of
retained earnings available for payment of dividends (other than dividends in
the Company's common stock). At May 1, 1999, there was approximately $37.8
million of retained earnings available for the payment of dividends. The
borrowings are collateralized by substantially all of the capital stock of the
Company's subsidiaries.
Page 16 of 49
<PAGE> 17
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations for discussion regarding market risks resulting from
changes in foreign currency exchange rates and interest rates.
Page 17 of 49
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SHOREWOOD PACKAGING CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 19
Consolidated Financial Statements
Balance Sheets at May 1, 1999 and May 2, 1998 20
Statements of Earnings, 52 week periods ended May 1, 1999 and May 2, 1998
and the 53 week period ended May 3, 1997 21
Statements of Cash Flows, 52 week periods ended May 1, 1999 and May 2, 1998
and the 53 week period ended May 3, 1997 22
Statements of Stockholders' Equity, 52 week periods ended May 1, 1999 and
May 2, 1998 and the 53 week period ended May 3, 1997 23
Notes to Financial Statements 24 - 39
</TABLE>
Page 18 of 49
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Shorewood Packaging Corporation
We have audited the accompanying consolidated balance sheets of Shorewood
Packaging Corporation and subsidiaries as of May 1, 1999 and May 2, 1998 and the
related consolidated statements of earnings, stockholders' equity and cash flows
for the 52 weeks ended May 1, 1999, the 52 weeks ended May 2, 1998 and the 53
weeks ended May 3, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Shorewood Packaging Corporation and
subsidiaries as of May 1, 1999 and May 2, 1998 and the results of their
operations and their cash flows for the 52 weeks ended May 1, 1999, the 52 weeks
ended May 2, 1998 and the 53 weeks ended May 3, 1997 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 2, 1999
Page 19 of 49
<PAGE> 20
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 1, MAY 2,
1999 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash, including cash equivalents of $1,395 and $1,341
in 1999 and 1998 $ 11,755 $ 7,268
Accounts receivable, net of allowance for doubtful accounts
of $638 and $516 in 1999 and 1998 51,295 32,054
Inventories 52,654 46,591
Prepaid expenses and other current assets 8,212 9,930
--------- ---------
Total Current Assets 123,916 95,843
Property, Plant and Equipment, net 243,448 200,293
Excess of Cost Over the Fair Value of Net Assets Acquired, net 123,954 18,295
Other Assets 24,145 11,553
--------- ---------
$ 515,463 $ 325,984
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 44,130 $ 33,100
Accrued expenses 32,064 13,887
Income taxes payable 4,215 2,864
Current maturities of long-term debt 20,000 15,000
--------- ---------
Total Current Liabilities 100,409 64,851
Long-Term Debt 227,712 126,437
Other Long-Term Liabilities 1,032 794
Minority Interest 14,981 --
Deferred Income Taxes 24,857 21,395
--------- ---------
Total Liabilities 368,991 213,477
--------- ---------
Temporary Equity Relating to Put Options -- 2,710
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; 60,000,000 shares authorized;
35,544,464 issued and 27,457,269 outstanding in 1999 and
34,106,974 issued and 27,092,100 outstanding in 1998 355 341
Additional paid-in capital 74,763 52,448
Retained earnings 153,003 121,976
Accumulated other comprehensive income (4,997) (4,274)
Treasury stock (8,087,195 and 7,014,874 shares at
cost in 1999 and 1998) (76,652) (60,694)
--------- ---------
Total Stockholders' Equity 146,472 109,797
--------- ---------
$ 515,463 $ 325,984
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 20 of 49
<PAGE> 21
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
MAY 1, MAY 2, MAY 3,
1999 1998 1997
<S> <C> <C> <C>
Net Sales $ 552,194 $ 415,386 $ 425,312
--------- --------- ---------
Costs and Expenses:
Cost of Sales 420,324 319,728 330,790
Selling, General and Administrative 68,860 45,661 45,519
Amortization of Excess of Cost Over the Fair Value of Net
Assets Acquired 2,451 749 770
Write-Down of Equipment 3,500 -- --
--------- --------- ---------
495,135 366,138 377,079
--------- --------- ---------
Earnings from Operations 57,059 49,248 48,233
Other Income, net 1,149 743 795
Gain on the Sale of Minority Interest 7,613 -- --
Interest Expense (13,405) (7,649) (8,861)
--------- --------- ---------
Earnings from Continuing Operations Before
Provision for Income Taxes, Minority Interest, Extraordinary
Item and Cumulative Effect of a Change in Accounting
Principle 52,416 42,342 40,167
Provision for Income Taxes 18,975 16,047 15,222
--------- --------- ---------
Earnings from Continuing Operations Before Minority
Interest, Extraordinary Item and Cumulative Effect of
a Change in Accounting Principle 33,441 26,295 24,945
Minority Interest 903 -- --
--------- --------- ---------
Earnings from Continuing Operations Before Extraordinary
Item and Cumulative Effect of a Change in Accounting
Principle 34,344 26,295 24,945
Discontinued Operations, net of Income Tax Benefit
of $724 in 1997 -- -- (1,187)
Extraordinary Item, net of Income Tax Benefit of
$177 and $205 in 1999 and 1997 (277) -- (336)
Cumulative Effect of a Change in Accounting Principle (3,040) -- --
--------- --------- ---------
Net Earnings $ 31,027 $ 26,295 $ 23,422
========= ========= =========
EARNINGS PER SHARE INFORMATION:
BASIC
Earnings from Continuing Operations Before Extraordinary
Item and Cumulative Effect of a Change in Accounting Principle $ 1.28 $ .97 $ .91
Discontinued Operations -- -- (.05)
Extraordinary Item (.01) -- (.01)
Cumulative Effect of a Change in Accounting Principle (.11) -- --
--------- --------- ---------
Net Earnings Per Common Share $ 1.16 $ .97 $ .85
========= ========= =========
DILUTED
Earnings from Continuing Operations Before Extraordinary
Item and Cumulative Effect of a Change in Accounting Principle $ 1.25 $ .95 $ .89
Discontinued Operations -- -- (.05)
Extraordinary Item (.01) -- (.01)
Cumulative Effect of a Change in Accounting Principle (.11) -- --
--------- --------- ---------
Net Earnings Per Common Share $ 1.13 $ .95 $ .83
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 26,759 27,057 27,402
========= ========= =========
DILUTED 27,553 27,723 28,070
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 21 of 49
<PAGE> 22
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
MAY 1, MAY 2, MAY 3,
1999 1998 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings $ 31,027 $ 26,295 $ 23,422
Adjustments to reconcile net earnings to net cash
flows provided from operations:
Non-cash cumulative effect of a change in accounting
principle 3,040 -- --
Write-down of equipment 3,500 -- --
Gain on sale of minority interest (7,613) -- --
Depreciation and amortization 23,295 17,874 17,214
Deferred income taxes 3,711 1,888 5,182
Non-cash restricted stock compensation 623 241 656
Changes in operating assets and liabilities, net of effect of business
acquisitions:
Accounts receivable 1,422 6,468 5,585
Inventories (239) (4,762) (1,661)
Prepaid expenses and other current assets 665 (4,655) 102
Other assets (14,195) (2,503) (1,349)
Accounts payable, accrued expenses and
other long term liabilities 4,878 11,362 (560)
Current income taxes 1,758 4,944 (1,162)
--------- --------- ---------
Net cash flows provided from operating activities 51,872 57,152 47,429
--------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures (39,160) (61,410) (20,794)
Business acquisitions, net of cash acquired of $4,629 in 1999 (124,022) -- (5,000)
Proceeds from the sale of minority interest 22,659 -- --
--------- --------- ---------
Net cash flows used in investing activities: (140,523) (61,410) (25,794)
--------- --------- ---------
Cash Flows from Financing Activities:
Net proceeds from revolver borrowings 80,430 31,070 14,706
Additions to long-term borrowings 100,000 -- 75,000
Repayments of long-term borrowings (73,750) (11,250) (114,000)
Purchase of treasury stock (15,958) (14,563) (6,619)
Issuance of common stock 2,288 2,864 7,334
--------- --------- ---------
Net cash flows provided from (used in) financing activities 93,010 8,121 (23,579)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents 128 252 618
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 4,487 4,115 (1,326)
Cash and cash equivalents at beginning of period 7,268 3,153 4,479
--------- --------- ---------
Cash and cash equivalents at end of period $ 11,755 $ 7,268 $ 3,153
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ 11,379 $ 5,553 $ 10,504
========= ========= =========
Income taxes paid $ 13,325 $ 9,252 $ 11,359
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 22 of 49
<PAGE> 23
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
-------------
Cumulative
Common Stock Foreign
------------------------ Additional Currency
Shares Paid-In Retained Translation Treasury
Issued Amount Capital Earnings Adjustments Stock Total
------ ------ ------- -------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 27, 1996 32,794,406 328 40,480 72,259 (2,119) (39,512) 71,436
Issuance of common stock
and warrant 957,607 10 9,738 -- -- -- 9,748
Purchase of treasury stock -- -- -- -- -- (6,619) (6,619)
Temporary equity relating to
put options -- -- (875) -- -- -- (875)
Comprehensive Income:
Net earnings, 53 weeks
ended May 3, 1997 -- -- -- 23,422 -- --
Foreign currency
translation adjustments -- -- -- -- (756) --
Total Comprehensive Income 22,666
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, May 3, 1997 33,752,013 338 49,343 95,681 (2,875) (46,131) 96,356
Issuance of common stock
and warrant 354,961 3 4,940 -- -- -- 4,943
Purchase of treasury stock -- -- -- -- -- (14,563) (14,563)
Temporary equity relating to
put options -- -- (1,835) -- -- -- (1,835)
Comprehensive Income:
Net earnings, 52 weeks
ended May 2, 1998 -- -- -- 26,295 -- --
Foreign currency
translation adjustments -- -- -- -- (1,399) --
Total Comprehensive Income 24,896
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, May 2, 1998 34,106,974 341 52,448 121,976 (4,274) (60,694) 109,797
Issuance of common stock
and warrants 1,437,490 14 19,605 19,619
Purchase of treasury stock -- -- -- -- -- (15,958) (15,958)
Temporary equity relating to
put options -- -- 2,710 -- -- -- 2,710
Comprehensive Income:
Net earnings, 52 weeks
ended May 1, 1999 -- -- -- 31,027 -- --
Foreign currency
translation adjustments -- -- -- -- (723) --
Total Comprehensive Income 30,304
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, May 1, 1999 35,544,464 $ 355 $ 74,763 $ 153,003 $ (4,997) $ (76,652) $ 146,472
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 23 of 49
<PAGE> 24
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The subsidiaries of the Company are all wholly-owned, except
as described in Note 3. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Recognition of revenue
The Company reports revenue, with the related costs, in the accounting period in
which goods are shipped to the customer.
(c) Statement of cash flows
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents.
(d) Inventories
Inventories are valued at the lower of cost or market. Cost is determined
principally on the first-in, first-out (FIFO) method. Components of inventory
include materials, labor and overhead costs.
(e) Depreciation and amortization
The Company computes depreciation and amortization of property, plant and
equipment substantially by the straight line method over the shorter of the
estimated useful lives or lease periods of the respective assets. The excess of
purchase price over the fair value of net assets of businesses acquired is
amortized over periods ranging from 10 to 40 years on a straight line basis.
The Company periodically evaluates the possible impairment of the excess of cost
over the fair value of net assets acquired and recorded amounts of property,
plant and equipment by comparing the estimated future undiscounted cash flows
from the acquired operations or the related assets, respectively, to the net
carrying value of the related asset.
(f) Income taxes
The Company and its domestic subsidiaries file a consolidated Federal income tax
return. Deferred taxes are provided for the income tax effects of temporary
differences in reporting transactions for financial reporting and tax reporting
purposes.
The Company records income taxes under the liability method as required by
Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes". Under the liability method, deferred tax assets and liabilities
are determined based on the differences between the financial accounting and tax
basis of assets and liabilities. Deferred tax assets or liabilities at the end
of each period are determined using the currently enacted tax rate.
Page 24 of 49
<PAGE> 25
United States ("U.S.") income taxes with respect to the undistributed earnings
of the Company's foreign subsidiaries have not been provided since it is the
intention of management that the undistributed earnings will be reinvested or
transferred to the Company without giving rise to U.S. tax liabilities. The
total amount of unremitted earnings of non-U.S. subsidiaries was approximately
$74 million at May 1, 1999.
(g) Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock-based compensation awards to employees.
Accordingly, no compensation cost has been recognized for stock options granted
under the Company's Plans as described in Note 10.
(h) Foreign currency translation
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars
at fiscal period-end exchange rates and revenues and expenses are translated on
a monthly basis at weighted average exchange rates for the respective month.
Gains and losses arising from translation are recorded as foreign currency
translation adjustments, a component of stockholders' equity. Foreign currency
transaction gains and losses are included in determining net earnings.
(i) Share information
All share and per share data have been retroactively adjusted to reflect the 3
for 2 stock split effected in May, 1998.
Basic weighted average shares outstanding does not include the dilutive effect
of outstanding stock options and warrants. Diluted weighted average common and
common equivalent shares outstanding include the dilutive effect of outstanding
stock options and warrants for all periods presented.
(j) Financial Instruments
Derivative financial instruments are used by the Company in the management of
its interest rate exposures and are accounted for on the accrual basis. Income
and expense are recorded as a component of interest expense. Gains realized on
the termination of interest rate swaps contracts (originally accounted for as
hedges) are deferred and amortized over the remaining terms of the original swap
agreements.
(k) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(l) Business segment
The Company and its subsidiaries operate in one business segment, providing
printed packaging products to the entertainment, cosmetic, tobacco and other
consumer product industries.
(m) Fiscal periods
Reference to 1999, 1998 and 1997 in the accompanying notes to the consolidated
financial statements refer to the fiscal periods ending May 1, 1999, May 2, 1998
and May 3, 1997, respectively.
Page 25 of 49
<PAGE> 26
(n) Comprehensive Income
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This statement establishes rules for the reporting of
comprehensive income and its components. Comprehensive income consists of net
income and foreign currency translation adjustments and is presented in the
Statements of Stockholders' Equity. The adoption of SFAS 130 had no impact on
stockholders' equity. Prior year financial statements have been reclassified to
conform with these requirements.
(o) Reclassifications
Certain reclassifications have been made to the prior years balances in order to
conform with the current year's presentation.
2. BUSINESS ACQUISITION
In October 1998, the Company purchased substantially all of the assets and
assumed substantially all of the liabilities of Queens Group, Inc. ("Queens")
for a purchase price of $129.5 million comprised of approximately $113.7 million
in cash including the assumption of debt, and 1.0 million shares of Company
common stock, plus transaction expenses. Simultaneously with the closing of the
transaction, the Company repaid all outstanding bank debt of Queens,
approximating $19.0 million. Queens was engaged in the manufacture of value
added printed packaging primarily for the home entertainment industry. The
transaction was financed through a new credit facility as described in Note 7.
The acquisition was recorded using the purchase method of accounting and,
accordingly, the results of operations of Queens are included in the
consolidated results of operations of the Company since the date of acquisition.
The purchase price of the acquisition has been allocated to the net assets
acquired based upon the related fair values. The excess of cost over the fair
value of net assets acquired approximated $108.2 million and is being amortized
over 40 years.
The following unaudited pro forma information for the fiscal years ended May 1,
1999 and May 2, 1998 includes the operations of the Company, inclusive of the
operations of Queens, as if the acquisition had occurred at the beginning of the
respective periods presented. The pro forma gives effect to the amortization
expense associated with the excess of cost over the fair value of net assets
acquired, adjustments related to the fair market value of the net assets
acquired, shares issued in connection with the transaction, interest expense
related to financing the acquisition, and related income tax effects.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
MAY 1, 1999 MAY 2, 1998
<S> <C> <C> <C>
Revenues $617,697 $566,282
======== ========
Earnings from Operations (a) $ 60,379 $ 54,259
======== ========
Net Earnings Before Extraordinary Items and Cumulative
Effect of a Change in Accounting Principle $ 34,495 $ 24,677
======== ========
Net Earnings Per Share Before Extraordinary Items and
Cumulative Effect of a Change in Accounting Principle
Basic $ 1.27 $ .88
======== ========
Diluted $ 1.23 $ .86
======== ========
</TABLE>
(a) after the write-down of equipment of $3.5 million.
Page 26 of 49
<PAGE> 27
SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FAIR VALUE OF NET ASSETS ACQUIRED:
<S> <C>
Accounts Receivable $ 20,963
Inventories 6,273
Prepaid and Other Current Assets 1,056
Property, Plant and Equipment 28,414
Other Assets 23
Excess of Cost Over the Fair Value of Net Assets Acquired 108,202
Accounts Payable and Accrued Expenses (24,934)
---------
139,997
Less: Equity Issued in Connection with Purchase (15,975)
---------
Net Cash Paid for Acquisition $ 124,022
=========
</TABLE>
Premium Group Acquisition
Effective January 1, 1994, the Company purchased certain of the United States
and Canadian assets of the Premium Packaging Group of Cascade Paperboard
International, Inc. (the "Premium Group"). In connection with this acquisition,
the Company accrued $5.0 million of contingent consideration as of April 27,
1996, which was paid in May 1996. In addition, the Company issued to the seller
a warrant for 52,500 shares of the Company's common stock at an exercise price
of $9.00 per share, which was exercised in December 1997.
<TABLE>
<CAPTION>
MAY 1, MAY 2,
1999 1998
--------- ---------
<S> <C> <C>
Excess of cost over the fair value of businesses acquired $ 128,878 $ 20,809
Accumulated amortization (4,924) (2,514)
--------- ---------
$ 123,954 $ 18,295
========= =========
</TABLE>
3. CHINA FACILITY/MINORITY INTEREST
The Company has completed building a state-of-the-art manufacturing facility in
the city of Guangzhou, China (the "China Facility"), which commenced operations
in the third quarter of fiscal 1999. Through May 1, 1999, the Company invested
approximately $40 million representing costs associated with the lease of the
related land, construction of the manufacturing facility, purchase of the
necessary machinery and equipment and other expenses associated with the
start-up of the facility.
In connection with the start-up of the facility, the Company incurred and
capitalized certain start-up costs aggregating approximately $3.0 million
through May 2, 1998. On April 3, 1998, Statement of Position Number 98-5,
"Reporting on the Costs of Start-Up Activities" was issued by the American
Institute of Certified Public Accountants, which requires the expensing of
start-up costs when incurred. Although adoption is not required until fiscal
2000, the Company adopted this Statement of Position on the first day of fiscal
1999. Accordingly, the Company recorded a $3.0 million pre-tax charge in its
first quarter of fiscal 1999 as a cumulative effect of a change in accounting
principle. This pre-tax charge has not been offset by a corresponding tax
benefit as these expenses relate to the China Facility which will enjoy a tax
holiday for its first three years of profitable operations. The Company will not
report the tax benefits until realized. Included in earnings from operations for
the 52 week period ended May 1, 1999 were losses of approximately $3.7 million
(of which approximately $3.6 million, is included in selling, general and
administrative expenses) related to costs incurred for the China Facility.
On October 28, 1998, the Company entered into a definitive agreement with
Westvaco Corporation to sell to Westvaco a 45% minority interest in its China
Facility. Westvaco is a major producer of paper, paperboard, envelopes,
packaging and specialty chemicals, with manufacturing facilities in the United
States, Brazil and the Czech Republic. The final agreement provided for Westvaco
to pay Shorewood, in cash, 45% of the total costs incurred to date related to
the China Facility plus an additional $5.0 million. Day-to-day management
control
Page 27 of 49
<PAGE> 28
of the operation will remain with the Company; however, Shorewood will work
closely with Westvaco on marketing programs and new product development. In
addition, Westvaco will participate in, among other things, decisions regarding
significant acquisitions, divestitures, and expansion through the sale of equity
to third parties.
In the fourth quarter of fiscal 1999 the transaction with Westvaco was
consummated and the Company received proceeds of approximately $22.7 million,
resulting in a gain of approximately $7.6 million.
4. INVENTORIES
<TABLE>
<CAPTION>
MAY 1, MAY 2,
1999 1998
------- -------
<S> <C> <C>
Raw material and supplies $20,286 $17,862
Work in process 8,951 7,833
Finished Goods 23,417 20,896
------- -------
$52,654 $46,591
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at historical cost. Depreciation and
amortization of property, plant and equipment from continuing operations was
$20.1 million, $15.9 million and $15.3 million in 1999, 1998 and 1997,
respectively. Capitalized interest costs related to the construction of plant
and equipment were $1.9 million, $1.9 million and $450 thousand in 1999, 1998,
and 1997, respectively.
In connection with the acquisition of Queens described in Note 2, the Company
performed a corporate wide strategic review of its machinery and equipment. As a
result of that review it was determined that the Company would dispose of
certain machinery and equipment that was not acquired as part of the Queens
acquisition. Included in fixed assets are assets held for sale of approximately
$4.3 million which when disposed of will result in a loss of approximately $3.5
million (which was recognized in the fourth quarter of fiscal 1999).
<TABLE>
<CAPTION>
RANGE OF
USEFUL MAY 1, MAY 2,
LIFE 1999 1998
------------- --------- ---------
<S> <C> <C> <C>
Land -- $ 6,560 $ 5,686
Building and improvements 30 - 40 years 64,496 43,959
Machinery and equipment 5 - 13 years 261,394 219,521
Leasehold improvements -- 4,865 5,818
Construction in progress -- 12,491 16,208
--------- ---------
349,806 291,192
Accumulated depreciation and amortization (106,358) (90,899)
--------- ---------
$ 243,448 $ 200,293
========= =========
</TABLE>
6. ACCRUED EXPENSES
<TABLE>
<CAPTION>
MAY 1, MAY 2,
1999 1998
------- -------
<S> <C> <C>
Accrued salaries, employee benefits and payroll taxes $15,948 $ 6,842
Other accrued expenses 16,116 7,045
------- -------
$32,064 $13,887
======= =======
</TABLE>
Page 28 of 49
<PAGE> 29
7. LONG-TERM DEBT AND INTEREST RATE DERIVATIVES
<TABLE>
<CAPTION>
MAY 1, MAY 2,
1999 1998
--------- ---------
<S> <C> <C>
Senior term notes $ 90,000 $ 63,750
Long-term revolver 157,712 77,687
--------- ---------
247,712 141,437
Current maturities (20,000) (15,000)
--------- ---------
$ 227,712 $ 126,437
========= =========
</TABLE>
In October 1998, in order to facilitate the acquisition of Queens as described
in Note 2 and other global opportunities which may arise over the next several
years, the Company entered into a new credit agreement with its lending banks to
replace its existing credit facility. The new credit facility provides for up to
$325 million of borrowings and consists of a $100 million term loan to be paid
in equal quarterly installments over five years and a $225 million revolving
credit facility maturing at the end of five years. The revolving credit is
available, in its entirety, without any borrowing base limitation. Borrowings
pursuant to the facility will bear interest at the discretion of the Company, at
either the Bank's prime rate (7.75% at May 1, 1999) or at the LIBOR rate (three
month term of 4.99% at May 1, 1999) plus 62.5 to 125 basis points based upon
financial ratios as defined in the underlying Agreement (125 basis points at May
1, 1999). Unused commitment fees will range from 20 to 30 basis points (30 basis
points at May 1, 1999), based upon the same financial ratios. The Company had
$1.6 million in outstanding letters of credit under the credit facility at May
1, 1999.
In connection with the refinancing, the Company recorded a net of tax
extraordinary charge of approximately $277 thousand representing the write-off
of previously deferred finance costs incurred in connection with the former
credit facility.
The underlying loan agreement for the borrowings referred to above includes
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 limits the amount of
retained earnings available for payment of dividends (other than dividends in
the Company's common stock). At May 1, 1999, there was approximately $37.8
million of retained earnings available for the payment of dividends. The
borrowings are collateralized by substantially all of the capital stock of the
Company's subsidiaries.
Based upon the borrowing rates currently available to the Company for bank loans
with similar terms, the fair value of the senior long-term debt approximates the
carrying value.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
2000 $20,000
2001 20,000
2002 20,000
2003 20,000
2004 167,712
--------
$247,712
========
</TABLE>
The effective interest rate on the Company's borrowings was 6.71%, 6.76% and
6.69% in 1999, 1998 and 1997, respectively.
In connection with the establishment of a new credit facility in the fourth
quarter of 1997, the Company recorded a net of tax extraordinary charge of
approximately $336 thousand representing the write-off of previously deferred
finance costs incurred in connection with the former facility.
Page 29 of 49
<PAGE> 30
Interest Rate Derivatives
The Company uses interest rate derivatives to manage its exposure to fluctuating
interest rates. These transactions effectively change a portion of the Company's
interest rate exposure from a floating-rate to a fixed-rate basis. The Company's
interest rate derivatives are generally structured for the Company to pay a
fixed rate and receive a floating rate based on LIBOR, as determined in
three-month intervals.
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. 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%. The fair value of the reversion swap
represents a liability of approximately $610 thousand at May 1, 1999.
In addition to the July 1997 swap agreement described above, the Company has the
following swap agreements outstanding at May 1, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT EXPIRING LIBOR RATE APPROXIMATE ASSET (LIABILITY)
- --------------- -------- ---------- -----------------------------
<S> <C> <C> <C>
$100.0 million October 2000 4.84% $ 680,000
$ 35.0 million May 2000 5.74% $(250,000)
$ 50.0 million August 1999 5.46% $(110,000)
</TABLE>
On June 16, 1998, the Financial Accounting Standards Board adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Adoption of SFAS
No. 133 is not required at this time. The adoption of SFAS 133 is not expected
to have a material impact on the Company's financial statements.
8. INCOME TAXES
Earnings from continuing operations before provision for income taxes, minority
interest, extraordinary item and cumulative effect of a change in accounting
principle is comprised of the following:
<TABLE>
<CAPTION>
MAY 1, MAY 2, MAY 3,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States $30,908 $20,391 $17,248
Foreign 21,508 21,951 22,919
------- ------- -------
$52,416 $42,342 $40,167
======= ======= =======
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
MAY 1, MAY 2, MAY 3,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ 6,104 $ 5,782 $ 1,893
State 465 884 579
Foreign 8,695 7,493 7,568
------- ------- -------
15,264 14,159 10,040
------- ------- -------
Deferred
Federal 2,862 846 3,467
State 374 504 810
Foreign 475 538 905
------- ------- -------
3,711 1,888 5,182
------- ------- -------
$18,975 $16,047 $15,222
======= ======= =======
</TABLE>
Page 30 of 49
<PAGE> 31
The Company's effective tax rate differs from the statutory U. S. Federal income
tax rate as a result of the following:
<TABLE>
<CAPTION>
MAY 1, MAY 2, MAY 3,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory U.S. Federal tax rate 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit 1.0 2.1 2.2
Foreign Sales Corporation Benefits (1.0) -- --
Foreign income tax rate differentials .6 1.3 1.1
Other .6 (.5) (.4)
------ ------ ------
36.2% 37.9% 37.9%
====== ====== ======
</TABLE>
The tax effects of significant items comprising the Company's net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
MAY 1, MAY 2, MAY 3,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred tax asset (liability):
Property, plant and equipment $(25,845) $(22,740) $(20,366)
Other assets 784 645 155
Accounts receivable 52 141 140
Inventories 574 600 941
Accrued expenses (254) 48 153
AMT taxes, state net operating loss and
investment tax credit carryforwards 1,730 2,430 1,912
Employee benefits 354 137 86
Other current assets (348) (609) (617)
-------- -------- --------
(22,953) (19,348) (17,596)
Valuation Allowance (1,730) (1,730) (1,730)
-------- -------- --------
$(24,683) $(21,078) $(19,326)
======== ======== ========
</TABLE>
The valuation allowance has been provided against state net operating loss and
investment tax credit carryforwards to reduce them to an amount that will more
likely than not be realized.
9. COMMITMENTS AND CONTINGENCIES
(a) Lease Agreements
The Company is committed for annual rentals under noncancellable operating
leases for production and office facilities expiring on various dates through
2010. Several leases include one year renewal options. The minimum future rental
commitments under noncancellable leases, exclusive of taxes and utilities, are
as follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
2000 $2,834
2001 2,564
2002 2,192
2003 2,184
2004 1,842
Thereafter 8,553
-------
$20,169
=======
</TABLE>
Page 31 of 49
<PAGE> 32
Rent expense under operating leases from continuing operations approximated $3.2
million, $2.8 million and $3.1 million in 1999, 1998 and 1997, respectively.
(b) Treasury Stock
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
<TABLE>
<CAPTION>
DATE OF AUTHORIZATION AUTHORIZED SHARES
<S> <C>
January 1993 3.0 million
December 1995 3.0 million
April 1997 1.86 million
</TABLE>
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 May 1, 1999, 1.6 million
shares remain authorized for purchase.
(c) Other 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.
10. STOCKHOLDERS' EQUITY
(a) Stock Incentive Plans
In July 1993, the Company established the 1993 Incentive Program (the "1993
Program"). The 1993 Program permits the granting of any or all of the following
types of awards: (i) stock options, including incentive stock options ("ISO's"),
(ii) stock appreciation rights ("SAR's"), in tandem with stock options or
freestanding, (iii) restricted stock, (iv) director's options, and (v) restored
options. Under the 1993 Program, 1.5 million shares were initially made
available for grant. In 1998, the Board of Directors authorized, and the
shareholders approved, an additional 1.5 million shares available for future
grant under the 1993 Program. Shares available for grant may be increased in
certain circumstances not to exceed a total of 4.5 million shares available
under the 1993 Program. Options granted prior to December 1994 become
exerciseable over four years from the date of grant at a rate of 25% each year,
and expire five years from the date of grant. Grants made subsequent to November
1994 become exerciseable over five years from the date of grant at the rate of
20% of the grant each year, and expire 10 years from the date of grant. Options
authorized under a 1990 non-qualified stock option plan which were not granted
as of April 27, 1996 were considered to have lapsed and are no longer available
for future grant.
Page 32 of 49
<PAGE> 33
A summary of changes in stock options and awards follows:
<TABLE>
<CAPTION>
Options Outstanding Options
Available for ---------------------------------
Future Grant Number Price Per Share
------------ ------ ---------------
<S> <C> <C> <C>
Balance April 28, 1996 667,203 1,601,450 $ 4.67 - $13.50
Increase in 1993 Program 35,459 --
Options granted (449,843) 449,843 $10.92 - $12.08
Options exercised -- (502,289) $ 4.67 - $12.67
Options canceled 42,149 (42,149) $11.00
Options lapsed (288,192) -- --
---------- ---------- ---------------
Balance May 3, 1997 6,776 1,506,855 $ 5.76 - $13.50
Increase in 1993 Program 1,571,979 -- --
Restricted Stock Award (69,973) -- --
Options granted (336,750) 336,750 $14.00 - $16.58
Options exercised -- (232,488) $ 5.76 - $12.67
Options canceled 52,390 (52,390) $ 5.76 - $12.67
---------- ---------- ---------------
Balance May 2, 1998 1,224,422 1,558,727 $ 5.76 - $16.58
Increase in 1993 Program 191,141 -- --
Restricted Stock Award (187,500) -- --
Options granted (825,500) 825,500 $13.75 - $16.00
Options exercised -- (249,990) $ 5.76 - $12.67
Options canceled 20,490 (20,490) $10.67 - $15.50
---------- ---------- ---------------
Balance May 1, 1999 423,053 2,113,747 $ 9.50 - $16.58
========== ========== ===============
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted Average
Range of Exercise Number of Options Remaining Contractual Weighted Average
Prices Outstanding Life (in Years) Exercise Price
------ ----------- --------------- --------------
<S> <C> <C> <C>
$ 9.50 - $14.25 1,743,247 7.0 $12.32
$14.26 - $16.58 370,500 8.8 $15.71
--------- --- ------
2,113,747 7.3 $12.91
========= === ======
</TABLE>
<TABLE>
<CAPTION>
Options Exerciseable
--------------------
Weighted Average
Range of Exercise Number of Options Remaining Contractual Weighted Average
Prices Exerciseable Life (in Years) Exercise Price
------ ------------ --------------- --------------
<S> <C> <C> <C>
$ 9.50 - $14.25 672,852 4.6 $11.25
$14.26 - $16.58 62,100 8.6 $15.66
--------- --- ------
734,952 4.9 $11.62
========= === ======
</TABLE>
During 1999, the Company issued 187,500 shares of restricted stock to certain
key employees. All or a portion of the shares issued in 1999 may vest in
calendar 2001 based upon the market performance of the Company's common stock.
Shares that do not vest in calendar 2001 will otherwise vest in calendar 2006 if
the employees continue to be employed by the Company. During 1998, the Company
issued 75,000 shares of restricted stock to certain key employees and 5,027
shares of restricted stock issued in 1995 were forfeited. All or a portion of
the shares issued in 1998 may vest in 2001 based upon the market performance of
the Company's common stock. Shares that do not vest in 2001 will otherwise vest
at the end of fiscal 2006 if the employees continue to
Page 33 of 49
<PAGE> 34
be employed by the Company. At the end of 1997, based upon the performance of
the Company's common stock, 90,946 shares of previously issued restricted stock
vested and a remaining 85,911 shares will vest at the end of fiscal 2002 if the
employees continue to be employed by the Company.
In 1997, the Company granted an option to purchase 225,000 shares at $12.08 per
share (the fair market value at the date of grant) to its Chief Executive
Officer ("the Executive"). These options are not pursuant to any of the
previously described plans. The option vests immediately, has demand
registration rights and expires ten years from the date of the grant.
(b) Accounting for Stock-Based Compensation
Under Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), the fair value of stock-based awards to
employees are calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company adopted the
disclosure-only provisions of SFAS 123 and accordingly, no compensation cost was
recognized in connection with its stock option plans. Had the Company elected to
recognize compensation cost for its stock option plans based upon the calculated
fair value at the grant dates for awards issued after April 30, 1995 under such
plans, consistent with the method prescribed by SFAS 123, net income and
earnings per share would reflect the pro forma amounts indicated below (in
thousands except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MAY 1, 1999 MAY 2, 1998 MAY 3, 1997
----------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings from Continuing Operations
Before Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle As reported $34,344 $26,295 $24,945
Pro forma 33,409 25,743 24,673
Net Earnings As reported $31,027 $26,295 $23,422
Pro forma 30,092 25,743 23,150
- ------------------------------------------------------------------------------------------------------------------------
Earnings Per Share Information:
BASIC:
Earnings from Continuing Operations
Before Extraordinary Item and
Cumulative Effect of a Change in
Accounting Principle As reported $ 1.28 $ .97 $ .91
Pro forma 1.25 .95 .90
Net Earnings As reported 1.16 .97 .85
Pro forma 1.12 .95 .84
DILUTED:
Earnings from Continuing Operations
Before Extraordinary Item and
Cumulative Effect of a Change in
Accounting Principle As reported $ 1.25 $ .95 $ .89
Pro forma 1.22 .94 .88
Net Earnings As reported 1.13 .95 .83
Pro forma 1.10 .94 .83
</TABLE>
Page 34 of 49
<PAGE> 35
The Company's calculations were made using the Black-Scholes option pricing
model with the following assumptions: expected life, 5 years; 5.42% risk free
interest rate; assumed volatility of 34.76% in 1999, 24.66% in 1998 and 1997;
and no dividends during the expected term.
(c) Common Stock Purchase Warrants
In fiscal 1996, the Company issued a warrant to purchase 300,000 shares of its
common stock at an exercise price of $10.00 per share to a customer who
concurrently entered into a five year supply agreement (which has since been
modified). The warrants are exerciseable immediately upon issuance and expire in
July 2001. During fiscal 1998, the supply agreement was modified and extended
and the Company concurrently issued warrants to purchase 525,000 shares of its
common stock to the customer. The warrant is exerciseable immediately at $12.25
and expires in May 2002. The modified supply agreement expires in May 2003. The
fair value of the warrants at the date of their respective issuances were
$900,000 and $1,838,000, respectively, which are being amortized on a straight
line basis over the respective term of the supply agreements. In July 1999, the
Company purchased the previously issued warrant to purchase 525,000 shares of
its common stock for approximately $4.2 million.
During fiscal 1996, as amended in fiscal 1997, the Company issued warrants to
purchase 600,000 shares of its common stock to a customer who concurrently
entered into a long-term supply agreement with the Company (which has since been
modified). The warrant is exerciseable immediately at $10.00 per share and
expires September 1, 2001. At such time as the customer may exercise the
warrant, any cash volume discount previously paid to the customer (and charged
to the Company's operations) based upon minimum levels of purchases will be
refunded to the Company and included in additional paid-in-capital. During
fiscal 1999, the supply agreement was modified and extended and the Company
concurrently issued two warrants to purchase 200,000 and 100,000 shares,
respectively of its common stock to the customer. The warrants are exerciseable
immediately at $14.50 and $18.00 per share, respectively, and expire in December
2003. The modified supply agreement expires in November 2004. The fair value of
the warrants at the date of issuance were $528,000 and $204,000, respectively,
which are being amortized on a straight line basis over the respective term of
the supply agreement.
During 1993, the Company issued a warrant to purchase 450,000 shares of its
common stock at an exercise price of $4.58 per share to a customer who
concurrently entered into a long-term supply agreement with the Company. The
customer was given the choice of either exercising the warrant or receiving a
cash volume rebate based upon certain minimal levels of purchases from the
Company during the term of the agreement. The warrant was exerciseable
immediately upon issuance, whereas the cash volume rebate, if any, was to be
paid after the expiration of the agreement. The customer exercised the warrant
in the fourth quarter of 1997, and the related accrual for the cash volume
rebate totaling $855 thousand, was transferred to additional paid-in capital.
(d) Reserved Shares
At May 1, 1999, there were 4,574,300 common shares reserved for issuance under
the stock incentive plans, outstanding options and warrants.
(e) Preferred Stock Purchase Rights
On May 4, 1995, the Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of common stock.
Each Right entitles the holder to purchase from the Company one one-hundredth of
a share of Series B Junior Participating Preferred Stock at a price of $17.00
per one one-hundredth of a preferred share. The Rights are exerciseable only if
an acquiring person acquires, or announces the intention to acquire, 25% or more
beneficial ownership of the outstanding common shares. The effect of the Rights
plan is to provide to the Company's stockholders the right, upon the occurrence
of an acquisition, tender offer or business combination transaction, to exchange
the preferred shares for common stock at a fraction of
Page 35 of 49
<PAGE> 36
the then-current market price of the common stock. The Rights expire on June 14,
2005 unless extended. The Rights are subject to other restrictions and terms as
described in the Rights Agreement.
(f) Temporary Equity Relating to Put Options
The Company periodically sells common equity put options ("put options") on
shares of its common stock which are exerciseable six months from the date of
issuance. There were no put options outstanding at May 1, 1999. 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.
(g) Related Party Transactions
In connection with the purchase of Queens described in Note 2, the Company paid
approximately $1.3 million to a firm whose president and principal shareholder
is a director of the Company. The firm also received an option to purchase
50,000 shares of the Company's common stock at an exercise price of $16.00. The
warrant is exerciseable immediately upon issuance and expires in October 2005.
In connection with a prior investment, this firm received an option to purchase
37,500 shares of the Company's common stock at an exercise price of $9.00. The
warrant was exerciseable immediately upon issuance and expires in January 2001.
In May 1995, the Company loaned $2.0 million (included in other assets) to the
Executive. The loan is due on May 4, 2000, and bears interest payable quarterly
equal to the Applicable Federal Rate as defined (4.90% at May 1, 1999), adjusted
monthly. Mandatory prepayments of this loan are required if the Executive's
compensation exceeds certain thresholds. The compensation committee of the Board
of Directors waived the required prepayment for 1999 and 1998. Interest income
related to this loan was $98 thousand and $113 thousand in 1999 and 1998,
respectively. Interest income related to loans to the Executive (including this
loan and another short term loan of $800 thousand) was $153 thousand in 1997.
The Company agreed to guaranty a portion of a loan made by a bank to the
Executive in connection with his purchase of certain real estate. As a result of
provisions in the related agreement and payments made by the Executive, the
guaranty agreement was terminated in September 1998.
In April 1998, the Company loaned $630 thousand to its now President and Chief
Financial Officer (the "President"). The loan bears interest at 6.5%, is
collateralized by a first mortgage on a residential property and is due in
annual installments beginning in August 1999 and continuing through August 2013.
The President has the right to prepay the loan at his option. Interest income
related to this loan was $41 thousand and $5 thousand in 1999 and 1998,
respectively.
(h) New Employment Agreements
Effective May 3, 1998, the Company entered into new five year employment
agreements with the Executive and the President providing for annual base
salaries of $800 thousand and $450 thousand, respectively. In connection with
his agreement, the Company paid to the Executive as a signing bonus the
aggregate amount of $1 million, payable in full although earned ratably over his
five-year employment period, provided that the Executive continues to be
employed with the Company at the end of each such year. Simultaneously with the
authorization of the employment agreements by the Board of Directors, the
Company granted the Executive and the President options to purchase 250 thousand
and 100 thousand shares of stock, respectively. The options are exerciseable at
$13.75 per share (the fair market value at the date of grant).
11. 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. In connection with the
disposal of Transport, the Company recorded a loss on disposal of $488 thousand
(net of income tax benefit of $298
Page 36 of 49
<PAGE> 37
thousand). During fiscal 1997, Transport's loss from operations was $699
thousand (net of income tax benefit of $426 thousand). For the year ended May 3,
1997 Transport had revenues to outside customers of $5.8 million. The net assets
of Transport were not material to the Company.
12. EMPLOYEE BENEFIT PLANS
(a) Defined Contribution Plans
The Company has profit sharing plans as well as employee savings plans. Based
upon the provisions of each employee savings plan, the Company matches a portion
of the employees' voluntary contributions. The amounts contributed to the profit
sharing plan in the United States are at the discretion of the Board of
Directors, whereas the amounts contributed to the profit sharing plans in Canada
are at the percentages provided for by the respective plans. Total provisions
with respect to defined contribution plans approximated $3.5 million, $2.9
million and $2.8 million in 1999, 1998 and 1997, respectively.
(b) 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. No bonus was payable under the terms of this Plan for 1996. For
fiscal 1997, a bonus of approximately $1.2 million would have been earned, had
the Executive not voluntarily agreed to accept $450,000. For fiscal 1998, a
bonus of $302,000 was earned by the Executive. For fiscal 1999, a bonus of
approximately $1.1 million was earned by the Executive.
13. MAJOR CUSTOMER AND CREDIT CONCENTRATIONS
Approximately 22%, 25% and 23% of net sales during 1999, 1998 and 1997,
respectively, were derived from sales to one customer. Approximately 12% and 14%
of net sales during 1998 and 1997, respectively, were derived from sales to two
other customers, who may be deemed to be affiliated with each other.
The Company's customers are primarily large entertainment, tobacco and other
consumer products companies who produce products in the United States and
Canada. At May 1, 1999, approximately 32% and 30% of accounts receivable related
to customers in the tobacco and cosmetics industries, respectively.
Approximately 25% of accounts receivable are due from Canadian companies.
Page 37 of 49
<PAGE> 38
14. GEOGRAPHIC OPERATIONS
<TABLE>
<CAPTION>
MAY 1, MAY 2, MAY 3,
1999 1998 1997
-------------------------------------------------
Net Sales
<S> <C> <C> <C>
Domestic $371,446 $249,222 $251,691
Canada 179,227 166,164 173,621
China 1,521 - -
-------------------------------------------------
$552,194 $415,386 $425,312
=================================================
Net Earnings
Domestic (a) $21,757 $12,320 $7,773
Canada 16,031 13,975 15,649
China (b) (6,761) - -
-------------------------------------------------
$31,027 $26,295 $23,422
=================================================
Identifiable Assets at Year-End
Domestic $395,819 $205,960 $188,540
Canada 100,397 93,376 85,658
China (net of minority interest of $14,981 in
1999) 19,247 26,648 3,680
-------------------------------------------------
$515,463 $325,984 $277,878
=================================================
</TABLE>
(a) Net of loss on discontinued operations in 1997.
(b) Includes cumulative effect of a change in accounting principle of
approximately $3.0 relating to the one-time write-off of previously deferred
costs related to the start-up of operations in China.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL 1999
----------------------------------------------------------------
AUGUST 1, 1998 OCTOBER 31, 1998 JANUARY 30, 1999 MAY 1, 1999
-------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
Net sales $115,359 $145,378 $141,397 $150,060
Gross profit 25,305 35,225 34,358 36,982
Selling, general and administrative expenses 12,463 16,440 19,383 23,025
Write-down of equipment -- -- -- 3,500
Earnings from operations 12,842 18,785 14,975 10,457
Earnings before minority interest, extraordinary
item and cumulative effect of change in
accounting principle 6,800 9,910 6,424 10,307
Net earnings 3,760 9,633 6,424 11,210
Basic Earnings per Share Information:
Earnings from continuing operations before
minority interest, extraordinary item and
cumulative effect of change in accounting
principle per common share $ .26 $ .37 $ .24 $ .41
Net earnings per common share .14 .36 .24 .42
Diluted Earnings per Share Information:
Earnings from continuing operations before
minority interest, extraordinary item and
cumulative effect of change in accounting
principle per common share $ .25 $ .37 $ .23 $ .40
Net earnings per common share .14 .36 .23 .40
Weighted average common and common
equivalent shares outstanding
Basic 26,495 26,451 26,995 27,096
Diluted 27,081 27,112 27,872 28,147
</TABLE>
Page 38 of 49
<PAGE> 39
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL 1998
------------------------------------------------------------------
AUGUST 2, 1997 NOVEMBER 1, 1997 JANUARY 31, 1998 MAY 2, 1998
-------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
Net sales $100,596 $114,828 $ 96,629 $103,333
Gross profit 22,509 27,401 21,695 24,053
Selling, general and administrative expenses 11,024 11,888 11,283 12,215
Earnings from operations 11,485 15,513 10,412 11,838
Net earnings 6,209 8,560 5,538 5,988
Basic Earnings per Share Information:
Net earnings per common share $ .23 $ .32 $ .20 $ .22
Diluted Earnings per Share Information:
Net earnings per common share $ .22 $ .31 $ .20 $ .22
Weighted average common and common
equivalent shares outstanding
Basic 27,141 27,132 27,026 26,928
Diluted 27,693 27,888 27,695 27,614
</TABLE>
Page 39 of 49
<PAGE> 40
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Pursuant to instruction G(3) to Form 10-K, the information required in Items
10-13 is incorporated by reference from the Company's definitive proxy statement
for the September 23, 1998 annual meeting of stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See "Index to Financial Statements and
Supplementary Data" in Item 8.
(a)(2) Financial Statements Schedules. The financial statement
schedules have not been included because they are not
applicable, not material or the information is included in
financial statements or notes thereto.
(a)(3) Exhibits
NUMBER DESCRIPTION
- ------ -----------
3.1 -- Certificate of Incorporation of the Company, as amended,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
3.2 -- Amended and Restated By-laws of the Company, incorporated by
reference to the corresponding Exhibit item to Amendment No. 1 to
Registration Statement on Form S-1, as filed with the Commission on
October 20, 1986, Commission File No. 33-8490.
9.1 -- Intentionally Omitted.
10.1 -- through 10.4 Intentionally Omitted.
10.5 -- Agreement of Lease dated May 20, 1977 between Frank X. Mascioli and
Shorewood Packaging Corporation, a New York corporation, relating to
premises located at 55 Engineers Lane, Farmingdale, New York,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
10.6 -- and 10.7 Intentionally Omitted.
10.08 -- through 10.40 Intentionally Omitted.
10.41 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Marc P. Shore,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
10.42 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Floyd Glinert,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
10.43 -- Intentionally Omitted.
10.44 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Charles Kreussling,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
10.45 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Kenneth Rosenblum,
incorporated by reference to the corresponding
Page 40 of 49
<PAGE> 41
Exhibit item to Registration Statement on Form S-1, as amended, as
filed with the Commission on September 4, 1986, Commission File No.
33-8490.
10.46 -- through 10.77 Intentionally Omitted.
10.78 -- Asset Purchase Agreement dated December 23, 1993 by and among
Shorewood Paperboard Corporation Limited, Shorewood Acquisition
Corporation of Delaware, Paperboard Industries Corporation and
Paperboard Industries Inc. incorporated by reference to the
corresponding exhibit item to Form 8-K Current Report of Shorewood
Packaging Corporation filed with the Commission on January 28, 1994,
Commission File No. 0-15077.
10.79 -- Intentionally Omitted.
10.80 -- Restated and Amended Credit Agreement dated February 25, 1994
between Shorewood Packaging Corporation, Shorewood Corporation of
Canada Limited and NationsBank of North Carolina, N.A. and The Bank of
Nova Scotia incorporated by reference to the corresponding exhibit item
to Shorewood Packaging Corporation's quarterly report on Form 10-Q for
the fiscal quarter ended January 29, 1994, as filed with the Commission
on March 15, 1994, Commission File No. 0-15077.
10.81 -- through 10.82 Intentionally Omitted.
10.83 -- First Amendment to Restated and Amended Credit Agreement dated July
18, 1994 between Shorewood Packaging Corporation, Shorewood Corporation
of Canada Limited and NationsBank of North Carolina, N.A. and The Bank
of Nova Scotia incorporated by reference to the corresponding exhibit
item to the Company's annual report on Form 10-K for the fiscal year
ended April 30, 1994, as filed with the Commission on July 29, 1994,
Commission File No. O-15077.
10.84 -- through 10.85 Intentionally Omitted.
10.86 -- Lease dated as of January 17, 1994 between Shorewood/Heminway
Acquisition Corporation and Heminway Packaging Corporation in respect
of premises located at 155 South Leonard Street, Waterbury, Connecticut
incorporated by reference to the corresponding exhibit item to the
Company's annual report on Form 10-K for the fiscal year ended April
30, 1994, as filed with the Commission on July 29, 1994, Commission
File No. O-15077.
10.87 -- Letter Agreement dated April 21, 1994 by and among SPC Corporation
Limited, (formerly known as Shorewood Paperboard Corporation Limited),
Shorewood Acquisition Corporation of Delaware, Paperboard Industries
Corporation and Paperboard Industries Inc. in respect of working
capital adjustment incorporated by reference to the corresponding
exhibit item to the Company's annual report on Form 10-K for the fiscal
year ended April 30, 1994, as filed with the Commission on July 29,
1994, Commission File No. O-15077.
10.88 -- Employment Agreement dated as of May 16, 1994 between Shorewood
Packaging Corporation and Howard M. Liebman incorporated by reference
to the corresponding exhibit item to the Company's annual report on
Form 10-K for the fiscal year ended April 30, 1994, as filed with the
Commission on July 29, 1994, Commission File No. O-15077.
10.89 -- Intentionally Omitted.
10.90 -- Shorewood Packaging Corporation Retirement and Savings Plan, and
Adoption Agreement, dated March 19, 1994 between Shorewood Packaging
Corporation and its subsidiaries, as employer, and NationsBank of
Georgia, N.A., as trustee incorporated by reference to the
corresponding exhibit item to the Company's annual report on Form 10-K
for the fiscal year ended April 30, 1994, as filed with the Commission
on July 29, 1994, Commission File No. O-15077.
10.91(a) Stock Warrant Agreement to purchase 100,000 shares of Common Stock,
dated as of January 13, 1994 incorporated by reference to the
corresponding exhibit item on Company's annual report on Form 10-K/A
for the fiscal year ended April 30, 1994, as filed with the Commission
on April 20, 1995, Commission File No. 0-15077.
10.91(b) Stock Warrant Agreement dated as of July 23, 1992 to purchase
300,000 shares of Common Stock incorporated by reference to the
corresponding exhibit item on Company's annual report on Form 10-K/A
for the fiscal year ended April 30, 1994, as filed with the Commission
on April 20, 1995, Commission File No. 0-15077.
10.92 -- Second Amendment to Amended and Restated Credit Agreement dated as
of November 22, 1994, among Shorewood Packaging Corporation, Shorewood
Packaging Corporation of Canada Limited, NationsBank of North Carolina,
N.A. and The Bank of Nova Scotia incorporated by reference to
Page 41 of 49
<PAGE> 42
the corresponding exhibit item on Company's annual report on Form
10-K/A for the fiscal year ended April 29, 1995, as filed with the
Commission on August 11, 1995, Commission File No. 0-15077.
10.93 -- Lease dated as of February 6, 1995, between Stanley Stahl, d/b/a
Stahl Park Avenue Co., and Shorewood Packaging Corporation (omitting
schedules and exhibits), incorporated by reference to the
corresponding exhibit item on the Company's annual report on Form
10-K/A for the fiscal year ended April 29, 1995, as filed with the
Commission on August 11, 1995, Commission File No. 0-15077.
10.94 -- The 1995 Performance Bonus Plan incorporated by reference to the
corresponding exhibit item to Quarterly Report on Form 10-Q/A for the
quarterly period ended July 29, 1995, as filed with the Commission on
September 20, 1995, Commission File No. 0-15077.
10.95 -- Stock Warrant Agreement dated as of August 11, 1995 to purchase
shares of common Stock incorporated by reference to the corresponding
exhibit item to Quarterly Report on Form 10-Q for the quarterly
period ended October 28, 1995, as filed with the Commission on
December 12, 1995, Commission File No. 0-15077.
10.96 -- 1993 Incentive Program as amended May 4, 1995 incorporated by
reference to the corresponding exhibit item to Quarterly Report on
Form 10-Q/A for the quarterly period ended October 28, 1995, as filed
with the Commission on February 20, 1996, Commission File No.
0-15077.
10.97 -- Non-Negotiable Promissory Note of Marc P. Shore dated May 4, 1995
incorporated by reference to the corresponding exhibit item to
Quarterly Report on Form 10-Q/A for the quarterly period ended
October 28, 1995, as filed with the Commission on February 20, 1996,
Commission File No. 0-15077.
10.98(a) Employment Agreement dated January 25, 1996 and made effective as
of May 1, 1995 between Shorewood Packaging Corporation and Marc P.
Shore incorporated by reference to the corresponding exhibit item to
Quarterly Report on Form 10-Q/A for the quarterly period ended
October 28, 1995, as filed with the Commission on February 20, 1996,
Commission File No. 0-15077.
10.98(b) Stock Option Agreement dated as of February 1, 1996 between Shorewood
Packaging Corporation and Jefferson Capital Group, LTD incorporated
by reference to the corresponding exhibit item to Quarterly Report on
Form 10-Q for the quarterly period ended January 27, 1996, as filed
with the Commission on March 12, 1996, Commission File No. 0-15077.
10.99 -- Third Amendment to Amended and Restated Credit Agreement dated as
of July 28, 1995, among Shorewood Packaging Corporation, Shorewood
Packaging Corporation of Canada Limited, Nationsbank, N.A. (formerly
known as NationsBank of North Carolina, N.A.) and The Bank of Nova
Scotia incorporated by reference to the corresponding exhibit item to
the Company's annual report on Form 10-K for the fiscal year ended
April 27, 1996, as filed with the Commission on July 26, 1996,
Commission File No. O-15077.
10.100 -- Fourth Amendment to Amended and Restated Credit Agreement dated as of
December 12, 1995, among Shorewood Packaging Corporation, Shorewood
Packaging Corporation of Canada Limited, Nationsbank, N.A. (formerly
known as NationsBank of North Carolina, N.A.) and The Bank of Nova
Scotia incorporated by reference to the corresponding exhibit item to
the Company's annual report on Form 10-K for the fiscal year ended
April 27, 1996, as filed with the Commission on July 26, 1996,
Commission File No. O-15077.
10.101 -- Fifth Amendment to Amended and Restated Credit Agreement dated as
of January, 26, 1996 among Shorewood Packaging Corporation, Shorewood
Packaging Corporation of Canada Limited, Nationsbank, N.A. (formerly
known as NationsBank of North Carolina, N.A.) and The Bank of Nova
Scotia incorporated by reference to the corresponding exhibit item to
the Company's annual report on Form 10-K for the fiscal year ended
April 27, 1996, as filed with the Commission on July 26, 1996,
Commission File No. O-15077.
10.102 -- Promissory Note of Marc P. Shore dated March 15, 1996 incorporated
by reference to the corresponding exhibit item to the Company's
annual report on Form 10-K for the fiscal year ended April 27, 1996,
as filed with the Commission on July 26, 1996, Commission File No.
O-15077.
10.103 -- Sixth Amendment to Amended and Restated Credit Agreement dated as
of July 2, 1996 among Shorewood Packaging Corporation, Shorewood
Packaging Corporation of Canada Limited,
Page 42 of 49
<PAGE> 43
Nationsbank, N.A. (formerly known as NationsBank of North Carolina,
N.A.) and The Bank of Nova Scotia incorporated by reference to the
corresponding exhibit item to the Company's quarterly report on Form
10-Q for the quarterly period ended August 3, 1996, as filed with the
Commission on September 17, 1996, Commission File No. O-15077.
10.104 -- Promissory Note of Marc P. Shore dated July 13, 1996 incorporated by
reference to the corresponding exhibit item to the Company's
quarterly report on Form 10-Q for the quarterly period ended August
3, 1996, as filed with the Commission on September 17, 1996,
Commission File No. O-15077.
10.105 -- Promissory Note of Marc P. Shore dated August 22, 1996
incorporated by reference to the corresponding exhibit item to the
Company's quarterly report on Form 10-Q for the quarterly period
ended August 3, 1996, as filed with the Commission on September 17,
1996, Commission File No. O-15077.
10.106 -- Promissory Note of Marc P. Shore dated November 11, 1996
incorporated by reference to the corresponding exhibit item to the
Company's quarterly report on Form 10-Q for the quarterly period
ended November 2, 1996, as filed with the Commission on December 17,
1996, Commission File No. O-15077.
10.107 -- Seventh Amendment to Amended and Restated Credit Agreement dated
as of January 8, 1997 among Shorewood Packaging Corporation,
Shorewood Packaging Corporation of Canada Limited, Nationsbank, N.A.
(formerly known as NationsBank of North Carolina, N.A.) and the Bank
of Nova Scotia incorporated by reference to the corresponding exhibit
item to the Company's quarterly report on Form 10-Q for the quarterly
period ended February 1, 1997, as filed with the Commission on March
18, 1997, Commission File No. O-15077.
10.108 -- Amended and Restated Credit Agreement dated as of May 2, 1997,
among Shorewood Packaging Corporation, Shorewood Corporation of
Canada Limited, Nationsbank, N.A., The Bank of Nova Scotia,
Creditanstalt-Bankverein, Crestar Bank, The Chase Manhattan Bank,
N.A., Banque Paribas, The Daiwa Bank, Ltd., Natwest Bank, N.A., The
Bank of New York, First Union National Bank of North Carolina and
United States National Bank of Oregon incorporated by reference to
the corresponding exhibit item to the Company's annual report on Form
10-K for the fiscal year ended May 2, 1997, as filed with the
Commission on August 1, 1997, Commission File No. O-15077.
10.109 -- Guaranty dated as of May 13, 1997, made by Shorewood Packaging
Corporation in favor of the Chase Manhattan Bank incorporated by
reference to the corresponding exhibit item to the Company's annual
report on Form 10-K for the fiscal year ended May 2, 1997, as filed
with the Commission on August 1, 1997, Commission File No. O-15077.
10.110 -- Agreement for Engineering Procurement and Construction between
Shorewood Packaging Company (Guangzhou) Ltd. And Lam Construction
Company, Ltd. Dated as of July 11, 1997 (with exhibits omitted)
incorporated by reference to the corresponding exhibit item to the
Company's annual report on Form 10-K for the fiscal year ended May 2,
1997, as filed with the Commission on August 1, 1997, Commission File
No. O-15077.
10.111 -- Amendment No. 1 to Stock Warrant Agreement as of December 4, 1996
incorporated by reference to the corresponding exhibit item to the
Company's annual report on Form 10-K for the fiscal year ended May 2,
1997, as filed with the Commission on August 1, 1997, Commission File
No. O-15077. *
10.112 -- Stock Option Agreement dated as of April 17, 1997 between
Shorewood Packaging Corporation and Marc P. Shore incorporated by
reference to the corresponding exhibit item to the Company's annual
report on Form 10-K for the fiscal year ended May 2, 1997, as filed
with the Commission on August 1, 1997, Commission File No. O-15077.
10.113 -- Stock Warrant Agreement dated as of May 15, 1997 to purchase
350,000 shares of common stock incorporated by reference to the
corresponding exhibit item to the Company's quarterly report on Form
10-Q for the quarterly period ended January 31, 1998, as filed with
the Commission on March 17, 1998, Commission File No. O-15077. *
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. O-15077
10.115 -- Promissory Note of Howard Liebman and Marsha Liebman dated April
1, 1998 incorporated by reference to the corresponding exhibit item
to the Company's annual report on Form 10-K for the year ending May
2, 1998, as filed with the Commission on July 31, 1998, Commission
File No. O-15077.
Page 43 of 49
<PAGE> 44
10.116 -- Second Amended and Restated Credit Agreement dated as of October
29, 1998, among Shorewood Packaging Corporation, Shorewood
Corporation of Canada Limited, Nationsbank, N.A., Nationsbank
Montgomery Securities, LLC, The Bank of Nova Scotia, The Chase
Manhattan Bank, The Bank of New York, First Union National Bank,
Societe Generale, ABN AMRO Bank N.V. and Fleet Bank, N.A.
incorporated by reference to the corresponding exhibit item to the
Company's quarterly report on Form 10-Q for the quarterly period
ended October 31, 1998, as filed with the Commission on December 15,
1998, Commission File No. O-15077
10.117 -- Purchase and Sale Agreement among SPC (Bermuda) Ltd., SPC Asia
Ltd. and Westvaco Worldwide Distribution SA, dated as of October 16,
1998 in connection with the sale of an interest in the Company's
China Facility incorporated by reference to the corresponding exhibit
item to the Company's quarterly report on Form 10-Q/A for the
quarterly period ended October 31, 1998, as filed with the Commission
on January 15, 1999, Commission File No. O-15077
10.118 -- Second Amended and Restated Credit Agreement dated as of October 29,
1998, among Shorewood Packaging Corporation, Shorewood Corporation of
Canada Limited, Nationsbank, N.A., Nationsbank Montgomery Securities,
LLC, The Bank of Nova Scotia, The Chase Manhattan Bank, The Bank of
New York, First Union National Bank, Societe Generale, ABN AMRO Bank
N.V. and Fleet Bank, N.A. incorporated by reference to the
corresponding exhibit item to the Company's quarterly report on Form
10-Q/A for the quarterly period ended October 31, 1998, as filed with
the Commission on January 15, 1999, Commission File No. O-15077
10.119 -- Employment Agreement between Shorewood Packaging Corporation and
Leonard Verebay dated as of October 30, 1998 incorporated by
reference to the corresponding exhibit item to the Company's
quarterly report on Form 10-Q/A for the quarterly period ended
October 31, 1998, as filed with the Commission on January 15, 1999,
Commission File No. O-15077
10.120 -- Employment Agreement between Shorewood Packaging Corporation and Eric
Kaltman dated as of October 30, 1998 incorporated by reference to the
corresponding exhibit item to the Company's quarterly report on Form
10-Q/A for the quarterly period ended October 31, 1998, as filed with
the Commission on January 15, 1999, Commission File No. O-15077
10.121 -- Stockholders and Registration Rights Agreement between Shorewood
Packaging Corporation, Leonard Verebay and Eric Kaltman dated as of
October 30, 1998 incorporated by reference to the corresponding
exhibit item to the Company's quarterly report on Form 10-Q/A for the
quarterly period ended October 31, 1998, as filed with the Commission
on January 15, 1999, Commission File No. O-15077
10.122 -- License Agreement dated as of October 30, 1998 between Shorewood
Packaging Corporation and Queens Group, Inc. incorporated by
reference to the corresponding exhibit item to the Company's
quarterly report on Form 10-Q/A for the quarterly period ended
October 31, 1998, as filed with the Commission on January 15, 1999,
Commission File No. O-15077
10.123 -- Amended and Restated Purchase and Sale Agreement by and among
Shorewood Asia Ventures, Ltd. and Westvaco Worldwide Distribution
S.A. dated March 18, 1999.
10.124 -- Stock Warrant Agreement dated as of December 1, 1998 to purchase
three hundred thousand (300,000) shares of the Company's common
stock.*
10.125 -- First Amendment to Second Amended and Restated Credit Agreement
dated as of April 9, 1999, among Shorewood Packaging Corporation,
Shorewood Corporation of Canada Limited, Nationsbank, N.A.,
Nationsbank Montgomery Securities, LLC, The Bank of Nova Scotia, The
Chase Manhattan Bank, The Bank of New York, First Union National
Bank, Societe Generale, ABN AMRO Bank N.V. and Fleet Bank, N.A..
10.126 -- Stock Option Agreement dated as of October 30, 1998, between
Shorewood Packaging Corporation and Jefferson Capital Group, Ltd to
purchase fifty thousand (50,000) shares of the Company's common
stock.
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Deloitte & Touche LLP.
Page 44 of 49
<PAGE> 45
(b) Reports on Form 8-K No current reports on Form 8-K were
filed by the Company during the last quarter of the period
covered by this report.
* Portions of this document have been omitted from the filed text
pursuant to an Application for Confidential Treatment which was filed
with the Securities and Exchange Commission
Page 45 of 49
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SHOREWOOD PACKAGING CORPORATION
By: /s/ Marc P. Shore
------------------------------------------------
Marc P. Shore
Chairman of the Board and Chief Executive Officer
Date: July 26, 1999
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 Company and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Marc P. Shore Chairman of the Board, Chief July 26, 1999
- ------------------------------------ Executive Officer and Director
Marc P. Shore
/s/ Howard M. Liebman President, Chief Financial Officer July 26, 1999
- ------------------------------------ and Director
Howard M. Liebman (Principal Financial Officer)
/s/ William H. Hogan Senior Vice President - Finance/ July 26, 1999
- ------------------------------------ Corporate Controller
William H. Hogan (Principal Accounting Officer)
/s/ Leonard Verebay Executive Vice President and July 22, 1999
- ------------------------------------ Director
Leonard Verebay
/s/ Floyd S. Glinert Director July 23, 1999
- ------------------------------------
Floyd S. Glinert
/s/ William Weidner Director July 27, 1999
- ------------------------------------
William Weidner
/s/ Timothy O'Donnell Director July 26, 1999
- ------------------------------------
R. Timothy O'Donnell
/s/ Melvin Braun Director July 23, 1999
- ------------------------------------
Melvin Braun
/s/ Kevin J. Bannon Director July 26, 1999
- ------------------------------------
Kevin J. Bannon
/s/ Virginia A. Kamsky Director July 22, 1999
- ------------------------------------
Virginia A. Kamsky
</TABLE>
Page 46 of 49
<PAGE> 47
EXHIBIT INDEX
Item Description Page
- ---- ----------- ----
21.1 Subsidiaries of Registrant 48
23.1 Consent of Deloitte & Touche LLP 49
Page 47 of 49
<PAGE> 1
AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT
BY AND AMONG
SHOREWOOD ASIA VENTURES, LTD.
AND
WESTVACO WORLDWIDE DISTRIBUTION S.A.
MARCH __, 1999
<PAGE> 2
AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT
AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT dated as of
the ___ day of March, 1999 by and among Shorewood Asia Ventures, Ltd., a private
company limited by shares organized under the laws of Bermuda ("SPC"), the sole
shareholders of which are SPC (Bermuda) Ltd., a Bermuda corporation and SPC
Asia, Ltd., a Bermuda corporation (together, "Shorewood Asia"), each of which is
a wholly-owned subsidiary of Shorewood Packaging Corporation., a Delaware
corporation ("Shorewood"), Shorewood, Westvaco Worldwide Distribution S.A., a
Swiss corporation ("Purchaser") and a wholly-owned subsidiary of Westvaco Corp.,
a Delaware corporation ("Westvaco"), and Westvaco.
W I T N E S S E T H:
WHEREAS, Shorewood Packaging China Ventures Ltd. is a private
company limited by shares organized under the Laws of the Republic of Mauritius
("Shorewood Mauritius"); Shorewood Packaging (GUANGZHOU) Co., Ltd., is a company
established in the People's Republic of China ("Shorewood Guangzhou"); as of the
Closing Date, SPC's share capital will consist of common shares (the "Common
Shares") and preferred shares (the "Preferred Shares"; together, the "Shares");
and as of the Closing Date, Shorewood Asia will be the beneficial and record
owner of all of the issued and outstanding Shares;
WHEREAS, Shorewood Guangzhou was formed to engage in the
business (the "China Business") of operating and maintaining a manufacturing
facility for paperboard folding carton packaging located in Guangzhou, Guangdong
Province, China (the "Facility"); the Facility is presently under construction,
and became operational in the Fall of 1998;
2
<PAGE> 3
WHEREAS, on or prior to the Closing Date (as hereinafter
defined), Shorewood expects to cause (i) SPC to become the sole beneficial and
record holder of all of the issued and outstanding equity securities of
Shorewood Mauritius and (ii) Shorewood Mauritius to become the sole beneficial
and record holder of all of the issued and outstanding equity securities of
Shorewood Guangzhou (the transaction described in clause (ii) to be referred to
herein as the "Guangzhou Ownership Change" and the transactions described in
clauses (i) and (ii) to be referred to herein jointly as the "Corporate
Restructuring");
WHEREAS, Purchaser wishes to subscribe for and purchase from
SPC, and SPC wishes to issue to Purchaser, that number of shares of capital
stock of SPC (the "WWD Shares") which shall, after giving effect to such
issuance, represent in the aggregate forty-five percent (45%) of the issued and
outstanding Common Shares of SPC and forty-five percent (45%) of the issued and
outstanding Preferred Shares of SPC, respectively, on the terms and conditions
set forth herein;
WHEREAS, Shorewood has advanced or loaned, or has committed to
advance or loan, various monies to Shorewood Guangzhou (such loans to be herein
referenced to as the "Shorewood Loans") pursuant to a Shareholder's Revolving
Loan Facility Contract, dated as of March 1, 1997 in the form previously
delivered to Purchaser (the "Loan Document");
WHEREAS, on or prior to the Closing Date, all rights under the
Loan Document shall have been assigned to, and all obligations under the Loan
Document shall have been assumed by, Shorewood Mauritius (said transaction, the
"Assignment and Assumption");
WHEREAS, Shorewood has exceeded, or is presently expected to
exceed, the total investment amount for the Facility previously approved by the
State Administration of Foreign Exchange of the People's Republic of China
("SAFE"); and Shorewood intends to seek approval to increase such total
investment amount up to US $50,000,000 (the "Investment Amount Increase");
3
<PAGE> 4
WHEREAS, the parties hereto have mutually determined and
agreed that the Chinese Authority Approval (as defined herein) is required to
implement the Guangzhou Ownership Change and the Investment Amount Increase, as
described in this Agreement; and
WHEREAS, the original agreement among the parties concerning
the subject matter hereof (the "Original Agreement") was executed as of October
16, 1998; and the parties are now desirous of amending and restating the
Original Agreement in its entirety, and replacing it with this Agreement, for
the purpose of, among other things, providing that Purchaser will acquire the
WWD Shares by original issuance from SPC rather than by assignment and transfer
from Shorewood Asia.
1. PURCHASE AND SALE OF SHARES
1.1 Purchase Price. The purchase price (the "Purchase Price")
to be paid by Purchaser for the WWD Shares is that amount which, as at the
Closing Date, is equal to forty-five percent (45%) of Shorewood's Project Costs
(as defined in Section 9) to date plus US $5 Million; but in no event shall the
Purchase Price exceed US $25.25 Million. The Purchase Price shall be paid, and
Westvaco shall cause Purchaser to pay the Purchase Price, to SPC at the Closing
in United States Dollars by wire transfer of immediately available funds to an
account(s) designated by Shorewood.
1.2 Additional Payments. (a) At the Closing, the Purchaser
shall, and Westvaco shall cause the Purchaser to, pay to SPC an amount equal to
forty-five percent (45%) of the Shorewood Override Contributions (as defined in
Section 9), if any, in United States Dollars by wire transfer of immediately
available funds to an account or accounts designated by Shorewood.
4
<PAGE> 5
(b) Purchaser shall have no obligation to reimburse SPC or
Shorewood in respect of amounts loaned or contributed by Shorewood, directly or
indirectly through the other Shorewood Entities, prior to the Closing in
connection with the China Business which are neither Shorewood Override
Contributions nor Shorewood Project Costs.
(c) Notwithstanding anything to the contrary contained in this
Article 1, Purchaser may credit against the amounts otherwise payable by it at
Closing pursuant to this Section 1 an amount equal to forty-five percent (45%)
of the Net Operating Gains (as defined in Section 9), if any, of the Shorewood
China Entities (as defined in Section 3.3).
(d) The amounts to be paid to or credited against the various
parties at Closing shall be based initially upon the amounts of the Shorewood
Project Costs as of the Closing Date, Shorewood Override Contributions and Net
Operating Gains (Losses) estimated in the Officer's Certificate, subject to
adjustment after the Closing as provided below. Shorewood shall deliver to
Westvaco no later than ten (10) business days prior to the Closing a good faith
estimate of the amounts of the Shorewood Project Costs as of the Closing Date,
Shorewood Override Contributions and Net Operating Gains (Losses) which will be
shown in the Officer's Certificate (the "Estimated Officer's Certificate").
Shorewood and Westvaco hereby endeavor and agree, as soon as practicable after
the Closing, to jointly review the calculations of the Shorewood Project Costs,
Shorewood Override Contributions and Net Operating Gains (Losses) contained in
the Officer's Certificate to determine whether further adjustments to the
Purchase Price or other applicable payments or credits hereunder are necessary,
with a view to completing all adjustments by August 2, 1999. If they so
determine, the Purchase Price or other applicable payments or credits hereunder
shall be adjusted, either upward or downward, and thus Purchaser shall either
pay SPC additional consideration or receive from SPC a refund, as applicable.
5
<PAGE> 6
(e) If Westvaco and Shorewood are unable to agree on any
adjustment to the Purchase Price or other applicable payment or credit hereunder
proposed by either one of them, then either one of them, by written notice to
the other, which written notice shall specify the nature of the dispute and
shall provide in reasonable detail the facts or accounting principles upon which
such dispute is based, may submit such dispute for resolution in accordance with
the arbitration procedures set forth in this paragraph. Thereafter, Westvaco and
Shorewood shall use their best efforts to resolve such disagreement. If Westvaco
and Shorewood are unable to resolve any disagreement within twenty (20) days
after the receiving party's receipt of such notice of disagreement, then either
Westvaco or Shorewood (the "Submitting Party") may submit such disagreement to a
certified independent public accounting firm that is nationally recognized (the
"Independent Accounting Firm") and mutually agreeable to Westvaco and Shorewood
upon notice thereof (an "Arbitration Notice") to the other party. If Westvaco
and Shorewood cannot agree upon such election within ten (10) business days
after the Submitting Party's Arbitration Notice is received by the other party,
the Independent Accounting Firm shall be selected by lot from among the other
national public accounting firms in the United States, excluding Deloitte &
Touche LLP and Pricewaterhouse Coopers LLP and their respective Affiliates. The
Independent Accounting Firm will be instructed to use its best efforts to render
its decision as to all items in dispute within thirty (30) days of submission.
The decision of the Independent Accounting Firm shall be final and binding upon
all parties hereto and the amounts paid by Purchaser at the Closing shall be
adjusted, either upward or downward, and thus Purchaser shall either pay to SPC
additional consideration or receive from SPC a refund, in accordance with any
upward or downward adjustment in the amount of the Shorewood Project Costs as of
the Closing Date, Shorewood Override Contributions or Net Operating Gains
(Losses) as determined by the
6
<PAGE> 7
Independent Accounting Firm. Each party shall bear its own expenses, including
expenses of its accountants and attorneys in connection with the resolution of
any such dispute, and the fees and expenses of the Independent Accounting Firm
shall be paid by the parties as determined by the Independent Accounting Firm.
(f) During the period beginning on the date Shorewood delivers
the Estimated Officer's Certificate to Westvaco and ending on the date that the
final adjustments to the amounts to be paid by or credited against the various
parties hereunder are determined in accordance with this Section, and during the
period of any dispute within the contemplation of Section 1.2(e), Shorewood
shall: (i) provide Westvaco and its authorized representatives with reasonable
access, during normal business hours and upon reasonable prior written notice,
to all relevant books, records (including work papers, schedules and memoranda),
facilities and employees of Shorewood involved in the preparation of the
Estimated Officer's Certificate and the Officer's Certificate and (ii) cooperate
with Westvaco and its authorized representatives, as they may reasonably
request, including the provision on a timely basis of relevant information used
in preparing the Estimated Officer's Certificate and the Officer's Certificate.
1.3 Instruments of Transfer. At the Closing, (a) SPC shall,
and Shorewood shall cause SPC to deliver one or more certificates representing
the WWD Shares purchased hereunder registered in the name of the Purchaser and
(b) Purchaser shall, and Westvaco shall cause Purchaser to, execute and deliver
to SPC subscription documents in the form of Exhibit 1.3 hereto.
2. CLOSING
2.1 Closing. The closing (the "Closing") of the sale and
purchase of the WWD Shares and the other transactions contemplated hereunder
shall occur as promptly as practicable, but not later than ten (10) business
days following satisfaction or waiver of the conditions set forth
7
<PAGE> 8
in Sections 6 and 7 (the "Closing Date"), at the offices of Bryan Cave LLP, 245
Park Avenue, New York, New York 10167 at or about 10:00 A.M. local time or at
such other time and place as is agreed to in writing by the parties hereto.
3. REPRESENTATIONS AND WARRANTIES OF SELLER. SPC and Shorewood, jointly
and severally, represent and warrant to the Purchaser as follows:
3.1 Due Formation and Qualification. Each of Shorewood, SPC,
Shorewood Mauritius, Shorewood Asia and Shorewood Guangzhou (together, the
"Shorewood Entities") is an entity duly formed, validly existing and in good
standing under the laws of the jurisdiction of its formation, and, has all
requisite power and authority to own, lease and operate its assets, properties
and business and to conduct its business as now being and as heretofore
conducted.
3.2 Authority to Execute and Perform Documents. Each of SPC
and Shorewood has the full legal right and power and all authority and approval
required to enter into, execute and deliver the "JV Documents" (as hereinafter
defined) and to perform fully its obligations thereunder including, without
limitation, the obligation to convey the Shares to Purchaser, free and clear of
all Liens (as hereinafter defined). The JV Documents have been, or will be at
the Closing, duly executed and delivered by SPC and Shorewood, if it is a party
thereto, and are, or will be when and as executed, the valid and binding
obligation of SPC and Shorewood, if it is a party thereto, enforceable in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
from time to time in effect which affect creditors' rights generally and by
general principles of equity regardless of whether such enforceability is
considered in a proceeding in equity or at law. The execution and delivery of
the JV Documents, the consummation of the transactions contemplated thereby and
the performance by SPC and Shorewood of each of the JV Documents to which it is
a party in
8
<PAGE> 9
accordance with its terms and conditions will not require the approval, consent
of, waiver, order or authorization of, or registration, declaration or filing
with, any foreign, federal, state, county, local or other governmental or
regulatory body or the approval or consent of any other person except for the
Chinese Authority Approval. Upon delivery of and payment for the WWD Shares
herein provided, Purchaser will acquire good and valid title thereto, free and
clear of any Lien.
3.3 Capitalization. As of the Closing Date, (a) Shorewood Asia
will be the sole record and beneficial holder of all outstanding equity
securities of SPC and no class of capital stock other than the Common Shares and
the Preferred Shares will be authorized or outstanding; (b) SPC will be the sole
record and beneficial holder of all outstanding equity securities of Shorewood
Mauritius and no class of capital stock other than common shares will be
authorized or outstanding; (c) Shorewood Mauritius will be the sole record and
beneficial holder of all outstanding equity securities of Shorewood Guangzhou;
and (d) there will be as at that time no authorized or outstanding options,
warrants, subscription calls, rights, commitments, conversion rights, plans or
other agreements of any character obligating either SPC, Shorewood Asia,
Shorewood Mauritius or Shorewood Guangzhou (collectively, the "Shorewood China
Entities") to authorize, issue, deliver, sell or redeem any of their respective
securities or other instruments or rights or participations convertible thereto,
except for the right of SPC to redeem the Preferred Shares in accordance with
the Bye-Laws of SPC upon the occurrence of certain events described therein.
3.4 Compliance with Laws. To the best knowledge of SPC and
Shorewood, none of the Shorewood China Entities or Shorewood is in violation of
(i) any applicable order, judgment, injunction, award or decree where such
violation would have a Material Adverse Effect (as hereinafter defined) or (ii)
any applicable law, ordinance or regulation or permit or license or any other
requirement of any governmental or regulatory body, court or arbitrator
applicable to the
9
<PAGE> 10
China Business where such violation would have a Material Adverse Effect, except
that Shorewood has exceeded, or is presently expected to exceed, the total
investment amount for the Facility previously approved by SAFE and the Chinese
Authority Approval is required for the Investment Amount Increase, which
approval has not yet been obtained, and other regulatory filings may be required
in connection with the Corporate Restructuring, which filings have not yet been
made. The parties acknowledge and confirm that, as of this date, the Chinese
Authority Approval required to implement the Guangzhou Ownership Change has been
obtained, which approval is attached hereto as Schedule 3.4.
3.5 No Breach. The execution, delivery and performance of the
JV Documents have not and the consummation of the transactions contemplated
thereby will not (i) violate, conflict with or result in a breach of any of the
provisions of the organizational documents or similar instruments of SPC or
Shorewood, (ii) violate, conflict with or result in the breach of any of the
terms of, result in a material modification of, or otherwise give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both constitute) a default (by way of substitution, notation or
otherwise) under, any instrument, contract or other agreement to which SPC or
Shorewood is or was a party or by or to which either of them or any of their
assets or properties may be bound or subject, (iii) violate any order, writ,
judgment, injunction, award or decree of any court, arbitrator or governmental
or regulatory body against, or binding upon, SPC or Shorewood or upon the
securities, properties or business of either SPC or Shorewood; or (iv) except
for the matters referenced in the last proviso of Section 3.4, violate any
statute, law or regulation of any jurisdiction as such statute, law or
regulation relates to SPC or Shorewood, the Shares, or, to the best knowledge of
SPC and Shorewood, the China Business.
10
<PAGE> 11
3.6 Litigation; Actions and Proceedings. There are no
outstanding orders, judgments, injunctions, awards or decrees of any court,
governmental or regulatory body or arbitration tribunal against or involving
either Shorewood Asia, Shorewood Mauritius or Shorewood Guangzhou; and there are
no outstanding orders, judgments, injunctions, awards or decrees of any court,
governmental or regulatory body or arbitration tribunal against Shorewood which
would have a material adverse effect on the ability of SPC or Shorewood to
consummate the transactions contemplated hereby. There are no actions, suits or
claims (including construction claims) or legal, administrative or arbitral
proceedings or, to the knowledge of SPC or Shorewood, investigations pending or,
to the knowledge of SPC, threatened in writing against or involving Shorewood,
Shorewood Asia, Shorewood Mauritius or Shorewood Guangzhou or any of their
respective properties or assets, that individually or in the aggregate, could
have a Material Adverse Effect.
3.7 Consents. Except for the Chinese Authority Approval, each
required filing or registration with, or consent, approval or other action of,
any governmental department, commission, board, bureau, agency or
instrumentality has been made, received, or taken, as the case may be, in
connection with the valid execution, delivery and performance of the JV
Documents by SPC and Shorewood.
3.8 Finders and Investment Bankers. None of the Shorewood
Entities, nor any of their respective managers, officers or directors, have
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the transactions contemplated
hereby.
3.9 SPC Knowledge. Notwithstanding anything to the contrary
set forth in this Section 3 or elsewhere in this Agreement, the qualification of
any representation, warranty or
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statement made by or in respect of either SPC or Shorewood or both SPC and
Shorewood, whether set forth in this Section 3 or in an exhibit or schedule
referenced in this Section 3 or anywhere else in this Agreement by use of the
words "to SPC's knowledge", "to Shorewood's knowledge", "to SPC's best
knowledge", "to Shorewood's best knowledge", "known to SPC" or "known to
Shorewood" or words to that effect means that, after reasonable inquiry with the
personnel having supervisory responsibility over the matter at hand, no
information has come to the knowledge of either Marc P. Shore, Andrew Shore,
Howard Liebman, William Hogan, Bruce Summerlin, Robert "Bob" Reeves or David
Stratton.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser and Westvaco jointly and severally represent and
warrant to SPC and Shorewood as follows:
4.1 Due Organization. Each of Purchaser and Westvaco is an
entity duly formed and validly existing under the laws of its jurisdiction of
incorporation and has full power and lawful authority to own, lease and operate
its assets, properties and business and to carry on its business as now being
and as heretofore conducted.
4.2 Purchase for Investment; Speculative Investment. Purchaser
is purchasing the Shares for its own account, for investment and not for resale
or distribution. Purchaser acknowledges that an investment in the Shares
involves special, speculative and substantial risk because, among other things,
the China Business is at a formative stage, the Facility has not yet commenced
operations and Shorewood Guangzhou presently has no customers or sales or
operating history and the political and economic climate in China remains
uncertain and unpredictable. Purchaser further represents that it has made the
determination to enter into this Agreement based upon its own independent
evaluation and assessment of the present and
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prospective business prospects of the China Business and has not relied on, or
been induced to enter into this Agreement on account of, any representation or
warranty of any kind, whether oral or written, express or implied, except for
such representations and warranties of SPC and Shorewood as are specifically set
forth in this Agreement and the other JV Documents.
4.3 Compliance with Laws. Neither Westvaco nor Purchaser is in
violation of any applicable order, judgment, injunction, award or decree where
such violation would have a material adverse effect on the ability of Purchaser
or Westvaco to consummate the transactions contemplated hereby. Neither Westvaco
nor Purchaser is in violation of any federal, state or local law, ordinance or
regulation or any other requirement of any governmental or regulatory body,
court or arbitrator applicable to its business where such violation would have a
material adverse effect on the ability of Purchaser or Westvaco to consummate
the transactions contemplated hereby.
4.4 No Breach. The execution, delivery and performance of the
JV Documents and the consummation of the transactions contemplated thereby will
not (i) violate, conflict with or result in a breach of any of the provisions of
the certificate of formation or other applicable instrument of the Purchaser or
Westvaco; (ii) violate, conflict with or result in the breach of any of the
terms of, result in a material modification of, or otherwise give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both constitute) a default (by way of substitution, novation or
otherwise) under, any instrument, contract or other agreement to which Purchaser
or Westvaco is a party or by or to which they or any of their respective assets
or properties may be bound or subject; (iii) violate any order, writ, judgment,
injunction, award or decree of any court, arbitrator or governmental or
regulatory body against, or binding upon, Purchaser or Westvaco; or (iv) violate
any statute, law or regulation of any jurisdiction as such statute, law or
regulation relates to the Purchaser or Westvaco.
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<PAGE> 14
4.5 Consents. Each required filing or registration with, or
consent, approval or other action of, any governmental department, commission,
board, bureau, agency or instrumentality has been made, received, or taken, as
the case may be, in connection with the valid execution, delivery and
performance of the JV Documents by Purchaser and Westvaco.
4.6 Finders and Investment Bankers. Neither Purchaser nor
Westvaco has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders' fees in connection with the transactions
contemplated hereby.
5. COVENANTS AND AGREEMENTS. The parties covenant and agree as
follows:
5.1 Consent to Jurisdiction and Service of Process. Any legal
action, suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby may be instituted in any state or federal court
located in New York County, State of New York, and each party agrees not to
assert, by way of motion, as a defense, or otherwise, in any such action, suit
or proceeding, any claim that it is not subject personally to the jurisdiction
of such court, that its property is exempt or immune from attachment or
execution, that the action, suit or proceeding is brought in an inconvenient
forum, that the venue of the action, suit or proceeding is improper or that this
Agreement or the subject matter hereof may not be enforced in or by such court.
Each party further irrevocably submits to the non-exclusive jurisdiction of any
such court in any such action, suit or proceeding. SPC hereby appoints Andrew
Shore, Esq., General Counsel, Shorewood Packaging Corporation, at its offices at
277 Park Avenue, New York, New York 10172, and Purchaser hereby appoints John W.
Hetherington, Corporate Secretary, Westvaco Corp., Westvaco Building, 299 Park
Avenue, New York, New York 10171 (or at each such person's or entity's office at
such other address as such person or entity hereafter furnishes to the other
parties) as such party's authorized agent to accept and acknowledge on such
party's behalf service of any and all process
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<PAGE> 15
that may be served in any such action, suit or proceeding. Any and all service
of process and any other notice in any such action, suit or proceeding shall be
effective against any party if given personally or by registered or certified
mail, return receipt requested, or by any other means of mail that requires a
signed receipt, postage prepaid, mailed to such party as herein provided.
Nothing herein contained shall be deemed to affect the right of any party to
serve process in any manner permitted by law or to commence legal proceedings or
otherwise proceed against any other party in any jurisdiction other than New
York. Each of the parties hereto hereby irrevocably waives the right to a jury
trial in respect of any proceeding or claim arising under the JV Documents.
5.2 Public Announcements. Neither Purchaser nor Westvaco nor
any Shorewood Entity shall, without the prior consent of the others, make any
public statement, announcement or release to trade publications or to the press,
or make any statements to any competitor, customer or any third party, with
respect to the JV Documents except to the extent that any party is advised by
its counsel that a public statement is required by law, in which event such
party may make appropriate public disclosure upon prior notice to the other
parties.
5.3 Further Assurances. Each of the parties shall execute such
documents or other papers and take such further actions as may be reasonably
required or desirable to carry out the provisions hereof and the transactions
contemplated hereby. Each such party shall use its reasonable efforts to fulfill
or obtain the fulfillment of the conditions to Closing.
5.4 Conduct of China Business Before Closing. From the date
hereof until the Closing Date, Shorewood shall, and shall cause each of the
other Shorewood Entities to, (a) operate the China Business in the ordinary
course and (b) refrain from taking any action which would require a material
change or addition to or a deletion from the disclosures of SPC and Shorewood
contained in Section 3. Except as may be required to effect the Corporate
Restructuring or the
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Assignment and Assumption, Shorewood shall not, without the prior written
consent of Purchaser, permit or cause any of the Shorewood China Entities to:
(a) except as may be required to comply with any
valid and mandatory government regulation, amend its charter documents or
by-laws;
(b) except for the issuance of securities
contemplated by the Corporate
Restructuring, issue stock;
(c) merge, consolidate, liquidate or dissolve;
(d) acquire or make a substantial investment in
another business;
(e) change the number of its directors;
(f) change its independent auditors;
(g) incur indebtedness in excess of US$500,000 in the
aggregate at anytime outstanding, other than purchases on credit in the ordinary
course of business and Shorewood Project Costs and Shorewood Override
Contributions;
(h) enter into transactions with Affiliates, except
that Shorewood or any of its Affiliates may provide services or personnel at
cost or goods or equipment at fair market value to such Shorewood China Entity
without restriction hereunder;
(i) sell a material portion of its assets;
(j) distribute property or cash to the holders of its
equity; provided that SPC may, and is hereby expressly authorized to, declare a
dividend issuable to the holders of record of the Preferred Shares and the
Common Shares as of the instant immediately preceding the Closing, out of the
contributed surplus of SPC, in an amount equal to the Purchase Price (as the
same may be adjusted from time to time pursuant to Section 1.2(d) or (e)), which
dividend shall be payable out of proceeds of the Purchase Price when and as same
are available; or
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(k) commence or settle litigation other than in the
ordinary course of business.
In connection with the continued operation of the China
Business between the date hereof and the Closing, Shorewood shall confer in good
faith, as Westvaco may reasonably request, with one or more representatives of
Westvaco designated in writing as Westvaco's representatives with respect to the
China Business. Shorewood agrees to use all reasonable efforts to deliver to
Westvaco true and complete copies of the instruments of formation and other
organizational documents of each of Shorewood China Entities as soon as is
reasonably practicable after the date hereof.
6. DELIVERIES BY SPC TO PURCHASER AT CLOSING. At the Closing, the
following deliveries shall be made by SPC and Shorewood to Purchaser, and the
following conditions shall be satisfied, in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
by the JV Documents, except to the extent, if any, waived by Purchaser:
6.1 Delivery of Assignment of WWD Shares. SPC shall have
delivered to Purchaser the certificate or certificates representing the WWD
Shares. SPC shall have paid, or cause to be paid, all transfer and other taxes
required to be paid in connection with the issuance to Purchaser of the WWD
Shares.
6.2 Stockholders' Agreement. Shorewood Asia and SPC shall have
delivered to Purchaser a duly executed counterpart copy of the Members Agreement
of Shorewood Asia Ventures, Ltd. (the "Stockholders' Agreement") attached hereto
as Exhibit 6.2.
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6.3 Representations, Warranties and Covenants. The
representations and warranties of SPC and Shorewood contained in the JV
Documents shall be true in all material respects on and as of the Closing Date
with the same force and effect as though made on and as of the Closing Date,
except for representations and warranties specifically relating to a time or
times other than the Closing Date (which shall be true and correct in all
material respects at such time or times). SPC and Shorewood shall have performed
and complied in all material respects with all covenants and agreements required
by the JV Documents to be performed or complied with by SPC and Shorewood on or
prior to the Closing Date. SPC shall have delivered to Purchaser a certificate,
dated the Closing Date and signed by each of them, to the foregoing effect and
stating that all conditions to Purchaser's obligations hereunder have been
satisfied.
6.4 Transactions Completed; Approval Obtained. (a) The
Assignment and Assumption and the Corporate Restructuring shall have been
completed and (b) the China Authority Approval (as defined below) shall have
been obtained or waived. As used herein, the "China Authority Approval" shall
mean (i) with respect to the Guangzhou Ownership Change, the approval or written
waiver of the Ministry of Foreign Trade and Economic Cooperation of the People's
Republic of China (MOFTEC) or such lesser governmental or regulatory body of the
People's Republic of China or any of its political subdivisions as may be
empowered or authorized under applicable law and regulation then in effect to
grant such approval or waiver and (ii) with respect to the Investment Amount
Increase, the approval or written waiver of the MOFTEC or, if as a result of an
intervening change of law or regulation or interpretation thereof such approval
is no longer necessary, the approval or written waiver (if any is required) of
such other governmental or regulatory body of the People's Republic of China or
the Province of Guangdong or any of their respective political subdivisions as
may be empowered or authorized under applicable law and
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regulation then in effect to grant such approval or waiver. The parties confirm
that the condition of this Section 6.4, as it applies to clause (i) above, has
been discharged and satisfied.
6.5 CFO Certificate. Shorewood shall have delivered to
Purchaser (i) no later than ten (10) business days prior to the Closing the
Estimated Officer's Certificate; and (ii) at or prior to the Closing the
Officer's Certificate.
7. DELIVERIES BY PURCHASER TO SPC AT CLOSING. At the Closing, the
following deliveries shall be made by Purchaser and Westvaco to SPC, and the
following conditions shall be satisfied, in connection with the execution and
delivery of the JV Documents and the consummation of the transactions
contemplated by the JV Documents, except to the extent, if any, waived by SPC:
7.1 Deliverables. Purchaser shall have delivered to SPC a duly
executed counterpart copy of the Stockholders' Agreement signed by Purchaser.
7.2 Representations and Covenants. The representations and
warranties of Purchaser and Westvaco contained in the JV Documents shall be true
in all material respects on and as of the Closing Date with the same force and
effect as though made on and as of the Closing Date, except for representations
and warranties specifically relating to a time or times other than the Closing
Date (which shall be true and correct in all material respects at such time or
times). Purchaser and Westvaco shall have performed and complied in all material
respects with all covenants and agreements required by the JV Documents to be
performed or complied with by them on or prior to the Closing Date. Purchaser
shall have delivered to SPC a certificate, dated the Closing Date and signed by
one of its officers, to the foregoing effect and stating that all conditions to
SPC's obligations hereunder have been satisfied.
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7.3 Purchase Price. Purchaser shall have delivered to SPC the
Purchase Price and any other payments required to be made by it in accordance
with Sections 1.1 and 1.2.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; EARLY TERMINATION;
INDEMNIFICATION.
8.1 Survival of Representative and Warranties; Early
Termination. All representations and warranties contained in this Agreement
shall survive for a period of eighteen (18) months after the Closing Date. This
Agreement may be terminated at any time prior to the Closing Date (a) by mutual
agreement of Westvaco and Shorewood, (b) by Westvaco, by written notice to
Shorewood, if the conditions set forth in Section 6, or any of them, are not
complied with or performed or waived on or before the eighteen (18) month
anniversary of the date of the Original Agreement (through no fault of Westvaco)
or (c) by Shorewood, by written notice to Westvaco, if the conditions set forth
in Section 7, or any of them, are not complied with or performed or waived on or
before the eighteen (18) month anniversary of the date of the Original Agreement
(through no fault of Shorewood).
8.2 Indemnification. (a) Westvaco and Purchaser and their
respective managers, directors, representatives and officers (individually, a
"Westvaco Indemnitee") shall be indemnified and held harmless by Shorewood from
and against any and all losses, claims, damages, liabilities, expenses
(including reasonable legal fees and expenses), judgments, fines, settlements
and other amounts arising from any and all claims, demands, actions, suits or
proceedings, civil, criminal, administrative or investigative, in which the
Westvaco Indemnitee may be involved, or threatened to be involved, as a party or
otherwise by reason of any breach of any representation or warranty made by
Shorewood and SPC contained in Section 3 of this Agreement and (b) Shorewood and
SPC and each of their respective managers, directors, representatives and
officers
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(individually, a "Shorewood Indemnitee") shall be indemnified and held
harmless by Westvaco from and against any and all losses, claims, liabilities,
expenses (including reasonable legal fees and expenses), judgments, fines,
settlements and other amounts arising from any and all claims, demands, actions,
suits or proceedings, civil, criminal, administrative or investigative, in which
the Shorewood Indemnitee may be involved or threatened to be involved, as a
party or otherwise, by reason of any breach of any representation or warranty of
Westvaco and Purchaser contained in Section 4 of this Agreement.
9. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the definitions hereinafter ascribed to them:
The term "Affiliate" means, with respect to any
party, any entity or individual that directly or indirectly controls, is
controlled by or is under common control with such entity.
(a) "JV Documents" shall mean (i) this Agreement and
(ii) the Stockholders' Agreement. Any reference to a JV Document with respect to
a party means any JV Document to be executed by such party.
(b) "Lien" shall mean any lien, pledge, mortgage,
security interest, claim, lease, charge, option, right of first refusal,
easement, servitude, transfer restriction under any operating or similar
agreement, encumbrance, judgment, order, writ, injunction, award, decree or any
other similar restriction or limitation whatsoever.
(c) "Material Adverse Effect" shall mean a material
adverse effect upon the assets, properties, business, operations, or condition
(financial or otherwise) of the China Business taken as a whole.
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(d) "Officer's Certificate" means a certificate of
Shorewood executed by the Chief Financial Officer of Shorewood, dated the
Closing Date, certifying as to the amount of the Shorewood Project Costs,
Shorewood Override Contributions, and Net Operating Gains (Losses), and
containing a summary description setting forth in reasonable detail how the
respective amounts were derived.
(e) "Interim Period Working Capital Contributions"
means all sums up to an aggregate amount of $15,000,000 loaned or contributed by
Shorewood, directly or indirectly through the other Shorewood Entities, after
the Shorewood Project Costs have been funded in full and prior to the Closing
Date to fund the working capital requirements of the China Business.
(f) "Net Operating Gains (Losses)" means the combined
EBITDA (earnings (losses) before interest, taxes, depreciation and amortization)
of the Shorewood Chinese Entities for the period commencing on the date hereof
and ending on the Closing Date, as reflected in the audited, to the extent
available, and the unaudited, unconsolidated financial statements of the
Shorewood Chinese Entities for the applicable period or periods, and certified
by the Chief Financial Officer of Shorewood as at the Closing Date in the
Officer's Certificate.
(g) "Shorewood Override Contributions" means all
Interim Period Working Capital Contributions plus all other amounts, if any,
loaned or contributed by Shorewood, directly or indirectly through the other
Shorewood Entities, after the Shorewood Project Costs have been funded in full
and prior to the Closing Date (i) to fund capital expenditures of the China
Business, up to an aggregate amount of $750,000 per quarter or (ii) otherwise in
connection with the China Business pursuant to a budget or other instrument or
consent jointly approved by Shorewood and Westvaco.
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(h) "Shorewood Project Costs" means all direct and
indirect, hard and soft, costs and expenses up to an aggregate amount of
$45,000,000 paid or incurred by Shorewood and the other Shorewood Entities at
any time in connection with the formation and organization of the Shorewood
China Entities, the acquisition of the land rights underlying the Facility and
the construction, build-out, equipping, roll-out and operation of the Facility,
including, without limitation, fees paid to outside consultants, reasonable
travel expenses, deposits, fees paid to attorneys, due diligence expenses,
capitalized interest, working capital, pre-operational SGA, construction costs,
professional fees, acquisition costs, equipment costs and purchases, personnel
recruitment and training costs, capital improvement work, and governmental fees
and assessments.
10. MISCELLANEOUS.
10. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by confirmed facsimile transmission or sent by
certified, registered or express mail, postage prepaid. Any such notice shall be
deemed given when so delivered personally, telegraphed, telexed or sent by
facsimile transmission or, if mailed, two days after the date of deposit in the
United States mails, as follows:
(i) if to SPC, to:
c/o Shorewood Packaging
277 Park Avenue
New York, New York 10172
Attention: Andrew Shore, Esq.,
Vice President and General Counsel
Facsimile No.: (212) 508-5677
and a copy to:
Bryan Cave LLP
245 Park Avenue
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New York, New York 10167-0034
Attention: Peter A. Eisenberg, Esq.
Facsimile No.: (212) 692-1900
(ii) If to Purchaser, to:
Westvaco Corp.
Westvaco Building
299 Park Avenue
New York, NY 10171
Attention: General Counsel
Facsimile No: (212) 318-5026
Any party may by notice given in accordance with this Section
to the other parties designate another address or person for receipt of notices
hereunder.
10.2 Entire Agreement. The JV Documents (including the
schedules) and the collateral agreements executed in connection with the
consummation of the transactions contemplated herein contain the entire
agreement among the parties with respect to the purchase of the WWD Shares and
related transactions, and supersedes all prior agreements, written or oral, with
respect thereto, including, without limitation, the Original Agreement.
10.3 Waivers and Amendments; Non-Contractual Remedies;
Preservation of Remedies. The JV Documents may be amended, superseded, canceled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by the parties or, in the case of a waiver, by the party
waiving compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, nor any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies that any party may otherwise have at law or
in equity.
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10.4 Governing Law. The JV Documents shall be governed and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed entirely within such State (without giving
effect to conflicts of law principles thereof).
10.5 Binding Effect; No Assignment; No Third Party
Beneficiaries. The JV Documents shall be binding upon and inure to the benefit
of the parties and their respective successors, assigns and legal
representatives. Nothing contained herein is intended or shall be construed as
creating third party beneficiaries to. None of the JV Documents is assignable,
except by operation law or as permitted in accordance with the express terms of
any such document or with the consent of all parties thereto.
10.6 Variations in Pronouns. All pronouns and any variations
thereof refer to the masculine, feminine or neuter, singular or plural, as the
context may require.
10.7 Counterparts. The JV Documents may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof each signed by less than all, but together signed by all of the
parties hereto.
10.8 Exhibits and Schedules The Exhibits and Schedules are a
part of this Agreement as if fully set forth herein. All references herein to
Sections, subsections, clauses, Exhibits and Schedules shall be deemed
references to such parts of this Agreement, unless the context shall otherwise
require.
10.9 Headings. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement.
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10.10 Expenses. Each of the SPC and the Purchaser shall pay
its expenses incident to preparing, entering into and performing the JV
Documents and the transactions contemplated therein, except for an amount equal
to $10,000 constituting the expenses incurred by Shorewood in connection with
the initial draft of the Stockholders' Agreement, which amount shall be treated
for all purposes under the JV Documents as a Shorewood Project Cost.
[INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, each of the parties hereto has executed
this Agreement as of the date first above written.
SHOREWOOD PACKAGING CORPORATION
By:
Name:
Title:
WESTVACO WORLDWIDE DISTRIBUTION S.A.
By:
Name:
Title:
WESTVACO CORPORATION
By:
Name:
Title:
SHOREWOOD ASIA VENTURES, LTD.
By:
Name:
Title:
27
<PAGE> 28
PARTIES TO THE ORIGINAL AGREEMENT
SPC (BERMUDA) LTD.
By:
Name:
Title:
SPC ASIA, LTD.
By:
Name:
Title:
28
<PAGE> 1
CONFIDENTIAL TREATMENT REQUESTED
THIS WARRANT (AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF) HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED UNLESS A REGISTRATION STATEMENT WITH RESPECT TO THIS WARRANT (AND
SUCH SHARES) HAS BECOME EFFECTIVE UNDER SUCH ACT OR IN THE OPINION OF COUNSEL TO
THE COMPANY SUCH REGISTRATION IS NOT REQUIRED.
STOCK WARRANT AGREEMENT dated as of December 1, 1998 between
Shorewood Packaging Corporation, a Delaware corporation, with its principal
office at 277 Park Avenue, New York, New York 10172 (the "Company") and [*] .
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company and its stockholders to grant to
[*] an option to purchase three hundred thousand (300,000) shares of the common
stock, par value $.01 per share (the "Common Stock") of the Company in
connection with [**]; and
[**] and
NOW, THEREFORE, the parties agree as follows:
1. Grant of Option
1.1 The Company grants to [*], on the terms
and conditions hereinafter set forth, the right to purchase three hundred
thousand (300,000) (subject to adjustment as hereinafter provided) shares of
Common Stock of the Company (the "Warrant Shares").
1.2 This Warrant and the Warrant Shares when
issued, are not, will not, and are not required to be, registered under the
Securities Act of 1933, as amended, (the "Securities Act") but, the Warrant
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
2.1 The Purchase Price for 200,000 of the
Warrant Shares shall be $14.50 per share (subject to adjustment as hereinafter
provided) which is the mean between the high and the low prices of the Common
Stock as of 4 p.m. on the date hereof. The Purchase Price for 100,000 of the
Warrant Shares shall be $18.00 per share (subject to adjustment as hereinafter
provided).
[*] [**] Portions of this document have been omitted pursuant to an Application
for Confidential Treatment. Such omissions will be filed separately with the
Securities and Exchange Commission together with such Application for
Confidential Treatment.
<PAGE> 2
3. Period of Warrant
3.1 This Warrant will be exercisable, in
whole and not in part, beginning on the date hereof and expiring thirty one (31)
days after the fifth anniversary hereof (the "Expiration Date").
4. Exercise of Warrant
4.1 This warrant shall be exercisable at any
time on or before 4:00 p.m. Eastern Standard time on the Expiration Date by
notice in writing from [*] to the Company which notice shall be signed by a duly
authorized officer of [*] . Except as provided in Section 8 below, such notice
shall be accompanied by payment in full made in cash or bank check payable to
the Company for the full amount of the purchase price.
4.2 Upon the exercise of this Warrant, the
Company shall promptly issue stock certificates for the shares of Common Stock
purchased. [*] will not be nor deemed to be, a holder of any Warrant Shares
unless and until certificates for such shares are issued to it under the terms
of this Agreement.
4.3 If and when this Warrant 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. NO TRANSFER, SALE OR OTHER DISPOSITION OF
THESE SHARES MAY BE MADE EXCEPT PURSUANT TO RULE 144
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNLESS A REGISTRATION STATEMENT WITH RESPECT TO THESE
SHARES HAS BECOME EFFECTIVE UNDER SAID ACT, OR THE
COMPANY IS FURNISHED WITH AN OPINION OF COUNSEL TO
THE COMPANY THAT SUCH REGISTRATION IN NOT REQUIRED."
4.4 The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant, 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 Warrant.
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; (ii) it will fully cooperate with [*] in preparing any
filings or
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<PAGE> 3
applications and provide such information to [*] or any regulatory authority as
may be necessary to obtain any approvals or fulfill any filing requirements in
connection with [*] exercise of this option or in connection with this
Agreement; and (iii) promptly take all action provided for herein to protect [*]
against any dilution of the Common Stock.
5. Transferability of Warrant
This Warrant shall be assignable or
transferable. Any such transfer or assignment shall be subject to all
requirements of the Securities Act and the Securities Exchange Act of 1934 and
all other applicable laws.
6. Demand Registration
At any time prior to the fifth anniversary
hereof, [*] or its transferee shall have the right exercisable by written notice
to the Company (the "Demand Request"), to have the Company prepare and file with
the Securities and Exchange Commission (the "SEC"), on no more than one (subject
to Section 8 below) occasion, a registration statement and such other documents,
including a prospectus, as may be necessary in the opinion of the Company
counsel, to comply with the provisions of the Securities Act, so as to permit a
public offering and sale of the Warrant Shares for nine (9) consecutive months
by [*]. Notwithstanding anything else herein contained, the Company will have no
obligation to prepare and file a registration statement under the Securities Act
pursuant to this Section 6 other than on Form S-3 if available to the Company
(or the equivalent thereto if such form is no longer generally available). The
Company shall be entitled to postpone for up to six (6) months the filing of any
registration statement otherwise required to be prepared and filed by the
Company pursuant to this Section 6 if at the time the Company receives a request
for registration the Board of Directors of the Company determines, in its
reasonable business judgment, that the filing of such registration statement and
the offering of the Warrant Shares pursuant thereto would interfere with any
financing, acquisition, corporate reorganization or other material transaction
by the Company, and the Company promptly gives [*] notice of such determination
and postponement. If the Company shall so postpone the filing of a registration
statement, [*] shall have the right to withdraw the request for registration by
giving written notice to the Company within fifteen (15) days after receipt of
the Company's notice of postponement (and, in the event of such withdrawal, such
request shall not be deemed a request for registration which may be made
pursuant to this Section 6. Notwithstanding the foregoing, the Company will have
no obligation to prepare and file a registration statement under the Securities
Act, if to do so would require a special audit of the Company's balance sheet
and related financial statements in connection with the preparation of the
registration statement, even if, as a result, the filing of the registration
statement would be delayed until after the completion of the Company's next
regular audit.
7. Piggy-Back Registration
If at any time the Company proposes to file
a registration statement to register Common Stock of the Company (other than
Common Stock issued with respect to any
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acquisition or any employee stock option, stock purchase or similar plan) under
the Securities Act for sale to the public in an underwritten offering, it will
at each such time give written notice to [*] of its intention to do so ("Notice
of Intent") and, upon the written request of [*] (the "Piggy-Back Request") made
within 30 calendar days after the receipt of any such notice (which request must
specify that [*] intends to dispose of all of the Warrant Shares held by [*] on
the date the Notice of Intent is received by [*] and state the intended method
of disposition thereof), the Company will use its best efforts to effect the
registration under the Securities Act of the Warrant Shares which the Company
has been so requested to register, to the extent requisite to permit the
intended disposition; provided, however, that if the managing underwriter shall
certify in writing that inclusion of all of the Warrant Shares would, in such
managing underwriter's opinion, materially interfere with the proposed
distribution of the securities in respect of which registration was originally
to be effected (x) at a price reasonably related to fair value, and (y) under
circumstances which will not materially and adversely affect the market of the
Company's securities (such writing to state the basis of such opinion and the
maximum number of shares which may be distributed without such interference),
then the Company may, upon written notice to [*], have the right to exclude from
such registration such number of Warrant Shares which it would otherwise be
required to register hereunder as is necessary to reduce the total amount of
securities to be so registered to the maximum amount which can be so marketed.
8. Combined Exercise and Registration Request
If at or before the date of a Demand Request or a
Piggy-Back Request, [*] shall not have exercised this Warrant in accordance with
the terms of Section 4.1 hereof, such Demand Request or Piggy-Back Request, as
the case may be, shall be deemed to be a notice of exercise by [*] pursuant to
the first sentence of Section 4.1 and an agreement to pay to the Company the
full amount required by the second sentence of Section 4.1 (in the form provided
therein) on or before the earlier of the Expiration Date or the date when a
registration statement filed by the Company pursuant to Section 6 or Section 7
becomes effective under the Securities Act (the "Effective Date").
Notwithstanding the foregoing, at any time before the Company requests the SEC
to accelerate the Effective Date of a registration statement filed pursuant to
Section 6 or Section 7 hereof, but not after the sixth anniversary hereof, [*]
may, by delivery of a written notice to the Company, withdraw its Demand Request
or Piggy-Back Request, as the case may be, and upon delivery of such withdrawal
notice such Demand Request or Piggy-Back Request, as the case may be, shall be
deemed to be null and void and [*] shall continue to have the rights granted in
Sections 4, 6, and 7 hereof, within the time limits provided therein, to the
same extent as if no Demand Request or Piggy-Back Request had been made and no
notice of exercise of this warrant had been delivered; provided, however, that
if the Demand Request or Piggy-Back Request, as the case may be is delivered to
the Company before the Expiration Date and [*] has not before then otherwise
exercised the Warrant pursuant to Section 4.1 hereof. [*] may, at its election
include with such withdrawal notice the payment required by the second sentence
of Section 4.1 and the Company shall deliver to [*] a stock certificate or stock
certificates in accordance with the provisions of Sections 4.2 and 4.3 hereof.
9. Registration Expenses
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<PAGE> 5
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 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 of the Company's independent public
accountants); provided, however, that fees and expenses of complying with Blue
Sky laws in those states where Warrant Shares and no other securities of the
Company covered by the registration statement will be offered for sale, shall be
paid by [*] .
10. Registration Procedures
If and whenever the Company is required to
effect the registration of any Warrant Shares under the Securities Act as
provided in this Agreement, the Company will promptly:
(i) prepare and file with the Securities and
Exchange Commission ("Commission") a registration statement with respect to such
Warrant Shares and use its beat efforts to cause such registration statement to
become effective;
(ii) 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 Warrant Shares until
such time as all of such Warrant Shares have been disposed of in accordance with
the intended methods of disposition by [*] set forth in such registration
statement, but in no event for a period of more than nine months after such
registration statement becomes effective;
(iii) furnish to [*] such number of copies
of such registration statement and of each such amendment and supplement thereto
and such number of copies of the prospectus included in such registration
statement as shall reasonably be requested by [*];
(iv) use its best efforts to register or
qualify the Warrant 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 seller shall
reasonably 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;
(v) notify [*] when a prospectus relating to
the Warrant Shares is required to be delivered under the Securities Act within
the period mentioned in subdivision (ii) of this paragraph, of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to
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<PAGE> 6
state any material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing
(and upon receipt of such notice and until a supplemented or amended prospectus
as set forth below is available, [*] 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
(vi) furnish to [*], at the time of the
disposition of any Warrant Shares by them, a signed copy of an opinion of
counsel to the effect that: (a) a registration statement covering such Warrant
Shares has been filed with the Commission under the Securities Act and has been
made effective by order of the Commission, (b) said registration statement and
the prospectus contained therein comply as to form in all material respects with
the requirements of the Securities Act, (c) no stop order has been issued by the
Commission suspending the effectiveness of such registration statement and (d)
the applicable provisions of the securities or Blue Sky laws of each state in
which the Company shall be required, pursuant to clause (iv) of this paragraph,
to register or qualify such Warrant 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.
The Company may require [*] to furnish the
Company such information regarding [*]'s identity and its intended distribution
of such Warrant Shares as the Company may from time to time reasonably require
in writing and as shall be required by law to effect such registration.
11. Termination of Obligations
The obligations of the Company imposed by
Section 6 through 9 above shall cease and terminate, as to any particular
Warrant 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 registration statement covering such securities, or (b) when the
Company shall have furnished to [*] an opinion of the Company's outside counsel
concluding that the Warrant Shares may be sold without registration under the
Securities Act or (c) seven years and thirty one days after the date hereof.
Whenever such restrictions shall terminate as to any Warrant Shares, [*] shall
be entitled to receive from the Company without expense a new certificate or
certificates representing such securities not bearing the legend set forth in
Section 4.3 hereto.
12. Availability of Information
The Company will use its best efforts to
comply with the reporting requirements of Sections 13 and 15(d) of the
Securities Exchange Act of 1934 to the extent it shall be required to do so
pursuant to such Sections, 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 promulgated
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<PAGE> 7
in effect and relating to the availability of an exemption from the Securities
Act for the sale of any Warrant Shares). The Company will also cooperate with
[*] 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 Warrant Shares.
13. Dilution or Other Adjustments
In any event of any change in the Common
Stock prior to the exercise of this warrant or the Expiration Date, which ever
is first, 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 price of shares of Common Stock of
the Company subject to the Warrant as are consistent with the provisions of
Schedule 13 hereto.
14. Representation
The Company represents and warrants that all
Warrant Shares deliverable upon exercise hereof will be duly authorized and upon
issuance in accordance with the terms 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.
15. Indemnity
The Company shall indemnify and hold
harmless the holder of the Warrant 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 such
securities laws; provided, however, that the Company shall not be obliged to so
indemnify any such holder or controlling person unless such 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 such law, 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
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<PAGE> 8
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.
16. Miscellaneous
16.1 This Agreement shall be governed by and
construed in accordance with the internal 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) 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 As used herein, the masculine gender
shall include the feminine gender.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above mentioned.
SHOREWOOD PACKAGING CORPORATION
By: /S/
-----------------------------------------
Marc Shore, President
[*]
By: /S/
-----------------------------------------
Authorized Signatory
By: /S/
-----------------------------------------
Authorized Signatory
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SCHEDULE 13
Anti-Dilution Provisions
13.1 Adjustment of Number of Shares Purchasable. Upon any adjustment of
the Purchase Price as provided in section 13.2, the holder hereof shall
thereafter be entitled to purchase, at the Purchase Price resulting from such
adjustment, the number of shares of Common Stock (calculated to the nearest
1/100th of a share) obtained by multiplying the Purchase Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
purchasable hereunder immediately prior to such adjustment and dividing the
product thereof by the Purchase Price resulting from such adjustment.
13.2 Adjustment of Purchase Price. The Purchase Price shall be subject
to adjustment from time to time as set forth in this section 13.2.
(a) Stock Dividends, Subdivisions and Combinations. If the
Company at any time and from time to time subsequent to the date hereof:
(i) declares a dividend upon, or makes any
distribution in respect of, any of its stock, payable in
shares of Common Stock, Convertible Securities or Stock
Purchase Rights, or
(ii) subdivides its outstanding shares of Common
Stock into a larger number of shares of Common Stock, or
(iii) combines its outstanding shares of Common Stock
into a smaller number of shares of Common Stock,
then the Purchase Price shall be adjusted to that price determined by
multiplying the Purchase Price per share of Common Stock immediately prior to
such event by a fraction (A) the numerator of which shall be the total number of
outstanding shares of Common Stock immediately prior to such event, and (B) the
denominator of which shall be the total number of outstanding shares of Common
Stock immediately after such event, treating as outstanding all shares of Common
Stock issuable upon conversions or exchanges of such Convertible Securities and
exercises of such Stock Purchase Rights.
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(b) Issuance of Stock Purchase Rights. If the Company at any
time and from time to time subsequent to the date hereof shall issue or sell any
Stock Purchase Rights and the consideration per share for which shares of Common
Stock may at any time thereafter be issuable upon exercise thereof (or, in the
case of Stock Purchase Rights exercisable for the purchase of Convertible
Securities, upon the subsequent conversions or exchange of such Convertible
Securities) shall be less than the Current Market Price per share (determined as
of the date specified in the next succeeding paragraph), the Purchase Price upon
each such issuance or sale shall be adjusted by multiplying the Purchase Price
in effect as of the date specified in the next succeeding paragraph by a
fraction the numerator of which is (i) the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such issue or sale multiplied by
the Current Market Price per share of Common Stock immediately prior to such
issue or sale plus (B) the aggregate consideration, if any, received by the
Company upon such issue or sale, divided by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale, and the
denominator of which is the Current Market Price per share of Common Stock
immediately prior to such issue or sale. For the purposes of such adjustment (i)
the maximum number of shares of Common Stock issuable upon exercise of such
Stock Purchase Rights (or upon conversion or exchange of such Convertible
Securities following such exercise) shall be deemed to have been issued as of
the date of the determination of the Current Market Price specified in the next
succeeding paragraph, and (ii) the aggregate consideration, if any, received for
such shares of Common Stock shall be deemed to be the minimum consideration
received and receivable by the Company in connection with the issuance and
exercise of such Stock Purchase Rights (or upon conversions or exchange of such
Convertible Securities).
For the purposes of this section 13.2(b), the date as of which
the Current Market Price shall be determined shall be the earlier of (i) the
date on which the Company shall enter into a firm contract for the issuance of
such Stock Purchase Rights and (ii) the date of actual issuance of such Stock
Purchase Rights.
(c) Minimum Adjustment. If any adjustment of the Purchase
Price pursuant to this section 13.2 shall result in an adjustment of less than
$.05, no such adjustment shall be made, but any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustments so carried
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<PAGE> 11
forward, shall amount to $.01; provided that upon any adjustment of the Purchase
Price resulting from (i) the declaration of a dividend upon, or the making of
any distribution in respect of, any stock of the Company payable in Common
Stock, Stock Purchase Rights or Convertible Securities or (ii) the
reclassification by subdivision, combination or otherwise, of the Common Stock
into a greater or smaller number of shares, the foregoing figure of $.01 per
share (or such figure as last adjusted) shall be proportionately adjusted, and
provided, further, that upon the exercise of this Warrant, the Company shall
make all necessary adjustments (to the nearest .001 of a cent) not theretofore
made to the Purchase Price up to and including the date upon which this Warrant
is exercised.
(d) Readjustment of Purchase Price. In the event to any change
in (i) the purchase price payable for any Stock Purchase Rights referred to in
section 13.2(b) or (ii) the consideration, if any, payable upon exercise of such
Stock Purchase Rights, the Purchase Price in effect at the time of such event
shall forthwith be readjusted to the Purchase Price which would have been in
effect at such time had such Stock Purchase Rights provided for such changed
purchase price or consideration as the case may be, at the time initially
granted, issued or sold. On the expiration of any Stock Purchase Rights not
exercised the Purchase Price then in effect shall forthwith be increased to the
Purchase Price which would have been in effect at the time of such expiration
had such Stock Purchase Rights or Convertible Securities never been issued. No
readjustment of the Purchase Price pursuant to this section 13.2(d) shall (i)
increase the Purchase Price by an amount in excess of the adjustment originally
made to the Purchase Price in respect of the issue, sale or grant of the
applicable Stock Purchase Rights or Convertible Securities or (ii) require any
adjustment to the amount paid or number of shares of Common Stock received by
any Person upon any exercise of this Warrant prior to the date upon which such
readjustment to the Purchase Price shall occur.
(e) Reorganization, Reclassification or Recapitalization of
Company. If the Company at any time and from time to time subsequent to the date
hereof shall effect (i) any reorganization or reclassification or
recapitalization of the capital stock of the Company (other than in the cases
referred to in section 13.2(a)), (ii) any consolidation or merger of the Company
with or into another Person, (iii) the sale, transfer or other disposition of
the property, assets or business of the Company as an entirety or substantially
as an entirety or (iv) any other transaction
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or any other event shall occur as a result of which holders of Common Stock
become entitled to receive any shares of stock or other securities and/or
property of another Person, there shall thereafter be deliverable upon the
exercise of this Warrant or any portion thereof (in lieu of or in addition to
the Warrant Shares theretofore deliverable, as appropriate) the highest number
of shares of stock or other securities and/or the greatest amount of property to
which the holder of the number of Warrant Shares which would otherwise have been
deliverable upon the exercise of this Warrant or any portion thereof at the time
would have been entitled upon such reorganization or reclassification or
recapitalization of capital stock, consolidation, merger, sale, transfer,
disposition or other transaction or upon the occurrence of such other event, and
at the same aggregate Purchase Price.
(f) Distribution of Assets. If the Company at any time and
from time to time subsequent to the date hereof declares a dividend upon, or
makes any distribution in respect of, any of its stock payable in any asset or
property of the Company, other than any cash dividend that (i) is paid out of
the retained earnings of the Company, in any transaction as to which the other
provisions of this section 13 are not strictly applicable, then and in each such
case, the Purchase Price shall be adjusted by subtracting from the Purchase
Price then in effect the Fair Value of the assets or property so distributed to
the holder of one share of Common Stock; provided that no such adjustment will
result in a Purchase Price of less than the then par value of the Common Stock.
(g) Other Dilutive Events. If any other event (other than
those referred to in this section 13.2, including, without limitation, any
issuance, repurchase, redemption or other distribution in respect of any shares
of stock or securities of the Company or of any other Person, including any
Person referred to in section 13.2(e) shall occur as to which the other
provisions of this section 13 are not strictly applicable but the failure to
make any adjustment to the Purchase Price or to any of the other terms of this
Warrant would not fairly protect the purchase rights and other rights
represented by this Warrant in accordance with the essential intent and
principles hereof, then, in each such case, the Company shall appoint a firm of
independent certified public accountants of recognized national standing (which
may be the regular auditors of the Company), which shall give its opinion as to
the adjustment, if any, on a basis consistent with the essential intent and
principles established in this section 13, necessary to preserve, without
dilution, the
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<PAGE> 13
rights represented by this Warrant. The Company shall pay the fees and expenses
of such firm of accountants in connection with any such opinion. Upon receipt of
such opinion, the Company will promptly mail a copy thereof of the holder of
this Warrant and shall make the adjustments described therein.
(h) Determination of Consideration. For purposes of this
section 13, the consideration received or receivable by the Company for the
issuance, sale, grant or assumption of shares of Common Stock or Stock Purchase
Rights, irrespective of the accounting treatment of such consideration, shall be
valued as follows:
(i) Cash Payment. In the case of cash, the net amount
received by the Company after deduction of any accrued
interest or dividends, any expenses paid or incurred and any
underwriting commissions or concessions paid or allowed by the
Company in connection with such issue or sale.
(ii) Non-Cash Payment. In the case of consideration
other than cash, the Fair Value thereof or, if less, in the
case of any security, the Current Market Price of such
security, if applicable (in any case as of the date
immediately preceding the issuance, sale or grant in
question).
(iii) Allocation Related to Common Stock. If shares
of Common Stock are issued or sold together with other
securities or other assets of the Company for a consideration
which covers both, the consideration received or receivable
(computed as provided in clauses (i) and (ii) of this section
13.2(h) shall be allocable to such shares of Common Stock as
determined in good faith by the board of directors of the
Company.
(iv) Allocation Related to Stock Purchase Rights and
Convertible Securities. If any Stock Purchase Rights or
Convertible Securities are issued or sold together with other
securities or other assets of the Company in a transaction in
which no specific consideration is allocated to the Stock
Purchase Rights or Convertible Securities, such Stock Purchase
Rights or Convertible Securities shall be deemed to have been
issued or sold without consideration.
(v) Dividends in Securities. If the Company shall
declare a dividend or make any other distribution upon any
stock of the Company (other than
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<PAGE> 14
Common Stock) payable in shares of Common Stock, Convertible
Securities or Stock Purchase Rights, such shares of Common
Stock, Convertible Securities or Stock Purchase Rights, as the
case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold
without consideration.
(vi) Stock Purchase Rights and Convertible
Securities. The consideration for which shares of Common Stock
shall be deemed to be issued upon the issuance or sale of any
Stock Purchase Rights or Convertible Securities shall be
determined by dividing (A) the total consideration, if any,
received by the Company as consideration for the Stock
Purchase Rights plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon
the exercise of such Stock Purchase Rights as the case may be,
in each case after deducting any accrued interest or
dividends, any expenses paid or incurred and any underwriting
commissions or concessions paid or allowed by the Company in
connection with such issue or sale; by (B) the maximum number
of shares of Common Stock issuable upon the exercise of such
Stock Purchase Rights.
(vii) Merger, Consolidation or Sale of Assets. If any
shares of Common Stock, Convertible Securities or Stock
Purchase Rights are issued in connection with any merger or
consolidation of which the Company is the surviving
corporation, the amount of consideration therefor shall be
deemed to be the Fair Value of such portion of the assets and
business of the non-surviving corporation as shall be
attributable to such Common Stock, Convertible Securities or
Stock Purchase Rights, as the case may be. In the event of (A)
any merger or consolidation of which the Company is not the
surviving corporation or (B) the sale, transfer or other
disposition of the property, assets or business of the Company
as an entirety or substantially as an entirety for stock or
other securities of any other Person, the Company shall be
deemed to have issued the number of shares of its Common Stock
for stock or securities of the surviving corporation or such
other Person computed on the basis of the actual exchange
ratio on which the transaction was predicated and for a
consideration equal to the Fair Value on the
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<PAGE> 15
date of such transaction of such stock of securities of the
surviving corporation or such other Person, and if any such
calculation results in adjustment of the Purchase Price, the
determination of the number of Warrant Shares issuable upon
exercise of this Warrant immediately prior to such merger,
consolidation or sale, for the purposes of section 13.2(e),
shall be made after giving effect to such adjustment of the
Purchase Price.
(i) Record Date. If the Company shall take a record of the
holders of the Common Stock for the purpose of entitling them (i) to receive a
dividend or other distribution payable in Common Stock, Convertible Securities
or Stock Purchase Rights or (ii) to subscribe for or purchase Common Stock,
Convertible Securities or Stock Purchase Rights, then all references in this
section 13 to the date of the issue or sale of the shares of Common Stock deemed
to have been issued or sold upon the declaration of such dividend or the making
of such other distribution or the date of the granting of such right of the
subscription or purchase, as the case may be, shall be deemed to be references
to such record date.
(j) Shares Outstanding. The number of shares of Common Stock
deemed to be outstanding at any given time shall not include shares of Common
Stock held by the Company or any Subsidiary.
(k) Maximum Purchase Price. At no time shall the Purchase
Price exceed the amount set forth in Section 2 of this Warrant except as a
result of an adjustment thereto pursuant to section 13.2(a)(iii) or 13.2(e).
(l) Application. Except as otherwise provided herein, all
subdivisions of this Section 13.2 are intended to operate independently of one
another. If an event occurs that requires the application or more than one
subdivision, all applicable subdivisions shall be given independent effect.
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(m) No Adjustments under Certain Circumstances. Anything
herein to the contrary notwithstanding, no adjustment to the Purchase Price
shall be made in the case of:
(i) any issuance of shares of Common Stock upon the
exercise in whole or part of any Warrant; or
(ii) any issuance of shares of Common Stock pursuant
to a rights offering in which the holder hereof elects to
participate in full under the provisions of section 13.3; or
(iii) (A) the granting by the Company of Stock
Purchase Rights to its employees, directors, officers and
other individuals entitled to participate under the Company's
Incentive Program or any successor program, so long as the
aggregate number of shares of Common Stock covered by all such
Stock Purchase Rights granted (and not theretofore terminated)
after the Closing Date do not exceed 15% of the shares of
Common Stock issued and outstanding on a fully-diluted basis
at the time of the latest granting of any such Stock Purchase
Rights, (B) the issuance of shares of Common Stock pursuant to
the exercise of such Stock Purchase Rights or (C) the issuance
of such additional shares of Common Stock as may be issuable
upon the exercise of such Stock Purchase Rights as a result of
adjustment in the number of shares covered thereby through the
operation of anti-dilution provisions substantially similar to
those set forth herein.
13.3. Rights Offering. If the Company shall effect an offering of
Common Stock pro rata among its stockholders, the holder hereof shall be
entitled, at its option, to elect to participate in each and every such offering
as if this Warrant had been exercised and such holder were, at the time of any
such rights offering, then a holder of that number of Warrant Shares to which
such holder is then entitled on the exercise hereof.
13.4 Certificates and Notices.
(a) Adjustments to Purchase Price. Upon any adjustment under
this Section 13 of the number of shares of Common Stock purchasable upon
exercise of this Warrant or of the Purchase Price, the Company shall, at its
expense, mail to the holder of this Warrant either (i) an
16
<PAGE> 17
Officers' Certificate or (ii) a certificate signed by any independent firm of
certified public accountants of recognized national standing selected by the
Company, setting forth in reasonable detail the events requiring the adjustment
and the method by which such adjustment was calculated and specifying the
adjusted Purchase Price and the number of shares of Common Stock purchasable
upon exercise of this Warrant after giving effect to such adjustment. The
certificate of any such firm of accountants shall be conclusive evidence of the
correctness of any computation made under this section 13.
(b) Extraordinary Corporate Events. If the Company at any time
and from time to time after the date hereof shall propose to (i) pay any
dividend payable in stock to the holders of shares of Common Stock or to make
any other distribution to the holders of shares of Common Stock, (ii) offer to
the holders of shares of Common Stock rights to subscribe for or purchase any
additional shares of any class of stock or any other rights or options or (iii)
effect any reclassification of the Common Stock (other than a reclassification
involving merely the subdivision or combination of outstanding shares of Common
Stock), or any reorganization or recapitalization or any consolidation or merger
(other than a merger in which no distribution of securities or other property is
to be made to holders of shares of Common Stock), or any sale, transfer or other
disposition of its property, assets and business as an entirety or substantially
as an entirety, or the liquidation, dissolution or winding up of the Company,
then, in each such case, the Company shall mail to the holder of this Warrant an
Officers' Certificate giving notice of such proposed action, specifying (A) the
date on which the stock transfer books of the Company shall close, or a record
shall be taken, for determining the holders of Common Stock entitled to receive
such stock dividends or other distribution or such rights or options, or the
date on which such reclassification, reorganization, recapitalization,
consolidation, merger, sale, transfer, other disposition, liquidation,
dissolution or winding up shall take place or commence, as the case may be, and
(B) the date as of which it is expected that holders of Common Stock of record
shall be entitled to receive securities or other property deliverable upon such
action, if any such date is to be fixed. Such Officers' Certificate shall be
mailed in the case of any action covered by clause (i) or (ii) above at least 20
days prior to the record date for determining holders of Common Stock for
purposes of receiving such payment or offer, or in the case of any action
covered by clause (iii) above at least 20 days prior to the date upon which such
action takes place and 10 days prior
17
<PAGE> 18
to any record date to determine holders of Common Stock entitled to receive such
securities or other property.
(c) Effect of Failure. Failure to give any certificate or
notice, or any defect in any certificate or notice required under this section
13.4 shall not affect the legality or validity of the adjustment of the Purchase
Price or the number of Warrant Shares purchasable upon exercise of this Warrant.
18
<PAGE> 1
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This First Amendment to Second Amended and Restated Credit Agreement
(this "First Amendment") is entered into as of April 9, 1999 among SHOREWOOD
PACKAGING CORPORATION (the "U.S. Borrower") and SHOREWOOD CORPORATION OF CANADA
LIMITED (the "Canadian Borrower") (collectively, the U.S. Borrower and the
Canadian Borrower are referred to as the "Borrowers"), NATIONSBANK, N.A., as
Administrative Agent, THE BANK OF NOVA SCOTIA, as Canadian Administrative Agent
and the Lenders party to the Credit Agreement (as defined below). All
capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in the Credit Agreement.
RECITALS
A. The Borrowers, the Administrative Agent, the Canadian Administrative
Agent and the Lenders entered into that certain Second Amended and Restated
Credit Agreement dated as of October 29, 1998 (the "Credit Agreement").
B. The Borrowers have requested, and the Required Lenders have agreed,
to amend the terms of the Credit Agreement as set forth below.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Amendment to Section 1.1. Clause (k) in the definition of "Permitted
Investments" set forth in Section 1.1 of the Credit Agreement is amended and
restated in its entirety to read as follows:
"(k) other Investments not to exceed $30 million, in the
aggregate, at any time outstanding (on a cost basis)."
2. Amendment to Section 6.17. Section 6.17 of the Credit Agreement is
amended and restated in its entirety to read as follows:
6.17 USE OF PROCEEDS; MARGIN STOCK.
The proceeds of the Loans hereunder will be used solely for the
purposes specified in Section 7.10. None of such proceeds will be used in
violation of Regulation U or Regulation X.
3. Representations and Warranties. The Borrowers hereby represent and
warrant to the Agents and the Lenders that (a) subsequent to the execution and
delivery of this First Amendment, no Default or Event of Default exists under
the Credit Agreement or any of the
<PAGE> 2
other Loan Documents; (b) all of the representations and warranties set forth in
the Loan Documents are true and correct as of the date hereof; (c) the liens
created and evidenced by the Loan Documents (including, without limitation, the
Stock Pledge Agreements) are valid and existing liens of the recited priority;
and (d) since the date of the last financial statements of Borrowers delivered
to Lenders, there has not occurred any event or condition that has caused or
could reasonably he expected to cause a Material Adverse Effect.
4. Ratification of Credit Agreement. The term "Credit Agreement" as
used in each of the Loan Documents shall hereafter mean the Credit Agreement as
amended by this Amendment. Except as herein specifically agreed, the Credit
Agreement is hereby ratified and confirmed and shall remain in full force and
effect according to its terms.
5. Authority/Enforceability. Each of the Borrowers, the Guarantors, the
Agents and the Lenders represents and warrants as follows:
(a) It has taken all necessary action to authorize the
execution, delivery and performance of this First Amendment.
(b) This First Amendment has been duly executed and delivered
by such Person and constitutes such Person's legal, valid and binding
obligations, enforceable in accordance with its terms, except as such
enforceability may be subject to (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or
similar laws affecting creditors' rights generally and (ii) general
principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity).
(c) No consent, approval, authorization or order of, or
filing, registration or qualification with, any court or governmental
authority or third party is required in connection with the execution,
delivery or performance by such Person of this Amendment.
6. Counterparts/Telecopy. This First Amendment may be executed in any
number of counterparts, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument.
Delivery of executed counterparts by telecopy shall be effective as an original
and shall constitute a representation that an original will be delivered.
7. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH
CAROLINA.
8. Entirety. This First Amendment and the other Loan Documents embody
the entire agreement between the parties and supersede all prior agreements and
understandings, if any, relating to the subject matter hereof. These Loan
Documents represent the final agreement between the parties and may not be
contradicted by evidence of prior, contemporaneous or subsequent oral agreements
of the parties. There are no oral agreements between the parties.
2
<PAGE> 3
This First Amendment shall be deemed to be effective as of the day and
year first above written.
BORROWERS:
SHOREWOOD PACKAGING CORPORATION
By:
----------------------------------------------
Name: Howard M. Liebman
Title: Executive Vice President / CFO
SHOREWOOD CORPORATION OF CANADA LIMITED
By:
----------------------------------------------
Name: Howard M. Liebman
Title: Vice President
3
<PAGE> 4
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
LENDERS:
NATIONSBANK, N.A., in its capacity as
Administrative Agent and as a Lender
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
4
<PAGE> 5
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THE BANK OF NOVA SCOTIA, in its
capacity as Canadian Administrative
Agent and as a Lender
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
5
<PAGE> 6
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
CRESTAR BANK
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
6
<PAGE> 7
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THE CHASE MANHATTAN BANK
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
7
<PAGE> 8
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
PARIBAS
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
8
<PAGE> 9
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
FLEET BANK N.A.
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
9
<PAGE> 10
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THE BANK OF NEW YORK
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
10
<PAGE> 11
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
FIRST UNION NATIONAL BANK
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
11
<PAGE> 12
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
US TRUST BANK
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
12
<PAGE> 13
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
BANK HAPOALIM B.M.
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
13
<PAGE> 14
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
BANK LEUMI USA
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
14
<PAGE> 15
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
MELLON BANK, N.A.
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
15
<PAGE> 16
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
ABN AMRO BANK N.V.
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
16
<PAGE> 17
SIGNATURE PAGE TO FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
SOCIETE GENERALE
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
17
<PAGE> 18
The Subsidiary Guarantors acknowledge and consent to all of the terms and
conditions of this First Amendment and agree that this First Amendment and any
documents executed in connection herewith do not operate to reduce or discharge
the Subsidiary Guarantors' obligations under their respective Guaranty
Agreements.
SHOREWOOD TECHNOLOGIES, INC., a
Delaware corporation
SHOREWOOD PACKAGING OF DELAWARE, INC.,
a Delaware corporation
By:
-------------------------------------
Name: Howard M. Liebman
Title: Vice President and Treasurer
SHOREWOOD PACKAGING CORPORATION
OF GEORGIA, a Georgia corporation
SHOREWOOD PACKAGING OF NORTH
CAROLINA, INC., a Delaware corporation
COMPANY OF VIRGINIA, INC. (f/k/a
SHOREWOOD PACKAGING OF VIRGINIA, INC.),
a Virginia corporation
SHOREWOOD PACKAGING OF CALIFORNIA, INC.,
a California corporation
SHOREWOOD PACKAGING COMPANY
OF ILLINOIS, INC., an Illinois
corporation
SHOREWOOD TRANSPORT, INC., a New York
corporation
By:
-------------------------------------
Name: Howard M. Liebman
Title: Executive Vice President and
Chief Financial Officer
[signatures continued]
18
<PAGE> 19
SHOR-WRAP, INC., a Delaware corporation
SHOREWOOD PACKAGING CORPORATION
OF ALABAMA, an Alabama corporation
SHOREWOOD PACKAGING CORPORATION OF
NEW YORK, a New York corporation
SHOREWOOD ACQUISITION CORP. OF DELAWARE,
a Delaware corporation
SHOREWOOD PACKAGING CORPORATION OF
VIRGINIA (f/k/a SHOREWOOD PAPERBOARD
CORPORATION OF VIRGINIA,. a Delaware
corporation
SPC COMPANY OF NEW YORK, INC. (f/k/a
SHOREWOOD PAPERBOARD CORPORATION OF
NEW YORK), a New York corporation
SHOREWOOD PACKAGING CORPORATION OF
CONNECTICUT (f/k/a SHOREWOOD/HEMINGWAY
SET-UP BOX CORPORATION, a Connecticut
corporation
SHOREWOOD PACKAGING CORPORATION OF
OREGON, an Oregon corporation
SHOREWOOD HOLOGRAPHIC PATTERNS, INC.,
a Delaware corporation
By:
-------------------------------------
Name: Howard M. Liebman
Title: Executive Vice President and
Chief Financial Officer
[signatures continued]
19
<PAGE> 20
SHOREWOOD PACKAGING CORPORATION OF
KENTUCKY, a Kentucky corporation,
SHOREWOOD PACKAGING CORPORATION OF
INDIANA, an Indiana corporation
SHOREWOOD PACKAGING CORPORATION OF NEW
JERSEY, a New Jersey corporation
By:
-------------------------------------
Name: Howard M. Liebman
Title: Vice President and
Chief Financial Officer
SHOREWOOD PACKAGING CORP. OF
CANADA LIMITED, a Canadian corporation
SHOREWOOD CARTON CORPORATION
LIMITED (f/k/a TORONTO CARTON
CORPORATION LIMITED), an
Ontario corporation
SPC CORPORATION LIMITED
(f/k/a SHOREWOOD PAPERBOARD
CORPORATION LIMITED), an
Ontario corporation
By:
-------------------------------------
Name: Howard M. Liebman
Title: Vice President
20
<PAGE> 1
SHOREWOOD PACKAGING CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT dated as of October 30, 1998, between
Shorewood Packaging Corporation, a Delaware corporation, with its principal
office at 277 Park Avenue, New York, New York, 10172, (the "Company") and
Jefferson Capital Group, Ltd., a Virginia corporation, with its principal office
at One James Center, Suite 1600, Richmond, Virginia, 23219, (the "Optionee").
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company and its stockholders to grant to
the Optionee an option to purchase 50,000 shares of the common stock, par value
$.01 per share (the "Common Stock") of the company in recognition of the
Optionee's services to the Company during the Queens transaction and as an
inducement to perform additional services on behalf of the Company; and
WHEREAS, R. Timothy O'Donnell ("O'Donnell"), the managing
director of Optionee, is also a director of Company; and
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company and its stockholders to grant
the Optionee certain rights pursuant to the terms of this Agreement in
recognition of the Optionee's services to the Company and as an inducement to
perform additional services on behalf of the Company.
NOW, THEREFORE, the parties agree as follows:
1. Grant of Option
1.1 The Company grants to the Optionee, on the terms
and conditions hereinafter set forth, an option (the "Option") to purchase
50,000 shares of Common Stock of the Company (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 The Option Shares are not, and are not required
to be, registered under the Securities Act of 1933, as amended, (the "Securities
Act") but may 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 and Payment for Shares
2.1 The purchase price for the Option Shares shall be
$16.00 per share (the closing price of Company common stock on the date of this
agreement).
2.2 Payment of the purchase price upon exercise of
the Option may be made in cash or check subject to collection.
<PAGE> 2
3. Period of Option and Certain Limitations on Right to
Exercise and Right to Sell Stock Received Upon Exercise of the Option
3.1 The period of the Option will be five years from
the date the option is granted, which date is first written above (the
"Period"). The Option will be exercisable, in whole or in part, at any time
during the Period.
3.2 Optionee understands and acknowledges that by
virtue of O'Donnell's status as a director of the Company, the subsequent sale
by Optionee of the shares may be subject to Securities and Exchange Commission
Rule 10b-5 and Exchange Act Section 16 (b) restricting transactions in Company
securities by certain corporate insiders. Moreover, the purchase and sale of any
securities of the Company by O'Donnell and/or any entity controlled by or under
common control with O'Donnell are subject to the Company's insider trading
policies as promulgated from time to time.
4. Exercise of Option
4.1 The Option herein granted shall be exercisable,
in whole or in part, from time to time by notice in writing from the Optionee to
the Company which notice shall be signed by a duly authorized officer of the
Optionee. Such notice shall specify the number of Option Shares with respect to
which the Option is then being exercised and shall be accompanied, pursuant to
Section 2 hereof.
4.2 Upon the exercise of the Option in whole or in
part, the Company shall promptly issue stock certificates for the shares of
Common Stock purchased and the Optionee shall be deemed to be the holder of the
shares of 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. The Optionee will not be nor deemed to be, a holder of any shares
subject to the Option unless and until certificates for such shares are issued
to it or them under the terms of this Agreement.
4.3 If and when the Option is exercised, the
certificates to be issued evidencing shares of the Company's Common Stock will
be restricted stock and 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. No transfer, sale or other disposition of
these shares may be made except pursuant to Rule 144
under the Securities Act of 1933, as amended, or
unless a registration statement with respect to these
shares has become effective under said 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."
5. Transferability of Options
The Option shall not be assignable or transferable by
the Optionee to any other individual or entity without the prior written consent
of the Company, which may be withheld in its reasonable discretion.
<PAGE> 3
6. Acceleration of Option Exercise
Upon the occurrence of any of the following events,
the Option shall be exercisable only within the 30 calendar days next succeeding
the occurrence of the relevant Triggering Event (as defined below), so long as
such exercise occurs within the Period and then only (a) by an authorized
officer of the Optionee on the Optionee's behalf and (b) if and to the extent
that the Optionee was entitled to exercise the Option at the date of the
stockholder approval of the Change of Control:
(a) the event that the stockholders of the Company
have approved an agreement to merge or consolidate with or into another
corporation (and the Company is not the survivor of such merger or
consolidation) or an agreement to sell or otherwise dispose of all or
substantially all of the Company's assets (including a plan of liquidation)
("Change of Control") (the date of the stockholder approval of the Change of
Control shall be the Triggering Event for purposes of this Subsection (a)).
7. Piggy-Back Registration
Subject to Sections 8 and 12 hereof, if at any time
after the date of this Agreement during the Period, the Company in addition to
any of the holders of the Common Stock other than the Optionee propose to file a
registration statement to register any security of the Company (other than
Common Stock issued with respect to any acquisition or any employee stock
option, stock purchase or similar plan) under the Securities Act for sale to the
public in an underwritten offering upon which may be registered securities
similar to the Option Shares, it will at each such time give written notice to
the Optionee of its intention to do so ("Notice of Intent") and, upon the
written request of the Optionee made within 30 calendar days after the receipt
of any such notice (which request must specify that the Optionee intends to
dispose of all of the Option Shares held by the Optionee on the date the Notice
of Intent is received by the Optionee, and state the intended method of
disposition thereof), the Company will use its best efforts to effect the
registration under the Securities Act of the Option Shares which the Company has
been so requested to register, to the extent requisite to permit the intended
disposition; provided, however, that if the managing underwriter shall certify
in writing that inclusion of all of the Option shares would, in such managing
underwriter's opinion, materially interfere with the proposed distribution of
the securities in respect of which registration was originally to be effected
(x) at a price reasonably related to fair value, and (y) under circumstances
which will not materially and adversely affect the market of the Company's
securities (such writing to state the basis of such opinion and the maximum
number of shares which may be distributed without such interference), then the
Company may, upon written notice to the Optionee, have the right to exclude from
such registration such number of Option Shares which it would otherwise be
required to register hereunder as is necessary to reduce the total amount of
securities to be so registered to the maximum amount which can be so marketed.
8. 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 this Agreement shall be paid by the Company (including,
without limitation, all registration and filing fees, printing expenses, fees
and
<PAGE> 4
expenses of complying with Blue Sky laws, and fees and disbursements of counsel
for the Company and of independent public accountants; provided, however, that
fees and expenses of complying with Blue Sky laws in those states where Option
Shares and no other securities of the Company covered by the registration
statement will be offered for sale, shall be paid by the Optionee).
9. Registration Procedures
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:
(i) prepare and file with the Securities and Exchange
Commission ("Commission") a registration statement on such form as the Company
may select with respect to such Option Shares and use its best efforts to cause
such registration statement to become effective;
(ii) 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 and other securities
covered by such registration statement until such time as all of such Option
Shares and other securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set forth in
such registration statement, but in no event for a period of more than nine
months after such registration statement becomes effective;
(iii) furnish to the Optionee 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;
(iv) 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 seller shall reasonably
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;
(v) notify the Optionee when a prospectus relating to
the Option Shares is required to be delivered under the Securities Act within
the period mentioned in subdivision (ii) of this paragraph, of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an 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 then
existing (and upon receipt of such notice and until a supplemented or amended
prospectus as set forth below is available, the Optionee 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
(vi) furnish to the Optionee, at the time of the
disposition of any Option Shares by him, a signed copy of an opinion of counsel
to the effect that: (a) 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, (b) said registration statement and the
prospectus contained therein comply as to form in all material
<PAGE> 5
respects with the requirements of the Securities Act, (c) no stop order has been
issued by the Commission suspending the effectiveness of such registration
statement and (d) the applicable provisions of the securities or Blue Sky laws
of each state in which the Company shall be required, pursuant to clause (iv) of
this paragraph, 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.
The Company may require the Optionee to furnish the
Company such information regarding it and the distribution of such Option Shares
as the Company may from time to time request in writing and as shall be required
by law to effect such registration.
10. Termination of Obligations
The obligations of the Company imposed by Sections 7
through 9 above shall cease and terminate, as to any particular Option Shares,
(a) when such shares shall have been effectively registered under the Securities
Act and disposed of in accordance with the registration statement covering such
securities, or (b) when in the opinion of counsel for the Company such
restrictions are no longer required in order to insure compliance with the
Securities Act or (c) seven years and one day after the date hereof. Whenever
such restrictions shall terminate as to any Option Shares, the Optionee shall be
entitled to receive from the Company without expense a new certificate or
certificates representing such securities not bearing the legend set forth in
Section 4.3 hereto.
11. Availability of Information
The Company will use its best efforts to comply with
the reporting requirements of Sections 13 and 15(d) of the Securities Exchange
Act of 1933 to the extent it shall be required to do so pursuant to such
Sections, 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 promulgated by the Commission under the Securities Act)
from time to time 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 Optionee in supplying such information and documentation as
may be necessary for him 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.
12. Registration Rights Condition
Notwithstanding any other provision contained herein,
the Company shall not be obligated to comply with any demands for registration
of Option Shares under the Securities Act if, at the time of such demand by the
Optionee:
(i) he is free to sell all of the Option Shares with
respect to which such registration was requested in accordance with Rule 144
promulgated under the Securities Act or any similar rule or regulation
promulgated under the Securities Act; or
(ii) the Company has in effect a registration
statement covering the
<PAGE> 6
disposition of the Option Shares.
13. Dilution or Other Adjustments
In the 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 (I)
the number of shares of Common Stock of the Company subject to the Option, (ii)
options granted hereunder, or (iii) any provision of this Agreement, in order to
prevent dilution or enlargement of the Option and the rights granted hereunder.
14. Miscellaneous
14.1 This Agreement shall be governed by the laws of
the State of New York.
14.2 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) 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.
14.3 As used herein, the masculine gender shall
include the feminine gender.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above mentioned.
SHOREWOOD PACKAGING CORPORATION
By: ___________________________________
Howard M. Liebman
Executive Vice President and
Chief Financial Officer
JEFFERSON CAPITAL GROUP, LTD.
By: ____________________________________
R. Timothy O'Donnell
Managing Director
<PAGE> 1
Exhibit 21.1
SHOREWOOD PACKAGING CORPORATION SUBSIDIARIES
<TABLE>
<CAPTION>
Name State of Incorporation/Country
---- ------------------------------
<S> <C>
Shorewood Packaging of California, Inc. California
Shorewood Packaging Company of Illinois, Inc. Illinois
SPC Company of Virginia, Inc. Virginia
Shorewood Packaging Corporation of Alabama Alabama
Shorewood Packaging Corp. of Canada, Ltd. Ontario, Canada
Shorewood Packaging of Delaware, Inc. Delaware
Shor-Wrap, Inc. Delaware
Shorewood Technologies, Inc. Delaware
Shorewood Packaging Corporation of Georgia Georgia
Shorewood Carton Corporation Limited Ontario, Canada
Shor-Wrap Packages of Canada, Ltd. Ontario, Canada
Shorewood Acquisition Corp. of Delaware Delaware
Shorewood Packaging Corporation of Virginia Delaware
SPC Company of New York, Inc. New York
Shorewood Packaging Corporation of Connecticut Connecticut
Shorewood Corporation of Canada Limited Ontario, Canada
SPC Corporation Limited Ontario, Canada
Shorewood Packaging Corporation of Oregon Oregon
Shorewood Packaging of North Carolina, Inc. Delaware
Shorewood Packaging Company (Guangzhou) Ltd. China
Shorewood Holographic Patterns, Inc. Delaware
Shorewood Asia Ventures Ltd. Bermuda
SPC (Bermuda) Ltd. Bermuda
SPC Asia, Ltd. Bermuda
Shorewood Packaging China Ventures Ltd. Mauritius
Shorewood Packaging Corporation of New Jersey New Jersey
Shorewood Packaging Corporation of Kentucky Kentucky
Shorewood Packaging Corporation of Indiana Indiana
Shorewood Packaging (UK) Company plc England and Wales
</TABLE>
Page 48 of 49
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.'s
33-16409, 33-38259 and 33-78614 of Shorewood Packaging Corporation each on Form
S-8 and to the incorporation by reference in Registration Statement No. 333-3671
of Shorewood Packaging Corporation on Form S-3 of our report dated July 2, 1999,
appearing in this Annual Report on Form 10-K of Shorewood Packaging Corporation
for the 52 weeks ended May 1, 1999.
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 29, 1999
Page 49 of 49
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-01-1999
<PERIOD-START> MAY-03-1998
<PERIOD-END> MAY-01-1999
<CASH> 11,755
<SECURITIES> 0
<RECEIVABLES> 51,295
<ALLOWANCES> 638
<INVENTORY> 52,654
<CURRENT-ASSETS> 123,916
<PP&E> 349,806
<DEPRECIATION> 106,358
<TOTAL-ASSETS> 515,463
<CURRENT-LIABILITIES> 100,409
<BONDS> 227,712
0
0
<COMMON> 355
<OTHER-SE> 146,117
<TOTAL-LIABILITY-AND-EQUITY> 515,463
<SALES> 552,194
<TOTAL-REVENUES> 552,194
<CGS> 420,324
<TOTAL-COSTS> 420,324
<OTHER-EXPENSES> 68,860
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,405
<INCOME-PRETAX> 52,416
<INCOME-TAX> 18,975
<INCOME-CONTINUING> 34,344
<DISCONTINUED> 0
<EXTRAORDINARY> (277)
<CHANGES> (3,040)
<NET-INCOME> 31,027
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.13
</TABLE>
