UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

þ  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to § 240.14a-12

 

PAXAR CORPORATION

(Name of Registrant as Specified in Its Charter)

 

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

 

Payment of Filing Fee (Check the appropriate box):

 

o  No fee required.

 

 

 

 

 

 

 

 

 

 

 

 

o  Fee paid previously with preliminary materials.

 

 

 

 

 

 

 

 

 

 

PRELIMINARY COPY, SUBJECT TO COMPLETION DATED APRIL 27, 2007

 

Paxar Corporation
105 Corporate Park Drive
White Plains, NY 10604
Phone 914-697-6800
FAX 914 696-4128

 

                    , 2007

 

Dear Paxar Shareholder:

 

You are cordially invited to attend the annual meeting of shareholders (the “annual meeting”) of Paxar Corporation (“Paxar”), which will be held at 9:30 a.m. on          , 2007, at the InterContinental The Barclay New York, 111 East 48th Street, New York, New York.

 

The proxies being solicited hereby are being solicited by Paxar and the board of directors of Paxar. We have retained D.F. King & Co., Inc., to assist in the distribution and solicitation of proxies. The board of directors of Paxar has unanimously approved a merger providing for the acquisition of Paxar by Avery Dennison Corporation. If the merger is completed you will receive $30.50 in cash without interest for each share of Paxar common stock that you own.

 

You will be asked, at the annual meeting, to adopt the merger agreement. The board of directors has unanimously approved and declared advisable the merger, the merger agreement and the transactions contemplated by the merger agreement and determined that the merger is in the best interests of Paxar’s shareholders. The board of directors unanimously recommends that Paxar’s shareholders vote “FOR” the adoption of the merger agreement.

 

At the annual meeting, as more fully described in the proxy statement attached to this letter, we will also consider the re-election of six directors. The board of directors recommends a vote “FOR” each nominee for director.

 

The proxy statement provides you with information about the proposed merger and the other matters to be considered at the annual meeting. We encourage you to read the entire proxy statement carefully. You may also obtain more information about Paxar from documents we have filed with the Securities and Exchange Commission.

 

Your vote is important regardless of the number of shares of Paxar’s common stock you own. Because the adoption of the merger agreement requires the affirmative vote of the holders of at least two-thirds of Paxar’s outstanding shares of common stock, a failure to vote will have the same effect as a vote “AGAINST” the merger. Accordingly, even if you plan to attend the meeting, we hope that you will read the proxy statement and the voting instructions on the enclosed proxy card, and then vote (1) by completing, signing, dating and mailing the proxy card in the enclosed postage-paid envelope, (2) by calling the toll-free number listed on the proxy card, or (3) through the Internet as indicated on the proxy card. This will not affect your right to attend or vote at the meeting.

 

Submitting your proxy will not prevent you from voting your shares in person if you subsequently choose to attend the annual meeting.

 

I look forward to seeing you at the annual meeting on          , 2007. Please remember that we consider your vote to be very important.

 

Rob van der Merwe

Chairman, President and Chief Executive Officer

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the proposed merger, passed upon the merits or fairness of the proposed merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

THIS PROXY STATEMENT IS DATED          , 2007

 

AND IS FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT          , 2007.

PAXAR CORPORATION

 

NOTICE OF ANNUAL MEETING
          , 2007, 9:30 a.m.
The Intercontinental The Barclay
111 East 48th Street
New York, New York

 

Dear Shareholder:

 

The annual meeting of shareholders of Paxar Corporation, a New York corporation (“Paxar”), will be held on          , 2007 at 9:30 a.m., local time, at the InterContinental The Barclay New York, 111 East 48th Street, New York, New York, to consider and take action on the following items:

 

 

Shareholders of record as of the close of business on          , 2007, are entitled to vote at the annual meeting or any postponement or adjournment thereof.

 

If you hold shares in your name and are attending the annual meeting, please bring your admission card included with the proxy statement. If your shares are held indirectly in the name of a bank, broker or other nominee, please request a letter or some other evidence of ownership from your bank, broker or other nominee, as well as a legal proxy if you wish to vote your shares in person, and bring these documents to the annual meeting.

 

The adoption of the merger agreement requires the affirmative vote of the holders of at least two-thirds of Paxar’s outstanding shares of common stock. Failure to vote or abstention will have the same effect as a vote against adoption of the merger agreement. It is important that your shares be represented at this meeting. Even if you plan to attend the meeting, we hope that you will read the enclosed proxy statement and the voting instructions on the enclosed proxy card, and then vote (1) by completing, signing, dating and mailing the proxy card in the enclosed postage-paid envelope, (2) by calling the toll-free number listed on the proxy card, or (3) through the Internet as indicated on the proxy card. This will not affect your right to attend or vote at the meeting. If you are a shareholder of record and you attend the annual meeting and wish to vote in person, you may withdraw your proxy and vote in person.

 

By Order of the Board of Directors,

 

Robert S. Stone

Secretary

 

White Plains, New York

          , 2007

 

TABLE OF CONTENTS

 

 

 

The following questions and answers address briefly some questions you may have regarding the annual meeting of Paxar, or the “annual meeting,” and the proposed merger described in this proxy statement. These questions and answers may not address all questions that may be important to you as a shareholder of Paxar. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement. In this proxy statement, the terms “Paxar,” “Company,” “we,” “our,” “ours,” and “us” refer to Paxar Corporation.

 

 

 

 

 

The following summary highlights selected information from this proxy statement and may not contain all of the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that item.

 

The Annual Meeting

 

Date, Time and Place of Annual Meeting (Page 12)

 

The annual meeting will be held on          , 2007 at 9:30 a.m., local time at the InterContinental The Barclay New York, 111 East 48th Street, New York, New York.

 

Purpose of the Annual Meeting (Page 12)

 

The purpose of the annual meeting is to take action upon the following: (i) a proposal to approve the merger agreement and thereby approve the merger; (ii) the re-election of six directors; and (iii) to transact any other business properly brought before the annual meeting (or any adjournment or postponement thereof).

 

Record Date for the Annual Meeting (Page 12)

 

Pursuant to the authority delegated to him by our board of directors, Robert P. van der Merwe, our Chairman of the Board, has fixed the close of business on          , 2007 as the record date for determination of shareholders entitled to notice of and to vote at the annual meeting.

 

Shares Entitled to Vote (Page 12)

 

Each shareholder is entitled to one vote at the annual meeting for each share of our common stock held by that shareholder at the close of business on the record date. Shares of our common stock held by us in our treasury will not be voted.

 

Vote Required (Page 12)

 

Each proposal requires a different percentage of votes in order to approve it:

 

 

Voting at the Annual Meeting (Page 13)

 

If you are a shareholder of record, you may vote in person by ballot at the annual meeting or by submitting a proxy. We recommend you submit your proxy even if you plan to attend the annual meeting.

 

If you attend the annual meeting, you may vote by ballot, thereby canceling any proxy previously submitted.

 

How to Vote by Proxy (Page 13)

 

By telephone or Internet.  If you are a shareholder of record, you can submit your proxy by telephone by calling the toll-free telephone number on your proxy card or by Internet by accessing the website identified on your proxy card.

 

By mail.  If you are a shareholder of record and choose to submit your proxy by mail, please complete each proxy card you receive, date and sign it,

and return it in the prepaid envelope which accompanied that proxy card.

 

Shares held in “street name.” If you hold your shares indirectly in the name of a bank, broker or other nominee, as a “street-name shareholder,” you will receive instructions from your bank, broker or other nominee describing how to vote your shares.

 

Proxies without Instruction (Page 13)

 

If you are a shareholder of record and submit your proxy but do not make specific choices, your proxy will follow our board of directors’ recommendations.

 

Revocation of Proxies (Page 13)

 

You may revoke your proxy at any time prior to the time your shares are voted. If you are a shareholder of record, your proxy can be revoked in several ways:

 

 

However, if your shares are held in “street name” through a bank, broker, custodian or other recordholder, you must check with your bank, broker, custodian or other recordholder to determine how to revoke your proxy.

 

Parties to the Merger (Page 16)

 

Paxar Corporation

105 Corporate Park Drive

White Plains, NY 10604

(914-697-6800)

 

We are a leading provider of innovative merchandising systems for the retail and apparel industry. We design and manufacture tickets, tags and labels, and we provide the technology — including the printers, software control systems and necessary supplies — for retail product identification. During the fiscal year ended December 31, 2006, we had revenues of approximately $880.8 million.

 

Avery Dennison Corporation

Charles D. Miller Corporate Center

150 North Orange Grove Boulevard

Pasadena, California 91103

(626-304-2000)

 

Avery Dennison is a Delaware corporation and is a leader in pressure-sensitive labeling materials, office products and retail tag, ticketing and branding systems. Based in Pasadena, CA, Avery Dennison is a FORTUNE 500 Company with 2006 sales of $5.6 billion. Avery Dennison employs more than 22,000 individuals in 49 countries worldwide who apply Avery Dennison’s technologies to develop, manufacture and market a wide range of products for both consumer and industrial markets. Products offered by Avery Dennison include Avery brand office products and graphics imaging media, Fasson brand self-adhesive materials, peel-and-stick postage stamps, reflective highway safety products, labels in a wide variety of automotive, industrial and durable goods applications, brand identification and supply chain management products for the retail and apparel industries, and specialty tapes and polymers.

 

Alpha Acquisition Corp.

c/o Avery Dennison Corporation

Charles D. Miller Corporate Center

150 North Orange Grove Boulevard

Pasadena, California 91103

(626-304-2000)

 

Alpha Acquisition is a New York corporation and a wholly-owned subsidiary of Avery Dennison. Alpha Acquisition was organized solely for the purpose of entering into the merger agreement and

consummating the transactions contemplated by the merger agreement. It has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement. Under the terms of the merger agreement, Alpha Acquisition will merge with and into us. Paxar will survive the merger and Alpha Acquisition will cease to exist.

 

When the Merger Will be Completed (Page 41)

 

We are working toward completing the merger as soon as possible, and expect to complete it in the early summer. In order to complete the merger, we must obtain shareholder approval and other closing conditions must be satisfied, including the receipt of regulatory approvals or the expiration or termination of applicable regulatory waiting periods. We and Avery Dennison made the required filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the “HSR Act,” with the Antitrust Division of the Department of Justice, or “DOJ,” and the Federal Trade Commission, or “FTC,” on April 4, 2007, and the DOJ and the FTC granted early termination of the applicable waiting period on April 20, 2007.

 

Board Recommendation (Page 24)

 

Our board has unanimously determined that the merger is in the best interests of our shareholders and has approved the merger. Our board unanimously recommends that our shareholders vote “FOR” approval of the merger.

 

Opinion of our Financial Advisor
(Page 26 and Annex B)

 

Goldman, Sachs & Co., or “Goldman Sachs,” delivered its opinion to our board of directors that, as of March 22, 2007, and based upon and subject to the factors and assumptions set forth therein, the $30.50 per share in cash to be received by the holders of our common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

 

The full text of the written opinion of Goldman Sachs, dated March 22, 2007, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B. Goldman Sachs provided its opinion for the information and assistance of our board of directors in connection with its consideration of the transaction. The opinion of Goldman Sachs is not a recommendation as to how any holder of our common stock should vote with respect to the transaction. Pursuant to an engagement letter between Paxar and Goldman Sachs, we have agreed to pay Goldman Sachs a transaction fee of approximately $15.3 million, the principal portion of which is payable upon consummation of the transaction.

 

Interests of the Company’s Directors and Management in the Merger (Page 32)

 

Our directors and executive officers may have interests in the merger that are different from, or in addition to, yours, including:

 

 

 

Material United States Federal Income Tax Consequences of the Merger (Page 38)

 

The receipt of cash in the merger by United States holders of our common stock will be a taxable transaction for United States federal income tax purposes. In general, for United States federal income tax purposes, a United States holder of our common stock will recognize gain or loss equal to the difference between the amount of cash received in exchange for such common stock and the United States holder’s adjusted tax basis in such common stock. If you are a non-United States holder of our common stock, the merger will generally not be a taxable transaction to you under United States federal income tax laws unless you have certain connections to the United States. Your tax consequences will depend on your individual situation. Accordingly, we urge you to consult with your own tax advisor for a full understanding of the tax consequences of the merger.

 

Regulatory Matters (Page 41)

 

The HSR Act prohibits us from completing the merger until we have furnished certain information and materials to the DOJ and the FTC and the required waiting period has expired or been terminated. We and Avery Dennison made the required filings with the DOJ and the FTC on April 4, 2007, and the DOJ and the FTC granted early termination of the applicable waiting period on April 20, 2007. We and Avery Dennison also conduct operations in a number of other jurisdictions where other regulatory filings may be required or advisable in connection with the completion of the merger.

 

Merger Consideration (Page 42)

 

After the merger is completed, you will have the right to receive $30.50 in cash, without interest, for each share of our common stock held by you at the effective time of the merger. Our shareholders will receive the merger consideration after exchanging their stock certificates in accordance with the instructions contained in the letter of transmittal to be sent to shareholders shortly after completion of the merger.

 

Treatment of Outstanding Stock Options (Page 42)

 

Each outstanding option will automatically be converted into an option to purchase shares of Avery Dennison’s common stock (rounded down to the nearest whole number) equal to:

 

 

The exercise price of each converted option will be adjusted by dividing the existing exercise price by the quotient obtained by dividing the per share merger consideration by the Average Avery Stock Price (rounded up to the nearest whole cent ). The vesting schedule for each option will not be accelerated as a result of the merger, and each option will otherwise generally remain subject to the terms of its applicable grant, provided that the vesting of each option will accelerate upon a termination without cause of the holder’s employment during the 24 months following the completion of the merger.

 

Treatment of Outstanding Shares of Restricted Stock (Page 43)

 

Restricted share awards will automatically be converted into a number of restricted shares of Avery Dennison common stock (rounded up to the nearest whole number) equal to the number of such restricted shares multiplied by the per share merger consideration, divided by the Average Avery Stock Price. The restricted shares will generally remain subject to the terms (including vesting terms) of the applicable equity-based compensation plans and grant agreements, provided that the vesting of such shares will accelerate upon a termination without cause of the holder’s employment during the 24 months following the completion of the merger.

 

Treatment of Other Equity Awards (Page 43)

 

 

All such shares (or units) will vest on the date that the applicable three-year performance period was scheduled to conclude, subject to accelerated vesting in accordance with the terms of the applicable performance share award agreement.

 

 

Procedures for Receiving the Merger Consideration (Page 44)

 

As soon as practicable after the effective time of the merger, an exchange agent will mail a letter of transmittal and instructions to you and our other shareholders. The letter of transmittal and instructions will tell you how to surrender your common stock certificates in exchange for the merger consideration. You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the exchange agent without a letter of transmittal.

 

No Solicitation of Transactions (Page 50)

 

The merger agreement restricts our ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving the Company. Notwithstanding these restrictions, under certain limited circumstances required for our board of directors to comply with its fiduciary duties, our board of directors may respond to an unsolicited, written, bona fide proposal for an alternative acquisition or terminate the merger agreement and enter into an agreement with respect to a superior proposal after paying the termination fee specified in the merger agreement.

 

Conditions to the Completion of the Merger (Page 57)

 

Before we can complete the merger, a number of conditions must be satisfied, including:

 

 

Termination of the Merger Agreement (Page 53)

 

The merger agreement may be terminated at any time prior to the effective time:

 

 

 

 

 

 

 

Termination Fees and Expenses (Page 54)

 

Under certain circumstances, in connection with the termination of the merger agreement, we will be required to pay a termination fee of $40,000,000 to Avery Dennison and to reimburse its reasonable out-of-pocket fees and expenses up to a maximum of $5,000,000. This fee and such expenses will be payable in the event that:

 

 

 

 

Under certain circumstances, in connection with the termination of the merger agreement, Avery Dennison has agreed to pay us a termination fee of $50,000,000. This fee will be payable in the event that:

 

 

Market Price of Our Stock (Page 57)

 

Our common stock is listed on the NYSE under the symbol “PXR.” On March 22, 2007, the last full trading day prior to the public announcement of the merger, our common stock closed at $24.03 per share. On          , 2007, the last full trading day prior to the date of this proxy statement, our common stock closed at $      per share.

 

 

Certain statements contained in this proxy statement, and the documents to which we refer you in this proxy statement, concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical facts, are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. We generally identify these statements by words or phrases, such as “anticipate,” “estimate,” “plan,” “expect,” “believe,” “intend,” “foresee,” “will,” “may” and other similar words or phrases. These statements discuss, among other things, our future outlook, our strategy, anticipated capital expenditures, future cash flows and borrowings, our proposed merger, pursuit of potential acquisition opportunities, sources of future funding and other goals and targets. Such forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties, and actual results may differ materially from those discussed in such statements. The risks, uncertainties and factors that could cause actual results to differ materially include, but are not limited to, the following:

 

 

This proxy statement is being furnished to our shareholders as part of the solicitation of proxies by our board of directors for use at the annual meeting. This proxy statement and the enclosed form of proxy are first being mailed to our shareholders on or about          , 2007.

 

Date, Time and Place of Annual Meeting

 

The annual meeting will be held on          , 2007 at 9:30 a.m., local time, at the InterContinental The Barclay New York, 111 East 48th Street, New York, New York.

 

Purpose of the Annual Meeting

 

The purpose of the annual meeting is to take action upon the following:

 

 

Record Date for the Annual Meeting

 

Pursuant to the authority delegated to him by our board of directors, Robert P. van der Merwe, our Chairman of the Board, has fixed the close of business on          , 2007 as the record date for determination of shareholders entitled to notice of and to vote at the annual meeting.

 

Outstanding Shares

 

As of          , 2007, the record date for the annual meeting, there were approximately           shares of our common stock outstanding.

 

Shares Entitled to Vote

 

Shares entitled to vote at the annual meeting are shares of our common stock held as of the close of business on the record date,          , 2007. Each shareholder is entitled to one vote at the annual meeting for each share of our common stock held by that shareholder at the close of business on the record date. Shares of our common stock held by us in our treasury are not voted.

 

Quorum, Abstentions and Broker Non-Votes

 

A quorum of our shareholders is necessary to hold a valid meeting. The presence in person or by proxy at the annual meeting of holders of a majority of the issued and outstanding shares of our common stock entitled to vote at the meeting is a quorum. Shares held by us in our treasury do not count towards a quorum. Abstentions and broker non-votes count as present for establishing a quorum. A broker non-vote occurs on an item when the broker is not permitted to vote on that item without instruction from the beneficial owner of the shares of our common stock and the beneficial owner gives no instruction as to voting of the shares. Under NYSE rules, your broker or bank does not have discretionary authority to vote your shares on the proposal to approve the merger agreement. Without your voting instructions, a broker non-vote will occur.

 

Vote Required

 

The proposals require different percentages of votes in order to approve them:

 

 

Abstentions and broker non-votes are not counted as votes cast on a proposal.

 

Shares Beneficially Owned by Our Directors and Officers

 

Our directors and officers beneficially owned           shares of our common stock on          , 2007, the record date for the annual meeting. These shares represent in total approximately  % of the total voting power of our voting securities outstanding and entitled to vote as of          , 2007. Arthur Hershaft, Director, Chairman Emeritus and former Chief Executive Officer of the Company, has entered into a Voting Agreement (the “voting agreement”) with Avery Dennison to vote all of the shares that he beneficially owns in favor of the merger proposal. We currently expect that our other directors and officers will vote their shares in favor of the merger proposal, although they have not entered into any agreements obligating them to do so.

 

Voting at the Annual Meeting

 

If you are a shareholder of record, you may vote in person by ballot at the annual meeting or by submitting a proxy. We recommend you submit your proxy even if you plan to attend the annual meeting. If you attend the annual meeting, you may vote by ballot, thereby canceling any proxy previously submitted.

 

Voting instructions are included on your proxy card. If you properly give your proxy and submit it to us in time to vote, one of the individuals named as your proxy will vote your shares as you have directed. You may vote for or against the proposals or abstain from voting.

 

How to Vote by Proxy

 

By Telephone or Internet.  If you are a shareholder of record, you can submit your proxy by telephone by calling the toll-free telephone number on your proxy card or by Internet by accessing the website identified on your proxy card. Telephone and Internet voting are available 24 hours a day and will be accessible beginning on          , 2007 at      until      on          , 2007. If you hold your shares indirectly in the name of a bank, broker or other nominee, as a “street-name shareholder,” you will receive instructions from your bank, broker or other nominee describing how to vote your shares. If you submit your proxy by telephone or Internet, please do not mail your proxy card.

 

By Mail.  If you are a shareholder of record and choose to submit your proxy by mail, please complete each proxy card you receive, date and sign it, and return it in the prepaid envelope which accompanied that proxy card. If you hold your shares indirectly in the name of a bank, broker or other nominee, as a “street-name shareholder,” you will receive instructions from your bank, broker or other nominee describing how to vote your shares.

 

Proxies without Instruction

 

If you are a shareholder of record and submit your proxy but do not make specific choices, your proxy will follow our board of directors’ recommendations and your shares will be voted:

 

 

If you hold your shares through a bank, broker, custodian or other recordholder, failure to instruct such recordholder how to vote your shares will have the effect described under “— Quorum, Abstentions and Broker Non-Votes” above.

 

Revocation of Proxies

 

You may revoke your proxy at any time prior to the time your shares are voted. If you are a shareholder of record, your proxy can be revoked in several ways:

 

 

 

However, if your shares are held in “street name” through a bank, broker, custodian or other recordholder, you must check with your bank, broker, custodian or other recordholder to determine how to revoke your proxy.

 

Proxy Solicitation

 

The proxies being solicited hereby are being solicited by us and our board of directors. We will pay the costs of soliciting proxies from our shareholders. In addition to this mailing, proxies may be solicited by our directors, officers or employees in person or by telephone, through the Internet or by electronic transmission. None of the directors, officers or employees will be directly compensated for such services. We have retained D.F. King to assist in the distribution and solicitation of proxies. We will pay D.F. King a fee of $15,000, plus reasonable expenses, for these services. In addition, we will reimburse brokers, bank nominees and other institutional holders for their reasonable out-of-pocket expenses in forwarding proxy materials to the beneficial owners of our common stock.

 

The extent to which these proxy soliciting efforts will be necessary depends entirely upon how promptly proxies are submitted. You should submit your proxy without delay by telephone, by the Internet or by mail. We also reimburse brokers and other nominees for their expenses in sending these materials to you and getting your voting instructions.

 

Other Business; Adjournments

 

We are not currently aware of any other business to be acted upon at the annual meeting. If, however, other matters are properly brought before the annual meeting, or any adjourned meeting, your proxies include discretionary authority on the part of the individuals appointed to vote your shares or act on those matters according to their best judgment.

 

If a quorum is not present, adjournments may be made in accordance with the Company’s bylaws by the vote of a majority of our shares of common stock present in person or by proxy without further notice other than by an announcement made at the meeting (as long as a new record date for the adjourned meeting is not fixed by our board).

 

Paxar Shareholder Account Maintenance

 

All communications concerning accounts of our shareholders of record, including address changes, name changes, inquiries as to requirements to transfer shares of common stock and similar issues can be handled by calling our transfer agent, Mellon Investor Services, toll-free, at 800-548-4857.

 

Communications with the Board

 

Shareholders and other interested parties wishing to communicate with the board of directors should write to: Thomas R. Loemker, Lead Director, Paxar Corporation, 105 Corporate Park Drive, White Plains, NY 10604. Communications may also be addressed to individual members of the board at the same address. All such communications will be treated in confidence and forwarded to the addressee unopened.

 

Disclosure of “Broker Non-Votes” and Abstentions

 

SEC rules provide that specifically designated blank spaces are provided on the proxy card for shareholders to mark if they wish either to withhold authority to vote for one or more nominees for director or to abstain on one or more of the

proposals. Votes withheld in connection with the adoption of the merger agreement will count as a vote against adoption of the merger agreement. Votes withheld in connection with the election of one or more of the nominees for director will not be counted as votes cast for or against such individuals. All abstentions and broker non-votes are counted towards the establishment of a quorum.

 

Certain Relationships and Related Transactions

 

See “Transactions with Related Persons.”

 

Compliance with Section 16(a) of the Exchange Act

 

See “Section 16(a) Beneficial Ownership Reporting Compliance.”

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT

 

The proposed transaction is the acquisition of Paxar by Avery Dennison pursuant the merger agreement. Once the merger agreement has been adopted by our shareholders, we have received regulatory approval and the other closing conditions under the merger agreement have been satisfied or waived, Alpha Acquisition will merge with and into us. Paxar will be the surviving corporation in the merger and will become a wholly-owned subsidiary of Avery Dennison.

 

 

Paxar Corporation

 

We are a leading provider of innovative merchandising systems for the retail and apparel industry. We design and manufacture tickets, tags and labels, and we provide the technology — including the printers, software control systems and necessary supplies — for retail product identification. During the fiscal year ended December 31, 2006, we had revenues of approximately $880.8 million.

 

Avery Dennison Corporation

 

Avery Dennison is a Delaware corporation and is a leader in pressure-sensitive labeling materials, office products and retail tag ticketing and branding systems. Based in Pasadena, CA, Avery Dennison is a FORTUNE 500 Company with 2006 sales of $5.6 billion. Avery Dennison employs more than 22,000 individuals in 49 countries worldwide who apply Avery Dennison’s technologies to develop, manufacture and market a wide range of products for both consumer and industrial markets. Products offered by Avery Dennison include Avery brand office products and graphics imaging media, Fasson brand self-adhesive materials, peel-and-stick postage stamps, reflective highway safety products, labels in a wide variety of automotive industrial and durable goods applications, brand identification and supply chain management products for the retail and apparel industries, and specialty tapes and polymers.

 

Alpha Acquisition Corp.

 

Alpha Acquisition is a New York corporation and a wholly-owned subsidiary of Avery Dennison. Alpha Acquisition was organized solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. It has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement. Under the terms of the merger agreement, Alpha Acquisition will merge with and into us. Paxar will survive the merger and Alpha Acquisition will cease to exist.

 

 

 

As part of its ongoing evaluation of the business, our board of directors and our senior management regularly discuss and review opportunities to achieve our long-term strategic goals and to take advantage of growth opportunities in the retail or apparel industries to further enhance our shareholder value. As part of its regular strategic planning process, our senior management periodically made presentations to our board that included review of potential opportunities for business

combinations, acquisitions and dispositions. From time to time, our board has evaluated a variety of possible strategic options in light of the business trends and regulatory conditions impacting us and the industries in which we operate.

 

On November 16, 2006, Arthur Hershaft, our then-Chairman of the board of directors, and Dean Scarborough, President and Chief Executive Officer of Avery Dennison, held a lunch meeting at Mr. Scarborough’s request at which Mr. Scarborough stated that Avery Dennison was interested in exploring a possible business combination transaction with us. Later that day, Mr. Hershaft informed Robert van der Merwe, our President and Chief Executive Officer, of Mr. Scarborough’s interest and Mr. van der Merwe arranged to meet Mr. Scarborough the following day.

 

On November 17, 2006, Mr. van der Merwe met with Mr. Scarborough. During the course of the meeting, they discussed business conditions in general, and Mr. Scarborough reiterated that Avery Dennison was interested in exploring a possible business combination transaction with us, although specific terms of any potential combination were not discussed. Mr. van der Merwe informed Mr. Scarborough that we were not for sale. Mr. Scarborough indicated that Avery Dennison was still interested in pursuing a transaction. Following that meeting, Mr. van der Merwe contacted a representative of Goldman, Sachs & Co., or “Goldman Sachs,” to act as our financial advisor in connection with the potential proposal from Avery Dennison and any other possible business combination transaction.

 

On November 18, 2006, Mr. van der Merwe contacted a representative of Kirkland & Ellis LLP, or “Kirkland & Ellis,” to act as our legal counsel in connection with this matter.

 

On November 21, 2006, members of our board of directors spoke by telephone. During the course of these discussions, Mr. van der Merwe provided our directors with a summary of his conversation with Mr. Scarborough. The board agreed with Mr. van der Merwe that we were not for sale.

 

Throughout the period of November 22 to December 4, 2006, members of our senior management held various meetings and discussions with representatives of Goldman Sachs and Kirkland & Ellis regarding Avery Dennison’s potential proposal, an analysis of our financial performance, an analysis of the legal responses to an unsolicited offer that were available to us, and an analysis of potential antitrust issues related to a possible business combination transaction. During this period, on December 1, 2006, several of our directors met informally with representatives of Kirkland & Ellis to discuss how the process related to an unsolicited business combination proposal could unfold and to obtain additional information with respect to their obligations as directors in this situation.

 

On December 4, 2006, Mr. Scarborough telephoned Mr. van der Merwe. Mr. Scarborough again expressed Avery Dennison’s interest in exploring a possible transaction with us and asked Mr. van der Merwe if our board had given the matter any further thought. Mr. van der Merwe informed Mr. Scarborough that some discussions had occurred, but that we had not received an offer from Avery Dennison and in any event we were not for sale. Mr. Scarborough indicated that Avery Dennison’s board of directors would be meeting later during this week and that he expected to contact Mr. van der Merwe thereafter.

 

On December 7, 2006, Mr. Scarborough telephoned Mr. van der Merwe to inform him that Avery Dennison’s board was enthusiastic about the possible transaction, that Avery Dennison had retained JP Morgan Securities, Inc., or “JPMorgan,” as its financial advisor and Wachtell, Lipton, Rosen & Katz, or “Wachtell Lipton,” as its legal counsel, and that he would shortly be sending a letter to Mr. van der Merwe outlining Avery Dennison’s proposal. Mr. Scarborough further informed Mr. Van der Merwe that it was not Avery Dennison’s intent to pursue a hostile transaction, but rather to engage Paxar in bilateral discussions regarding a transaction.

 

On December 8, 2007, Mr. van der Merwe received the following letter from Mr. Scarborough.

 

Friday, December 8, 2006

 

Robert van der Merwe

President and Chief Executive Officer Paxar Corporation

105 Corporate Park Drive

White Plains, New York 10604

 

Dear Mr. van der Merwe:

 

I am pleased to present, on behalf of Avery Dennison Corporation (“Avery Dennison”) and its Board of Directors, for your consideration the following confidential and nonbinding proposal to acquire Paxar Corporation (“Paxar” or the “Company”).

 

By way of background, Avery Dennison has a current market capitalization of approximately $7.6 billion and is a leading manufacturer and marketer of consumer and commercial products with revenues of approximately $5.6 billion. It is a leader in pressure-sensitive technology, self-adhesive base materials and self-adhesive consumer and office products, sold under well-known brands such as Avery Dennison^®, Fasson^®, Avery^®, Marks-A-Lot^® and HI-LITER^®, with approximately 55% of revenues outside of the United States. Avery Dennison has over 22,000 employees worldwide with manufacturing and distribution facilities in over 40 countries.

 

We recognize Paxar as a leader in branding and identification solutions to the retail and apparel industry and a long-time business partner of ours. The Company is a trusted partner to prominent retailers, branded-apparel companies and consumer packaged goods companies, distributing products to over 60 countries around the world. We recognize and respect your progress towards your strategic and operational goals, and would like to forge a partnership that will enable both companies to thrive.

 

We believe the strategic rationale for a combination of Avery Dennison and Paxar is clear and compelling. The combined business would be a globally-diversified business with revenues of $6.5 billion. In addition to the industrial logic, there is a tremendous opportunity to leverage the two existing, high-quality management teams in the new organization. Under our combined leadership the new organization will be able to reach a level of performance unattainable by either organization apart. As such, we believe our offer is in the best interests of the employees, management and shareholders of both of our organizations.

 

Given our review of publicly available information on Paxar and the analysis that we have undertaken to date, our financing discussions with JPMorgan, and our own knowledge of your business from our longstanding relationship, we believe that we are well positioned to effect a combination with Paxar that delivers value to your shareholders that is substantially in excess of Paxar’s publicly-traded stock price.

 

Confidential and Non-Binding Acquisition Proposal

 

 

This non-binding proposal shall not constitute any obligation or commitment to proceed with this transaction until after the satisfactory completion of our due diligence investigation and the negotiation and execution of a mutually satisfactory definitive acquisition agreement containing terms, provisions and conditions (including regulatory approvals) customary for this type of transaction.

 

We have retained JPMorgan and Wachtell, Lipton, Rosen & Katz to assist us in structuring and negotiating the transaction, and Latham & Watkins LLP as regulatory counsel. If you have any questions regarding this proposal, please do not hesitate to contact me (626-304-2148), Karl Will at JPMorgan (415-315-8600), or Andy Brownstein at Wachtell (212-403-1233).

 

We look forward to furthering our discussions with you and proceeding expeditiously towards a definitive acquisition agreement with Paxar. Given our desire to pursue this opportunity, we stand ready to provide any clarifications or to answer any questions that you may have regarding this proposal.

 

Sincerely

 

Dean Scarborough

President and Chief Executive Officer

Avery Dennison Corporation

 

On December 11, 2006, Mr. van der Merwe telephoned Mr. Scarborough to let him know that the letter had been received and that we hoped to respond to the proposal within a couple of weeks.

 

On December 14, 2006, Mr. van der Merwe convened a special meeting of our board of directors at the New York, New York offices of Kirkland & Ellis to discuss Avery Dennison’s proposal. At the meeting, representatives of management reviewed our current and anticipated financial performance and representatives of Goldman Sachs reviewed their preliminary financial analysis of Paxar. Representatives of Kirkland & Ellis were also in attendance to provide general legal advice and reviewed with our board its fiduciary duties in connection with considering a possible business combination transaction or other strategic alternatives, including maintaining the status quo. During the course of the meeting, a number of topics were discussed, including a review of our strategic alternatives, factors affecting the retail and apparel industries, the prospect of consolidation in the industries in which we operate, and the likelihood of obtaining necessary regulatory approvals to complete a business combination transaction.

 

Following the special meeting of our board, Mr. van der Merwe and Leo Benatar, one of our directors, together telephoned Mr. Scarborough on December 19, 2006, to tell him that, while our board was intrigued by and could appreciate the logic of a potential combination with Avery Dennison, the proposed price of $27.50 per share was insufficient, and we were not interested in pursuing a potential transaction in this value range.

 

Messrs. Scarborough and van der Merwe spoke again by telephone on both December 21 and 22, 2006. During these conversations, Mr. van der Merwe reiterated that we were not for sale and would certainly not be interested in a transaction at a price at or near $27.50 per share. In response, Mr. Scarborough said that Avery Dennison was committed to the transaction but could not justify offering a higher price based on the publicly available information it had been able to review. Mr. van der Merwe ultimately indicated that he would consider providing very limited confidential information with respect to the historical financial performance of certain of our businesses and our synergy assumptions, as long as Avery Dennison entered into a confidentiality agreement with respect to such information and understood that the information was being provided solely to enable the parties to determine whether or not it made sense to pursue a transaction at a higher price and would not be disclosed except as required by law.

 

On December 26, 2006, Avery Dennison entered into a confidentiality agreement with us covering the limited information discussed above, and certain information was subsequently provided to Avery Dennison and JPMorgan.

 

Mr. Scarborough telephoned Mr. van der Merwe on December 29, 2006, and told him that Avery Dennison would raise its offer to $29.00 per share. Mr. van der Merwe said he would discuss the revised proposal with our board of directors.

 

Throughout the period of December 29, 2006, through January 4, 2007, representatives of Goldman Sachs and JPMorgan discussed the synergy

and other assumptions used by Avery Dennison in establishing its offer price. Also during this period, Mr. van der Merwe individually telephoned directors to keep them informed about our contacts with Avery Dennison and its advisors.

 

On January 8, 2007, Mr. van der Merwe called Mr. Scarborough and told him that we were not willing to proceed with a transaction at $29.00 per share. During this call, Messrs. van der Merwe and Scarborough discussed several issues, including valuation, synergy assumptions and access to information.

 

During the period from January 9 through January 15, 2007, Messrs. van der Merwe and Scarborough remained in contact, continuing to discuss whether it made sense for the parties to meet to discuss valuation and synergy issues. During this time, it became clear that an impasse would arise unless further information was provided to justify a higher price. Accordingly, on January 15, 2007, Avery Dennison and their advisors agreed to meet with us on January 19 in order for our senior management team to make a presentation on synergy opportunities and our business, operations and strategy.

 

On January 18, 2007, certain members of our senior management, certain of our directors, and representatives of Goldman Sachs and Kirkland & Ellis held an organizational meeting in the New York, New York, offices of Kirkland & Ellis in order to review the information that was to be shared with Avery Dennison and to discuss other transactional matters. We also entered into a customary confidentiality agreement, including a standstill provision, with Avery Dennison on this date.

 

On January 19, 2007, our senior management and Avery Dennison met in the New York, New York offices of Kirkland & Ellis. Also present at this meeting were representatives of Goldman Sachs, Kirkland & Ellis, JPMorgan, Wachtell Lipton and The Boston Consulting Group, an advisor to Avery Dennison. During this meeting, our senior management team made a presentation to Avery Dennison regarding certain aspects of our business, operations and strategy, and the parties discussed numerous issues, including valuation, potential synergies, information technology issues and regulatory issues.

 

Mr. Scarborough telephoned Mr. van der Merwe on January 23, 2007 to inform him that, based on the information shared in the January 19th management meeting, Avery Dennison’s offer remained at $29.00 per share. Mr. van der Merwe expressed his disappointment with this development and told Mr. Scarborough that he had a board meeting coming up at which he would update our directors and, if appropriate, get back to Mr. Scarborough.

 

A regular meeting of our board was held on January 24 and 25, 2007 at Doral Arrowwood in Rye Brook, New York. At the meeting, which representatives of Goldman Sachs and Kirkland & Ellis joined on January 25, our senior management updated the directors on the status of their discussions with Avery Dennison and various related economic and legal issues. Topics discussed included, among others, a review of the directors’ fiduciary duties, a review of our performance and strategic alternatives, regulatory considerations, including the likelihood of obtaining necessary regulatory approvals to complete a business combination transaction involving Avery Dennison and us and the conditions that could be attached to such approvals, a review of potential valuation methodologies applicable to us, the potential synergies that could be realized in a transaction involving Avery Dennison and us, the financial ability of Avery Dennison to complete the transaction and the scope and nature of the potential due diligence process. Following this discussion, our board concluded that it made sense for Mr. van der Merwe to contact Mr. Scarborough to see if the parties could reach agreement on a potential business combination transaction at a higher value than was being offered by Avery Dennison and authorized Mr. van der Merwe to proceed with negotiations.

 

On January 26, 2007, Mr. van der Merwe informed Mr. Scarborough by telephone that our board was not prepared to entertain a transaction valued at $29.00 per share. Mr. Scarborough suggested that Avery Dennison might consider increasing the price slightly, depending upon the final terms of any agreement. Mr. van der Merwe agreed to discuss with our board whether it made sense to proceed any further. Mr. van der Merwe individually updated certain directors with respect to the status of his negotiations with Mr. Scarborough.

 

Mr. van der Merwe met with Mr. Scarborough on February 2, 2007 and discussed, among other matters, valuation and regulatory issues, but they were unable to reach an agreement on any of the fundamental business or legal points.

 

Mr. van der Merwe updated our board of directors on the status of his conversations with Mr. Scarborough during a conference call on February 5, 2007. Representatives of Goldman Sachs and Kirkland & Ellis participated in the meeting. Following this discussion, our board reaffirmed its decision to see if the parties could reach agreement on a potential business combination transaction at a higher value than was being offered by Avery Dennison. Our board also instructed Goldman Sachs to contact selected potential buyers who had expressed interest in business combinations involving us in the past or who might otherwise reasonably be expected to be interested in a business combination with us.

 

On February 12, 2007, Mr. van der Merwe telephoned Mr. Scarborough and told him that we might consider a transaction in the range of $30.00 plus per share, depending upon the final terms of any agreement and if Avery Dennison was responsible for any regulatory risk associated with the potential transaction. Mr. Scarborough responded that Avery Dennison could neither commit to that price nor to bearing all regulatory risk. The parties, nonetheless, agreed that Avery Dennison could conduct confirmatory due diligence on us to see if it could help the parties bridge the value and other gaps and more fully understand the potential regulatory issues.

 

During the week of February 12, 2007, at our direction, Goldman Sachs contacted several parties who either had previously expressed interest in potential business combinations involving us or who might otherwise reasonably be expected to be interested in a potential business combination with us at a value representative of the alternatives that were available to us. Of the parties contacted, one responded during this same week to say it was not interested in pursuing a transaction as it did not believe our business fit with its higher growth strategy. A second, referred to as “company A”, expressed initial interest in pursuing a potential transaction, signed a confidentiality agreement with us on February 15, 2007, and, on February 16, 2007, was given substantively the same confidential information that had previously been delivered to Avery Dennison.

 

On February 16, 2007, certain members of our senior management and representatives of Goldman Sachs and Kirkland & Ellis held an organizational meeting in order to begin comprehensive preparations for a due diligence process with respect to a possible merger with Avery Dennison. On February 17, 2007, Wachtell Lipton delivered a due diligence request list on behalf of Avery Dennison related to business, financial and legal matters.

 

Throughout the period from February 17 through February 27, 2007 members of our senior management and our financial and legal advisors continued to collect appropriate diligence materials and on February 27, 2007, access to a virtual data room was provided to Avery Dennison and its business, financial, legal and accounting advisors.

 

During the week of February 19, 2007, two of the potential business combination partners approached by Goldman Sachs on our behalf informed Goldman Sachs that, having reviewed publicly available information, they were not interested in pursuing a transaction with us.

 

On February 27, 2007, company A informed Goldman Sachs that it would not be able to make an offer for us for consideration in excess of our then market value. As a result, it was agreed that it did not make sense for the parties to continue pursuing a transaction.

 

Wachtell Lipton distributed a draft merger agreement and a draft voting agreement to us and Kirkland & Ellis on March 1, 2007.

 

During the period of March 8 through March 15, 2007, our senior management and our financial, legal, accounting and other advisors held numerous and extensive meetings by telephone with Avery Dennison and certain of its financial, legal, accounting and other advisors to provide information in the course of the due diligence process. This review included an examination of business and financial outlooks, litigation, environmental, accounting, financial reporting, tax, human resources, employee benefits, executive compensation, information technology and general legal matters.

 

Members of our senior management updated our directors on the status of recent conversations with Avery Dennison and the due diligence process during a special meeting of our board held telephonically on March 14, 2007. Representatives of Goldman Sachs updated our board with respect to the responses of the other potential business combination partners it had contacted. The terms of the draft merger agreement and certain proposed amendments were also outlined for the board. Following the board meeting, Kirkland delivered a revised draft of the merger agreement to Wachtell Lipton.

 

On March 17, 2007, Wachtell Lipton delivered a revised draft of the merger agreement to Kirkland & Ellis. Upon receipt of Avery Dennison’s revised merger agreement, telephone conferences between our representatives and representatives from Avery Dennison were held on March 17 and March 18, 2007, to discuss the suggested revisions to the merger agreement.

 

On March 18, 2007, Mr. Scarborough telephoned Mr. van der Merwe and suggested that Avery could consider raising its proposed price to $30.50 per share and its termination fee in the event of any antitrust regulatory problem to $40 million, subject to obtaining the agreement of Mr. Arthur Hershaft to vote his shares in favor of the merger and reaching agreement on other open matters, including regulatory issues, in a manner satisfactory to Avery Dennison. Following this call, Mr. van der Merwe met telephonically with certain members of our board and representatives of our financial and legal advisors regarding certain of the open issues. Mr. van der Merwe then telephoned Mr. Scarborough and asked Avery to raise the termination fee to $70 million. Following discussion, Mr. Scarborough suggested that Avery could consider a termination fee of $50 million, subject to acceptance of the $30.50 per share price and reaching satisfactory agreement on all other open matters. Mr. van der Merwe indicated that he would recommend this position to our board of directors, subject to satisfactory resolution of other open matters.

 

On March 20, 2007, Mr. van der Merwe and Mr. Scarborough held several telephonic meetings to try to reach agreement, subject to board approval, on the open matters raised by diligence and on the open legal and business matters.

 

On March 20 and 21, 2007, we, assisted by Goldman Sachs and Kirkland & Ellis, continued negotiations with Avery Dennison and Wachtell Lipton regarding the terms of the merger and the merger agreement with a view to increasing certainty of the transaction and providing each party with appropriate termination rights and termination fees.

 

On March 21 and 22, 2007, Mr. van der Merwe and Mr. Scarborough continued to discuss several of the open matters, including employee retention and the treatment of stock options, restricted stock and other equity grants in the merger.

 

On the afternoon of March 22, 2007, our board convened a special meeting, held telephonically, to further review the terms of the transaction that had been negotiated with Avery Dennison. Representatives of Kirkland & Ellis again discussed with our board the legal duties of directors in connection with an extraordinary transaction such as the proposed merger and reviewed in detail the terms of the merger agreement and other legal aspects of the proposal by Avery Dennison. Representatives of Goldman Sachs then reviewed and analyzed the financial aspects of Avery Dennison’s proposal and delivered an oral opinion (subsequently confirmed in writing) that, as of that date and based on and subject to the factors and assumptions set forth in its opinion, the $30.50 per share in cash to be paid to holders of our common stock pursuant to the merger agreement was fair to such holders from a financial point of view. See “Opinion of the Company’s Financial Advisor.” After full discussion and deliberation, our board decided that Avery Dennison’s proposal was more advantageous to our shareholders and other constituents than any other strategic alternative available to us, including remaining an independent public company. Thereupon, our board unanimously:

 

 

That evening, we and Avery Dennison executed and delivered the merger agreement, and Mr. Arthur Hershaft and Avery Dennison executed and delivered the voting agreement.

 

In reaching its decision to approve the merger and the merger agreement and to recommend that our shareholders vote to adopt the merger agreement, our board of directors consulted with senior management, as well as our legal and financial advisors, reviewed a significant amount of information, and considered a number of factors, including, among others, the following:

 

 

 

Our board also considered the potential risks of the merger, including:

 

 

 

In view of the variety of factors and the quality and amount of information considered as well as the complexity of these matters, the board did not find it practicable to, and did not attempt to, make specific assessments of, quantify, rank or otherwise assign relative weights to the specific factors considered in reaching this determination. Our board conducted an overall analysis of the factors described above, as well as others, including thorough discussion with, and questioning of, our senior management and our legal and financial advisors, and considered the benefits of the merger to outweigh the risks and the factors overall to be favorable to, and to support, its determination. Our board did not undertake to make any specific determination as to whether any particular factor, or any aspect of any factor, was favorable or unfavorable to its ultimate determination. Individual members of our board may have given different weight to different factors.

 

Our board of directors has unanimously determined that the merger is fair to and in the best interests of our shareholders and has approved the merger. Our board of directors unanimously recommends that our shareholders vote for approval of the merger and adoption of the merger agreement.

 

 

Goldman Sachs rendered its opinion to the Paxar board of directors that, as of March 22, 2007, and based upon and subject to the factors and assumptions set forth therein, the $30.50 per share in cash to be received by the holders of Paxar common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

 

The full text of the written opinion of Goldman Sachs, dated March 22, 2007, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B. Goldman Sachs provided its opinion for the information and assistance of the Paxar board of directors in connection with its consideration of the transaction. The opinion of Goldman Sachs is not a recommendation as to how any holder of Paxar common stock should vote with respect to the transaction.

 

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

 

 

Goldman Sachs also held discussions with members of the senior management of Paxar regarding the past and current business operations, financial condition and future prospects of Paxar. In addition, Goldman Sachs reviewed the reported price and trading activity for Paxar’s shares of common stock, compared certain financial and stock market information for Paxar with similar information for certain other companies the securities of which are publicly traded, reviewed the financial terms of certain recent business combinations in the labeling industry specifically and in other industries generally and performed such other studies and analyses, and considered such other factors, as it considered appropriate.

 

Goldman Sachs relied upon the accuracy and completeness of all of the financial, accounting, legal, tax and other information discussed with or reviewed by us and has assumed such accuracy and completeness for purposes of rendering this opinion. In that regard, Goldman Sachs has assumed with Paxar’s board of directors’ consent that the internal financial forecasts prepared by the management of Paxar have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Paxar. In addition, Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of Paxar or any of its subsidiaries, and Goldman Sachs has not been furnished with any such evaluation or appraisal. Goldman Sachs’ opinion does not address the underlying business decision of Paxar to engage in the merger.

 

The following is a summary of the material financial analyses delivered by Goldman Sachs to the board of directors of Paxar in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs, nor does the order of analyses described represent relative importance or weight given to those analyses by Goldman Sachs. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Goldman Sachs’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before March 22, 2007, and is not necessarily indicative of current market conditions.

 

Historical Stock Trading Analysis.  Goldman Sachs reviewed the historical trading prices and volumes for the Paxar common stock for the 5-year period ended March 2007. In addition, Goldman Sachs analyzed the consideration to be received by holders of Paxar common stock pursuant to the merger agreement in relation to the latest one-, three-, six- and twelve-months average market prices of the Paxar common stock.

 

This analysis indicated that the price per share to be paid to Paxar shareholders pursuant to the merger agreement represented:

 

 

Selected Companies Analysis.  Goldman Sachs reviewed and compared certain financial

information for Paxar to corresponding financial information, ratios and public market multiples for the following publicly traded corporations in the labeling industry:

 

 

Although none of the selected companies is directly comparable to Paxar, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of Paxar.

 

Goldman Sachs also calculated and compared various financial multiples and ratios for the selected companies based on financial data as of March 20, 2007, information it obtained from SEC filings and IBES estimates. The multiples and ratios of Paxar were calculated using the Paxar closing price on March 20, 2007, and IBES estimates. With respect to the selected companies and Paxar, Goldman Sachs calculated:

 

 

The results of these analyses are summarized as follows:

 

 

Goldman Sachs also calculated the selected companies’ estimated calendar years 2007 and 2008 price/earnings ratios and compared these results to the results for Paxar. The following table presents the results of this analysis:

 

 

Goldman Sachs also considered LTM operating margins and EBITDA margins, five-year earnings per share, or “EPS,” growth rate provided by IBES, estimated 2007 price to earnings ratio divided by the five-year EPS growth rate provided by IBES, and dividend yield.

 

The following table presents the results of this analysis:

 

 

Analysis at Various Prices.  Goldman Sachs performed certain analyses, based on historical information and projections provided by management of Paxar and a price of $30.50 per share of Paxar common stock. Goldman Sachs calculated for Paxar the implied total equity consideration (on a diluted basis) and implied enterprise value, the ratio of enterprise value to EBITDA, the ratio of enterprise value to earnings before interest and taxes, or “EBIT,” and the ratio of price to earnings. The following table presents the results of Goldman Sachs’ analysis (dollar amounts in millions, except for purchase price per share):

 

 

Discounted Cash Flow Analysis.  Goldman Sachs performed a discounted cash flow analysis on Paxar using Paxar’s management projections. Goldman Sachs calculated implied indications of net present value of free cash flows for Paxar for the years 2007 through 2009 using discount rates ranging from 8.0% to 11.0%. Goldman Sachs calculated illustrative terminal values per share of the Paxar common stock in the year 2010 based on multiples ranging from 8.0x to 11.0x estimated 2010 EBITDA. These illustrative terminal values were then discounted to calculate implied indications of net present values using discount rates ranging from 8.0% to 11.0%. The various ranges for discount rates and terminal value multiples were

chosen to reflect theoretical analyses of cost of capital. The following table presents the results of this analysis:

 

 

Selected Transactions Analysis.  Goldman Sachs analyzed certain information relating to the following selected transactions in the labeling industry since 1995:

 

 

For each of the selected transactions, Goldman Sachs calculated and compared levered aggregate consideration as a multiple of LTM EBITDA. The following table presents the results of this analysis:

 

 

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs’ opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Goldman Sachs made its determination as to fairness on

the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to Paxar or the contemplated transaction.

 

Goldman Sachs prepared these analyses for purposes of Goldman Sachs’ providing its opinion to Paxar’s board of directors as to the fairness from a financial point of view of the $30.50 per share in cash to be received by holders of Paxar’s common stock pursuant to the merger agreement. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Paxar, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast.

 

The merger consideration was determined through arms’-length negotiations between Paxar and Avery Dennison and was approved by Paxar’s board of directors. Goldman Sachs provided advice to Paxar during these negotiations. Goldman Sachs did not, however, recommend any specific amount of consideration to Paxar or its board of directors or that any specific amount of consideration constituted the only appropriate consideration for the transaction.

 

As described above, Goldman Sachs’ opinion to Paxar’s board of directors was one of many factors taken into consideration by Paxar’s board of directors in making its determination to approve the merger agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Goldman Sachs in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of Goldman Sachs attached as Annex B.

 

Goldman Sachs and its affiliates, as part of their investment banking business, are continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and other transactions as well as for estate, corporate and other purposes. Goldman Sachs has acted as financial advisor to Paxar in connection with, and has participated in certain of the negotiations leading to, the transaction contemplated by the merger agreement. Goldman Sachs has provided certain investment banking services to Avery Dennison from time to time, including having participated as one of ten lenders in its Credit Facility (aggregate principal amount $525,000,000) in July 2004 and having acted as Joint Lead Manager with respect to the offering of its Floating Rate Notes due 2007 (aggregate principal amount $150,000,000) in August 2004. Goldman Sachs also may provide investment banking services to Paxar and Avery Dennison and their respective affiliates in the future. In connection with the above-described investment banking services Goldman Sachs has received, and may receive in the future, compensation.

 

Goldman Sachs is a full service securities firm engaged, either directly or through its affiliates, in securities trading, investment management, financial planning and benefits counseling, risk management, hedging, financing and brokerage activities for both companies and individuals. In the ordinary course of these activities, Goldman Sachs and its affiliates may provide such service to Paxar, Avery Dennison and their respective affiliates, may actively trade the debt and equity securities (or related derivative securities) of Paxar and Avery Dennison for their own account and for the accounts of their customers and may at any time hold long and short positions of such securities.

 

The board of directors selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has

substantial experience in transactions similar to the transaction. Pursuant to a letter agreement, dated December 14, 2006, Paxar engaged Goldman Sachs to act as its financial advisor in connection with the contemplated transaction. Pursuant to the terms of this engagement letter, Paxar has agreed to pay Goldman Sachs a transaction fee of approximately $15.3 million. In addition, Paxar has agreed to reimburse Goldman Sachs for its expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws.

 

In considering the recommendation of our board of directors in favor of the merger, you should be aware that a number of our directors and named executive officers have interests in the merger that are different from, or in addition to, the interests of our other shareholders. Such interests relate to or arise from, among other things:

 

 

These interests are described below in greater detail. Our board of directors was aware of, and considered, the interests of our directors and executive officers in approving the merger agreement and the merger.

 

The following table sets forth the number of shares of common stock held by our named executive officers and directors as of March 31, 2007 and the merger consideration that each of them will receive upon consummation of the merger based upon security holdings as of such date:

 

 

Change of Control Employment Agreements

 

Each of our current executive officers and certain of our non-executive officers has entered into a change of control employment agreement that provides for the following benefits in the event that such officer’s employment is terminated without cause (as defined in the change of control employment agreement), or in the event that such officer terminates his or her employment for good reason (as defined in the change of control employment agreement), during the three-year period following a change of control of us, in exchange for such officer’s execution of a release of any claims that he or she may have against us: (i) accrued obligations, including a prorated bonus for the year of termination, (ii) a lump sum payment of 2.99 times such officer’s annual base salary and target bonus, (iii) continued life, disability, accident and health insurance benefits for up to thirty-six months, (iv) accelerated vesting of stock options, restricted stock and performance share awards. For all officers other than Messrs. van der Merwe and Colatrella, these payments and benefits are reduced to the extent necessary to avoid imposition of the golden parachute excise tax under Section 4999 of the United States Internal Revenue Code of 1986, as amended, or the “Code.” With regard to Messrs. van der Merwe and Colatrella, their change of control employment agreements were amended on March 22, 2007, to limit the lump sum payment of base salary and bonus to two times the sum of their base salary and target bonus, and to eliminate the Section 4999 limitations and replace it with a tax gross-up payment with respect to payments and benefits subject to Section 4999 of the Code. The gross-up payment cannot exceed the amount that would result in the executive retaining on an after-tax basis a portion of the gross-up payment of up to $400,000 for Mr. Colatrella and of up to $2,000,000 for Mr. van der Merwe. Benefits under

the change of control employment agreements supersede any post-termination payments that otherwise would be payable to such officers, including those under any other employment or severance agreement to which such officer is a party.

 

The amount payable under each change of control employment agreement is subject to numerous variables and can vary depending upon the circumstances in existence at the time such amounts become payable. Therefore, in order to quantify the amount payable under each change of control employment agreement, several assumptions must be made. Assuming, among other things, that compensation and benefit levels on the date such amounts become payable are equal to the compensation and benefit levels in effect on the date hereof and assuming that the merger was consummated on March 31, 2007 and a qualifying termination occurred immediately thereafter, we estimate that each named executive officer who is party to a change of control employment agreement would have been entitled to receive the approximate amount of cash severance payments and the approximate value of health and welfare benefits set forth in the following table:⁽¹⁾

 

 

 

Stock Options

 

In the merger, each outstanding option to purchase our common stock issued under our stock option plans will be canceled and will automatically be converted into an option to purchase shares of Avery Dennison’s common stock (rounded down to the nearest whole number) equal to:

 

 

The exercise price of each converted option will be equal (rounded up to the nearest whole cent) to:

 

 

The vesting schedule for each converted option will not be accelerated solely as a result of the merger, and each option will otherwise remain subject to the terms of its applicable grant, except that unvested options will be accelerated upon a termination of a holder’s employment without cause at any time prior to the second anniversary of the merger.

 

Shares of Restricted Stock

 

In the merger, each issued and outstanding award of restricted shares of our common stock issued pursuant to our benefit plans will automatically be converted into a number of restricted shares of

Avery Dennison common stock (rounded up to the nearest whole number) equal to:

 

 

The converted restricted shares will remain subject to the terms (including vesting terms) of the applicable equity-based compensation plans and grant agreements, except that vesting of restricted shares will be accelerated upon a termination of a holder’s employment without cause at any time prior to the second anniversary of the merger.

 

Other Outstanding Equity Awards

 

In the merger, performance share awards granted under our 2000 Long-term Performance and Incentive Plan will be converted into a number of restricted shares of Avery Dennison common stock (or, at Avery Dennison’s election, restricted stock units with dividend equivalent rights, in either case rounded up to the nearest whole number) equal to:

 

 

All such shares (or units) will vest on the date that the applicable three-year performance period was scheduled to conclude, subject to accelerated vesting upon a termination without cause or by the executive for good reason prior to the 18-month anniversary of the merger.

 

In the merger, except as otherwise agreed by Avery Dennison and the holder of any other equity-based award, each right of any kind to receive shares of our common stock or benefits measured in whole or in part by the value of a number of shares of our common stock granted under any of our benefit plans (other than options, shares of restricted stock and awards under our 2000 Long-term Performance and Incentive Plan) will be converted into a cash-based right or award equal in amount to the merger consideration in respect of each share of our common stock underlying the applicable award.

 

The following table summarizes the number of outstanding shares of restricted stock, stock options and performance shares held by our named executive officers and directors as of March 31, 2007:

 

 

Hershaft Supplemental Pension Funding

 

As described more fully below, each of Victor Hershaft and Arthur Hershaft currently has a vested right to a supplemental retirement benefit from us equal to 60% of his “Final Average Compensation,” defined as the average of his highest three years’ compensation during the preceding seven full years prior to the date his employment terminates, with a survivor benefit at 50% of that rate. See “Transactions With Related Persons.” Upon a change of control, each of Victor Hershaft and Arthur Hershaft may require us to establish and fund a rabbi trust to pay the retirement benefit.

 

Employee Benefits

 

For a period of one year following the effective time of the merger, Avery Dennison has agreed to provide:

 

 

Avery Dennison has also agreed, with respect to benefit plans maintained by Avery Dennison or any of its subsidiaries with respect to which any of our employees may become a participant after the effective time, to,

 

 

 

Indemnification and Insurance

 

The merger agreement provides that all rights of indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the merger, as well as rights to advancement of expenses, in favor of any person who is or was a director, officer, trustee, employee, agent or fiduciary of us or our subsidiaries (the “indemnified parties”), as provided in our and our subsidiaries’ organizational documents or in any indemnification or employment agreement or other contract, will be assumed by the surviving corporation, will survive the merger and continue in full force and effect in accordance with their terms and will not be repealed or amended in a manner that would adversely affect any right of the indemnified parties for a period of six years from the merger.

 

In addition, the merger agreement provides that for a period of six years after the merger, the surviving corporation will maintain in effect our current policies of directors’ and officers’ liability insurance; provided, however, that in no event will the surviving corporation be required to pay an annual premium on such insurance policy that is greater than 300% of the annual premium we paid for such coverage as of the effective time. If such coverage is no longer available (or is only available for an amount in excess of 300% of the amount we paid), the surviving corporation will nevertheless be obligated to provide such coverage as may be obtained by payment of the maximum annual premium it is required to pay under the merger agreement. Rather than provide such on-going coverage, Avery Dennison may direct us to purchase, at or prior to the effective time, a “tail” policy providing coverage no less favorable than the coverage we currently maintain.

 

Effects on the Company if the Merger Is Not Completed

 

If the requisite shareholder approval in connection with the merger is not obtained, or if any other condition to the merger is not satisfied or waived and the merger agreement is otherwise terminated, the merger will not be completed and shareholders will not receive any payment for their shares in connection with the merger. In addition, in the circumstances described below under “The Merger Agreement — Termination Fees and Expenses,” we would be required to pay Avery Dennison a termination fee of $40,000,000 and to reimburse it for its actual out-of-pocket fees and expenses up to a maximum of $5,000,000. In other circumstances described in “The Merger Agreement — Termination Fees and Expenses,” Avery Dennison would be required to pay us a termination fee of $50,000,000.

 

The following is a general discussion of certain material United States federal income tax consequences arising in respect of the transactions contemplated by the Merger Agreement and the disposition of shares of our common stock. We base this summary on the provisions of the Code, the Treasury regulations promulgated thereunder, judicial authority, published administrative positions of the United States Internal Revenue Service, or the “IRS,” and other applicable authorities, all as in effect on the date of this proxy statement, and all of which are subject to change, possibly on a retroactive basis. We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with our statements and conclusions.

 

This discussion assumes that a holder holds the shares of our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not purport to deal with all aspects of United States federal income taxation that might be relevant to particular shareholders in light of their personal investment circumstances or status, nor does it address tax considerations applicable to investors that may be subject to special treatment under the United States federal income tax laws, such as:

 

 

The United States tax treatment of partners in partnerships holding shares of our common stock generally will depend on the status of the partners and the activities of the partnership. If you are a partner of a partnership (or own an interest in an entity treated as a partnership for United States federal income tax purposes) that owns shares of our common stock, you should consult your own tax advisors.

 

In addition, this summary does not address any tax considerations under state, local or foreign laws or United States federal laws other than those pertaining to the United States federal income tax that may apply to our shareholders.

 

The following discussion is for information purposes only and is not a substitute for careful tax planning and advice. You are urged to consult your own tax advisors with respect to the application of the United States federal income tax laws to you, as well as any tax consequences, including the application and effect of any state, local or foreign income and other tax laws, arising out of the receipt of cash in exchange for our common stock pursuant to the merger.

 

United States Shareholders

 

For purposes of this discussion, the term “United States Shareholder” means a beneficial owner of our common stock that is, for United States federal income tax purposes:

 

 

Receipt of Cash in Exchange for Our Common Stock.  The receipt of cash in the merger by United States Shareholders of our common stock will be a taxable transaction for United States federal income tax purposes. In general, for United States federal income tax purposes, a United States Shareholder of our common stock will recognize gain or loss equal to the difference between:

 

 

If the holding period in our common stock surrendered in the merger is greater than one year as of the date of the merger, the gain or loss will be long-term capital gain or loss. The deductibility of a capital loss recognized on the exchange is subject to limitations under the Code. If a United States Shareholder acquired different blocks of our common stock at different times and different prices, then the United States Shareholder must determine its adjusted tax basis and holding period separately with respect to each block of our common stock.

 

Information Reporting and Backup Withholding Tax.  Under the Code, a United States Shareholder may be subject, under certain circumstances, to information reporting on the cash received in the merger unless such United States Shareholder is a corporation or other exempt recipient. A backup withholding tax will also apply (currently at a rate of 28%) with respect to the amount of cash received in the merger, unless a United States Shareholder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the applicable requirements of the backup withholding tax rules. Backup withholding tax is not an additional tax, and any amounts withheld under the backup withholding tax rules may be refunded by the IRS or credited against a United States Shareholder’s United States federal income tax liability, if any, provided that such United States Shareholder furnishes the required information to the IRS in a timely manner.

 

Non-United States Shareholders

 

The following discussion applies only to Non-United States Shareholders (as defined below), and assumes that no item of income, gain, deduction or loss derived by the Non-United States Shareholder in respect of shares of our common stock at any time is effectively connected with the conduct of a United States trade or business. A Non-United States Shareholder is a beneficial owner of our common stock that is, for United States federal income tax purposes:

 

 

 

Special rules, not discussed here, may apply to certain Non-United States Shareholders, such as:

 

 

Such Non-United States Shareholders should consult their own tax advisors to determine the United States federal, state, local and other tax consequences that may be relevant to them.

 

Receipt of Cash in Exchange for Our Common Stock.  Any gain realized on the receipt of cash in the merger by a Non-United States Shareholder generally will not be subject to United States federal income tax unless the Non-United States Shareholder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or we are or have been a “United States real property holding corporation” for United States federal income tax purposes and the Non-United States Shareholder owned more than 5% of our common stock at any time during the five years preceding the merger.

 

We believe that we have not been during the past five years, are not, and do not anticipate becoming, a “United States real property holding corporation”; however, no assurances can be given in this regard. Any Non-United States Shareholder who holds or held (at any time during the shorter of the five year period preceding the date of the merger or the holder’s holding period) more than 5% of our common stock should consult with its tax advisors.

 

Information Reporting and Backup Withholding Tax.  Subject to the discussion immediately below, information reporting and, depending on the circumstances, backup withholding tax (currently at a rate of 28%) will apply to the cash received in the merger by a Non-United States Shareholder, unless the beneficial owner certifies under penalty of perjury that it is a Non-United States Shareholder (usually satisfied by providing an IRS Form W-8BEN) and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code, or such Non-United States Shareholder otherwise establishes an exemption. Additional rules relating to information reporting requirements and backup withholding tax with respect to the payment of proceeds from the disposition of shares of our common stock are as follows:

 

 

Any amounts withheld under the backup withholding rules may be refunded by the IRS or credited against a Non-United States Shareholder’s United States federal income tax liability, if any, provided that such Non-United States Shareholder furnishes the required information to the IRS in a timely manner.

 

Under the provisions of the HSR Act and the rules and regulations promulgated thereunder, the merger may not be completed until the expiration of a 30-day waiting period following the filing of notification and report forms with the DOJ and the FTC, unless a request for additional information and documentary material is received from the DOJ or the FTC or unless early termination of the waiting period is granted. On April 4, 2007, we and Avery Dennison filed our respective notification and report forms with the FTC and the DOJ, and the FTC and the DOJ granted early termination of the applicable waiting period on April 20, 2007.

 

At any time before or after the merger, the DOJ, the FTC, a state attorney general, or a governmental authority in a foreign jurisdiction could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the merger or seeking divestiture of substantial assets of Avery Dennison, Paxar, or their subsidiaries. Private parties may also bring legal actions under the antitrust laws under certain circumstances.

 

We and Avery Dennison conduct operations in a number of other jurisdictions where other regulatory filings may be required or advisable in connection with the completion of the merger. Under the merger agreement, we are required to obtain these approvals prior to completing the merger. We currently expect to obtain approvals or otherwise file merger notifications in certain jurisdictions, including Germany, Norway, and Turkey.

 

We are working toward completing the merger as soon as possible and expect to complete it in the early summer. While we believe that we will receive the requisite approvals and clearances for the merger, there can be no assurance as to the timing of this approval, that a challenge to the merger on antitrust grounds will not be made or, if a challenge is made, of the result of such challenge. Similarly, there can be no assurance that we and Avery Dennison will obtain the regulatory approvals necessary to complete the merger or that the granting of these approvals will not involve the imposition of conditions to the completion of the merger or require changes to the terms of the merger. These conditions or changes could result in the conditions to the merger not being satisfied prior to March 22, 2008, the end date provided in the merger agreement, or at all.

 

Pursuant to Section 910 of the Business Corporation Law of the State of New York, or the “NYBCL,” our shareholders will not be entitled to exercise dissenters’ rights if the merger is adopted and consummated, because our common stock was listed on the NYSE on the record date. Section 910 of the NYBCL provides that a dissenting shareholder’s right to receive payment of the fair value of his, her or its shares under Section 623 of the NYBCL is not available to a holder of shares of any class or series of stock, which shares or depository receipts in respect thereof, were listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, at the record date fixed to determine the shareholders entitled to receive notice of the meeting of shareholders to vote upon the agreement and plan of merger.

 

 

The following is a summary of the material terms of the merger agreement. This summary does not purport to describe all the terms of the merger agreement and is qualified by reference to the complete merger agreement which is attached as Annex A to this proxy statement and incorporated by reference into this document. We urge you to read the merger agreement carefully and in its entirety.

 

The merger agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about us, Avery Dennison or Alpha Acquisition. Such information can be found elsewhere in this proxy statement and in the public filings we and Avery Dennison make with the SEC, which are available without charge at www.sec.gov. See “Where You Can Find More Information.”

 

Subject to the terms and conditions of the merger agreement and in accordance with New York law, at the effective time of the merger, Alpha Acquisition will merge with and into us and the separate existence of Alpha Acquisition will cease. Paxar will continue as the surviving corporation and become a wholly-owned subsidiary of Avery Dennison. The merger will have the effects set forth in §906 of the NYBCL, so that all of our and Alpha Acquisition’s rights, privileges, immunities, powers, purposes, property, liabilities, obligations and penalties will become those of the surviving corporation.

 

The merger will become effective upon the filing of a certificate of merger by the Department of State of the State of New York or at such subsequent date (which shall not be later than 30 days after the date on which the certificate of merger is filed) as is provided in the certificate of merger. The filing of the certificate of merger will occur as soon as practicable on the first business day after the satisfaction or waiver of the conditions to the completion of the merger. See “— Conditions to the Merger” on page 52.

 

The merger agreement provides that the certificate of incorporation and by-laws of Alpha Acquisition in effect immediately prior the time the merger is completed will be the certificate of incorporation and by-laws of the surviving corporation after the merger is completed.

 

The initial directors of the surviving corporation will be the directors of Alpha Acquisition immediately prior to the merger. The initial officers of the surviving corporation will be the officers of the Company immediately prior to the merger.

 

Common Stock

 

After the merger is completed, you will have the right to receive $30.50 in cash, without interest, for each share of our common stock held by you at the effective time of the merger. Our shareholders will receive the merger consideration after exchanging their stock certificates in accordance with the instructions contained in the letter of transmittal to be sent to shareholders shortly after completion of the merger.

 

Stock Options

 

In the merger, each outstanding option to purchase our common stock issued under our stock option plans will be canceled and will automatically be converted into an option to purchase shares of Avery Dennison’s common stock (rounded down to the nearest whole number) equal to:

 

 

 

The exercise price of each converted option will be equal (rounded up to the nearest whole cent) to:

 

 

The vesting schedule for each converted option will not be accelerated as a result of the merger, and each option will otherwise remain subject to the terms its applicable grant, except that unvested options will be accelerated upon a termination of a holder’s employment without cause at any time prior to the second anniversary of the merger.

 

Shares of Restricted Stock

 

In the merger, each issued and outstanding award of restricted shares of our common stock issued pursuant to our benefit plans will automatically be converted into a number of restricted shares of Avery Dennison common stock (rounded up to the nearest whole number) equal to:

 

 

The converted restricted shares will remain subject to the terms (including vesting terms) of the applicable equity-based compensation plans and grant agreements, except that vesting of restricted shares will be accelerated upon a termination of a holder’s employment without cause at any time prior to the second anniversary of the merger.

 

Other Outstanding Equity Awards

 

In the merger, performance share awards granted under our 2000 Long-term Performance and Incentive Plan, whether vested or unvested, and without affecting the vesting thereof, will be converted into a number of restricted shares of Avery Dennison common stock (or, at Avery Dennison’s election, restricted stock units with dividend equivalent rights, in either case rounded up to the nearest whole number) equal to:

 

 

All such shares (or units) will vest on the date that the applicable three-year performance period was scheduled to conclude, subject to accelerated vesting in accordance with the terms of the applicable performance share award agreement.

 

Pursuant to the merger agreement, except as otherwise agreed by Avery Dennison and the holder of any other equity-based award, each right of any kind to receive shares of our common stock or benefits measured in whole or in part by the value of a number of shares of our common stock granted under any of our benefit plans (other than options, shares of restricted stock and awards under our 2000 Long-term Performance and Incentive Plan), whether vested or unvested, and without affecting the vesting thereof, will be converted into a cash-based right or award equal in amount to the merger consideration in respect of each share of our common stock underlying the applicable award.

 

The following table summarizes the number of outstanding shares of restricted stock, stock options and performance shares held by our named executive officers and directors as of March 31, 2007:

 

 

 

Prior to the effective time of the merger, Avery Dennison will, or will cause, an amount of cash in an aggregate amount equal to the product of (i) the number of shares of our common stock issued and outstanding at the effective time (other than shares of our common stock to be cancelled as set forth above) and (ii) the merger consideration, to be deposited in trust with a bank or trust company, referred to as an “exchange agent,” that is reasonably acceptable to us. As soon as practicable after the merger, Avery Dennison will cause the exchange agent to mail a letter of transmittal and instructions to you and the other shareholders. The letter of transmittal and instructions will tell you how to surrender your common stock certificates in exchange for the merger consideration.

 

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the exchange agent without a letter of transmittal.

 

You will not be entitled to receive the merger consideration until you surrender your stock certificate or certificates to the exchange agent, together with a duly completed and executed letter of transmittal and any other documents as the exchange agent may reasonably require. The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is properly endorsed or is otherwise in the proper form for transfer. In addition, the person who surrenders such certificate must either pay any transfer or other applicable taxes or establish to the satisfaction of the surviving corporation that such taxes have been paid or are not applicable.

 

No interest will be paid or will accrue on the cash payable upon surrender of the certificates. Avery Dennison, the surviving corporation or the exchange agent will be entitled to deduct and withhold, and pay to the appropriate taxing authorities, any applicable taxes from the merger consideration. Any sum which is withheld and paid to a taxing authority by Avery Dennison, the surviving corporation or the exchange agent will be deemed to have been paid to the person with regard to whom it is withheld.

 

At the effective time of the merger, our stock transfer books will be closed, and there will be no further registration of transfers of outstanding shares of our common stock. If, after the effective time of the merger, certificates are presented to the surviving corporation for transfer, they will be canceled and exchanged for the merger consideration.

 

None of the exchange agent, Avery Dennison, the Company or any other person will be liable to any person for any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any portion of the merger consideration deposited with the exchange agent that remains undistributed to the holders of certificates evidencing shares of our common stock for twelve months after the effective time of the merger, will be delivered, upon demand, to Avery Dennison. Holders of certificates who have not surrendered their certificates prior to the delivery of such funds to Avery Dennison may only look to Avery Dennison for the payment of the merger consideration.

 

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the merger consideration, you will have to make an affidavit claiming that the certificate has been lost, stolen or destroyed and, if requested by Avery Dennison, post a bond in a reasonable amount sufficient to protect Avery Dennison and the surviving corporation against any claim that may be made against it with respect to that certificate.

 

We make various representations and warranties to Avery Dennison and Alpha Acquisition in the merger agreement that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement or in our related disclosure schedule delivered in connection with the signing of the merger agreement. Our representations and warranties relate to, among other things:

 

 

 

For purposes of the merger agreement, a “material adverse effect” means any change, effect, event, occurrence or state of facts that is materially adverse to the business, financial condition or results of operations of us and our subsidiaries, taken as a whole. A “material adverse effect” will not have occurred, however, if any change, effect, event, occurrence or state of facts relates to or results from:

 

 

In addition, Avery Dennison and Alpha Acquisition make various representations and warranties to us in the merger agreement that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement or in Avery Dennison’s disclosure schedule delivered in connection with the signing of the merger agreement. Their representations and warranties relate to, among other things:

 

 

None of the representations and warranties in the merger agreement will survive after the effective time of the merger.

 

You should be aware that these representations and warranties were made by and to us, Avery Dennison and Alpha Acquisition as of specific dates and subject, in some cases, to specified exceptions and qualifications contained in the merger agreement or in the related disclosure schedules delivered by us and Avery Dennison at the signing of the merger agreement. The assertions embodied in those representations and warranties were made solely for purposes of the contract between us, Avery Dennison and Alpha Acquisition and may be subject to important qualifications and limitations agreed by us, Avery Dennison and Alpha Acquisition in connection with negotiating its terms. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to contractual standards of materiality that differ from the standards of materiality under United States federal securities laws, or may have been used for the purpose of allocating risk between us, on the one hand, and Avery Dennison and Alpha Acquisition, on the other hand, rather than establishing matters as facts. For the foregoing reasons, you should not rely on the representations and warranties as statements of factual information.

 

Under the merger agreement, we have agreed that between March 22, 2007, and the effective time of the merger, subject to certain exceptions and unless Avery Dennison gives its prior written consent (which consent will not be unreasonably withheld, conditioned or delayed), we will, and will cause each of our subsidiaries to:

 

 

In addition, we have agreed that during the same time period, and again subject to certain exceptions and unless Avery Dennison gives its prior written consent (which consent will not be unreasonably withheld, conditioned or delayed), we and our subsidiaries will not:

 

 

 

 

Under the merger agreement, Avery Dennison and Alpha Acquisition have agreed that between March 22, 2007 and the effective time of the merger, subject to certain exceptions and unless we give our prior written consent (which consent will not be unreasonably withheld, conditioned or delayed), Avery Dennison:

 

 

The merger agreement requires us, as promptly as practicable following March 22, 2007, to establish a record date for, duly call, give notice of, convene and hold a meeting of our shareholders for the purpose of obtaining approval and adoption of the merger agreement. Except as our board of directors determines in its reasonable good faith judgment that such action would be inconsistent with its fiduciary duty under applicable law, the merger agreement requires our board of directors to recommend adoption of the merger agreement and the transactions contemplated in the merger agreement.

 

Under the merger agreement, we and Avery Dennison have each agreed to give written notice, as promptly as practicable, to the other upon becoming aware of material event, development or occurrence that would reasonably be expected to give rise to a failure of a condition precedent to the merger.

 

Under the merger agreement, we and Avery Dennison have each agreed to consult with and give the other a reasonable opportunity to review and comment on any public statement with respect to the transactions contemplated by the merger agreement before issuing any such statement, except to the extent required by any applicable law, court process or rule or regulation of any securities exchange.

 

Subject to the terms and conditions of the merger agreement, each party has agreed to use reasonable best efforts to take promptly all actions and do all things necessary, proper or advisable to consummate the merger and the transactions contemplated by the merger agreement, including making or the filing under the HSR Act and filings with any other governmental entities that may be necessary, proper or advisable. Each party has also agreed to use its reasonable best efforts to obtain all necessary consents from third parties and to defend any lawsuit or other proceeding challenging the merger agreement or the consummation of the merger. In addition, each party has agreed to

use its reasonable best efforts to resolve any objections or suits raised by governmental entities in relation to the transactions contemplated by the merger agreement so as to enable the merger to be consummated as soon as reasonably possible. Such efforts may include selling, holding separate or otherwise disposing of the assets of such party or conducting its business in a manner which would resolve the objections or suits, provided that Avery Dennison and its subsidiaries will not be required to take any action that, individually or in the aggregate, would result in or would be reasonably likely to result in a material adverse effect (measured against an amount of assets or businesses equal in size to us and our subsidiaries) after the effective time of the merger.

 

Subject to the exception set out below, from March 22, 2007, until the earlier of the effective time of the merger or the termination of the merger agreement, we have agreed that we will not, and will not permit any of our subsidiaries, officers, directors, employees, affiliates, agents or other representatives to, directly or indirectly:

 

 

For purposes of the merger agreement, an “alternative proposal” means any inquiry, proposal or offer from any person (other than Avery Dennison and its affiliates) relating to:

 

 

other than, in each case, the transactions contemplated by the merger agreement.

 

There is an exception from the restriction above in the merger agreement, if at any time prior to the time at which our shareholders approve the merger, we receive an unsolicited written “alternative proposal” which did not result from a breach of the above restrictions and which our board of directors determines in good faith, after consultation with our outside legal and financial advisors, constitutes or would reasonably be expected to result in, a “superior proposal” and our board of directors determines in good faith, after consultation with our outside legal and financial advisors, that the failure to take any action on such proposal would be inconsistent with its fiduciary duties under applicable law. We may, in response to such “superior proposal,” furnish confidential information with respect to us to any person making such a “superior proposal” pursuant to a confidentiality agreement that is no less restrictive to such person than the confidentiality agreement that we entered into with Avery

Dennison is to Avery Dennison. We may also participate in negotiations with such person regarding the “alternative proposal.”

 

For purposes of the merger agreement, “superior proposal” means any written “alternative proposal” involving more than 50% of our assets or equity by any person on terms which our board of directors determines in good faith, after consultation with our outside legal and financial advisors, to be more favorable to the holders of our shares of common stock than the merger, taking into account all terms and conditions of the “alternative proposal” and the merger agreement (including any amendments proposed by Avery Dennison in response to such “alternative proposal”) and all financial, regulatory, legal and other aspects of the “alternative proposal.” Our board of directors, however, may not determine that any “alternative proposal” is a “superior proposal” prior to the time that is 3 business days after the date on which we have disclosed all material terms of the proposal to Avery Dennison, and this 3-business day period will commence anew following each material amendment of the terms of the proposal.

 

Subject to the exception set out below, we have also agreed that our board of directors will not:

 

 

Our board of directors may, however, at any time prior to the time at which our shareholders approve the merger, withdraw or modify its recommendation of the merger if it determines that an “alternative proposal” is a “superior proposal” and further determines in good faith, after consultation with our outside counsel, that the failure to withdraw or modify its recommendation would be inconsistent with the exercise of its fiduciary duties.

 

We have also agreed, effective as of March 22, 2007, to cease, and to cause our subsidiaries, affiliates, directors, officers, employees and advisers to cease, any solicitations, discussion or negotiations with any person (other than Avery Dennison and Alpha Acquisition) regarding any “alternative proposal” and that we will promptly notify Avery Dennison after receipt of an “alternative proposal” or any request for information or otherwise related to the commencement of activities concerning an “alternative proposal.”

 

For a period of one year following the effective time of the merger, Avery Dennison has agreed to provide:

 

 

Avery Dennison has also agreed, with respect to any benefit plan maintained by Avery Dennison or any of its subsidiaries with respect to which any of our employees may become a participant after the effective time, to,

 

 

 

The merger agreement provides that all rights of indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the merger, as well as rights to advancement of expenses, in favor of any person who is or was a director, officer, trustee, employee, agent or fiduciary of us or our subsidiaries (the “indemnified parties”), as provided in our and our subsidiaries’ organizational documents or in any indemnification or employment agreement or other contract, will be assumed by the surviving corporation, will survive the merger and continue in full force and effect in accordance with their terms and will not be repealed or amended in a manner that would adversely affect any right of the indemnified parties for a period of six years from the merger.

 

In addition, the merger agreement provides that for a period of six years after the merger, the surviving corporation will maintain in effect our current policies of directors’ and officers’ liability insurance; provided, however, that in no event will the surviving corporation be required to pay an annual premium on such insurance policy that is greater than 300% of the annual premium we paid for such coverage as of the effective time. If such coverage is no longer available (or is only available for an amount in excess of 300% of the amount we paid), the surviving corporation will nevertheless be obligated to provide such coverage as may be obtained by payment of the maximum annual premium it is required to pay under the merger agreement. Rather than provide such on-going coverage, Avery Dennison may direct us to purchase, at or prior to the effective time, a “tail” policy providing coverage no less favorable than the coverage we currently maintain.

 

The obligations of the parties to complete the merger are subject to the satisfaction or waiver of the following mutual conditions:

 

 

The obligations of Avery Dennison and Alpha Acquisition to complete the merger are subject

to the satisfaction or waiver of the following additional conditions:

 

 

Our obligation to complete the merger is subject to the satisfaction or waiver of the following additional conditions:

 

 

The merger agreement may be terminated at any time prior to the effective time:

 

 

 

 

 

 

 

Under the merger agreement, each party will pay all fees and expenses incurred by it in connection with the merger, whether or not the merger is completed.

 

We have agreed to pay Avery Dennison a termination fee of $40,000,000, plus Avery Dennison’s actual out-of-pocket fees and expenses up to a maximum of $5,000,000, in the event that:

 

 

 

 

 

In the first case, $5,000,000 of the termination fee will be due on termination of the merger agreement, and the remainder on entry into a definitive agreement with respect to an “alternative proposal” or consummation of the transaction proposed by an “alternative proposal.” In the other cases, the full termination fee will be due on termination of the merger agreement. The expenses will be due after termination of the agreement and within two business days of our receipt of an invoice for those expenses.

 

Avery Dennison has agreed to pay us a termination fee of $50,000,000, within two business days of the termination of the merger agreement, in the event that:

 

 

Any provision of the merger agreement may be amended by the written agreement of the parties at any time before or after approval by our shareholders unless an amendment would by law require any further approval of our shareholders, in which case the amendment would require such approval.

 

The merger agreement provides that at any time prior to the merger, any party to the merger agreement may, in writing:

 

 

Concurrently with the execution and delivery of the merger agreement, Mr. Arthur Hershaft and Avery Dennison entered into a voting agreement. The voting agreement provides that until either our shareholders approve the merger or the merger agreement is terminated in accordance with its terms, Mr. Hershaft shall:

 

 

The voting agreement does not restrict Mr. Hershaft’s actions as a director of the Company.

 

Mr. Hershaft agrees not to transfer or encumber any of his shares of the Company, except that Mr. Hershaft may:

 

 

Mr. Hershaft agrees not to, and not to permit his representatives to, take any action in connection with an alternative proposal to the merger which we would not be permitted to take under the provisions described in “— No Solicitation of Transactions.” Mr. Hershaft must promptly notify Avery Dennison of any inquiries or proposals with respect to such subject matter.

 

 

Our common stock is traded on the NYSE under the symbol “PXR.” This table shows, for the periods indicated, the range of high and low sale prices for our common stock as quoted on the NYSE.

 

 

The following table sets forth the closing per share sales price of our common stock, as reported on the NYSE on March 22, 2007, the last full trading day before the public announcement of the merger, and on          , 2007, the latest practicable trading day before the printing of this proxy statement:

 

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for use in the operation and expansion of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

 

Following the merger there will be no further market for our common stock.

 

The following table indicates how many shares of common stock were beneficially owned, as of March 31, 2007, by (1) each person known by us to be the owner of more than 5% of the outstanding shares of common stock, (2) each Director, (3) our Chief Executive Officer, Chief Financial Officer and each of our other three most highly compensated officers and (4) all directors and executive officers as a group. In general, “beneficial ownership” includes those shares a director or executive officer has sole or shared power to vote or transfer (whether or not owned directly), and rights to acquire common stock through the exercise of stock options that are exercisable currently or become exercisable within 60 days. Except as indicated otherwise, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them. We based our calculation of the percentage owned on 41,573,384 shares outstanding on March 31, 2007. In calculating the percentage of outstanding shares owned in the column below, we added shares that may be acquired within 60 days both to the other shares that the person owns and to the number of shares outstanding. The address of each of the directors and executive officers listed below is c/o Paxar Corporation, 105 Corporate Park Drive, White Plains, New York 10604.

 

 

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE ELECTION OF THE NOMINEES LISTED IN PROPOSAL 2.

 

The number of directors on our board has been set at 12. Our board has determined that all of our directors, except Robert van der Merwe, Arthur Hershaft, and Jack Becker, are independent under NYSE Rules and have no relationship with our company, other than being a director and shareholder. In making its determination, the board adhered to the specific tests for independence included in the NYSE listing standards.

 

There are two classes of directors, each of which is elected in alternate years for a two-year term and until their successors are duly elected and qualified. At this year’s annual meeting, six incumbents who have previously been elected by shareholders have been nominated for re-election to the board of directors. These nominees will serve until the merger is completed or, if the merger is not completed, for a term of two years.

 

Proxies not marked to the contrary will be voted “FOR” the election of the following six persons:

 

Biographical Information about Nominees for the Board of Directors

 

 

 

Biographical Information about Directors with Terms to Expire in 2008

 

 

MEETINGS OF THE BOARD OF DIRECTORS AND

INFORMATION REGARDING COMMITTEES

 

Meeting of the Board of Directors and Executive Sessions

 

Our board of directors held five meetings in 2006. Each director attended at least 75% of the total number of board meetings and of the meetings of committees on which such director served. The non-management directors meet in executive sessions after each board meeting and at such other times as they may determine. Thomas R. Loemker has been chosen by the non-management directors to act as the Lead Director and preside at their meetings.

 

Communications with the Board

 

Shareholders and other interested parties wishing to communicate with the board of directors should write to: Thomas R. Loemker, Lead Director, Paxar Corporation, 105 Corporate Park Drive, White Plains, New York 10604. Communications may also be addressed to individual members of the board at the same address. All such communications will be treated in confidence and forwarded to the addressee unopened.

 

Director Attendance at annual meetings

 

Our policy is that all directors and nominees for election as directors attend our annual shareholders’ meeting. All of our directors attended our 2006 annual shareholders’ meeting. We expect all of our directors to attend this year’s annual shareholders’ meeting.

 

Board Committees

 

The board of directors has three standing committees: the Audit Committee, the Executive Development and Compensation Committee, and the Nominating and Corporate Governance Committee. The membership of each committee and the charters of each committee are available on our web site, www.paxar.com, at About Paxar, Investor Relations, Corporate Governance. Shareholders can obtain copies by writing to our Secretary, Robert S. Stone, 105 Corporate Park Drive, White Plains, New York 10604.

 

The Audit Committee:  The members of the Audit Committee in 2006 were James R. Painter (Chairman), Harvey L. Ganis, David L. Kolb and James C. McGroddy. Our board has determined that all members of the Audit Committee are independent and that Messrs. Painter, Ganis and Kolb are audit committee financial experts under applicable SEC and NYSE Regulations. Mr. Ganis, however, resigned from the board of directors and the Audit Committee on November 3, 2006. The duties of the Audit Committee include the hiring and retaining of our independent auditors and internal auditors, both of which report to the committee. The committee reviews our Code of Business Ethics compliance program, as well as our environmental compliance program. The committee also reviews, prior to publication, our quarterly earnings releases and our reports to the SEC on Forms 10-K and 10-Q. The Audit Committee held ten meetings in 2006.

 

Report of the Audit Committee:  The Audit Committee selects the Company’s independent auditors, approves the scope of the audit plan, and reviews and approves the fees of the independent auditors. The Audit Committee met regularly with the Company’s independent auditors, Ernst & Young LLP, or “E&Y,” during 2006, both with and without management present, to review the scope and results of the audit engagement, the system of internal controls and procedures, the effectiveness of procedures intended to prevent violations of laws and regulations, and the implementation of internal financial controls required by the Sarbanes-Oxley Act of 2002. In compliance with SEC rules regarding auditor independence, and in accordance with the Audit Committee Charter, as first adopted on July 31, 1998, and most recently amended November 1, 2005, we reviewed all services performed by E&Y for the Company in 2006, within and outside the scope of the quarterly and annual auditing function.

 

We also:

 

 

We have reviewed and discussed the audited financial statements for 2006 with management and discussed with E&Y the matters required to be discussed by Statement on Auditing Standards No. 61, as amended by SAS Nos. 89 and 90. Also, at our meeting on February 26, 2007, we received from E&Y the written disclosures and the letter from the independent accountants required by Independence Standards Board Standard No. 1. E&Y’s letter dated February 26, 2007, and presented at our meeting on that date, states that E&Y acted as independent auditors with respect to the Company. We discussed E&Y’s independence with them. Based on the discussions referred to above, we recommended that the audited financial statements be included in the Company’s Annual Report on Form 10-K for 2006 for filing with the SEC.

 

We have reviewed the committee’s Charter, as last amended on November 1, 2005, and have determined that the Charter continues to meet applicable SEC and NYSE standards. The board of directors has determined that the Audit Committee members are independent and have the expertise to serve on the committee pursuant to all relevant criteria.

 

Harvey L. Ganis resigned from the board of directors and from the Audit Committee on November 3, 2006. On January 25, 2007, Thomas R. Loemker was elected to the committee.

 

 

The Executive Development and Compensation Committee:  The members of the Executive Development and Compensation Committee are David E. McKinney (Chairman), Leo Benatar, James C. McGroddy and Roger M. Widmann, all of whom are independent directors under the NYSE regulations. The committee’s mission includes executive development and succession planning as part of its Charter as well as the compensation of the Company’s executives. The committee has responsibility for evaluating the performance of the Chief Executive Officer and, as part of the succession planning process, reviewing the CEO’s evaluation of the executives who report directly to the CEO. The committee’s duties also include approving the compensation arrangements for the five highest-salaried executives, approving the Annual Incentive Plan, authorizing the issuance of stock awards, performance share units and other stock-based awards under our 2000 Long-Term Performance and Incentive Plan, and monitoring the compensation and incentive programs for all of our executives. The committee held six meetings in 2006.

 

The Nominating and Corporate Governance Committee:  The members of the Nominating and Corporate Governance Committee are David L. Kolb (Chairman), Leo Benatar and Joyce F. Brown. Our board has determined that all members of the committee are independent. The committee closely follows the Corporate Accountability and Listing Standards promulgated by the NYSE and the regulations issued pursuant to the Sarbanes-Oxley Act of 2002. These developments in the area of corporate governance require the committee to regularly review its mission, the missions of the other standing committees of the board, and the Company’s and the board’s compliance with the SEC regulations issued to implement these requirements.

 

The committee’s duties and responsibilities include recommending nominees to the board of directors in accordance with the committee’s Charter and the Company’s Corporate Governance Guidelines, both of which are accessible on our Web site, www.paxar.com, by clicking on Investor Relations, Corporate Governance, and Committee Structure. Members of the committee regularly discuss potential candidates who would have an appreciation for the global structure of the Company’s operations and familiarity with the apparel and retail industries. The committee evaluates all potential candidates, whether recommended by security holders, committee members, board members, or financial or legal advisors, on the same basis, which is whether a candidate can bring added value to the board’s discussions and understanding of global issues as they affect our businesses. Specific criteria and qualifications considered in identifying, evaluating and nominating potential candidates include experience in Paxar’s industries or related industries, whether through direct involvement, consulting or academia; expertise applicable to the responsibilities of one or more of the standing committees of the board; current or former service as a senior officer of a publicly owned company; experience in public accounting and auditing; experience in international commerce; and experience in investment banking and finance.

 

The committee also reviews issues of public and social interest affecting the Company, advises the board and management on corporate governance matters, reviews compensation for directors, and evaluates and recommends measures for improving the effectiveness of the board. The committee will consider candidates recommended by shareholders who meet, in the judgment of the committee, a satisfactory number of the criteria for board membership described above, as established in the Company’s Corporate Governance Guidelines and the committee’s Charter. Shareholders desiring to make such recommendations may do so by writing to the Secretary of the Company, giving the recommended candidate’s name, biographical data, and qualifications. The Nominating and Governance Committee held one meeting in 2006.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

The Executive Development and Compensation Committee of the board of directors is responsible for establishing, reviewing and annually approving our executive compensation program. The committee’s objectives are to ensure that the program is reasonable and competitive while keeping executives focused on shareholder value. F.W. Cook & Co., Inc., a leading executive compensation consulting firm, acts as an advisor to the committee with respect to the structure and implementation of our executive compensation program. Stated simply, our philosophy for executive compensation is to:

 

 

Design of the Company’s Program

 

The executive compensation program contains fixed and performance-based elements, with three major components designed to provide executives with market-rate base salaries and the opportunity to increase their earnings, based on performance, with annual incentives and long-term incentives. The Executive Development and Compensation Committee compares our executives’ salaries and annual and long-term incentives with comparable executive compensation information from a peer group of companies of comparable size or in comparable industries. The members of the peer group as of January 17, 2006, were: AEP Industries Inc., Avery Dennison, Brady Corporation, Caraustar Industries, Inc., Checkpoint Systems, Inc., Clarcor Inc., Constar International Inc., The Reynolds & Reynolds Company, Sonoco Products Co., Standard Register Co., Symbol Technologies, Intermec (formerly, UNOVA), and Zebra Technologies Corp. The committee makes changes to the members of the peer group as members of the group are acquired or restructured and as industry developments occur. During 2006, Symbol Technologies was acquired and is no longer part of the peer group.

 

The components of our executive compensation program are:

 

Base Salaries.  The Executive Development and Compensation Committee reviews the fixed portion of each executive’s compensation annually, based upon management’s recommendations. The committee evaluates management’s recommendations and, in its discretion and as appropriate, authorizes individual variances and increases based on performance, job responsibilities, retention risk and similar factors that management reviews with the committee. F.W. Cook & Co., Inc. assists the committee in making such annual determinations.

 

Annual Incentive Compensation.  The annual Incentive Compensation Plan is structured to enable executives covered by the Plan to earn an additional 40% to 80% of their base salary if their performance targets are achieved. Performance targets are based on a variety of measurements, such as sales revenue, operating income, earnings per share, return on invested capital, personal business goals, and goals for the group or unit for which the executive is responsible. Our overall objective is to provide incentives for the executives to bring their focus to those factors assigned to them. The successful achievement by each individual in meeting or exceeding his or her measurements will result in our being able to achieve our overall annual plan. For named executive officers at corporate headquarters, the incentives are linked to the overall achievement of our company by rewarding them on earnings per share and return on invested capital. For group, unit or regional leaders, the incentives are linked to performance measurements attributable to sales growth of the businesses for which they have direct responsibility, in addition to measurements

based on earnings per share and asset management.

 

Long-term Equity Compensation.  We strive to align the financial interests of our executives with long-term total shareholder return through stock awards and performance awards based on the value of our stock. Performance objectives are measured over a three-year period. Awards in 2006 were paid in cash. All subsequent awards will be paid in our common stock, if objectives are met or exceeded. At the end of the three-year period, no award will be made if minimum targets are not achieved. We compare the competitiveness of our equity program with those of our peer group and other companies of comparable size and in comparable industries. We use the Black-Scholes method to establish the value of stock option grants. The stock option and stock-based performance awards are measured against various quantitative and qualitative targets and are designed to qualify as “performance based” for compliance with Section 162(m) of the Code, which otherwise limits deductibility of compensation.

 

Change of Control Employment Agreements

 

Each of our current executive officers and certain of our non-executive officers has entered into a change of control employment agreement that provides for the following benefits in the event that such officer’s employment is terminated without cause (as defined in the change of control employment agreement), or in the event that such officer terminates his or her employment for good reason (as defined in the change of control employment agreement), during the three-year period following a change of control of us, in exchange for such officer’s execution of a release of any claims that he or she may have against us: (i) accrued obligations, including a prorated bonus for the year of termination, (ii) a lump sum payment of 2.99 times such officer’s annual base salary and target bonus, (iii) continued life, disability, accident and health insurance benefits for up to thirty-six months, (iv) accelerated vesting of stock options, restricted stock and performance share awards. For all officers other than Messrs. van der Merwe and Colatrella, these payments and benefits are reduced to the extent necessary to avoid imposition of the “golden parachute” excise tax under Section 4999 of the Code. With regard to Messrs. van der Merwe and Colatrella, their change of control agreements were amended on March 22, 2007, to limit the lump sum payment of base salary and bonus to two times the sum of their base salary and target bonus, and to eliminate the Section 4999 limitations and replace it with a tax gross-up payment with respect to payments and benefits subject to Section 4999 of the Code. The tax gross-up payment cannot exceed the amount that would result in the executive retaining on an after-tax basis a portion of the gross-up payment of up to $400,000 for Mr. Colatrella and of up to $2,000,000 for Mr. van der Merwe. Benefits under the change of control employment agreements supersede any post-termination payments that otherwise would be payable to such officers, including those under any other employment or severance agreement to which such officer is a party.

The amount payable under each change of control employment agreement is subject to numerous variables and can vary depending upon the circumstances in existence at the time such amounts become payable. Therefore, in order to quantify the amount payable under each change of control employment agreement, several assumptions must be made. Assuming, among other things, that compensation and benefit levels on the date such amounts become payable equal to the compensation and benefit levels in effect on the date hereof and assuming that the merger was consummated on December 31, 2006, a qualifying termination occurred immediately thereafter and the executive officers’ agreements as currently in effect were then in effect, we estimate that each named executive officer who is party to a change of control employment agreement would have been entitled to receive the approximate amount of cash severance payments and the approximate value of health and welfare benefits set forth in the following table:⁽¹⁾