1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 2, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to _______________________.
Commission file number: 0-15077
SHOREWOOD PACKAGING CORPORATION
(Exact name of registrant as specified in its Charter)
DELAWARE 11-2742734
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(Address of principal executive offices)
(212) 371-1500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
DECEMBER 1, 1996 18,365,385
Date Number of Shares
Page 1 of 17
2
SHOREWOOD PACKAGING CORPORATION
AND SUBSIDIARIES
INDEX PAGE
Part I: Financial Statements
Consolidated Condensed Balance Sheets
November 2, 1996 (Unaudited) and
April 27, 1996 (Audited) 3
Consolidated Condensed Statements of Earnings
13 weeks ended November 2, 1996 (Unaudited) and
13 weeks ended October 28, 1995 (Unaudited) 4
Consolidated Condensed Statements of Earnings
27 weeks ended November 2, 1996 (Unaudited) and
26 weeks ended October 28, 1995 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows
27 weeks ended November 2, 1996 (Unaudited) and
26 weeks ended October 28, 1995 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements 7 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
Part II: Other Information 15 - 17
Certain statements under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are typically
identified by their inclusion of phrases such as "the Company anticipates," "the
Company believes" and other phrases of similar meaning. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance or achievements of the Company to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others: general economic and business conditions; competition; political
changes in international markets; raw material and other operating costs; costs
of capital equipment; changes in foreign currency exchange rates; changes in
business strategy or expansion plans; the results of continuing environmental
compliance testing and monitoring; quality of management; availability, terms,
and development of capital; fluctuating interest rates; and other factors
referenced in this Form 10-Q.
Page 2 of 17
3
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
NOVEMBER 2, APRIL 27,
1996 1996
ASSETS (UNAUDITED) (AUDITED)
Current Assets:
Cash and Cash Equivalents $ 7,272 $ 4,479
Accounts Receivable, net 46,987 44,306
Inventories 39,917 41,397
Deferred Tax Assets 854 854
Prepaid Expenses and Other Current Assets 4,874 4,882
--------- ---------
Total Current Assets 99,904 95,918
Property, Plant and Equipment, net 156,336 153,079
Excess of Cost Over the Fair Value of Net Assets Acquired, net 19,871 20,208
Other Assets 8,197 6,709
--------- ---------
$ 284,308 $ 275,914
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 28,821 $ 24,071
Accrued Expenses 12,120 17,058
Current Maturities of Long-Term Debt 25,250 24,000
--------- ---------
Total Current Liabilities 66,191 65,129
Long-Term Debt 112,205 122,588
Deferred Credit and Other Long-Term Liabilities 2,161 1,641
Deferred Income Taxes 17,573 15,120
--------- ---------
Total Liabilities 198,130 204,478
--------- ---------
Commitments and Contingencies
Fair Value of Warrants, net of deferred fair value of warrants ($855) -- --
Stockholders' Equity:
Series A Preferred Stock, $10 par value; 50,000 shares
authorized, none issued -- --
Preferred Stock, $10 par value; 5,000,000 shares authorized
none issued -- --
Common Stock, $.01 par value; 40,000,000 shares authorized
22,142,571 issued and 18,373,385 outstanding in November and
21,862,937 issued and 18,292,251 outstanding in April 221 219
Additional Paid-In Capital 44,374 40,589
Retained Earnings 85,492 72,259
Cumulative Foreign Currency Translation Adjustment (1,309) (2,119)
Treasury Stock (3,769,186 and 3,570,686 shares at
cost in November and April) (42,600) (39,512)
--------- ---------
Total Stockholders' Equity 86,178 71,436
--------- ---------
$ 284,308 $ 275,914
========= =========
Page 3 of 17
4
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
13 WEEKS 13 WEEKS
ENDED ENDED
NOVEMBER 2, OCTOBER 28,
1996 1995
Net Sales $ 117,017 $ 105,120
--------- ---------
Costs and Expenses:
Cost of Sales 91,220 81,629
Selling, General and Administrative 11,790 11,458
--------- ---------
Earnings from Operations 14,007 12,033
Other Income, net (194) 239
Interest Expense (2,335) (2,102)
--------- ---------
Earnings Before Provision for Income Taxes 11,478 10,170
Provision for Income Taxes 4,384 3,888
--------- ---------
Net Earnings $ 7,094 $ 6,282
========= =========
Net Earnings Per Common and Common
Equivalent Share $ .38 $ .32
========= =========
Weighted Average Common and Common Equivalent
Shares Outstanding 18,677 19,899
========= =========
Page 4 of 17
5
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
27 WEEKS 26 WEEKS
ENDED ENDED
NOVEMBER 2, OCTOBER 28,
1996 1995
Net Sales $ 226,764 $ 195,819
--------- ---------
Costs and Expenses:
Cost of Sales 177,024 151,314
Selling, General and Administrative 23,653 21,135
--------- ---------
Earnings from Operations 26,087 23,370
Other Income, net 34 469
Interest Expense (4,710) (4,184)
--------- ---------
Earnings Before Provision for Income Taxes 21,411 19,655
Provision for Income Taxes 8,178 7,512
--------- ---------
Net Earnings $ 13,233 $ 12,143
========= =========
Net Earnings Per Common and Common
Equivalent Share $ .71 $ .61
========= =========
Weighted Average Common and Common Equivalent
Shares Outstanding 18,692 19,871
========= =========
Page 5 of 17
6
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
27 WEEKS 26 WEEKS
ENDED ENDED
NOVEMBER 2, OCTOBER 28,
1996 1995
Cash flows from operating activities:
Net earnings $ 13,233 $ 12,143
Adjustments to reconcile net earnings to net cash flows
provided from operations:
Depreciation and amortization 8,712 6,863
Deferred income taxes 2,396 1,718
Changes in operating assets and liabilities:
Accounts receivable (2,438) (5,035)
Inventories 1,674 180
Prepaid expenses and other current assets 22 767
Other assets (616) (1,532)
Accounts payable, accrued expenses and other
long term liabilities 5,048 (3,310)
-------- --------
Net cash flows provided from operating activities 28,031 11,794
-------- --------
Cash Flows from Investing Activities:
Capital Expenditures (10,634) (28,686)
Business Acquisitions (5,000) --
-------- --------
Net cash flows used in investing activities (15,634) (28,686)
-------- --------
Cash Flows from Financing Activities:
Net (repayments of) proceeds from long-term borrowings (9,143) 18,256
Purchase of treasury stock (3,088) --
Issuance of common stock 2,537 559
-------- --------
Net cash flows (used in) provided from financing activities (9,694) 18,815
-------- --------
Effect of exchange rate changes on cash and cash equivalents 90 181
-------- --------
Increase in cash and cash equivalents 2,793 2,104
Cash and cash equivalents at beginning of period 4,479 4,100
-------- --------
Cash and cash equivalents at end of period $ 7,272 $ 6,204
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ 5,070 $ 4,414
======== ========
Income taxes paid $ 3,803 $ 3,161
======== ========
Page 6 of 17
7
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position, the
results of operations, and the changes in cash flows at November 2, 1996 and for
all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes included in the
Company's April 27, 1996 Annual Report to Stockholders on Form 10-K as filed
with the Securities and Exchange Commission ("1996 Form 10-K").
The Company's fiscal year ends on the Saturday closest to April 30. Fiscal 1997
will be a 53 week year to end May 3, 1997 and the first quarter was a 14 week
period which ended August 3, 1996.
The results of operations for the 13 week period and 27 week period ended
November 2, 1996 are not necessarily indicative of the results for the full
year.
Amounts presented for prior periods have been reclassified in order to conform
to the current period's classification. Specifically, shipping and delivery
expenses of approximately $693 thousand, $1,249 thousand, and $658 thousand for
the 13 and 26 weeks ended October 28, 1995, and the 14 weeks ended August 3,
1996, respectively, were reclassified from cost of goods sold to selling,
general and administrative expenses.
2. NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which is effective for the Company beginning April 28, 1996. SFAS
No. 123 requires expanded disclosures of stock-based compensation arrangements
with employees in notes to annual financial statements and encourages (but does
not require) compensation cost to be measured on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
Accounting Principles Board ("APB") Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma effect
on net income and earnings per share (under the provisions of SFAS No. 123) in
its annual financial statements.
3. INCOME TAXES
The effective income tax rate is based on estimates of annual amounts of taxable
income and other factors. These estimates are updated periodically and any
increase or decrease in the provision for income taxes is reflected in the
period in which the estimate is changed.
Page 7 of 17
8
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
4. INVENTORIES
Inventories consist of the following:
NOVEMBER 2, 1996 APRIL 27, 1996
Raw materials and supplies $18,194 $18,111
Work in process 7,441 8,248
Finished Goods 14,282 15,038
------- -------
$39,917 $41,397
======= =======
5. OTHER ASSETS
In May 1995, the Company loaned $2.0 million to its then Vice Chairman (now
Chairman) of the Board and President (the "Executive"). The loan is due on May
4, 2000, and bears interest payable quarterly equal to the Applicable Federal
Rate as defined (5.83% at November 2, 1996), adjusted monthly. Mandatory
prepayments of this loan are required if the Executive's compensation exceeds
certain thresholds. In March, 1996 the Company loaned the Executive an
additional $800 thousand on a short term basis bearing interest at 6.5%.
6. COMMITMENTS AND CONTINGENCIES
a. Treasury Stock
In January 1993, the Company's Board of Directors authorized the purchase of up
to 2.0 million shares of the Company's common stock, and in December 1995,
authorized the purchase of up to an additional 2.0 million shares of the
Company's common stock, from time to time in the open market, subject to the
terms of the Company's current credit agreement. As of November 2, 1996,
approximately 1.5 million shares are authorized for purchase under the existing
Board of Directors resolutions. Since November 2, 1996 and through December 1,
1996 the Company purchased an additional 8 thousand shares of its common stock.
b. Environmental Matters
On a continuing basis, the Company monitors its compliance with applicable
environmental laws and regulations. As part of this process the Company
cooperates with appropriate governmental authorities to perform any necessary
testing and compliance procedures. The Company is not currently aware of any
environmental compliance matters that it believes will have a material effect on
the consolidated financial statements.
c. 1995 Performance Bonus Plan
In July 1995, the Board of Directors approved the 1995 Performance Bonus Plan
(the "Plan"), applicable to its then Vice Chairman (now the Chairman) of the
Board and President only. Under the Plan, for each of the five fiscal years of
the Company commencing with fiscal year 1996, the Executive will be entitled to
a graduated bonus (the "Performance Bonus") based upon a comparison of the
Company's earnings from operations plus depreciation and amortization (the
"Performance Measure") in that award year with the immediately preceding fiscal
year. The size of the Performance Bonus is tied to the level of the Company's
performance, as measured by the Performance Measure, with the larger bonuses
available only in the case of truly superior results. The maximum Performance
Bonus payable in respect of any award year under the Plan is $2.0 million. No
bonus was payable pursuant to the Plan for fiscal 1996.
Page 8 of 17
9
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
A shareholder of the Company has brought a suit in the United States District
court, Southern District of New York, seeking to enjoin payment of Performance
Bonuses under the 1995 Performance Bonus Plan described above. The Company
believes that the suit is without merit and expects to pay Performance Bonuses
under the Plan when and if earned. A motion for summary judgment has been filed
on behalf of the Company, which is currently pending.
7. COMMON STOCK PURCHASE WARRANTS
Effective August 1, 1996, the Company finalized a new five year supply agreement
pursuant to which a customer will receive a cash volume discount based upon
certain minimum levels of purchases from the Company during the term of the
agreement. In connection with the new agreement, the Company has issued to the
customer warrants to purchase 200,000 shares of its common stock at an exercise
price of $15.00 per share. The warrants are exerciseable immediately and expire
concurrently with the supply agreement. The Company has recorded the fair value
of this warrant in other assets and is amortizing this amount on a straight line
basis over the term of the supply agreement.
Page 9 of 17
10
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's fiscal year ends on the Saturday closest to April 30. Fiscal 1997
will be a 53 week year to end May 3, 1997. The first quarter was a 14 week
period which ended August 3, 1996. The discussion below reflects
reclassifications made to cost of goods sold and selling, general and
administrative expenses of prior periods in order to conform to the current
period classification. Specifically, shipping and delivery expenses of
approximately $693 thousand, $1,249 thousand, and $658 thousand for the 13 and
26 weeks ended October 28, 1995, and the 14 weeks ended August 3, 1996,
respectively, were reclassified from cost of goods sold to selling, general and
administrative expenses.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three and six months ended November 2, 1996 were $117.0
million and $226.8 million compared to net sales of $105.1 million and $195.8
million, respectively, for the corresponding prior periods, an increase of
11.3%, and 15.8%, respectively. The Company's new facility in Oregon effectively
began production during the third quarter of fiscal 1996. Sales for the
Company's Oregon facility were approximately $1.8 million for the fourth quarter
of fiscal 1996, and approximately $4.6 million and $7.9 million for the three
and six months ended November 2, 1996, respectively.
In addition to accelerating sales growth in Oregon, the Company continues to
penetrate its existing markets by expanding product lines within existing
customer bases, and adding new customers. In fiscal 1996 the Company entered
into certain contracts with existing customers whereby the customer has agreed
to provide the Company with minimum levels of sales, normally for a five year
period. In addition to these agreements, the Company's tobacco business
continues to expand. A large portion of the packaging produced by the Company
for the tobacco industry is sold to North American tobacco companies for
ultimate sale in the export market. Sales to the Company's computer and CD ROM
customers are also experiencing favorable growth trends.
The Company believes that future sales growth will be generated through
continued penetration of its existing markets, and the expanding market of CD
ROM products. The Company believes that its Oregon facility will provide
additional sales growth in future quarters of fiscal 1997.
Cost of Sales
Cost of sales as a percentage of sales for the three and six months ended
November 2, 1996 were 78.0% and 78.1% as compared to 77.7% and 77.3%,
respectively, for the corresponding prior periods. The Company's Oregon facility
had a negative impact on the Company's overall margin in the quarter ended
August 3, 1996 and contributed favorably to the Company's overall margin in the
quarter ended November 2, 1996. The Oregon facility did not have any impact on
the corresponding prior periods. Cost of sales as a percentage of sales for the
fourth quarter of fiscal 1996 was 79.0%. The continuing favorable trend in cost
of sales as a percentage of sales from the fourth quarter of fiscal 1996 to the
end of the second quarter of fiscal 1997 is due to the favorable trend in raw
material costs, increased sales of value added packaging which has stronger
margins than standard product line sales, the favorable impact of the Company's
corporate wide purchasing program and the previously mentioned Oregon
operations.
Page 10 of 17
11
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's margins were adversely affected by increases in certain raw
material costs in fiscal 1996 as compared to the prior year, some of which could
not be offset by increases in the selling price to the customer. Recently the
Company has experienced a decline in certain raw material costs which had a
favorable impact during the fourth quarter of fiscal 1996 as well as the first
and second quarters of fiscal 1997, and is expected to continue to favorably
impact fiscal 1997 operations when compared to fiscal 1996 operations. The
Company remains sensitive to price competitiveness in the markets that it
serves, and in the areas that are targeted for growth and believes that the
installation of state-of-the-art printing and manufacturing equipment (and
related labor and production efficiencies), and the expansion of its corporate
wide purchasing program will enable it to continue to compete effectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
three and six months ended November 2, 1996 were 10.1% and 10.4% as compared to
10.9% and 10.8%, respectively, for the corresponding prior periods. The decrease
in selling, general and administrative expenses as a percentage of sales is
largely due to increased sales while certain selling, general and administrative
costs have remained fixed. This decrease is offset somewhat by additional costs
associated with the enhancement of the Company's customer service departments,
as well as increased occupancy and operating costs associated with the Company's
corporate offices, and an increase in legal and other professional fees. In
addition, selling, general and administrative expenses as a percentage of sales
are higher at the Company's Oregon facility as a result of its early operations,
however, these costs are expected to decline as a percentage of sales as
production at that facility continues to increase.
Investment and Other Income
Investment and other income (loss), net, for the three and six months ended
November 2, 1996 were $(194) thousand and $34 thousand, respectively. The net
loss for the three month period was primarily due to net foreign exchange losses
of approximately $364 thousand, offset by interest and investment income of $148
thousand. The net income for the six month period includes net foreign exchange
losses of approximately $269 thousand, offset by interest and investment income
of approximately $281 thousand.
Investment and other income, net for three and six months ended October 28, 1995
was $239 thousand and $469 thousand, respectively. The net income for the three
month period was primarily due to gains on the sale of equipment of $193
thousand and investment income of $121 thousand. These gains were offset by a
loss on foreign exchange of $75 thousand. The net income for the six month
period was primarily due to gains on the sale of equipment of $210 thousand and
investment income of $251 thousand. Foreign exchange gains did not have an
impact on the six month period.
The Company's exposure to foreign exchange transaction gains or losses relate to
the Company's Canadian facilities which have U.S. dollar denominated net current
assets. The Company believes that fluctuations in foreign exchange rates will
not have a material impact on the operations or liquidity of the Company, based
upon current and historical levels of working capital at the Canadian
facilities.
Page 11 of 17
12
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Interest Expense
Interest expense for the three and six months ended November 2, 1996 were $2.3
million and $4.7 million as compared to $2.1 million and $4.2 million,
respectively, for the corresponding prior periods. The increase in interest
costs for the three and six months ended November 2, 1996 as compared to the
prior period is due to increased levels of borrowings, primarily related to the
Company's common stock repurchase program, lower swap amortization discussed
below, and a reduction in the amount of capitalized interest associated with
construction in progress. Interest costs capitalized for the three and six
months ended November 2, 1996 relating to the construction of plant and
equipment amounted to $96 thousand and $216 thousand as compared to $292
thousand and $554 thousand, respectively, in the corresponding prior periods.
The reduction in capitalized interest costs is a result of the Company's Oregon
facility becoming operational in fiscal 1996. The Company anticipates that the
amount of interest to be capitalized in fiscal 1997 will continue to be
significantly less than the amounts capitalized in the corresponding prior
periods of fiscal 1996.
In October 1994, the Company assigned to a bank an interest rate swap agreement
relating to $42.0 million of its debt for cash proceeds of approximately $1.3
million. The proceeds have been recorded as a deferred credit which is being
amortized as a reduction of interest expense (amounting to $83 thousand and $179
thousand, respectively, for the three and six months ended November 2, 1996 and
$134 thousand and $280 thousand, respectively, for the corresponding prior
periods). At November 2, 1996, $220 thousand of deferred gain remains which will
be amortized: $129 thousand remaining in fiscal 1997; and $91 thousand in fiscal
1998.
The Company has used, and may continue to use, interest rate swaps and caps to
manage its exposure to fluctuating interest rates under its debt agreements.
Income Taxes
The effective income tax rate for the three and six months ended November 2,
1996 and the corresponding prior period was 38.2%. These rates reflect a blend
of domestic and foreign taxes and are adjusted periodically based upon the
estimated annual effective tax rate, which for the entire fiscal year ended
April 27, 1996 was 37.9%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at November 2, 1996 was $7.3 million as compared to
$4.5 million at April 27, 1996, and working capital was $33.7 million as
compared to $30.8 million as of the same dates respectively. The current ratio
at November 2, 1996 and April 27, 1996 was approximately 1.5 to one. The
Company's cash balances normally remain relatively constant as a result of the
Company's cash management program whereby collection of accounts receivable are
used to retire revolver obligations, and payments of accounts payable and
accrued expenses are funded through the revolver obligations.
Page 12 of 17
13
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Cash flow from operating activities for the six months ended November 2, 1996
was $24.3 million before changes in operating assets and liabilities as compared
to $20.7 million for the corresponding prior period, whereas net cash flows
provided from operating activities was $28.0 million as compared to $11.8
million for the same periods. The net increase in net cash flows from operating
activities was favorably impacted due to reduced investments in accounts
receivable and increases in the Company's accounts payable balances when
compared to the corresponding prior period. Cash flows from operations as well
as borrowings under the Company's credit facilities were used to support $15.6
million in capital investments, including the payment of $5.0 million of
contingent consideration previously accrued relating to the acquisition of the
Premium Group. In addition, the Company purchased approximately $3.1 million of
treasury stock under the Board of Directors authorized program described below.
The Company has completed the construction of its facility in Oregon. Further
investment in plant and equipment, including that associated with the new
facility, will be dependent upon business needs. The Company anticipates that
such investments will approximate $20.0 million for all of fiscal 1997. The
Company anticipates paying for these investments with funds generated from
operations.
In January 1993, the Company's Board of Directors authorized the purchase of up
to 2.0 million shares of the Company's common stock and in December 1995, the
Board of Directors authorized the purchase of up to an additional 2.0 million
shares from time to time in the open market, subject to the terms of the
Company's current credit agreement. As of November 2, 1996, approximately 1.5
million shares are authorized for purchase under existing Board of Directors
resolutions. The Board and management of the Company believe the long-term
outlook for the Company to be promising and that the Company's common stock
represents an attractive investment opportunity. The treasury stock purchases
will be made from time to time as market conditions permit.
To effectuate its Board authorization, the Company entered into a credit
facility with its lending banks increasing its line of credit by approximately
$41.0 million to $185 million. The new facility consists of $120.0 million of
senior term notes ($18.0 million of which has since been repaid) and $65.0
million of a long-term revolver which bear interest, at the discretion of the
Company, at either the Bank's prime rate or LIBOR plus between 75 to 125 basis
points depending upon certain financial ratios. The senior term notes will be
repaid in various quarterly installments through May 7, 2000 at which time the
revolver will mature.
The loan agreement contains covenants related to levels of debt to cash flow,
current assets to current liabilities, fixed charge coverage, net worth and
investments (including investments in the Company's own common stock), and
restricts the amount of retained earnings available for payment of dividends.
The loan agreement requires the Company to prepay the term notes to the extent
of 50% of excess cash flow as defined. To date, no prepayments have been
required.
In May 1995, the Company loaned $2.0 million to its then Vice Chairman (now
Chairman) of the Board and President (the "Executive"). The loan is due on May
4, 2000, and bears interest payable quarterly equal to the Applicable Federal
Rate as defined (5.83% at November 2, 1996), adjusted monthly. Mandatory
prepayments of this loan are required if the Executive's compensation exceeds
certain thresholds. In March, 1996 the Company loaned the Executive an
additional $800 thousand on a short term basis bearing interest at 6.5%.
Page 13 of 17
14
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company expects that cash flow from operations together with the borrowing
capacity under the revolving credit facility will be sufficient to meet the
current needs of the business. The Company is considering expansion into the
Peoples Republic of China. If the Company commits to such expansion, it may
require additional financing. The Company has, as described above, a $65.0
million long-term revolving credit facility for its working capital
requirements. Borrowings under this facility are limited to the sum of 80% of
accounts receivable and 50% of inventories. At November 2, 1996, the Company had
borrowings under this facility of $35.5 million and additional credit
availability under this facility of $16.9 million.
Page 14 of 17
15
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
Part II
Item 1 LEGAL PROCEEDINGS
Information concerning legal and environmental matters is incorporated
by reference from Part I, Footnotes 6(b) and (c) of Notes to
Consolidated Condensed Financial Statements
Item 2 CHANGES IN SECURITIES
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of Stockholders was held on October 30,
1996 (the "Meeting"). At the Meeting, the Company's stockholders voted
upon the following matters: (I) The election of two directors
comprising the Class I Directors; (ii) the ratification of the stock
option grant to Jefferson Capital Group, Ltd.; (iii) the ratification
of proposals to amend the Company's 1993 Incentive Program; and (iv)
the ratification of Deloitte & Touche LLP as the independent auditors
of the Company for the fiscal year ending May 3, 1997.
The Holders of the Company's common stock voted as a single class on
all matters submitted for a vote at the Meeting. The number of votes
cast for, against or withheld, as well as the number of abstentions, as
to each such matter is set forth below:
ELECTION OF DIRECTORS
--------------------------------------------------------
NAME FOR WITHHELD
--------------------------------------------------------
Melvin L. Braun 16,469,015 685,713
--------------------------------------------------------
Floyd S. Glinert 16,417,815 736,913
--------------------------------------------------------
RATIFICATION OF STOCK OPTION GRANT TO JEFFERSON CAPITAL GROUP, LTD.
--------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------
11,529,683 3,839,681 204,777
--------------------------------------------------------
RATIFICATION OF PROPOSALS TO AMEND THE COMPANY'S 1993 INCENTIVE PROGRAM
--------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------
10,692,765 4,647,258 203,411
--------------------------------------------------------
RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE LLP
--------------------------------------------------------
FOR AGAINST ABSTAIN
--------------------------------------------------------
17,124,050 4,790 25,888
--------------------------------------------------------
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The Inspectors of Election for the Meeting recorded broker non-votes to
proposals 2 and 3 in the amount of 1,580,587 and 1,611,294,
respectively at the Meeting.
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.106 - Promissory Note of Marc P. Shore.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the regulations of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOREWOOD PACKAGING CORPORATION
(Registrant)
by: /s/ Howard M. Liebman
----------------------------
Howard M. Liebman
Executive Vice President and
Chief Financial Officer
Dated: December 16, 1996
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