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 August 1, 1998
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to _______________________.
Commission file number: 0-15077
SHOREWOOD PACKAGING CORPORATION
(Exact name of registrant as specified in its Charter)
DELAWARE 11-2742734
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(Address of principal executive offices)
(212) 371-1500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO | |
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
SEPTEMBER 1, 1998 26,537,000
Date Number of Shares
PAGE 1 OF 16
2
SHOREWOOD PACKAGING CORPORATION
AND SUBSIDIARIES
INDEX PAGE
Part I: Financial Statements
Consolidated Balance Sheets
August 1, 1998 (Unaudited) and
May 2, 1998 (Audited) 3
Consolidated Condensed Statements of Earnings
13 weeks ended August 1, 1998 (Unaudited) and
13 weeks ended August 2, 1997 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows
13 weeks ended August 1, 1998 (Unaudited) and
13 weeks ended August 2, 1997 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements 6 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
Part II: Other Information 15
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 16
3
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
AUGUST 1, MAY 2,
1998 1998
(UNAUDITED) (AUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,507 $ 7,268
Accounts receivable, net 44,232 32,054
Inventories 43,273 46,591
Deferred tax assets 317 317
Refundable income taxes -- 411
Prepaid expenses and other current assets 4,310 9,202
--------- ---------
Total Current Assets 98,639 95,843
Property, Plant and Equipment, net 206,802 200,293
Excess of Cost Over the Fair Value of Net Assets Acquired, net 17,802 18,295
Other Assets 8,819 11,553
--------- ---------
$ 332,062 $ 325,984
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 34,659 $ 33,100
Accrued expenses 9,706 13,887
Income taxes payable 3,383 2,864
Current maturities of long-term debt 15,000 15,000
--------- ---------
Total Current Liabilities 62,748 64,851
Long-Term Debt 144,774 126,437
Other Long-Term Liabilities 1,076 794
Deferred Income Taxes 21,624 21,395
--------- ---------
Total Liabilities 230,222 213,477
--------- ---------
Temporary Equity Relating to Put Options 2,508 2,710
Commitments and Contingencies
Stockholders' Equity:
Series A preferred stock, $10 par value; 50,000 shares
authorized, none issued -- --
Preferred stock, $10 par value; 5,000,000 shares authorized
none issued -- --
Common stock, $.01 par value; 40,000,000 shares authorized;
34,328,149 issued and 26,537,075 outstanding in August and
34,106,974 issued and 27,092,100 outstanding in May 343 341
Additional paid-in capital 52,957 52,448
Retained earnings 125,736 121,976
Cumulative foreign currency translation adjustment (7,413) (4,274)
Treasury stock (7,791,074 and 7,014,874 shares at
cost in August and May) (72,291) (60,694)
--------- ---------
Total Stockholders' Equity 99,332 109,797
--------- ---------
$ 332,062 $ 325,984
========= =========
PAGE 3 OF 16
4
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
13 WEEKS 13 WEEKS
ENDED ENDED
AUGUST 1, AUGUST 2,
1998 1997
Net Sales $ 115,359 $ 100,596
--------- ---------
Costs and Expenses:
Cost of Sales 90,054 78,087
Selling, General and Administrative 12,463 11,024
--------- ---------
Earnings from Operations 12,842 11,485
Other Income, net 391 581
Interest Expense (2,086) (2,051)
--------- ---------
Earnings Before Provision for Income Taxes and Cumulative
Effect of Change in Accounting Principle 11,147 10,015
Provision for Income Taxes 4,347 3,806
--------- ---------
Earnings Before Cumulative Effect of Change in Accounting
Principle 6,800 6,209
Cumulative Effect on Prior Years Related to the Adoption of
SOP 98-5 Reporting on the Cost of Start-Up Activities (3,040) --
--------- ---------
Net Earnings $ 3,760 $ 6,209
========= =========
EARNINGS PER SHARE INFORMATION:
BASIC
Earnings Before Cumulative Effect of Change in Accounting
Principle $ .26 $ .23
Cumulative Effect of Change in Accounting Principle (.12) --
--------- ---------
Net Earnings Per Common Share $ .14 $ .23
========= =========
DILUTED
Earnings Before Cumulative Effect of Change in Accounting
Principle $ .25 $ .22
Cumulative Effect of Change in Accounting Principle (.11) --
--------- ---------
Net Earnings Per Common and Common Equivalent Share $ .14 $ .22
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 26,495 27,141
========= =========
DILUTED 27,081 27,693
========= =========
PAGE 4 OF 16
5
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
13 WEEKS 13 WEEKS
ENDED ENDED
AUGUST 1, AUGUST 2,
1998 1997
Cash flows from operating activities:
Net earnings $ 3,760 $ 6,209
Adjustments to reconcile earnings before cumulative effect
of change in accounting principle to net cash flows
provided from operations:
Non-cash cumulative effect of change in
accounting principle 3,040 --
Depreciation and amortization 4,769 4,322
Deferred income taxes 522 1,294
Changes in operating assets and liabilities:
Accounts receivable (13,178) (308)
Inventories 2,330 (433)
Prepaid expenses and other current assets 3,271 (309)
Other assets 1,068 (3,507)
Accounts payable, accrued expenses and other
long term liabilities (501) (2,540)
-------- --------
Net cash flows provided from operating activities 5,081 4,728
-------- --------
Cash Flows from Investing Activities:
Capital Expenditures (13,261) (7,970)
-------- --------
Net cash flows used in investing activities (13,261) (7,970)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from revolver borrowings 22,559 10,593
Repayments of long-term borrowings (3,750) --
Purchase of treasury stock (11,597) (8,313)
Issuance of common stock 309 542
-------- --------
Net cash flows provided from financing activities 7,521 2,822
-------- --------
Effect of exchange rate changes on cash and cash equivalents (102) 13
-------- --------
Decrease in cash and cash equivalents (761) (407)
Cash and cash equivalents at beginning of period 7,268 3,153
-------- --------
Cash and cash equivalents at end of period $ 6,507 $ 2,746
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ 2,896 $ 60
======== ========
Income taxes paid $ 2,028 $ 3,478
======== ========
PAGE 5 OF 16
6
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 August 1, 1998 and for
all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes included in the
Company's May 2, 1998 Annual Report to Stockholders on Form 10-K as filed with
the Securities and Exchange Commission ("1998 Form 10-K").
The results of operations for the 13 week period ended August 1, 1998 are not
necessarily indicative of the results for the full year.
2. INCOME TAXES
The effective income tax rate is based on estimates of annual amounts of taxable
income and other factors. These estimates are updated periodically and any
increase or decrease in the provision for income taxes is reflected in the
period in which the estimate is changed.
3. INVENTORIES
Inventories consist of the following:
AUGUST 1, 1998 MAY 2, 1998
Raw materials and supplies $17,759 $17,862
Work in process 6,873 7,833
Finished goods 18,641 20,896
------- -------
$43,273 $46,591
======= =======
4. NEW ACCOUNTING PRONOUNCEMENT
Effective May 3, 1998 the Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" which requires that all
items that are required to be recognized under accounting standards as
components of other comprehensive income be reported in the financial
statements. Prior periods will be reclassified, as required. The Company's total
Comprehensive earnings were as follows:
THIRTEEN WEEKS ENDED
AUGUST 1, 1998 AUGUST 2, 1997
Net earnings $ 3,760 $ 6,209
Other comprehensive earnings (losses):
Change in equity due to foreign currency translation adjustment (3,139) 447
-------- -------
Comprehensive Earnings $ 621 $ 6,656
======== =======
PAGE 6 OF 16
7
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
5. COMMITMENTS AND CONTINGENCIES
a. Treasury Stock
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
DATE OF AUTHORIZATION AUTHORIZED SHARES
January 1993 3.0 million
December 1995 3.0 million
April 1997 1.86 million
Shares are authorized for purchase from time to time in the open market, subject
to the terms of the Company's credit facility. As of August 1, 1998,
approximately 1.9 million shares remain authorized for purchase.
b. Temporary Equity Relating to Put Options
The Company periodically sells common equity put options ("put options") on
shares of its common stock which are exerciseable six months from the date of
issuance. At August 1, 1998, 160,000 options were outstanding at strike prices
ranging from $13.86 to $16.83 per share.
Temporary equity relating to put options on the accompanying consolidated
balance sheets represent the amount the Company would be obligated to pay if all
unexpired put options were exercised.
c. New Facility / Cumulative Effect of Change in Accounting Principle
The Company has committed to building a state-of-the-art manufacturing facility
in the city of Guangzhou, China (the "China Facility"), which will be completed
and operating in October 1998. The facility and related equipment will require
an initial capital investment of approximately $45.0 million, including working
capital, which the Company has financed through the Company's existing credit
facility. Through August 1, 1998, the Company has invested approximately $32.7
million representing costs associated with the lease of the related land,
construction of the manufacturing facility, purchase of the necessary machinery
and equipment and other expenses associated with the start-up of the facility.
The Company anticipates spending the remaining $12.3 million during the
remainder of fiscal 1999 with funds generated from operations as well as the
existing credit facility.
In connection with the start-up of the facility, the Company has incurred and
capitalized certain start-up costs aggregating $3.0 million. On April 3, 1998,
Statement of Position Number 98-5, "Reporting on the Costs of Start-Up
Activities" was issued by the American Institute of Certified Public
Accountants, which requires the expensing of the start-up costs when incurred.
Although adoption is not required until fiscal 2000, the Company adopted this
Statement of Position on the first day of fiscal 1999. Accordingly, the Company
recorded a $3.0 million pre-tax charge in its first quarter of fiscal 1999 as a
cumulative effect of a change in accounting principle. This pre-tax charge has
not been offset by a corresponding tax benefit as these expenses relate to the
China Facility which will enjoy a tax holiday for its first three years of
profitable operation. The Company will not report the tax benefits until
realized. The effect of early
PAGE 7 OF 16
8
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
adopting this Statement of Position did not have a material effect on the
Company's operations in the first quarter of fiscal 1999.
d. Environmental Matters
On a continuing basis, the Company monitors its compliance with applicable
environmental laws and regulations. As part of this process the Company
cooperates with appropriate governmental authorities to perform any necessary
testing and compliance procedures. The Company is not currently aware of any
environmental compliance matters that it believes will have a material effect on
the consolidated financial statements.
e. 1995 Performance Bonus Plan
In July 1995, the Board of Directors approved the 1995 Performance Bonus Plan
(the "Plan"), applicable to its Chairman of the Board and President (the
"Executive"). Under the Plan, for each of the five fiscal years of the Company
commencing with fiscal year 1996, the Executive will be entitled to a graduated
bonus (the "Performance Bonus") based upon a comparison of the Company's
earnings from operations plus depreciation and amortization (the "Performance
Measure") in that award year with the immediately preceding fiscal year. The
size of the Performance Bonus, if any, is tied to the level of the Company's
performance, as measured by the Performance Measure. The maximum Performance
Bonus payable in respect of any award year under the Plan is $2.0 million. The
Board of Directors has approved, subject to shareholder approval, the extension
of the Plan for an additional three years.
f. New Employment Agreements
Effective May 3, 1998, the Company entered into new five year employment
agreements with the Executive and its Executive Vice President and Chief
Financial Officer ("EVP") providing for annual base salaries of $800 thousand
and $450 thousand, respectively. In connection with his agreement, the Company
paid to the Executive as a signing bonus the aggregate amount of $1 million,
payable in full although earned ratably over his five-year employment period,
provided that the Executive continues to be employed with the Company at the end
of each such year. Simultaneously with the authorization of the employment
agreements by the Board of Directors, the Company granted the Executive and the
EVP options to purchase 250 thousand and 100 thousand shares of stock,
respectively.
g. Other
The Company agreed to guaranty a portion of an $8.5 million loan made by a bank
to the Executive in connection with his purchase of certain real estate. The
Company's maximum liability under the guaranty is $3.0 million. The guaranty
will terminate at such time as $4.3 million of the loan has been repaid by the
Executive provided that: i) the unpaid portion of the loan is less than 75% of
the then fair market value of the related real estate which was mortgaged to
secure the loan; ii) the Executive's annual compensation meets or exceeds the
level of annual compensation at the date of the guaranty; and iii) there are no
defaults under the loan agreement. As of September 1998, the Executive had
repaid in excess of half of the loan and the guaranty agreement was terminated.
PAGE 8 OF 16
9
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
6. SUBSEQUENT EVENTS
a. Letter of Intent to Purchase Assets of the Queens Group
In August 1998, the Company announced that it has entered into a letter of
intent to purchase substantially all of the assets of Queens Group, Inc. and
certain of its affiliates ("Queens"). Queens is a leading manufacturer of high
quality, value-added printing primarily for the music, multimedia and general
consumer packaging industries. Queens owns and operates five manufacturing
facilities in the United States, employing approximately 1,000 people. In its
latest fiscal year, Queens reported revenues in excess of $148 million. The
purchase price will be payable 88% in cash and through the assumption of certain
indebtedness with the remainder, 12%, payable through the issuance of Shorewood
common stock. In order to pay for the acquisition of Queens, the Company
anticipates refinancing its existing credit facility.
Consummation of the transaction is subject to (1) the negotiation and execution
of a definitive acquisition agreement; (2) the approval by the Board of
Directors of Shorewood; (3) the receipt of all necessary regulatory approvals;
and (4) the completion of Shorewood's due diligence.
b. Sale of 45% Minority Interest in China Facility
In September 1998, the Company announced that it has reached an agreement in
principal with Westvaco Corporation to sell to Westvaco a 45% minority interest
in its China Facility. Westvaco is a major producer of paper, paperboard,
envelopes, packaging and specialty chemicals, with manufacturing facilities in
the United States, Brazil and the Czech Republic. The final agreements will
provide for Westvaco to pay Shorewood, in cash, 45% of the total cost plus an
additional $5 million. Day-to-day management control of the operation will
remain with the Company; however, Shorewood will work closely with Westvaco on
marketing programs and new product development. The gain on the sale will be
recorded upon closing of the transaction, expected to take place in the second
or third quarter of this fiscal year.
Consummation of the Westvaco transaction is subject to the execution of a
definitive purchase and sale and operating agreements, and the satisfaction of
certain conditions contained in the purchase and sale agreements.
PAGE 9 OF 16
10
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales for the 13 week period ended August 1, 1998 were $115.4 million
compared to net sales of $100.6 million for the corresponding prior 13 week
period, an increase of 14.7%. The Company experienced increases in sales in all
industry categories, with double-digit percentage increases in sales in home
entertainment (including the sale of packaging for the "Titanic" video which had
significant sales in the first quarter). The Company has been awarded an
increase in market share for the tobacco industry and as such anticipates that
its growth in sales to the tobacco industry will continue throughout fiscal
1999.
The Company believes that future sales growth will be generated through
continued penetration of its existing markets, as well as its expansion into
China.
Cost of Sales
Cost of sales as a percentage of sales for the quarter ended August 1, 1998 was
78.1% as compared to 77.6% for the corresponding prior period. The increase in
cost of sales as a percentage of sales is attributable to the learning curve
related to new products and newly installed equipment which began operating
during the last six months. The equipment is currently operating more
efficiently which should result in better margins. The Company remains sensitive
to price competitiveness in the markets that it serves, and in the areas that
are targeted for growth and believes that the installation of state-of-the-art
printing and manufacturing equipment (and related labor and production
efficiencies) will enable it to compete effectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
quarter ended August 1, 1998 was 10.8% as compared to 11.0% for the
corresponding prior period. The decrease in selling, general and administrative
expenses as a percentage of sales is largely due to the Company's fixed costs
being spread over a higher volume of sales. Included in selling, general and
administrative expenses in the first quarter was $300,000 of costs relating to
the facility in Guangzhou, China (the "China Facility").
Other Income, net
Other income, net, for the quarter ended August 1, 1998 includes foreign
exchange gains of $495 thousand and approximately $108 thousand of investment
income, offset by losses on disposal of fixed assets of $212 thousand.
Other income, net, for the quarter ended August 2, 1997 includes approximately
$357 thousand gain on the sale of equipment, and approximately $238 thousand of
investment income. Foreign exchange losses were not significant.
PAGE 10 OF 16
11
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's exposure to foreign exchange transaction gains or losses relate to
the Company's Canadian facilities which have U.S. dollar denominated net assets.
The Company believes that fluctuations in foreign exchange rates will not have a
material impact on the operations or liquidity of the Company, based upon
current and historical levels of working capital at the Canadian facilities.
Recently, several Asian currencies experienced weaknesses which had the impact
of reducing some demand for Company products produced in North America intended
for ultimate use in export markets. The Canadian dollar has also experienced
recent weakness against the U.S. dollar. The recent investments in the China
Facility will expose the Company to additional foreign exchange risks related to
the Renminbi ("Rmb"). Should the Canadian dollar or the Rmb weaken, the Company
would experience a reduction in the net worth of the Company's investments in
Canada and China (through the cumulative translation adjustment account). In
addition, the translation of the net operating results for Canada and China
(whether losses or profits) would be reduced. Exposure to foreign exchange
transaction gains or losses in China is expected to be minimal as the Company
will make purchases and sales in both Rmb and the U.S. dollar, and settlement
periods on both accounts receivable and accounts payable are expected to be
short.
Interest Expense
Interest expense was $2.1 million for the quarter ended August 1, 1998 and for
the corresponding prior period. Capitalized interest increased from $195
thousand to $514 thousand, primarily related to the Company's construction of
its facility in China. The Company anticipates that the amount of interest to be
capitalized in fiscal 1999 will begin to decrease during the second quarter of
fiscal 1999 as the China Facility commences operations.
At August 1, 1998, the Company had two outstanding intermediate-term interest
rate swap agreements. Under the first agreement which relates to $50.0 million
of borrowings under the credit facility, the Company pays a fixed rate of 5.76%
and receives a floating rate based on LIBOR, as determined in three-month
intervals. This agreement terminates November 3, 1998. Under the second
agreement which relates to $35.0 million of borrowings under the credit
facility, the Company pays a fixed rate of 5.74% and receives a floating rate
based on LIBOR, as determined in three-month intervals. This agreement
terminates May 5, 1999, unless extended at the discretion of the financial
institution for an additional year.
In July 1997, the Company entered into a reversion swap agreement relating to
$50.0 million of borrowings under the credit facility. Under the agreement, the
Company pays a fixed rate of 5.73% and receives a floating rate based on LIBOR,
as determined in three month intervals. This agreement terminates in April 2002.
After the first year, however, the fixed rate reverts back to floating for any
three month period during which the LIBOR rate exceeds 6.625%. The rate reverts
back to the fixed rate of 5.73% for any subsequent period for which the LIBOR
rate drops below 6.625%.
The fair value of the interest rate swap agreements are immaterial to the
financial statements of the Company.
The Company has used, and may continue to use, interest rate swaps and caps to
manage its exposure to fluctuating interest rates under its debt agreements.
PAGE 11 OF 16
12
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Income Taxes
The effective income tax rate for the quarter ended August 1, 1998 is 39.0% and
was 38.0% for the corresponding prior period. These rates reflect a blend of
domestic and foreign taxes and are adjusted periodically based upon the
estimated annual effective tax rate, which for the entire fiscal year ended May
2, 1998 was 37.9%.
The China Facility will enjoy a tax holiday for the first three years of
profitable operations, and thereafter be taxed at lower rates than the Company's
North American operations. Anticipated losses during the early periods of
operation will not result in related tax benefits. Such benefits will be
recognized when realized. The Company anticipates that this situation will
temporarily result in an increase in its effective tax rate in fiscal 1999.
Start-Up Costs
In connection with the start-up of the China facility, the Company had incurred
and capitalized certain start-up costs aggregating $3.0 million. On April 3,
1998, Statement of Position Number 98-5, "Reporting on the Costs of Start-Up
Activities" was issued by the American Institute of Certified Public
Accountants, which requires the expensing of the start-up costs when incurred.
Although adoption is not required until fiscal 2000, the Company adopted this
Statement of Position on the first day of fiscal 1999. Accordingly, the Company
recorded a $3.0 million pre-tax charge in its first quarter of fiscal 1999 as a
cumulative effect of a change in accounting principle. This pre-tax charge has
not been offset by a corresponding tax benefit as these expenses relate to the
China Facility which will enjoy a tax holiday for its first three years of
profitable operation. The Company will not report the tax benefits until
realized. The effect of early adopting this Statement of Position did not have a
material effect on the Company's operations in the first quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at August 1, 1998 was $6.5 million as compared to $7.3
million at May 2, 1998, and working capital was $35.9 million as compared to
$31.0 million as of the same dates respectively. The current ratio at August 1,
1998 was 1.6 to one and was 1.5 to one at May 2, 1998. The Company has a 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 revolving credit facility.
Cash flow from operating activities for the quarter ended August 1, 1998 was
$12.1 million before changes in operating assets and liabilities as compared to
$11.8 million for the corresponding prior period. Cash flows from operations as
well as borrowings under the Company's credit facilities were used to support
$13.3 million in capital investments. In addition, the Company purchased
approximately $11.6 million of treasury stock under the Board of Directors
authorized program described below. The Company anticipates that capital
expenditures will approximate $35.0 million for all of fiscal 1999 including the
completion of the China Facility. The Company has committed to building a
state-of-the-art manufacturing facility in the city of Guangzhou, China, which
will be completed and operating in October 1998. The facility and related
equipment will require an initial capital investment of approximately $45.0
million, including working capital, which the Company has financed through the
Company's existing credit facility.
PAGE 12 OF 16
13
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Through August 1, 1998, the Company has invested approximately $32.7 million
representing costs associated with the lease of the related land, construction
of the manufacturing facility, purchase of the necessary machinery and equipment
and other expenses associated with the start-up of the facility. The Company
anticipates spending the remaining $12.3 million during the remainder of fiscal
1999 with funds generated from operations as well as the existing credit
facility.
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
DATE OF AUTHORIZATION AUTHORIZED SHARES
January 1993 3.0 million
December 1995 3.0 million
April 1997 1.86 million
Shares are authorized for purchase from time to time in the open market, subject
to the terms of the Company's credit facility. As of August 1, 1998,
approximately 1.9 million shares remain authorized for purchase.
The Board and management of the Company believe the long-term outlook for the
Company to be promising and that the Company's common stock represents an
attractive investment opportunity. The treasury stock purchases will be made
from time to time as market conditions permit.
To fund the China investment and other global opportunities which may arise over
the next several years and to facilitate its share repurchase program, the
Company entered into a credit facility in May 1997 with its lending banks
increasing its line of credit to $200 million. The facility consists of $75.0
million of senior term notes and $125.0 million of a long-term revolver which
bear interest, at the discretion of the Company, at either the Bank's prime rate
or LIBOR plus between 50 and 100 basis points depending upon certain financial
ratios. The revolving credit is available, in its entirety, without any
borrowing base limitation. At August 1, 1998, the Company had borrowings under
the revolving facility of $99.8 million. The senior term notes will be repaid in
equal quarterly installments through May, 2002 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. At
August 1, 1998, there was approximately $6.6 million of retained earnings
available for the payment of dividends.
The Company expects that cash flow from operations together with the borrowing
capacity under the revolving credit facility will be sufficient to meet the
needs of the business.
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14
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which are not
required to be adopted at this date include Statement of Financial Accounting
Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The Company is evaluating the impact SFAS 133 will have on its
financial statements.
SUBSEQUENT EVENTS
In August 1998, the Company announced that it has entered into a letter of
intent to purchase substantially all of the assets of Queens Group, Inc. and
certain of its affiliates ("Queens"). Queens is a leading manufacturer of high
quality, value-added printing primarily for the music, multimedia and general
consumer packaging industries. Queens owns and operates five manufacturing
facilities in the United States, employing approximately 1,000 people. In its
latest fiscal year, Queens reported revenues in excess of $148 million. The
purchase price will be payable 88% in cash and through the assumption of certain
indebtedness with the remainder, 12%, payable through the issuance of Shorewood
common stock. In order to pay for the acquisition of Queens, the Company
anticipates refinancing its existing credit facility.
Consummation of the transaction is subject to (1) the negotiation and execution
of a definitive acquisition agreement; (2) the approval by the Board of
Directors of Shorewood; (3) the receipt of all necessary regulatory approvals;
and (4) the completion of Shorewood's due diligence.
In September 1998, the Company announced that it has reached an agreement in
principal with Westvaco Corporation to sell to Westvaco a 45% minority interest
in its China Facility. Westvaco is a major producer of paper, paperboard,
envelopes, packaging and specialty chemicals, with manufacturing facilities in
the United States, Brazil and the Czech Republic. The final agreements will
provide for Westvaco to pay Shorewood, in cash, 45% of the total cost plus an
additional $5 million. Day-to-day management control of the operation will
remain with the Company; however, Shorewood will work closely with Westvaco on
marketing programs and new product development. The gain on the sale will be
recorded upon closing of the transaction, expected to take place in the second
or third quarter of this fiscal year.
Consummation of the Westvaco transaction is subject to the execution of a
definitive purchase and sale and operating agreements, and the satisfaction of
certain conditions contained in the purchase and sale agreements.
PAGE 14 OF 16
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 5(d) of Notes to Consolidated
Condensed Financial Statements
Item 2 CHANGES IN SECURITIES
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
None.
PAGE 15 OF 16
16
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: September 14, 1998
PAGE 16 OF 16