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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
(MARK ONE)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 29, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-15077
SHOREWOOD PACKAGING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-2742734
(State or other jurisdiction (IRS employer
of incorporation or organization) identification No.)
277 PARK AVENUE
(Address of principal executive offices)
10172
(Zip Code)
(212) 371-1500
Registrant's telephone number, including area code
----------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /x/ No / /
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of July 26, 1995, the aggregate market value of the Registrant's
common stock held by non-affiliates of the Registrant was approximately
$263,950,080. (This figure was computed on the basis of the average of the
high and low selling prices for the Registrant's common stock on July 26,
1995). Non-affiliates include all shareholders of Registrant other than
executive officers, directors and 5% shareholders who are employees of the
Registrant. As of July 26, 1995, there were 19,367,599 shares of the
Registrant's common stock, $.01 par value per share, issued and outstanding.
The information required in Part III of this Form 10-K is incorporated
by reference from the Registrant's definitive proxy statement for the October
19, 1995 annual meeting of stockholders.
The Exhibit Index is Located on Page 40.
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PART I
ITEM 1. BUSINESS
Shorewood Packaging Corporation and its subsidiaries (collectively,
"Shorewood" or the "Company") print and manufacture high quality paperboard
packaging for the cosmetics, home video, music, software, tobacco and
toiletries and general consumer markets in the United States and Canada.
Shorewood was incorporated in November 1967. The Company's principal executive
offices are located at 277 Park Avenue, New York, New York 10172 and its
telephone number is (212) 371-1500.
Shorewood's strategic objectives are (i) the maintenance of its
position as a leading paperboard packager to the tobacco industry and the home
entertainment market, which includes the music and video industries; (ii) the
further expansion of the Company's markets in the CD-ROM computer software and
games industry and in the cosmetics and toiletries, food, liquor, consumer
electronics, film and hosiery industries; and (iii) the identification of other
areas in the general consumer packaging industry that can most benefit from the
Company's ability to produce graphically enhanced high quality packaging. To
achieve these objectives, the Company intends to continue expanding its
printing, packaging and graphic arts capabilities, including the development
and application of advanced manufacturing technologies.
Packaging Products
The Company produces high quality specialized packaging, principally
folding cartons and set up boxes, for its customers in the United States and
Canada that require sophisticated precision graphic packaging for their
products, including customers in the home entertainment industry, the tobacco
industry, the software industry, the personal care, cosmetic and toiletries
industries and in such general consumer industries as the food, liquor, film,
hosiery, consumer electronics and pharmaceutical industries.
In January 1994, the Company acquired the assets comprising the
"Somerville Premium Packaging Business" of Cascades Paperboard International,
Inc. (the "Premium Group"). See "Acquisitions". As a result of its
acquisition of the Premium Group, the Company has become a principal supplier
of printed packaging products for the tobacco industry. For its tobacco
industry customers, the Company produces the hard flip-top cigarette packages
as well as the traditional slide and shell packages. These products are used
to package many of the leading tobacco brands. The Company believes that
through its acquisition of the Premium Group it has become the primary carton
supplier to the Canadian tobacco industry and a leading manufacturer of
paperboard packaging for the tobacco industry in the United States. See
"Tobacco Industry". In the fiscal year ended April 29, 1995 ("fiscal 1995"),
Philip Morris, one of Shorewood's tobacco industry customers, accounted for
approximately 17% of the Company's consolidated net revenues. In addition, two
other customers, who may be deemed to be affiliated with each other, accounted
in the aggregate for approximately 13% of the Company's fiscal 1995
consolidated net revenues, albeit neither alone accounted for more than 10% of
the Company's consolidated revenues in such fiscal year. Although Shorewood
believes that its relationships with these customers are excellent, the Company
does not have long-term supply agreements with them and there can be no
assurance that their packaging requirements in the future will continue at the
same levels as in fiscal 1995.
For its music and home entertainment industry customers, the Company
manufactures compact disc packaging (including folders, booklets and liners),
prerecorded cassette packaging (including folders and sleeves), and other
printed material and paperboard packaging for all video cassette formats
(including VHS and 8 millimeter). The Company's music industry customers
include most of the major
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music production and distribution companies in the United States. The Company
has long-standing relationships with many of these companies and in certain
cases also has agreements, typically for three to five years, to supply their
packaging products.
In March 1993, the manufacturers of prerecorded music discontinued the
use of the long-box as a packaging medium for compact discs. During fiscal
1993, the Company realized revenues of approximately $20 million from the sales
of the long-box. Revenues derived from the long-box were negligible during
fiscal years 1994 and 1995. The revenue loss was mitigated as the Company's
revenues increased in fiscal years 1994 and 1995, primarily as a result of its
acquisition of the Premium Group. Additionally, the Company continues its
efforts to market to music industry manufacturers and other users of compact
discs different forms of compact disc packaging.
The Company has supplied a significant portion of the music packaging
products required by Sony Music Entertainment, Inc., a wholly-owned subsidiary
of Sony Corporation ("Sony") and, from time to time, has entered into supply
agreements with Sony. Sony and its affiliates (including its Canadian
operations) accounted for approximately 18% of the Company's net sales for
fiscal 1993. Sony did not account for more than 10% of the Company's
consolidated revenues in either fiscal 1994 or fiscal 1995. The Company cannot
predict the packaging product requirements of Sony in the future.
The Company is a supplier of paperboard packaging for the cosmetics
and toiletries industry and also produces a wide range of consumer packaging
products. Additionally, as a result of the Company's acquisition of certain
operating assets from Heminway Packaging Corporation ("Heminway") in January
1994, the Company manufactures and provides rigid set-up boxes, principally for
customers in the cosmetics industry. See "Acquisitions."
An emerging new market for the Company's products is the CD-ROM
computer software and games industry. The Company is currently constructing a
manufacturing facility in the Pacific Northwest, home of many leading software
manufacturers, to better service this market. See "Item 2. Properties". The
Company expects to derive future sales growth through the continued expansion
of its role as a supplier of paperboard packaging for CD-ROM products.
Production
The Company generally produces packaging from specifications, art work
or film supplied by its customers. However, the Company from time to time
designs and develops new packaging concepts and structures when required by its
customers.
Shorewood has developed and currently utilizes a printing and
manufacturing web system, referred to as the "JOSH System", which combines
gravure and lithographic printing. The Company believes that the JOSH System
gives designers of packaging the flexibility to translate certain graphic
concepts into high quality, cost-efficient and precisely manufactured
packaging. The Company's manufacturing facilities are equipped with Josh
Systems and multi-color sheet fed printing presses as well as other equipment
necessary to produce packaging including platemaking equipment, leaf stamping
machines, diecutters/embossers, folders and gluers. Further, the Company has
machine shops which enable it to service and maintain substantially all of its
machinery and equipment. The Company also maintains a full-time design and
engineering staff.
The Company's productive capacity has substantially increased as a
result of capital expenditures for machinery and equipment and the acquisition
of new facilities, including the acquisition of the
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Premium Group. The Company's policy is to continue to enhance its
technological capacities to meet competitive challenges, although there can be
no assurance that it will be able to do so.
Marketing and Sales
The Company's sales result primarily from direct solicitation by the
Company's executive officers and 54 salespeople, 34 of whom are in the United
States and 20 of whom are in Canada.
The Company's marketing and sales efforts emphasize the Company's
ability to print high quality specialized packaging in a timely manner by
utilizing the Company's state-of-the-art manufacturing systems. The Company
and its design and packaging development staff are frequently consulted by
consumer product companies for assistance in developing new and alternative
packaging concepts. Shorewood has also assisted its customers in the
development and acquisition of automated packaging equipment which can use the
Company's new packaging products. The Company's ability to meet the rapid
delivery requirements of its customers has enhanced its competitive position
with consumer product companies.
In addition to sales activities conducted from its manufacturing
plants, the Company has sales offices in New York, New York; Los Angeles and
Redwood City, California; Chicago, Illinois; Charlotte, North Carolina;
Greenwich, Connecticut and Montreal, Canada.
Part of the Company's business is seasonal. Sales generally increase
in the five months preceding the Christmas holiday season because many of the
products for which it supplies packaging - cosmetics, home video, music,
toiletries and toys - have higher holiday sales. However, in the past several
years, as the Company's range of products for which it supplies packaging has
expanded, through acquisitions, the development of new markets and otherwise,
the seasonality factor of the Company's business has diminished.
Customers are billed upon completion of a shipment. For customers in
the music and home video industry, and the tobacco industry, jobs are generally
completed and shipped to customers shortly after an order is received. For
general consumer customers, jobs are usually completed and shipped within six
to eight weeks. As of April 29, 1995, the Company had approximately $62
million in backlog orders, all of which will be filled within the fiscal year
ending April 27, 1996 ("fiscal 1996"). As of April 1994, the Company had
approximately $45.9 million in backlog orders, all of which were filled within
the 1995 fiscal year.
Competition
The principal elements of competition in the paperboard packaging
industry are quality, service and price. The Company believes that it competes
effectively in each of these categories. Although the Company believes that it
is the largest non- integrated folding carton company in North America, it
faces substantial competition from different companies in its different
industry areas, some of which are subsidiaries or divisions of companies with
much greater financial resources than those of the Company.
While the Company believes its present competitive position is strong,
there can be no assurance that this will not change. Other packaging companies
may develop technologies which equal or improve upon those of the Company or
may have strong relationships with potential customers which could inhibit the
expansion of the Company's business. Furthermore, because the Company supplies
packaging to consumer industries, it is also subject to the competitive forces
affecting its customers.
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Employees
At April 29, 1995, the Company employed approximately 2,700 full-time
employees, of which approximately 1,700 individuals were located in the United
States and approximately 1,000 individuals were located in Canada.
Approximately 22% of the Company's employees are represented by unions
covering manufacturing personnel in Andalusia, Alabama; Waterbury, Connecticut;
Pittsford, New York; Smiths Falls and Toronto, Canada (Toronto Carton facility
only). Collective bargaining contracts are negotiated on an individual plant
or union local basis. The Company's collective bargaining agreements expire at
various times from 1995 to 1999. The Company considers its labor relations to
be satisfactory and it has not experienced any significant work stoppages in
its operating history.
Materials
Although the Company buys a number of different materials, such as
paperboard, paper, ink, coatings, film and plates, the costs associated with
the purchase of paperboard and paper are the most significant. The Company
purchases paperboard and paper from various mills and suppliers and many
alternate sources are available. While the Company does not anticipate any
significant difficulty in obtaining supplies of paperboard, paper or other
materials in the future, there can be no assurance that, as the Company's
business continues to expand, it will not encounter difficulty in obtaining its
increasing material requirements.
Acquisitions
Effective January 1, 1994, the Company, through wholly-owned
subsidiaries, acquired the Premium Group for a cash payment of approximately
$96.9 million and the assumption of approximately $9.9 million of liabilities.
In addition, the Company is contingently liable for the payment of $5 million
if certain combined earnings levels during the four year period following the
consummation of the transaction are achieved. The Company has issued a warrant
to the seller to purchase 35,000 shares of the Company's common stock which is
exercisable at $13.50 per share, subject to the same contingency. At the time
of the closing of the transaction, the Company prepaid a total of $31.9 million
of senior notes. The transaction and prepayment of the Company's senior notes
were paid for from the proceeds of senior credit facilities provided to the
Company and its subsidiaries by a syndicate of lenders.
The Premium Group is a leading supplier of high value-added folding
cartons primarily for the tobacco and cosmetic industries in the United States
and Canada. The Premium Group manufactures a wide variety of high quality
gravure and lithographed printed packaging products, including hard flip-top
cigarette packages as well as the traditional slide and shell packages. Those
products are used to package many of the leading tobacco brands in the United
States and Canada. The Premium Group also produces a wide range of consumer
packaging products, including packaging for perfumes, confectionery and a large
variety of health and beauty products.
The acquisition of the Premium Group added to the Company's
manufacturing facilities two plants in Canada, located in Brockville and Smiths
Falls, Ontario, and three plants in the United States, located in Danville,
Virginia, Williamsburg, Virginia and Pittsford, New York. The Canadian plants
exclusively provide gravure manufacturing capacity and are highly focused on
the domestic and international tobacco markets. The U.S. plants provide a
wider variety of products, including the flip-top cigarette package as well as
a range of folding cartons for the cosmetic and health and beauty aid sectors.
In an effort to
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streamline operations and increase productivity, the Company will close the
Pittsford, New York plant in fiscal 1996 and transfer the equipment located in
Pittsford to other Shorewood facilities.
On January 17, 1994, the Company acquired certain assets from Heminway
which comprised substantially all of its assets used in its rigid set-up box
and thermoforming business (the "Heminway Business") for a cash purchase price
of $3.7 million. The Heminway Business produces rigid set-up boxes primarily
for the cosmetics industry, including packaging for perfumes and beauty
products. This transaction was financed with funds from the Company's
revolving credit facility. After its acquisition by the Company, the
Heminway Business experienced certain production inefficiencies. In April
1995, the Company commenced a lawsuit against Heminway and certain of its
affiliates seeking damages and other relief in respect of the acquisition of
the Heminway Business. See "Item 3. Legal Proceedings".
Tobacco Industry
As a result of its acquisition of the Premium Group, the Company has
become a principal supplier of printed packaging products for the tobacco
industry in North America. A number of factors have recently weakened the
North American tobacco market, which could adversely affect the Company's
performance. These factors include a gradual decrease in consumption, the
shift from premium to discount cigarette brands, cigarette taxes in effect or
under consideration and a generally hostile legislative and regulatory climate
in the United States and Canada.
In contrast, the Company believes that the potential for export
markets provide favorable prospects for the tobacco business. There are three
principal factors driving the favorable outlook for export markets: (i) Growth
in overseas markets; (ii) the opening of international markets to free trade in
tobacco (especially in Eastern Europe, the former Soviet Union and China), and
(iii) increased world demand for American blend cigarettes. The Company's
policy is to continue to aggressively pursue the export tobacco market which
provides the best potential for future sales growth.
ITEM 2. PROPERTIES
The Company owns offices and manufacturing facilities in LaGrange,
Georgia; Roanoke, Virginia; Danville, Virginia; Williamsburg, Virginia; Smiths
Falls, Ontario; Brockville, Ontario and Andalusia, Alabama. Additionally, the
Company is constructing a manufacturing facility in Springfield, Oregon which
is scheduled to become operational in the Fall of 1995. Upon completion of the
Oregon plant, the Company will own in the aggregate approximately 1.1 million
square feet of office and manufacturing space. The Company also leases office,
manufacturing and warehousing facilities at various locations in New York,
Connecticut, California, Georgia, Illinois, North Carolina and Canada which
leases expire at various times ending in the year 2002. The aggregate annual
net rental cost, exclusive of real estate taxes, for a total of approximately
811,000 square feet of rental space, is approximately $3.5 million. In fiscal
1996, the Company will close the facility which it leases in Pittsford, New
York. See "Acquisitions".
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ITEM 3. LEGAL PROCEEDINGS
1. Shorewood Packaging Corporation of Connecticut and Shorewood
Packaging Corporation v. Heminway Packaging Corporation, et al.
In April 1995, the Company and its wholly-owned subsidiary, Shorewood
Packaging Corporation of Connecticut ("SPCC"), commenced a civil action in
Supreme Court of the State of New York, New York County, against Heminway and
certain of its affiliates seeking compensatory and punitive damages and other
relief with regard to the acquisition of the Heminway Business. See
"Acquisitions." The suit contends that Heminway and the other defendants
misrepresented the financial condition and operational capabilities of the
Heminway Business. The Company is seeking damages in excess of $5 million.
In June 1995 Heminway filed an answer, affirmative defenses and
counterclaim to the Company and SPCC's complaint. The counterclaim asserts
claims for compensatory damages exceeding $10 million and punitive damages of
$7.7 million. Heminway's counterclaim also seeks a declaratory judgment and
damages with respect to SPCC's paying into escrow a portion of rent due and
payable pursuant to a lease between Heminway and SPCC. The remaining two
defendants moved to dismiss the complaint for failure to state a cause of
action. On June 29, 1995, the Company and SPCC moved to dismiss the
counterclaim and responded to the motion to dismiss the complaint. Management
intends to vigorously pursue its claims against the defendants and to
vigorously defend the counterclaim.
2. Shorewood Packaging Corporation v. Newman Construction Company, et al.
In January 1990, the Company commenced a civil action in the United
States District Court for the Northern District of Georgia, Atlanta Division,
seeking in excess of $5 million of damages arising out of construction work
performed by the defendant at Shorewood's LaGrange, Georgia manufacturing and
warehouse facility. In November 1994, the Company accepted a cash settlement
of $1.5 million to terminate the litigation. In addition, the defendant's
counterclaim for approximately $300,000, representing the last payment due
under the construction contract, was dismissed as part of the settlement.
The Company is not presently a party to any other material litigation.
On a continuing basis, the Company monitors its compliance with applicable
environmental laws and regulations. As part of this process, the Company
cooperates with appropriate governmental authorities to perform any necessary
testing and compliance procedures. The Company is not aware of any
environmental compliance proceeding that will have a material effect on its
consolidated financial statements. During fiscal 1995, the Company has been
involved, at various locations, in the correction of certain violations of
applicable environmental laws, rules or regulations. Amounts paid during
fiscal 1995 to all governmental agencies aggregated less than $100,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no vote of security holders during the fourth quarter of the
fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Company's Common Stock is traded in
the over-the-counter market on the NASDAQ National Market System under the
symbol SHOR. The following table sets forth, for the fiscal periods indicated,
the high and low sales prices for the Common Stock on the National Market
System, as reported by NASDAQ.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
Fiscal 1995
First Quarter . . . . . . . . . . . . . . $ 19.25 $ 14.25
Second Quarter . . . . . . . . . . . . . 22.75 18.00
Third Quarter . . . . . . . . . . . . . . 20.56 16.25
Fourth Quarter . . . . . . . . . . . . . 19.75 14.50
Fiscal 1994
First Quarter . . . . . . . . . . . . . . $ 10.00 $ 7.00
Second Quarter . . . . . . . . . . . . 11.00 8.25
Third Quarter . . . . . . . . . . . . . 16.75 10.50
Fourth Quarter . . . . . . . . . . . . 17.25 13.75
</TABLE>
The last sale price of the Company's Common Stock on July 26, 1995 was
$17.375.
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 from time to
time in the open market. Pursuant to this authorization, through the end of
fiscal 1995, the Company utilizing internally generated funds purchased 1.2
million shares of its Common Stock for approximately $12.6 million. The
Company is restricted under the terms of its Senior Term Notes and long-term
revolver agreements from purchasing shares of its Common Stock.
(b) Holders. There were 301 record holders of the Company's
Common Stock as of July 26, 1995. The Company believes that, as of such date,
there were in excess of 1,000 beneficial holders of the Company's Common Stock,
including those stockholders whose shares were held of record by certain
depository companies.
(c) Cash Dividends. The Company has not paid any cash dividends
on its Common Stock during either of its two most recent fiscal years. The
Company anticipates that its earnings for the foreseeable future will be
utilized to reduce debt, to fund acquisitions or to purchase shares of its
Common Stock, or will be retained for use in its business. Accordingly, the
Company believes that it is now unlikely that any cash dividends will be paid
on its Common Stock in the near future.
The Company's Senior Term Notes and long-term revolver agreements
restrict the amount of retained earnings available for the payment of dividends
(other than dividends payable in the Company's Common Stock). The amount of
retained earnings free from such restrictions as of April 29, 1995 approximated
$14.4 million.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information set forth below for
and as of the fiscal year ended April 29, 1995 and for and as of the end of
each of the four preceding fiscal years is derived from, and qualified by
reference to, the consolidated financial statements of Shorewood Packaging
Corporation and subsidiaries which have been audited by Deloitte & Touche LLP,
independent auditors whose report as of April 29, 1995 and April 30, 1994 and
for the 52 weeks ended April 29, 1995, April 30, 1994 and May 1, 1993 is
included elsewhere herein. Except for the Special Dividend of $3.25 per Common
Share paid on July 2, 1991, cash dividends were not paid on the Company's
Common Stock in any of the periods indicated below.
SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
52 Weeks Ended
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April 29, April 30, May 1, May 2, April 27,
1995 1994 1993 1992(1) 1991
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<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 357,033 $216,469 $184,122 $160,140 142,012
Gross profit 80,971 49,254 48,082 43,063 40,189
Selling, general and administrative
expenses 35,801 24,230 20,161 21,621 18,442
Restructuring charge - 3,400 - - -
Earnings from operations 45,170 21,624 27,921 21,442 21,747
Investment and other income, net 10 903 903 167 795
Interest expense 8,979 6,727 5,385 5,375 2,052
Earnings before provision for income
taxes, extraordinary item and cumulative
effect 36,201 15,800 23,439 16,234 20,490
Provision for income taxes 13,692 6,409 8,810 6,425 7,658
Earnings before extraordinary item
and cumulative effect 22,509 9,391 14,629 9,809 12,832
Extraordinary item - (3,098) - - -
Cumulative effect - - 1,150 - -
Net earnings 22,509 6,293 15,779 9,809 12,832
Earnings before extraordinary item and
cumulative effect per common share 1.17 .52 .78 .52 .67
Net earnings per common share 1.17 .35 .84 .52 .67
Weighted Average Common and Common
Equivalent Shares Outstanding 19,314 18,089 18,866 18,717 19,048
</TABLE>
<TABLE>
<CAPTION>
April 29, April 30, May 1, May 2, April 27,
1995 1994 1993 1992 1991
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 31,948 $ 31,408 $ 21,857 $ 20,400 $ 25,942
Property, plant and equipment, net 129,153 135,376 59,872 55,452 60,538
Total assets 245,264 220,350 112,760 100,816 110,934
Short-term debt 21,394 10,419 9,669 3,711 5,780
Long-term debt excluding current
maturities 99,793 120,493 31,900 35,000 13,213
convertible subordinated Debentures - 17,500 17,500 17,500 -
Stockholders' equity 67,409 27,111 26,085 17,273 67,974
</TABLE>
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(1) 53 week period
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Effective January 1, 1994, the Company acquired certain operating assets of the
Premium Packaging Group of Cascades Paperboard International, Inc. (The
"Premium Group"), and on January 17, 1994, the Company purchased the operating
assets of Heminway Packaging Corporation ("Heminway") (collectively "the
Acquired Companies") (See Note 2 of Notes to Consolidated Financial
Statements). The Premium Group manufactures and provides folding cartons to
the tobacco, cosmetics and toiletries and general consumer industries while
Heminway manufactures and provides rigid set-up boxes principally to the
cosmetics industry. These acquisitions were recorded using the purchase method
of accounting. Accordingly, the operating results related to the Acquired
Companies were included in the Company's results of operations for the periods
subsequent to each respective acquisition date. The historical results of
operations of Heminway were not significant to the consolidated financial
statements of the Company.
The fourth quarter of fiscal 1994 is the first quarter in which the operations
of the Acquired Companies were included in the consolidated operating results
of the Company for a full quarter. Fiscal 1995's results of operations
represent the first year of operations in which the Acquired Companies and the
Company's results are included for the full year.
Fiscal Year Comparisons
Net Sales
Net sales for fiscal 1995 were $357.0 million compared to net sales of $216.5
million for the corresponding prior period, an increase of 64.9%. Included in
fiscal 1995 are sales of approximately $177.6 million produced by facilities of
the Acquired Companies as compared to $47.7 million for the corresponding prior
period (since the date of acquisition, January 1, 1994).
Net sales for fiscal 1994 were $216.5 million compared to net sales of $184.1
million for the corresponding prior period, an increase of 17.6%. Included in
the 1994 fiscal period are sales of approximately $47.7 million related to the
operations of the Acquired Companies. Net sales for the 1994 fiscal year were
adversely affected by the decision by the music industry to discontinue the use
of the long-box as a packaging medium for compact discs. Revenues derived from
the long-box were negligible during fiscal 1994 as compared with $20.0 million
in fiscal 1993.
The Company believes that its future sales growth will be generated through
continued penetration of its existing markets and the expanding market of CD
Rom products. The Company expects its new facility in Oregon to begin
production and provide additional sales growth during fiscal 1996.
Cost of Sales
Cost of sales as a percentage of sales was 77.3% in fiscal 1995 as compared
with 77.2% in fiscal 1994. Cost of sales in fiscal 1995 was adversely affected
by increased raw material costs which were unable to be immediately reflected
in the selling price of the Company's products. In addition, the Company
experienced some inefficiencies related to the installation of new production
capacity in certain of its facilities.
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Cost of sales as a percentage of sales was 77.2% in fiscal 1994 as compared
with 73.9% in fiscal 1993. The increase in the cost of sales percentage in
fiscal 1994 was primarily attributed to the discontinued use of the long-box
for compact discs resulting in the related lower level of sales at the
Company's Farmingdale, New York facility. In addition, the Company's cost of
sales percentage increased due to the inclusion of the operations of the
Acquired Companies whose margins have been historically lower than that of the
Company.
The Company remains sensitive to the price competitiveness in the markets that
it currently serves and in areas of its targeted growth. It believes that the
labor and production efficiencies associated with the installation of
additional state-of-the-art printing and manufacturing equipment, including the
new facility in Oregon, will enable the Company to compete effectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 10.0%, 11.2%, and 10.9% of
net sales for fiscal years 1995, 1994 and 1993, respectively. The amount of
selling, general and administrative expenses for fiscal 1995 increased compared
to fiscal 1994 and fiscal 1994 increased compared to fiscal 1993 due to the
inclusion of such expenses of the Acquired Companies.
Plant Closing and Restructuring
During fiscal 1995 the Company completed its determination of the allocation of
purchase price with respect to the Acquired Companies. In order to streamline
the Company's operations and increase productivity, the Company will close the
Pittsford, New York plant during fiscal 1996 and transfer the equipment located
there to other Company facilities. Included in the final allocation of the
purchase price is an estimate of the cost of closing this redundant facility
(See Note 2 of Notes to Consolidated Financial Statements).
As a result of the discontinued use of the long-box as a packaging medium for
compact discs and the related diminished level of sales, the Company decided at
the end of the third quarter of fiscal 1994 to close its Farmingdale, New York
facility effective as of April 30, 1994. In connection with the closing of
this facility and the restructuring of the Company's operations relating
thereto, the Company recorded a restructuring charge before provision for
income taxes amounting to $3.4 million during the third quarter of fiscal 1994.
Included in this charge are amounts provided for the termination of leases,
disposal of equipment, severance payments and other related restructuring
items. The impact on net earnings related to the restructuring charge was a
loss of approximately $2.1 million or ($.12) per share.
Investment and Other Income
Investment and other income, net, decreased in fiscal 1995 as compared to
fiscal 1994 primarily due to the change in the impact of foreign exchange gains
and losses. For fiscal 1995 the Company had losses from foreign exchange
transactions of approximately $270,000 while in fiscal 1994 the Company had
gains of approximately $234,000. The foreign exchange impact was consistent in
fiscal 1993 when compared to fiscal 1994.
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
11
<PAGE> 12
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.
Investment income representing interest on short-term deposits was
approximately $320,000 in fiscal 1995 and fiscal 1994, and approximately
$404,000 in fiscal 1993.
Interest Expense
Interest expense for fiscal 1995 increased compared to fiscal 1994, and fiscal
1994 increased compared to fiscal 1993 as a result of the additional borrowings
required to finance the purchase of the Acquired Companies.
Capitalized interest costs related to the construction of fixed assets were
$377,000 in fiscal 1995 and $131,000 in fiscal 1994 and fiscal 1993. The
Company anticipates additional capitalization of interest during fiscal 1996 in
connection with the construction of the manufacturing facility in Oregon.
In October 1994, the Company assigned to a bank an interest rate swap agreement
relating to $42 million of its Senior Term Notes 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 $371,000 in fiscal 1995). At April 29, 1995 $913,000 of deferred gain
remains which will be amortized: $510,000 in 1996; $289,000 in 1997; and
$114,000 in 1998.
The Company has in the past, and may continue to in the future, use interest
rate swaps and caps to manage its exposure to fluctuating interest rates under
its debt agreements (See Note 6 of Notes to Consolidated Financial Statements).
Income Taxes
The effective income tax rate was 37.8% in fiscal 1995 as compared with 40.6%
in fiscal 1994 and 37.6% in fiscal 1993. These rates reflect a blend of
domestic and foreign taxes. (See note 7 of notes to Consolidated Financial
Statements).
During the first quarter of fiscal 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 changed the method of accounting for income taxes from the
deferred method to the liability method. Under the deferred method, deferred
income taxes were recognized using the tax rates in effect when the tax was
first recorded and not adjusted for subsequent changes in the tax rates until
paid or recovered. Under the liability method, deferred tax assets and
liabilities are determined based on the difference between the financial
accounting and tax bases of assets and liabilities. Deferred tax assets or
liabilities at the end of each period are determined using the currently
enacted tax rate. Net earnings in fiscal 1993 increased by $1.15 million as a
result of the cumulative effect of this change in accounting principle.
The increase in the effective tax rate in fiscal 1994 includes approximately
$200,000 representing the effect of the income tax rate change enacted into law
in August 1993.
12
<PAGE> 13
Extraordinary Item
In connection with the purchase of the Acquired Companies, the Company prepaid
$31.9 million of Senior Notes. As a result of the prepayment, the Company
recorded, in the third quarter of fiscal 1994, an extraordinary charge of $3.1
million (after related income tax benefit of $1.9 million) consisting of
prepayment penalties and the write-off of deferred finance costs.
Impact of Inflation
The Company from time to time experiences increases in the costs of materials
and labor, as well as in other manufacturing and operating expenses. The
Company's ability, consistent with that of its competitors, to pass on such
increased costs through increased prices has been affected differently at
various times.
Liquidity and Capital Resources
Cash and cash equivalents at April 29,1995 totaled approximately $4.1 million
and working capital at this date was $31.9 million as compared to $31.4 million
at the end of fiscal 1994. The current ratio was 1.5 to 1 at April 29, 1995
compared with 1.7 to 1 at the end of fiscal 1994.
Cash flow provided from operating activities for fiscal 1995 approximated $40.0
million before changes in operating assets and liabilities, of which $13.2
million was invested in non-cash working capital, primarily inventories. The
increase in inventories is primarily attributed to additional raw materials to
support additional capacity (as well as sales volume) and increased raw
material prices. Cash flows from operations were used to support approximately
$15.6 million in capital expenditures with the balance primarily used to reduce
the Company's long-term obligations. In connection with a planned expansion of
the Company's facilities, the Company anticipates investing approximately $20.0
million in a new plant and new equipment in Oregon, of which $800,000 has
been disbursed as of April 29, 1995. Funds for this expansion are to be
provided from the Company's existing credit facility.
Net capital expenditures primarily for manufacturing equipment, for the 52 week
period ended April 29, 1995 were approximately $15.6 million. The Senior Term
Note and Long-Term Revolver Agreement (the "Loan Agreement") limit capital
expenditures by the Company to $15.0 million during fiscal 1996 (excluding
capital expenditures related to the Company's investment in its Oregon
facility, which are limited to $20.0 million).
The Loan Agreement provides for 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.
Retained earnings free from restrictions at April 29, 1995 approximated $14.4
million. The Loan Agreement requires the Company to prepay the term notes to
the extent of 50% of excess cash flow as defined. For the year ended April 29,
1995, there was no excess cash flow as defined.
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 in the foreseeable future. The Company has a $50 million
five-year 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 (the "Borrowing Base"). At April 29, 1995,
the Company had borrowings under this facility of $12.2 million and was not
limited by its Borrowing Base.
13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 15
Consolidated Financial Statements:
Balance Sheets at April 29, 1995 and April 30, 1994 16
Statements of Earnings, 52 weeks ended April 29, 1995, 17
April 30, 1994 and May 1, 1993
Statements of Cash Flows, 52 weeks ended April 29, 1995, 18
April 30, 1994 and May 1, 1993
Statements of Stockholders' Equity, 52 weeks ended 19
April 29, 1995, April 30, 1994 and May 1, 1993
Notes to Financial Statements 20
</TABLE>
14
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Shorewood Packaging Corporation
We have audited the accompanying consolidated balance sheets of Shorewood
Packaging Corporation and subsidiaries as of April 29, 1995 and April 30, 1994
and the related consolidated statements of earnings, stockholders' equity and
cash flows for the 52 weeks ended April 29, 1995, April 30, 1994 and May 1,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Shorewood Packaging Corporation
and subsidiaries as of April 29, 1995 and April 30, 1994 and the results of
their operations and their cash flows for the 52 weeks ended April 29, 1995,
April 30, 1994 and May 1, 1993 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
New York, New York
June 27, 1995
15
<PAGE> 16
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
April 29, April 30,
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash, including cash equivalents of $2,158 in 1995 and
$2,048 in 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,100 $ 2,735
Accounts receivable, less allowance for doubtful
accounts of $452 in 1995 and $231 in 1994 . . . . . . . . . . . . 40,801 38,937
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,641 31,790
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,424 2,079
Prepaid expenses and other current assets . . . . . . . . . . . . . . 3,986 2,699
-------- ---------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . 96,952 78,240
Property, Plant and Equipment, at cost - net . . . . . . . . . . . . . . 129,153 135,376
Excess of Cost Over the Fair Value of Net Assets Acquired - net . . . . . 14,906 2,316
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,253 4,418
-------- ---------
$245,264 $220,350
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,122 $ 24,163
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,918 10,155
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . 570 2,095
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 21,394 10,419
-------- ---------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . 65,004 46,832
Long-term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,793 120,493
Deferred Credit and Other long-term Liabilities . . . . . . . . . . . . . 1,314 -
Convertible Subordinated Debentures . . . . . . . . . . . . . . . . . . . - 17,500
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 11,744 8,414
-------- ---------
177,855 193,239
-------- ---------
Commitments and Contingencies
Fair Value of Warrants, net of deferred fair value of warrants ($1,357) - -
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;
21,622,726 issued and 19,227,040 outstanding in 1995 and
20,163,923 issued and 17,845,923 outstanding in 1994 . . . . . . . . . 216 202
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 38,670 20,244
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,255 29,566
Cumulative foreign currency translation adjustments . . . . . . . . . . . (1,497) (2,013)
Less: Treasury stock (2,395,686 shares at cost in 1995
and 2,318,000 shares at cost in 1994) . . . . . . . . . . . . . . . . (22,235) (20,888)
-------- ---------
67,409 27,111
-------- ---------
$245,264 $220,350
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share data)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
April 29, April 30, May 1,
1995 1994 1993
--------- ---------- --------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . . $357,033 $216,469 $184,122
-------- -------- --------
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . . 276,062 167,215 136,040
Selling, general and administrative . . . . . . 35,801 24,230 20,161
Restructuring charge . . . . . . . . . . . . . . - 3,400 -
-------- -------- --------
311,863 194,845 156,201
-------- -------- --------
Earnings from Operations . . . . . . . . . . . . . 45,170 21,624 27,921
Investment and other income, net . . . . . . . . . 10 903 903
Interest Expense . . . . . . . . . . . . . . . . . (8,979) (6,727) (5,385)
-------- -------- --------
Earnings Before Provision for
Income Taxes, Extraordinary Item
and Cumulative Effect of Change
in Accounting Principle . . . . . . . . . . . . 36,201 15,800 23,439
Provision for Income Taxes . . . . . . . . . . . . 13,692 6,409 8,810
-------- -------- --------
Earnings before Extraordinary Item . . . . . . . .
and Cumulative Effect of Change
in Accounting Principle . . . . . . . . . . . . 22,509 9,391 14,629
Extraordinary Item . . . . . . . . . . . . . . . . - (3,098) -
Cumulative Effect on Prior Years
(to May 2, 1992) Related to
the Adoption of SFAS 109-
Accounting for Income Taxes . . . . . . . . . . - - 1,150
-------- -------- --------
Net Earnings . . . . . . . . . . . . . . . . . . . $ 22,509 $ 6,293 $ 15,779
======== ======== ========
Per Common and Common Equivalent Share Amounts:
Earnings Before Extraordinary Item and
Cumulative Effect . . . . . . . . . . . . . . . $ 1.17 $ .52 $ .78
Extraordinary Item . . . . . . . . . . . . . . . . - (.17) -
Cumulative Effect of Change in
Accounting Principle . . . . . . . . . . . . . . - - .06
-------- -------- --------
Net Earnings per Common and Common
Equivalent Share . . . . . . . . . . . . . . . . $ 1.17 $ .35 $ .84
======== ======== ========
Weighted Average Common and Common
Equivalent Shares Outstanding . . . . . . . . . . 19,314 18,089 18,866
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
April 29, April 30, May 1,
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Cash Flows Provided from Operating Activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,509 $ 6,293 $ 15,779
Adjustments to reconcile net earnings to net cash
flows provided from operating activities:
Cumulative effect of change in accounting . . . . . . . . . . . . . - - (1,150)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 13,335 10,245 8,086
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 4,030 (645) (202)
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . 106 729 -
Changes in operating assets and liabilities, net of
effects of businesses acquired:
Accounts receivable . . . . . . . . . . . . . . . . . . . . (1,450) (4,712) (1,372)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (14,508) 542 (183)
Prepaid expenses and other current assets . . . . . . . . . (1,147) (332) 642
Other assets . . . . . . . . . . . . . . . . . . . . . . . . (520) (3,385) -
Accounts payable and accrued expenses . . . . . . . . . . . 2,888 6,399 444
Income taxes payable . . . . . . . . . . . . . . . . . . . . 1,525 638 (306)
------- --------- --------
Net cash flows provided from operating activities . . . . . . . . . . . . 26,768 15,772 21,738
------- --------- --------
Cash Flows Used by Investing Activities:
Business acquisitions . . . . . . . . . . . . . . . . . . . . . . . (259) (103,710) -
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . (15,585) (9,080) (11,770)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 (102)
------- --------- --------
Net cash flows used by investing activities . . . . . . . . . . . . . . . (15,844) (112,782) (11,872)
------- --------- --------
Cash Flows (Used by) Provided From Financing Activities:
Net increase (decrease) in short-term debt / revolver borrowings . . 247 (6,361) 3,193
Additions to long-term debt . . . . . . . . . . . . . . . . . . . . - 144,000 -
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . (10,413) (47,000) (63)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . (1,219) (4,181) (7,240)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . 812 740 945
Proceeds from assignment of interest rate swap . . . . . . . . . . . 1,283 - -
------- --------- --------
Net cash flows (used by) provided from financing activities . . . . . . . (9,290) 87,198 (3,165)
------- --------- --------
Effect of exchange rate changes on cash and cash equivalents . . . . . . ( 269) 73 47
------- --------- --------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . 1,365 (9,739) 6,748
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . 2,735 12,474 5,726
------- --------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . $ 4,100 $ 2,735 $ 12,474
======= ========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid, net of amounts capitalized . . . . . . . . . . . . . $ 9,083 $ 6,886 $ 5,365
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . $11,312 $ 4,420 $ 9,320
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share data)
<TABLE>
<CAPTION>
Cumulative
Common Stock Foreign
$.01 Par Value Additional Currency
-----------------
Shares Paid-in Retained Translation
Issued Amount Capital Earnings Adjustments Treasury Stock Total
------ ------ ------- -------- ----------- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance May 3, 1992 . . . . . . . 19,965,394 $200 $18,561 $ 7,494 $ 485 $ (9,467) $17,273
Issuance of Common Stock . . . . 120,412 1 944 - - - 945
Purchase of Treasury Stock . . . - - - - - (7,240) (7,240)
Net Earnings, 52 Weeks ended
May 1, 1993 . . . . . . . . . . - - - 15,779 - - 15,779
Foreign Currency
Translation Adjustments . . . . - - - - (672) - (672)
----------- ---- ------- ------- ------- -------- -------
Balance May 1, 1993 . . . . . . . 20,085,806 201 19,505 23,273 (187) (16,707) 26,085
Issuance of Common Stock . . . . 78,117 1 739 - - - 740
Purchase of Treasury Stock . . . - - - - - (4,181) (4,181)
Net Earnings, 52 Weeks ended
April 30, 1994 . . . . . . . . - - - 6,293 - - 6,293
Foreign Currency
Translation Adjustments . . . . - - - - (1,826) - (1,826)
----------- ---- ------- ------- ------- -------- --------
Balance April 30, 1994 . . . . . 20,163,923 202 20,244 29,566 (2,013) (20,888) 27,111
Issuance of Common Stock . . . . 112,649 1 939 - - (128) 812
Conversion of Subordinated
Debentures . . . . . . . . . . 1,346,154 13 17,487 - - - 17,500
Purchase of Treasury Stock . . . - - - - - (1,219) (1,219)
Net Earnings, 52 Weeks ended
April 29, 1995 . . . . . . . . - - - 22,509 - - 22,509
Other . . . . . . . . . . . . . . - - - 180 - - 180
Foreign Currency
Translation Adjustments . . . . - - - - 516 - (516)
----------- ---- ------- ------- ------- -------- --------
Balance April 29, 1995 . . . . . 21,622,726 $216 $38,670 $52,255 $(1,497) $(22,235) $67,409
=========== ==== ======= ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
b. Recognition of revenue
The Company reports revenue, with the related costs, in the accounting
period in which goods are shipped to the customer.
c. Statement of cash flows
The Company considers all highly liquid temporary investments with
original maturities of three months or less to be cash equivalents.
d. Inventories
Inventories are valued at the lower of cost or market. Cost is
determined principally on the first-in, first-out (FIFO) method. Components of
inventory include materials, labor and overhead costs.
e. Depreciation and amortization
The Company computes depreciation and amortization of property, plant
and equipment substantially by the straight-line method over the shorter of the
estimated useful lives or lease periods of the respective assets. The excess of
purchase price over the fair value of net assets of businesses acquired is
amortized over periods ranging from 10 to 40 years on a straight-line basis.
The Company periodically evaluates the possible impairment of the
excess of cost over the fair value of net assets acquired by comparing the
undiscounted cash flows from the acquired operations to the net carrying value
of the related asset.
f. Income taxes
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. Deferred taxes are provided for the income tax effects of
temporary differences in reporting transactions for financial reporting and tax
purposes.
The Company adopted Statement of Financial Accounting Standards No.109
"Accounting for Income Taxes" ("SFAS 109") during the fiscal quarter ended
August 1, 1992. SFAS 109 changed the method of accounting for income taxes from
the deferred method to the liability method. Under the deferred method, deferred
income taxes were recognized using the tax rates in effect when the tax
liability was first recorded and not adjusted for subsequent changes in the tax
rates until paid or recovered. Under
20
<PAGE> 21
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
the liability method, deferred tax assets and liabilities are determined based
on the difference between the financial accounting and tax basis of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the currently enacted tax rate. The impact on the provision
for income taxes for fiscal 1993 was not significant. The cumulative effect of
this accounting change increased net earnings in 1993 by $1,150.
United States ("U.S.") income taxes with respect to the undistributed
earnings of the Company's foreign subsidiaries have not been provided since it
is the intention of management that the undistributed earnings will be
reinvested or transferred to the Company without giving rise to U.S. tax
liabilities. The total amount of unremitted earnings of non-U.S. subsidiaries
was approximately $24.9 million at April 29, 1995.
g. Foreign currency translation
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal period-end exchange rates and revenues and expenses are
translated on a monthly basis at weighted average exchange rates for the
respective month. Gains and losses arising from translation are recorded as
foreign currency translation adjustments, a component of stockholders' equity.
Foreign currency transaction gains and losses are included in determining net
earnings.
h. Share information
Weighted average common and common equivalent shares outstanding
include the dilutive effect of outstanding stock options and warrants for all
periods presented.
Fully diluted earnings per share has not been presented as it is not
materially different from primary earnings per share.
Weighted average common and common equivalent shares for the 1995
period include the effect of the shares issued upon conversion of the Company's
Convertible Subordinated Debentures since the date of conversion. Had these
shares been issued as of May 1, 1994, earnings per share for the 1995 period
would have been approximately $1.15.
i. Business segment
The Company and its subsidiaries operate in one business segment,
providing printed packaging products to the entertainment, cosmetic, tobacco and
other consumer product industries.
j. Fiscal periods
Reference to 1995, 1994, and 1993 in the accompanying notes to the
consolidated financial statements refer to the fiscal periods ending April 29,
1995, April 30, 1994 and May 1, 1993, respectively.
21
<PAGE> 22
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
k. Reclassifications
Certain reclassifications have been made to the prior years balances to
conform with the current year's presentation.
2. ACQUISITIONS
Effective January 1, 1994, the Company purchased certain of the United
States and Canadian assets of the Premium Packaging Group of Cascade Paperboard
International, Inc. (the "Premium Group") for a cash purchase price of
approximately $96.9 million plus the assumption of approximately $9.9 million of
liabilities (primarily accounts payable) and transaction expenses. In addition,
the Company is contingently liable for an additional $5.0 million of
consideration if certain earnings levels related to the combined operations
during the four-year period following the consummation of the transaction are
attained. The Company has issued a warrant to the seller exercisable, subject to
the above-described contingency, for 35,000 shares of Company Common Stock at an
exercise price of $13.50 per share. At the time of the closing of the
transaction, the Company prepaid a total of $31.9 million of Senior Notes. The
transaction and prepayment of the Company's Senior Notes were financed with
senior credit facilities including $120 million in five-year term loans and $24
million of borrowing under a $50 million five-year revolving credit facility. In
connection with the prepayment of the Senior Notes, the Company recorded, in the
third quarter of fiscal 1994, an extraordinary charge of $3.1 million (after
related income tax benefit of $1.9 million) consisting of prepayment penalties
and the write-off of deferred finance costs.
On January 17, 1994 the Company purchased the operating assets of
Heminway Packaging Corporation for a cash purchase price of $3.7 million plus
transaction expenses. This transaction was financed with funds from the
Company's revolving credit facility referred to above. The historical results of
operations of Heminway were not material to the operations of the Company.
These acquisitions were recorded using the purchase method of
accounting and accordingly, the results of their operations are included in the
consolidated results of operations of the Company since the dates of their
respective acquisitions. The excess of cost over the estimated fair value of the
net assets acquired approximated $2.2 million at April 30, 1994. During fiscal
1995, the Company completed its determination of the allocation of the purchase
price with respect to the acquisitions. The result was to increase the excess of
cost over the fair value of net assets acquired by $12.5 million, increase
accrued expenses by $3.4 million and reduce property, plant and equipment by
$9.1 million. Included in the final allocation of the purchase price is an
estimate of the cost associated with closing one of the Premium Group's
facilities. Accumulated amortization of the excess of cost over the fair value
of net assets acquired approximated $543 in 1995 and $414 in 1994.
The following unaudited pro forma information for 1994 includes the
operations of the Company inclusive of the operations of the Premium Group as if
the acquisition had occurred at the beginning of the period presented, including
the impact of the Company's new financing agreement described above, the
amortization expense associated with intangible assets acquired, adjustments
related to the fair market value of the assets and liabilities of the Premium
Group as finally determined (including, among other things, adjustment of
depreciation expense) and related income tax effects.
22
<PAGE> 23
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
<TABLE>
<CAPTION>
Fiscal 1994
-----------
<S> <C>
Net sales $ 300,791
===========
Earnings before extraordinary item and
and cumulative effect of change
in accounting principle $ 12,043
===========
Net earnings $ 8,945
===========
Per Common and Common Equivalent Share Amounts:
Earnings before extraordinary item and
and cumulative effect of change
in accounting principle $ .67
===========
Net earnings $ .50
===========
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Raw materials and supplies $20,767 $11,714
Work-in-process 12,043 7,091
Finished goods 13,831 12,985
-------- -------
$46,641 $31,790
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT, AT COST-NET
<TABLE>
<S> <C> <C>
1995 1994
-------- --------
Land $ 3,121 $ 2,330
Building and improvements 31,385 30,218
Machinery and equipment 148,176 144,042
Leasehold improvements 2,735 2,371
Construction in progress 4,868 5,081
-------- --------
190,285 184,042
Less accumulated depreciation and
amortization 61,132 48,666
-------- --------
$129,153 $135,376
======== ========
</TABLE>
23
<PAGE> 24
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
Depreciation and amortization of property, plant and equipment amounted to
$12,792 in 1995, $9,834 in 1994 and $7,888 in 1993. Capitalized interest costs
related to the construction of fixed assets were $377 in 1995 and $131 in 1994
and 1993.
5. ACCRUED EXPENSES
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Accrued salaries, employee benefits
and payroll taxes $ 6,026 $ 5,523
Other accrued expenses 8,892 4,632
------- -------
$14,918 $10,155
======= =======
</TABLE>
6. LONG-TERM DEBT/CONVERTIBLE SUBORDINATED DEBENTURES
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Senior tern notes (a) $108,940 $18,912
Long-term revolver (b) 12,247 12,000
-------- -------
121,187 30,912
Less current maturities 21,394 10,419
-------- -------
$ 99,793 $20,493
======== =======
Convertible subordinated debentures (c) - $17,500
======== =======
</TABLE>
- ---------------------
(a) In connection with the acquisition of the Premium Group and the prepayment
of certain obligations, the Company entered into Term Note Agreements
(totaling $96 million in the U.S. and the Canadian equivalent of $24
million in Canada) with a syndicate of banks. The notes are payable in
quarterly installments beginning in August 1994, through May 1999. The
notes bear interest, at the discretion of the Company, at either the bank's
prime rate (9.00% at April 29, 1995) or at the LIBOR rate (maximum
six-month term, 6.06% to 6.38% at April 29, 1995) plus 75 basis points
(reduced from 125 basis points during the year as determined based upon the
Company having attained certain financial ratios as defined). The
effective interest rate on the Senior Term Notes ranged from 5.25% to 7.06%
during 1995. The Company has pledged as collateral 100% and 66%,
respectively, of the outstanding shares of its domestic and foreign
subsidiaries.
(b) Borrowings under this $50 million five-year revolving credit facility are
limited to the sum of 80% of accounts receivable and 50% of inventories
(the "Borrowing Base"). The revolving credit facility has interest terms
and collateral similar to the Senior Term Notes and matures in May 1999.
The interest rate on these borrowings ranged from 6.94% to 9.0% at April
29, 1995.
(c) In September 1994, 100% of the Company's Convertible Subordinated Notes
were converted at $13.00 per share into approximately 1.35 million shares
of common stock.
24
<PAGE> 25
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The underlying loan agreement for the borrowings referred to in (a)
and (b) above includes covenants related to levels of debt to cash flow,
current assets to current liabilities, fixed charge coverage, net worth and
investments (including investments in the Company's own common stock), and
restricts the amount of retained earnings available for payment of dividends.
Retained earnings free from restrictions at April 29, 1995 approximated $14.4
million. The agreement requires the Company to prepay the term notes to the
extent of 50% of excess cash flow as defined. For the year ended April 29,
1995, there was no excess cash flow as defined.
Based on the borrowing rates currently available to the Company for bank loans
with similar terms, the fair value of the senior long-term debt approximates
the carrying value.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending:
-------------------
<S> <C>
1996 $ 21,394
1997 23,879
1998 27,606
1999 28,849
2000 19,459
---------
$ 121,187
=========
</TABLE>
Interest Rate Swap/Cap Agreements
At April 29, 1995, the Company had an outstanding
intermediate-term interest rate swap agreement relating to approximately $33
million of its Senior Term Notes. Under the agreement, the Company pays a
fixed rate of 6.45% and receives a floating rate based on LIBOR, as determined
in 1-month intervals (ranging from 4.5% to 6.3% for 1995). The transaction
effectively changes a portion of the Company's interest rate exposure from a
floating-rate to a fixed-rate basis. The fair value of the interest rate swap
agreement at April 29, 1995 was immaterial to the Company. The agreement
terminates in February, 1997.
At April 29, 1995, the Company had an outstanding interest rate cap
agreement relating to approximately $17 million of its Senior Term Notes.
Under the agreement, the maximum LIBOR rate is 8.5%. The company paid $71 for
this agreement, which is being amortized over the life of the agreement. The
fair value of the interest rate cap agreement at April 29, 1995 was immaterial
to the Company. The agreement terminates in February, 1997.
In October 1994, the Company assigned to a bank an interest rate swap
agreement relating to $42 million of its Senior Term Notes for cash proceeds
approximating $1.3 million. The proceeds have been recorded as a deferred
credit on the accompanying balance sheet which is being amortized as a
reduction of interest expense over the remaining life of the related swap
agreement. At April 29, 1995, $913 of deferred gain remains which will be
amortized: $510 in 1996; $289 in 1997; and $114 in 1998.
25
<PAGE> 26
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
7. INCOME TAXES
Earnings before provision for income taxes and extraordinary item is
comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
United States $ 21,919 $ 6,586 $ 20,282
Foreign 14,282 9,214 3,157
-------- -------- --------
$ 36,201 $ 15,800 $ 23,439
======== ======== ========
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Current
Federal $ 4,982 $ 2,858 $ 6,611
State and local 852 773 1,100
Foreign 3,828 3,423 1,301
-------- -------- --------
9,662 7,054 9,012
-------- -------- --------
Deferred
Federal 2,339 (394) (47)
State and local 174 (236) (147)
Foreign 1,517 (15) (8)
-------- -------- --------
4,030 (645) (202)
-------- -------- --------
$ 13,692 $ 6,409 $ 8,810
======== ======== ========
</TABLE>
The Company's effective income tax rate differs from the statutory
U.S. Federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Statutory US Federal tax rate 35.0% 34.0% 34.0%
State income taxes, net of Federal benefit 1.8 2.3 3.0
Foreign income tax rate differentials 1.0 1.7 .9
Other, net - - -
---- ---- ----
37.8% 40.6% 37.6%
==== ==== ====
</TABLE>
26
<PAGE> 27
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The tax effects of significant items comprising the Company's net
deferred tax liability as of April 29, 1995 and April 30, 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax asset (Liability):
Property, plant and equipment $(12,360) $(7,934)
Other assets (359) (249)
Accounts receivable 509 398
Inventories 666 487
Accrued expenses 138 673
State net operating loss and
investment tax credit
carryforwards 1,285 564
Employee benefits 297 144
Other 195 (128)
-------- -------
(9,629) (6,045)
Valuation Allowance (691) (290)
-------- -------
$(10,320) $(6,335)
======== =======
</TABLE>
The valuation allowance has been provided against state net operating
loss and investment tax credit carryforwards to reduce them to the amount that
will more likely than not be realized.
8. COMMITMENTS AND CONTINGENCIES
a. Lease Agreements
The Company is committed for annual rentals under noncancellable
operating leases for production and office facilities expiring on various dates
through 2010. Several leases include one year renewal options. The minimum
future rental commitments under noncancellable leases, exclusive of taxes and
utilities, are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending:
-------------------
<S> <C>
1996 $ 3,861
1997 3,790
1998 2,989
1999 2,686
2000 1,865
Thereafter 11,434
--------
Total minimum rental payments $ 26,625
========
</TABLE>
Rent expense under operating leases approximated $3,451 in 1995,
$2,403 in 1994 and $2,125 in 1993.
27
<PAGE> 28
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
b. 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 from time to
time in the open market. Pursuant to this authorization through April 29,
1995, the Company, utilizing internally generated funds, purchased
approximately 1.2 million shares of its Common Stock for approximately $12.6
million.
c. New Facility
In connection with a planned expansion of the Company's facilities,
the Company anticipates investing approximately $20 million in a new plant and
equipment, of which approximately $.8 million has been disbursed as of April
29, 1995. Funds for this expansion are to be provided from the Company's
existing credit facilities.
d. Legal Matters
In January 1995, the Company commenced a civil action in the Supreme
Court of the State of New York against the former owners of Heminway Packaging
Corporation and certain of its affiliates seeking compensatory and punitive
damages and other relief. The suit contends that the defendants misrepresented
the financial condition and operational capabilities of the acquired business.
The Company is seeking damages in excess of $5.0 million. In June 1995, the
defendants filed an answer and a counterclaim to the Company's complaint,
seeking compensatory damages exceeding $10.0 million and punitive damages of
$7.7 million. Management intends to pursue its claims against the defendants
and to vigorously defend the counter claim, and believes that the ultimate
outcome of these cases will not have a material adverse effect on the
operations or financial condition of the Company.
e. Other Matters
On a continuing basis, the Company monitors its compliance with
applicable environmental laws and regulations. As part of this process the
Company cooperates with appropriate governmental authorities to perform any
necessary testing and compliance procedures. The purchase agreements relating
to the acquisition of the Acquired Companies indemnify the Company from all
costs and expenses relating to environmental matters which existed at the
acquired facilities on or prior to the respective closing dates. The Company
is not currently aware of any environmental compliance matters that it
believes will have a material effect on the consolidated financial statements.
9. STOCKHOLDERS' EQUITY
a. Stock Incentive Plans
In August 1986, the Company established a nonqualified stock option
plan (the "1986 Plan") and authorized the issuance of options to purchase an
aggregate 847,500 shares of common stock to key employees, officers and
directors at the market price at the date of the grant. In October 1990, the
28
<PAGE> 29
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
Company made available for future grant options to acquire an additional
600,000 shares of common stock under a nonqualified 1990 Stock Option Plan (the
"1990 Plan"). The 1990 Plan is in all material respects identical to the
original nonqualified stock plan. In July 1993, the Company established the
1993 Incentive Program (the "1993 Program"). The 1993 Program permits the
granting of any or all of the following types of awards: (1) stock options,
including incentive stock options ("ISO's"), (2) stock appreciation rights
("SAR's"), in tandem with stock options or freestanding, (3) restricted stock,
(4) directors' options to be issued pursuant to a prescribed formula and (5)
restored options. Under the 1993 Program, an additional 1 million shares were
made available for grant. Options become exercisable over four years from the
date of grant at a rate of 25% each year, and expire five years from the date
of grant. Future grants of options will be exercisable over five years from the
date of grant at the rate of 20% of the grant each year and will expire 10
years from the date of grant.
A summary of changes in stock options and awards follows:
<TABLE>
<CAPTION>
Options Outstanding Options
Available ----------------------------------
For Future Price
Grant Number Per Share
---------- --------- -------------------
<S> <C> <C> <C>
Balance, May 3, 1992 539,513 673,465 $ 4.81 - $ 10.69
Options granted (12,000) 12,000 $ 9.50
Options exercised (117,412) $ 4.81 - $ 10.34
Options canceled 11,446 (11,446) $ 5.57 - $ 8.63
Options lapsed (184,973)
---------- -------- ------- -------
Balance May 1, 1993 353,986 556,607 $ 4.98 - $ 10.69
1993 Program 1,000,000
Options granted (375,500) 375,500 $ 8.63 - $ 13.75
Options exercised (78,117) $ 4.98 - $ 10.69
Options canceled $4,446 (4,446) $ 7.25 -
--------- -------- ------- -------
Balance April 30, 1994 982,932 849,544 $ 4.98 - $ 13.75
Restricted Stock Award (114,497)
Options granted (271,320) 271,320 $ 14.75 - $ 20.25
Options exercised (94,651) $ 4.98 - $ 9.81
Options canceled 43,586 (43,586) $ 8.50 - $ 19.00
--------- -------- ------- -------
Balance April 29, 1995 640,701 982,627 $ 5.57 - $ 20.25
========= ======== ======= =======
</TABLE>
Options previously authorized under the 1986 Plan which were not granted as
of the end of fiscal 1993 were considered to have lapsed and no longer
available for future grant. At April 29, 1995, options to purchase 361,554
shares were exercisable at prices ranging from $5.57 to $14.25 per share.
During fiscal 1995 the Company issued a net 114,497 shares of restricted stock
to certain key employees. A portion or all of the shares may vest at the end
of fiscal 1997 based upon the market performance of the
29
<PAGE> 30
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
Company's common stock. Any shares that do not vest at such time will
otherwise vest at the end of fiscal 2002 if the employee continues to be
employed by the Company.
b. Common Stock Purchase Warrants
During fiscal 1993 and the fourth quarter of fiscal 1994, the Company
issued Warrants to purchase 300,000 shares and 100,000 shares of its Common
Stock at exercise prices of $6.88 and $13.50 per share, respectively, to a
customer who concurrently entered into long-term supply agreements with the
Company. The customer has the choice of either exercising the Warrants or
receiving a cash volume discount based upon certain minimum levels of purchases
from the Company during the terms of the supply agreements. The Warrants are
exercisable immediately whereas the cash volume rebate, if any, is payable
after the expiration of the supply agreements. The Warrants expire August 22,
1997 and August 31, 1998, respectively. At such time as the customer may
choose to exercise either of the Warrants, the related accrued cash rebate will
be transferred to additional paid in capital. The fair values of the Warrants
at their dates of issuance were determined to be $855 and $502, respectively,
and are included in the balance sheet net of a deferred contra account in like
amount. As of April 29, 1995, the Company continues to believe that the
customer will exercise the first Warrant and continues to accrue volume
discounts based upon sales with respect to the second Warrant.
c. Reserved Shares
At April 29, 1995, 2,073,149 common shares were reserved for issuance
under the stock incentive plans and outstanding warrants .
d. Preferred Stock Purchase Rights
On May 4, 1995, the Board of Directors declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of common
stock. Each Right entitles the holder to purchase from the Company one
one-hundredth of a share of Series B Junior Participating Preferred Stock at a
price of $17.00 per one one-hundredth of a preferred share. The Rights are
exercisable only if an acquiring person acquires, or announces the intention to
acquire, 25% or more beneficial ownership of the outstanding common shares.
The effect of the Rights plan is to provide to the Company's stockholders the
right, upon the occurrence of an acquisition, tender offer or business
combination transaction, to exchange the preferred shares for common stock at a
fraction of the then-current market price of the common stock. The Rights
expire on June 14, 2005 unless extended. The Rights are subject to other
restrictions and terms as described in the Rights Agreement.
e. Related Party Transactions
CIGNA Corporation and its affiliates ("CIGNA"), was the holder of
$15.0 million of the Company's debentures, which upon conversion represented
1.15 million shares of common stock. Accordingly, CIGNA has been considered a
beneficial owner of more than 5% of the outstanding stock
30
<PAGE> 31
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
of the Company for all of the periods presented. Amounts paid to CIGNA for
interest and insurance costs for 1995 were $685, as compared to $2,918 in 1994,
and $3,711 in 1993. In addition, in connection with the financing of the
acquisition of the Premium Group in January, 1994, the Company prepaid $16.9
million of Senior Notes due to CIGNA, and incurred a pre-tax prepayment penalty
to CIGNA of $2.3 million. This penalty is included in the 1994 financial
statements as a part of the total extraordinary item of approximately $3.1
million (after income tax benefit of $1.9 million).
In connection with the acquisition of the Premium Group and related
financing, the Company paid a fee of $1.5 million to a firm whose president and
principal shareholder is a director of the Company. In addition, the firm
holds an option to purchase 14,821 common shares at an exercise price of $5.02
per share.
10. RESTRUCTURING CHARGE
As a result of the discontinued use of the long-box as a packaging
medium for compact discs and the related diminished level of sales, the Company
decided at the end of the third quarter of fiscal 1994 to close its
Farmingdale, New York facility effective as of April 30, 1994. In connection
with the closing of this facility and the restructuring of the Company's
operations relating thereto, the Company recorded a restructuring charge before
provision for income taxes amounting to $3.4 million during 1994. Included in
this charge are amounts provided for the termination of leases ($530), disposal
of equipment ($1,020), severance payments ($750) and other related
restructuring items ($1,100). With the exception of the lease commitments, all
of the respective cash outlays related to the closing of the facility were made
by the end of 1995.
11. EMPLOYEE BENEFIT PLANS
(a) Defined Contribution Plans
The Company has profit sharing plans as well as employee savings
plans. Based upon the provisions of each employee savings plan, the Company
matches a portion of the employees' voluntary contributions. The amounts
contributed to the profit sharing plan in the United States are at the
discretion of the Board of Directors, whereas the amounts contributed to the
profit sharing plans in Canada are at the percentages provided for by the
respective plans. Total provisions with respect to defined contribution plans
approximated $1,613, $977 and $824 in 1995, 1994 and 1993, respectively.
(b) Defined Benefit Plans
In connection with the acquisitions of the Premium Group and Heminway,
the Company assumed the obligations related to two defined benefit pension
plans covering union employees. In addition, the Company established a frozen
plan to accept assets to be transferred from a Premium Group defined benefit
pension plan, which assets relate to non-union employees who have been
transferred to and are now employees of the Company.
31
<PAGE> 32
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The following table sets forth the funded status of the Plans as of
April 29, 1995 and April 30, 1994:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Vested benefit obligation $2,782 $2,616
====== ======
Accummulated benefit obligation $3,029 $2,923
====== ======
Projected benefit obligation $3,029 $2,923
Market value of assets 3,059 3,275
------ ------
Plan assets in excess of projected
benefit obligation 30 352
Unrecognized transition obligation - -
Unrecognized prior service cost 22 -
Unrecognized loss/(gain) (203) (452)
------ -------
Prepaid/(accrued) pension cost $ (151) $ (100)
====== =======
Discount rate and expected rate
of return on plan assets 8% 8%
====== =======
</TABLE>
12. MAJOR CUSTOMER AND CREDIT CONCENTRATIONS
Approximately 17% and 13% of net sales during 1995 were derived from
sales to two customers and their affiliates. Approximately 18% of net sales
during 1993 were derived from sales to one customer and its affiliates. No
other customer accounted for more than 10% of net sales in any of the three
fiscal years ended April 29, 1995.
The Company's customers are primarily large entertainment, tobacco
and other consumer products companies who produce products in the United States
and Canada. At April 29, 1995, approximately 43% and 14% of accounts
receivable related to customers in the tobacco and music industries,
respectively. Approximately 42% of accounts receivable are due from Canadian
companies.
32
<PAGE> 33
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
13. GEOGRAPHIC OPERATIONS
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net Sales
Domestic . . . . . . . . . . . . . . . . . . $219,218 $142,028 $137,405
Foreign . . . . . . . . . . . . . . . . . . 137,815 74,441 46,717
-------- -------- --------
$357,033 $216,469 $184,122
======== ======== ========
Net Earnings
Domestic (a) . . . . . . . . . . . . . . . . $ 13,572 $ 487 $ 13,916
Foreign . . . . . . . . . . . . . . . . . . 8,937 5,806 1,863
-------- -------- --------
$ 22,509 $ 6,293 $ 15,779
======== ======== ========
Identifiable Assets At Year-End
Domestic . . . . . . . . . . . . . . . . . . $165,388 $152,821 $ 87,371
Foreign . . . . . . . . . . . . . . . . . . 79,876 67,529 25,389
-------- -------- --------
$245,264 $220,350 $112,760
======== ======== ========
</TABLE>
The Company's foreign operations are conducted in Canada.
(a) After an extraordinary charge of $3,098 in 1994 and a cumulative effect
credit of $1,150 in 1993.
33
<PAGE> 34
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
34
<PAGE> 35
PART III
Pursuant to instruction G(3) to Form 10-K, the information required in
Items 10-13 is incorporated by reference from the Company's definitive proxy
statement for the October 19, 1995 annual meeting of stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See "Index to Financial Statements and
Supplementary Data" in Item 8.
(a)(2) Financial Statements Schedules. The financial statement
schedules have not been included because they are not
applicable or the information is included in financial
statements or notes thereto.
(a)(3) Exhibits
NUMBER DESCRIPTION
- ------ -----------
3.1 -- Certificate of Incorporation of the Company, as amended,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
3.2 -- Amended and Restated By-laws of the Company, incorporated by
reference to the corresponding Exhibit item to Amendment No. 1 to
Registration Statement on Form S-1, as filed with the Commission
on October 20, 1986, Commission File No. 33-8490.
9.1 -- Intentionally Omitted.
10.1 -- through 10.4 Intentionally Omitted.
10.5 -- Agreement of Lease dated May 20, 1977 between Frank X. Mascioli
and Shorewood Packaging Corporation, a New York corporation,
relating to premises located at 55 Engineers Lane, Farmingdale,
New York, incorporated by reference to the corresponding Exhibit
item to Registration Statement on Form S-1, as amended, as filed
with the Commission on September 4, 1986, Commission File No.
33-8490.
10.6 -- and 10.7 Intentionally Omitted.
10.8 -- Lease dated June 13, 1979 between Ravin Investments Limited and
Shorewood Packaging Corp. of Canada Limited, as amended as of
March 14, 1983, between Pension Fund Realty Limited and Shorewood
Packaging Corp. of Canada Limited, relating to premises located
at 2220 Midland Avenue, Scarborough, Ontario, Canada,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
10.9 -- Lease Agreement dated November 1, 1984 between The Beneficiary Of
Land Trust Established With American National Bank and Trust
Company of Chicago and Shorewood Packaging Company of Illinois,
Inc., relating to the Countryside Executive Center in Palatine,
Illinois, incorporated by reference to the corresponding Exhibit
item to Registration Statement on Form S-1, as amended, as filed
with the Commission on September 4, 1986, Commission File No.
33-8490.
10.10 -- through 10.39 Intentionally Omitted.
10.40 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Paul B. Shore,
incorporated by reference to the
35
<PAGE> 36
corresponding Exhibit item to Registration Statement on Form S-1,
as amended, as filed with the Commission on September 4, 1986,
Commission File No. 33-8490.
10.41 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Marc P. Shore,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
10.42 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Floyd Glinert,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on September 4, 1986, Commission File No. 33-8490.
10.43 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Murray B.
Frischer, incorporated by reference to the corresponding Exhibit
item to Registration Statement on Form S-1, as amended, as filed
with the Commission on September 4, 1986, Commission File
No. 33-8490.
10.44 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Charles
Kreussling, incorporated by reference to the corresponding
Exhibit item to Registration Statement on Form S-1, as amended,
as filed with the Commission on September 4, 1986, Commission
File No. 33-8490.
10.45 -- Non-Competition Agreement dated as of June 20, 1985 between
Shorewood Packaging Corporation of New York and Kenneth
Rosenblum, incorporated by reference to the corresponding Exhibit
item to Registration Statement on Form S-1, as amended, as filed
with the Commission on September 4, 1986, Commission File No.
33-8490.
10.46 -- through 10.50 Intentionally Omitted.
10.51 -- Lease dated as of April 30, 1987 between Shorewood Packaging
Corporation and Blamore Real Estate Company relating to the
premises located at 10 East 53rd Street, New York, New York,
incorporated by reference to the corresponding Exhibit item to
Registration Statement on Form S-1, as amended, as filed with the
Commission on June 5, 1987, Commission File No. 33-14395.
10.52 -- through 10.56 Intentionally Omitted.
10.57 -- Asset Purchase Agreement, dated as of August 1, 1988, by and
among Goody Products, Inc., Southeastern Box Co., Inc., Shorewood
Packaging Corporation and Shorewood Box Co., Inc., incorporated
by reference to the corresponding Exhibit item to Quarterly
Report on Form 10-Q for the quarter ended July 30, 1988 filed
with the Commission on August 30, 1988, Commission file No.
0-15077.
10.58 -- Agreement, dated August 1, 1988, by and between Goody Products,
Inc. and Shorewood Packaging Corporation, incorporated by
reference to the corresponding Exhibit item to Quarterly Report
on Form 10-Q for the quarter ended July 30, 1988 filed with the
Commission on August 30, 1988. Commission file No. 0-15077.
10.59 -- through 10.77 Intentionally Omitted.
10.78 -- Asset Purchase Agreement dated December 23, 1993 by and among
Shorewood Paperboard Corporation Limited, Shorewood Acquisition
Corporation of Delaware, Paperboard Industries Corporation and
Paperboard Industries Inc. incorporated by reference to the
corresponding exhibit item to Form 8-K Current Report of
Shorewood Packaging Corporation filed with the Commission on
January 28, 1994, Commission File No. 0-15077.
10.79 -- Sheeter Purchase Agreement dated December 23, 1993 by and among
Shorewood Acquisition Corporation of Delaware and Paperboard
Industries Inc. incorporated by reference to the corresponding
exhibit item to Form 8-K Current Report of Shorewood Packaging
Corporation filed with the Commission on January 28, 1994,
Commission File No. 0-15077.
10.80 -- Restated and Amended Credit Agreement dated February 25, 1994
between Shorewood Packaging Corporation, Shorewood Corporation of
Canada Limited and NationsBank of North Carolina, N.A. and The
Bank of Nova Scotia incorporated by reference to the
36
<PAGE> 37
corresponding exhibit item to Shorewood Packaging Corporation's
quarterly report on Form 10-Q for the fiscal quarter ended January
29, 1994, as filed with the Commission on March 15, 1994,
Commission File No. 0-15077.
10.81 -- Trademark License Agreement dated January 14, 1994 between
Paperboard Industries Inc. and Shorewood Acquisition Corporation
of Delaware incorporated by reference to the corresponding
exhibit item to the Company's annual report on Form 10-K for the
fiscal year ended April 30, 1994, as filed with the Commission on
July 29, 1994, Commission File No. O-15077.
10.82 -- Non-Competition Agreement dated January 14, 1994 between Cascades
Inc., Cascades Paperboard International Inc., Paperboard
Industries Corporation, Paperboard Industries Inc., Shorewood
Packaging Corporation, Shorewood Paperboard Corporation Limited
and Shorewood Acquisition Corporation of Delaware incorporated by
reference to the corresponding exhibit item to the Company's
annual report on Form 10-K for the fiscal year ended April 30,
1994, as filed with the Commission on July 29, 1994, Commission
File No. O-15077.
10.83 -- First Amendment to Restated and Amended Credit Agreement dated
July 18, 1994 between Shorewood Packaging Corporation, Shorewood
Corporation of Canada Limited and NationsBank of North Carolina,
N.A. and The Bank of Nova Scotia incorporated by reference to the
corresponding exhibit item to the Company's annual report on Form
10-K for the fiscal year ended April 30, 1994, as filed with the
Commission on July 29, 1994, Commission File No. O-15077.
10.84 -- Amendment, as of January 14, 1994, to Note Purchase Agreement
dated as of June 27, 1991 between Shorewood Packaging Corporation
and each of Connecticut General Life Insurance Company, Inc.,
Mezzanine Partners II, L.P., Life Insurance Company of North
America and The Prudential Insurance Company of America
incorporated by reference to the corresponding exhibit item to
the Company's annual report on Form 10-K for the fiscal year
ended April 30, 1994, as filed with the Commission on July 29,
1994, Commission File No. O-15077.
10.85 -- Asset Purchase Agreement dated January 17, 1994 between
Shorewood/Heminway Acquisition Corporation and Heminway Packaging
Corporation (omitting schedules and exhibits) incorporated by
reference to the corresponding exhibit item to the Company's
annual report on Form 10-K for the fiscal year ended April 30,
1994, as filed with the Commission on July 29, 1994, Commission
File No. O-15077.
10.86 -- Lease dated as of January 17, 1994 between Shorewood/Heminway
Acquisition Corporation and Heminway Packaging Corporation in
respect of premises located at 155 South Leonard Street,
Waterbury, Connecticut incorporated by reference to the
corresponding exhibit item to the Company's annual report on Form
10-K for the fiscal year ended April 30, 1994, as filed with the
Commission on July 29, 1994, Commission File No. O-15077.
10.87 -- Letter Agreement dated April 21, 1994 by and among SPC
Corporation Limited, (formerly known as Shorewood Paperboard
Corporation Limited), Shorewood Acquisition Corporation of
Delaware, Paperboard Industries Corporation and Paperboard
Industries Inc. in respect of working capital adjustment
incorporated by reference to the corresponding exhibit item to
the Company's annual report on Form 10-K for the fiscal year
ended April 30, 1994, as filed with the Commission on July 29,
1994, Commission File No. O-15077.
10.88 -- Employment Agreement dated as of May 16, 1994 between Shorewood
Packaging Corporation and Howard M. Liebman incorporated by
reference to the corresponding exhibit item to the Company's
annual report on Form 10-K for the fiscal year ended April 30,
1994, as filed with the Commission on July 29, 1994, Commission
File No. O-15077.
10.89 -- Consultation and Termination Agreement dated May 6, 1994 between
Shorewood Packaging Corporation and Murray B. Frischer
incorporated by reference to the corresponding exhibit
37
<PAGE> 38
item to the Company's annual report on Form 10-K for the fiscal
year ended April 30, 1994, as filed with the Commission on July 29,
1994, Commission File No. O-15077.
10.90 -- Shorewood Packaging Corporation Retirement and Savings Plan, and
Adoption Agreement, dated March 19, 1994 between Shorewood
Packaging Corporation and its subsidiaries, as employer, and
NationsBank of Georgia, N.A., as trustee incorporated by
reference to the corresponding exhibit item to the Company's
annual report on Form 10-K for the fiscal year ended April 30,
1994, as filed with the Commission on July 29, 1994, Commission
File No. O-15077.
10.91 (a) Stock Warrant Agreement to purchase 100,000 shares of Common
Stock, dated as of January 13, 1994.
10.91 (b) Stock Warrant Agreement dated as of July 23, 1992 to purchase
300,000 shares of Common Stock.
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company during
the last quarter of the period covered by this report.
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SHOREWOOD PACKAGING CORPORATION
By: /s/ Paul B. Shore
----------------------------------------------------
Paul B. Shore
Chairman of the Board and Chief Executive Officer
Date: July 27, 1995
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Paul B. Shore Chairman of the Board July 27, 1995
- --------------------------- and Chief Executive
Paul B. Shore Officer and Director
/s/ Marc P. Shore Vice Chairman of the Board July 26, 1995
- --------------------------- and President and Director
Marc P. Shore
/s/ Floyd S. Glinert Executive Vice President July 25, 1995
- --------------------------- - Marketing and Director
Floyd S. Glinert
/s/ Howard M. Liebman Executive Vice President July 25, 1995
- --------------------------- and Chief Financial Officer
Howard M. Liebman (Principal Financial Officer)
/s/ William H. Hogan Corporate Controller July 26, 1995
- --------------------------- (Principal Accounting Officer)
William H. Hogan
/s/ William Weidner Director July 26, 1995
- ---------------------------
William Weidner
/s/ Timothy O'Donnell Director July 26, 1995
- ---------------------------
R. Timothy O'Donnell
/s/ Melvin Braun Director July 26, 1995
- ---------------------------
Melvin Braun
/s/ Seymour Leslie Director July 26, 1995
- ---------------------------
Seymour Leslie
/s/ Kevin J. Bannon Director July 26, 1995
- ---------------------------
Kevin J. Bannon
</TABLE>
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
Item Description Page
- ---- ----------- ----
<S> <C> <C>
21.1 Subsidiaries of Registrant 41
23.1 Consent of Deloitte & Touche LLP 42
27.1 Financial Data Schedule
</TABLE>
40
<PAGE> 1
EXHIBIT 21.1
SHOREWOOD PACKAGING CORPORATION SUBSIDIARIES
<TABLE>
<CAPTION>
Name State of Incorporation/Country
---- ------------------------------
<S> <C>
Shorewood Packaging of California, Inc. California
Shorewood Packaging Company of Illinois, Inc. Illinois
SPC Company of Virginia, Inc. Virginia
Shorewood Packaging Corporation of Alabama Alabama
Shorewood Packaging Corporation of Canada, Ltd. Canada
Shorewood Transport, Inc. New York
Shorewood Packaging of Delaware, Inc. Delaware
Shor-Wrap, Inc. Delaware
Shorewood Technologies, Inc. Delaware
Shorewood Packaging Corporation of Georgia Georgia
Toronto Carton Corporation Limited Canada
Shor-Wrap Packages of Canada, Ltd. Canada
Shorewood Acquisition Corporation of Delaware Delaware
Shorewood Packaging Corporation of Virginia Virginia
SPC Company of New York, Inc. New York
Shorewood Packaging Corporation of Connecticut Connecticut
Shorewood Corporation of Canada Limited Canada
SPC Corporation Limited Canada
Shorewood Packaging Corporation of Oregon Oregon
</TABLE>
41
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.'s
33-16409, 33-38259 and 33-78614 of Shorewood Packaging Corporation each on Form
S-8 of our report dated June 27, 1995, appearing in this Annual Report on Form
10-K of Shorewood Packaging Corporation for the 52 weeks ended April 29, 1995.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 25, 1995
42
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-29-1995
<PERIOD-START> APR-30-1994
<PERIOD-END> APR-29-1995
<CASH> 4,100
<SECURITIES> 0
<RECEIVABLES> 40,801
<ALLOWANCES> 452
<INVENTORY> 46,641
<CURRENT-ASSETS> 96,952
<PP&E> 190,285
<DEPRECIATION> 61,132
<TOTAL-ASSETS> 245,264
<CURRENT-LIABILITIES> 65,004
<BONDS> 99,793
<COMMON> 216
0
0
<OTHER-SE> 67,193
<TOTAL-LIABILITY-AND-EQUITY> 245,264
<SALES> 357,033
<TOTAL-REVENUES> 357,033
<CGS> 276,062
<TOTAL-COSTS> 276,062
<OTHER-EXPENSES> 35,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,979
<INCOME-PRETAX> 36,201
<INCOME-TAX> 13,692
<INCOME-CONTINUING> 22,509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,509
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
</TABLE>
