<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 27, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
------------------- -----------------------
Commission file number: 0-15077
SHOREWOOD PACKAGING CORPORATION
(Exact name of registrant as specified in its Charter)
DELAWARE 11-2742734
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(Address of principal executive offices)
(212) 371-1500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
MARCH 1, 1996 18,189,629
Date Number of Shares
</TABLE>
<PAGE> 2
SHOREWOOD PACKAGING CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C>
Part I: Financial Statements
Consolidated Condensed Balance Sheets
January 27, 1996 (Unaudited) and
April 29, 1995 (Audited) 3
Consolidated Condensed Statements of Earnings
13 weeks ended January 27, 1996 (Unaudited) and
January 28, 1995 (Unaudited) 4
39 weeks ended January 27, 1996 (Unaudited) and
January 28, 1995 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows
39 weeks ended January 27, 1996 (Unaudited) and
January 28, 1995 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements 7 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 13
Part II: Other Information 14
</TABLE>
2
<PAGE> 3
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 27, APRIL 29,
1996 1995
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 2,508 $ 4,100
Accounts Receivable, net 33,162 40,801
Inventories 44,226 46,641
Deferred Tax Assets 1,424 1,424
Prepaid expenses and other current assets 5,845 3,986
--------- ---------
Total Current Assets 87,165 96,952
Property, Plant and Equipment, net 154,799 129,153
Excess of Cost Over the Fair Value of Net Assets Acquired, net 19,441 14,906
Other Assets 4,739 4,253
--------- ---------
$ 266,144 $ 245,264
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 19,888 $ 28,122
Accrued Expenses 15,637 14,918
Income Taxes Payable -- 570
Current maturities of long-term debt 24,000 21,394
--------- ---------
Total Current Liabilities 59,525 65,004
Long-Term Debt 122,789 99,793
Deferred Credit and Other Long-Term Liabilities 1,731 1,314
Deferred Income Taxes 14,658 11,744
--------- ---------
Total Liabilities 198,703 177,855
--------- ---------
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
21,681,557 issued and 18,375,871 outstanding in January and
21,622,726 issued and 19,227,040 outstanding in April 217 216
Additional Paid-In Capital 39,263 38,670
Retained Earnings 66,823 52,255
Cumulative Foreign Currency Translation Adjustment (3,037) (1,497)
Treasury Stock (3,305,686 and 2,395,686 shares at
cost in January and April) (35,825) (22,235)
--------- ---------
Total Stockholders' Equity 67,441 67,409
--------- ---------
$ 266,144 $ 245,264
========= =========
</TABLE>
3
<PAGE> 4
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
JANUARY 27, JANUARY 28,
1996 1995
<S> <C> <C>
Net Sales $ 93,107 $ 85,654
-------- --------
Costs and Expenses:
Cost of Sales 75,334 66,122
Selling, General and Administrative 10,038 9,168
-------- --------
Earnings from Operations 7,735 10,364
Other Income, net 303 455
Interest Expense (1,995) (2,005)
-------- --------
Earnings Before Provision for Income Taxes and Extraordinary Item 6,043 8,814
Provision for Income Taxes 2,253 3,292
-------- --------
Earnings Before Extraordinary Item 3,790 5,522
Extraordinary Item, net of Income Tax Benefit of $837 (1,365) --
-------- --------
Net Earnings $ 2,425 $ 5,522
======== ========
Earnings Per Common and Common
Equivalent Share Before Extraordinary Item $ .20 $ .28
Extraordinary Item, net of Income Tax Benefit (.07) --
-------- --------
Net Earnings Per Common and Common
Equivalent Share $ .13 $ .28
======== ========
Weighted Average Common and Common Equivalent
Shares Outstanding 19,342 20,011
======== ========
</TABLE>
4
<PAGE> 5
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS 39 WEEKS
ENDED ENDED
JANUARY 27, JANUARY 28,
1996 1995
<S> <C> <C>
Net Sales $ 288,927 $ 267,477
--------- ---------
Costs and Expenses:
Cost of Sales 227,897 205,982
Selling, General and Administrative 29,870 26,722
--------- ---------
Earnings from Operations 31,160 34,773
Other Income, net 717 549
Interest Expense (6,179) (6,771)
--------- ---------
Earnings Before Provision for Income Taxes and Extraordinary Item 25,698 28,551
Provision for Income Taxes 9,765 10,792
--------- ---------
Earnings Before Extraordinary Item 15,933 17,759
Extraordinary Item, net of Income Tax Benefit of $837 (1,365) --
--------- ---------
Net Earnings $ 14,568 $ 17,759
========= =========
Earnings Per Common and Common
Equivalent Share Before Extraordinary Item $ .81 $ .93
Extraordinary Item, net of Income Tax Benefit (.07) --
--------- ---------
Net Earnings Per Common and Common
Equivalent Share $ .74 $ .93
========= =========
Weighted Average Common and Common Equivalent
Shares Outstanding 19,694 19,120
========= =========
</TABLE>
5
<PAGE> 6
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS 39 WEEKS
ENDED ENDED
JANUARY 27, JANUARY 28,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 14,568 $ 17,759
Adjustments to reconcile net earnings to net cash flows
provided from operations:
Depreciation and amortization 10,358 10,441
Deferred income taxes 2,991 2,219
Other non-cash items (217)
Changes in operating assets and liabilities:
Accounts receivable 7,281 (1,555)
Inventories 2,073 (9,549)
Prepaid expenses and other current assets (1,898) (565)
Other assets (1,170) (171)
Accounts payable, accrued expenses and other
long term liabilities (12,296) (1,292)
Income taxes payable (552) (984)
-------- --------
Net cash flows provided from operating activities 21,355 16,086
-------- --------
Cash Flows from Investing Activities:
Capital Expenditures (36,175) (9,059)
-------- --------
Net cash flows used in investing activities (36,175) (9,059)
-------- --------
Cash Flows from Financing Activities
Net proceeds from (repayments of) long-term borrowings 26,140 (9,855)
Purchase of treasury stock (13,590) (128)
Issuance of common stock 594 791
Proceeds from assignment of interest rate swap -- 1,283
Other -- 156
-------- --------
Net cash flows provided from (used in) financing activities 13,144 (7,753)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 84 84
-------- --------
Decrease in cash and cash equivalents (1,592) (642)
Cash and cash equivalents at beginning of period 4,100 2,735
-------- --------
Cash and cash equivalents at end of period $ 2,508 $ 2,093
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ 6,453 $ 6,942
======== ========
Income taxes paid $ 6,746 $ 9,860
======== ========
</TABLE>
6
<PAGE> 7
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position, the
results of operations, and the changes in cash flows at January 27, 1996 and for
all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes included in the
Company's April 29, 1995 Annual Report to Stockholders on Form 10-K as filed
with the Securities and Exchange Commission ("1995 Form 10-K").
The results of operations for the 13 and 39 week periods ended January 27, 1996
are not necessarily indicative of the results for the full year.
2. INCOME TAXES
The effective income tax rate is based on estimates of annual amounts of taxable
income and other factors. These estimates are updated periodically and any
increase or decrease in the provision for income taxes is reflected in the
period in which the estimate is changed.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 27, 1996 APRIL 29, 1995
<S> <C> <C>
Raw materials and supplies $20,199 $20,767
Work in process 8,330 12,043
Finished Goods 15,697 13,831
------- -------
$44,226 $46,641
======= =======
</TABLE>
4. OTHER ASSETS
In May 1995, the Company loaned $2.0 million to its Vice Chairman of the Board
and President (the "Executive"). The loan is due on May 4, 2000, and bears
interest payable quarterly equal to the Applicable Federal Rate as defined
(5.37% at January 27, 1996), adjusted monthly. Mandatory prepayments of this
loan are required if the Executive's compensation exceeds certain thresholds.
5. COMMITMENTS AND CONTINGENCIES
a. Treasury Stock
In January 1993, the Company's Board of Directors authorized the purchase of up
to 2.0 million shares of the Company's common stock , and in December 1995,
authorized the purchase of up to an
7
<PAGE> 8
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
additional 2.0 million shares of the Company's common stock, from time to time
in the open market, subject to the terms of the Company's new credit agreement.
1,931,000 shares are authorized for purchase under existing Board of Directors
resolutions as of January 27, 1996. The Company purchased 910,000 shares of its
common stock during the third quarter of 1996. Since January 27, 1996 and
through March 10, 1996 the Company purchased an additional 215,000 shares of its
common stock.
b. New Facility
In connection with a planned expansion of the Company's facilities, the Company
anticipates investing approximately $22.0 million in a new plant and equipment,
of which approximately $18.8 million has been disbursed as of January 27, 1996.
Funds for this expansion are to be provided from the Company's credit facility.
c. Legal Matters
In January 1995, the Company commenced a civil action in the Supreme Court of
the State of New York against Heminway Packaging Corporation ("Heminway") and
certain of its affiliates seeking compensatory and punitive damages and other
relief in connection with the January 1994 acquisition by the Company of
Heminway's rigid set-up box and thermoforming business (the "Heminway
Business"). 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. Heminway's
counter-claim also seeks a declaratory judgment and damages with respect to
certain escrowed rents. The remaining defendants moved to dismiss the complaint.
On June 29, 1995. the Company moved to dismiss the counter-claims. The pending
motions have been submitted to the court and are awaiting decision.
Management believes that the ultimate outcome of this claim will not have a
material adverse effect on the operations or financial condition of the Company.
d. Environmental Matters
On a continuing basis, the Company monitors its compliance with applicable
environmental laws and regulations. As part of this process the Company
cooperates with appropriate governmental authorities to perform any necessary
testing and compliance procedures. The purchase agreements relating to the
acquisition of certain acquired companies indemnify the Company from all costs
and expenses relating to environmental matters which existed at the related
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.
8
<PAGE> 9
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
e. 1995 Performance Bonus Plan
In July 1995, the Board of Directors approved the 1995 Performance Bonus Plan
(the "Plan"), applicable to its Vice Chairman of the Board and President only.
Under the Plan, for each of the five fiscal years of the Company commencing with
fiscal year 1996, the Executive will be entitled to a graduated bonus (the
"Performance Bonus") based upon a comparison of the Company's earnings from
operations plus depreciation and amortization (the "Performance Measure") in
that award year with the immediately preceding fiscal year. Bonuses are payable
only if pre-established thresholds are met. The size of the Performance Bonus is
tied to the level of the Company's performance, as measured by the Performance
Measure, with the larger bonuses available only in the case of truly superior
results. The maximum Performance Bonus payable in respect of any award year
under the Plan is $2.0 million.
A shareholder of the Company has brought a suit in the United States District
court, Southern District of New York, seeking to enjoin payment of Performance
Bonuses under the 1995 Performance Bonus Plan described above. The Company
believes that the suit is without merit and expects to pay Performance Bonuses
under the Plan when and if earned. A motion for summary judgment has been filed
on behalf of the Company, which is currently pending.
f. Common Stock Purchase Warrants
During the second quarter, the Company issued warrants to purchase 400,000
shares of its common stock to a customer who concurrently entered into a
long-term supply agreement with the Company. The warrant is exerciseable
immediately at $17.13 per share and expires September 1, 2000. At such time as
the customer may exercise the warrant, any cash volume discount previously paid
to the customer based upon minimum levels of purchases will be refunded to the
Company and included in paid-in-capital.
g. Acquisition Contingent Consideration
The Company recorded approximately $5.0 million of contingent consideration in
the second quarter, as it is probable that such amount will be paid to the
former owners of the Premium Group, based upon the anticipated attainment of
previously established thresholds.
6. NEW CREDIT FACILITY
In December 1995, the Company entered into a new senior credit facility. The new
facility increased the amount available under the Company's previous credit
facility by $41.0 million to $185.0 million. The new facility consists of $120.0
million of senior term notes and $65.0 million of a long-term revolver which
bear interest, at the discretion of the Company, at either the Bank's prime rate
or at LIBOR plus 100 basis points. The senior term notes will be repaid in
various quarterly installments through May 7, 2000 at which time the revolver
will mature. The increased credit facility was made available to facilitate the
Company's programs to purchase shares of its common stock as more fully
described in Note 5.
In connection with establishment of the new credit facility, the Company
recorded, in the third quarter, an extraordinary charge representing the
write-off of previously deferred finance costs incurred in connection with the
prior facility of approximately $1.4 million (net of tax benefit of $.8
million).
9
<PAGE> 10
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
In January 1994, the Company acquired certain operating assets of the Premium
Packaging Group of Cascades Paperboard International, Inc. (the "Premium Group")
and the Heminway Business. The Premium Group's and Heminway's operations are
reflected in the results of operations for the entire periods presented.
RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter and nine months ended January 27, 1996 were $93.1
million and $288.9 million compared to net sales of $85.7 million and $267.5
million for the corresponding prior period, an increase of 8.7% and 8.0%,
respectively. The Company believes that future sales growth will be generated
through continued penetration of its existing markets, and the expanding market
of CD ROM products. The Company's new facility in Oregon effectively began
production during the third quarter, and contributed sales of approximately $1.2
million for the quarter. The Company anticipates that sales for its Oregon
facility will continue to grow now that the facility is fully operational. The
Company's Pittsford facility ceased production in September 1995. The closure of
Pittsford did not have a significant effect on sales as customer orders were
satisfied by other Company facilities.
Cost of Sales
Cost of sales as a percentage of sales for the quarter and nine months ended
January 27, 1996 were 80.9% and 78.9% as compared to 77.2% and 77.0% for the
corresponding prior periods, respectively. The Company's Oregon facility is not
yet operating at anticipated capacity, and as such, had a negative impact on the
Company's overall margin. Further, the Company experienced lower margins in the
third quarter due to weather conditions in the Northeast throughout the third
quarter as well as first run costs associated with obtaining new product lines
from new and existing customers. The increase in cost of sales as a percentage
of sales for the nine month period ended January 27, 1996 is attributable to the
previously mentioned Oregon operations and new customers, and manufacturing
inefficiencies experienced at one of the Company's major facilities in the
second quarter. The Company has taken action to correct the problems at that
facility and expects to see improvement throughout the balance of the year. In
addition to the above, weather conditions have adversely impacted the Company's
operations. The month of October was adversely impacted by Hurricane Opal which
caused downtime at two of the Company's facilities due to power interruptions
and other consequences of local weather conditions. The third quarter was
adversely impacted due to the significant snowfalls and icing conditions which
occurred on the East Coast of the United States, causing shut downs at four
plants and reduced activity for the Company's trucking operations.
The Company's margins have been affected by increases in certain raw material
costs this year as compared to the prior year, some of which could not be
reflected in the selling price to the customer. Recently the Company has
experienced a decline in certain raw material costs which should favorably
impact the remainder of fiscal 1996. The Company remains sensitive to price
competitiveness in the
10
<PAGE> 11
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
markets that it serves, and in the areas that are targeted for growth. It
believes that the installation of state-of-the-art printing and manufacturing
equipment (and related labor and production efficiencies) will enable it to
compete effectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
quarter and nine months ended January 27, 1996 were 10.8% and 10.3% as compared
to 10.7% and 10.0%, respectively, for the corresponding prior periods. The
increase in selling, general and administrative expenses as a percentage of
sales is largely due to additional costs associated with the integration of the
Premium Group's operations, including additional professional fees, and
increased occupancy and operating costs associated with the Company's corporate
offices. In addition, selling, general and administrative expenses as a
percentage of sales are higher at the Company's Oregon facility as a result of
its early operations, but are expected to decline as a percentage of sales as
the facility becomes fully operational.
Interest Expense
Interest expense for the quarter and nine months ended January 27, 1996 was $2.0
million and $6.2 million as compared to $2.0 million and $6.8 million,
respectively, for the corresponding prior periods. The reduction in interest
expense for the nine months resulted primarily from the conversion into common
stock of $17.5 million of convertible subordinated debentures in September 1994,
partially offset by an increase in interest rates. Interest costs capitalized
for the quarter and nine months ended January 27, 1996 relating to the
construction of plant and equipment (including the Company's Oregon facility)
amounted to $373 thousand and $927 thousand, respectively. Interest costs
capitalized during the prior periods were not significant. The Company's Oregon
facility did not become fully operational until late in the third quarter which
resulted in higher than anticipated capitalized interest costs for the period.
The Company anticipates that the amount of interest to be capitalized in the
quarter to end April 1996 will be significantly less than the amounts previously
capitalized.
In October 1994, the Company assigned to a bank an interest rate swap agreement
relating to $42.0 million of its debt for cash proceeds of approximately $1.3
million. The proceeds have been recorded as a deferred credit which is being
amortized as a reduction of interest expense (amounting to $121 thousand and
$401 thousand for the quarter and nine months ended January 27, 1996,
respectively, and $161 thousand and $217 thousand for the corresponding prior
periods). At January 27, 1996, $512 thousand of deferred gain remains which will
be amortized: $109 thousand in the remaining portion of fiscal 1996, $289
thousand in fiscal 1997; and $114 thousand in fiscal 1998.
The Company has used, and may continue to use, interest rate swaps and caps to
manage its exposure to fluctuating interest rates under its debt agreements.
11
<PAGE> 12
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Income Taxes
The effective income tax rate for the quarter and nine months ended January 27,
1996 was 37.3% and 38.0% compared to 37.3 and 37.8% for the corresponding prior
periods, respectively. These rates reflect a blend of domestic and foreign taxes
and are adjusted periodically based upon the estimated annual effective tax
rate, which for the entire fiscal year ended April 29, 1995 was 37.8%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at January 27, 1996 were $2.5 million as compared to
$4.1 million at April 29, 1995, and working capital was $27.6 million as
compared to $31.9 million as of the same dates respectively. The current ratio
at January 27, 1996 and April 29, 1995 was approximately 1.5 to one. The
decrease in cash is primarily due to the timing of payments under the Company's
revolving credit facility.
Cash flow from operating activities for the nine months ended January 27, 1996
was $27.9 million before changes in operating assets and liabilities. Cash flows
from operations as well as borrowings under the Company's credit facilities were
used to support $36.2 million in capital expenditures and the purchase of
treasury stock. In connection with a planned expansion of the Company's
facilities, the Company anticipates investing approximately $22.0 million in a
new plant and new equipment in Oregon, of which $18.8 million has been disbursed
as of January 27, 1996. Funds for the expansion are to be provided from the
Company's credit facility.
In January 1993, the Company's Board of Directors authorized the purchase of up
to 2.0 million shares of the Company's common stock and in December 1995, the
Board of Directors authorized the purchase of up to an additional 2.0 million
shares from time to time in the open market, subject to the terms of the
Company's new credit agreement. 1,931,000 shares are authorized for purchase
under existing Board of Directors resolutions as of January 27, 1996. The
Company purchased 910,000 shares of its common stock during the third quarter.
Since January 27, 1996, the Company purchased an additional 215,000 shares of
its common stock.
To effectuate its Board authorization, the Company entered into a new credit
facility with its lending banks increasing its line of credit by approximately
$41.0 million to $185 million. The new facility consists of $120.0 million of
senior term notes and $65.0 million of a long-term revolver which bear interest,
at the discretion of the Company, at either the Bank's prime rate or at LIBOR
plus 100 basis points. The senior term notes will be repaid in various quarterly
installments through May 7, 2000 at which time the revolver will mature. The
increased credit facility was made available to facilitate the Company's
programs to purchase shares of its common stock.
The Board and management of the Company believe the long-term outlook for the
Company to be promising and that the Company's common stock represents an
attractive investment opportunity. The treasury stock purchases will be made
from time to time as market conditions permit.
12
<PAGE> 13
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
In connection with establishment of the new credit facility, the Company
recorded, in the third quarter, an extraordinary charge representing the
write-off of previously deferred finance costs incurred in connection with the
prior facility of approximately $1.4 million (net of tax benefit of $.8
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.
The Loan Agreement requires the Company to prepay the term notes to the extent
of 50% of excess cash flow as defined. To date, no prepayments have been
required.
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. The Company has, as described above, a $65.0 million
long-term revolving credit facility for its working capital requirements.
Borrowings under this facility are limited to the sum of 80% of accounts
receivable and 50% of inventories. At January 27, 1996, the Company had
borrowings under this facility of $26.8 million.
The Company recorded approximately $5.0 million of contingent consideration in
the second quarter, as it is probable that such amount will be paid to the
former owners of the Premium Group, based upon the anticipated attainment of
previously established thresholds.
13
<PAGE> 14
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
Part II
Item 1 LEGAL PROCEEDINGS
Information concerning legal and environmental matters is incorporated
by reference from Part I, Footnotes 5(c), (d) and (e) of Notes to
Consolidated Condensed Financial Statements
Item 2 CHANGES IN SECURITIES
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.98 Stock Option Agreement dated as of February 1, 1996 between
Shorewood Packaging Corporation and Jefferson Capital Group, LTD.
(b) Reports on Form 8-K
None.
14
<PAGE> 15
SIGNATURES
Pursuant to the regulations of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOREWOOD PACKAGING CORPORATION
(Registrant)
by: s/ Howard M. Liebman
---------------------------
Howard M. Liebman
Executive Vice President and
Chief Financial Officer
Dated: March 14, 1996
15
<PAGE> 16
EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION
- ------- -----------
EX-10.98 Stock Option Agreement dates as of February 1, 1996 between
Shorewood Packaging Corporation and Jefferson Capital Group, LTD.
EX-27 Financial Data Schedule
<PAGE> 1
STOCK OPTION AGREEMENT dated as of February 1, 1996 between
Shorewood Packaging Corporation, a Delaware corporation, with its principal
office at 277 Park Avenue, New York, New York 10172-0124 (the "Company") and
Jefferson Capital Group, Ltd., a Virginia corporation, with its principal office
at One James Center, Suite 1414, Richmond, Virginia 23219 (the "Optionee").
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company and its stockholders to grant to
the Optionee an option to purchase 25,000 shares of the common stock, par value
$.01 per share (the "Common Stock"), of the Company in recognition of the
Optionee's services to the Company and as an inducement to perform additional
services on behalf of the Company upon the terms set forth below.
NOW, THEREFORE, the parties agree as follows:
1. GRANT OF OPTION
1.1 The Company grants to the Optionee, on the
terms and conditions hereinafter set forth, an option (the "Option") to purchase
25,000 shares of Common Stock of the Company (the "Option Shares").
1.2 Optionee understands that the Option is not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
as amended to date and as may be amended from time to time.
1.3 Except as expressly provided herein, the Option
Shares are not, and are not required to be, registered under the Securities Act
of 1933, as amended, (the "Securities Act").
2. PRICE AND PAYMENT FOR SHARES The purchase price (the
"Purchase Price") for the Option Shares shall be $13 1/2 per share, subject to
adjustment as provided in Section 13 below.
3. PERIOD OF OPTION The period of the Option will be five
years from the date the Option is granted, which date is first written above
(the "Period"). The Option will be exercisable, in whole or in part, at any time
after the approval of the Option by
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the Company's stockholders entitled to vote thereon and before the
expiration of the Period.
4. EXERCISE OF OPTION
4.1 The Option may be exercised only by delivering or
transmitting by registered or certified mail to the Secretary or the Treasurer
of the Company, at the Company's then principal office, a written notice signed
by an authorized officer of the Optionee on the Optionee's behalf specifying the
number of Option Shares that the Optionee has irrevocably elected to purchase
under the Option. Optionee shall pay the Purchase Price in cash or by delivering
shares of Common Stock already owned by it for a minimum of six (6) months and
having a fair market value on the date of exercise equal to the Purchase Price,
or any combination of cash or shares. The Purchase Price shall be paid not later
than thirty (30) days after the date of a statement from the Company following
exercise setting forth the Purchase Price. If the Optionee fails to pay the
Purchase Price within said thirty (30) day period, the Company shall have the
right to take whatever action it deems appropriate, including, without
limitation, voiding the option exercise. The Company shall not issue or transfer
Option Shares upon exercise of the Option until the Purchase Price is fully
paid.
4.2 Upon the exercise of the Option, in whole or in
part, the Company shall promptly issue stock certificates for the shares of
Common Stock purchased and the Optionee shall be deemed to be the holder of the
shares of Common Stock purchased as of the date of issuance of certificates for
such shares to it. The Company may delay issuing certificates representing
Option Shares for a reasonable period of time pending listing of same on the
NASDAQ Stock Market. The Optionee will not be nor deemed to be a holder of any
shares subject to the Option unless and until certificates for such shares are
issued to it under the terms of this Agreement.
4.3 If and when the Option is exercised, the
certificates to be issued evidencing shares of the Company's Common Stock shall
bear a legend substantially as follows:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), and may not be transferred in the absence of an
effective registration statement under the Act covering the
shares or of an opinion of counsel to the Corporation that
such transfer will not require registration of such shares
under the Act."
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5. TRANSFERABILITY OF OPTION
The Option herein granted shall be assignable and transferable
by the Optionee to R. Timothy O'Donnell ("O'Donnell"), provided that the
Optionee shall notify the Company within five business days of any such transfer
or assignment. The Option shall not be assignable or transferable by the
Optionee to any other individual or entity.
6. TERMINATION; ACCELERATION
All rights of the Optionee in the Option to the extent not
exercised shall terminate at the expiration of the Period or, if sooner, 30 days
after the occurrence of either of the following events: (a) the stockholders of
the Company shall have approved an agreement to merge or consolidate with or
into another corporation (and the Company is not the survivor of such merger or
consolidation) or an agreement to sell or otherwise dispose of all or
substantially all of the Company's assets (including a plan of liquidation); or
(b) O'Donnell ceases to be the beneficial owner of at least 20% of the capital
stock of the Optionee, on a fully diluted basis, for any reason, including,
without limitation, O'Donnell's death or the sale or gift of his capital stock.
7. PIGGY-BACK REGISTRATION
Subject to Sections 8 and 12 hereof, if at any time after the
date of this Agreement and prior to the date which is two (2) years after the
last Option exercise hereunder (or, if the Option is never exercised, prior to
the expiration of the Period), the Company proposes to file a registration
statement to register any Common Stock (other than Common Stock issued with
respect to any acquisition or any employee stock option, stock purchase or
similar plan) under the Securities Act for sale to the public in an underwritten
offering, it will at each such time give written notice to the Optionee of its
intention to do so ("Notice of Intent") and, upon the written request of the
Optionee made within 30 calendar days after the receipt of any such notice
(which request must specify that the Optionee intends to dispose of all of the
Option Shares held by the Optionee on the date the Notice of Intent is received
by the Optionee), the Company will use its best efforts to effect the
registration under the Securities Act of the Option Shares which the Company has
been so requested to register; provided, however, that if the managing
underwriter shall certify in writing that inclusion of all or any of the Option
Shares would, in such managing underwriter's opinion, materially interfere with
the proposed distribution and marketing of the Common Stock in respect of which
registration was originally to be effected (such writing to state the basis of
such opinion and the maximum number of shares which may be distributed without
such interference), then the Company may, upon written notice to the Optionee,
have the
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<PAGE> 4
right to exclude from such registration such number of Option Shares which it
would otherwise be required to register hereunder as is necessary to reduce the
total amount of Common Stock to be so registered to the maximum amount which can
be so marketed.
8. REGISTRATION EXPENSES
The costs and expenses (other than underwriting discounts and
commissions) of all registrations and qualifications under the Securities Act,
and of all other actions the Company is required to take or effect pursuant to
this Agreement shall be paid by the Company (including, without limitation, all
registration and filing fees, printing expenses, fees and expenses of complying
with Blue Sky laws, and fees and disbursements of counsel for the Company and of
independent public accountants; provided, however, that fees and expenses of
complying with Blue Sky laws in those states where Option Shares and no other
securities of the Company covered by the registration statement will be offered
for sale shall be paid by the Optionee).
9. REGISTRATION PROCEDURES
If and whenever the Company is required to effect the
registration of any Option Shares under the Securities Act as provided in this
Agreement, the Company will promptly:
9.1 prepare and file with the Securities and Exchange
Commission ("Commission") a registration statement with respect to such Option
Shares and use its best efforts to cause such registration statement to become
effective;
9.2 prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all such Option Shares and other securities
covered by such registration statement until such time as all of such Option
Shares and other securities have been disposed of in accordance with such
registration statement, but in no event for a period of more than nine months
after such registration statement becomes effective;
9.3 furnish to the Optionee such number of copies of
such registration statement and of each such amendment and supplement thereto,
such number of copies of the prospectus included in such registration statement,
in conformity with the requirements of the Securities Act;
9.4 subject to Section 8 hereof, use its best efforts
to register or qualify the Option Shares covered by such registration statement
under such other securities or Blue Sky laws
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of such jurisdictions within the United States of America (including territories
and commonwealths thereof) as the Optionee shall reasonably request, except that
the Company shall not for any such purpose be required to qualify generally to
do business as a foreign corporation in any jurisdiction wherein it is not so
qualified, to subject itself to taxation in any such jurisdiction.
9.5 The Company may require the Optionee to furnish
the Company such information regarding it and the distribution of such Option
Shares as the Company may from time to time request in writing and as shall be
required by law to effect such registration.
10. TERMINATION OF OBLIGATIONS
The obligations of the Company imposed by Section 7 through 9
above shall cease and terminate, as to any particular Option Shares, when such
shares shall have been effectively registered under the Securities Act and
disposed of in accordance with the registration statement covering such
securities.
11. AVAILABILITY OF INFORMATION
The Company will cooperate with the Optionee in supplying such
information and documentation as may be necessary for it to complete and file
any information reporting forms presently or hereafter required by the
Commission as a condition to the availability of an exemption from the
Securities Act for the sale of any Option Shares.
12. REGISTRATION RIGHTS CONDITION
Notwithstanding any other provision contained herein, the
Company shall not be obligated to comply with any demands for registration of
any Option Shares under the Securities Act if, at the time of such demand by the
Optionee:
(i) the Optionee is free to sell such Option
Sharesin accordance with Rule 144 promulgated under the Securities Act or any
similar rule or regulation promulgated under the Securities Act; or
(ii) the Company has in effect a registration
statement covering the disposition of such Option Shares.
13. DILUTION OR OTHER ADJUSTMENTS
In the event of any change in the Common Stock
subject to the Option granted by this Agreement through merger, consolidation,
reorganization, recapitalization, stock split, stock dividend, or the issuance
to stockholders of rights to subscribe to
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<PAGE> 6
stock of the same class, or in the event of any change in the capital structure
or other increase or decrease in the number of issued shares of Common Stock
effected without the receipt of consideration by the Company, the Board of
Directors of the Company shall make such adjustments with respect to (i) the
number of Option Shares, (ii) the Purchase Price, or (iii) any provision of this
Agreement, as it may deem equitable in order to prevent dilution or enlargement
of the Option and the rights granted hereunder.
14. MISCELLANEOUS
14.1 The interpretation of this Agreement by the
Board of Directors of the Company shall be binding on the Optionee.
14.2 The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of New
York without giving effect to the provisions, principles or policies thereof
relating to choice or conflict of law.
14.3 Any and all notices referred to herein shall be
sufficient if furnished in writing and delivered in person or mailed by
certified mail (return receipt requested ) to the respective parties at their
addresses set forth above or to such other address as either party may from time
to time designate in writing.
14.4 As used herein, the masculine gender shall
include the feminine gender. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.5 No amendment, change or modification of this
document shall be valid unless in writing and signed by all of the parties
hereto.
14.6 No reliance upon or waiver of one or more
provisions of this Agreement shall constitute a waiver of any other provisions
hereof.
14.7 All of the terms and provisions contained herein
shall inure to the benefit of and shall be binding upon the parties hereto and
their respective heirs, personal representatives, successors and assigns.
14.8 The captions appearing at the commencement of
the sections hereof are descriptive only and are for convenience of reference.
Should there be any conflict between any such caption and the section at the
head of which it appears, the substantive
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<PAGE> 7
provisions of such section and not such caption shall control and govern in the
construction of this document.
14.9 This Agreement constitutes the entire
understanding and agreement of the parties with respect to the subject matter of
this Agreement, and any and all prior agreements, understandings or
representations are hereby terminated and canceled in their entirety.
14.10 The Option shall be effective as of February 1,
1996, subject to approval by the Company's stockholders entitled to vote
thereon. If the Company's stockholders decline to approve the Option at any duly
convened meeting of stockholders at which the Option is submitted for
stockholder approval, then, notwithstanding anything to the contrary herein,
this Agreement shall terminate immediately and cease to be of any force and
effect.
SHOREWOOD PACKAGING CORPORATION
By: /s/ Howard M. Liebman
---------------------------
Authorized Signatory
JEFFERSON CAPITAL GROUP, LTD.
By: /s/ R. Timothy O'Donnell
---------------------------
Authorized Signatory
7
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