<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 February 1, 1997
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)
<TABLE>
<CAPTION>
DELAWARE 11-2742734
<S> <C>
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
</TABLE>
277 PARK AVENUE
NEW YORK, NEW YORK 10172-0124
(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, 1997 18,200,385
Date Number of Shares
</TABLE>
PAGE 1 OF 16
<PAGE> 2
SHOREWOOD PACKAGING CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C>
Part I: Financial Statements
Consolidated Condensed Balance Sheets
February 1, 1997 (Unaudited) and
April 27, 1996 (Audited) 3
Consolidated Condensed Statements of Earnings
13 weeks ended February 1, 1997 (Unaudited) and
13 weeks ended January 27, 1996 (Unaudited) 4
Consolidated Condensed Statements of Earnings
40 weeks ended February 1, 1997 (Unaudited) and
39 weeks ended January 27, 1996 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows
40 weeks ended February 1, 1997 (Unaudited) and
39 weeks ended January 27, 1996 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements 7 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
Part II: Other Information 15 - 16
</TABLE>
Certain statements under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are typically
identified by their inclusion of phrases such as "the Company anticipates," "the
Company believes" and other phrases of similar meaning. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance or achievements of the Company to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others: general economic and business conditions; competition; political
changes in international markets; raw material and other operating costs; costs
of capital equipment; changes in foreign currency exchange rates; changes in
business strategy or expansion plans; the results of continuing environmental
compliance testing and monitoring; quality of management; availability, terms,
and development of capital; fluctuating interest rates; and other factors
referenced in this Form 10-Q.
Page 2 of 16
<PAGE> 3
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 1, APRIL 27,
1997 1996
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 4,090 $ 4,479
Accounts Receivable, net 40,305 44,306
Inventories 41,215 41,397
Deferred Tax Assets 854 854
Prepaid Expenses and Other Current Assets 4,736 4,882
--------- ---------
Total Current Assets 91,200 95,918
Property, Plant and Equipment, net 160,298 153,079
Excess of Cost Over the Fair Value of Net Assets Acquired, net 19,673 20,208
Other Assets 8,677 6,709
--------- ---------
$ 279,848 $ 275,914
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 27,279 $ 24,071
Accrued Expenses 11,017 17,058
Current Maturities of Long-Term Debt 26,500 24,000
--------- ---------
Total Current Liabilities 64,796 65,129
Long-Term Debt 104,593 122,588
Deferred Credit and Other Long-Term Liabilities 2,100 1,641
Deferred Income Taxes 18,558 15,120
--------- ---------
Total Liabilities 190,047 204,478
--------- ---------
Commitments and Contingencies
Fair Value of Warrants, net of deferred fair value of warrants ($855) -- --
Stockholders' Equity:
Series A Preferred Stock, $10 par value; 50,000 shares
authorized, none issued -- --
Preferred Stock, $10 par value; 5,000,000 shares authorized
none issued -- --
Common Stock, $.01 par value; 40,000,000 shares authorized
22,149,571 issued and 18,348,385 outstanding in February and
21,862,937 issued and 18,292,251 outstanding in April 221 219
Additional Paid-In Capital 44,128 40,589
Retained Earnings 90,357 72,259
Cumulative Foreign Currency Translation Adjustment (1,436) (2,119)
Treasury Stock (3,801,186 and 3,570,686 shares at
cost in February and April) (43,469) (39,512)
--------- ---------
Total Stockholders' Equity 89,801 71,436
--------- ---------
$ 279,848 $ 275,914
========= =========
</TABLE>
Page 3 of 16
<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
FEBRUARY 1, JANUARY 27,
1997 1996
<S> <C> <C>
Net Sales $ 99,351 $ 93,107
-------- --------
Costs and Expenses:
Cost of Sales 78,295 74,791
Selling, General and Administrative 11,399 10,605
-------- --------
Earnings from Operations 9,657 7,711
Other Income, net 350 327
Interest Expense (2,135) (1,995)
-------- --------
Earnings Before Provision for Income Taxes and Extraordinary Item 7,872 6,043
Provision for Income Taxes 3,007 2,253
-------- --------
Earnings Before Extraordinary Item 4,865 3,790
Extraordinary Item, net of Income Tax Benefit of $837 -- (1,365)
-------- --------
Net Earnings $ 4,865 $ 2,425
======== ========
Earnings Per Common and Common
Equivalent Share Before Extraordinary Item
$ .26 $ .20
Extraordinary Item, net of Income Tax Benefit -- (.07)
-------- --------
Net Earnings Per Common and Common
Equivalent Share $ .26 $ .13
======== ========
Weighted Average Common and Common Equivalent
Shares Outstanding 18,821 19,342
======== ========
</TABLE>
Page 4 of 16
<PAGE> 5
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS 39 WEEKS
ENDED ENDED
FEBRUARY 1, JANUARY 27,
1997 1996
<S> <C> <C>
Net Sales $ 326,115 $ 288,927
--------- ---------
Costs and Expenses:
Cost of Sales 255,319 226,105
Selling, General and Administrative 35,052 31,741
--------- ---------
Earnings from Operations 35,744 31,081
Other Income, net 384 796
Interest Expense (6,845) (6,179)
--------- ---------
Earnings Before Provision for Income Taxes and Extraordinary Item 29,283 25,698
Provision for Income Taxes 11,185 9,765
--------- ---------
Earnings Before Extraordinary Item 18,098 15,933
Extraordinary Item, net of Income Tax Benefit of $837 -- (1,365)
--------- ---------
Net Earnings $ 18,098 $ 14,568
========= =========
Earnings Per Common and Common
Equivalent Share Before Extraordinary Item
$ .97 $ .81
Extraordinary Item, net of Income Tax Benefit -- (.07)
--------- ---------
Net Earnings Per Common and Common
Equivalent Share $ .97 $ .74
========= =========
Weighted Average Common and Common Equivalent
Shares Outstanding 18,735 19,694
========= =========
</TABLE>
Page 5 of 16
<PAGE> 6
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
40 WEEKS 39 WEEKS
ENDED ENDED
FEBRUARY 1, JANUARY 27,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 18,098 $ 14,568
Adjustments to reconcile net earnings to net cash flows
provided from operations:
Depreciation and amortization 13,061 10,358
Deferred income taxes 3,388 2,991
Changes in operating assets and liabilities:
Accounts receivable 4,211 7,281
Inventories 358 2,073
Prepaid expenses and other current assets 166 (1,898)
Other assets (1,715) (1,170)
Accounts payable, accrued expenses and other
long term liabilities 2,506 (12,848)
-------- --------
Net cash flows provided from operating activities 40,073 21,355
-------- --------
Cash Flows from Investing Activities:
Capital Expenditures (18,682) (36,175)
Business Acquisitions (5,000) --
-------- --------
Net cash flows used in investing activities (23,682) (36,175)
-------- --------
Cash Flows from Financing Activities:
Net (repayments of) proceeds from long-term borrowings (15,460) 26,140
Purchase of treasury stock (3,957) (13,590)
Issuance of common stock 2,641 594
-------- --------
Net cash flows (used in) provided from financing activities (16,776) 13,144
-------- --------
Effect of exchange rate changes on cash and cash equivalents (4) 84
-------- --------
Increase in cash and cash equivalents (389) (1,592)
Cash and cash equivalents at beginning of period 4,479 4,100
-------- --------
Cash and cash equivalents at end of period $ 4,090 $ 2,508
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ 7,375 $ 6,453
======== ========
Income taxes paid $ 5,872 $ 6,746
======== ========
</TABLE>
Page 6 of 16
<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 February 1, 1997 and for
all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes included in the
Company's April 27, 1996 Annual Report to Stockholders on Form 10-K as filed
with the Securities and Exchange Commission ("1996 Form 10-K").
The Company's fiscal year ends on the Saturday closest to April 30. Fiscal 1997
will be a 53 week year to end May 3, 1997 and the first quarter was a 14 week
period which ended August 3, 1996.
The results of operations for the 13 week period and 40 week period ended
February 1, 1997 are not necessarily indicative of the results for the full
year.
Amounts presented for prior periods have been reclassified in order to conform
to the current period's classification. Specifically, shipping and delivery
expenses of approximately $543 thousand, $1,792 thousand, and $658 thousand for
the 13 and 39 weeks ended January 27, 1996, and the 14 weeks ended August 3,
1996, respectively, were reclassified from cost of goods sold to selling,
general and administrative expenses.
2. NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which is effective for the Company beginning April 28, 1996. SFAS
No. 123 requires expanded disclosures of stock-based compensation arrangements
with employees in notes to annual financial statements and encourages (but does
not require) compensation cost to be measured on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
Accounting Principles Board ("APB") Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma effect
on net income and earnings per share (under the provisions of SFAS No. 123) in
its annual financial statements.
3. INCOME TAXES
The effective income tax rate is based on estimates of annual amounts of taxable
income and other factors. These estimates are updated periodically and any
increase or decrease in the provision for income taxes is reflected in the
period in which the estimate is changed.
Page 7 of 16
<PAGE> 8
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 APRIL 27, 1996
<S> <C> <C>
Raw materials and supplies $18,146 $18,111
Work in process 7,267 8,248
Finished Goods 15,802 15,038
-------- -------
$41,215 $41,397
======= =======
</TABLE>
5. OTHER ASSETS
In May 1995, the Company loaned $2.0 million to its then Vice Chairman (now
Chairman) of the Board and President (the "Executive"). The loan is due on May
4, 2000, and bears interest payable quarterly equal to the Applicable Federal
Rate as defined (5.69% at February 1, 1997), adjusted monthly. Mandatory
prepayments of this loan are required if the Executive's compensation exceeds
certain thresholds. In March, 1996 the Company loaned the Executive an
additional $800 thousand which was repaid in December 1996.
6. COMMITMENTS AND CONTINGENCIES
a. Treasury Stock
In January 1993, the Company's Board of Directors authorized the purchase of up
to 2.0 million shares of the Company's common stock, and in December 1995,
authorized the purchase of up to an additional 2.0 million shares of the
Company's common stock, from time to time in the open market, subject to the
terms of the Company's current credit agreement. As of February 1, 1997,
approximately 1.4 million shares are authorized for purchase under the existing
Board of Directors resolutions. Since February 1, 1997 and through March 1, 1997
the Company purchased an additional 150 thousand shares of its common stock.
b. Environmental Matters
On a continuing basis, the Company monitors its compliance with applicable
environmental laws and regulations. As part of this process the Company
cooperates with appropriate governmental authorities to perform any necessary
testing and compliance procedures. The Company is not currently aware of any
environmental compliance matters that it believes will have a material effect on
the consolidated financial statements.
c. 1995 Performance Bonus Plan
In July 1995, the Board of Directors approved the 1995 Performance Bonus Plan
(the "Plan"), applicable to its then Vice Chairman (now the Chairman) of the
Board and President only. Under the Plan, for each of the five fiscal years of
the Company commencing with fiscal year 1996, the Executive will be entitled to
a graduated bonus (the "Performance Bonus") based upon a comparison of the
Company's earnings from operations plus depreciation and amortization (the
"Performance Measure") in that award year with the immediately preceding fiscal
year. The size of the Performance Bonus is tied to the level of the Company's
performance, as measured by the Performance Measure, with the larger bonuses
available only in the case of truly superior results. The maximum Performance
Bonus payable in respect of any award year under the Plan is $2.0 million. No
bonus was payable pursuant to the Plan for fiscal 1996.
Page 8 of 16
<PAGE> 9
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
A shareholder of the Company has brought a suit in the United States District
court, Southern District of New York, seeking to enjoin payment of Performance
Bonuses under the 1995 Performance Bonus Plan described above. During the third
quarter of fiscal 1997, this case was dismissed with all parties exchanging
releases. The Company neither modified, amended or revoked the Plan in
response to the suit, nor paid damages of any kind to the plaintiff.
7. EXTRAORDINARY ITEM
In connection with establishment of the credit facility in December 1995, the
Company recorded, in the third quarter of fiscal 1996, 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).
8. COMMON STOCK PURCHASE WARRANTS
Effective August 1, 1996, the Company finalized a new five year supply agreement
pursuant to which a customer will receive a cash volume discount based upon
certain minimum levels of purchases from the Company during the term of the
agreement. In connection with the new agreement, the Company has issued to the
customer warrants to purchase 200,000 shares of its common stock at an exercise
price of $15.00 per share. The warrants are exerciseable immediately and expire
concurrently with the supply agreement. The Company has recorded the fair value
of this warrant in other assets and is amortizing this amount on a straight line
basis over the term of the supply agreement.
Page 9 of 16
<PAGE> 10
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's fiscal year ends on the Saturday closest to April 30. Fiscal 1997
will be a 53 week year to end May 3, 1997. The first quarter was a 14 week
period which ended August 3, 1996. The discussion below reflects
reclassifications made to cost of goods sold and selling, general and
administrative expenses of prior periods in order to conform to the current
period classification. Specifically, shipping and delivery expenses of
approximately $543 thousand, $1,792 thousand, and $658 thousand for the 13 and
39 weeks ended January 27, 1996, and the 14 weeks ended August 3, 1996,
respectively, were reclassified from cost of goods sold to selling, general and
administrative expenses.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three and nine months ended February 1, 1997 were $99.4
million and $326.1 million compared to net sales of $93.1 million and $288.9
million, respectively, for the corresponding prior periods, an increase of 6.7%,
and 12.9%, respectively. The Company's new facility in Oregon effectively began
production during the third quarter of fiscal 1996. Sales for the Company's
Oregon facility were approximately $1.8 million for the fourth quarter of fiscal
1996, and approximately $4.3 million and $12.1 million for the three and nine
months ended February 1, 1997, respectively.
In addition to accelerating sales growth in Oregon, the Company continues to
penetrate its existing markets by expanding product lines within existing
customer bases, and adding new customers. The Company has entered into certain
contracts with existing customers whereby the customer has agreed to provide the
Company with minimum levels of sales, normally for a five year period. In
addition a large portion of the packaging produced by the Company for the
tobacco industry is sold to North American tobacco companies for ultimate sale
in the export market which continues to grow. Sales to the Company's computer
and CD ROM customers are also experiencing favorable growth trends. Third
quarter sales for fiscal 1997 were negatively impacted by the periods holiday
schedule, which had fewer production days than previous years.
The Company believes that future sales growth will be generated through
continued penetration of its existing markets, and the expanding market of CD
ROM products. The Company believes that its Oregon facility will provide
additional sales growth in future quarters of fiscal 1997.
Cost of Sales
Cost of sales as a percentage of sales for the three and nine months ended
February 1, 1997 were 78.8% and 78.3% as compared to 80.3% and 78.3%,
respectively, for the corresponding prior periods. The Company's Oregon facility
had a negative impact on the Company's overall margin in the quarter ended
August 3, 1996 and contributed favorably to the Company's overall margin in the
quarters ended November 2, 1996 and February 1, 1997. The Oregon facility did
not have any impact on the corresponding prior periods. The continuing favorable
trend in cost of sales as a percentage of sales is due to the favorable trend in
raw material costs, increased sales of value added packaging which has stronger
margins than standard product line sales, the favorable impact of the Company's
corporate wide purchasing program and the previously mentioned Oregon
operations.
Page 10 of 16
<PAGE> 11
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's margins were adversely affected by increases in certain raw
material costs in fiscal 1996 as compared to the prior year, some of which could
not be offset by increases in the selling price to customers. The Company has
experienced a decline in certain raw material costs which had a favorable impact
during the fourth quarter of fiscal 1996 as well as the first, second and third
quarters of fiscal 1997. The Company remains sensitive to price competitiveness
in the markets that it serves, and in the areas that are targeted for growth and
believes that the installation of state-of-the-art printing and manufacturing
equipment (and related labor and production efficiencies), and the expansion of
its corporate wide purchasing program will enable it to continue to compete
effectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
three and nine months ended February 1, 1997 were 11.5% and 10.7% as compared to
11.4% and 11.0%, respectively, for the corresponding prior periods. The decrease
in selling, general and administrative expenses as a percentage of sales for the
nine month period is largely due to increased sales while certain selling,
general and administrative costs have remained fixed. This decrease is offset
somewhat by additional costs associated with the enhancement of the Company's
customer service departments, as well as increased occupancy and operating costs
associated with the Company's corporate offices, and an increase in legal and
other professional fees. In addition, selling, general and administrative
expenses as a percentage of sales are higher at the Company's Oregon facility as
a result of its early operations, however, these costs are expected to decline
as a percentage of sales as production at that facility continues to increase.
Investment and Other Income
Investment and other income (loss), net, for the three and nine months ended
February 1, 1997 were $350 thousand and $384 thousand, respectively. The net
income for the three month period was primarily due to net foreign exchange
income of approximately $156 thousand and interest and investment income of $166
thousand. The net income for the nine month period includes net foreign exchange
losses of approximately $113 thousand, offset by interest and investment income
of approximately $447 thousand.
Investment and other income, net for three and nine months ended January 27,
1996 was $327 thousand and $796 thousand, respectively. The net income for the
three month period was primarily due to net foreign exchange income of
approximately $122 thousand, gains on the sale of equipment of $101 thousand and
investment income of $98 thousand. The net income for the nine month period was
primarily due to gains on the sale of equipment of $311 thousand, investment
income of $270 thousand and net foreign exchange income of approximately $131
thousand.
The Company's exposure to foreign exchange transaction gains or losses relate to
the Company's Canadian facilities which have U.S. dollar denominated net current
assets. The Company believes that fluctuations in foreign exchange rates will
not have a material impact on the operations or liquidity of the Company, based
upon current and historical levels of working capital at the Canadian
facilities.
Page 11 of 16
<PAGE> 12
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Interest Expense
Interest expense for the three and nine months ended February 1, 1997 were $2.1
million and $6.8 million as compared to $2.0 million and $6.2 million ,
respectively, for the corresponding prior periods. The increase in interest
costs for the three and nine months ended February 1, 1997 as compared to the
corresponding prior periods is due to lower amortization of deferred interest
income related to a swap discussed below, and a reduction in the amount of
capitalized interest associated with construction in progress, partially offset
by a decreased level of borrowings (primarily related to increased cash flows
from operations and term loan payments). Interest costs capitalized for the
three and nine months ended February 1, 1997 relating to the construction of
plant and equipment amounted to $177 thousand and $393 thousand as compared to
$373 thousand and $927 thousand, respectively, in the corresponding prior
periods. The reduction in capitalized interest costs is a result of the
Company's Oregon facility becoming operational in fiscal 1996. The Company
anticipates that the amount of interest to be capitalized in fiscal 1997 will
continue to be significantly less than the amounts capitalized in the
corresponding prior periods of fiscal 1996.
In October 1994, the Company assigned to a bank an interest rate swap agreement
relating to $42.0 million of its debt for cash proceeds of approximately $1.3
million. The proceeds have been recorded as a deferred credit which is being
amortized as a reduction of interest expense (amounting to $74 thousand and $254
thousand, respectively, for the three and nine months ended February 1, 1997 and
$121 thousand and $401 thousand, respectively, for the corresponding prior
periods). At February 1, 1997, $146 thousand of deferred gain remains which will
be amortized: $55 thousand remaining in fiscal 1997; and $91 thousand in fiscal
1998.
The Company has used, and may continue to use, interest rate swaps and caps to
manage its exposure to fluctuating interest rates under its debt agreements.
Income Taxes
The effective income tax rate for the three and nine months ended February 1,
1997 was 38.2% compared to 37.3% and 38.0% for the corresponding prior periods.
These rates reflect a blend of domestic and foreign taxes and are adjusted
periodically based upon the estimated annual effective tax rate, which for the
entire fiscal year ended April 27, 1996 was 37.9%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at February 1, 1997 was $4.1 million as compared to
$4.5 million at April 27, 1996, and working capital was $26.4 million as
compared to $30.8 million as of the same dates respectively. The current ratio
at February 1, 1997 was approximately 1.4 to one as compared to 1.5 to one at
April 27, 1996. The Company's cash balances normally remain relatively constant
as a result of the Company's cash management program whereby collection of
accounts receivable are used to retire revolver obligations, and payments of
accounts payable and accrued expenses are funded through the revolver credit
facility.
Page 12 of 16
<PAGE> 13
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Cash flow from operating activities for the nine months ended January 1, 1997
was $34.5 million before changes in operating assets and liabilities as compared
to $27.9 million for the corresponding prior period, whereas net cash flows
provided from operating activities was $40.1 million as compared to $21.4
million for the same periods. The net increase in net cash flows from operating
activities was favorably impacted due to reduced investments in accounts
receivable and increases in the Company's accounts payable balances when
compared to the corresponding prior period. Cash flows from operations as well
as borrowings under the Company's credit facilities were used to support $23.7
million in capital investments, including the payment of $5.0 million of
contingent consideration previously accrued relating to the acquisition of the
Premium Group. In addition, the Company purchased approximately $4.0 million of
treasury stock under the Board of Directors authorized program described below.
The Company has completed the construction of its facility in Oregon. Further
investment in plant and equipment, including that associated with the new
facility, and potential expansion into international markets, will be dependent
upon business needs and opportunities. The Company anticipates that such
investments will approximate $21.0 million for all of fiscal 1997. The Company
anticipates paying for these investments with funds generated from operations.
In January 1993, the Company's Board of Directors authorized the purchase of up
to 2.0 million shares of the Company's common stock and in December 1995, the
Board of Directors authorized the purchase of up to an additional 2.0 million
shares from time to time in the open market, subject to the terms of the
Company's current credit agreement. As of February 1, 1997, approximately 1.4
million shares are authorized for purchase under existing Board of Directors
resolutions. The Board and management of the Company believe the long-term
outlook for the Company to be promising and that the Company's common stock
represents an attractive investment opportunity. The treasury stock purchases
will be made from time to time as market conditions permit.
To effectuate its 1995 Board authorization, the Company entered into a credit
facility with its lending banks increasing its line of credit by approximately
$41.0 million to $185 million. The new facility consists of $120.0 million of
senior term notes ($24.0 million of which has since been repaid) and $65.0
million of a long-term revolver which bear interest, at the discretion of the
Company, at either the Bank's prime rate or LIBOR plus between 75 to 125 basis
points depending upon certain financial ratios. The senior term notes will be
repaid in various quarterly installments through May 7, 2000 at which time the
revolver will mature.
The loan agreement contains covenants related to levels of debt to cash flow,
current assets to current liabilities, fixed charge coverage, net worth and
investments (including investments in the Company's own common stock), and
restricts the amount of retained earnings available for payment of dividends.
The loan agreement requires the Company to prepay the term notes to the extent
of 50% of excess cash flow as defined. To date, no prepayments have been
required.
In May 1995, the Company loaned $2.0 million to its then Vice Chairman (now
Chairman) of the Board and President (the "Executive"). The loan is due on May
4, 2000, and bears interest payable quarterly equal to the Applicable Federal
Rate as defined (5.69% at February 1, 1997), adjusted monthly. Mandatory
prepayments of this loan are required if the Executive's compensation exceeds
certain thresholds. In March, 1996 the Company loaned the Executive an
additional $800 thousand which was repaid in December 1996.
Page 13 of 16
<PAGE> 14
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company expects that cash flow from operations together with the borrowing
capacity under the revolving credit facility will be sufficient to meet the
current needs of the business. The Company is considering expansion into the
Peoples Republic of China. If the Company commits to such expansion, it may
require additional financing. The Company has, as described above, a $65.0
million long-term revolving credit facility for its working capital
requirements. Borrowings under this facility are limited to the sum of 80% of
accounts receivable and 50% of inventories. At February 1, 1997, the Company had
borrowings under this facility of $35.1 million and additional credit
availability under this facility of $14.6 million.
Page 14 of 16
<PAGE> 15
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
Part II
Item 1 LEGAL PROCEEDINGS
Information concerning legal and environmental matters is incorporated by
reference from Part I, Footnotes 6(b) and (c) of Notes to Consolidated
Condensed Financial Statements
Item 2 CHANGES IN SECURITIES
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.107 - Seventh Amendment to Amended and Restated Credit Agreement
dated as of January 8, 1997 among Shorewood Packaging Corporation,
Shorewood Packaging Corporation of Canada Limited, Nationsbank, N.A.
(formerly known as NationsBank of North Carolina, N.A.) and the Bank of
Nova Scotia.
(b) Reports on Form 8-K
None.
Page 15 of 16
<PAGE> 16
SIGNATURES
Pursuant to the regulations of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOREWOOD PACKAGING CORPORATION
(Registrant)
by: /s/ Howard M. Liebman
------------------------
Howard M. Liebman
Executive Vice President and
Chief Financial Officer
Dated: March 17, 1997
Page 16 of 16
<PAGE> 1
Exhibit 10.107
January 8, 1997
TO THE ATTACHED DISTRIBUTION LIST
Re: Amended and Restated Credit Agreement dated as of February 25,
1994, among Shorewood Packaging Corporation (the "U.S. Borrower"),
Shorewood Corporation of Canada Limited (the "Canadian Borrower")
(collectively, the U.S. Borrower and the Canadian Borrower may be
referred to herein as the "Borrowers"), NationsBank, N.A. (formerly
known as NationsBank, N.A. (Carolinas) and NationsBank of North
Carolina, N.A.), as Administrative Agent, the Bank of Nova Scotia, as
Canadian Administrative Agent and the Lenders identified therein, as
amended by that certain First Amendment to Amended and Restated Credit
Agreement dated as of July 18, 1994, that certain Second Amendment to
Amended and Restated Credit Agreement dated as of November 22, 1994,
that certain Third Amendment to Amended and Restated Credit Agreement
dated as of July 28, 1995, that certain Fourth Amendment to Amended and
Restated Credit Agreement dated as of December 12, 1995, that certain
Fifth Amendment to Amended and Restated Credit Agreement dated as of
January 26, 1996 and that certain Sixth Amendment to Amended and
Restated Credit Agreement dated as of July 2, 1996 (as further amended,
modified, extended, renewed or replaced from time to time, the "Credit
Agreement"). Terms used but not otherwise defined herein shall have the
meanings provided in the Credit Agreement.
Ladies and Gentlemen:
To avoid "thin capitalization" tax exposure on intercompany interest charges in
Canada, the U.S. Borrower placed additional equity in the Canadian Borrower in
1994, resulting in the issuance by the Canadian Borrower to the U.S. Borrower of
5,655,172 shares of preferred stock, of which 3,732,413 shares, evidenced by
share certificate no. P-2 (the "Preferred Shares") have been pledged to the
Administrative Agent, for the benefit of the Lenders, pursuant to the terms of
the Credit Documents. The recent satisfaction by the Canadian Borrower of its
intercompany debt has removed all "thin capitalization" tax exposure concerns
for the U.S. Borrower. As a result, the U.S. Borrower would now like to move
some equity back to the United States pursuant to the redemption of the
Preferred Shares.
Therefore, the Borrowers have requested that the Lenders consent to the
Administrative Agent's (i) termination of the Administrative
<PAGE> 2
To Distribution List
January 8, 1997
Agent's security interest in the Preferred Shares and (ii) release of share
certificate no. P-2 evidencing the Preferred Shares. The Borrowers have also
requested that the Administrative Agent, as registered holder of the Preferred
Shares, tender the Preferred Shares for redemption and direct the Canadian
Borrower to pay the redemption price directly to the U.S. Borrower.
Please sign where indicated below and return a copy of this letter to the
undersigned to evidence your consent to the (i) termination by the
Administrative Agent of its security interest in the Preferred Shares, (ii)
release of share certificate no. P-2 evidencing the Preferred Shares, (iii)
tender by the Administrative Agent of the Preferred Shares for redemption and
(iv) payment of the redemption price for the Preferred Shares directly to the
U.S. Borrower.
The Administrative Agent shall continue to maintain, for the benefit of the
Lenders, a security interest in 66% of the common stock issued by the Canadian
Borrower.
Very truly yours,
NATIONSBANK, N.A., in its capacity
as Agent and as Lender
By:________________________________
Name: ____________________________
Title: _____________________________
Accepted and agreed:
BORROWERS:
SHOREWOOD PACKAGING CORPORATION
By:____________________________
Name: Howard M. Liebman
Title: Executive Vice President and
Chief Financial Officer
SHOREWOOD CORPORATION OF CANADA
LIMITED
By:____________________________
Name: Howard M. Liebman
Title: Vice President
<PAGE> 3
To Distribution List
January 8, 1997
LENDERS:
THE BANK OF NOVA SCOTIA, in its
capacity as Canadian Administrative
Agent and as a Lender
By:____________________________
Name:__________________________
Title:_________________________
By:____________________________
Name:__________________________
Title:_________________________
CREDITANSTALT BANKVEREIN
By:____________________________
Name:__________________________
Title:_________________________
By:____________________________
Name:__________________________
Title:_________________________
CRESTAR BANK
By:____________________________
Name:__________________________
Title:_________________________
UNITED STATES NATIONAL BANK OF
OREGON
By:____________________________
Name:__________________________
Title:_________________________
THE CHASE MANHATTAN BANK, N. A.
By:_____________________________
Name:___________________________
Title:__________________________
<PAGE> 4
To Distribution List
January 8, 1997
BANQUE PARIBAS
By:_____________________________
Name:___________________________
Title:__________________________
By:_____________________________
Name:___________________________
Title:__________________________
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH
By:_____________________________
Name:___________________________
Title:__________________________
By:_____________________________
Name:___________________________
Title:__________________________
FLEET BANK, N.A.
By:_____________________________
Name:___________________________
Title:__________________________
THE BANK OF NEW YORK
By:_____________________________
Name:___________________________
Title:__________________________
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By:_____________________________
Name:___________________________
Title:__________________________
<PAGE> 5
To Distribution List
January 8, 1997
The Subsidiary Guarantors acknowledge and consent to all of the terms and
conditions of this letter, and agree that this letter and any documents executed
in connection herewith do not operate to reduce or discharge the Subsidiary
Guarantors' obligations under their respective Guaranty Agreements.
SHOREWOOD TECHNOLOGIES, INC.
By:________________________________
Name: Howard M. Liebman
Title: Vice President
SHOREWOOD PACKAGING CORPORATION OF
GEORGIA
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SHOREWOOD PACKAGING OF
NORTH CAROLINA, INC.
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SPC COMPANY OF VIRGINIA, INC.
(f/k/a SHOREWOOD PACKAGING OF
VIRGINIA, INC.)
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
<PAGE> 6
To Distribution List
January 8, 1997
SHOREWOOD PACKAGING OF CALIFORNIA,
INC.
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SHOREWOOD PACKAGING COMPANY OF
ILLINOIS, INC.
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SHOREWOOD TRANSPORT, INC.
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SHOREWOOD PACKAGING OF DELAWARE, INC.
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SHOR-WRAP, INC.
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
<PAGE> 7
To Distribution List
January 8, 1997
SHOREWOOD PACKAGING CORPORATION OF ALABAMA
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SHOREWOOD PACKAGING CORPORATION OF
NEW YORK
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SHOREWOOD ACQUISITION CORP. OF
DELAWARE
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SHOREWOOD PACKAGING CORPORATION OF
VIRGINIA (f/k/a SHOREWOOD PAPERBOARD
CORPORATION OF VIRGINIA)
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
SPC COMPANY OF NEW YORK, INC.
(f/k/a SHOREWOOD PAPERBOARD
CORPORATION OF NEW YORK)
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
<PAGE> 8
To Distribution List
January 8, 1997
SHOREWOOD PACKAGING CORPORATION OF
CONNECTICUT, (f/k/a
SHOREWOOD/HEMINWAY SET-UP BOX
CORPORATION)
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President &
Chief Financial Officer
TORONTO CARTON CORPORATION LIMITED
By:________________________________
Name: Howard M. Liebman
Title: Vice President
SPC CORPORATION LIMITED (f/k/a
SHOREWOOD PAPERBOARD CORPORATION
LIMITED)
By:________________________________
Name: Howard M. Liebman
Title: Vice President
SHOREWOOD PACKAGING CORP. OF CANADA
LIMITED
By:________________________________
Name: Howard M. Liebman
Title: Vice President
SHOREWOOD PACKAGING CORPORATION OF
OREGON
By:________________________________
Name: Howard M. Liebman
Title: Executive Vice President
<TABLE> <S> <C>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-3-1997
<PERIOD-START> APR-28-1996
<PERIOD-END> FEB-01-1997
<CASH> 4,090
<SECURITIES> 0
<RECEIVABLES> 40,305
<ALLOWANCES> 1,102
<INVENTORY> 41,215
<CURRENT-ASSETS> 91,200
<PP&E> 241,460
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0
0
<COMMON> 221
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<TOTAL-LIABILITY-AND-EQUITY> 279,848
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