<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 November 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)
DELAWARE 11-2742734
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(Address of principal executive offices)
(212) 371-1500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
DECEMBER 1, 1997 18,153,000
Date Number of Shares
Page 1 of 16
<PAGE> 2
SHOREWOOD PACKAGING CORPORATION
AND SUBSIDIARIES
INDEX PAGE
Part I: Financial Statements
Consolidated Balance Sheets
November 1, 1997 (Unaudited) and
May 3, 1997 (Audited) 3
Consolidated Condensed Statements of Earnings
13 weeks ended November 1, 1997 (Unaudited) and
13 weeks ended November 2, 1996 (Unaudited) 4
Consolidated Condensed Statements of Earnings
26 weeks ended November 1, 1997 (Unaudited) and
27 weeks ended November 2, 1996 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows
26 weeks ended November 1, 1997 (Unaudited) and
27 weeks ended November 2, 1996 (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
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 BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 1 , MAY 3,
1997 1997
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,220 $ 3,153
Accounts receivable, net 48,414 38,998
Inventories 40,999 42,291
Deferred tax assets 885 885
Refundable income taxes 2,043 4,621
Prepaid expenses and other current assets 6,713 4,584
--------- ---------
Total Current Assets 103,274 94,532
Property, Plant and Equipment, net 184,771 156,156
Excess of Cost Over the Fair Value of Net Assets Acquired, net 18,756 19,180
Other Assets 7,632 8,010
--------- ---------
$ 314,433 $ 277,878
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 26,989 $ 25,653
Accrued expenses 12,097 12,214
Current maturities of long-term debt 15,000 15,000
--------- ---------
Total Current Liabilities 54,086 52,867
Long-Term Debt 132,244 106,856
Deferred Credit and Other Long-Term Liabilities 835 713
Deferred Income Taxes 23,679 20,211
--------- ---------
Total Liabilities 210,844 180,647
--------- ---------
Temporary Equity Relating to Put Options 941 875
Commitments and Contingencies
Stockholders' Equity:
Series A preferred stock, $10 par value; 50,000 shares
authorized, none issued -- --
Preferred stock, $10 par value; 5,000,000 shares authorized
none issued -- --
Common stock, $.01 par value; 40,000,000 shares authorized;
22,576,617 issued and 18,156,483 outstanding in November and
22,501,342 issued and 18,535,156 outstanding in May 226 225
Additional paid-in capital 49,824 49,456
Retained earnings 110,450 95,681
Cumulative foreign currency translation adjustment (3,408) (2,875)
Treasury stock (4,420,134 and 3,966,186 shares at
cost in November and May) (54,444) (46,131)
--------- ---------
Total Stockholders' Equity 102,648 96,356
--------- ---------
$ 314,433 $ 277,878
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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
NOVEMBER 1, NOVEMBER 2,
1997 1996
<S> <C> <C>
Net Sales $ 114,828 $ 115,246
--------- ---------
Costs and Expenses:
Cost of Sales 87,427 89,674
Selling, General and Administrative 11,888 11,570
--------- ---------
Earnings from Operations 15,513 14,002
Other Income, net 147 (216)
Interest Expense (1,854) (2,335)
--------- ---------
Earnings Before Provision for Income Taxes and Gain from
Discontinued Operations 13,806 11,451
Provision for Income Taxes 5,246 4,374
--------- ---------
Earnings Before Gain from Discontinued Operations 8,560 7,077
Gain from Discontinued Operations -- 17
--------- ---------
Net Earnings $ 8,560 $ 7,094
========= =========
EARNINGS PER SHARE INFORMATION:
Earnings from Continuing Operations $ .46 $ .38
Gain from Discontinued Operations -- --
--------- ---------
Net Earnings Per Common and Common
Equivalent Share $ .46 $ .38
========= =========
Weighted Average Common and Common Equivalent
Shares Outstanding 18,592 18,677
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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>
26 WEEKS 27 WEEKS
ENDED ENDED
NOVEMBER 1, NOVEMBER 2,
1997 1996
<S> <C> <C>
Net Sales $ 215,424 $ 223,367
--------- ---------
Costs and Expenses:
Cost of Sales 165,514 173,901
Selling, General and Administrative 22,912 23,179
--------- ---------
Earnings from Operations 26,998 26,287
Other Income, net 728 13
Interest Expense (3,905) (4,710)
--------- ---------
Earnings Before Provision for Income Taxes and Loss from
Discontinued Operations 23,821 21,590
Provision for Income Taxes 9,052 8,247
--------- ---------
Earnings Before Loss from Discontinued Operations 14,769 13,343
Loss from Discontinued Operations -- (110)
--------- ---------
Net Earnings $ 14,769 $ 13,233
========= =========
EARNINGS PER SHARE INFORMATION:
Earnings from Continuing Operations $ .80 $ .71
Loss from Discontinued Operations -- --
--------- ---------
Net Earnings Per Common and Common
Equivalent Share $ .80 $ .71
========= =========
Weighted Average Common and Common Equivalent
Shares Outstanding 18,527 18,692
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 16
<PAGE> 6
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS 27 WEEKS
ENDED ENDED
NOVEMBER 1, NOVEMBER 2,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 14,769 $ 13,233
Adjustments to reconcile net earnings to net cash flows
provided from operations:
Depreciation and amortization 8,660 8,712
Deferred income taxes 3,171 2,396
Changes in operating assets and liabilities:
Accounts receivable (9,606) (2,438)
Inventories 1,163 1,674
Prepaid expenses and other current assets (2,145) 22
Other assets (129) (616)
Accounts payable, accrued expenses and other
long term liabilities 4,099 5,048
-------- --------
Net cash flows provided from operating activities 19,982 28,031
-------- --------
Cash Flows from Investing Activities:
Capital Expenditures (36,888) (10,634)
Business Acquisitions -- (5,000)
-------- --------
Net cash flows used in investing activities (36,888) (15,634)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from (repayments of) long-term borrowings 25,465 (9,143)
Purchase of treasury stock (8,313) (3,088)
Issuance of common stock 776 2,537
-------- --------
Net cash flows provided from (used in) financing activities 17,928 (9,694)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 45 90
-------- --------
Increase in cash and cash equivalents 1,067 2,793
Cash and cash equivalents at beginning of period 3,153 4,479
-------- --------
Cash and cash equivalents at end of period $ 4,220 $ 7,272
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ 1,925 $ 5,070
======== ========
Income taxes paid $ 5,563 $ 3,803
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 November 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 May 3, 1997 Annual Report to Stockholders on Form 10-K as filed with
the Securities and Exchange Commission ("1997 Form 10-K").
The Company's fiscal year ends on the Saturday closest to April 30. Fiscal 1998
will be a 52 week year to end May 2, 1998. The first and second quarters of
fiscal 1998 were 13 week periods which ended August 2, 1997 and November 1,
1997, respectively. Fiscal 1997 was a 53 week year ended May 3, 1997. The first
quarter of fiscal 1997 was a 14 week period which ended on August 3, 1996 and
the second quarter was a 13 week period which ended November 2, 1996.
The results of operations for the 13 week period and 26 week period ended
November 1, 1997 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. The effective tax rate for fiscal 1997
was 37.9%.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 1, 1997 MAY 3, 1997
<S> <C> <C>
Raw materials and supplies $15,738 $16,432
Work in process 7,358 8,209
Finished goods 17,903 17,650
------- -------
$40,999 $42,291
======= =======
</TABLE>
4. OTHER ASSETS
In May 1995, the Company loaned $2.0 million (included in other assets) to its
then Vice Chairman (and now present 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 (5.57% at November 1,
1997), adjusted monthly.
Page 7 of 16
<PAGE> 8
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
The Company agreed to guaranty a portion of an $8.5 million loan made by a bank
to the Executive in connection with his purchase of certain real estate. The
Company's maximum liability under the guaranty is $3.0 million. The guaranty
will terminate at such time as $4.3 million of the loan has been repaid by the
Executive provided that: i) the unpaid portion of the loan is less than 75% of
the then fair market value of the related real estate which was mortgaged to
secure the loan; ii) the Executive's annual compensation meets or exceeds the
level of annual compensation at the date of the guaranty; and iii) there are no
defaults under the loan agreement. Pursuant to the terms of the loan agreement,
a prepayment of $2.0 million must be made in each of November 1997, February
1998 and May 1998 and the remaining balance is due August 1998. In consideration
for the Company's guaranty, the Executive agreed to pay to the Company a monthly
fee of 1% per annum of the outstanding guaranty amount and to reimburse the
Company for expenses incurred in connection with the guaranty. In December 1997,
the underlying loan agreement was modified, waiving the November 1997 payment
and increasing the August 1998 payment to $4.5 million from the original amount
of $2.5 million.
5. COMMITMENTS AND CONTINGENCIES
a. Treasury Stock
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
DATE OF AUTHORIZATION AUTHORIZED SHARES
January 1993 2.0 million
December 1995 2.0 million
April 1997 1.24 million
Shares are authorized for purchase from time to time in the open market, subject
to the terms of the Company's credit facility. As of November 1, 1997,
approximately 2.05 million shares remain authorized for purchase.
b. Temporary Equity Relating to Put Options
In April 1997, the Company sold common equity put options on 50,000 shares of
its common stock which were exerciseable six months from the date of issuance
and gave an independent party the right to sell such shares to the Company at a
strike price of $17.50 per share. The common equity put options sold in April
have expired and were not exercised.
During the first quarter of 1998, the Company sold additional common equity put
options on 25,000 shares of its common stock which are exerciseable six months
from the date of issuance at a strike price of $18.00.
During the second quarter of 1998, the Company sold additional common equity put
options on 25,000 shares of its common stock which are exerciseable six months
from the date of issuance at a strike price of approximately $19.63.
Temporary equity relating to put options on the accompanying consolidated
balance sheet represents the amount the Company would be obligated to pay if all
the put options were exercised.
Page 8 of 16
<PAGE> 9
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
c. New Facility
The Company has committed to building a state-of-the-art manufacturing facility
in the city of Guangzhou, China. The facility and related equipment will require
a capital investment of approximately $37.0 million. Through November 1, 1997,
the Company has invested approximately $1.7 million for a 50 year land lease,
$.9 million for costs associated with the design and construction of the
facility and $10.0 million representing deposits on equipment which is being
shipped to the China facility. The Company has also invested approximately $1.9
million (included in other assets) associated with the new facility. The Company
expects to spend the remaining $22.5 million during fiscal 1998. The Company
anticipates paying for this investment with funds generated from operations as
well as the existing credit facility.
d. Environmental Matters
On a continuing basis, the Company monitors its compliance with applicable
environmental laws and regulations. As part of this process the Company
cooperates with appropriate governmental authorities to perform any necessary
testing and compliance procedures. The Company is not currently aware of any
environmental compliance matters that it believes will have a material effect on
the consolidated financial statements.
e. 1995 Performance Bonus Plan
In July 1995, the Board of Directors approved the 1995 Performance Bonus Plan
(the "Plan"), applicable to the Executive. Under the Plan, for each of the five
fiscal years of the Company commencing with fiscal year 1996, the Executive will
be entitled to a graduated bonus (the "Performance Bonus") based upon a
comparison of the Company's earnings from operations plus depreciation and
amortization (the "Performance Measure") in that award year with the immediately
preceding fiscal year. The size of the Performance Bonus, if any, is tied to the
level of the Company's performance, as measured by the Performance Measure. The
maximum Performance Bonus payable in respect of any award year under the Plan is
$2.0 million.
6. DISCONTINUED OPERATIONS
In March 1997 the Company announced that it would discontinue its transportation
business ("Transport"), dispose of the related assets and outsource its future
delivery requirements. Transport had provided freight delivery services to the
Company as well as to other non-related customers. The Company believes that
this transaction will enable management to concentrate more on its core business
and reduce the Company's future freight and delivery expenses. During the three
and six months ended November 2, 1996, Transport's gain (loss) from operations
was $17 thousand and $(110) thousand (net of income tax (provision) benefit of
$(11) thousand and $68 thousand), respectively, and revenues to outside
customers were $1.8 million and $3.4 million, respectively. The net assets of
Transport were not material to the Company.
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 1998
will be a 52 week year to end May 2, 1998. The first and second quarters of
fiscal 1998 were 13 week periods which ended August 2, 1997 and November 1,
1997, respectively. Fiscal 1997 was a 53 week year ended May 3, 1997. The first
quarter of fiscal 1997 was a 14 week period which ended on August 3, 1996 and
the second quarter was a 13 week period which ended November 2, 1996.
In March 1997, the Company disposed of its transportation business ("Shorewood
Transport"). The operations of Shorewood Transport have been presented as
"Discontinued" in all prior periods.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three and six month periods ended November 1, 1997 were $114.8
million and $215.4 million as compared to net sales of $115.2 million and $223.4
million for the corresponding prior periods. After adjusting for the extra week
in the prior period, sales were essentially flat when compared to the prior
year. Flat sales for the three and six month periods are primarily due to sales
to tobacco industry customers not meeting expectations. The Company anticipates
that this trend will continue in the third quarter, however, the Company
believes it will experience sales growth in the fourth quarter as compared to
the corresponding prior period.
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, as well as its expansion into China.
Cost of Sales
Cost of sales as a percentage of sales for the three and six months ended
November 1, 1997 were 76.1% and 76.8% as compared to 77.8% and 77.9% for the
corresponding prior periods. The decrease in this percentage when compared to
the prior year is primarily due to manufacturing efficiencies as well as the
Company's corporate-wide purchasing program which is continuing to show
favorable results. The Company remains sensitive to price competitiveness in the
markets that it serves, and in the areas that are targeted for growth and
believes that the installation of state-of-the-art printing and manufacturing
equipment (and related labor and production efficiencies) will enable it to
continue to compete effectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for the
three and six months ended November 1, 1997 was 10.4% and 10.6% as compared to
10.0% and 10.4% for the corresponding prior period. The increase in selling,
general and administrative expenses as a percentage of sales is largely due to
the flat sales described above and the Company's continued development of
corporate-wide shared services.
Page 10 of 16
<PAGE> 11
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Investment and Other Income
Investment and other income, net, for the three and six months ended November 1,
1997 were $147 and $728 thousand, respectively. The net gain for the three month
period was primarily due to net foreign exchange gains of $170 thousand and a
loss on the sale of equipment of approximately $(25) thousand. The net gain for
the six month period includes a net gain on the sale of equipment of $332
thousand, investment income of $240 thousand and net foreign exchange gains of
$156 thousand.
Investment and other income (loss), net, for the three and six months ended
November 2, 1996 were $(216) thousand and $13 thousand, respectively. The net
loss for the three month period was primarily due to net foreign exchange losses
of approximately $(364) thousand, offset by interest and investment income of
$148 thousand. The net income for the six month period includes net foreign
exchange losses of approximately $(269) thousand, offset by interest and
investment income of approximately $260 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 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..
Interest Expense
Interest expense for the three and six months ended November 1, 1997 was $1.9
million and $3.9 million as compared to $2.3 million and $4.7 million for the
corresponding prior periods. The decrease in interest costs is related to
decreases in the Company's effective interest rate during the second quarter of
fiscal 1998 as compared to the corresponding prior period as well as a reduced
average level of borrowings. These decreases were partially offset by lower
amortization of deferred interest income related to a swap. Capitalized interest
increased from $96 thousand to $463 thousand for the three month period and from
$216 thousand to $658 thousand for the six month period, primarily related to
the Company's construction of its facility in China as well as equipment
additions in North America. The Company anticipates that the amount of interest
to be capitalized in fiscal 1998 will continue to increase as the Company
invests more funds into the construction of the China facility.
At November 1, 1997, the Company had two outstanding intermediate-term interest
rate swap agreements, each relating to approximately $35.0 million of borrowings
under the credit facility. Under the first agreement, the Company pays a fixed
rate of 6.19% and receives a floating rate based on LIBOR, as determined in
three-month intervals. This agreement terminates May 5, 1998. Under the second
agreement, the Company pays a fixed rate of 5.98% and receives a floating rate
based on LIBOR, as determined in three-month intervals. This agreement
terminates November 3, 1997. These transactions effectively change a portion of
the Company's interest rate exposure from a floating-rate to a fixed-rate basis.
Page 11 of 16
<PAGE> 12
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
In July 1997, the Company entered into a reversion swap agreement relating to
$50.0 million of borrowings under the credit facility. Under the agreement, the
Company pays a fixed rate of 5.73% and receives a floating rate based upon
LIBOR, as determined in three month intervals. This agreement terminates in
April 2002. This transaction effectively changes a portion of the Company's
interest rate exposure from a floating-rate to a fixed-rate basis. After the
first year, however, the fixed rate reverts back to floating for any three month
period during which the LIBOR rate exceeds 6.625%. The rate reverts back to the
fixed rate of 5.73% for any subsequent period for which the LIBOR rate drops
below 6.625%.
In October 1997, the Company entered into an intermediate-term interest rate
swap agreement relating to approximately $50.0 million of borrowings under the
credit facility. Under the agreement, the Company pays a fixed rate of 5.76% and
receives a floating rate based on LIBOR, as determined in three-month intervals.
The agreement begins on November 3, 1997 and terminates November 3, 1998.
In October 1997, the Company entered into an intermediate-term interest rate
swap agreement relating to approximately $35.0 million of borrowings under the
credit facility. Under the agreement, the Company pays a fixed rate of 5.74% and
receives a floating rate based on LIBOR, as determined in three-month intervals.
The agreement begins on May 5, 1998 and terminates May 5, 1999. The agreement
may be extended at the discretion of the financial institution for an additional
year.
The fair value of the interest rate swap agreements are immaterial to the
financial statements of the Company.
The Company has used, and may continue to use, interest rate swaps and caps to
manage its exposure to fluctuating interest rates under its debt agreements.
Income Taxes
The effective income tax rate for the three and six month period ended November
1, 1997 is 38.0% and was 38.2% 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 May 3, 1997 was 37.9%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at November 1, 1997 was $4.2 million as compared to
$3.2 million at May 3, 1997, and working capital was $49.2 million as compared
to $41.7 million as of the same dates respectively. The current ratio at
November 1, 1997 was 1.9 to one and was 1.8 to one at May 3, 1997. The Company's
cash balances remain relatively constant as a result of the Company's cash
management program whereby collection of accounts receivable are used to retire
revolver obligations, and payments of accounts payable and accrued expenses are
funded through the revolver obligations.
Page 12 of 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 six months ended November 1, 1997
was $26.6 million before changes in operating assets and liabilities as compared
to $24.3 million for the corresponding prior period. Cash flows from operations
as well as borrowings under the Company's credit facilities were used to support
$36.9 million in capital investments. In addition, the Company purchased
approximately $8.3 million of treasury stock under the Board of Directors
authorized program described below. The Company is in the process of
constructing its facility in China. The Company anticipates investing an
additional $22.5 million during fiscal 1998 for the construction of this
facility and related equipment. Further investment in plant and equipment, in
North America, is currently planned to approximate $33.0 million for all of
fiscal 1998. The Company anticipates paying for these investments with funds
generated from operations as well as the existing credit facility.
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
DATE OF AUTHORIZATION AUTHORIZED SHARES
January 1993 2.0 million
December 1995 2.0 million
April 1997 1.24 million
Shares are authorized for purchase from time to time in the open market, subject
to the terms of the Company's credit facility. As of November 1, 1997,
approximately 2.05 million shares remain authorized for purchase.
The Board and management of the Company believe the long-term outlook for the
Company to be promising and that the Company's common stock represents an
attractive investment opportunity. The treasury stock purchases will be made
from time to time as market conditions permit.
To fund the China investment, and to facilitate its share repurchase program,
the Company entered into a credit facility with its lending banks increasing its
line of credit to $200 million. The facility consists of $75.0 million of senior
term notes and $125.0 million of a long-term revolver which bear interest, at
the discretion of the Company, at either the Bank's prime rate or LIBOR plus
between 50 and 100 basis points depending upon certain financial ratios. The
revolving credit is available, in its entirety, without any borrowing base
limitation. At November 1, 1997, the Company had borrowings under the long-term
revolver facility of $76.0 million. The senior term notes will be repaid in
equal quarterly installments through May, 2002 at which time the revolver will
mature. At November 1, 1997, the outstanding balance of the senior term notes
was approximately $71.3 million.
The loan agreement contains covenants related to levels of debt to cash flow,
current assets to current liabilities, fixed charge coverage, net worth and
investments (including investments in the Company's own common stock), and
restricts the amount of retained earnings available for payment of dividends. At
November 1, 1997, there was approximately $17.6 million of retained earnings
available for the payment of dividends.
The Company expects that cash flow from operations together with the borrowing
capacity under the revolving credit facility will be sufficient to meet the
needs of the business.
Page 13 of 16
<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(d) of Notes to Consolidated
Condensed Financial Statements
Item 2 CHANGES IN SECURITIES
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of Stockholders was held on October 30,
1997 (the "Meeting"). At the Meeting, the Company's stockholders voted
upon the following matters: (I) The election of three directors
comprising the Class II Directors; (ii) the ratification of proposals
to amend the Company's 1993 Incentive Program; and (iii) the
ratification of Deloitte & Touche LLP as the independent auditors of
the Company for the fiscal year ending May 2, 1998.
The Holders of the Company's common stock voted as a single class on
all matters submitted for a vote at the Meeting. The number of votes
cast for, against or withheld, as well as the number of abstentions, as
to each such matter is set forth below:
ELECTION OF DIRECTORS
------------------------ ----------------- -------------
NAME FOR WITHHELD
------------------------ ----------------- -------------
R. Timothy O'Donnell 14,991,779 863,335
------------------------ ----------------- -------------
------------------------ ----------------- -------------
Kevin J. Bannon 14,992,479 862,635
------------------------ ----------------- -------------
------------------------ ----------------- -------------
William P. Weidner 14,992,479 862,635
------------------------ ----------------- -------------
RATIFICATION OF PROPOSALS TO AMEND THE COMPANY'S 1993 INCENTIVE PROGRAM
--------------------- ------------------- --------------
FOR AGAINST ABSTAIN
--------------------- ------------------- --------------
9,886,440 4,165,656 223,781
--------------------- ------------------- --------------
RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE LLP
------------------- ------------------- ----------------
FOR AGAINST ABSTAIN
------------------- ------------------- ----------------
15,788,572 45,985 20,557
------------------- ------------------- ----------------
The Inspectors of Election for the Meeting recorded broker non-votes to
proposal 2 in the amount of 1,579,237 at the Meeting.
Item 5 OTHER INFORMATION
None
Page 14 of 16
<PAGE> 15
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(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: December 15, 1997
Page 16 of 16
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