<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 July 31, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _____________ to ___________________.
Commission file number: 0-15077
SHOREWOOD PACKAGING CORPORATION
(Exact name of registrant as specified in its Charter)
DELAWARE 11-2742734
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(Address of principal executive offices)
(212) 371-1500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
SEPTEMBER 1, 1999 27,560,000
Date Number of Shares
Page 1 of 16
<PAGE> 2
SHOREWOOD PACKAGING CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C> <C>
Part I: Financial Statements
Consolidated Balance Sheets
July 31, 1999 (Unaudited) and
May 1, 1999 (Audited) 3
Consolidated Condensed Statements of Earnings
13 weeks ended July 31, 1999 (Unaudited) and
13 weeks ended August 1, 1998 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows
13 weeks ended July 31, 1999 (Unaudited) and
13 weeks ended August 1, 1998 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements 6 - 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 14
Part II: Other Information 15
</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 BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31, MAY 1,
1999 1999
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,056 $ 11,755
Accounts receivable, net 67,455 51,295
Inventories 50,142 52,654
Prepaid expenses and other current assets 9,059 8,212
--------- ---------
Total Current Assets 127,712 123,916
Property, Plant and Equipment, net 245,283 243,448
Excess of Cost Over the Fair Value of Net Assets Acquired, net 122,942 123,954
Other Assets 36,179 24,145
--------- ---------
$ 532,116 $ 515,463
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 40,952 $ 44,130
Accrued expenses 28,882 32,064
Income taxes payable 1,949 4,215
Current maturities of long-term debt 20,000 20,000
--------- ---------
Total Current Liabilities 91,783 100,409
Long-Term Debt 251,303 227,712
Other Long-Term Liabilities 1,005 1,032
Minority Interest 13,998 14,981
Deferred Income Taxes 25,483 24,857
--------- ---------
Total Liabilities 383,572 368,991
--------- ---------
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; 60,000,000 shares authorized;
35,757,645 issued and 27,642,421 outstanding in July and
35,544,464 issued and 27,457,269 outstanding in May 358 355
Additional paid-in capital 71,862 74,763
Retained earnings 160,746 153,003
Accumulated other comprehensive income (7,267) (4,997)
Treasury stock (8,115,224 and 8,087,195 shares at
cost in July and May) (77,155) (76,652)
--------- ---------
Total Stockholders' Equity 148,544 146,472
--------- ---------
$ 532,116 $ 515,463
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3 of 16
<PAGE> 4
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
JULY 31, AUGUST 1,
1999 1998
<S> <C> <C>
Net Sales $ 143,711 $ 115,359
--------- ---------
Costs and Expenses:
Cost of Sales 108,774 90,054
Selling, General and Administrative 19,870 12,259
Amortization of Excess of Cost Over the Fair Value of Net
Assets Acquired 847 204
--------- ---------
Earnings from Operations 14,220 12,842
Other Income, net 783 391
Interest Expense (4,100) (2,086)
--------- ---------
Earnings Before Provision for Income Taxes, Minority Interest
and Cumulative Effect of a Change in Accounting Principle 10,903 11,147
Provision for Income Taxes 4,143 4,347
--------- ---------
Earnings Before Minority Interest and Cumulative Effect of
a Change in Accounting Principle 6,760 6,800
Minority Interest 983 --
--------- ---------
Earnings Before Cumulative Effect of a Change in Accounting
Principle 7,743 6,800
Cumulative Effect on Prior Years Related to the Adoption of
SOP 98-5 Reporting on the Cost of Start-Up Activities -- (3,040)
--------- ---------
Net Earnings $ 7,743 $ 3,760
========= =========
EARNINGS PER SHARE INFORMATION:
BASIC
Earnings Before Cumulative Effect of a Change in Accounting
Principle $ .28 $ .26
Cumulative Effect of a Change in Accounting Principle -- (.12)
--------- ---------
Net Earnings Per Common Share $ .28 $ .14
========= =========
DILUTED
Earnings Before Cumulative Effect of a Change in Accounting
Principle $ .28 $ .25
Cumulative Effect of a Change in Accounting Principle -- (.11)
--------- ---------
Net Earnings Per Common Share $ .28 $ .14
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 27,179 26,495
========= =========
DILUTED 28,064 27,081
========= =========
</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 CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS 13 WEEKS
ENDED ENDED
JULY 31, AUGUST 1,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings before minority interest $ 6,760 $ 3,760
Adjustments to reconcile net earnings before minority interest
to net cash flows provided from operations:
Non-cash cumulative effect of a change in accounting
principle -- 3,040
Depreciation and amortization 6,924 4,769
Deferred income taxes 829 522
Changes in operating assets and liabilities:
Accounts receivable (16,814) (13,178)
Inventories 1,992 2,330
Prepaid expenses and other current assets (884) 3,271
Other assets (12,271) 1,068
Accounts payable, accrued expenses and other
long term liabilities (10,213) (501)
-------- --------
Net cash flows (used in) provided from operating activities (23,677) 5,081
-------- --------
Cash Flows from Investing Activities:
Capital Expenditures (6,987) (13,261)
-------- --------
Net cash flows used in investing activities (6,987) (13,261)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from revolver borrowings 28,591 22,559
Repayments of long-term borrowings (5,000) (3,750)
Purchase of treasury stock (503) (11,597)
Purchase of common stock purchase warrant (4,200) --
Issuance of common stock 1,302 309
-------- --------
Net cash flows provided from financing activities 20,190 7,521
-------- --------
Effect of exchange rate changes on cash and cash equivalents (225) (102)
-------- --------
Decrease in cash and cash equivalents (10,699) (761)
Cash and cash equivalents at beginning of period 11,755 7,268
-------- --------
Cash and cash equivalents at end of period $ 1,056 $ 6,507
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized amounts $ 3,880 $ 2,028
======== ========
Income taxes paid $ 5,580 $ 2,896
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 16
<PAGE> 6
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position, the
results of operations, and the changes in cash flows at July 31, 1999 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 1, 1999 Annual Report to Stockholders on Form 10-K as filed with
the Securities and Exchange Commission ("1999 Form 10-K").
The results of operations for the 13 week period ended July 31, 1999 are not
necessarily indicative of the results for the full year.
2. BUSINESS ACQUISITION
In October 1998, the Company purchased substantially all of the assets and
assumed substantially all of the liabilities of Queens Group, Inc. ("Queens")
for a purchase price of $129.5 million comprised of approximately $113.7 million
in cash including the assumption of debt, and 1.0 million shares of Company
common stock, plus transaction expenses. Simultaneously with the closing of the
transaction, the Company repaid all outstanding bank debt of Queens,
approximating $19.0 million. Queens was engaged in the manufacture of value
added printed packaging primarily for the home entertainment industry. The
transaction was financed through a new credit facility.
The acquisition was recorded using the purchase method of accounting and,
accordingly, the results of operations of Queens are included in the
consolidated results of operations of the Company since the date of acquisition.
The purchase price of the acquisition has been allocated to the net assets
acquired based upon the related fair values. The excess of cost over the fair
value of net assets acquired approximated $108.2 million and is being amortized
over 40 years.
The following unaudited pro forma information for the thirteen week period ended
August 1, 1998 includes the operations of the Company, inclusive of the
operations of Queens, as if the acquisition had occurred at the beginning of the
respective periods presented. The pro forma gives effect to the amortization
expense associated with the excess of cost over the fair value of net assets
acquired, adjustments related to the fair market value of the net assets
acquired, shares issued in connection with the transaction, interest expense
related to financing the acquisition, and related income tax effects.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED
AUGUST 1, 1998
<S> <C>
Revenues $151,048
========
Earnings from Operations $ 14,158
========
Net Earnings Before Cumulative Effect of a Change in Accounting Principle $ 6,421
========
Net Earnings Per Share Before Cumulative Effect of a Change in Accounting Principle
Basic $ .23
========
Diluted $ .23
========
</TABLE>
Page 6 of 16
<PAGE> 7
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
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.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31, 1999 MAY 1, 1999
<S> <C> <C>
Raw materials and supplies $19,708 $20,286
Work in process 10,923 8,951
Finished goods 19,511 23,417
-------- --------
$50,142 $52,654
======= =======
</TABLE>
5. COMPREHENSIVE INCOME
The Company's total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
JULY 31, 1999 AUGUST 1, 1998
<S> <C> <C>
Net earnings $ 7,743 $ 3,760
Other comprehensive earnings (losses):
Change in equity due to foreign currency translation adjustment (2,270) (3,139)
--------- ---------
Comprehensive Earnings $ 5,473 $ 621
======= ========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
a. Treasury Stock
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
<TABLE>
<CAPTION>
DATE OF AUTHORIZATION AUTHORIZED SHARES
<S> <C>
January 1993 3.0 million
December 1995 3.0 million
April 1997 1.86 million
</TABLE>
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 July 31, 1999,
approximately 1.6 million shares remain authorized for purchase. Since July 31,
1999 and through September 1, 1999, the Company has purchased an additional 100
thousand shares of its common stock.
b. New Facility / Cumulative Effect of Change in Accounting Principle
The Company has completed building a state-of-the-art manufacturing facility in
the city of Guangzhou, China (the "China Facility"), which commenced operations
in the third quarter of fiscal 1999. In the fourth quarter of fiscal 1999 the
Company consummated a definitive agreement with Westvaco Corporation whereby it
sold to Westvaco a 45% minority interest in its China Facility.
Page 7 of 16
<PAGE> 8
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
Included in earnings from operations for the 13 week period ended July 31, 1999
were losses of approximately $2.1 million (of which approximately $900 thousand
is included in selling, general and administrative expenses). Included in
earnings from operations for the 13 week period ended August 1, 1998 were losses
of approximately $300 thousand (which was included in selling, general and
administrative expenses).
c. 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.
d. 1995 Performance Bonus Plan
In July 1995, the Board of Directors approved the 1995 Performance Bonus Plan
(the "Plan"), applicable to its Chairman of the Board (the "Chairman"). Under
the Plan, for each of the five fiscal years of the Company commencing with
fiscal year 1996, the Chairman 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. In 1998, the Board of
Directors has approved and shareholders have ratified the extension of the Plan
for an additional three years.
e. Loans to Executives
In connection with their exercise of stock options, the Company made loans of
approximately $527 thousand to its Chairman and approximately $657 to its
President in the first quarter of fiscal 2000. The principle amounts and accrued
interest on the loans (included as a component of additional paid-in capital)
are due and payable October 2, 2000. The loans are collateralized by a pledges
of 44,562 and 55,977 shares, respectively, of common stock.
f. Common Stock Purchase Warrants
In July 1999, the Company purchased a previously issued warrant to purchase
525,000 shares of its common stock for approximately $4.2 million.
Page 8 of 16
<PAGE> 9
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales for the 13 week period ended July 31, 1999 were $143.7 million
compared to $115.4 million for the corresponding prior 13 week period, an
increase of 24.6%. The revenue growth over the corresponding prior period
represents the strength of the home entertainment market (including the effect
of the acquisition of the Queens Group in the second quarter of fiscal 1999)
partially offset by lower sales to the Company's tobacco customers, reflecting
the softness in that industry.
The Company believes that future sales growth will be generated through
continued penetration of the home entertainment and cosmetics and general
consumer markets as well as its growth in China.
Cost of Sales
Cost of sales as a percentage of sales for the 13 week period ended July 31,
1999 was 75.7% as compared to 78.1% for the corresponding prior period. The
decrease in cost of sales as a percentage of sales is primarily attributable to
increased sales from the acquisition of Queens, whose sales had a favorable
margin when compared to consolidated margins, favorable product mix, and
favorable absorption of fixed overhead costs as a result of higher sales volume.
The decrease in cost of sales as a percentage of sales is also attributable to
savings derived from new equipment installed over the previous fiscal year.
These decreases were partially offset by losses on initial sales from its
facility in China.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (including the amortization of
excess of cost over the fair value of net assets acquired) as a percentage of
sales for the 13 week period ended July 31, 1999 was 14.4% as compared to 10.8%
for the corresponding prior period. Selling, general and administrative expenses
as a percentage of sales for the former Queens facilities are greater than that
of existing Shorewood facilities.
Other Income, net
Other income, net for the 13 week period ended July 31, 1999 includes foreign
exchange gains of $527 thousand and investment income of $259 thousand.
Other income, net, for the 13 week period ended August 1, 1998 includes foreign
exchange gains of $495 thousand and approximately $108 thousand of investment
income, offset by losses on disposal of fixed assets of $212 thousand.
Page 9 of 16
<PAGE> 10
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's exposure to foreign exchange transaction gains or losses relate to
the Company's Canadian facilities which have U.S. dollar denominated net assets.
The Company believes that fluctuations in foreign exchange rates will not have a
material impact on the operations or liquidity of the Company, based upon
current and historical levels of working capital at the Canadian facilities.
Recently, several Asian currencies have experienced weaknesses, which had the
impact of reducing some demand for Company products produced in North America
intended for ultimate use in export markets. The investments in the China
Facility expose the Company to foreign exchange risks related to the Renminbi
("Rmb"). Should the Canadian dollar or Rmb weaken, the Company would experience
a reduction in the net worth of the Company's investments in Canada and China
(through the accumulated other comprehensive income account). In addition, net
operating results (whether losses or profits) would be reduced. Exposure to
foreign exchange transaction gains or losses in China is expected to be minimal
as the Company expects to make purchases and sales in both Rmb and the US
dollar, and settlement periods on both accounts receivable and accounts payable
are expected to be short.
Interest Expense
Interest expense was $4.1 million for the 13 week period ended July 31, 1999 and
$2.1 million for the corresponding prior period. The increase in interest costs
for the 13 week period as compared to the corresponding prior period is
primarily attributable to increased borrowings related to financing the
acquisition of Queens and increased borrowings relating to the China Facility.
Capitalized interest decreased from $514 thousand to $165 thousand, primarily
related to the Company's completion of its facility in China during the third
quarter of fiscal 1999. The Company anticipates that the amount of interest to
be capitalized in fiscal 2000 will continue to be below the levels of the prior
year.
The Company uses interest rate derivatives to manage its exposure to fluctuating
interest rates. These transactions effectively change a portion of the Company's
interest rate exposure from a floating-rate to a fixed-rate basis. The Company's
interest rate derivatives are generally structured for the Company to pay a
fixed rate and receive a floating rate based on LIBOR, as determined in
three-month intervals.
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. 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 addition to the July 1997 swap agreement described above, the Company has the
following swap agreements outstanding at July 31, 1999:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT EXPIRING LIBOR RATE
- --------------- -------- ----------
<S> <C> <C>
$100.0 million October 2000 4.84%
$ 35.0 million May 2000 5.74%
$ 50.0 million August 1999 5.46%
</TABLE>
Page 10 of 16
<PAGE> 11
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
On June 16, 1998, the Financial Accounting Standards Board adopted Statement on
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Adoption of SFAS No. 133 is not required at
this time. In July 1999, the Financial Accounting Standards Board adopted SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of SFAS No. 133 -- an amendment of SFAS No. 133."
SFAS 137 defers the effective date of SFAS 133 until June 15, 2000. The adoption
of SFAS No. 133 and SFAS No. 137 are not expected to have a material impact on
the Company's financial statements.
Income Taxes
The effective income tax rate for the 13 week period ended July 31, 1999 is
38.0% and was 39.0% for the corresponding prior period. These rates reflect a
blend of domestic and foreign taxes and are adjusted periodically based upon the
estimated annual effective tax rate, which for the entire fiscal year ended May
1, 1999 was 36.2%.
The China Facility will enjoy a tax holiday for the first three years of
profitable operations, and thereafter be taxed at lower rates than the Company's
North American operations. Anticipated losses during the early periods of
operation will not result in related tax benefits. Such benefits will be
recognized when realized. The Company anticipates that this situation will
temporarily result in an increase in its effective tax rate in fiscal 2000.
China Facility / Start-Up Costs / Minority Interest
The Company has completed building a state-of-the-art manufacturing facility in
the city of Guangzhou, China (the "China Facility"), which commenced operations
in the third quarter of fiscal 1999. In the fourth quarter of fiscal 1999 the
Company consummated a definitive agreement with Westvaco Corporation whereby it
sold to Westvaco a 45% minority interest in its China Facility.
Included in earnings from operations for the 13 week period ended July 31, 1999
were losses of approximately $2.1 million (of which approximately $900 thousand
is included in selling, general and administrative expenses). Included in
earnings from operations for the 13 week period ended August 1, 1998 were losses
of approximately $300 thousand (which was included in selling, general and
administrative expenses).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at July 31, 1999 was $1.1 million as compared to $11.8
million at May 1, 1999, and working capital was $35.9 million as compared to
$23.5 million as of the same dates respectively. The current ratio at July 31,
1999 was 1.4 to one and was 1.2 to one at May 1, 1999. The Company has a cash
management program whereby collection of accounts receivable are used to retire
revolver obligations, and payments of accounts payable and accrued expenses are
funded through the revolving credit facility.
Page 11 of 16
<PAGE> 12
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 13 week period ended July 31, 1999
was $14.5 million before changes in operating assets and liabilities as compared
to $12.1 million for the corresponding prior period. Cash flows from operations
as well as borrowings under the Company's credit facilities were used to support
$7.0 million in capital investments and the repurchase of a previously issued
common stock purchase warrant of approximately $4.2 million. The Company
anticipates that capital expenditures will approximate $32.0 million for all of
fiscal 2000.
The Company's Board of Directors has authorized the purchase of the Company's
common stock as follows:
<TABLE>
<CAPTION>
DATE OF AUTHORIZATION AUTHORIZED SHARES
<S> <C>
January 1993 3.0 million
December 1995 3.0 million
April 1997 1.86 million
</TABLE>
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 July 31, 1999,
approximately 1.6 million shares remain authorized for purchase. Since July 31,
1999 and through September 1, 1999, the Company has purchased an additional 100
thousand 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.
In October 1998, in order to facilitate the acquisition of Queens and other
global opportunities which may arise over the next several years, the Company
entered into a new credit agreement with its lending banks to replace its
existing credit facility. The new credit facility provides for up to $325
million of borrowings and consists of a $100 million term loan to be paid in
equal quarterly installments over five years and a $225 million revolving credit
facility maturing at the end of five years. The revolving credit is available,
in its entirety, without any borrowing base limitation. Borrowings pursuant to
the facility will bear interest at the discretion of the Company, at either the
Bank's prime rate or at the LIBOR rate plus 62.5 to 125 basis points based upon
financial ratios as defined in the underlying Agreement. Unused commitment fees
will range from 20 to 30 basis points, based upon the same financial ratios. At
July 31, 1999, the Company had borrowings under the revolving facility of $186.3
million.
The underlying loan agreement for the borrowings referred to above includes
covenants related to levels of debt to cash flow, current assets to current
liabilities, fixed charge coverage, net worth and investments (including
investments in the Company's own common stock), and limits the amount of
retained earnings available for payment of dividends (other than dividends in
the Company's common stock). At July 31, 1999, there was approximately $36.0
million of retained earnings available for the payment of dividends. The
borrowings are collateralized by substantially all of the capital stock of the
Company's subsidiaries.
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 12 of 16
<PAGE> 13
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
YEAR 2000
State of Readiness
Independent of Year 2000 concerns, the Company has been focused on replacing
and/or upgrading all of its primary information systems, a project which began
in fiscal 1996. By eliminating the Company's legacy systems and replacing them
with an integrated system of modern information applications, the Company
expects to benefit both by enhancing business capabilities generally and
concurrently eliminating Year 2000 problems. This project is expected to be
completed by the end of calendar 1999.
To specifically address Year 2000 issues and to identify and eliminate Year 2000
problems throughout its operations, the Company has implemented a structured
program encompassing both information and non-information technology systems.
This program includes an internal review of all computer hardware and software,
whether used directly to support business and manufacturing processes or
embedded in components of machinery and other equipment, and a thorough review
of third party relationships.
With regard to its internal business systems, the Company has been preparing for
Year 2000 since mid-1997. As of July 31, 1999, the Company's assessment is that
a significant proportion of information systems and applications have been
rendered Year 2000 ready. Although the percentages of this work completed vary
across the Company's operations, the Company plans to complete the process of
making all its significant internal information systems Year 2000 ready by
November 1999.
As to third party issues, the Company has contacted key suppliers whose
noncompliance, either individually or cumulatively, could materially impact the
Company's business. Those suppliers who have responded indicate that they will
address Year 2000 issues in a timely manner. The Company is following up with
suppliers who have not responded. The Company is also soliciting and reviewing
on an ongoing basis Year 2000 disclosures of customers having similar
significance to the Company's business. The Company cannot provide assurance
that the Year 2000 compliance plans of its suppliers and customers will be
successfully completed in a timely manner.
Program Costs
As at July 31, 1999, cumulative Year 2000 program costs are estimated to be less
than $1 million. This estimate includes internal costs (i.e., related payroll
and required downtime) and external costs (i.e., hiring outside consultants to
assist in compliance efforts). Year 2000 program costs do not include the cost
of major new business system implementations scheduled prior to or independently
from the Company's specific Year 2000 compliance efforts described herein.
Estimated costs would have been substantially greater but for the fact that
recent modernization of many of the Company's business systems discussed above
involved the replacement of legacy software with new software which is Year 2000
compliant. The Year 2000 program costs have been funded by operating cash flow
and expensed as incurred. The Company does not expect a material adverse impact
on its long-term results of operations, liquidity or financial position as a
result of Year 2000 program costs. Cost estimates may be refined as technical
assessment, remediation and testing continue and as compliance status
information becomes available from third-party business associates.
Page 13 of 16
<PAGE> 14
SHOREWOOD PACKAGING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Risks
As a result of the steps detailed above, the Company does not anticipate that
Year 2000 issues will cause material problems for the Company, or will disrupt
business or result in a decline in earnings. However, if the Company, its
customers and suppliers are unable to adequately resolve Year 2000 issues, the
most likely worst case scenario includes a temporary slowdown or abrupt stoppage
of operations at one or more of the Company's facilities due to the failure of
one or more critical process control elements or business systems. Such failures
could result in interruptions in manufacturing, safety or environmental systems;
or a temporary inability to receive raw materials, ship finished products, or
process orders and invoices. Although not anticipated at this time, if such or
similar scenarios were to occur, they could, depending on their duration, have a
material impact on the Company's results of operations and financial position.
Such theoretical consequences are of a kind and magnitude generally shared with
other manufacturing companies. Assuming the successful completion of its Year
2000 program in a timely manner, the Company expects that any Year 2000
disruptions which may occur will be minor and not material to its business.
Contingency Plans
Contingency plans for business and process control systems began to be
implemented in April 1999. Such plans include the identification of alternate
suppliers; coordination with and support of customers to encourage placement of
orders and subsequent delivery of products in late 1999 rather than in early
2000; accumulation of raw material inventory; identification of manual
alternatives; and identification and implementation of alternative communication
methods. Contingency plans will continue to be reassessed and refined as
additional information becomes available.
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 5(d) of Notes to Consolidated
Condensed Financial Statements
Item 2 CHANGES IN SECURITIES
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.127-- Promissory Note of Howard M. Liebman dated June 23, 1999.
10.128-- Promissory Note of Howard M. Liebman dated July 26, 1999.
10.129-- Promissory Note of Marc P. Shore dated July 26, 1999.
(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
President and Chief Financial
Officer
Dated: September 14, 1999
Page 16 of 16
<PAGE> 1
PROMISSORY NOTE
$341,145 New York, New York June 23, 1999
For valued received, the undersigned promises to pay to SHOREWOOD
PACKAGING CORPORATION, or order, at 277 Park Avenue, New York, New York 10172,
the sum of Three hundred forty-one thousand One hundred Forty-five Dollars
($341,145). All unpaid principal shall bear interest from the date hereof at the
rate of Six and One Half percent (6.5%) per annum until paid. Unless paid
sooner, the unpaid principal balance of this note with accrued interest shall be
all due and payable on October 2, 2000.
This note may be prepaid from time to time, in whole or in part,
without penalty.
This note is secured by the pledge to Payee of certain of Maker's
shares in Shorewood Packaging Corporation as collateral security.
Should default be made in payment of any installment when due, the
whole sum of principal and accrued interest shall become immediately due at the
option of the holder of this note without presentment or demand for payment,
dishonor or notice of dishonor, protest or notice of protest or other
formalities, all of which are hereby waived. Principal and interest is payable
in lawful money of the United States without offset or deduction. If action be
instituted on this note, the undersigned promises to pay such sum as the Court
may fix as attorneys' fees.
/s/ Howard M. Liebman
------------------------------
Howard M. Liebman
<PAGE> 1
PROMISSORY NOTE
$316,376 New York, New York July 26, 1999
For valued received, the undersigned promises to pay to SHOREWOOD
PACKAGING CORPORATION, or order, at 277 Park Avenue, New York, New York 10172,
the sum of Three hundred sixteen thousand Three hundred Seventy-six Dollars
($316,376). All unpaid principal shall bear interest from the date hereof at the
rate of Six and One Half percent (6.5%) per annum until paid. Unless paid
sooner, the unpaid principal balance of this note with accrued interest shall be
all due and payable on October 2, 2000.
This note may be prepaid from time to time, in whole or in part,
without penalty.
This note is secured by the pledge to Payee of certain of Maker's
shares in Shorewood Packaging Corporation as collateral security.
Should default be made in payment of any installment when due, the
whole sum of principal and accrued interest shall become immediately due at the
option of the holder of this note without presentment or demand for payment,
dishonor or notice of dishonor, protest or notice of protest or other
formalities, all of which are hereby waived. Principal and interest is payable
in lawful money of the United States without offset or deduction. If action be
instituted on this note, the undersigned promises to pay such sum as the Court
may fix as attorneys' fees.
/s/ Howard M. Liebman
------------------------------
Howard M. Liebman
<PAGE> 1
PROMISSORY NOTE
$527,316 New York, New York July 26, 1999
For valued received, the undersigned promises to pay to SHOREWOOD
PACKAGING CORPORATION, or order, at 277 Park Avenue, New York, New York 10172,
the sum of Five hundred twenty-seven thousand Three hundred Sixteen Dollars
($527,316). All unpaid principal shall bear interest from the date hereof at the
rate of Six and One Half percent (6.5%) per annum until paid. Unless paid
sooner, the unpaid principal balance of this note with accrued interest shall be
all due and payable on October 2, 2000.
This note may be prepaid from time to time, in whole or in part,
without penalty.
This note is secured by the pledge to Payee of certain of Maker's
shares in Shorewood Packaging Corporation as collateral security.
Should default be made in payment of any installment when due, the
whole sum of principal and accrued interest shall become immediately due at the
option of the holder of this note without presentment or demand for payment,
dishonor or notice of dishonor, protest or notice of protest or other
formalities, all of which are hereby waived. Principal and interest is payable
in lawful money of the United States without offset or deduction. If action be
instituted on this note, the undersigned promises to pay such sum as the Court
may fix as attorneys' fees.
/s/ Marc P. Shore
------------------------------
Marc P. Shore
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