-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PnEei39PibSte7TRvJ0DOFY3CboSv3zoz9LOZCvEhitEVHi7Y5gLxT7w4gpaG3ZV UUDrpLNBcCAOcYLxGXkaMw== 0000950134-98-005923.txt : 19980716 0000950134-98-005923.hdr.sgml : 19980716 ACCESSION NUMBER: 0000950134-98-005923 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980530 FILED AS OF DATE: 19980715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORWOOD PROMOTIONAL PRODUCTS INC CENTRAL INDEX KEY: 0000902793 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 742553074 STATE OF INCORPORATION: TX FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21800 FILM NUMBER: 98666204 BUSINESS ADDRESS: STREET 1: 106 E 6TH ST STREET 2: STE 300 CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 2103419440 10-Q 1 FORM 10-Q FOR QUARTER ENDED MAY 30, 1998 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 Period Ended May 30, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the Transition Period From ________________ to Commission file number 0-21800 ------------------------------------------------ NORWOOD PROMOTIONAL PRODUCTS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) TEXAS 74-2553074 - ------------------------------------------------------------------------------------------------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
106 E. SIXTH ST., SUITE 300 AUSTIN, TEXAS 78701 --------------------------------------------------- (Address of Principal executive offices) (Zip Code) (512) 476-7100 -------------- (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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: 5,083,335 shares of Common Stock, no par value, as of July 8, 1998. 1 2 NORWOOD PROMOTIONAL PRODUCTS, INC. INDEX TO FORM 10-Q QUARTER ENDED MAY 30, 1998
PAGE NO. -------- PART I. Financial Information Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Statements of Income 3 Condensed Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Consolidated Statement of Shareholders' Equity 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. Other Information Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 Index to Exhibits 16
2 3 NORWOOD PROMOTIONAL PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands, except per share amounts) ITEM 1.
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ----------------------- MAY 30, MAY 31, MAY 30, MAY 31, 1998 1997 (a) 1998 1997 (a) --------- --------- --------- --------- Sales $ 53,347 $ 51,816 $ 140,300 $ 126,902 Cost of sales 38,156 36,508 101,656 89,358 --------- --------- --------- --------- Gross profit 15,191 15,308 38,644 37,544 Operating expenses 8,731 8,866 26,426 25,619 --------- --------- --------- --------- Operating income 6,460 6,442 12,218 11,925 Interest expense 1,032 822 2,936 2,135 --------- --------- --------- --------- Income before income taxes 5,428 5,620 9,282 9,790 Provision for income taxes 2,161 2,295 3,740 3,941 --------- --------- --------- --------- Income from continuing operations 3,267 3,325 5,542 5,849 Discontinued operations -- (549) -- (1,468) --------- --------- --------- --------- Net income $ 3,267 $ 2,776 $ 5,542 $ 4,381 ========= ========= ========= ========= Net income (loss) per common share: Basic: (b) (b) Income from continuing operations $ 0.64 $ 0.63 $ 1.09 $ 1.06 Discontinued operations -- (0.10) -- (0.26) --------- --------- --------- --------- Net income $ 0.64 $ (0.53) $ 1.09 $ 0.80 ========= ========= ========= ========= Diluted: Income from continuing operations $ 0.62 $ 0.62 $ 1.06 $ 1.04 Discontinued operations -- (0.10) -- (0.26) --------- --------- --------- --------- Net income $ 0.62 $ (0.52) $ 1.06 $ 0.78 ========= ========= ========= ========= Weighted average number of common shares outstanding: Basic 5,080 5,279 5,075 5,504 Diluted 5,310 5,326 5,222 5,623
(a) Restated for discontinued operations reported in the fourth quarter, 1997 (b) Restated to conform with the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share See accompanying notes to condensed consolidated financial statements. 3 4 NORWOOD PROMOTIONAL PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MAY 30, 1998 AUGUST 30, 1997 ASSETS (UNAUDITED) (AUDITED) ------------ --------------- Current Assets: Cash and cash equivalents $ 206 $ 2,609 Accounts receivable 26,439 24,282 Income taxes receivable -- 551 Other receivables 595 713 Inventories 35,462 32,105 Prepaid expenses and other current assets 3,139 2,464 --------- --------- Total current assets 65,841 62,724 Property, plant and equipment, net 18,802 21,141 Goodwill 36,677 39,009 Deferred income taxes 2,630 2,549 Other assets 10,759 9,771 --------- --------- Total assets $ 134,709 $ 135,194 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Trade accounts payable $ 12,163 $ 11,299 Accrued liabilities 5,051 11,197 Income taxes payable 1,600 -- Current portion of long-term debt 2,909 2,352 --------- --------- Total current liabilities 21,723 24,848 Long-term debt, excluding current portion 55,997 59,070 Shareholders' equity: Common stock, no par value; 20,000,000 shares authorized; 5,657,281 and 5,638,789 shares issued at May 30, 1998 and August 30, 1997, respectively 23,029 22,858 Additional paid-in capital 29,340 29,340 Less cost of treasury stock, 576,530 shares at May 30, 1998 and August 30, 1997, respectively (7,391) (7,391) Retained earnings 12,011 6,469 --------- --------- Total shareholders' equity 56,989 51,276 --------- --------- Total liabilities and shareholders' equity $ 134,709 $ 135,194 ========= =========
See accompanying notes to condensed consolidated financial statements 4 5 NORWOOD PROMOTIONAL PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED ---------------------- MAY 30, MAY 31, 1998 1997 -------- -------- OPERATING ACTIVITIES Net income $ 5,542 $ 4,381 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,881 3,197 Amortization 3,054 2,940 Deferred income taxes (81) -- Loss on sale of property & equipment 2 -- Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable (2,157) (4,621) Income taxes receivable 551 -- Inventories (3,357) (1,350) Prepaid expenses and other current assets (675) (1,413) Other receivables 118 (134) Accounts payable 864 2,051 Accrued liabilities (4,900) (1,197) Income taxes payable 1,600 1,061 -------- -------- Net cash provided by operating activities 3,442 4,915 -------- -------- INVESTING ACTIVITIES Business acquisitions, net of cash -- (8,229) Purchase of property, plant & equipment (3,413) (3,490) Proceeds from retirement of property, plant & equipment -- 44 -------- -------- Net cash used in investing activities (3,413) (11,675) -------- -------- FINANCING ACTIVITIES Proceeds from long-term debt 38,642 61,140 Payments on long-term debt (41,245) (47,871) Proceeds on common stock options 171 92 Purchase of treasury stock -- (7,383) -------- -------- Net cash provided (used) by financing activities (2,432) 5,978 -------- -------- Net change in cash and cash equivalents (2,403) (782) Cash and cash equivalents at beginning of period 2,609 1,861 -------- -------- Cash and cash equivalents at end of period $ 206 $ 1,079 ======== ======== Noncash investing activity: Note receivable for sale of equipment $ 2,282 ---
See accompanying notes to condensed consolidated financial statements 5 6 NORWOOD PROMOTIONAL PRODUCTS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED, IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ---------------- PAID-IN RETAINED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY ----- ------ ------- -------- -------- ------------- Balance at August 30, 1997 5,639 $22,858 $29,340 $ 6,469 $(7,391) $51,276 Exercise of common stock options 18 171 -- -- -- 171 Net income -- -- -- 5,542 -- 5,542 ----- ------- ------- ------- ------- ------- Balance at May 30, 1998 5,657 $23,029 $29,340 $12,011 $(7,391) $56,989 ===== ======= ======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements 6 7 NORWOOD PROMOTIONAL PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED MAY 30, 1998 AND MAY 31, 1997 1. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Air-Tex Corporation ("Air-Tex"), ArtMold Products Corporation ("ArtMold"), Barlow Promotional Products, Inc. ("Barlow"), Key Industries, Inc. ("Key"), Radio Cap Company, Inc. ("RCC") and Norcorp, Inc. ("Norcorp") and have been presented in accordance with the reporting requirements for interim financial statements. Such requirements do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in an Annual Report of the registrant on Form 10-K. The information furnished herein reflects all adjustments which, in the opinion of management, are of a normal recurring nature and necessary for a fair statement of the results of interim periods. Such results for interim periods are not necessarily indicative of the results to be expected for a full year, principally due to seasonal fluctuations in product line revenue. 2. INVENTORIES Inventories at May 30, 1998 and May 31, 1997 consist of (in thousands):
May 30, 1998 May 31, 1997 Raw materials $ 9,145 $ 9,164 Work in process 962 1,298 Finished goods 25,355 21,643 Total $35,462 $32,105
EARNINGS PER SHARE The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128 during the second quarter ended February 28, 1998. As required by SFAS No. 128, the method used by the Company to compute earning per share was changed and prior periods have been restated. Under the new requirements for calculating basic (formerly primary) earnings per share, the dilutive effect of stock options and warrants is excluded. In addition for calculating diluted (formerly fully diluted) earnings per share, the treasury stock method is applied using the average price for the period rather than the higher of the average price or the closing price on the last day of the period. MERGER The Company announced on May 16, 1998 that it had signed a merger agreement (the "Merger") with FPK, LLC, a limited liability company formed by the Company's Chairman and Chief Executive Officer, under which each share of the common stock of the Company (other than shares held by certain members of Norwood's management and employees) will be converted into the right to receive $20.70 per share in cash. Under the merger agreement, FPK, LLC will form a wholly owned subsidiary which will be merged with and into the Company, with the Company being the surviving corporation. The Merger is subject, among other things, to the approval of the holders of at least two-thirds of the outstanding common stock of the Company and the consummation of debt and equity financing to finance the transaction. Financing is being arranged by FPK, LLC. 7 8 Based on the recommendation of a Special Committee of the Board of Directors, the merger agreement was unanimously approved by the Board of Directors of the Company (with two interested directors abstaining) and by the Sole Manager and Member of FPK, LLC. It is anticipated that the transaction will close in the third calendar quarter of 1998. Upon completion of the transaction, the Company will continue to operate as an independent company. 8 9 NORWOOD PROMOTIONAL PRODUCTS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following is Management's discussion and analysis of the results of operations and financial condition of Norwood Promotional Products, Inc. and its subsidiaries ("the Company") during the periods included in the accompanying condensed consolidated financial statements. The discussion below relates to material changes in the results of operations for the three and nine months ended May 30, 1998 as compared to the same periods ended May 31, 1997, and to material changes in the financial condition of the Company occurring since the prior fiscal year end of August 30, 1997. The Company's results of operations for the periods discussed below were affected by the acquisitions of Wesburn Golf (acquired in February 1997) and DM Apparel, Inc. (acquired in February 1997) (collectively referred to as the "fiscal 1997 acquisitions"). For further information, refer to the Company's Annual Report on Form 10-K for the year ended August 30, 1997. THREE MONTHS ENDED MAY 30, 1998 COMPARED WITH THREE MONTHS ENDED MAY 31, 1997 Sales for the third quarter of fiscal 1998 increased $1.5 million, or 3.0%, to $53.3 million from $51.8 million (restated for discontinued operations reported August 1997) in the third quarter of fiscal 1997. Significant sales increases for the third quarter were realized at RCC (8.3% increase), Barlow (12.2% increase) and Key (7.0% increase) over the same quarter last year while Air-Tex experienced a decrease in sales of 8.8% compared to the same quarter last year. Gross profit for the third quarter of fiscal 1998 decreased $117,000, or 0.8%, to $15.2 million from $15.3 million in the third quarter of fiscal 1997. This decrease was attributable to a decline in overall gross profit percentage from 29.5% to 28.5% resulting from the growth in logo golf ball sales which have lower gross profit margins (offset by lower operating expenses), and lower margins recorded by the Company's custom sewing jacket operation, its California Line division, and the Air-Tex bag product lines. In addition, due to higher than expected sales volumes, the Company has experienced labor variances at RCC due to its plastic drinkware processing and at Barlow due to the relocation of its St. Paul, Minnesota facility. Operating expenses for the third quarter of fiscal 1998 decreased $135,000, or 1.5%, to $8.7 million from $8.9 million in the third quarter of fiscal 1997. Operating expenses as a percentage of sales decreased from 17.1% to 16.4%. These decreases reflect the lower operating expenses of the logo golf ball business, the realignment of the operating companies into two groups undertaken at the end of fiscal 1997 and to other cost saving initiatives undertaken by the Company's subsidiaries. Operating income for the third quarter of fiscal 1998 increased $18,000, or 0.3%, to $6.5 million from $6.4 million in the third quarter of fiscal 1997. Operating income as a percentage of sales decreased from 12.4% to 12.1%. This decrease was mainly attributable to lower contributions from the custom sewing jacket operation, bag product lines at Air-Tex and California Line. Management believes that the bag product lines lower operating income will recover. Interest expense was $1.0 million for the third quarter of fiscal 1998 compared to $822,000 in the third quarter of fiscal 1997. The increase was principally attributable to the increase in borrowings used to repurchase 575,100 shares of the Company's common stock in April 1997. 9 10 The Company's effective tax rate was 39.8% during the third quarter of fiscal 1998 compared with 40.8% in the third quarter of fiscal 1997. Discontinued operations for fiscal 1997 relates to the Company's decision to discontinue the operations of the Alpha Products retail division in the fourth quarter of 1997. The after-tax operating loss attributable to the Alpha Products division in the third quarter of fiscal 1997 was $549,000. Net income for the third quarter of fiscal 1998 increased $491,000 to $3.3 million from $2.8 million in the third quarter of fiscal 1997. The Company announced at the end of fiscal 1997 that its operating entities had been reorganized into two groups: RCC Group and Barlow Group. At the beginning of the third quarter of fiscal 1998, the Barlow Group was further subdivided into two groups consisting of the Barlow Group and The Artmold-Key Group. The RCC Group is comprised of operations producing drinkware, Koozie(R), headwear and promotional bag products. The Barlow Group's products include pocket tools, business gifts and recognition awards, while the Artmold-Key Group's products include writing instruments, and desktop and office products. For the third quarter of 1998, the RCC Group recorded sales of $24.6 million, a 2.7% increase from sales of $24.0 million in the same period for 1997. The Barlow Group's sales for the 1998 third quarter increased $788,000 to $9.0 million from $8.2 million reported in the 1997 third quarter. The Artmold-Key Group's sales for the third quarter of 1998 increased $28,000 to $19.8 million from $19.7 million in the same period for 1997. Adjusted for fiscal 1997 acquisitions, Artmold-Key Group sales increased 9.9% from the comparable quarter. The gross profit margin of the RCC Group was 30.2% for the third quarter of fiscal 1998 compared to 33.0% for the same period of 1997; for the Barlow Group, the gross profit margin was 34.6% compared to 37.0% for the third quarters of 1998 and 1997, respectively; and for the Artmold-Key Group, the gross profit margin was 22.5%, compared to 22.9% for the same respective periods. The variance for the RCC Group was due to the start-up expenses of the Alpha Products operations which moved from Atlanta to San Antonio; the variance for the Barlow Group was due to relocations costs of the recognition awards division from St. Paul, Minnesota to California and increased overseas air-freight variances; and the variance for the Artmold-Key Group was due to a change in sales mix; increased logo golf ball sales, which traditionally have lower gross margins on sales. Operating expenses in the third quarter of 1998, as a percentage of sales, were approximately 13.5%, 21.7%, and 13.7% for the RCC Group, Barlow Group, and Artmold-Key Group, respectively, compared to 14.1%, 21.2%. and 13.7%, respectively, for the same period of 1997. NINE MONTHS ENDED MAY 30, 1998 COMPARED WITH NINE MONTHS ENDED MAY 31, 1997 Sales for the first nine months of fiscal 1998 increased $13.4 million, or 10.6%, to $140.3 million from $126.9 million (restated for discontinued operations reported August 1997) in the first nine months of fiscal 1997. Excluding businesses acquired during the second half of fiscal 1997, sales for the first nine months of fiscal 1998 increased approximately 6.9% from the comparable period last year. Significant sales increases for the first nine months of fiscal 1998 were realized at RCC (11.3% increase) and Barlow (13.4% increase) over the same period last year while Air-Tex posted a decrease in sales of 14.6% compared to the same period last year. Gross profit for the first nine months of fiscal 1998 increased $1.1 million, or 2.9%, to $38.6 million from $37.5 million in the first nine months of fiscal 1997. This increase was attributable to the fiscal 1997 acquisitions offset by a decline in overall gross profit percentage from 29.6% to 27.5%. This decrease was attributable to the growth in logo golf ball sales which have lower gross profit margins (offset by lower operating expenses), and lower margins recorded by the Company's custom sewing jacket operation, its California Line division and the Air-Tex bag product lines. In addition, due to higher sales volumes, the Company has experienced labor variances at RCC due to its plastic drinkware processing and at Barlow due to the relocation of its St. Paul, Minnesota facility. 10 11 Operating expenses for the first nine months of fiscal 1998 increased $807,000 or 3.1%, to $26.4 million from $25.6 million in the first nine months of fiscal 1997. This increase was primarily attributable to the fiscal 1997 acquisitions. Operating expenses as a percentage of sales decreased from 20.2% to 18.8%. This decrease reflects the lower operating expenses of the logo golf ball business, the realignment of the operating companies into two groups undertaken at the end of fiscal 1997 and to other cost saving initiatives undertaken by the Company's subsidiaries. Operating income for the first nine months of fiscal 1998 increased $293,000, or 2.5%, to $12.2 million from $11.9 million in the first nine months of fiscal 1997. Operating income as a percentage of sales decreased from 9.4% to 8.7%. This decrease was mainly attributable to lower gross profit due to the relocation of the promotional products division of Alpha Products from Atlanta to San Antonio and lower contributions from the custom sewing jacket operation, bag product lines at Air-Tex and California Line. Management believes the bag product lines lower operating income will recover. Interest expense was $2.9 million for the first nine months of fiscal 1998 compared to $2.1 million in the first nine months of fiscal 1997. The increase was principally attributable to the increase in borrowings to repurchase 575,100 shares of the Company's common stock in April 1997. The Company's effective tax rate was 40.3% during the first nine months of fiscal 1998 and fiscal 1997, respectively. Discontinued operations for fiscal 1997 relates to the Company's decision to discontinue the operations of the Alpha Products retail division in the fourth quarter of 1997. The after-tax operating loss attributable to the Alpha Products retail division for the nine months ended May 31, 1997 was $1.5 million. Net income for the first nine months of fiscal 1998 increased $1.2 million, or 26.5%, to $5.5 million from $4.4 million in the first nine months of fiscal 1997. For the nine months ended May 30, 1998, the RCC Group recorded sales of $63.2 million, an 8.5% increase from sales of $58.2 million in the same period for 1997. The Barlow Group's sales for the first nine months of fiscal 1998 increased $2.4 million to $28.7 million from $26.3 million reported in the same period of fiscal 1997. The Artmold-Key Group's sales for the first nine months of fiscal 1998 increased $6.9 million to $48.4 million from $41.5 million in the same period for 1997. Adjusted for fiscal 1997 acquisitions, Artmold -Key Group sales increased 9.6% from the comparable period. The gross profit margin of the RCC Group was 27.6% for the nine months ended May 30, 1998 compared to 30.5% for the same period of 1997; for the Barlow Group, the gross profit margin was 35.8% compared to 36.4% for the first nine months of fiscal 1998 and 1997, respectively; and for the Artmold-Key Group, the gross profit margin was 22.6%, compared to 24.1% for the same respective periods. The variance for the RCC Group was due to the start-up expenses of the Alpha Products operations which moved from Atlanta to San Antonio; the variance for the Barlow Group was due to relocations costs of the recognition awards division from St. Paul, Minnesota to California and increased overseas air-freight variances; and the variance for the Artmold-Key Group was due to a change in sales mix; increased logo golf ball sales, which traditionally have lower gross margins on sales. Operating expense in the first nine months of fiscal 1998, as a percentage of sales, were approximately 15.3%, 19.6%, and 16.1% for the RCC Group, Barlow Group, and Artmold-Key Group, respectively, compared to 17.2%, 20.1%. and 17.8%, respectively, for the same period of 1997. 11 12 LIQUIDITY AND CAPITAL RESOURCES The Company has financed its business activities primarily with borrowings under its bank credit facilities (the "1997 Credit Facility"), notes payable to former owners of acquired businesses, the sale of its common stock and cash provided from operations. The 1997 Credit Facility provides for aggregate borrowings of up to $125.0 million, comprised of a $40.0 million term loan facility ($39.7 million outstanding at May 30, 1998), a $60.0 million reducing revolving credit facility to be used for future acquisitions ($0 outstanding at May 30, 1998) and a $25 million revolving credit facility to be used for working capital purposes ($6.7 million outstanding at May 30, 1998). Pursuant to the terms of the 1997 Credit Facility, the Company is required to maintain certain financial ratios and is subject to limitation on dividends, additional indebtedness, liens, investments, issuances of stock, mergers and acquisitions, and sales of assets. The Company is required to make quarterly payments on the term loan facility through maturity at the end of fiscal 2005. The reducing revolving credit facility and the revolving credit facility terminate at the end of fiscal 2003. Amounts outstanding under the 1997 Credit Facility bear interest at a rate equal to either the agent bank's prime rate or the London Interbank Offered Rate, plus an interest rate spread which varies based on the Company's leverage ratio (determined under the credit agreement). Indebtedness under the 1997 Credit Facility is secured by a first priority security interest in substantially all the assets of the Company. Additionally, any assets acquired with financing under the 1997 Credit Facility will serve as security. Borrowings under the 1997 Credit Facility are jointly and severally guaranteed by all existing, acquired or created subsidiaries of the Company. WORKING CAPITAL AND CAPITAL EXPENDITURES Net cash provided by operating activities was $3.4 million and $4.9 million for the nine months ended May 30, 1998 and May 31, 1997, respectively. Capital expenditures were approximately $3.4 million and $3.5 million for the nine months ended May 30, 1998 and May 31, 1997, respectively. During the current fiscal year, the Company's principal capital needs will be to finance ongoing capital expenditures. Although the Company currently believes that cash flow from operations and available borrowing capacity under the 1997 Credit Facility will be sufficient to meet the Company's working capital and capital expenditure requirements and future debt service obligations for at least the next 12 months, there can be no assurance that this will be the case. The Company believes its fiscal 1998 capital expenditure requirements will be approximately $4.0 million primarily to acquire additional processing equipment, management information systems, furniture and fixtures and leasehold improvements. YEAR 2000 ISSUES Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. This could cause a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has initiated an assessment and replaced or will modify portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company does not expect that the Year 2000 Issue will materially affect future financial results. 12 13 FORWARD LOOKING STATEMENTS This report contains forward looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, that are not historical facts. Such statements may include, but not be limited to, projected capital expenditure requirements, plans for future operations, financing needs or plans, and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. These statements involve management's assumptions and are subject to risks and uncertainties, including those set forth below, along with factors set forth in the Company's Annual Report on Form 10-K in "Business--Risk Factors". The following factors could affect the Company's results, causing such results to differ materially from those in any forward looking statement contained in this report: (i) the failure of the Company to maintain or control its internal growth or the failure of the Company to manage its expanding operations effectively; (ii) a change in risks inherent in the Company's foreign sourcing of supplies; (iii) the loss of the services of one or more key management personnel; (iv) a change in the risks inherent in the Company's leverage position; (v) the loss of the Company's single supplier of Koozie(R) insulation material; and (vi) an increase in competition. 13 14 NORWOOD PROMOTIONAL PRODUCTS, INC. FORM 10-Q FOR THE QUARTER ENDED MAY 30, 1998 PART II Item 1. Legal Proceedings On March 16, 1998, Harbor Finance Partners, an alleged shareholder of the Company, filed a lawsuit against the Company seeking to enjoin the Merger. The plaintiff alleged that the Merger is unfair to the Company's shareholders. The lawsuit also named the Company's directors individually and, as alternative relief, sought unspecified damages for an alleged breach of their fiduciary duties. The suit was filed in the 250th District Court of Travis County, Texas and was styled Harbor Finance Partners v. Frank P. Krasovec, et al. The plaintiff sought certification as a class action on behalf of all shareholders of the Company, except the individual defendants and their affiliates. On April 10, 1998, the Company filed special exceptions asserting that the plaintiff was not entitled to the requested relief as a matter of law. At a hearing on April 16, 1998, the Court sustained the Company's special exceptions and ordered the plaintiff to amend its pleadings to state a proper claim for relief by April 27, 1998. On April 24, 1998, the plaintiff filed a non-suit, dismissing the lawsuit. On May 28, 1998, the lawsuit was fully and finally resolved when an Agreed Order was entered in the 280th District Court of Travis County which dismissed the lawsuit with prejudice. Item 6. Exhibits and Reports on Form 8-K 6 (a) Exhibits: See Index to Exhibits. 6 (b) Reports on Form 8-K: The following is the date and description of the events reported on Forms 8-K filed during the third quarter of 1998:
Date of Earliest Event Reported on Form 8-K Description - --------------------------------------------------------------- March 15, 1998 Agreement and Plan of Merger by and between FPK, LLC and Norwood Promotional Products, Inc.
14 15 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Norwood Promotional Products, Inc. ---------------------------------- (Registrant) Date: July 14, 1998 /s/ James P. Gunning, Jr. ----------------------------------------------------- James P. Gunning, Jr. Secretary, Treasurer and Chief Financial Officer 15 16 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION 11.0 -- Computation of earnings per share 27.0 -- Financial data schedule
EX-11 2 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.0 COMPUTATION OF EARNINGS PER SHARE (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------- -------------------- MAY 30, MAY 31, MAY 30, MAY 31, 1998 1997 (a) 1998 1997 (a) BASIC: (b) (b) Weighted average common shares outstanding 5,080 279 5,075 5,504 Income from continuing operations $ 3,267 $ 3,325 $ 5,542 $ 5,849 Discontinued operations -- (549) -- (1,468) Net Income $ 3,267 $ 2,776 $ 5,542 $ 4,381 Per share amounts: Income from continuing operations $ 0.64 $ 0.63 $ 1.09 $ 1.06 Discontinued operations -- (0.10) -- (0.26) Net Income $ 0.64 $ 0.53 $ 1.09 $ 0.80 DILUTED: (b) (b) Weighted average common shares outstanding 5,080 5,279 5,075 5,504 Weighted average dilutive potential common shares outstanding 230 47 147 119 Total 5,310 5,326 5,222 5,623 Income from continuing operations $ 3,267 $ 3,325 $ 5,542 $ 5,849 Discontinued operations -- (549) -- (1,468) Net Income $ 3,267 $ 2,776 $ 5,542 $ 4,381 Per share amounts: Income from continuing operations $ 0.62 $ 0.62 $ 1.06 $ 1.04 Discontinued operations -- (0.10) -- (0.26) Net Income $ 0.62 $ 0.52 $ 1.06 $ 0.78
(a) Restated for discontinued operations reported in the fourth quarter, 1997 (b) Restated to conform with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF NORWOOD PROMOTIONAL PRODUCTS, INC. FOR THE NINE MONTHS ENDED MAY 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q. 1,000 9-MOS AUG-29-1998 AUG-31-1997 MAY-30-1998 206 0 27,115 676 35,462 65,841 35,897 17,095 134,709 21,723 0 0 0 23,029 33,960 134,709 140,300 140,300 101,656 26,426 0 0 2,936 9,282 3,740 5,542 0 0 0 5,542 1.09 1.06
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