<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only
(as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
NORWOOD PROMOTIONAL PRODUCTS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$16,971
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 13E-3
- --------------------------------------------------------------------------------
(3) Filing Party:
Norwood Promotional Products, Inc.
- --------------------------------------------------------------------------------
(4) Date Filed:
April 29, 1998
- --------------------------------------------------------------------------------
<PAGE> 2
NORWOOD PROMOTIONAL PRODUCTS, INC.
106 E. SIXTH STREET
SUITE 300
AUSTIN, TEXAS 78701
JULY 22, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
(including any adjournments or postponements thereof, the "Meeting") of Norwood
Promotional Products, Inc. (the "Company") to be held on Wednesday, August 19,
1998 at 10:00 a.m., local time, in the University Room at the Metropolitan Club,
1300 One American Center, 600 Congress Avenue, Austin, Texas.
At the Meeting, you will be asked to consider and vote upon proposals to
(1) adopt an amendment to the articles of incorporation of the Company (the "Par
Value Conversion") that would change the shares of the common stock of the
Company (the "Common Stock") from shares without par value into shares with a
par value of $0.01 per share (2) if the Par Value Conversion is adopted, adopt
an amendment to the articles of incorporation of the Company (the "Serial
Preferred Amendment") that would authorize the Board of Directors of the Company
(the "Board") to establish and issue one or more series of serial preferred
stock, and (3) approve the merger (the "Merger") of a wholly-owned subsidiary
("Newco") of FPK, LLC ("LLC") with and into the Company, with the Company
continuing as the surviving corporation (the "Surviving Corporation"), pursuant
to an Agreement and Plan of Merger dated as of March 15, 1998, as amended (the
"Merger Agreement"), by and between the Company and LLC, and the other terms of
the Merger Agreement. The adoption of the Par Value Conversion is a condition to
the consummation of the Merger under the Merger Agreement. A copy of the Merger
Agreement is attached to the accompanying Proxy Statement as Appendix A.
Subject to the terms and conditions of the Merger Agreement, at the
effective time of the Merger (the "Effective Time"), each share of Common Stock
outstanding immediately prior to the Effective Time (other than shares held by
the Company or any of its subsidiaries as treasury stock, shares held by the
Buyout Group (as defined below) and shares held by dissenting shareholders who
have validly exercised and perfected their rights under Texas law) will be
converted into the right to receive $20.70 in cash (the "Merger Consideration").
Frank P. Krasovec is the Chairman, President and Chief Executive Officer of
the Company and is a member of the Buyout Group. Mr. Krasovec beneficially owns
all the interests in LLC. All of the capital stock of Newco, when formed, will
be beneficially owned by LLC. John H. Josephson, a director of the Company, is
also a member of the Buyout Group. As of July 20, 1998 (the "Record Date"), Mr.
Krasovec and the other shareholders of the Company who will continue to own
shares of common stock in the Surviving Corporation (the "Buyout Group")
beneficially owned 660,917 and 474,088 shares of Common Stock, respectively
(representing approximately 13.0% and 9.3%, respectively, of the outstanding
Common Stock).
Pursuant to the Texas Business Corporation Act, the affirmative vote of
holders of at least two-thirds of the shares of Common Stock outstanding as of
the Record Date is required to adopt the Par Value Conversion and the Serial
Preferred Amendment (collectively, the "Charter Amendments") and to approve the
Merger Agreement. It is anticipated that the members of the Buyout Group and
their spouses will vote the 983,865 shares of Common Stock held of record by
them, representing approximately 19.3% of the outstanding Common Stock, in favor
of the adoption of the Charter Amendments and the approval of the Merger
Agreement. In addition, it is anticipated that the members of the Board who are
not members of the Buyout Group will vote the 25,010 shares of Common Stock held
of record by them in favor of the Charter Amendments and the Merger Agreement.
At the Effective Time, in order to fund a portion of the costs of the
Merger, the Surviving Corporation will issue (i) shares of its common stock to
purchasers (which purchasers may include members of the Buyout
<PAGE> 3
Group) (the "Additional Common Shareholders") for an aggregate of approximately
$4 million, and (ii) units of its preferred stock and common stock to purchasers
for an aggregate of $20 million (collectively, with the Additional Common
Shareholders, the "New Shareholders"). Newco will be formed by LLC in order to
enable members of the Buyout Group and the New Shareholders to acquire, through
the Merger, all of the outstanding Common Stock not already owned by the members
of the Buyout Group. At the Effective Time, the members of the Buyout Group will
continue to beneficially own an aggregate of 1,135,005 shares of Common Stock
that they held immediately prior to the Effective Time. If the Merger is
consummated, (i) the members of the Buyout Group, along with the New
Shareholders, will hold all of the outstanding capital stock of the Surviving
Corporation, and (ii) except as described in the Proxy Statement, the holders of
options, warrants and convertible debt instruments entitling them to purchase or
acquire shares of Common Stock, including members of the Buyout Group, who do
not exercise or convert such options, warrants or convertible debt instruments
prior to the Effective Time will continue to hold such securities entitling them
to purchase or acquire common stock of the Surviving Corporation. The Company
expects all directors who are not members of the Buyout Group to exercise their
warrants to purchase shares of Common Stock prior to the Effective Time.
Due to the inherent conflicts of interest related to the Merger, the Board
appointed a Special Committee of the Board (the "Special Committee") comprised
of two of the directors of the Company, Robert L. Seibert and John H. Wilson
III, who are neither officers of the Company nor members of the Buyout Group, to
review, evaluate and negotiate the terms of the proposed Merger and to make a
recommendation to the Board concerning the fairness of the proposed Merger. The
Special Committee retained J.C. Bradford & Co., L.L.C. ("J.C. Bradford") to act
as its financial advisor. J.C. Bradford has delivered its written opinion to the
Special Committee to the effect that, as of the date hereof, the Merger
Consideration of $20.70 in cash per share of Common Stock to be received in the
Merger by the Company's shareholders other than members of the Buyout Group (the
"Public Shareholders") is fair to the Public Shareholders from a financial point
of view. A copy of J.C. Bradford's written opinion is attached as Appendix B to
the accompanying Proxy Statement.
For the reasons set forth in the attached Proxy Statement, upon the
recommendation of the Special Committee, the Board (with two interested
directors abstaining) has unanimously determined that the proposed Merger is in
the best interests of the Company and the Public Shareholders, approved the
terms of Merger Agreement and recommended that the Merger Agreement be approved
and adopted by the shareholders of the Company. Under the terms of the Merger
Agreement, it is a condition to the consummation of the Merger that the Par
Value Conversion be adopted. THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
ADOPTION OF BOTH CHARTER AMENDMENTS AND "FOR" APPROVAL OF THE MERGER AGREEMENT.
Attached is a Notice of Special Meeting of Shareholders and a Proxy
Statement containing a description of the Charter Amendments and a discussion of
the background of, reasons for and terms of the Merger. You are urged to read
this material carefully. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE
ASKED TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. FAILURE TO
VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE CHARTER AMENDMENTS AND THE
MERGER AGREEMENT. If you attend the Meeting, your proxy may be revoked if you
elect to vote in person. Your prompt cooperation will be greatly appreciated.
Very truly yours,
/S/ JAMES P. GUNNING
James P. Gunning, Jr.,
Secretary
<PAGE> 4
NORWOOD PROMOTIONAL PRODUCTS, INC.
106 E. SIXTH STREET
SUITE 300
AUSTIN, TEXAS 78701
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 19, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of Norwood Promotional Products, Inc. (the "Company") will be held on
Wednesday, August 19, 1998 at 10:00 a.m., local time, in the University Room at
the Metropolitan Club, 1300 One American Center, 600 Congress Avenue, Austin,
Texas, for the following purposes:
(1) To consider and vote upon a proposal to adopt an amendment to the
Company's articles of incorporation (the "Par Value Conversion") to change
the shares of the Company's common stock (the "Common Stock") from shares
without par value to shares with a par value of $0.01 per share;
(2) If the Par Value Conversion is adopted, to consider and vote upon
a proposal to adopt an amendment to the Company's articles of incorporation
(the "Serial Preferred Amendment") to authorize the Board of Directors of
the Company (the "Board of Directors") to establish and issue up to
1,000,000 shares in one or more series of serial preferred stock. The
Serial Preferred Amendment is submitted to the shareholders conditioned
upon and subject to the adoption by the shareholders of the Par Value
Conversion. If the Par Value Conversion is not adopted, the Serial
Preferred Amendment will not become effective;
(3) To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of March 15, 1998, as amended (the
"Merger Agreement"), between the Company and FPK, LLC ("LLC"), and the
merger of a wholly-owned subsidiary of LLC with and into the Company (the
"Merger") as contemplated by the Merger Agreement; and
(4) To transact such other business as may properly come before the
Meeting or any postponements or adjournments thereof.
Please read carefully the accompanying Proxy Statement. A copy of the
proposed amendment to the articles of incorporation implementing the Par Value
Conversion is attached as Appendix C-1 thereto, a copy of the proposed Serial
Preferred Amendment is attached as Appendix C-2 thereto and a copy of the Merger
Agreement is attached as Appendix A thereto. The Proxy Statement and Appendices
thereto form a part of this Notice.
Only shareholders of record on the books of the Company at the close of
business on July 20, 1998, the record date fixed by the Board of Directors, are
entitled to notice of, and to vote at, the Meeting and any postponements or
adjournments thereof. A list of the shareholders entitled to vote at the Meeting
will be kept on file at the offices of the Company located at 106 E. Sixth
Street, Suite 300, Austin, Texas 78701 for a period of at least 10 days prior to
the Meeting and will also be available at the Meeting subject to inspection by
any shareholder as required by law.
In connection with the Merger, holders of Common Stock who comply with
certain requirements and procedures set forth in Articles 5.12 and 5.13 of the
Texas Business Corporation Act may be entitled to assert certain dissenters'
rights. A copy of Articles 5.12 and 5.13 of the Texas Business Corporation Act
is attached as Appendix D to the accompanying Proxy Statement.
You are cordially invited to attend the Meeting. WHETHER OR NOT YOU EXPECT
TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO MARK, SIGN, DATE AND MAIL THE
ENCLOSED PROXY CARD PROMPTLY SO THAT YOUR SHARES OF COMMON STOCK MAY BE
REPRESENTED AND VOTED IN ACCORDANCE WITH YOUR WISHES. Proxies should be
<PAGE> 5
mailed promptly, but not later than August 12, 1998. If you attend the Meeting,
you may revoke your proxy and vote in person.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON APPROVAL OF
THE MERGER, YOU WILL BE SENT INSTRUCTIONS REGARDING THE PROCEDURES TO EXCHANGE
YOUR EXISTING CERTIFICATES EVIDENCING COMMON STOCK OF THE COMPANY FOR THE MERGER
CONSIDERATION.
By Order of the Board of Directors
/S/ JAMES P. GUNNING
James P. Gunning, Jr.,
Secretary
Austin, Texas
July 22, 1998
<PAGE> 6
NORWOOD PROMOTIONAL PRODUCTS, INC.
106 E. SIXTH STREET
SUITE 300
AUSTIN, TEXAS 78701
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 19, 1998
The accompanying proxy is solicited by and on behalf of the Board of
Directors (the "Board of Directors" or "Board") of Norwood Promotional Products,
Inc. (the "Company") for use at a Special Meeting of Shareholders to be held on
Wednesday, August 19, 1998, at 10:00 a.m., local time, in the University Room at
the Metropolitan Club, 1300 One American Center, 600 Congress Avenue, Austin,
Texas, and any postponements or adjournments thereof (the "Meeting"). The
matters to be considered and acted upon at the Meeting are described in the
foregoing Notice of Special Meeting of Shareholders and this Proxy Statement (as
defined below). This Proxy Statement and the related form of proxy are first
being mailed on or about July 24, 1998 to all shareholders of record as of July
20, 1998 (the "Record Date"). Shares of the Company's common stock, no par value
(the "Common Stock"), represented by proxies, will be voted as hereinafter
described or as otherwise specified in the proxy by the shareholder. Any proxy
given by a shareholder may be revoked by the shareholder at any time, prior to
the voting of the proxy, by delivering a written notice to the Secretary of the
Company, by executing and delivering a later-dated proxy or by attending the
Meeting and voting in person.
At the Meeting, holders of the Common Stock as of the Record Date will
consider and vote upon proposals to (1) adopt an amendment to the articles of
incorporation of the Company (the "Par Value Conversion") that would change the
shares of the Common Stock from shares without par value into shares with a par
value of $0.01 per share, (2) if the Par Value Conversion is adopted, adopt an
amendment to the articles of incorporation of the Company (the "Serial Preferred
Amendment") that would authorize the Board of Directors to establish and issue
up to 1,000,000 shares in one or more series of serial preferred stock ("Serial
Preferred Stock"), and (3) approve and adopt the merger (the "Merger") of a
wholly-owned subsidiary of FPK, LLC ("LLC") with and into the Company, with the
Company continuing as the surviving corporation (the "Surviving Corporation")
pursuant to an Agreement and Plan of Merger dated as of March 15, 1998, as
amended (the "Merger Agreement"), by and between the Company and LLC, and
approve the other terms of the Merger Agreement. The Merger Agreement provides,
subject to the approval of two-thirds of the shareholders of the Company at the
Meeting and subject to the satisfaction or waiver of certain other conditions,
that: (a) a newly-formed, wholly-owned, corporate subsidiary of LLC ("Newco")
will be merged with and into the Company, with the Company continuing as the
Surviving Corporation; (b) each share of Common Stock that is outstanding at the
Effective Time (as hereinafter defined) of the Merger, excluding shares of
Common Stock held by the Company or any of its subsidiaries as treasury stock,
shares held by members of the Buyout Group (as hereinafter defined), and shares
held by dissenting shareholders who have validly exercised and perfected their
rights under Texas law (the "Dissenting Shareholders"), will be converted into
the right to receive $20.70 per share in cash, without interest, subject to any
applicable back-up withholding of taxes (the "Merger Consideration"); and (c)
except as provided herein, each existing option, warrant and convertible debt
instrument (each a "Company Stock Derivative") relating to shares of Common
Stock that is not exercised or converted prior to the Effective Time shall
continue to be outstanding on the same terms and conditions as existed
immediately prior to the Effective Time (except that the term of all Company
Stock Derivatives (other than convertible debt and employee incentive stock
options) will be extended for three years after the date of their current
expiration), except that upon exercise or conversion of each Company Stock
Derivative, the holder will receive common stock of the Surviving Corporation
rather than the Common Stock. If the Charter Amendment is adopted by the
shareholders, it will be filed and will become effective whether or not the
Merger is consummated.
Frank P. Krasovec ("Krasovec") is the Chairman, President and Chief
Executive Officer of the Company and is a member of the Buyout Group. Krasovec
beneficially owns all the interests in LLC. All of
<PAGE> 7
the capital stock of Newco, when formed, will be beneficially owned by LLC. John
H. Josephson ("Josephson"), a director of the Company, is also a member of the
Buyout Group. As of the Record Date, Krasovec and the other shareholders of the
Company who will continue to own shares of common stock in the Surviving
Corporation (the "Buyout Group") beneficially owned 660,917 and 474,088 shares
of Common Stock, respectively (representing approximately 13.0% and 9.3%,
respectively, of the outstanding Common Stock).
At the Effective Time, in order to fund a portion of the costs of the
Merger, the Surviving Corporation will issue (i) shares of its common stock to
purchasers (which purchasers may include members of the Buyout Group) (the
"Additional Common Shareholders") for an aggregate of approximately $4 million,
and (ii) units of its preferred stock and common stock to purchasers (the
"Preferred Shareholders") for an aggregate of $20 million (collectively, with
the Additional Common Shareholders, the "New Shareholders"). Newco will be
formed by LLC in order to enable members of the Buyout Group and the New
Shareholders to acquire, through the Merger, all of the outstanding Common Stock
not already owned by the members of the Buyout Group (the "Public Stock"). At
the Effective Time, the members of the Buyout Group will continue to
beneficially own an aggregate of 1,135,005 shares of Common Stock that they held
immediately prior to the Effective Time.
Pursuant to the Texas Business Corporation Act (the "TBCA"), the
affirmative vote of holders of at least two-thirds of the outstanding shares of
Common Stock is required to adopt the Charter Amendments and approve the Merger
Agreement. It is anticipated that the members of the Buyout Group and their
spouses will vote the 983,865 shares of Common Stock held of record by them,
representing approximately 19.3% of the outstanding Common Stock, in favor of
the adoption of the Charter Amendments and the approval of the Merger Agreement.
In addition, it is anticipated that the members of the Board who are not members
of the Buyout Group will vote the 25,010 shares of Common Stock held of record
by them in favor of the adoption of the Charter Amendments and the approval of
the Merger Agreement. The Company expects all directors who are not members of
the Buyout Group to exercise their warrants to purchase shares of Common Stock
prior to the Effective Time.
The Board of Directors appointed a Special Committee of the Board (the
"Special Committee") to review, evaluate and negotiate the terms of the Merger
Agreement and to make a recommendation to the Board of Directors concerning the
fairness of the Merger. The Special Committee is comprised of two of the
directors, Robert L. Seibert and John H. Wilson III, who are neither officers of
the Company nor members of the Buyout Group (but who will receive cash in
exchange for their shares of Common Stock, including shares of Common Stock
issued to them upon exercise of their Company Stock Derivatives prior to the
Effective Time, upon consummation of the Merger). Based upon the unanimous
recommendation of the Special Committee, the Board of Directors (with Krasovec
and Josephson abstaining due to inherent conflicts of interest) unanimously
determined that the Merger is in the best interests of the Company and holders
of the Public Stock (the "Public Shareholders"), approved the terms of the
Merger Agreement and recommended that the Merger Agreement be approved by the
shareholders of the Company. The Board of Directors also approved the Charter
Amendments, with the approval of the Serial Preferred Amendment conditioned upon
and subject to the adoption by the shareholders of the Par Value Conversion.
Under the terms of the Merger Agreement, it is a condition to the consummation
of the Merger that the Par Value Conversion be adopted.
All shares of Common Stock represented by properly executed proxies
received prior to or at the Meeting and not revoked will be voted in accordance
with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH PROXIES WILL BE VOTED FOR THE ADOPTION OF BOTH CHARTER
AMENDMENTS AND FOR THE APPROVAL OF THE MERGER AGREEMENT AND IN THE DISCRETION OF
THE PERSONS NAMED IN THE PROXY WITH RESPECT TO SUCH OTHER MATTERS AS MAY
PROPERLY COME BEFORE THE MEETING. A shareholder may revoke his or her proxy at
any time before it is voted at the meeting by (i) executing and delivering to
the Secretary of the Company a proxy bearing a later date, (ii) filing written
notice of such revocation with the Secretary of the Company stating that the
proxy is revoked or (iii) attending the Meeting and voting in person.
In addition to the solicitation of proxies by use of the mails, directors,
officers and employees of the Company, without receiving additional
compensation, may solicit proxies by telephone, telecopier or personal
ii
<PAGE> 8
interview. The Company also will request brokerage houses and other custodians,
nominees and fiduciaries to forward soliciting material to the beneficial owners
of Common Stock held of record by such custodians and will reimburse such
custodians for their expenses in forwarding soliciting materials. The Company
has retained ChaseMellon Shareholder Services, L.L.C., a proxy solicitation
firm, to aid in the solicitation of proxies and in the planning and organization
of the Meeting for a fee of $7,500 plus expenses.
If the Merger is not consummated, any proposals of shareholders of the
Company intended to be presented at the Annual Meeting of Shareholders of the
Company to be held in 1998 must be received by the Company, addressed to the
Secretary of the Company, by no later than August 19, 1998 to be considered for
inclusion in the Company's proxy statement and form of proxy relating to that
meeting. Any such proposal has to comply with the requirements of Rule 14a-8
promulgated pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------
The Board of Directors knows of no additional matters that will be
presented for consideration at the Meeting. Execution of the accompanying proxy,
however, confers on the designated proxy holders discretionary authority to vote
the shares of Common Stock covered thereby in accordance with their best
judgment on such other business, if any, that may properly come before, and all
matters incident to the conduct of, the Meeting or any adjournments or
postponements thereof.
The date of this Proxy Statement is July 22, 1998.
iii
<PAGE> 9
AVAILABLE INFORMATION
The Company, LLC, Krasovec, Josephson, James P. Gunning, Jr. ("Gunning")
and John Finnell ("Finnell") have filed with the Securities and Exchange
Commission (the "SEC" or "Commission") a Rule 13E-3 Transaction Statement on
Schedule 13E-3 (including any amendments thereto, the "Schedule 13E-3") under
the Exchange Act with respect to the Merger. This Proxy Statement does not
contain all of the information set forth in the Schedule 13E-3 and the exhibits
thereto, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. The Company is subject to the informational requirements
of the Exchange Act and, in accordance therewith, files reports, proxy
statements and other information with the SEC.
The Schedule 13E-3 and the exhibits thereto, as well as such reports, proxy
statements and other information filed by the Company, can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices at Suite 1300, Seven World Trade Center, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
Copies of such materials also can be obtained at prescribed rates from the
Public Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC maintains an Internet site on the World Wide Web
at "http://www.sec.gov," which contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC.
Except as otherwise indicated herein, all information appearing in this
Proxy Statement concerning the Company has been supplied by the Company, and all
information appearing in this Proxy Statement concerning LLC, Newco and the
members of the Buyout Group has been supplied by LLC or the members of the
Buyout Group or is based upon publicly available documents on file with the SEC
and other public records.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON.
iv
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................................... iv
Table of Contents........................................... v
Summary..................................................... 1
Selected Financial Data..................................... 6
The Parties................................................. 8
The Company............................................... 8
LLC....................................................... 8
Newco..................................................... 8
The Meeting................................................. 8
Time, Date and Place...................................... 8
Voting Rights............................................. 8
Required Vote............................................. 9
Proposal One -- Par Value Conversion........................ 9
Proposal Two -- Serial Preferred Amendment to the Articles
of Incorporation.......................................... 10
Proposal Three -- The Merger and Related Matters............ 12
Special Factors........................................... 12
Background of the Merger............................... 12
Purpose of and Reasons for the Merger; Certain Effects
of the Merger......................................... 15
Determination of Fairness of the Merger by the Special
Committee and the Board of Directors.................. 16
Opinion of Special Committee's Financial Advisor....... 19
Position of Krasovec, Gunning, Josephson and Finnell as
to Fairness........................................... 22
Material Prepared by Krasovec's Advisor................ 23
Certain Projections.................................... 26
Conflicts of Interest.................................. 27
Future Plans of the Company............................ 27
Rights of Dissenting Shareholders...................... 28
Estimated Fees and Expenses; Sources of Funds.......... 30
Expenses............................................... 33
The Merger Agreement...................................... 33
The Merger............................................. 33
Effective Time......................................... 33
Articles of Incorporation and Bylaws of the Surviving
Corporation........................................... 33
Directors and Officers of the Surviving Corporation.... 33
Conversion of Securities in the Merger; Treatment of
Derivatives........................................... 34
Payment for and Surrender of Company Common Shares..... 34
Closing of Stock Transfer Records...................... 36
Representations and Warranties......................... 36
Acquisition Proposals.................................. 36
Interim Operations of the Company...................... 37
Certain Filings and Other Actions...................... 38
Access to Information.................................. 38
Insurance; Indemnity................................... 39
Employee Benefits...................................... 39
Financing.............................................. 40
Conditions............................................. 40
Termination............................................ 41
Amendment.............................................. 43
Material U.S. Federal Income Tax Consequences of the
Merger................................................ 43
Accounting Treatment of the Merger..................... 44
Regulatory Approvals................................... 44
Litigation............................................. 45
Market Information.......................................... 45
Security Ownership of Certain Beneficial Owners and
Management................................................ 46
</TABLE>
v
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Purchases of Common Stock by and Other Transactions with
Certain Persons........................................... 48
Transaction of Other Business............................... 48
Independent Auditors........................................ 48
Appendices:
Appendix A -- Agreement and Plan of Merger, as amended.... A-1
Appendix B -- Opinion of J.C. Bradford & Co., L.L.C....... B-1
Appendix C-1 -- Proposed Amendment Implementing the Par
Value Conversion....................................... C-1
Appendix C-2 -- Proposed Serial Preferred Amendment....... C-2
Appendix D -- Articles 5.12 and 5.13 of the Texas Business
Corporation Act........................................ D-1
Appendix E -- Form of Proxy Card.......................... E-1
Appendix F -- Annual Report on Form 10-K for the fiscal
year ended August 30, 1997, as amended................. F-1
Appendix G -- Quarterly Report on Form 10-Q for the nine
months ended May 30, 1998.............................. G-1
</TABLE>
vi
<PAGE> 12
SUMMARY
The following summary is subject to and qualified in its entirety by
reference to the more detailed information contained elsewhere in this Proxy
Statement, including in the Appendices attached hereto (the "Proxy Statement").
Unless defined herein, capitalized terms used in this Proxy Statement have the
meanings ascribed to them in the Merger Agreement.
Certain information contained in this Proxy Statement contains forward
looking statements, including without limitation, statements as to the Company's
financial condition, results of operations and liquidity and capital resources
and statements as to management's beliefs, expectations or options. Such forward
looking statements are subject to risks and uncertainties and may be affected by
various factors that may cause actual results to differ materially from those in
the forward looking statements. Certain of these risks, uncertainties and other
factors, as and when applicable, are discussed in the Company's filings with the
Commission.
Shareholders are urged to read carefully the Proxy Statement in its
entirety.
Time, Date and Place.......... The Meeting will be held on Wednesday, August
19, 1998 at 10:00 a.m., local time, in the
University Room at the Metropolitan Club, 1300
One American Center, 600 Congress Avenue,
Austin, Texas.
Purposes of the Meeting....... To consider and vote upon (i) the adoption of
the Par Value Conversion (attached as Appendix
C-1 hereto), (ii) if the Par Value Conversion
is adopted, the adoption of the Serial
Preferred Amendment (attached as Appendix C-2
hereto), (iii) the approval of the Merger
Agreement (attached as Appendix A hereto), and
(iv) such other matters as may properly come
before the Meeting or any postponements or
adjournments thereof.
Voting Rights................. The close of business on July 20, 1998 has been
fixed as the Record Date for determining
holders of Common Stock entitled to notice of
and to vote at the Meeting. Each share of
Common Stock outstanding on the Record Date is
entitled to one vote at the Meeting. As of the
Record Date, 5,085,640 shares of Common Stock
were outstanding. The presence, in person or by
proxy, of the holders of a majority of the
shares of Common Stock entitled to vote at the
Meeting is necessary to constitute a quorum for
the transaction of business of the Meeting.
Any proxy given by a shareholder may be revoked
by the shareholder at any time prior to the
voting of the proxy by delivering a written
notice of revocation to the Secretary of the
Company, by executing and delivering a
later-dated proxy or by attending the meeting
and voting in person. UNLESS CONTRARY
INSTRUCTIONS ARE INDICATED ON THE PROXY, ALL
SHARES OF COMMON STOCK REPRESENTED BY VALID
PROXIES WILL BE VOTED FOR ADOPTION OF BOTH THE
CHARTER AMENDMENTS AND FOR APPROVAL OF THE
MERGER AGREEMENT.
Required Vote................. The affirmative vote of holders of at least
two-thirds of all of the outstanding shares of
Common Stock is required to adopt the Charter
Amendments and to approve the Merger Agreement,
which vote will constitute a majority of
outstanding shares of Common Stock held by
unaffiliated shareholders. It is anticipated
that the members of the Buyout Group and their
spouses will vote the 983,865 shares of Common
Stock held of record by them (representing
approximately 19.3% of the outstanding Common
Stock) in favor of the matters to be voted
upon. In addition, it is
1
<PAGE> 13
anticipated that the members of the Board who
are not members of the Buyout Group will vote
the 25,010 shares of Common Stock held of
record by them in favor of the Charter
Amendments and the Merger Agreement.
Effective Time of the
Merger........................ The Merger is expected to become effective as
of the date and time (the "Effective Time") of
the filing of appropriate Articles of Merger
with the Secretary of State of the State of
Texas, which is anticipated to occur
approximately one business day after the
approval of the Merger Agreement by the
Company's shareholders and the satisfaction or
waiver of the other conditions to the Merger
stated in the Merger Agreement.
Recommendation of the Board of
Directors................... Based upon, among other things, the
recommendation of the Special Committee and the
opinion of J.C. Bradford & Co., L.L.C. ("J.C.
Bradford") referred to below, the Board of
Directors (with Krasovec and Josephson
abstaining due to inherent conflicts of
interest) has determined that the Merger is in
the best interests of the Company and the
Public Shareholders and unanimously recommends
that the shareholders vote FOR approval of the
Merger Agreement. The Board of Directors also
has approved both the Charter Amendments and
recommends that the shareholders vote FOR
adoption of both the Charter Amendments.
Opinion of Special Committee's
Financial Advisor........... The Special Committee retained J.C. Bradford to
act as its financial advisor in connection with
the Merger. J.C. Bradford has delivered its
written opinion to the Special Committee, dated
the date hereof, to the effect that, as of such
date and subject to the qualifications and
assumptions set forth therein, the Merger
Consideration of $20.70 in cash per share of
Common Stock to be received by the Public
Shareholders in the Merger is fair to such
shareholders from a financial point of view. A
copy of J.C. Bradford's written opinion, which
sets forth the assumptions made, matters
considered and limitations on the review
undertaken in connection with the opinion, is
attached hereto as Appendix B and is
incorporated herein by reference. PUBLIC
SHAREHOLDERS SHOULD READ SUCH OPINION CAREFULLY
IN ITS ENTIRETY.
Conflicts of Interest......... In considering the recommendation of the Board
with respect to the Merger, Public Shareholders
should be aware that, upon consummation of the
Merger, (i) the members of the Buyout Group
(including Krasovec and Gunning, the executive
officers of the Company, and Josephson, a
director of the Company), along with the New
Shareholders, will be the sole shareholders of
the Surviving Corporation; (ii) Josephson, in
addition to being a member of the Buyout Group,
is affiliated with Allen & Company Incorporated
("Allen"), which has acted as a financial
advisor to Krasovec in connection with the
Merger and which will continue to own warrants
to purchase shares of the Surviving
Corporation's common stock after the Effective
Time; (iii) as holders of Company Stock
Derivatives, all of the members of the Buyout
Group will continue to hold such Company Stock
Derivatives on the same terms and conditions as
existed immediately prior to the Effective
2
<PAGE> 14
Time of the Merger (except as set forth
herein), as will all other holders of such
Company Stock Derivatives; and (iv) each
director of the Company (other than Krasovec
and Josephson) will receive $20.70 per share
upon payment of the Merger Consideration for
the shares of Common Stock that they own and
the shares of Common Stock they will receive
upon the anticipated exercise of their Company
Stock Derivatives. Accordingly, the members of
the Buyout Group and the above-mentioned
directors of the Company have a direct economic
interest in the Merger. In light of these
inherent conflicts of interest, the Board of
Directors of the Company appointed the Special
Committee comprised of two of the directors who
are not officers of the Company or members of
the Buyout Group to review, evaluate and
negotiate the terms of the Merger Agreement and
to make a recommendation to the Board
concerning the fairness of the Merger.
Certain Effects of the
Merger........................ Following the Merger, the Buyout Group and the
New Shareholders will own 100% of the
outstanding capital stock of the Surviving
Corporation. Except as set forth herein, all
Company Stock Derivatives outstanding
immediately prior to the Effective Time shall
remain outstanding and shall be exercisable or
convertible into the common stock of the
Surviving Corporation. The members of the
Buyout Group and the New Shareholders will be
the sole beneficiaries of any future earnings
and growth of the Surviving Corporation (until
shares of the Surviving Corporation, if any,
are issued to others pursuant to the exercise
or conversion of Company Stock Derivatives or
otherwise), and the Public Shareholders will no
longer benefit from any increases in the value
of the Company or any payment of dividends on
the shares of Common Stock and will no longer
bear the risk of any decreases in value of the
Company. As a result of the Merger, (i) the
Surviving Corporation will be privately held,
(ii) there will be no public market for the
Common Stock and (iii) the Common Stock will
cease to be quoted on The Nasdaq Stock Market's
National Market ("Nasdaq"). Except as described
herein, all employee benefit and compensation
plans of the Surviving Corporation will be
substantially the same as the Company's present
benefit plans for a period of at least one
year, but the Surviving Corporation may
determine to amend present benefit plans or to
initiate additional employee benefit plans in
the future.
Future Plans for the
Company....................... It is expected that, immediately following the
Merger, the business and operations of the
Company will be continued by the Company, as
the Surviving Corporation in the Merger,
substantially as they are currently being
conducted. However, the members of the Buyout
Group and the management of the Surviving
Corporation will continue to evaluate the
Company's business and operations after the
consummation of the Merger and make such
changes as are deemed appropriate.
Merger Agreement.............. The Company and LLC have entered into the
Merger Agreement, providing for the merger of
Newco with and into the Company, with the
Company being the Surviving Corporation. A copy
of the Merger Agreement is attached hereto as
Appendix A. Under the
3
<PAGE> 15
terms of the Merger Agreement, each share of
the Common Stock outstanding immediately prior
to the Effective Time (other than shares of
Common Stock held by members of the Buyout
Group, held by the Company or any of its
subsidiaries as treasury stock and held by
Dissenting Shareholders) will be converted into
the right to receive $20.70 in cash, without
interest. At the Effective Time, the members of
the Buyout Group will continue to hold their
respective shares of the Common Stock and, upon
consummation of the Merger, the shares of the
Common Stock held by the members of the Buyout
Group will become outstanding common stock of
the Surviving Corporation. Thus, as a result of
the Merger, the Surviving Corporation will
become wholly-owned by the members of the
Buyout Group and the New Shareholders
(excluding any rights of any holder of Company
Stock Derivatives to exercise such derivatives
for common stock of the Surviving Corporation).
The Company has agreed not to participate or
engage in any discussions with anyone other
than LLC and the Buyout Group regarding any
Acquisition Proposal (as defined herein)
involving the Company, except with respect to
unsolicited written proposals or offers if the
Board reasonably believes that there is a
substantial risk that a failure to consider
such unsolicited written proposal or offer
would violate its fiduciary duties.
Dissenters' Rights............ If the Merger is consummated, Dissenting
Shareholders will be entitled to demand payment
of the fair value of their shares of Common
Stock in accordance with the procedures set
forth in Articles 5.12 and 5.13 of the TBCA.
Shareholders wishing to exercise dissenters'
rights must (i) not vote in favor of approval
of the Merger Agreement (which would include
submitting a signed proxy without voting
instructions); (ii) deliver to the Company,
prior to the Meeting, written notice of their
objection to the Merger stating that they will
exercise their right to dissent under the TBCA
if the Merger is effected; and (iii) strictly
comply with the other requirements of the TBCA.
Failure to follow the procedures required by
Articles 5.12 and 5.13 of the TBCA may result
in the loss of dissenters' rights (in which
event a shareholder will be entitled to receive
the Merger Consideration with respect to such
shareholder's shares of Common Stock in
accordance with the Merger Agreement).
Material U.S. Federal Income
Tax Consequences of the
Merger...................... The receipt of cash for Public Stock pursuant
to the Merger will be a taxable transaction to
the Public Shareholders for U.S. federal income
tax purposes under the Internal Revenue Code of
1986, as amended (the "Code"), and may be a
taxable transaction for foreign, state and
local income tax purposes as well. Public
Shareholders should consult their own tax
advisors regarding the U.S. federal income tax
consequences of the Merger, as well as any tax
consequences under state, local or foreign
laws.
Accounting Treatment of the
Merger........................ The Merger will be accounted for as a
"recapitalization," as such term is used under
generally accepted accounting principles, for
accounting and financial reporting purposes.
4
<PAGE> 16
Estimated Fees and Expenses,
Sources of Funds.............. The total financing for the Merger Agreement
and related costs and expenses will be
approximately $182.4 million, of which
approximately $88 million will be required to
pay the Merger Consideration to the Public
Shareholders and approximately $94.4 million
will have been incurred to refinance certain of
the Company's current indebtedness, fund the
Surviving Corporation's working capital needs
after the Merger and to pay all expenses of the
Company, LLC, Newco and the members of the
Buyout Group in connection with the Merger
Agreement and the transactions contemplated
thereby. Such funds will be furnished from (i)
equity financing of approximately $44.4 million
(the "Equity Financing"), consisting of (A)
approximately $24.4 million to be provided by
the Buyout Group and the Additional Common
Shareholders and (B) $20 million from the
issuance by the Surviving Corporation to the
Preferred Shareholders of units of its
pay-in-kind preferred stock and common stock,
which will be provided pursuant to a commitment
letter from Ares Leveraged Investment Fund,
L.P., an affiliate of Ares Management, L.P.
("Ares"), (ii) a $50 million senior secured
credit facility to be provided to the Surviving
Corporation pursuant to a commitment letter
from Merrill Lynch Capital Corporation
("Merrill Lynch"), NationsBank, N.A.
("NationsBank") and NationsBanc Montgomery
Securities, LLC ("NMS"), consisting of (A) a
$25 million senior secured term loan which will
be fully drawn at the Effective Time and (B) a
$25 million senior secured revolving credit
facility, of which no more than $10 million
will be drawn at the Effective Time (together,
the "Credit Facilities"), and (iii) up to $100
million from the issuance by the Surviving
Corporation of unsecured senior subordinated
notes due 2008, which notes will be sold or
placed pursuant to a highly confident letter by
Merrill Lynch, Pierce, Fenner & Smith
Incorporated and its affiliates and will be
issued at the Effective Time (the "Senior
Subordinated Notes").
5
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended August 30,
1997 are derived from the audited consolidated financial statements of the
Company. The financial data for the nine month periods ended May 31, 1997 and
May 30, 1998 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, that the Company considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the nine months ended May 30, 1998 are not necessarily indicative of
the results that may be expected for the entire year ending August 29, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(A) NINE MONTHS ENDED
------------------------------------------------------------------ ----------------------
AUGUST 28, SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, AUGUST 30, MAY 31, MAY 30,
1993 1994 1995 1996(C) 1997 1997(I) 1998
---------- ------------ ------------ ---------- ---------- --------- ---------
AUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA UNAUDITED, IN
THOUSANDS, EXCEPT PER
SHARE DATA
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(b):
Sales............................. $49,300 $62,385 $103,860 $144,048 $175,835 $126,902 $140,300
Cost of Sales..................... 33,860 43,207 70,963 100,245 125,732 89,358 101,656
------- ------- -------- -------- -------- -------- --------
Gross Profit.................... 15,440 19,178 32,897 43,803 50,103 37,544 38,644
Operating expenses:
Sales and marketing............. 5,678 6,886 11,290 16,441 18,119 13,360 13,161
General and administrative...... 4,266 5,065 9,037 12,171 13,125 9,319 10,211
Amortization expense............ 724 889 2,119 3,538 3,885 2,940 3,054
Restructuring and unusual
charges....................... -- -- -- 1,640 1,816 -- --
------- ------- -------- -------- -------- -------- --------
Total operating expenses.......... 10,668 12,840 22,446 33,790 36,945 25,619 26,426
------- ------- -------- -------- -------- -------- --------
Operating income.................. 4,772 6,338 10,451 10,013 13,158 11,925 12,218
Interest expense.................. 1,982 1,030 3,619 3,246 3,002 2,135 2,936
------- ------- -------- -------- -------- -------- --------
Income before income taxes........ 2,790 5,308 6,832 6,767 10,156 9,790 9,282
Provision for income taxes........ 1,032 1,979 2,800 2,705 4,091 3,941 3,740
------- ------- -------- -------- -------- -------- --------
Income from continuing operations
before extraordinary loss....... 1,758 3,329 4,032 4,062 6,065 5,849 5,542
Net income........................ $ 1,183(d) $ 3,329 $ 4,032 $ 4,155(f) $ 1,004(f) $ 4,381(k) $ 5,542
======= ======= ======== ======== ======== ======== ========
Net income available to common
shareholders.................... $ 1,116(e) $ 3,329 $ 4,032 $ 4,155 $ 1,004 $ 4,381 $ 5,542
Earnings per common share(j):
Basic........................... $ 0.65 $ 0.94 $ 1.14 $ 0.85 $ 0.19 $ 0.80 $ 1.09
Diluted......................... $ 0.62 $ 0.93 $ 1.11 $ 0.82 $ 0.18 $ 0.78 $ 1.06
Weighted average number of common
shares outstanding(j):
Basic........................... 1,718 3,539 3,539 4,898 5,388 5,504 5,075
Diluted......................... 1,803 3,576 3,636 5,090 5,500 5,623 5,222
BALANCE SHEET DATA:
(AT END OF PERIOD)
Working capital................. $12,246 $18,668 $ 31,083 $ 35,248 $ 37,876 $ 37,921 $ 44,118
Total assets.................... 25,941 55,702 94,859 121,376 135,194 136,056 134,709
Total debt:
Bank credit facility.......... 6,146 27,100 50,500 33,725 46,990 45,270 45,470
Other debt and capital
leases...................... 1,828 5,097 12,410 13,953 14,432 15,677 13,436
Total shareholders' equity........ 13,546 16,871 21,034 57,380 51,276 54,470 56,989
OTHER DATA:
EBITDA(g)....................... $ 6,597 $ 8,526 $ 14,476 $ 16,686 $ 21,313 $ 17,537 $ 18,152
Cash flows from operating
activities.................... 1,101 1,708 2,948 6,866 8,844 4,915 3,442
Depreciation expense............ 1,101 1,299 1,906 3,135 4,270 2,672(i) 2,880
Amortization expense............ 724 889 2,119 3,538 3,885 2,940 3,054
Capital expenditures............ 1,199 1,426 2,073 4,919 4,863 3,490 3,413
Dividends(h).................... 132 -- -- -- -- -- --
</TABLE>
- ---------------
(a) The Company's fiscal year is a 52- or 53-week period ending on the Saturday
closest to August 31. All references to fiscal 1993, 1994, 1995, 1996 and
1997 are to the fiscal years ended August 28, 1993, September 3, 1994,
September 2, 1995, August 31, 1996 and August 30, 1997, respectively.
(b) The Company's results of operations for the periods presented were
significantly affected by acquisitions in fiscal 1994, 1995, 1996 and 1997
and by the public offerings of Common Stock in June 1993 and December 1995.
These factors affect the comparability of sales and results of operations
from period to period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" incorporated herein by
reference to such information included in the Company's reports on Form
10-K and Form 10-Q.
(c) The fiscal 1996 amounts have been restated to reflect the activity for the
five months of ownership of the Alpha Products retail division as
discontinued operations.
(d) After deducting a one-time charge to earnings of $575,000, net of taxes,
related to the write-off of unamortized debt costs and the termination of a
product financing arrangement in connection with the Company's initial
public offering of Common Stock in June 1993, which resulted in a reduction
in basic and diluted earnings per share of $0.33 and $0.32, respectively.
(e) Reflects the deduction of dividends on outstanding Junior Preferred Stock
which was redeemed in fiscal 1993.
6
<PAGE> 18
(f) After deducting gain (loss) on discontinued operations, net of tax, of
$93,000 and ($1.96) million in fiscal 1996 and fiscal 1997, respectively,
and estimated loss of $2.86 million on disposal of discontinued operations,
net of tax, in fiscal 1997. Additionally, an extraordinary loss from debt
extinguishment of $241,000, net of tax, was recognized in fiscal 1997.
(g) EBITDA is defined as income from continuing operations before extraordinary
loss, income taxes, interest expense, depreciation and amortization. The
Company believes that the presentation of EBITDA facilitates an investor's
understanding of the effects on the Company's operations of amortization of
goodwill and other intangibles and increased interest expense under
indebtedness incurred in connection with various acquisitions which
substantially impacted net income, net income per common share and cash
flows. EBITDA should not be considered by an investor as an alternative to
net income as an indicator of the Company's operating performance or to
cash flows as a measure of liquidity. EBITDA is not presented in financial
statements prepared in accordance with generally accepted accounting
principles ("GAAP") and may be different than a similarly titled measure
presented by another entity.
(h) The Company paid dividends to holders of its preferred stock between fiscal
1990 and fiscal 1993. None of the preferred stock is currently outstanding.
(i) Restated for discontinued operations reported in the fourth quarter 1997.
(j) The fiscal 1993, 1994, 1995, 1996, 1997 and Nine Months Ended May 31, 1997
amounts have been restated to conform with the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share.
(k) After deducting loss on discontinued operations, net of tax, of $1.5
million for the Nine Months Ended May 31, 1997.
7
<PAGE> 19
THE PARTIES
THE COMPANY
The Company is a Texas corporation. Its principal executive offices are
located at 106 E. Sixth Street, Suite 300, Austin, Texas 78701, and its
telephone number is (512) 476-7100. For a further discussion of the Company, its
business and its current financial condition, see the Company's Annual Report on
Form 10-K for the fiscal year ended August 30, 1997, as amended, and the
Company's Quarterly Report on Form 10-Q for the nine months ended May 30, 1998,
copies of which are attached hereto as Appendix F and Appendix G, respectively.
LLC
LLC is a Delaware limited liability company. Its principal offices are
located at 106 E. Sixth Street, Suite 300, Austin, Texas 78701, and its
telephone number is (512) 476-7100. Krasovec is the sole member and manager of
LLC. LLC conducts no business activities and its only asset will be the capital
stock of Newco when Newco is formed, and such capital stock will be canceled at
the Effective Time.
NEWCO
Newco will be a Texas corporation, wholly owned by LLC and organized solely
for the purpose of effecting the Merger. Newco will have no material assets.
Newco will not engage in any activities except in connection with the Merger and
will cease to exist upon the consummation of the Merger. Newco's principal
offices will be located at 106 E. Sixth Street, Suite 300, Austin, Texas 78701,
and its telephone number will be (512) 476-7100.
THE MEETING
TIME, DATE AND PLACE
The Meeting will be held on Wednesday, August 19, 1998 at 10:00 a.m., local
time, in the University Room at the Metropolitan Club, 1300 One American Center,
600 Congress Avenue, Austin, Texas.
VOTING RIGHTS
Only holders of shares of Common Stock of record at the close of business
on the Record Date will be entitled to notice of and vote at the Meeting. At the
close of business on the Record Date, the Company had 5,085,640 outstanding
shares of Common Stock, each such share entitling the holder thereof to one vote
on each matter that may properly come before the Meeting. The presence at the
Meeting, in person or by proxy, of the holders of a majority of the shares of
Common Stock entitled to vote shall constitute a quorum at the Meeting.
Abstentions and broker non-votes (shares held by brokers and other nominees or
fiduciaries that are present at the Meeting but not voted on a particular
matter) will be counted as present at the Meeting for purposes of determining
the presence or absence of a quorum, but since they are not votes "for" a
particular matter, they will have the same effect as votes "against" a
particular matter. Any proxy given by a shareholder may be revoked by the
shareholder at any time, prior to the voting of the proxy, by delivering a
written notice of such revocation to the Secretary of the Company, by executing
and delivering a later-dated proxy or by attending the Meeting and voting in
person.
If a shareholder gives specific voting instructions by checking the boxes
on the proxy, the shares of Common Stock will be voted in accordance with such
instructions. UNLESS CONTRARY INSTRUCTIONS ARE INDICATED ON THE PROXY, ALL
SHARES OF COMMON STOCK REPRESENTED BY VALID PROXIES WILL BE VOTED FOR EACH
PROPOSAL SET FORTH IN SUCH PROXY AND WILL BE VOTED AT THE DISCRETION OF THE
PROXIES IN RESPECT OF SUCH OTHER BUSINESS, IF ANY, AS MAY PROPERLY BE BROUGHT
BEFORE THE MEETING. As of the date hereof, the Board of Directors knows of no
other business that will be presented for consideration at the Meeting other
than the matters referred to herein. If, however, other matters are properly
brought before the Meeting, it is the intention of the persons
8
<PAGE> 20
named in the accompanying proxy to vote the shares represented thereby in
accordance with their best judgment and discretionary authority to do so is
included in the proxy.
In addition to the solicitation of proxies by mail, the directors, officers
and employees of the Company, without receiving additional compensation, may
solicit proxies by telephone, telecopier, personal interview or otherwise. The
Company also will request brokerage houses and other custodians, nominees and
fiduciaries to forward soliciting material to the beneficial owners of Common
Stock held of record by such custodians and will reimburse such custodians for
their reasonable out-of-pocket expenses incurred by them in forwarding
soliciting materials. The Company has retained ChaseMellon Shareholder Services,
L.L.C., a proxy solicitation firm, to aid in the solicitation of proxies and in
the planning and organization of the Meeting for a fee of $7,500 plus expenses.
REQUIRED VOTE
Pursuant to the TBCA, the affirmative vote of the holders of two-thirds of
the outstanding shares of Common Stock is required to adopt each of the Charter
Amendments and to approve the Merger Agreement, which vote will constitute a
majority of outstanding shares of Common Stock held by unaffiliated
shareholders. In addition, because the Serial Preferred Amendment is submitted
to the shareholders conditioned upon and subject to the adoption of the Par
Value Conversion, the affirmative vote of the holders of two-thirds of the
outstanding shares of Common Stock adopting the Par Value Conversion is required
to adopt the Serial Preferred Amendment. It is anticipated that the members of
the Buyout Group and their spouses will vote the 983,865 shares of Common Stock
held of record by them (representing approximately 19.3% of the outstanding
Common Stock) in favor of the matters to be voted upon. It is also anticipated
that the members of the Board who are not members of the Buyout Group will vote
the 25,010 shares of Common Stock held of record by them in favor of the Charter
Amendments and the Merger Agreement.
PROPOSAL ONE
PAR VALUE CONVERSION
The Board of Directors has adopted a resolution setting forth a proposed
amendment to Article Four of the Company's articles of incorporation
implementing the Par Value Conversion, and directed that the proposed amendment
be submitted to a vote of the shareholders at the Meeting. The Par Value
Conversion would change the shares of Common Stock from shares without par value
into shares with a par value of $0.01 per share. The primary reason for the Par
Value Conversion is to increase the Company's surplus, as defined in the TBCA,
by fixing the par value of the Common Stock, thereby enhancing the ability of
the Company under the TBCA to purchase its own shares and make distributions to
shareholders, including in connection with the Merger. Under the terms of the
Merger Agreement, the adoption of the Par Value Conversion is a condition to the
consummation of the Merger. The adoption of the Par Value Conversion is also a
condition to the adoption of the Serial Preferred Amendment. The proposed
amendment to the Company's articles of incorporation implementing the Par Value
Conversion is set forth in Appendix C-1 to this Proxy Statement and should be
read in its entirety by the shareholders.
The affirmative vote of the holders of at least two-thirds of the
outstanding Common Stock present in person or by proxy is required for adoption
of the Par Value Conversion. The adoption of the Serial Preferred Amendment and
the approval of the Merger Agreement are not conditions to the adoption of the
Par Value Conversion. If the Par Value Conversion is adopted by the shareholders
and the Serial Preferred Amendment is not adopted, the articles of incorporation
of the Company will be amended to implement the Par Value Conversion, whether or
not the Merger Agreement is approved or the Merger is consummated.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" ADOPTION OF
THE PAR VALUE CONVERSION (PROPOSAL ONE).
If the Par Value Conversion is adopted and becomes effective, the Common
Stock will be automatically converted from shares without par value into shares
with a par value of $.01 per share. As a result, pursuant to the TBCA, the
"stated capital" of the Company will be reduced by $22,975,646, from $23,032,245
to $56,599 (the product of $0.01 multiplied by the number of shares of Common
Stock issued), and the "surplus" of the Company will be increased in an equal
amount. Under the TBCA, a Texas corporation may not make any
9
<PAGE> 21
distribution to its shareholders, including a dividend, a redemption or other
acquisition of shares or a payment in liquidation of its assets, if the
corporation would be insolvent as a result of such distribution or if such
distribution exceeds such corporation's surplus. Therefore, the increase in the
Company's surplus resulting from the Par Value Conversion would enhance the
ability of the Company to use the funds it raises to finance the Merger for the
payment of the Merger Consideration for the Public Stock pursuant to the Merger.
If the Par Value Conversion is not approved by the shareholders, the Company may
not be able to consummate the Merger, even if the Merger Agreement is approved
and the Company receives adequate financing to fund the Merger, if the Company's
surplus is inadequate.
PROPOSAL TWO
SERIAL PREFERRED AMENDMENT TO THE ARTICLES OF INCORPORATION
The Board of Directors has adopted a resolution setting forth a proposed
amendment to Article Four of the Company's articles of incorporation (the
"Serial Preferred Amendment") that would authorize the Board of Directors to
establish and issue one or more series of serial preferred Stock, and directed
that the Serial Preferred Amendment be submitted to a vote of the shareholders
at the Meeting if the Par Value Conversion is adopted by the shareholders at the
Meeting. The Serial Preferred Amendment would authorize the Board of Directors
to establish and issue up to 1,000,000 shares of Serial Preferred Stock. The
proposed Serial Preferred Amendment is set forth in Appendix C-2 to this Proxy
Statement and should be read in its entirety by the shareholders.
The affirmative vote of the holders of at least two-thirds of the
outstanding Common Stock present in person or by proxy is required for adoption
of the proposed Serial Preferred Amendment. If both Charter Amendments are
adopted by the shareholders, the Company will file articles of amendment
implementing both Charter Amendments with the Secretary of State of the State of
Texas. The Charter Amendments will both become effective upon the issuance by
the Secretary of State of the State of Texas of a certificate of amendment. The
approval of the Merger Agreement is not a condition to the adoption of the
Serial Preferred Amendment. If the Charter Amendments are adopted by the
shareholders, the Charter Amendments will become effective whether or not the
Merger Agreement is approved or the Merger is consummated.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" ADOPTION OF
THE SERIAL PREFERRED AMENDMENT (PROPOSAL TWO).
The Serial Preferred Amendment would expressly vest in the Board the
authority to establish and issue up to 1,000,000 shares of Serial Preferred
Stock in one or more series to be designated by the Board. Such provisions are
often referred to as "blank check" provisions because they give the Board of
Directors the flexibility, at any time or from time to time, without further
shareholder approval, to create one or more series of Serial Preferred Stock and
to determine the designations, preferences and limitations of each such series,
including, but not limited to, (i) the number of shares, (ii) dividend rights,
(iii) voting rights, (iv) conversion privileges, (v) redemption provisions, (vi)
sinking fund provisions, (vii) rights upon liquidation, dissolution or winding
up of the Company and (viii) other relative rights, preferences and limitations
of such series.
The Board of Directors believes that amending the Company's articles of
incorporation to authorize the Board to issue up to 1,000,000 shares of Serial
Preferred Stock provides the Company with the flexibility to address its
potential future financing needs, including in connection with the Merger, by
creating one or more series of Serial Preferred Stock customized to meet the
needs of any particular transaction and to market conditions. The Company also
could issue Serial Preferred Stock for other corporate purposes, such as to
implement joint ventures or to make acquisitions.
LLC has agreed in principle with Ares to cause the Surviving Corporation to
issue to the Preferred Shareholders, at the Effective Time, a new series of
20,000 shares of Serial Preferred Stock with a liquidation preference of $1,000
per share, in connection with the financing of the Merger. The new series of
Serial Preferred Stock, to be designated "Senior Redeemable Exchangeable
Preferred Stock" (the "Preferred Stock"), will be issued in units, each
consisting of one share of Preferred Stock and an undetermined number of shares
of common stock of the Surviving Corporation representing approximately 15% of
its common stock in the aggregate, on a fully diluted basis. Total proceeds from
the issuance of such units is expected to be $20 million, which will be used by
the Surviving Corporation to pay a portion of the expenses incurred in
10
<PAGE> 22
connection with the Merger, including the payment of Merger Consideration for
the Public Stock. The Preferred Stock will have no voting rights, other than as
required by law, and will be senior in liquidation and payment of dividends to
all other classes of capital stock of the Surviving Corporation outstanding at
the Effective Time or issued thereafter. The Preferred Stock will accrue
dividends at a rate equal to the greater of (i) 12.25% and (ii) the yield to
maturity on the Senior Subordinated Notes plus 250 basis points. For the first
five years after issuance, dividends on the Preferred Stock will be payable, at
the Surviving Corporation's option, in additional shares of Preferred Stock or
cash. Thereafter, dividends on the Preferred Stock will be payable in cash only.
The Preferred Stock will be redeemable, in whole or in part, at the option
of the Surviving Corporation at any time after the fifth anniversary of the
issuance thereof, at various premiums to the liquidation preference thereof and
may be redeemed prior to the fifth anniversary of issuance in certain instances.
The Surviving Corporation will also have the option at any time to exchange the
Preferred Stock for subordinated notes with substantially the same terms as the
Preferred Stock. If the Merger Agreement is approved by the shareholders, but
the Serial Preferred Amendment is not adopted, in order to consummate the
Merger, the Company may have to find an alternative to the Preferred Stock to
finance that portion of the Merger. There is no assurance that any such
alternative source of financing could be obtained. Therefore, if the Serial
Preferred Amendment is not authorized, the Merger may not be consummated, even
if the Merger Agreement is approved by the shareholders.
If the Merger is not consummated, the Preferred Stock will not be issued.
Although the Company is not currently considering any other issuance of Serial
Preferred Stock for any other financing or transactional purposes and has no
present intention to issue any other series of Serial Preferred Stock, the Board
and management of the Company believe that, in the future, the Board should have
the flexibility to issue Serial Preferred Stock consistent with its ability to
issue debt or additional shares of Common Stock, whether or not the Merger is
consummated.
If the Merger is not consummated, and if any future series of Serial
Preferred Stock issued by the Board provides for dividends, such dividends may
be cumulative and may have a preference as to the payment over the Common Stock.
In addition, if any series of Serial Preferred Stock authorized by the Board so
provides, in the event of any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, the holders of each such series of
the then outstanding Serial Preferred Stock may be entitled to receive, prior to
the distribution of any assets or funds to the holders of Common Stock, a
liquidation preference established by the Board of Directors, together with all
accumulated and unpaid dividends. Depending upon the consideration paid for
Serial Preferred Stock, the liquidation preference of Serial Preferred Stock and
other matters, the issuance of Serial Preferred Stock could therefore result in
a reduction in the assets available for distribution to the holders of Common
Stock in the event of liquidation of the Company. Holders of Common Stock do not
have any preemptive rights to acquire Serial Preferred Stock or any other
securities of the Company.
The Company's authorized capital stock currently consists of 24,000,700
shares, consisting of 4,000,000 shares of cumulative convertible preferred
stock, no par value ("Senior Preferred Stock"), 700 shares of cumulative
preferred stock, no par value ("Junior Preferred Stock"), and 20,000,000 shares
of Common Stock. As of the Record Date, 5,085,640 shares of Common Stock were
outstanding and no shares of Senior Preferred Stock or Junior Preferred Stock
were outstanding. The Serial Preferred Amendment would eliminate the Senior
Preferred Stock and the Junior Preferred Stock. The Serial Preferred Amendment
is not designed to deter or to prevent a change in control; however, if the
Merger is not consummated, under certain circumstances, the Company could use
the Serial Preferred Stock to create voting impediments or to frustrate persons
seeking to effect a takeover or otherwise gain control of the Company and
thereby to protect the continuity of the Company's management. In addition, the
issuance of additional Common Stock or Serial Preferred Stock at below market
rates would dilute the value of the outstanding securities of the Company. The
Company could also privately place such shares with purchasers who might favor
the Board of Directors in opposing a hostile takeover bid.
11
<PAGE> 23
PROPOSAL THREE
THE MERGER AND RELATED MATTERS
SPECIAL FACTORS
BACKGROUND OF THE MERGER
Since June 1993, the Company has experienced significant growth. This
growth has resulted from internal growth and from selective acquisitions of
other businesses. As the Company expanded, its management became more
decentralized and it relied primarily on the operating companies to implement
systems designed to integrate the operations of acquired businesses.
During fiscal years 1996 and 1997, the Company encountered difficulties in
integrating the operations of certain acquired businesses. In the fourth quarter
of fiscal 1996, the Company recorded restructuring and non-recurring charges of
approximately $1.6 million ($984,000 net of tax) based on its decision to
consolidate certain facilities, terminate certain employees and write-off
capitalized acquisition costs. In the fourth quarter of fiscal 1997, the Company
decided to discontinue the operations of its Alpha Products retail division,
acquired in fiscal 1996, and relocate the promotional products division of Alpha
Products to other Company facilities. The Company announced that it anticipated
the loss from discontinued operations of the Alpha Products retail division
would be approximately $8.0 million ($4.8 million net of tax). The Company also
undertook a substantial restructuring in August 1997 that included significant
changes in management personnel and the realignment of operating companies into
two principal operating groups. As a result of these changes, the Company
recorded restructuring and non-recurring charges of approximately $1.8 million
($1.1 million net of tax).
Management of the Company believes that the operating results reported by
the Company as a result of difficulties encountered in implementing its
acquisition strategy and the resulting restructuring and consolidation charges,
which results did not meet expectations of securities analysts, combined with
the Company's small market capitalization and the limited trading activity in
the Company's Common Stock, have depressed the market price of the Common Stock.
In light of these conditions, Krasovec met with Merrill Lynch in November
1997 and again in December 1997 to discuss the possibility of a buyout of the
Public Shareholders. Krasovec selected Merrill Lynch because of its
long-standing relationship with the Company beginning with its initial
investment in the Company in 1989 and continuing today in its role as the
arranger and administrative agent of the Company's current senior credit
facility.
On January 8, 1998, representatives of Merrill Lynch made a presentation to
Krasovec regarding the feasibility of a leveraged buyout and recapitalization of
the Company. The presentation included an analysis of the sources and uses of
funds necessary to recapitalize the Company and certain timing and due diligence
issues.
On January 9, 1998, a special meeting of the Board of Directors was held
during which Krasovec informed the Board of Directors that he was evaluating
whether to make a proposal involving the acquisition of the outstanding Common
Stock of the Company through a merger or other leveraged buyout transaction.
Krasovec informed the Board that any such proposal might involve other members
of management of the Company or other persons.
With Krasovec excused from the meeting, the Board of Directors appointed
Messrs. Robert L. Seibert and John H. Wilson III, two of the directors of the
Company who are neither officers of the Company nor members of the Buyout Group,
to serve on the Special Committee created to receive, review, evaluate and
negotiate any proposed transaction and to make recommendations in respect
thereof to the Board. The Board authorized the Special Committee to engage its
own financial and legal advisors for the transaction at the Company's expense.
Between January 9, 1998 and March 6, 1998, several telephone meetings
occurred between the members of the Special Committee. Between January 9, 1998
and February 12, 1998, the Special Committee contacted
12
<PAGE> 24
a number of investment banking firms regarding acting as the financial adviser
to the Special Committee. On January 20, 1998, the Special Committee engaged
Fulbright & Jaworski, L.L.P. as its special legal counsel.
As of January 12, 1998, Krasovec formally engaged Merrill Lynch and Allen
as his financial advisors to assist him in analyzing, structuring, negotiating
and effecting a proposed transaction with the Company. On January 19, 1998,
Krasovec and other members of management made a presentation to representatives
of NationsBank and Merrill Lynch on the Company's business and operations. On
January 29, 1998, Krasovec formally engaged Blank Rome Comisky & McCauley LLP as
his counsel.
On February 5, 1998, the Special Committee received a written proposal
letter from Krasovec suggesting a cash price of $19.50 for each share of
outstanding Common Stock of the Company. In the proposal letter, Krasovec stated
that he expected the acquisition would be effected by means of a merger of the
Company with a company to be formed by Krasovec and that he would solicit other
investors, including other members of senior management of the Company, to
invest in such newly formed company. The proposal letter also stated that
Krasovec was arranging with Merrill Lynch and NationsBank to provide the funds
necessary to finance the acquisition and that the financing sources would
deliver commitment letters and a "highly confident" letter in the aggregate
amount of the required financing at the time of the execution of a binding,
definitive merger agreement.
On February 12, 1998, the Special Committee engaged J.C. Bradford as
special financial advisor to the Special Committee and the Board. Subject to
written confirmation in a formal engagement letter, the Special Committee
authorized J.C. Bradford to commence an examination of the Company and explore
appropriate valuation methodologies for the purpose of rendering an opinion
regarding whether the consideration to be paid in any transaction would be fair
to the Public Shareholders from a financial point of view. J.C. Bradford
thereafter undertook a review of the Company's business, operations and
prospects with a view toward advising the Special Committee as to the fairness,
from a financial point of view, of the consideration to be proposed by Krasovec.
The scope and nature of that examination is discussed in "-- Opinion of Special
Committee's Financial Advisor." J.C. Bradford provided the Special Committee
with a written preliminary report with respect to its preliminary examination of
the Company and the various valuation methodologies that would be used in
determining the fairness, from a financial point of view, of the price to be
paid to the Public Shareholders. Such preliminary report was prepared on the
same basis as J.C. Bradford's final report to the Special Committee and was
superceded by the final report. After considering the preliminary report
provided by J.C. Bradford, which indicated that $19.50 per share was generally
below the ranges of implied values for the Company's common stock and based on
their own knowledge and experience in commercial transactions, the members of
the Special Committee concluded that the proposed price of $19.50 per share
should be increased.
On February 27, 1998, John H. Wilson III, a member of the Special
Committee, contacted Krasovec to inform him that the cash price of $19.50 per
share was inadequate. On March 2, 1998, Krasovec met with Mr. Wilson to inform
him that he would increase the consideration to $20.70 per share, provided the
other terms of a merger agreement, including the respective representations and
warranties, covenants and conditions of the parties, could be agreed upon. On
March 4, 1998, an initial draft of the Merger Agreement was delivered to the
members of the Special Committee and to counsel to the Special Committee and
counsel to the Company.
On March 7, 1998, a special meeting of the Board of Directors was held to
discuss the terms of the revised proposal submitted by Krasovec. J.C. Bradford
reviewed for the Board of Directors its financial analyses and indicated that,
based upon the various considerations and assumptions described below under
"-- Opinion of Special Committee's Financial Advisor," J.C. Bradford was
prepared to orally advise the Board of Directors that the $20.70 per share in
cash to be received by the Public Shareholders in connection with the proposed
Merger was fair from a financial point of view to the Public Shareholders. See
"-- Opinion of Special Committee's Financial Advisor."
During the next several days, Krasovec, members of the Special Committee
and counsel to Krasovec, the Special Committee and the Company (Hughes & Luce,
L.L.P.) engaged in numerous telephone conversations to discuss and negotiate the
terms of the Merger Agreement, including the respective representations and
13
<PAGE> 25
warranties, covenants and conditions of the parties, as well as terms relating
to termination fees and expenses and the termination of the Merger Agreement.
On March 11, 1998, a substantially complete form of the Merger Agreement
was delivered to the directors of the Company. On March 13, 1998, substantially
complete forms of the commitment and "highly confident" letter regarding the
financing of the Merger were delivered to the directors of the Company. On March
13, 1998, Krasovec formed FPK, LLC by filing a certificate of formation with the
Secretary of State of the State of Delaware.
On March 15, 1998, a special meeting of the Board of Directors was held by
telephone conference. A presentation was made by counsel to the Special
Committee as to the revisions to the Merger Agreement. J.C. Bradford then
delivered its oral opinion that, as of March 15, 1998, the $20.70 per share cash
consideration to be received by the Public Shareholders in the Merger was fair
to such shareholders from a financial point of view. The Special Committee then
recommended to the Board the approval of the Merger Agreement and the
transactions contemplated thereby. The Board of Directors (with Krasovec and
Josephson abstaining due to inherent conflicts of interest) unanimously adopted
a resolution approving the Merger Agreement and recommending that the
shareholders of the Company approve the Merger Agreement. See "-- Conflicts of
Interest."
Later on March 15, 1998, the parties executed and delivered the Merger
Agreement. On the morning of March 16, 1998, the execution of the Merger
Agreement was publicly announced through a press release issued by the Company.
Following the execution of the Merger Agreement, Krasovec solicited certain
members of the Company's management (namely, Gunning, Finnell, Michael
Linderman, James Preston, Paul W. Lawson, Russell A. Devereau, George Bell
Strob, Brian P. Miller, J. Max Waits and David Kagel) to become members of the
Buyout Group. Such members of the Company's management, along with Krasovec,
jointly filed a Schedule 13D with the Commission on March 25, 1998, as amended
on April 7, 1997, stating their intention to become members of the Buyout Group.
It is anticipated that the members of the Buyout Group, along with the New
Shareholders, will enter into a shareholders' agreement that will provide
certain rights and responsibilities among the shareholders of the Surviving
Corporation. The terms of the shareholders' agreement have not yet been
determined.
On June 24, 1998, representatives of The Seidler Company, LLC, a Delaware
limited liability company ("Seidler"), approached Krasovec concerning a possible
transaction between the Company and Seidler. On June 25, 1998, the Company
received a letter from Seidler expressing an interest in acquiring the Company
in a transaction in which the shareholders of the Company would receive $25.25
in cash for each share of the Company's Common Stock. In this letter, Seidler
made its proposal contingent upon the receipt and satisfactory review of certain
due diligence information to be provided by the Company, the execution of a
definitive agreement mutually satisfactory to the parties and the receipt of all
required regulatory approvals. The proposal letter also stated that Seidler's
financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
had issued a "highly confident" letter in support of the financing for this
proposal. A copy of this proposal letter was forwarded to the Special Committee
and the other members of the Board of Directors.
On June 27, 1998, the Special Committee, its legal and financial advisors
and legal counsel for the Company met with a representative of Seidler and its
legal and financial advisors to discuss the proposal. At this meeting,
representatives of Seidler and DLJ presented information regarding Seidler,
including acquisitions completed by Seidler in the promotional products industry
during the last five years, and the structure of the financing to be arranged to
consummate the proposed transaction. After meeting separately with its legal and
financial advisors, the Special Committee determined that it was in the best
interests of the Company and its shareholders to conduct negotiations with
Seidler. The Special Committee then resolved to recommend to the Board of
Directors that such negotiations be undertaken and that confidential information
regarding the Company be furnished to Seidler.
14
<PAGE> 26
On June 28, 1998, a joint meeting of the Special Committee and the Board of
Directors was held by telephone conference in order to discuss the terms and
conditions of the proposal made by Seidler. The Board of Directors (with
Krasovec and Josephson not participating) determined that it was in the best
interests of the Company and its shareholders to conduct negotiations with
Seidler regarding a possible acquisition of the Company by Seidler. The Board of
Directors then authorized the Special Committee (i) to negotiate and enter into
a confidentiality agreement with Seidler under which Seidler and its
representatives would be furnished the same or comparable confidential financial
and other information regarding the Company as was made available to the Buyout
Group, (ii) to receive, review and evaluate any proposals made by Seidler and
(iii) to negotiate the terms of definitive acquisition documents appropriate for
the proposed transaction.
On June 29, 1998, representatives of the Special Committee and Seidler
negotiated the terms of the confidentiality agreement. This agreement was
executed and the Company began providing information requested by Seidler that
same day. Over the next several days, the Company promptly responded to all
requests for information made by either Seidler or DLJ.
On July 2, 1998, Seidler delivered to the Special Committee and the Board
of Directors a letter reducing its proposed price from $25.25 per share to
$24.30 per share. As with the original proposal letter, this revised proposal
was subject to continued due diligence on the part of Seidler.
Beginning on July 6, 1998, legal counsel to the Special Committee and legal
counsel to the Company began negotiations with legal counsel for Seidler
regarding draft acquisition documents provided by Seidler. Negotiations
continued during the next several days while the Company continued to provide
confidential financial and other information to Seidler.
At the request of the Special Committee, Krasovec agreed to meet with
representatives of Seidler to facilitate Seidler's due diligence and the
negotiations between the Company and Seidler. Between June 29, 1998 and July 8,
1998, representatives of Seidler met and had telephone conversations with
Krasovec. In these discussions, representatives of Seidler explored with
Krasovec possible alternative transactions involving Seidler and the Company,
including a possible minority investment by Seidler in the Surviving Corporation
or a joint venture between subsidiaries or divisions of the Company and Seidler.
No understandings or agreements were reached regarding any alternative
transaction, and none are pending.
On July 9, 1998, legal counsel to Seidler informed legal counsel to the
Special Committee by telephone that Seidler intended to withdraw its proposal to
acquire the Company. This decision was confirmed in a letter from Seidler to
Krasovec, Josephson and John H. Wilson, III dated July 13, 1998. Seidler
indicated that its interest in acquiring the Company at a price of $24.30 per
share had been based on the assumption that the Company would achieve minimum
EBITDA for fiscal year 1998 of $25 million. Based on its due diligence, Seidler
stated that it projected that the Company's EBITDA for fiscal 1998 would be only
approximately $23.5 million.
The Special Committee and the Board of Directors have determined that the
Merger continues to be in the best interests of the Company and the Public
Shareholders and that no further action need be taken with respect to the
withdrawn proposal by Seidler. J.C. Bradford has issued its written opinion to
the Special Committee to the effect that the Merger Consideration is fair to the
Public Shareholders from a financial point of view.
PURPOSE OF AND REASONS FOR THE MERGER; CERTAIN EFFECTS OF THE MERGER
The principal purposes for the Merger are: (a) for the members of the
Buyout Group, along with the New Shareholders, to acquire all of the equity
interest in the Company represented by the Public Stock; (b) to give the Public
Shareholders the opportunity to dispose of their shares of Common Stock at a
fair value; and (c) because the Company has been unable to realize many of the
benefits of being a public company, since the market price of the Common Stock,
in the view of management, has been artificially depressed due to the Company's
operating results, small market capitalization and the lack of an active trading
market for the Common Stock. Other than as set forth herein, the members of the
Buyout Group have no reason for proposing the Merger at this particular time (as
opposed to any other time) and are not aware of
15
<PAGE> 27
any material development affecting the future value of the Common Stock that is
not described in this Proxy Statement. See "-- Future Plans of the Company."
The Merger has been structured so as to enable the Buyout Group, along with
the New Shareholders, to acquire all of the equity interest in the Company while
maximizing shareholder value for the Public Shareholders. The Merger will
terminate all equity interests in the Company of the Company's current
shareholders, other than the members of the Buyout Group. Accordingly, the
Public Shareholders will share in neither future earnings and growth of the
Company nor the risks associated with achieving such earnings and growth
following the Merger. The Merger will enable the Public Shareholders to receive
a cash payment of $20.70 per share of Common Stock pursuant to a transaction
which has been determined by the Special Committee and the Board of Directors of
the Company and by Krasovec, as discussed under "-- Determination of Fairness of
the Merger by the Special Committee and the Board of Directors" and "-- Position
of Krasovec, Gunning, Josephson and Finnell as to Fairness," to be fair to such
Public Shareholders, or to seek dissenters' rights as described under "-- Rights
of Dissenting Shareholders." The Merger Consideration was the result of
arm's-length negotiations between representatives of Krasovec and the members of
the Special Committee and their respective advisors following the receipt of the
proposal by Krasovec. Following the Merger, the members of the Buyout Group and
the New Shareholders, along with holders of other Company Stock Derivatives upon
their exercise or conversion, will be the sole beneficiaries of any future
earnings and growth of the Company and will have the ability to benefit from any
divestitures, strategic acquisitions or other corporate opportunities that may
be pursued by the Company in the future.
The assumption by the Company of the status of a private company will allow
the Company to eliminate the time devoted by its management and certain other
employees to matters that relate exclusively to the Company being a public
company. Additionally, the Company will be able to reduce certain other costs
that relate to being a public company, estimated by the Company to be
approximately $600,000 per year, including the following: the cost of preparing,
printing and mailing certain corporate reports and proxy statements, the expense
of a transfer agent and the cost of investor relations activities. As a result
of the Merger, the Surviving Corporation will be privately held and there will
be no public market for its common stock. Upon consummation of the Merger, the
Common Stock will cease to be quoted on Nasdaq.
In connection with the Merger and the discussions relating thereto, the
members of the Buyout Group have advised the Company that, relating to the
structure of the Merger, they did not consider any alternative that would have
allowed the Public Shareholders to maintain an equity interest in the Company
because no such alternative would have accomplished the purposes of the Merger
set forth in this section. The members of the Buyout Group considered, but
ultimately rejected, a redemption, including an issuer self tender of the Public
Stock, because a merger would permit the Company's shareholders to vote on the
transaction and permit sufficient time to raise the necessary financing.
The Company believes that the Merger will be treated for federal income tax
purposes as a redemption by the Company of the Public Stock and, therefore, will
not give rise to gain, loss or other income to the Company, to LLC or to Newco.
The Merger will be a taxable transaction to the holders of the Common Stock who
receive Merger Consideration or cash pursuant to the exercise of dissenters'
rights for federal income tax purposes and may be taxable for state, local,
foreign and other tax purposes. See "The Merger Agreement -- Certain U.S.
Federal Income Tax Consequences of the Merger."
Other than the Company's Second Amended and Restated Employee Stock
Purchase Plan, which is expected to be terminated at the Effective Time, all
employee benefit and compensation plans of the Surviving Corporation will be
substantially the same as the Company's present benefit plans for a period of at
least one year. The Surviving Corporation may determine to amend present benefit
plans or to initiate additional employee benefit plans in the future to
compensate and motivate key employees. See "The Merger Agreement -- Employee
Benefits."
DETERMINATION OF FAIRNESS OF THE MERGER BY THE SPECIAL COMMITTEE AND THE BOARD
OF DIRECTORS
On March 15, 1998, the Board of Directors (with Krasovec and Josephson
abstaining due to inherent conflicts of interest), after receiving the
recommendation of the Special Committee, unanimously determined
16
<PAGE> 28
that the Merger is in the best interests of the Company and the Public
Shareholders, approved the Merger Agreement and recommended to the Public
Shareholders that they approve the Merger Agreement. See "-- Conflicts of
Interests."
In making its determination with respect to the fairness, from a financial
point of view, of the Merger, including the Merger Consideration, and in
determining to recommend approval of the Merger Agreement to the Board of
Directors, the Special Committee considered a number of factors. In making its
determination with respect to the fairness of the Merger from a financial point
of view, including the Merger Consideration, and in approving the Merger
Agreement, the Board of Directors (except for the interested directors)
considered the same factors. The material factors so considered by the Special
Committee and the Board of Directors were those set forth below. In analyzing
the proposed Merger, the Special Committee met on numerous separate occasions,
consulted with its financial and legal advisors and had numerous other
discussions with Krasovec and his representatives and between the members of the
Special Committee. The Special Committee did not perform any financial analysis
other than that performed by J.C. Bradford.
(i) The Special Committee and the Board considered the historical
market prices and recent trading activity of the Common Stock and the fact
that the Merger Consideration would enable the Public Shareholders to
realize a premium over the prices at which the Common Stock has traded in
the last year (including the ten business day average of reported closing
prices for the Common Stock ending with the day prior to the date of the
Company's press release reporting the Merger (the "Public Announcement
Date") which was $17.375); and the Merger Consideration represents a 19%
premium over the ten business day average price and a 30% premium over the
average of the closing prices during the 120 business days prior to the
Public Announcement Date. Although such prices may not adequately reflect
the value of the Common Stock in the view of management, the historical
market prices of the Common Stock for the past year were deemed relevant
because they indicate the arm's-length trading prices of the Common Stock
for that period as determined in the open market. In the judgment of the
Special Committee and the Board, the fact that the Merger Consideration
represents a premium over such prices is a significant factor in the
determination of fairness.
(ii) The Special Committee and the Board considered the oral opinion
of J.C. Bradford to the effect that, as of March 15, 1998, the Merger
Consideration of $20.70 in cash per share of Common Stock to be received by
the Public Shareholders in the Merger was fair to such shareholders from a
financial point of view and also considered the analyses underlying such
opinion. See "-- Opinion of Special Committee's Financial Advisor." A copy
of the written J.C. Bradford opinion, dated the date hereof, setting forth
the assumptions made, matters considered and limitations on the review
undertaken in connection with such opinion, is attached as Appendix B to
this Proxy Statement and should be carefully read in its entirety.
(iii) The Special Committee and the Board considered information with
respect to the financial condition, results of operations, business and
prospects of the Company, as well as the risks involved in achieving such
prospects, and the current state of the promotional products industry,
including the Special Committee's views regarding the economic and market
conditions affecting the Company and such industry. The Special Committee
and Board believe that the promotional products industry will face
increased competition in the future, notably from Internet-based
advertising, and that this trend could adversely affect the future growth
prospects of the industry and the Company. Therefore, the Special Committee
determined that there was significant risk involved in the Company
achieving future growth that would support a price per share higher than
the Merger Consideration.
(iv) The Special Committee and the Board also evaluated the Merger
Consideration in light of the following factors: price, the ability of LLC
to consummate the proposed transaction, the percentage of Common Stock
owned by the members of the Buyout Group, the proposed structure of the
transaction and anticipated closing date, and the fiduciary obligations of
the Special Committee and the Board to the Public Shareholders. Based upon
information provided by LLC, the Special Committee and the Board believed
that LLC could obtain the financing required to complete the Merger. In
addition, because of the percentage of Common Stock owned by members of the
Buyout Group, the Special Committee and the Board considered it likely that
the Merger would be approved by the shareholders of the Company.
17
<PAGE> 29
These factors, when combined with the structure of the transaction as a
merger, led the Special Committee and the Board to conclude that the Merger
could be completed more quickly than any alternative transaction, with less
disruption of the Company's business operations.
(v) The Special Committee considered the risks to the Company and the
Public Shareholders of entering into the Merger Agreement with LLC,
including (a) LLC being a newly-formed company without any significant
assets prior to consummation of the Merger, (b) LLC's ability to consummate
the Merger being dependent upon its ability to close on the financing and
(c) the provisions of the Merger Agreement requiring the Company in certain
circumstances to reimburse LLC for its reasonable and customary
out-of-pocket expenses in the event that the Merger is not consummated.
(vi) The Special Committee also considered the fact that consummation
of the Merger would preclude the Public Shareholders from having the
opportunity to participate in the future growth prospects of the Surviving
Corporation. Accordingly, in reaching its conclusion to approve the Merger
Agreement, the Special Committee considered the Revised Projections (as
defined below) and determined, based in part on these projections and on
J.C. Bradford's analysis of these projections, that the future prospects of
the Company are adequately reflected in the Merger Consideration. The
Special Committee believed that it was appropriate to consider management's
projections in its analysis because management is in the best position to
analyze the financial prospects of the Company. In addition, the Special
Committee recognized that the members of the Buyout Group will have the
opportunity to benefit from any increases in the value of the Surviving
Corporation following the Merger. See "-- Conflicts of Interest,"
"-- Future Plans of the Company," "-- Certain Projections" and "-- Purpose
of and Reasons for the Merger; Certain Effects of the Merger."
(vii) The Special Committee also considered the fact that the Merger
would afford the Public Shareholders an opportunity to dispose of their
Common Stock at fair value without the possible diminution of value
resulting from the lack of an active trading market and without payment of
brokerage fees.
The Special Committee considered whether the Company should actively seek
other potential buyers for the Company, but did not solicit other offers and did
not request J.C. Bradford to seek other bids or explore other alternatives to
the Merger. Based on statements by LLC, the Special Committee believed that LLC
would withdraw the proposal set forth in the Merger Agreement if the Company
were to solicit competing offers. Moreover, the Special Committee concluded that
there were very few, if any, other companies in the promotional products
industry that would be plausible acquirers of the Company and that there could
be no assurance that soliciting other offers would lead to an alternative
transaction more favorable to the Public Shareholders than the Merger. The
Special Committee and the Board of Directors also considered that the Merger
Agreement did not preclude unsolicited offers. The Special Committee and the
Board of Directors believed that the public awareness of ability to consider
unsolicited proposals disclosed in the Current Report on Form 8-K filed promptly
after the execution of the Merger Agreement would act as a "market check" and
confirm to the Special Committee and the Board of Directors that no other
potential superior offers were available or, alternatively, would generate one
or more superior offers.
In view of the various factors considered by the Special Committee in
connection with its evaluation of the Merger and the Merger Consideration, the
Special Committee did not find it necessary to quantify or otherwise attempt to
assign relative importance to the specific factors considered in making its
determination, nor did it evaluate whether such factors were of equal
importance. However, based upon these factors, the evaluation of all the
relevant information provided to them by J.C. Bradford and taking into account
the existing trading ranges for the Common Stock, the Special Committee
determined that the Merger, including the Merger Consideration, was fair from a
financial point of view, to the Public Shareholders. The Special Committee and
the other members of the Board of Directors believe that the Merger was
considered in a manner that was procedurally fair to the Public Shareholders and
that the directors properly discharged their responsibilities and duties.
18
<PAGE> 30
Krasovec and Josephson are the only members of the Board of Directors who
are members of the Buyout Group. Accordingly, Krasovec and Josephson did not
participate on the Special Committee and abstained from voting on the Merger due
to inherent conflicts of interest. See "-- Conflicts of Interest."
The Company believes that the manner in which the Merger is to be
implemented is procedurally fair to the Public Shareholders based on the
following factors: (i) the Special Committee was formed to promote and protect
the interests of the Public Shareholders; (ii) the Special Committee was
comprised solely of members of the Board of Directors who are neither members of
the Buyout Group nor officers of the Company (but who will receive cash in
exchange for their Common Stock, including shares of Common Stock to be issued
upon the anticipated exercise of their warrants, upon consummation of the
Merger); (iii) the Special Committee retained an independent financial advisor,
J.C. Bradford, and independent legal counsel, Fulbright & Jaworski L.L.P.; and
(iv) the negotiations between Krasovec and the Special Committee and their
respective counsel of the terms of the Merger Agreement were conducted on an
arm's-length basis.
OPINION OF SPECIAL COMMITTEE'S FINANCIAL ADVISOR
J.C. Bradford was retained by the Special Committee to assist the Special
Committee and the Board of Directors in evaluating the proposed Merger and to
render its opinion as to the fairness from a financial point of view of the
consideration to be received by the Public Shareholders in the Merger. J.C.
Bradford is a nationally recognized investment banking firm that engages in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate, and other purposes. J.C. Bradford was selected
as the Special Committee's financial advisor based upon such expertise.
On March 15, 1998, J.C. Bradford delivered its oral opinion to the Special
Committee to the effect that, as of such date, the Merger Consideration was fair
to the Public Shareholders from a financial point of view. J.C. Bradford
subsequently confirmed its oral opinion by delivery of its written opinion dated
as of the date of this Proxy Statement. J.C. Bradford's opinion is directed only
to the fairness from a financial point of view of the Merger Consideration to be
received by the Public Shareholders in the Merger and does not constitute a
recommendation to any shareholder as to whether such shareholder should vote in
favor of the Merger. J.C. Bradford conducted valuation analyses of the Common
Stock and evaluated the Merger Consideration, but was not asked to and did not
recommend a specific per share price to be issued pursuant to the Merger. J.C.
Bradford's opinion does not address the likely tax consequences of the Merger to
any Public Shareholder. In addition, J.C. Bradford was not asked to consider and
its opinion does not address the relative merits of the proposed Merger as
compared to any alternative business strategies that might exist for the Company
or the effect of any other transactions in which the Company might engage. J.C.
Bradford did not make an independent evaluation or appraisal of the assets and
liabilities of the Company or any of its subsidiaries or affiliates and has not
been provided with any such evaluation or appraisal. The full text of J.C.
Bradford's written opinion, which sets forth the assumptions made, procedures
followed, matters considered, and limits of its review undertaken in connection
with the opinion, is included as Appendix B and is incorporated by reference
herein. The Public Shareholders are urged to and should read such opinion in its
entirety.
In conducting its analysis and delivering its opinions, J.C. Bradford
considered such financial and other factors as it deemed appropriate and
feasible under the circumstances, including the following items J.C. Bradford
considers material to its opinion: (i) the Merger Agreement; (ii) the historical
and current financial position and results of operations of the Company; (iii)
the Revised Projections for the fiscal years beginning September 1, 1997 and
ending August 31, 2003, prepared for the Company by its senior management; (iv)
certain financial and securities data of certain other companies, the securities
of which are publicly traded and that J.C. Bradford believed to be generally
comparable to the Company; (v) prices and premiums paid in certain other
acquisitions and transactions that J.C. Bradford believed to be relevant; and
(vi) historical and current price and trading activity for the Common Stock.
J.C. Bradford also held discussions with members of the senior management of the
Company regarding the past and current business operations, financial condition
and future prospects of the Company. With the permission of the Special
Committee, J.C. Bradford assumed that financing for the Merger had been
irrevocably obtained on the terms set forth in commitment letters and highly
confident letters from financing sources previously reviewed by
19
<PAGE> 31
J.C. Bradford, and that the Merger Agreement had been executed and delivered by
the parties thereto on terms substantially similar to those contained in the
most recent draft thereof supplied to and reviewed by J.C. Bradford as of the
date of its opinion. In addition, J.C. Bradford took into account its assessment
of general economic, market and financial conditions and its experience in other
transactions as well as its experience in securities valuation and its knowledge
of the promotional products industry generally.
J.C. Bradford's opinion is necessarily based upon general economic, market,
financial and other conditions as they existed on the date thereof and the
information made available to J.C. Bradford through such date. For purposes of
the opinion, J.C. Bradford relied upon and assumed the accuracy and completeness
of the financial and other information made available to it and did not assume
responsibility for independent verification of such information. J.C. Bradford
has assumed, and the management of the Company has represented, that the
information provided by the Company, including the Revised Projections had a
reasonable basis and reflected the best currently available estimates and
judgments of the Company's management as to the recent and likely future
performance of the Company. J.C. Bradford did not make any adjustments to the
Revised Projections. See "-- Certain Projections." J.C. Bradford also relied
upon the representations of the Company's management that they were not aware of
any information or fact that would make the information provided to J.C.
Bradford incomplete or misleading, J.C. Bradford was not authorized by the
Special Committee or the Company to solicit, and did not solicit, other entities
for purposes of a possible business combination. No limitations were imposed by
the Special Committee or the Company on the scope of J.C. Bradford's
investigation or the procedures to be followed in rendering its opinion. The
opinion was based upon the information available to J.C. Bradford and the facts
and circumstances as they existed and were subject to evaluation on the date of
the opinion. Events occurring after such date could materially affect the
assumptions used in preparing the opinion and J.C. Bradford has no duty or
obligation to update or amend its opinion or otherwise advise the Special
Committee, the Board of Directors or any other party or person of the occurrence
of any such events.
In preparing its report to the Special Committee, J.C. Bradford performed a
variety of financial and comparative analyses and considered a variety of
factors, including (i) comparable company analysis; (ii) discounted cash flow
analysis; (iii) leveraged buyout analysis; (iv) premium analysis; and (v) stock
trading analysis. The summary of J.C. Bradford's analyses set forth below does
not purport to be a complete description of the analyses underlying J.C.
Bradford's opinion. The preparation of a fairness opinion is a complex process
involving subjective judgments and is not necessarily susceptible to partial
analysis or summary description. In arriving at its opinion, J.C. Bradford did
not attribute any particular weight to any analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, J.C. Bradford believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
the factors considered by it, without considering all analyses and factors,
could create a misleading or incomplete view of the processes underlying such
analyses and its opinion. With respect to the comparable company analysis
summarized below, no company utilized as a comparison is identical to the
Company and such analysis necessarily involves complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies and other factors that could affect the acquisition or public
trading values of the companies concerned. The analyses performed by J.C.
Bradford are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses.
The following is a summary of the report presented by J.C. Bradford to the
Special Committee on March 7, 1998:
(a) Comparable Company Analysis. Using publicly available information,
J.C. Bradford reviewed certain financial and operating data for several
publicly traded companies engaged in businesses with characteristics
similar to the Company's (the "Comparable Company Group"). The Comparable
Company Group includes CCS Industries, Inc., Equity Marketing, Inc.,
Lillian Vernon Corp., Racing Champions Corp. and Swiss Army Brands, Inc.
J.C. Bradford advised the Special Committee that there were no publicly
traded companies directly comparable to the Company and the analysis had to
be considered in light of that qualification. J.C. Bradford calculated the
current market price of each company as a multiple of estimated 1998
earnings ("1998 P/E"), which ranged from 11.3x to 25.6x with
20
<PAGE> 32
an adjusted average multiple of 13.1x; current market price as a multiple
of estimated 1999 earnings ("1999 P/E"), which ranged from 9.3x to 22.2x
with an adjusted average multiple of 11.2x; current market price as a
multiple of book value ("Book Value Multiple"), which ranged from 1.2x to
2.6x with an adjusted average multiple of 1.7x; total firm value (defined
as equity market value plus net debt) as a multiple of last twelve months
("LTM") revenues ("Revenue Multiple"), which ranged from 0.6x to 2.1x with
an adjusted average multiple of 0.9x; and total firm value as a multiple of
LTM earnings and earnings before interest, taxes, depreciation and
amortization ("EBITDA") (the "EBITDA Multiple"), which ranged from 5.7x to
9.0x with an adjusted average multiple of 7.4x. J.C. Bradford compared the
Comparable Company Group multiples to the corresponding multiples in the
Merger, including 12.6x 1998 P/E, 10.3x 1999 P/E, 2.1x Book Value Multiple,
0.9x Revenue Multiple and 7.2x EBITDA Multiple.
(b) Discounted Cash Flow Analysis. Using discounted cash flow
analysis, based on information obtained from the senior management of the
Company, J.C. Bradford discounted to present value the future cash flows
that the Company is projected to generate through 2003, under various
circumstances, assuming the Company performed in accordance with the
Revised Projections. J.C. Bradford calculated terminal values for the
Company (i.e., the values at the 2003 fiscal year end) by applying
multiples of EBITDA and earnings in the year 2003. The cash flow streams
and terminal values were then discounted to present values using different
discount rates chosen to reflect different assumptions regarding the
Company's cost of capital. J.C. Bradford's analysis of operating cash flows
yielded an implied value per share ranging from $19.27 to $23.17. J.C.
Bradford's analysis utilizing the free cash flow method resulted in per
share values ranging from $19.94 to $22.37. J.C. Bradford also calculated
various implied future stock prices of the Company based on its projected
net earnings for fiscal years 1999 to 2003 and discounted those prices to
present values using different discount rates chosen to reflect different
assumptions regarding the Company's cost of capital. Based on the above
described analysis, the implied value per share ranged from $18.16 to
$20.95 as compared to the closing stock price of the Common Stock on March
3, 1998 of $17.38 and the offer price of $20.70.
(c) Leveraged Buyout Analysis. J.C. Bradford utilized the Revised
Projections provided by senior management of the Company to analyze the
value of the Company as a stand-alone entity in a leveraged transaction.
Based on the structure of the proposed recapitalization and the proposed
offer of $20.70 per share of Common Stock in the Merger, J.C. Bradford
calculated the five-year internal rates of return ("IRRs") to the
convertible preferred equity holders and the equity investors, and analyzed
the total indebtedness to be incurred as a result of the transaction. J.C.
Bradford calculated terminal values for the Company (i.e., the values at
the 2003 fiscal-year end) by applying multiples of EBITDA in the year 2003.
J.C. Bradford noted that, based on the foregoing, the convertible preferred
equity holders are projected to achieve an IRR of between 22.9% and 25.0%
over the five-year period, and that the equity investors are projected to
achieve an IRR of between 31.1% and 36.9% over the five-year period. J.C.
Bradford also noted that upon completion of the transaction, the Company's
total indebtedness to LTM EBITDA ratio will be approximately 4.8x. Based
upon its experience in leveraged transactions, J.C. Bradford noted that
these return levels are generally consistent with those required in such
transactions.
(d) Premium Analysis. J.C. Bradford prepared an analysis of the
premiums paid in 386 completed cash acquisitions of public companies since
January 1995 in which 100% of the target's shares were controlled by the
acquirer following the acquisition. J.C. Bradford considered, among other
factors, the type of consideration used in the acquisition and the premiums
paid based on the closing price of the target's shares at one day, one week
and four weeks prior to the announcement. For all cash acquisitions where
100% of the target's shares were controlled by the acquirer following the
acquisition, J.C. Bradford calculated median premiums of 24.0%, 27.5% and
33.6% at one day, one week, and four weeks prior to the announcement,
respectively. These premiums, based upon the announcement date of March 16,
1998, imply per share equity values for the Company of $21.55, $22.15 and
$22.38, respectively. These premiums, when applied to the 30-day average
stock price as of March 7, 1998, imply per share equity values for the
Company of $19.98, $20.55 and $21.54, respectively.
21
<PAGE> 33
(e) Stock Trading Analysis. J.C. Bradford reviewed and analyzed the
historical trading volume and prices at which the Common Stock has traded
since the Company's initial public offering. J.C. Bradford noted that
trading activity was limited and that the trading market was relatively
illiquid. J.C. Bradford also noted that the highest traded price was
$24.00, which occurred in April 1996, and the lowest traded price was
$9.25, which occurred in May 1994.
Pursuant to the terms of an engagement letter dated February 12, 1998, the
Company agreed to pay J.C. Bradford for acting as financial advisor to the
Special Committee in connection with the Merger a fee as follows: (i) $50,000
upon execution of the engagement letter, (ii) $75,000 at the time J.C. Bradford
notified the Special Committee that it was prepared to render its opinion
concerning the Merger, and (iii) $100,000 upon delivery of the opinion by J.C.
Bradford. The fees paid to J.C. Bradford were not contingent upon the
consummation of the Merger and were to be paid regardless of the substance of
the opinion of J.C. Bradford. In addition, the Company has agreed to reimburse
J.C. Bradford for its reasonable out-of-pocket expenses, including the fees and
disbursements of its counsel, and to indemnify J.C. Bradford and certain related
persons against certain liabilities relating to or arising out of its
engagement, including certain liabilities under the federal securities laws. In
the ordinary course of its business, J.C. Bradford has traded, and may in the
future trade, securities of the Company for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities.
J.C. Bradford was engaged by the Special Committee to render its opinion as
to the fairness from a financial point of view of the consideration to be
received by the Public Shareholders in the Merger in connection with the Special
Committee's discharge of its fiduciary obligations. The engagement letter
between J.C. Bradford and the Special Committee provides, and J.C. Bradford has
advised the members of the Board of Directors and the Special Committee, that
J.C. Bradford does not believe that any person (including any shareholder of the
Company) other than the Board of Directors and the Special Committee has the
legal right to rely upon J.C. Bradford's opinion for any claim arising under
state law and that, should any such claim be brought against J.C. Bradford, this
assertion will be raised as a defense. In the absence of governing authority,
this assertion will be resolved by the final adjudication of such issue by a
court of competent jurisdiction. Resolution of this matter under state law,
however, will have no effect on the rights and responsibilities of any person
under the federal securities laws or on the rights and responsibilities of the
Company's Board of Directors and the Special Committee under applicable state
law.
POSITION OF KRASOVEC, GUNNING, JOSEPHSON AND FINNELL AS TO FAIRNESS
Krasovec, Gunning, Josephson and Finnell have concluded that the Merger and
the Merger Consideration are fair to the Public Shareholders and recommend that
the Public Shareholders vote in favor of the Merger based upon the following
factors: (i) the conclusions and recommendations of the Special Committee and
the Company's Board of Directors; (ii) the fact that the Merger Consideration
and the other terms and conditions of the Merger Agreement were the result of
arm's-length good faith negotiations between the Special Committee and its
advisor and Krasovec and his advisors; (iii) the Financial Analyses, (as defined
below) prepared by Merrill Lynch and (iv) the other factors referred to above as
having been taken into account by the Special Committee and the Board of
Directors. See "-- Determination of Fairness of the Merger by the Special
Committee and the Board of Directors," "-- Opinion of the Special Committee's
Financial Advisor" and "-- Material Prepared by Krasovec's Advisor." Krasovec,
Gunning, Josephson and Finnell also took into account the factors referred to
above as having been taken into account by the Special Committee and the
Company's Board of Directors.
In view of the variety of factors considered in connection with their
evaluation of the Merger and the Merger Consideration, Krasovec, Gunning,
Josephson and Finnell did not find it practicable to assign relative weights to
the factors considered in reaching their decision and, therefore, Krasovec,
Gunning, Josephson and Finnell did not quantify or otherwise attach relative
weights to the specific factors considered by the Special Committee, the
Company's Board of Directors and themselves.
Krasovec engaged Merrill Lynch and Allen to provide advice regarding, and
to assist in negotiating, the Merger Agreement. Krasovec also engaged Merrill
Lynch to assist in obtaining the financing necessary to
22
<PAGE> 34
consummate the transactions contemplated by the Merger Agreement. Neither
Merrill Lynch nor Allen were engaged to, nor did either of them render, any
opinion as to the fairness of the Merger Consideration. If the Merger is
consummated, Allen will be paid a fee of $700,000 for providing advice and
assistance with respect to negotiating the Merger Agreement and Merrill Lynch
will be paid fees in the aggregate of $5,025,000 for (i) providing advice and
assistance with respect to negotiating the Merger Agreement, (ii) acting as
co-arranger in connection with the $50 million senior secured credit facility to
be provided to the Surviving Corporation pursuant to that certain commitment
letter, dated March 15, 1998 from Merrill Lynch, NationsBank and NMS, (iii)
acting as an initial purchaser in connection with the issuance by the Surviving
Corporation of up to $100 million principal amount of Senior Subordinated Notes
pursuant to that certain highly confident letter, dated March 15, 1998, from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, (iv) issuing the highly
confident letter relating to the Senior Subordinated Notes and (v) acting in
connection with the placement of units of Preferred Stock and common stock of
the Surviving Corporation (for which Ares will also obtain a fee). Regardless of
whether the Merger is consummated, Merrill Lynch and Allen will be reimbursed
for all out-of-pocket expenses. All amounts owed to Merrill Lynch and Allen will
be paid by the Surviving Corporation pursuant to its agreement to pay all
expenses of the transaction. See "-- Expenses" and "The Merger
Agreement -- Termination."
MATERIAL PREPARED BY KRASOVEC'S ADVISOR
Merrill Lynch was retained by Krasovec to act as his financial advisor. On
November 19, 1997 and again on December 5, 1997, Merrill Lynch met with Krasovec
and provided him with certain financial analyses (respectively, the "November
Financial Analyses" and the "December Financial Analyses" and together, the
"Financial Analyses"). The Financial Analyses were preliminary and were never
updated after December 5, 1997. The Financial Analyses are described below and
the full text of the Financial Analyses are filed as exhibits to the Schedule
13E-3 filed with the Commission in connection with the Merger and will be made
available for inspection and copying at the principal executive offices of the
Company during its regular business hours by any interested holder of shares of
Common Stock or by any representative of such a holder designated as such in
writing. The description below is qualified by reference to the text of such
Financial Analyses. Merrill Lynch was not requested to, and did not, render any
opinion as to the fairness of the consideration to be received by the Public
Shareholders, or any other party, in the Merger nor did Krasovec or the Buyout
Group obtain any opinion as to the fairness of the Merger to the Public
Stockholders.
Merrill Lynch prepared the Financial Analyses based on its review of (i)
the Company's publicly available business and historical financial information,
(ii) the historical market prices and trading volume of the Company's Common
Stock, (iii) certain initial financial forecasts prepared and furnished by the
Company's management, (iv) publicly available business and historical financial
information of companies it deemed comparable to the Company, (v) the historical
market prices of the common stock of the companies referred to in clause (iv),
and (vi) business trends in the business segments in which the Company operates.
Merrill Lynch assumed and relied on the accuracy and completeness of all
information supplied or otherwise made available to it and did not assume any
responsibility for independently verifying such information or undertake an
independent evaluation or appraisal of any of the assets or liabilities of the
Company, nor was Merrill Lynch furnished with any such evaluation or appraisal.
The following is a summary of the material financial analyses used by
Merrill Lynch in preparing the December Financial Analyses (all of the analyses
are as of December 5, 1997), which, except as described below, are not
materially different than the financial analyses used by Merrill Lynch in
preparing the November Financial Analyses:
(a) Recent Stock Price and Earnings Performance
Merrill Lynch reviewed the historical trading prices and volumes at which
the Common Stock had traded since June 1993 (when the Company effected an
initial public offering) as well as during the twelve month period beginning
December 1996 and compiled the percentage of Common Stock traded within and
below various price ranges. Such review included Merrill Lynch's analysis of the
historical trading prices of the Common Stock as compared to the Standard &
Poor's 400 Index and a composite index comprised of four
23
<PAGE> 35
other publicly traded corporations in businesses comparable to the Company's
business: Cyrk Inc., Equity Marketing, HA-LO Industries and Swiss Army Brands.
Representatives of Merrill Lynch advised Krasovec that there were no publicly
traded companies directly comparable to the Company and that the analysis had to
be considered in light of that qualification. The analysis of such historical
share trading prices indicated that the Common Stock underperformed both the
Standard & Poor's 400 Index and the comparable composite index during each
period. Since June 1993, the Standard & Poor's 400 Index had increased 118.5%,
the comparable composite index had increased 384.5%, and the Common Stock had
increased 29.3%. Since December 1996, the Standard & Poor's 400 Index had
increased 27%, the comparable composite index had increased 0.3%, and the Common
Stock had decreased 5.6%. This analysis also revealed that the twelve month high
for the Common Stock was $21.50 and the twelve month low was $12.00, with the
Common Stock trading at $14.88 on December 2, 1997.
(b) Discounted Cash Flow Analysis
Because there are few publicly traded companies comparable to the Company
and because acquisitions of comparable companies have been made primarily by the
Company and have been small acquisitions with little publicly disclosed
financial information, Merrill Lynch noted that the best method to value the
Company was by its discounted cash flows. Merrill Lynch performed a discounted
cash flow analysis based on projected cash flows per share.
In performing the November Financial Analyses Merrill Lynch used a forecast
of the Company's income statement (including EBITDA) as well as selected cash
flow items (the "Initial Projections") for the years 1998 through 2004 that was
prepared by the Company, without making any adjustments to such forecasts.
Merrill Lynch then calculated ranges for the terminal value of the Company
applying to the EBITDA estimate for fiscal year 2004 terminal value multiples
ranging from 6.0x to 8.0x (which multiples were selected by Merrill Lynch on the
basis of its experience and judgment). Merrill Lynch then discounted the stream
of free cash flows (as estimated by Merrill Lynch) for fiscal years 1998 through
2004 as well as the terminal value of the Company using discount rates ranging
from 11% to 13%, representing Merrill Lynch's estimate of the weighted average
cost of capital of the Company. Based on these calculations, Merrill Lynch
calculated a value per share of Common Stock ranging from $29.23 to $43.74.
In performing the December Financial Analyses, Merrill Lynch used the
Initial Projections, without making any adjustments to such forecasts. Merrill
Lynch than calculated ranges for the terminal value of the Company applying to
the EBITDA estimate for fiscal year 2004 terminal value multiples ranging from
6.0x to 8.0x (which multiples were selected by Merrill Lynch on the basis of its
experience and judgment). Merrill Lynch then discounted the stream of free cash
flows (as estimated by Merrill Lynch, such estimate being revised from the
estimate used in the November Financial Analyses) for fiscal years 1998 through
2004 as well as the terminal value of the Company using discount rates ranging
from 11% to 13%, representing Merrill Lynch's estimate of the weighted average
cost of capital to the Company. Based on these calculations, Merrill Lynch
calculated a value per share of Common Stock ranging from $32.44 to $47.13.
Merrill Lynch included this calculation in an appendix to the December Financial
Analyses.
After meetings with the Company's management and after conducting its due
diligence investigation of the Company, Merrill Lynch formulated a set of
adjustments to the Initial Projections (as adjusted, the "Adjusted
Projections"). In comparison with the Initial Projections, the Adjusted
Projections reflected (i) revenue and operating profit increasing at a more
conservative rate since Merrill Lynch believed that such rate was more
consistent with the Company's historical rates of revenue growth and operating
profit growth; (ii) capital expenditures increasing since Merrill Lynch believed
that it was appropriate to project an increase in capital expenditures
consistent with the projected increase in sales; and (iii) depreciation
increasing since Merrill Lynch believed that it was appropriate to project an
increase in depreciation consistent with the increase in projected capital
expenditures. Performing an analysis substantially identical to the one
described in the immediately preceding paragraph on the Adjusted Projections
yielded a value per share of Common Stock ranging from $18.00 to $28.00. Merrill
Lynch included this result in the December Financial Analyses.
24
<PAGE> 36
(c) Comparable Public Company Multiples Analysis
Merrill Lynch reviewed certain publicly available financial, operating and
stock market information for Cyrk Inc., Equity Marketing Inc., HA-LO Industries,
Swiss Army Brands, and Bemrose Corporation (a European company), which are
publicly traded companies that Merrill Lynch deemed to be similar in certain
respects to the Company. Although these companies were deemed comparable based
on certain characteristics of their business, each was different from the
Company in other key respects. Nevertheless, Merrill Lynch used these companies
in its analysis because few publicly traded comparable companies exist. Merrill
Lynch calculated, among other things, (i) market value of equity as a multiple
of estimated 1997 and 1998 earnings per share and (ii) market capitalization as
a multiple of the last twelve months sales, EBITDA, and EBIT. For the relevant
periods the comparable companies had a (i) median market value of equity to
earnings per share of 18.6x and 19.1x for estimated 1997 and 1988 earnings,
respectively and (ii) market capitalization as a multiple of the last twelve
month sales, EBITDA and EBIT of .87x, 8.4x and of 11.5x, respectively. The
Company's multiples were lower than the median public company comparable
multiple in each of the calculations with (i) market value of equity as a
multiple of estimated 1997 and 1998 earnings of 12.9x and 10.9x, respectively
and (ii) market capitalization as a multiple of the last twelve months sales,
EBITDA and EBIT of .76x, 5.8x and 9.0x, respectively. Based on these comparable
public company multiples, Merrill Lynch calculated a reference value for the
Common Stock ranging from $14.50 to $25.00.
(d) Comparable Company Acquisition Multiples Analysis
Merrill Lynch also examined ten transactions involving the acquisition of
comparable manufacturing companies since 1994 and five transactions involving
the acquisition of comparable distributors since 1995. The Company was the
acquiror in each of the ten transactions involving manufacturing companies. For
nine of the ten transactions Merrill Lynch determined the multiple of
transaction value to sales, with the analysis revealing a range of 0.44x to
1.52x with the median multiple being 0.95x. For the five acquisitions of
comparable distributors, HA-LO was the acquiror in three of the transactions and
Cyrk Inc. was the acquiror in two of the transactions. Merrill Lynch determined
for each of these five transactions the multiple of transaction value to sales,
with the analysis revealing a range of 0.10x to 1.46x and the median multiple
being 0.40x. These comparable company acquisition multiples indicate a reference
value for the Common Stock ranging from $19.00 to $27.00.
Selecting portions of the material set forth above, without considering the
material as a whole, could create an incomplete view of the processes underlying
the analysis of Merrill Lynch. Moreover, as indicated above, the material was
preliminary when presented on December 5, 1997 and has not been updated since
that time. Additionally, no company or transaction used in the material for
comparison is identical to the Company or the Merger. The material was prepared
solely for the purposes described above and did not and does not purport to be
an appraisal or necessarily to reflect the prices at which businesses or
securities actually may be sold. Analyses based upon projected future results
are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of Merrill Lynch, their inclusion in this
Proxy Statement should not be regarded as an indication that Merrill Lynch
believes that future results or actual values will not be materially different
from these forecasts or assumptions.
Merrill Lynch provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of the Company for its own account and for the account of customers.
Merrill Lynch is acting as financial advisor in connection with the Merger
based upon Merrill Lynch's qualifications, expertise and reputation, including
the fact that Merrill Lynch, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bidding, secondary distributions of listed and unlisted securities, private
placements and valuation for corporate and other purposes. Pursuant to an
engagement letter between Krasovec and Merrill Lynch, dated as of January 12,
1998, Krasovec has agreed to pay Merrill Lynch a fee of $1,500,000 payable in
cash upon the closing of the Merger. Krasovec has also agreed to pay, upon
request, Merrill Lynch's reasonable out-of-pocket expenses incurred in
connection with its activities
25
<PAGE> 37
under the engagement letter and to indemnify it against certain liabilities,
including under the federal securities laws.
CERTAIN PROJECTIONS
The Company does not as a matter of course make public forecasts or
projections as to future revenues or results of operations. As discussed above
in "-- Determination of Fairness of the Merger by the Special Committee and the
Board of Directors," "-- Opinion of Special Committee's Financial Advisor," and
"-- Material Prepared by Krasovec's Advisor," management presented estimates of
the Company's future financial performance to representatives of Merrill Lynch
and to representatives of J.C. Bradford and to certain independent directors in
connection with their analysis of the proposed Merger. Management initially
prepared the Initial Projections in November 1997, which it provided to
representatives of Merrill Lynch in that month. As described above, Merrill
Lynch formulated a set of adjustments to the Initial Projections (as adjusted,
the "Adjusted Projections"). Management concluded, based upon historical
performance and the Company's operating results subsequent to the preparation of
the Initial Projections, that the Initial Projections were too optimistic and,
accordingly, management revised its estimates in January 1998. Management
provided the revised projections ("Revised Projections") to representatives of
J.C. Bradford, certain independent directors and its Financing Sources in
February 1998. The Initial Projections, the Adjusted Projections and Revised
Projections are summarized in the table below.
While presented with numerical specificity, the projections are based upon
numerous estimates and assumptions that are inherently subject to significant
business, economic, industry and competitive uncertainties and contingencies,
all of which are difficult to predict and many of which are beyond the Company's
control. Certain assumptions on which the projections were based related to the
achievement of strategic goals, objectives and targets over the applicable
periods that are more aggressive than recent historical results. Because there
can be no assurance that the Company will complete any acquisitions, the
projections do not reflect any future acquisitions by the Company and were
prepared based on the assumption that the Company will not complete any
acquisitions of other businesses during the five-year period covered by the
projections. An important element of the Company's business strategy is to
selectively acquire other businesses. Accordingly, there can be no assurance
that the projected results would be realized or that actual results would not be
significantly higher or lower than those predicted.
While the projections were prepared in good faith, no assurance can be made
regarding future events. Therefore, such projections cannot be considered a
reliable predictor of future operating results, and this information should not
be relied upon as such. Additionally, the financial projections do not reflect
revised prospects for the Company, changes in general business and economic
conditions, or any other transaction or event that has occurred or may occur and
that was not anticipated at the time such information was prepared. The
projections were not prepared with a view toward public disclosure or complying
with either the published guidelines of the Commission regarding projections or
forecasts or the American Institute of Certified Public Accountants' Guide for
Prospective Financial Statements. The projections do not purport to present
operations in accordance with generally accepted accounting principles, and the
Company's independent auditors have not examined, compiled or performed any
procedures regarding these projections, and accordingly, assume no
responsibility for them. Shareholders are cautioned not to place undue reliance
on the projections.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED AUGUST 31,
---------------------------------------------------------
1998 1999 2000 2001 2002 2003
------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Initial Projections:
Sales..................... 195.0 210.0 226.0 243.0 262.0 283.0
EBITDA.................... 26.9 30.6 34.1 38.0 42.3 47.0
Adjusted Projections:
Sales..................... 188.3 195.8 203.6 211.8 220.3 229.1
EBITDA.................... 25.8 28.6 29.8 30.8 31.9 33.0
Revised Projections:
Sales..................... 193.4 207.8 223.5 239.9 258.0 276.0
EBITDA.................... 26.0 29.3 32.2 35.4 38.5 42.5
</TABLE>
26
<PAGE> 38
CONFLICTS OF INTERESTS
In considering the recommendations of the Company's Board of Directors, the
Company's shareholders should be aware that certain members of the Company's
management and the Board of Directors have interests in the Merger beyond the
interests of the Public Shareholders that may create potential conflicts of
interest.
Krasovec is the Chairman, Chief Executive Officer and President of the
Company and a member of the Buyout Group. Josephson, a director of the Company,
is also a member of the Buyout Group. In addition, Josephson is an affiliate of
Allen, which is one of the financial advisors retained by Krasovec to provide
financial advice in connection with the proposed Merger. Allen and Josephson
will continue to own warrants to acquire common stock of the Surviving
Corporation. Due to their conflicts of interest, Krasovec and Josephson did not
participate on the Special Committee and abstained from evaluating and voting on
the Merger.
As of the Record Date, Krasovec and the other members of the Buyout Group
beneficially owned 660,917 and 474,088 shares of Common Stock, respectively
(representing approximately 13.0% and 9.3%, respectively, of the Common Stock
then outstanding). In the Merger, Krasovec's ownership position in the Company
will be converted into beneficial ownership of approximately 44% of the total
outstanding common stock of the Surviving Corporation immediately after the
Merger, and the ownership position in the Company of the rest of the members of
the Buyout Group will be converted into beneficial ownership of approximately
32% of the total outstanding common stock of the Surviving Corporation
immediately after the Merger.
Following the Merger, the members of the Buyout Group and the New
Shareholders will own, in the aggregate, 100% of the Surviving Corporation's
common stock outstanding immediately after the Merger. Accordingly, the members
of the Buyout Group have a direct economic interest in the Merger. See
"-- Future Plans of the Company."
Additionally, substantially all of the members of the Buyout Group hold
Company Stock Derivatives to purchase shares of Common Stock. As set forth in
the Merger Agreement, all such derivatives (whether or not exercisable) will
continue to be outstanding after the Effective Time and shall entitle the
holders of such derivatives to purchase common stock of the Surviving
Corporation under the same terms and conditions as existed immediately prior to
the Effective Time, except that the term of all Company Stock Derivatives (other
than convertible debt and employee incentive stock options) shall be extended
for three years from the date of their current expiration. See "The Merger
Agreement -- Conversion of Securities in the Merger; Treatment of Derivatives."
The opportunity to obtain an equity interest in the Surviving Corporation
may have presented the members of the Buyout Group with actual or potential
conflicts of interest in connection with the Merger. In light of these inherent
conflicts of interest, the Board of Directors of the Company appointed the
Special Committee comprised solely of Board members who are not members of the
Buyout Group and are not officers of the Company (but who will receive cash in
exchange for their shares of Common Stock, including shares of Common Stock to
be issued upon their anticipated exercise of their warrants, upon consummation
of the Merger).
In making its determination with respect to the Merger in accordance with
its fiduciary duties to the Public Shareholders, the Special Committee and the
Board of Directors considered the actual and potential conflicts of interest of
the members of the Buyout Group and certain of the Board's members, along with
the other matters described under "-- Determination of Fairness of the Merger by
the Special Committee and the Board of Directors."
FUTURE PLANS OF THE COMPANY
It is expected that, following the Merger, the business and operations of
the Company will be continued by the Company, as the Surviving Corporation in
the Merger, substantially as they are currently being conducted. However, the
members of the Buyout Group and the management of the Surviving Corporation will
continue to evaluate the Company's business and operations after the
consummation of the Merger and
27
<PAGE> 39
make such changes as are deemed appropriate. The Company's executive and
corporate headquarters is expected to remain at its current location in Austin,
Texas.
Except as otherwise indicated in this Proxy Statement, the members of the
Buyout Group do not have any present plans or proposals subsequent to the Merger
that relate to or would result in an extraordinary corporate transaction, such
as a merger, reorganization or liquidation, involving the Company, a sale or
transfer of a material amount of assets of the Company or any material change in
the Company's corporate structure. However, the Company regularly reviews
various strategic acquisition opportunities and periodically engages in
discussions regarding such possible acquisitions. Currently, the Company is not
a party to any agreements, understandings, arrangements or negotiations
regarding any material acquisitions; however, as the result of the Company's
process of regularly reviewing acquisition prospects, negotiations may occur
from time to time if appropriate opportunities arise. See "-- Estimated Fees and
Expenses; Sources of Funds."
The Merger Agreement provides that the directors and officers of Newco
immediately prior to the Effective Time shall become, from and after the
Effective Time, the directors and officers of the Surviving Corporation. Such
persons will continue as directors or officers, as the case may be, of the
Surviving Corporation until their successors have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in accordance
with the articles of incorporation and by-laws of the Surviving Corporation. It
is anticipated that the sole director of Newco will be Krasovec, with an
additional director who will be designated by the New Shareholders. It is also
anticipated that the officers of Newco will be the current officers of the
Company.
RIGHTS OF DISSENTING SHAREHOLDERS
If the Merger Agreement is approved by the required vote of the Company's
shareholders and is not abandoned or terminated, shareholders of the Company who
did not vote in favor of the Merger may, by complying with Articles 5.12 and
5.13 of the TBCA, be entitled to dissenters' rights as described therein. If a
shareholder of the Company has a beneficial interest in shares of Common Stock
that are held of record in the name of another person, such as a broker or
nominee, and such shareholder desires to perfect whatever dissenters' rights
such beneficial shareholder may have, such beneficial shareholder must act
promptly to cause the holder of record timely and properly to follow the steps
summarized below.
A VOTE IN FAVOR OF THE MERGER BY A SHAREHOLDER OF THE COMPANY WILL RESULT
IN A WAIVER OF THE SHAREHOLDER'S DISSENTERS' RIGHTS.
The Company's shareholders will have the right to dissent from the Merger
and to obtain an appraisal of the fair value of their shares of Common Stock in
the event that the Merger Agreement is approved and is not abandoned or
terminated. Fair value will be determined as of the day immediately preceding
the Meeting.
The summary set forth below does not purport to be a complete statement of
the provisions of Texas law relating to shareholders' rights to dissent and to
obtain an appraisal of Common Stock in connection with the Merger and is
qualified in its entirety by reference to Articles 5.12 and 5.13 of the TBCA,
which are attached hereto as Appendix D, and the other relevant provisions of
the TBCA. The TBCA contains provisions that, in the case of the merger of a
corporation organized under the laws of Texas, grant Dissenting Shareholders who
comply with the procedures set forth in Articles 5.12 and 5.13 the right to
receive payment in cash equal to the fair value of their shares. The principal
provisions of Articles 5.12 and 5.13 as they apply to the Merger are summarized
below.
To claim dissenters' rights, a shareholder must (i) prior to the
shareholder vote on the Merger, file a written objection to the Merger stating
that such shareholder intends to demand payment for such shareholder's Common
Stock if the Merger is consummated and giving such shareholder's address to
which notice of the Merger shall be mailed in the event it occurs; (ii) not vote
such shareholder's Common Stock in favor of approval of the Merger; (iii) if the
Merger is approved by the Company's shareholders and consummated, demand, in
writing, payment of the fair value of such shareholder's shares of Common Stock
from the Surviving Corporation (stating therein the number and class of shares
of Common Stock owned by such shareholder and an estimate of the fair market
value of such shares) within ten days after the date the
28
<PAGE> 40
notice that the Merger has become effective is delivered or mailed to the
shareholder, which notice must be provided to all shareholders who complied with
(i) and (ii) above within ten days after the Effective Time of the Merger; and
(iv) within twenty days of filing such written demand for payment, submit to the
Surviving Corporation the certificate or certificates representing such
shareholder's shares of Common Stock for the purpose of having a notation placed
thereon to the effect that a demand for payment with respect thereto has been
made.
Neither an abstention from voting on the Merger proposal nor a vote against
the Merger will be deemed to satisfy the requirement that a written objection be
filed with the Company before the vote on the Merger. However, a shareholder who
has filed a written objection to the Merger as provided above will not be deemed
to have waived such shareholder's dissenter's rights by abstaining from voting
on the Merger proposal or otherwise not voting; however, such a shareholder will
be deemed to have waived such shareholder's dissenters' rights if such
shareholder votes in favor of the Merger. A shareholder who fails to make the
written demand within the ten-day period described above will be bound by the
Merger as if such shareholder had voted in favor thereof. If a shareholder fails
to submit such shareholder's certificates within the twenty-day period described
above, such shareholder's rights to receive payment pursuant to dissenters'
rights shall terminate unless a court for good and sufficient cause determines
otherwise.
In the event that the Merger is approved by the Company's shareholders and
a shareholder elects to exercise such shareholder's dissenters' rights, the
Surviving Corporation shall, within twenty days of the date it receives such
shareholder's written demand for payment, deliver or mail to such shareholder a
written notice that either: (i) provides that the Surviving Corporation accepts
the amount claimed by the Dissenting Shareholder as the fair value of such
shareholder's shares and that the Surviving Corporation agrees to pay such
amount within ninety days after the Effective Time of the Merger and upon
surrender of the certificates for such shareholder's shares duly endorsed; or
(ii) contains an estimate by the Surviving Corporation of the fair value of the
shares and an offer to pay such amount within ninety days after the effective
date of the Merger, but only if the Surviving Corporation receives from the
shareholder, within sixty days after such date, a notice from the shareholder
that such shareholder agrees to accept such amount upon surrender of such
shareholder's share certificate or certificates duly endorsed.
If the Dissenting Shareholder and the Surviving Corporation fail to agree
on a value within sixty days after the Effective Time of the Merger, either the
shareholder or the Surviving Corporation may, within sixty days after the
expiration of such sixty day period, file a petition in any court of competent
jurisdiction in Travis County, Texas for the purpose of obtaining a
determination of the value of the shares of the Dissenting Shareholder. Then, if
the court determines that the shareholder has complied with the requirements for
a Dissenting Shareholder under Articles 5.12 and 5.13 of the TBCA, the court
will appoint one or more appraisers to determine the value of the shareholder's
shares. All Dissenting Shareholders who do not reach agreement with the
Surviving Corporation as to the value of their shares within sixty days of the
effective date of the Merger will receive notice of such court proceeding, and
those who are found to have complied with Articles 5.12 and 5.13 of the TBCA
will be bound by the final judgment of the court as to the value of their
shares.
A Dissenting Shareholder who makes a written demand for payment of such
shareholder's shares will not thereafter be entitled to vote or to exercise any
other rights of a shareholder, except the right to receive payment for such
shareholder's shares pursuant to the TBCA.
A Dissenting Shareholder may withdraw such shareholder's demand for payment
for such shareholder's shares at any time before such payment is made. The
demand may not be withdrawn after payment by the Surviving Corporation has been
made nor may the demand be withdrawn after a petition has been filed with a
court for such payment unless the Surviving Corporation consents to the
withdrawal of the demand.
In the absence of fraud in the transaction, the remedy provided by Article
5.12 of the TBCA is the exclusive remedy for the recovery of the value of shares
or money damages by a Dissenting Shareholder. If the Surviving Corporation
complies but a Dissenting Shareholder fails to comply with the requirements of
Articles 5.12 and 5.13 of the TBCA, such shareholder is not entitled to bring an
action for the recovery of the value of such shareholder's shares or for money
damages.
29
<PAGE> 41
ANY SHAREHOLDER CONTEMPLATING THE EXERCISE OF THE RIGHTS SUMMARIZED ABOVE
IN CONNECTION WITH THE MERGER IS URGED TO CONSULT SUCH SHAREHOLDER'S OWN
COUNSEL. THE FAILURE BY A SHAREHOLDER TO FOLLOW PRECISELY ALL OF THE STEPS
REQUIRED BY ARTICLES 5.12 AND 5.13 OF THE TBCA WILL RESULT IN THE LOSS OF THOSE
RIGHTS.
ESTIMATED FEES AND EXPENSES; SOURCES OF FUNDS
Estimated fees and expenses incurred or to be incurred by the Company, LLC,
Newco and the members of the Buyout Group in connection with the Merger
Agreement and the transactions contemplated thereby are approximately as
follows:
<TABLE>
<S> <C>
Payment of Merger Consideration(1).......................... $88,000,000
Financial advisory fees, financing commitment fees and
expenses(2)............................................... 7,175,000
Legal fees and expenses(3).................................. 1,475,000
Accounting and appraisal fees and expenses.................. 150,000
SEC filing fees............................................. 16,800
Printing and mailing expenses............................... 75,000
Paying Agent fees and expenses.............................. 1,500
Miscellaneous expenses...................................... 106,700
-----------
TOTAL............................................. $97,000,000
</TABLE>
- ---------------
(1) Includes payment for all outstanding shares of Common Stock other than those
owned by members of the Buyout Group.
(2) Includes the fees and estimated expenses of J.C. Bradford, Merrill Lynch and
Allen See "-- Opinion of Special Committee's Financial Advisor" and
"-- Position of Krasovec, Gunning, Josephson and Finnell as to Fairness."
(3) Includes the estimated fees and expenses of legal counsel for the Special
Committee, for the Company, for J.C. Bradford, for Krasovec and the members
of the Buyout Group, for Merrill Lynch and for Ares.
The total funds required to pay the Merger Consideration of $20.70 per
share to all Public Shareholders, consummate the other transactions contemplated
by the Merger Agreement, refinance certain of the Company's current
indebtedness, fund the Surviving Corporation's working capital needs after the
Merger, and pay all related fees, costs and expenses is estimated to be
approximately $182.4 million, which amount will be obtained by means of certain
equity contributions and borrowings as described below. Except as otherwise
stated below, all of such equity contributions will become effective at the
Effective Time, and all of such borrowings will become available immediately
subsequent to the Effective Time upon satisfaction of the conditions in the loan
documents. None of the equity contributions or borrowings will become effective
or available if the Merger is not consummated for any reason. The terms of and
the documentation for the intended borrowings have not yet been finalized and
are still being negotiated. Accordingly, the description below of such
borrowings is preliminary and not necessarily complete. In any event, the final
documentation for such borrowings might contain terms and conditions that are
more or less restrictive than currently contemplated.
The total financing for the Merger Agreement and related costs and expenses
will be approximately $182.4 million, of which approximately $88 million will be
required to pay the Merger Consideration to the Public Shareholders and
approximately $94.4 million will have been incurred to refinance certain of the
Company's current indebtedness, fund the Surviving Corporation's working capital
needs after the Merger and to pay all expenses of the Company, LLC, Newco and
the members of the Buyout Group in connection with the Merger Agreement and the
transactions contemplated thereby. Such funds will be furnished from (i) the
Equity Financing of approximately $44.4 million, consisting of (A) approximately
$24.4 million to be provided by the Buyout Group and the Additional Common
Shareholders and (B) $20 million from the issuance to the Preferred Shareholders
by the Surviving Corporation of units of Preferred Stock and common
30
<PAGE> 42
stock of the Surviving Corporation, which will be provided pursuant to a
commitment letter from Ares, (ii) the $50 million Credit Facilities to be
provided to the Surviving Corporation pursuant to a commitment letter from
Merrill Lynch, NationsBank and NMS, consisting of (A) a $25 million senior
secured term loan which will be fully drawn at the Effective Time and (B) a $25
million senior secured revolving credit facility, of which no more than $10
million will be drawn at the Effective Time, and (iii) up to $100 million from
the issuance by the Surviving Corporation of the Senior Subordinated Notes at
the Effective Time.
Equity Financing. At the Effective Time, the Equity Financing, in the
amount of approximately $44.4 million, will consist of (A) approximately $24.4
million to be provided by the Buyout Group and the Additional Common
Shareholders, as described below, and (B) $20 million from the issuance by the
Surviving Corporation of units of Preferred Stock and common stock of the
Surviving Corporation, which will be provided pursuant to a commitment letter
from Ares, as described below:
Additional Common Shareholders. Of the $24.4 million of Equity Financing,
approximately $20.4 million will be provided by the members of the Buyout Group,
by converting their Common Stock (valued at the Merger Consideration of $20.70
per share) into common stock of the Surviving Corporation, and approximately $4
million will be provided through the issuance of new shares of common stock by
the Surviving Corporation at the Effective Time to the Additional Common
Shareholders, which shareholders may include members of the Buyout Group. An
employee of Merrill Lynch is a member of a limited liability company that is
anticipated to be an Additional Common Shareholder.
Preferred Shareholders. At the Effective Time, the Surviving Corporation
will issue to the Preferred Shareholders 20,000 units ("Units"), each consisting
of (i) one share of the Surviving Corporation's Preferred Stock with a
liquidation preference ("Liquidation Preference") of $1,000 per share, and (ii)
an undetermined number of shares of common stock. The total number of shares of
common stock to be issued to the Preferred Shareholders will represent 15% of
the fully diluted common equity of the Surviving Corporation. The Preferred
Stock will have no voting rights, other than as required by law, and will be
ranked senior in liquidation and payment of dividends to all other classes of
capital stock of the Surviving Corporation, now outstanding or hereafter issued.
The annual dividend rate (the "Dividend Rate") of the Preferred Stock will be
the greater of (i) 12.25% and (ii) the yield to maturity on the Senior
Subordinated Notes plus 250 basis points. For the first five years after
issuance, dividends will be payable, at the Surviving Corporation's option, in
additional shares of Preferred Stock or cash. Thereafter, dividends will be
payable in cash. All dividends will accumulate and will be payable (whether in
cash or Preferred Stock) quarterly, in arrears. Dividends will accumulate on all
unpaid dividends at the applicable annual Dividend Rate.
The Preferred Stock will be redeemable, in whole or in part, at the option
of the Surviving Corporation at any time on or after the dividend payment date
that is closest to the fifth anniversary of issuance. The Preferred Stock will
also be redeemable at the option of the Surviving Corporation any time on or
prior to the fifth anniversary of issuance in certain instances. The Surviving
Corporation will have the option to exchange the Preferred Stock at any time for
subordinated notes that will have substantially the same terms as the Preferred
Stock.
Credit Facilities. At the Effective Time, Merrill Lynch, NationsBank and
certain other lenders (collectively, the "Lenders") will make available to the
Surviving Corporation senior secured credit facilities in an aggregate principal
amount of $50 million, such Credit Facilities comprising:
Term Loan Facility. The Lenders will make available a term loan facility in
an aggregate principal amount of $25 million (the "Term Loan Facility"). The
Term Loan Facility will mature on the fifth anniversary of the Effective Time.
Amounts outstanding under the Term Loan Facility will amortize,
31
<PAGE> 43
beginning with the last business day of the first full fiscal quarter after the
Effective Time, on a quarterly basis during each year as set forth below:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- -----------
<S> <C>
1998............................................ $ 3,000,000
1999............................................ 4,000,000
2000............................................ 5,000,000
2001............................................ 6,500,000
2002............................................ 6,500,000
-----------
$25,000,000
</TABLE>
The Term Loan Facility will be available solely on the Effective Time in a
single draw. Amounts borrowed under the Term Loan Facility that are repaid or
prepaid may not be reborrowed. Borrowings under the Term Loan Facility may be
prepaid at any time in whole or in part at the option of the Surviving
Corporation, in a minimum principal amount and in multiples to be agreed upon,
without premium or penalty (except, in the case of LIBOR borrowings, prepayments
not made on the last day of the relevant interest period). Voluntary prepayments
under the Term Loan Facility will be applied pro rata against the remaining
scheduled amortization payments under the Term Loan Facility.
Revolving Facility. The Lenders will make available a revolving credit
facility in an aggregate principal amount of $25 million (the "Revolving
Facility"). The Revolving Facility will mature on the fifth anniversary of the
Effective Time (the "Revolving Facility Maturity Date"). The Revolving Facility
will be available for working capital and general corporate purposes in the form
of revolving loans and letters of credit ("Letters of Credit") on and after the
Effective Time until 30 business days prior to the Revolving Facility Maturity
Date. Amounts repaid under the Revolving Facility may be reborrowed to the
extent of the commitments then in effect. At the Effective Time, not more than
$10 million shall be drawn under the Revolving Facility to consummate the
Merger. The unutilized portion of the commitments under the Revolving Facility
may be reduced and Revolving Loans may be repaid at any time, in each case, at
the option of the Surviving Corporation, in a minimum principal amount and in
multiples to be agreed upon, without premium or penalty (except, in the case of
LIBOR borrowings, prepayments not made on the last day of the relevant interest
period).
The Credit Facilities will be secured by (i) a perfected first priority
lien on, and pledge of, all the capital stock and intercompany debt of each of
the direct and indirect subsidiaries of the Surviving Corporation existing at
the Effective Time or thereafter created or acquired (except that to the extent
that the pledge thereof would cause material adverse tax consequences, such
pledge with respect to foreign subsidiaries shall be limited to 65% of the
capital stock of "first tier" foreign subsidiaries), and (ii) a perfected first
priority lien on, and security interest in, all of the tangible and intangible
properties and assets (including all real property) of the Surviving Corporation
and its direct and indirect domestic subsidiaries existing at the Effective Time
or thereafter created or acquired, except for those properties and assets which
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, shall
determine in its sole discretion that the costs of obtaining such security
interest are excessive in relation to the value of the security to be afforded
thereby (it being understood that none of the foregoing shall be subject to any
other liens or security interests, except for certain customary exceptions to be
agreed upon) (all of such collateral, the "Collateral").
The Surviving Corporation will be entitled to make borrowings at either
LIBOR or ABR, plus (A) with respect to LIBOR Loans, (i) in the case of loans
under the Revolving Facility, 2.50% per annum; (ii) in the case of loans under
the Term Loan Facility, 2.50% per annum; and (B) with respect to ABR Loans, (i)
in the case of loans under the Revolving Facility, 1.50% per annum; and (ii) in
the case of loans under the Term Loan Facility, 1.50% per annum. A pricing grid
governing such rates showing stepups/stepdowns in such rates beginning 12 months
after the Effective Time shall be negotiated based upon improved credit
measures.
The Credit Facilities will be subject to a 0.50% per annum commitment fee
on the undrawn amount of the commitment, commencing at the Effective Time. The
Company intends to repay all indebtedness and terminate all commitments to make
extensions of credit under its existing $125 million credit facility arranged
32
<PAGE> 44
by Merrill Lynch (the "Old Credit Facility"). Other than as described herein,
the Company has no present plans or arrangements to refinance or repay the
Credit Facilities.
Senior Subordinated Notes. At the Effective Time, the Surviving Corporation
will issue up to $100 million principal amount of unsecured senior subordinated
notes due 2008, which notes will be sold or placed pursuant to a highly
confident letter, dated March 15, 1998, by Merrill Lynch, Pierce, Fenner & Smith
Incorporated and its affiliates.
EXPENSES
Except with regard to the expense payments described under the caption "The
Merger Agreement -- Termination," the Merger Agreement provides that in the
event the Merger is not consummated, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated by the
Merger Agreement will be paid by the party incurring such expenses. In the event
the Merger is consummated, all costs and expenses incurred in connection with
the Merger Agreement and the transactions contemplated thereby (including those
incurred by LLC and Newco) will be paid by the Surviving Corporation.
THE MERGER AGREEMENT
The following discussion is a summary of the material provisions of the
Merger Agreement. This summary and all other discussions of the terms and
conditions of the Merger and the Merger Agreement included elsewhere in this
Proxy Statement are qualified in their entirety by reference to the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy Statement and
incorporated by reference herein. Capitalized terms used but not defined herein
have the meanings ascribed to such terms in the Merger Agreement.
THE MERGER
On the terms and subject to the conditions of the Merger Agreement, at the
Effective Time, Newco will be merged with and into the Company in accordance
with the applicable provisions of the TBCA, and the separate corporate existence
of Newco will thereupon cease. The Company will be the surviving corporation
under the corporate name it possesses immediately prior to the Effective Time.
The Merger will have the effects specified in the TBCA and in the Merger
Agreement.
EFFECTIVE TIME
Within two business days following the date on which the last of the
conditions (excluding conditions that by their terms cannot be satisfied until
the date of the Merger) set forth in the Merger Agreement is satisfied or waived
or at such other time or date as the parties may agree, Newco and the Company
will cause articles of merger to be filed with the Secretary of State of the
State of Texas as provided in the TBCA. Upon completion of such filing and the
issuance of a certificate of merger by the Secretary of State of the State of
Texas, the Merger will become effective in accordance with the TBCA.
ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION
The Merger Agreement provides that the articles of incorporation of the
Company, as in effect immediately prior to the Effective Time, as amended to
reflect the Charter Amendments, and the by-laws of the Company, as in effect
immediately prior to the Effective Time, shall become, from and after the
Effective Time, the articles of incorporation and by-laws of the Surviving
Corporation until amended in accordance with their terms and the TBCA.
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
The Merger Agreement provides that the directors and officers of Newco
immediately prior to the Effective Time shall become, from and after the
Effective Time, the directors and officers of the Surviving Corporation. Such
persons will continue as directors or officers, as the case may be, of the
Surviving
33
<PAGE> 45
Corporation until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the articles of incorporation and by-laws of the Surviving Corporation. It
is anticipated that the sole director of Newco will be Krasovec, with an
additional director who will be designated by the New Shareholders. It is also
anticipated that the officers of Newco will be the current officers of the
Company.
CONVERSION OF SECURITIES IN THE MERGER; TREATMENT OF DERIVATIVES
The Merger Agreement provides that, at the Effective Time, (i) each share
of Common Stock (collectively, the "Company Common Shares") issued and
outstanding immediately prior to the Effective Time, other than the Non-Merger
Consideration Shares (as defined below) and other than Company Common Shares
owned by Dissenting Shareholders, will, by virtue of the Merger and without any
action on the part of the holders thereof, be converted solely and exclusively
into the right to receive the Merger Consideration and any dividends payable as
described below; (ii) all Company Common Shares to be converted into the right
to receive the Merger Consideration pursuant to clause (i) will, by virtue of
the Merger and without any action on the part of the holders thereof, cease to
be outstanding, be canceled and retired and cease to exist, and each holder of
Company Common Shares will thereafter cease to have any rights with respect to
such Company Common Shares (other than the right to receive any dividends
payable as described below), except the right to receive the Merger
Consideration for each of the Company Common Shares, upon the surrender of such
holder's certificate(s) in accordance with the terms of the Merger Agreement,
without any interest thereon, as provided in the Merger Agreement, or the rights
under Articles 5.11, 5.12 and 5.13 of the TBCA; (iii) each Company Common Share
issued and outstanding that is owned by any member of the Buyout Group
immediately prior to the Effective Time (the "Buyout Shares"), by virtue of the
Merger and without any action on the part of the holder thereof, will be
converted into one fully paid and nonassessable share of common stock, $.01 par
value, of the Surviving Corporation; (iv) each Company Common Share issued and
outstanding that is owned by the Company as treasury stock or any of the
Company's Subsidiaries (as defined below) immediately prior to the Effective
Time (together with the Buyout Shares and the Company Common Shares held by
Dissenting Shareholders, the "Non-Merger Consideration Shares") will, by virtue
of the Merger and without any action on the part of the holder thereof, cease to
be outstanding, be canceled and retired and cease to exist without payment of
any Merger Consideration therefor; (v) each share of capital stock of Newco
issued and outstanding immediately prior to the Effective Time will, by virtue
of the Merger and without any action on the part of Newco or the holder thereof,
cease to be outstanding, be canceled and retired and cease to exist without
payment of any Consideration therefor; and (vi) all notes and other debt
instruments of the Company that are outstanding immediately prior to the
Effective Time shall continue to be outstanding subsequent to the Effective Time
as debt instruments of the Surviving Corporation, subject to their respective
terms and provisions. The word "Subsidiary," when used in the Merger Agreement
with respect to any party, means any corporation or other organization, whether
incorporated or unincorporated, of which such party directly or indirectly owns
or controls at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the board of directors
or others performing similar functions.
Each Company Stock Derivative to purchase Company Common Shares outstanding
immediately prior to the Effective Time shall continue to be outstanding
subsequent to the Effective Time as options, warrants and convertible debt of
the Surviving Corporation, subject to all expiration, lapse and other terms and
conditions thereof, except that the term of all Company Stock Derivatives (other
than convertible debt and employee incentive stock options) shall be extended
for three years from the date of their current expiration. It is anticipated
that all warrants held by directors of the Company (other than Krasovec and
Josephson) will be exercised prior to the Effective Time.
PAYMENT FOR AND SURRENDER OF COMPANY COMMON SHARES
From time to time as needed by the Paying Agent (as defined below), the
Surviving Corporation will deposit with such bank or trust company designated by
LLC and reasonably acceptable to the Company (the "Paying Agent"), for the
benefit of the holders of Company Common Shares, cash, cash equivalents or a
34
<PAGE> 46
combination thereof in an aggregate amount equal to the product of (i) the
number of Company Common Shares issued and outstanding at the Effective Time
(other than the Non-Merger Consideration Shares) multiplied by (ii) the Merger
Consideration (being hereinafter referred to as the "Payment Fund"). The Paying
Agent will, pursuant to irrevocable instructions from the Surviving Corporation,
deliver the Merger Consideration out of the Payment Fund, and, except as
described herein, the Payment Fund will not be used for any other purpose. The
Company will act as paying agent with respect to payments to holders of Company
Stock Derivatives described in the preceding paragraph.
Promptly after the Effective Time, the Paying Agent will mail to each
holder of record (other than the Company, members of the Buyout Group, any of
the Company's Subsidiaries or any Dissenting Shareholders) of a certificate or
certificates that immediately prior to the Effective Time represented
outstanding Company Common Shares (the "Certificates") (i) a form of letter of
transmittal (which will specify that delivery will be effected, and risk of loss
and title to the Certificates will pass, only upon proper delivery of the
Certificates to the Paying Agent) and (ii) instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender of
Certificates for cancellation to the Paying Agent, together with such letter of
transmittal duly executed and any other required documents, the holder of such
Certificates will be entitled to receive for each of the Company Common Shares
represented by such Certificates the Merger Consideration, and the Certificates
so surrendered will promptly be canceled. Until so surrendered, Certificates
will represent solely the right to receive the Merger Consideration plus any
declared but unpaid dividends. No interest will be paid or accrued on the cash
payable upon the surrender of the Certificates. No dividends or other
distributions, if any, that are declared prior to the Effective Time and are
payable after the Effective Time to holders of record of Certificates will be
paid to persons entitled by reason of the Merger to receive the Merger
Consideration until such persons surrender their Certificates. Upon such
surrender, there will be paid to the registered holders of surrendered
Certificates such declared but unpaid dividends or other distributions, if any,
on the appropriate payment date.
In no event will the persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions. If any Merger Consideration is to be paid to a person whose name
is a name other than that in which the surrendered Certificate in exchange
therefor is registered, it will be a condition of such exchange that the
Certificate so surrendered be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange pay to the Paying Agent
any transfer or other taxes required by reason of the payment of such Merger
Consideration in a name other than that of the registered holder of the
surrendered Certificate, or establish to the satisfaction of the Paying Agent
that such tax has been paid or is not applicable. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Certificate to be lost, stolen or
destroyed, the Paying Agent will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration deliverable in respect thereof as
determined in accordance with the Merger Agreement, provided that the person to
whom the Merger Consideration is paid shall, as a condition precedent to the
payment thereof if required by the Surviving Corporation, give the Surviving
Corporation a bond in such sum as it may direct or otherwise indemnify the
Surviving Corporation in a manner satisfactory to it against any claim that may
be made against the Surviving Corporation with respect to the Certificate
claimed to have been lost, stolen or destroyed.
Any portion of the Payment Fund that remains unclaimed by the former
shareholders of the Company for 180 days after the Effective Time will be
delivered to the Surviving Corporation, and any former shareholders of the
Company will thereafter look only to the Surviving Corporation for payment of
their claim for the Merger Consideration for the Company Common Shares.
Neither LLC, Newco, the Surviving Corporation nor the Paying Agent shall be
liable to any holder of Company Common Shares for such shares (or dividends or
distributions with respect thereto) or cash from the Payment Fund (or from the
Surviving Corporation after the Payment Fund has terminated) delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Immediately prior to the time as any amounts remaining unclaimed by
holders of any such shares would otherwise escheat to or become property of any
governmental or regulatory authority, domestic or foreign ("Governmental
Entity"), such amounts shall, to the extent permitted by applicable law, become
the property of the Surviving
35
<PAGE> 47
Corporation free and clear of any claims or interest of any such holders or
their successors, assigns or personal representatives previously entitled
thereto.
CLOSING OF STOCK TRANSFER RECORDS
At the Effective Time, the stock transfer books of the Company, other than
with respect to Buyout Shares, will be closed, and there shall be no further
registration of transfers of shares of Company Common Stock thereafter on the
records of the Company.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties. These include representations and warranties by the Company with
respect to corporate existence, good standing, corporate authority,
authorization, validity and effect of the Merger Agreement, capitalization,
Subsidiaries, conflicts, required filings and consents, finders' fees and
brokerage commissions, receipt of J.C. Bradford's opinion, SEC filings,
financial statements, undisclosed liabilities and absence of certain changes or
events. LLC has also made certain representations and warranties on behalf of
itself and Newco, where appropriate, with respect to limited liability company
or corporate existence, good standing, corporate and limited liability company
authority, authorization, validity and effect of the Merger Agreement,
Subsidiaries, conflicts, required filings and consents, finders' fees and
brokerage commissions, financing and certain regulatory matters.
ACQUISITION PROPOSALS
Under the Merger Agreement, the Company has agreed to cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted theretofore with respect to any Acquisition Proposal (as defined
below). The Company has agreed that, prior to the Effective Time, neither it nor
any of its Subsidiaries will, nor will it or any of its Subsidiaries permit
their respective officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) to, initiate, solicit, participate in
or encourage, directly or indirectly, any Acquisition Proposal or, except as set
forth below, engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal. An "Acquisition Proposal" means, other than
the transactions among the Company and LLC contemplated by the Merger Agreement
or that LLC consents to in writing in advance, any of the following involving
the Company or any of its Subsidiaries: (i) any merger, consolidation, share
exchange, recapitalization, business combination, or similar transaction; (ii)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition of
all or substantially all of the assets of the Company and its Subsidiaries,
taken as a whole, in a single transaction or series of transactions; (iii) any
tender offer or exchange offer for all or substantially all of the outstanding
shares of capital stock of the Company or the filing of a registration statement
under the Securities Act of 1933, as amended, in connection therewith; or (iv)
any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing. Notwithstanding
the foregoing, in the event the Company receives an unsolicited written proposal
or unsolicited written offer (in either case subject to due diligence) with
respect to an Acquisition Proposal, the Special Committee or the Board of
Directors of the Company shall be entitled to review and participate in
negotiations concerning such proposal and furnish confidential information and
data concerning the Company and its Subsidiaries to the offeror if the Board of
Directors reasonably believes, after consultation with its counsel and its
financial advisor, that there is a substantial risk that a failure to do so
would violate its fiduciary duties to the shareholders of the Company; provided
that (A) the Company shall have furnished, or concurrently with the provision of
such information to such offeror shall furnish, LLC with all such information
provided to such offeror and (B) the offeror executes a confidentiality
agreement with the Company. The Company shall notify the Special Committee and
LLC immediately of any such unsolicited Acquisition Proposal, or any inquiry or
contact with any person with respect thereto. In addition, in the event (i) the
Company enters into negotiations with respect to an unsolicited Acquisition
Proposal or (ii) the Company's Board of Directors (upon recommendation of the
Special Committee) shall withdraw its approval
36
<PAGE> 48
of the Merger Agreement and the transactions contemplated thereby or its
recommendation to the shareholders of the Company to approve the same, then the
Company shall immediately deliver an additional notice of such events to LLC.
Nothing in the Merger Agreement will (x) permit the Company to terminate the
Merger Agreement except as provided therein, (y) permit the Company to enter
into any agreement to consummate an Acquisition Proposal for as long as the
Merger Agreement remains in effect (it being agreed that for as long as the
Merger Agreement remains in effect, the Company will not enter into any
agreement with any person that provides for, or in any way facilitates, an
Acquisition Proposal except as otherwise permitted in the Merger Agreement), or
(z) affect any other obligation of the Company under the Merger Agreement. Under
the Merger Agreement, LLC shall cause the members of the Buyout Group to notify
the Special Committee immediately in the event a member of the Buyout Group
receives an unsolicited written proposal or unsolicited written offer with
respect to an Acquisition Proposal or any inquiry or contact with any person
with respect thereto.
INTERIM OPERATIONS OF THE COMPANY
Pursuant to the Merger Agreement, the Company has agreed that, prior to the
Effective Time, except as contemplated by any other provision of the Merger
Agreement, unless LLC has previously consented in writing thereto or unless the
Chief Executive Officer of the Company has previously authorized thereto, the
Company: (i) will, and will cause each of its Subsidiaries to, conduct its
operations in the ordinary and normal course, consistent with past practice;
(ii) will use its reasonable best efforts, and will cause each of its
Subsidiaries to use its reasonable best efforts, to preserve intact their
business organizations and goodwill, keep available the services of their
respective officers and employees, and maintain satisfactory relationships with
those persons having business relationships with them; (iii) will not amend its
articles of incorporation or bylaws or comparable governing instruments; (iv)
will, upon the occurrence of any event or change in circumstances as a result of
which any representation or warranty of the Company contained in the Merger
Agreement would be untrue or incorrect in any material respect if such
representation or warranty were made immediately following the occurrence of
such event or change in circumstance, promptly (and in any event within two
business days of an executive officer of the Company obtaining knowledge
thereof) notify LLC thereof; (v) will promptly deliver to LLC true and correct
copies of any report, statement, application or schedule (including exhibits
thereto) filed by the Company with the SEC subsequent to the date of the Merger
Agreement; (vi) will not (a) issue any shares of its capital stock, other than
the issuance of Common Stock issuable upon exercise of Company Stock Derivatives
outstanding on the date of the Merger Agreement (in accordance with the present
terms thereof), effect any stock split, or otherwise change its capitalization
as it existed on the date of the Merger Agreement, (b) grant, confer or award
any option, warrant, conversion right or other equity rights not existing on the
date of the Merger Agreement to acquire any shares of its capital stock, (c)
grant, confer or award any bonuses or other forms of incentive compensation to
any officer, director or employee, except for cash bonuses or incentives
consistent with past practice or under any existing agreement or automatically
under any of the Company's stock option plans, (d) increase any compensation
under any employment agreement with any of its present or future officers,
directors or employees, except for normal increases for officers and employees
consistent with past practice or the terms of such employment agreement, (e)
grant any severance or termination pay to, or enter into any employment,
severance or termination agreement with any officer, director, or employee or
amend any such agreement in any material respect other than severance
arrangements consistent with past practice with respect to officers and
employees terminated by the Company, or (f) adopt any new employee benefit plan
or program (including any stock option, stock benefit or stock purchase plan) or
amend any existing employee benefit plan or program in any material respect;
(vii) will not (a) declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock or other
ownership interests or (b) directly or indirectly redeem, purchase or otherwise
acquire any shares of its capital stock or capital stock of any of its
Subsidiaries, or make any commitment for any such action; (viii) will not, and
will not permit any of its Subsidiaries to, sell, lease or otherwise dispose of
any of its assets (including capital stock of Subsidiaries) or acquire any
business or assets, except for (a) any purchase or sale of inventory in the
ordinary course of business, or (b) any sale, lease or other disposition of
assets in the ordinary course of business; (ix) will not incur any material
amount of indebtedness for borrowed money or make any loans, advances or capital
contributions to, or investments
37
<PAGE> 49
(other than non-controlling investments in the ordinary course of business) in,
any other person other than a wholly owned Subsidiary of the Company, or issue
or sell any debt securities, other than borrowings under existing lines of
credit in the ordinary course of business; (x) will not, except pursuant to and
in accordance with the capital budget disclosed to LLC prior to the date of the
Merger Agreement, authorize, commit to, or make capital expenditures; (xi) will
not mortgage or otherwise encumber or subject to any lien any properties or
assets except for such of the foregoing as are in the ordinary course of
business and would not be reasonably likely to have, individually or in the
aggregate, a material adverse effect on the business, operations, properties,
financial condition, assets or liabilities of the Company and its Subsidiaries
taken as a whole (a "Material Adverse Effect"); (xii) will not enter into or
agree to enter into any contract without the prior written consent of LLC unless
such contract is entered into by the Company for (a) any purchase or sale of
inventory undertaken in the ordinary course of business, (b) the sale of
accounts receivable that are more than 180 days past due, or (c) any other
contract in the ordinary course of business; (xiii) will maintain insurance
consistent with past practices for its businesses and properties; (xiv) will not
make any change in its accounting (including tax accounting) methods, principles
or practices, except as may be required by generally accepted accounting
principles and except, in the case of tax accounting methods, principles or
practices, in the ordinary course of business of the Company or any of its
Subsidiaries; and (xv) will not take or agree in writing or otherwise to take
any action that would make any of the representations or warranties of the
Company contained in the Merger Agreement untrue or incorrect or prevent the
Company from performing or cause the Company not to perform its covenants
contained in the Merger Agreement.
CERTAIN FILINGS AND OTHER ACTIONS
The Company and LLC have agreed, subject to the terms and conditions
provided in the Merger Agreement, that they will (i) use all reasonable efforts
to cooperate with one another in (a) determining which filings are required to
be made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from
Governmental Entities, in connection with the execution and delivery of the
Merger Agreement and the consummation of the transactions contemplated thereby
and (b) timely making all such filings and timely seeking all such consents,
approvals, permits or authorizations, including this Proxy Statement and
information required by Schedule 13E-3 and Schedule 14A; and (ii) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by the Merger
Agreement. If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of the Merger Agreement, the
proper officers and directors of the parties will take all such necessary
action.
ACCESS TO INFORMATION
The Company has agreed that, from the date of the Merger Agreement to the
Effective Time, it will, and will cause its Subsidiaries to, subject to the
execution of reasonable confidentiality agreements that the Company may elect to
require, (a) allow all designated officers, attorneys, accountants and other
representatives of LLC reasonable access at all reasonable times upon reasonable
notice to the offices, records and files, correspondence, audits and properties,
as well as to all information relating to commitments, contracts, titles and
financial position, or otherwise pertaining to the business and affairs, of the
Company and its Subsidiaries, as the case may be, (b) furnish to LLC, LLC's
counsel, financial advisors, auditors and other authorized representatives such
financial and operating data and other information as such persons may
reasonably request, (c) instruct the employees, counsel and financial advisors
of the Company to cooperate with the other in the other's investigation of the
business of it and its Subsidiaries and (d) keep LLC fully appraised and
informed of all material developments with respect to the assets, business
activities, financial condition, earnings and prospects of the Company and its
Subsidiaries. LLC will be permitted to make extracts from or to make copies of
such books and records as may be reasonably necessary.
38
<PAGE> 50
INSURANCE; INDEMNITY
The Merger Agreement provides that, from and after the Effective Time, the
Surviving Corporation will indemnify, defend and hold harmless, to the fullest
extent that the Company would be required under its presently existing articles
of incorporation and presently existing by-laws and applicable law, each person
who is now or was prior to the date of the Merger Agreement an officer or
director of the Company or any of its Subsidiaries (individually, an
"Indemnified Party" and collectively, the "Indemnified Parties"), against all
losses, claims, damages, liabilities, costs or expenses (including attorneys'
fees), judgments, fines, penalties and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in their
capacities as such occurring at or prior to the Effective Time. In the event of
any such claim, action, suit, proceeding or investigation (an "Action"), any
Indemnified Party wishing to claim indemnification will promptly notify the
Surviving Corporation thereof (provided that failure to so notify the Surviving
Corporation will not affect the obligations of the Surviving Corporation to
provide indemnification except to the extent that the Surviving Corporation
shall have been prejudiced as a result of such failure). With respect to any
Action for which indemnification is requested, the Surviving Corporation will be
entitled to participate therein at its own expense and, except as otherwise
provided below, to the extent that it may wish, the Surviving Corporation may
assume the defense thereof, with counsel reasonably satisfactory to the
Indemnified Party. After notice from the Surviving Corporation to the
Indemnified Party of its election to assume the defense of an Action, the
Surviving Corporation will not be liable to the Indemnified Party for any legal
or other expenses subsequently incurred by the Indemnified Party in connection
with the defense thereof, other than as provided below. The Surviving
Corporation will not settle any Actions without the consent of the Indemnified
Party where such settlement includes an admission of civil or criminal liability
on behalf of an officer or director or requires any payment to be made by the
Indemnified Party. The Indemnified Party will have the right to employ counsel
in any Action, but the fees and expenses of such counsel incurred after notice
from the Surviving Corporation of its assumption of the defense thereof will be
at the expense of the Indemnified Party, unless (i) the employment of counsel by
the Indemnified Party has been authorized by the Surviving Corporation in
writing, (ii) the Indemnified Party will have reasonably concluded upon the
advice of counsel that there may be a conflict of interest between the
Indemnified Party and the Surviving Corporation in the conduct of the defense of
an Action, or (iii) the Surviving Corporation shall not in fact have employed
counsel to assume the defense of an Action, in each of which cases the
reasonable fees and expenses of counsel selected by the Indemnified Party will
be at the expense of the Surviving Corporation. Notwithstanding the foregoing,
the Surviving Corporation will not be liable for any settlement effected without
its written consent, which will not be unreasonably withheld, conditioned or
delayed, and the Surviving Corporation will not be obligated pursuant to the
Merger Agreement to pay the fees and disbursements of more than one counsel
(including local counsel) for all Indemnified Parties in any single Action,
except to the extent two or more of such Indemnified Parties have conflicting
interests in the outcome of such action.
For a period of six years after the Effective Time, the Surviving
Corporation will maintain officers' and directors' liability insurance covering
the Indemnified Parties who are currently covered, in their capacities as
officers and directors, by the Company's existing officers' and directors'
liability insurance policies on terms substantially no less advantageous to the
Indemnified Parties than such existing insurance; provided, however, that the
Surviving Corporation will not be required in order to maintain or procure such
coverage to pay premiums on an annualized basis in excess of 200% of the current
annual premium paid by the Company for its existing coverage (the "Cap") (which
current annual premium is approximately $100,000); and provided, further, that
if equivalent coverage cannot be obtained, or can be obtained only by paying an
annual premium in excess of the Cap, the Surviving Corporation will only be
required to obtain as much coverage as can be obtained by paying premiums on an
annualized basis equal to the Cap.
EMPLOYEE BENEFITS
The Merger Agreement provides that from and after the Effective Time the
Surviving Corporation will have sole discretion over the hiring, promotion,
retention and firing of employees of the Surviving Corporation. Notwithstanding
the immediately preceding sentence, the Surviving Corporation will (i) satisfy
all obligations
39
<PAGE> 51
of the Company or any of its Subsidiaries under any existing severance agreement
between the Company or any of its Subsidiaries and any of their officers or
employees and (ii) until the expiration of at least one year after the Effective
Time, satisfy all obligations of the Company or any of its Subsidiaries under
their current respective severance policies. The Surviving Corporation will
provide for the benefit of employees of the Surviving Corporation who were
employees of the Company immediately prior to the Effective Time "employee
benefit plans" within the meaning of Section 3(3) of ERISA (a) for a period of
at least one year after the Effective Time, that are, in the aggregate,
substantially comparable to the "employee benefit plans" provided to such
individuals by the Company or any Subsidiary on the date of the Merger
Agreement, and (b) thereafter that are, at the election of the Surviving
Corporation, either (i) in the aggregate, substantially comparable to the
"employee benefit plans" provided to such individuals by the Company or any
Subsidiary on the date of the Merger Agreement or (ii) in the aggregate,
substantially comparable to the "employee benefit plans" provided to similarly
situated employees of the Surviving Corporation or its Subsidiaries who were not
employees of the Company or any Subsidiary immediately prior to the Effective
Time; provided, however, that notwithstanding the foregoing (A) nothing in the
Merger Agreement will be deemed to require the Surviving Corporation to modify
the benefit formulas under any pension, profit sharing or savings plan of the
Company or any Subsidiary in a manner that increases the aggregate expenses
thereof as of the date of the Merger Agreement in order to comply with the
requirements of ERISA or the Code, (B) multiemployer pension plans with the
meaning of 3(37) of ERISA, employee stock ownership, stock bonus, stock option
and similar equity-based plans, programs and arrangements of the Company or any
of its Subsidiaries are not encompassed within the meaning of the term "employee
benefit plans," and (C) nothing in the Merger Agreement will obligate the
Surviving Corporation to continue any particular "employee benefit plan" for any
period after the Effective Time.
FINANCING
Upon the terms and subject to the conditions of the Merger Agreement, the
Company is required to use commercially reasonable efforts to take, or cause to
be taken, all action, and to do or cause to be done, and to assist and cooperate
with the other parties in doing, all things necessary, as promptly as
practicable, proper or advisable to secure the Financing on terms substantially
as outlined in the Financing Letters.
CONDITIONS
Conditions to Each Party's Obligation To Effect the Merger. Under the
Merger Agreement, the respective obligations of each party to effect the Merger
are subject to the fulfillment of the following conditions: (i) the Merger
Agreement and the transactions contemplated thereby (including the Par Value
Conversion) shall have been approved in the manner required by applicable law by
the holders of the issued and outstanding shares of capital stock of the
Company; (ii) the aggregate number of Company Common Shares owned by those
Company shareholders, if any, other than members of the Buyout Group, who shall
have exercised, or given notice of their intent to exercise, the rights of
Dissenting Shareholders under the TBCA shall be less than ten percent (10%) of
the total number of outstanding Company Common Shares; (iii) neither of the
parties thereto shall be subject to any order or injunction of a court of
competent jurisdiction that prohibits the consummation of the transactions
contemplated by the Merger Agreement or the effective operation of the business
of the Company and its Subsidiaries after the Effective Time; (iv) the Company
shall have received the Financing on terms substantially as outlined in the
Financing Letters and shall have sufficient financing thereunder to consummate
the Merger; and (v) all consents, authorizations, orders and approvals of (or
filings or registrations with) any Governmental Entity required in connection
with the execution, delivery and performance of the Merger Agreement shall have
been obtained or made, except for filings in connection with the Merger and any
other documents required to be filed after the Effective Time and except where
the failure to have obtained or made any such consent, authorization, order,
approval, filing or registration would not have a material adverse effect on the
business, financial condition or results of operations of the Surviving
Corporation following the Effective Time.
Conditions to Obligation of the Company To Effect the Merger. Under the
Merger Agreement, the obligation of the Company to effect the Merger is subject
to the fulfillment of the following additional
40
<PAGE> 52
conditions: (i) (a) the representations and warranties of LLC contained in the
Merger Agreement shall have been true and correct in all material respects as of
the date of the Merger Agreement and (b) the representations and warranties of
LLC and Newco contained in the Merger Agreement and in any document delivered in
connection therewith shall be true and correct in all material respects (but
without regard to any materiality qualifications or references to material
adverse effect contained in any specific representation or warranty) as of the
Closing Date, except (I) for changes specifically permitted by the Merger
Agreement and (II) that those representations and warranties that address
matters only as of a particular date shall remain true and correct in all
material respects as of such date; (ii) LLC shall have performed or complied
with all agreements and conditions contained in the Merger Agreement required to
be performed or complied with by it on or prior to the Effective Time; (iii) LLC
shall have delivered to the Company a certificate, dated the Closing Date,
signed by the President of LLC, certifying as to the fulfillment of the
conditions specified in clauses (i) and (ii) above; (iv) LLC shall have
delivered to the Company a certificate, dated the Closing Date, signed by the
President of LLC, certifying that, to its knowledge, certain conditions have
been fulfilled (unless the Company is unable to deliver a specified officer's
certificate); and (v) LLC shall have obtained all material consents, waivers,
approvals, authorizations or orders and made all filings required in connection
with the authorization, execution and delivery of the Merger Agreement by LLC
and the consummation by it of the transactions contemplated by the Merger
Agreement, and all applicable notice periods shall have expired.
Conditions to Obligation of LLC and Newco to Effect the Merger. Under the
Merger Agreement, the obligations of LLC and Newco to effect the Merger are
subject to the fulfillment of the following additional conditions: (i) (a) the
representations and warranties of the Company contained in the Merger Agreement
shall have been true and correct in all material respects as of the date of the
Merger Agreement and (b) the representations and warranties of the Company
contained in the Merger Agreement and in any document delivered in connection
therewith shall be true and correct in all material respects (but without regard
to any materiality qualifications or references to material adverse effect
contained in any specific representation or warranty) as of the Closing Date,
except (I) for changes specifically permitted by the Merger Agreement and (II)
that those representations and warranties that address matters only as of a
particular date shall remain true and correct in all material respects as of
such date; (ii) the Company shall have performed or complied with all agreements
and conditions contained in the Merger Agreement required to be performed or
complied with by it on or prior to the Closing Date, unless such failure to
perform or comply is due to any act by, or omission of LLC or any members of the
Buyout Group; (iii) the Company shall have delivered to LLC a certificate, dated
the Closing Date, signed by the Chief Executive Officer of the Company,
certifying as to the fulfillment of the conditions specified in clauses (i) and
(ii) above; (iv) from the date of the Merger Agreement through the Effective
Time, there shall not have been any condition, event or occurrence that,
individually or in the aggregate, has resulted in a Material Adverse Effect; (v)
the Company shall have obtained all material consents, waivers, approvals,
authorizations or orders and made all filings required in connection with the
authorization, execution and delivery of the Merger Agreement by the Company and
the consummation by it of the transactions contemplated thereby, and all
applicable notice periods shall have expired; (vi) the Company or the Board of
Directors of the Company shall have taken any action needed to be taken to
provide that Company Stock Derivatives will be treated as described under the
caption "-- Conversion of Securities in the Merger; Treatment of Derivatives";
(vii) LLC shall have received a valuation of the assets of the Company from a
reputable third party, and such other assurances it deems reasonable, that the
payment of the Merger Consideration is in compliance with Article 2.38 of the
TBCA, which limits the repurchase of outstanding shares if such repurchase would
make the corporation insolvent or would exceed the surplus of the corporation;
and (viii) the provisions of Article 13.03 of the TBCA, which restricts certain
business combinations between public companies and affiliated shareholders,
shall not apply to the Merger, the Merger Agreement and the transactions
contemplated thereby.
TERMINATION
Termination by Mutual Consent. The Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, whether
before or after approval of the matters presented in connection with the Merger
by the shareholders of the Company or the member of LLC, by the mutual written
consent of the Manager of LLC and the Special Committee or Board of Directors of
the Company.
41
<PAGE> 53
Termination by Either the Company or LLC. The Merger Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the shareholders of the Company or by the member of LLC, (i)
by either the Company or LLC if (a) any Governmental Entity shall have issued
any injunction or taken any other action permanently restraining, enjoining or
otherwise prohibiting the consummation of the Merger or such injunction or other
action shall have become final and nonappealable, or (b) any required approval
of the shareholders of the Company shall not have been obtained by reason of the
failure to obtain the required vote upon a vote held at a duly held meeting of
shareholders or at any adjournments or postponements thereof or (ii) by either
the Company or LLC, so long as such party has not breached its obligations under
the Merger Agreement, if the Merger shall not have been consummated on or before
September 30, 1998; provided, that the right to terminate the Merger Agreement
under this clause (ii) shall not be available to any party to the Merger
Agreement whose failure to fulfill any obligation under the Merger Agreement has
been the cause of or resulted in the failure of the Merger to occur on or before
such date.
Termination by the Company. The Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after approval of the matters presented in connection with the Merger by the
shareholders of the Company or by the member of LLC, by the Company (i) if there
has been a material breach of the Merger Agreement on the part of LLC of its
covenants or any of its representations or warranties contained therein shall be
materially inaccurate and such breach or inaccuracy has not been cured within 10
business days after written notice thereof from the Company or (ii) if the
Company receives an Acquisition Proposal in writing from any person or group (a)
that the Company's Board determines in its good faith judgment is more favorable
to the Company's shareholders than the Merger and (b) as a result of which, the
Company's Board reasonably believes, after consultation with its counsel and its
financial advisor, that there is a substantial risk that a failure to terminate
the Merger Agreement would violate its fiduciary duties to the shareholders of
the Company.
Termination by LLC. The Merger Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after the approval of the matters presented in connection with the Merger by the
shareholders of the Company or by the member of LLC, by LLC if (i) there has
been a material breach of the Merger Agreement on the part of the Company of its
covenants or any of its representations or warranties contained therein shall be
materially inaccurate and such breach or inaccuracy has not been cured within 10
business days after written notice thereof from LLC; or (ii) the Board of
Directors of the Company, without the consent of LLC (a) shall have withdrawn or
modified, in any manner that is adverse to LLC, its recommendation or approval
of the Merger or the Merger Agreement or shall have resolved to do so or (b)
shall have recommended to the shareholders of the Company any Acquisition
Proposal or any transaction described in the definition of Acquisition Proposal,
or shall have resolved to do so.
Effect of Termination and Abandonment. In the event of termination of the
Merger Agreement by either the Company or LLC pursuant to the terms described
above, the Merger Agreement shall become void, and there shall be no liability
or obligation on the part of LLC or the Company or their respective affiliates,
officers, directors or shareholders (except (i) with respect to certain
obligations of the parties to the Merger Agreement, including those with respect
to expenses, insurance, indemnity and employee benefits, and (ii) to the extent
that such termination results from the willful breach by a party to the Merger
Agreement of any of its representations or warranties, or any of the covenants
and agreements contained in the Merger Agreement). If the Merger Agreement is
terminated in certain circumstances, and such termination was not due to any act
by, or omission of, LLC or any member of the Buyout Group (not including the act
of termination), then the Company shall pay (or reimburse) to LLC all reasonable
and customary out-of-pocket fees, costs and expenses (including reasonable and
customary out-of-pocket fees, costs and expenses of accountants, attorneys and
financing sources (as described in the commitment letters and highly confident
letter described in "Special Factors -- Estimated Expenses and Fees; Sources of
Funds")) incurred by or on behalf of LLC in connection with the Merger, the
Merger Agreement and the transactions contemplated thereby.
42
<PAGE> 54
Sole Remedy. The rights and remedies set forth above are the sole and
exclusive rights and remedies of the parties to the Merger Agreement with
respect to the inaccuracy of a representation or warranty or the breach of a
covenant by the Company (with respect to the compliance with a covenant that was
under the control of a member of the Buyout Group as an officer of the Company).
AMENDMENT
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties to the Merger Agreement. The parties to
the Merger Agreement may agree to any amendment or supplement to the Merger
Agreement or a waiver of any provision of the Merger Agreement, either before or
after the approval of the Company's shareholders (and without seeking further
shareholder approval), so long as such amendment, supplement or waiver does not
have a material adverse effect on the Company's shareholders which determination
will be made by the Board of Directors of the Company (with interested directors
abstaining due to conflicts of interest) and will be binding on the Company's
shareholders.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following section summarizes the material United States federal income
tax consequences of the Merger to shareholders of the Company other than the
members of the Buyout Group. It is based upon laws, regulations (whether final,
temporary, or proposed), rulings and judicial decisions now in effect, all of
which are subject to change, possibly with retroactive effect. It does not
address all aspects of federal income taxation that may be relevant to a
particular shareholder in light of that shareholder's personal circumstances,
nor does it address federal income tax consequences to types of taxpayers
subject to special treatment under the federal income tax laws (e.g., life
insurance companies, tax exempt organizations, foreign taxpayers, securities
dealers and persons who have entered into hedging transactions with respect to
the Common Stock or who hold the Common Stock as part of a conversion
transaction or straddle), nor does it address any aspect of state, local,
foreign, federal estate and gift or other tax laws. It is assumed that the
shares of Common Stock are held as capital assets by a United States person
(i.e., a citizen or resident of the United States or a domestic corporation).
The Company has not requested, and does not anticipate requesting, any ruling
from the Internal Revenue Service with respect to the Merger.
The receipt of cash for Common Stock pursuant to the Merger will be a
taxable transaction to the Public Shareholders for federal income tax purposes
under the Code and also may be a taxable transaction under applicable state,
local, foreign and other tax laws. The Merger will be treated for federal income
tax purposes as a redemption by the Company of the Public Stock. Any Public
Shareholder that is not related to a member of the Buyout Group or to a
purchaser of units of common stock and preferred stock of the Company in a way
that would result in constructive ownership of such other person's stock under
applicable provisions of the Code will be treated as having sold such
shareholder's Common Stock for the cash received by such shareholder in the
Merger. In general, for federal income tax purposes, a shareholder will
recognize gain (or loss) equal to the amount by which the cash received in
exchange for the Common Stock exceeds (or is exceeded by) the tax basis for such
Common Stock. Assuming that the Common Stock is held as a capital asset, such
gain or loss will be capital gain or loss. In the case of individuals and other
noncorporate taxpayers, such gain will be subject to a maximum federal income
tax rate of 20% for Common Stock held for more than one year. The same maximum
rate applies for purposes of the alternative minimum tax.
Shareholders who hold Common Stock issued to them by the Company after
August 10, 1993 and prior to December 31, 1994 may qualify for a full or partial
deferral of any gain from the sale or exchange of such Common Stock in the
Merger if such shareholders purchase other stock in an original issuance
satisfying the requirements for "Qualified Small Business Stock" within the
meaning of Section 1202 of the Code within
43
<PAGE> 55
60 days after the Effective Time ("Replacement Small Business Stock"). Qualified
Small Business Stock generally consists of stock in a C corporation the
aggregate gross assets of which do not exceed $50 million on or immediately
after the date of issuance and which satisfies certain active business
requirements. The amount of gain realized in the Merger will not be recognized
to the extent of the cost of the Replacement Small Business Stock that is not
already used to offset gains on the sale or exchange of other Qualified Small
Business Stock. Any such deferred gain instead will be applied to reduce the
shareholder's basis in the Replacement Small Business Stock. Shareholders will
continue to be taxed as described above on the excess, if any, of the amount
received in the Merger over the cost of the Replacement Small Business Stock. If
the combined holding periods of the Common Stock and the Replacement Small
Business Stock exceed five years, a shareholder may also qualify for a 50%
exclusion of any gain from the subsequent sale or exchange of the Replacement
Small Business Stock.
The foregoing discussion may not be applicable to shareholders who acquired
their Common Stock pursuant to the exercise of options or other compensation
arrangements, or who are not citizens or residents of the United States, or who
are otherwise subject to special tax treatment under the Code or who are treated
under the Code as constructively owning Common Stock by reason of being related
to a member of the Buyout Group.
Cash payments to shareholders pursuant to the Merger may be subject to
backup withholding tax at a rate of 31% on the gross amount of the Merger
Consideration unless the shareholder has complied with certain reporting and/or
certification procedures. The Letter of Transmittal, which will be sent to the
former shareholders of the Company following the Effective Time if the Merger is
consummated, will include a substitute Form W-9 on which shareholders can
provide the information required to avoid backup withholding. Any amount
withheld from a shareholder under the backup withholding rules will be allowed
as a credit against such shareholder's federal income tax liability and may
entitle the shareholder to a refund, provided that the required information is
timely furnished to the Internal Revenue Service. Shareholders should consult
their tax advisors regarding the application of information reporting and backup
withholding in their particular circumstances and the availability of an
exemption therefrom if the shareholders cannot or do not make the certifications
required by the substitute Form W-9.
EACH SHAREHOLDER IS URGED TO CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE MERGER IN
VIEW OF THE SHAREHOLDER'S OWN PARTICULAR CIRCUMSTANCES.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a "recapitalization," as that term is
used under generally accepted accounting principles, for accounting and
financial reporting purposes.
REGULATORY APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), provides that certain transactions may not be consummated unless
certain information has been furnished to the Antitrust Division of the
Department of Justice and the Federal Trade Commission (the "FTC") and certain
waiting period requirements have been satisfied. Pursuant to the provisions of
the Merger Agreement, the consummation of the Merger is subject to any
requirements of the HSR Act. Representatives of the Company and Krasovec have
determined, after communications with the FTC, that an exemption from the
notification requirements of the HSR Act applied to the Merger. Therefore, no
filings are required under the HSR Act prior to the consummation of the Merger.
No other federal or state regulatory approvals are required to be obtained, nor
are any other regulatory requirements required to be complied with, in
connection with consummation of the Merger by any party to the Merger Agreement.
44
<PAGE> 56
LITIGATION
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 that dismissed the lawsuit with prejudice.
MARKET INFORMATION
The Company's Common Stock is listed for quotation on Nasdaq under the
symbol "NPPI". The following table sets forth the high and low closing sales
prices for the Common Stock for the fiscal periods indicated, as reported by
Nasdaq.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
- ----------- ------ ------
<S> <C> <C>
First Quarter (ended December 2, 1995).................... 19.00 15.50
Second Quarter (ended March 2, 1996)...................... 20.50 16.25
Third Quarter (ended June 1, 1996)........................ 24.00 17.00
Fourth Quarter (ended August 31, 1996).................... 22.75 12.75
FISCAL 1997
First Quarter (ended November 30, 1996)................... 18.25 14.00
Second Quarter (ended March 1, 1997)...................... 21.50 15.25
Third Quarter (ended May 31, 1997)........................ 17.50 12.50
Fourth Quarter (ended August 30, 1997).................... 16.25 12.00
FISCAL 1998
First Quarter (ended November 29, 1997)................... 17.00 13.875
Second Quarter (ended February 28, 1998).................. 17.063 14.75
Third Quarter (ended May 30, 1998)........................ 20.25 16.75
Fourth Quarter (through July 17, 1998).................... 20.438 19.75
</TABLE>
These quotations reflect inter-dealer prices, without retail markups,
markdowns or commissions and may not necessarily reflect actual transactions.
On March 13, 1998, the last full trading day on which shares of stock
traded prior to the Public Announcement Date, the last reported sales price
quoted by Nasdaq was $17.375 per share of Common Stock. On July 21, 1998, the
most recent date on which shares of stock traded prior to the printing of this
Proxy Statement, the last reported sales price quoted by Nasdaq was $19.875 per
share of Common Stock. As of the Record Date, there were 71 holders of record of
Common Stock of the Company. The Company's shareholders are urged to obtain a
current market quotation for the Common Stock.
The Merger Consideration represents a 19% premium over the closing sale
price on March 13, 1998, the last full trading day on which the Common Stock
traded prior to the Public Announcement Date.
Except for payments to shareholders in connection with a restructuring of
the Company in October 1989, which were treated as dividends for accounting
purposes, the Company has never paid any cash dividends or
45
<PAGE> 57
distributions on its Common Stock and intends to retain earnings for use in its
business expansion. The Company paid dividends to holders of its preferred stock
between fiscal 1990 and fiscal 1993. None of the preferred stock is currently
outstanding. The Old Credit Facility limits the payment of cash dividends on the
Company's capital stock and, in any event, the Company does not anticipate
paying any cash dividends in the foreseeable future.
On December 20, 1995, the Company sold 2,015,481 shares of Common Stock in
an underwritten public offering at an offering price of $17.00 per share for an
aggregate of $34,263,177 (before deducting underwriting discounts and
commissions of $2,186,797 and expenses of $1,090,000).
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the Record Date for (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each member of the Buyout Group, (iv) all of the members of the Buyout Group and
(v) all of the directors and officers of the Company as a group. Except pursuant
to applicable community property laws and except as otherwise indicated, each
shareholder identified in the table possess sole voting and investment power
with respect to its or his shares.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(A) BENEFICIAL OWNERSHIP(B) Class(b)
--------------------------------------- ----------------------- ----------
<S> <C> <C>
Frank P. Krasovec(c)........................................ 660,917 13.0%
FIVE PERCENT SHAREHOLDERS OTHER THAN KRASOVEC:
Newberger & Berman, L.L.C.(d)(e)............................ 833,700 16.4%
Heartland Advisors, Inc.(d)(f).............................. 486,000 9.6%
Tweedy, Browne Company LLC(d)(g)............................ 267,500 5.3%
Thomas Horstmann & Bryant, Inc.(d)(h)....................... 460,000 9.0%
DIRECTORS OTHER THAN KRASOVEC:
Robert L. Seibert(i)........................................ 14,587 *
John H. Wilson III(j)....................................... 40,651 *
John H. Josephson(k)........................................ 30,728 *
Harold Holland(l)........................................... 12,000 *
Roy D. Terracina(m)......................................... 16,500 *
MEMBERS OF THE BUYOUT GROUP OTHER THAN KRASOVEC AND
JOSEPHSON:
James P. Gunning, Jr........................................ 500 *
J. Max Waits(n)............................................. 13,100 *
John Finnell(o)............................................. 207,185 4.1%
Michael Linderman(p)........................................ 57,331 1.1%
James Preston............................................... 1,000 *
Paul W. Larson(q)........................................... 62,298 1.2%
Russell A. Devereau(r)...................................... 4,167 *
George Bell Strob(s)........................................ 55,194 1.1%
Brian P. Miller............................................. 17,142 *
David Kagel(t).............................................. 25,443 *
All members of the Buyout Group (12 persons)(u)............. 1,135,005 22.3%
All directors and named executive officers as a group (7
persons)(v)............................................... 775,883 15.3%
Company Employee 401(k) Plan................................ 8,888 *
</TABLE>
- ---------------
* Less than 1%
46
<PAGE> 58
(a) Except as otherwise shown, the address of each person listed above is care
of Norwood Promotional Products, Inc., 106 E. Sixth Street, Suite 300,
Austin, Texas 78701.
(b) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of Common Stock
shown as beneficially owned by them. Beneficial ownership as reported in
the above table has been determined in accordance with Rule 13d-3 of the
Exchange Act. The percentages are based upon 5,085,640 shares outstanding
as of the Record Date.
(c) Includes 7,000 shares of Common Stock issuable upon exercise of options
granted to Krasovec, which are exercisable within 60 days. Includes 1,000
shares of Common Stock held of record by Krasovec's wife.
(d) Information regarding beneficial ownership has been obtained from reports
on SEC Schedule 13F and 13G or from Nasdaq. This information has not been
verified by the Company.
(e) The business address of Newberger & Berman, L.L.C. is 605 Third Avenue, New
York, New York 10158-3698.
(f) The business address for Heartland Advisors, Inc. is 790 N. Milwaukee
Street, Milwaukee, Wisconsin 53202-3712.
(g) The business address of Tweedy, Browne Company LLC is 52 Vanderbilt Avenue,
New York, New York 10017.
(h) The business address of Thomson Horstmann & Bryant, Inc. is Park 80
West/Plaza Two, Saddle Brook, New Jersey 07663.
(i) Includes 6,000 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Seibert, which are exercisable within 60 days.
(j) Includes 28,728 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Wilson, which are exercisable within 60 days.
(k) Includes 28,728 shares of Common Stock issuable upon exercise of warrants
granted to Josephson, which are exercisable within 60 days. Excludes
150,000 shares of Common Stock issuable upon exercise of warrants held by
Allen. Josephson, a director of Allen, disclaims beneficial ownership of
these shares.
(l) Includes 12,000 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Holland, which are exercisable within 60 days.
(m) Includes 12,000 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Terracina, which are exercisable within 60 days.
(n) Includes 7,862 shares of Common Stock issuable upon exercise of options
granted to Mr. Waits, which are exercisable within 60 days.
(o) Includes 9,728 shares of Common Stock issuable upon exercise of options
granted to Mr. Finnell, which are exercisable within 60 days.
(p) Includes 21,000 shares of Common Stock issuable upon exercise of options
and warrants granted to Mr. Linderman, which are exercisable within 60
days. Includes 35,294 shares of Common Stock issuable upon the conversion
of convertible debt issued to Mr. Linderman. Includes 710 shares held of
record by Mr. Linderman's wife.
(q) Includes 3,867 shares of Common Stock issuable upon exercise of options
granted to Mr. Larson, which are exercisable within 60 days.
(r) Includes 3,667 shares of Common Stock issuable upon exercise of options
granted to Mr. Devereau, which are exercisable within 60 days.
(s) Includes 16,009 shares of Common Stock issuable upon exercise of options
granted to Mr. Strob, which are exercisable within 60 days. Mr. Strob holds
all of his shares of Common Stock jointly with his wife, Debra Ann Strob.
Accordingly, Mrs. Strob may be deemed to share in the power to vote or
direct the vote of Mr. Strob's shares.
(t) Includes 17,985 shares of Common Stock issuable upon exercise of options
granted to Mr. Kagel, which are exercisable within 60 days.
47
<PAGE> 59
(u) Includes 151,140 shares of Common Stock issuable upon exercise of options
or warrants that are exercisable within 60 days. Includes 1,000 shares of
Common Stock held of record by Krasovec's wife and 710 shares of Common
Stock held of record by Mr. Linderman's wife. Includes 35,294 shares of
Common Stock issuable upon the conversion of convertible debt issued to Mr.
Linderman. Includes 39,185 shares of Common Stock held jointly by Mr. Strob
and his wife.
(v) Includes 94,456 shares of Common Stock issuable upon exercise of options or
warrants that are exercisable within 60 days. Includes 1,000 shares of
Common Stock held of record by Krasovec's wife.
PURCHASES OF COMMON STOCK BY AND OTHER
TRANSACTIONS WITH CERTAIN PERSONS
Neither the Company, the members of the Buyout Group, any affiliate thereof
nor, to the Company's knowledge, any of the executive officers or directors of
the Company have purchased Common Stock within sixty days of the date of this
Proxy Statement.
The following table sets forth certain information concerning purchases of
Common Stock since September 3, 1995 by the Company, Krasovec and LLC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES RANGE OF PRICES AVERAGE PURCHASE
FISCAL QUARTER NAME PURCHASED PAID PER SHARE PRICE PER SHARE
- -------------- --------- --------- ----------------- ----------------
<S> <C> <C> <C> <C>
Quarter ended May 31, 1997....... Company 575,100 $12.625 - $13.125 $12.839
Quarter ended August 31, 1996.... Krasovec 10,000 $13.500 - $15.000 $14.250
Quarter ended May 31, 1997....... Krasovec 13,000 $13.375 - $15.250 $14.534
Quarter ended November 29,
1997........................... Krasovec 5,000 $16.375 - $16.750 $16.525
</TABLE>
TRANSACTION OF OTHER BUSINESS
The Board of Directors knows of no other matters which may be presented at
the Meeting, but if other matters do properly come before the Meeting, it is
intended that the persons named in the Proxy will vote, pursuant to their
discretionary authority, according to their best judgment in the interest of the
Company.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company as of August 30, 1997
and for the year then ended included in the Company's Annual Report on Form 10-K
for the fiscal year ended August 30, 1997, as amended, which is attached hereto
as Appendix F, have been audited by Ernst & Young LLP, independent auditors, as
stated in their report appearing therein.
It is expected that representatives of Ernst & Young LLP, will be present
at the Meeting, and will have an opportunity to respond to appropriate questions
of shareholders and to make a statement if they so desire.
48
<PAGE> 60
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
NORWOOD PROMOTIONAL PRODUCTS, INC.
AND
FPK, LLC,
AS AMENDED
A-1
<PAGE> 61
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
FPK, LLC
AND
NORWOOD PROMOTIONAL PRODUCTS, INC.
DATED AS OF MARCH 15, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 62
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. THE MERGER.................................................. 1
1.1 The Merger............................................. 1
1.2 The Closing............................................ 1
1.3 Effective Time......................................... 2
1.4 Company Actions........................................ 2
2. ARTICLES OF INCORPORATION, BY-LAWS, DIRECTORS AND OFFICERS
OF THE SURVIVING CORPORATION................................ 2
2.1 Articles of Incorporation and By-laws of Surviving
Corporation................................................. 2
2.2 Directors and Officers of Surviving Corporation........ 2
3. CONVERSION OF SECURITIES.................................... 3
3.1 Conversion of Securities............................... 3
3.2 Dissenting Shareholders................................ 3
3.3 Payment for and Surrender of Company Common Shares..... 4
3.4 Stock Transfer Books................................... 5
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 5
4.1 Organization and Qualification......................... 5
4.2 Authorization, Validity and Effect of Agreement........ 5
4.3 Capitalization......................................... 6
4.4 Subsidiaries........................................... 6
4.5 No Conflict; Required Filings and Consents............. 6
4.6 No Brokers............................................. 7
4.7 Opinion of Financial Advisor........................... 7
4.8 SEC Filings; Financial Statements; Undisclosed
Liabilities................................................. 7
4.9 Absence of Certain Changes or Events................... 8
5. REPRESENTATIONS AND WARRANTIES OF LLC....................... 8
5.1 Organization........................................... 8
5.2 Authorization, Validity and Effect of Agreement........ 9
5.3 Subsidiaries........................................... 9
5.4 No Conflict; Required Filings and Consents............. 9
5.5 No Brokers............................................. 10
5.6 Financing.............................................. 10
5.7 WARN Act............................................... 10
6. COVENANTS................................................... 10
6.1 Acquisition Proposals.................................. 10
6.2 Conduct of Business by the Company..................... 11
6.3 Meeting of Shareholders................................ 12
6.4 Filings, Other Action.................................. 13
6.5 Access to Information; Confidentiality................. 13
6.6 Publicity.............................................. 13
6.7 Reasonable Efforts; Additional Actions................. 13
6.8 Expenses............................................... 14
6.9 Insurance; Indemnity................................... 14
6.10 Employee Benefits...................................... 15
6.11 Conveyance Taxes....................................... 16
6.12 Financing.............................................. 16
6.13 Newco.................................................. 16
</TABLE>
i
<PAGE> 63
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7. CONDITIONS.................................................. 16
7.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... 16
7.2 Conditions to Obligation of Company to Effect the
Merger...................................................... 17
7.3 Conditions to Obligation of LLC and Newco To Effect the
Merger...................................................... 17
8. TERMINATION................................................. 18
8.1 Termination............................................ 18
8.2 Effect of Termination.................................. 19
8.3 Extension; Waiver...................................... 19
8.4 Sole Remedy............................................ 20
9. GENERAL PROVISIONS.......................................... 20
9.1 Nonsurvival of Representations, Warranties and
Agreements.................................................. 20
9.2 Notices................................................ 20
9.3 Assignment; Binding Effect............................. 20
9.4 Entire Agreement....................................... 21
9.5 Amendment.............................................. 21
9.6 Governing Law.......................................... 21
9.7 Counterparts........................................... 21
9.8 Headings............................................... 21
9.9 Interpretation......................................... 21
9.10 Waivers................................................ 21
9.11 Incorporation of Schedules............................. 21
9.12 Severability........................................... 21
9.13 Enforcement of Agreement............................... 21
</TABLE>
LIST OF SCHEDULES
Schedule 4.3 Company Stock Derivatives
Schedule 4.4 Company Subsidiaries
Schedule 4.5 Consents
Schedule 4.8 SEC Filings; Financial Statements; Undisclosed Liabilities
Schedule 4.9 Absence of Certain Changes or Events
ii
<PAGE> 64
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Action...................................................... 15
Agreement................................................... 1
Blue Sky Laws............................................... 7
Cap......................................................... 15
Certificate of Merger....................................... 2
Certificates................................................ 4
Closing..................................................... 1
Closing Date................................................ 1
Code........................................................ 7
Company..................................................... 1
Company Common Share........................................ 3
Company Stock Derivative.................................... 3
Company Stock Plan.......................................... 6
Consideration............................................... 3
Effective Time.............................................. 2
Exchange Act................................................ 2
Financing................................................... 10
Financing Letters........................................... 1
Governmental Entity......................................... 7
HSR Act..................................................... 7
Indemnified Party........................................... 15
J.C. Bradford............................................... 2
LLC......................................................... 1
Merger...................................................... 1
Newco....................................................... 1
Parent Material Adverse Effect.............................. 9
Paying Agent................................................ 4
Payment Fund................................................ 4
Proxy Statement............................................. 2
SEC......................................................... 2
Securities Act.............................................. 6
Special Committee........................................... 1
Stockholders' Meeting....................................... 12
Subsidiary.................................................. 6
Surviving Corporation....................................... 1
TBCA........................................................ 1
WARN Act.................................................... 10
</TABLE>
iii
<PAGE> 65
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (this "Agreement"), dated as of March 15,
1998, by and between FPK, LLC, a Delaware limited liability company ("LLC"), and
NORWOOD PROMOTIONAL PRODUCTS, INC., a Texas corporation (the "Company").
BACKGROUND
A. LLC was formed by the filing of a Certificate of Formation with the
Secretary of State of the State of Delaware on March 13, 1998.
B. The Board of Directors of the Company (based upon the recommendation of
a special committee of its independent directors (the "Special Committee")) and
the Manager of LLC have each determined that a business combination between the
Company and a wholly-owned subsidiary corporation of LLC to be formed under the
laws of Texas prior to the Effective Time (as defined in Section 1.3) ("Newco")
is in the best interests of their respective companies and shareholders/member,
whereby Newco will merge with and into the Company (the "Merger"), with the
Company being the surviving corporation, all upon the terms and subject to the
conditions of this Agreement.
C. Certain executive officers and employees of the Company and certain
other holders of Company Common Shares (as defined in Section 3.1 ) desire to
remain shareholders of the Surviving Corporation (as defined in Section 1.1)
(collectively, each being a member of the "Buyout Group"), whose members will be
set forth on a list which LLC will deliver to the Company at least three days
prior to the mailing of the definitive Proxy Statement (as defined in 1.4).
D. LLC has arranged for the debt and equity financing necessary to complete
the Merger to be provided to the Company simultaneous with the completion of the
Merger in accordance with the terms and conditions of certain commitment
letters, highly confident letters and term sheets (the "Financing Letters").
E. Each of the Company and LLC desires to provide for the consummation of
the Merger and certain other transactions relating thereto, on the terms and
subject to the conditions set forth herein.
NOW THEREFORE, intending to be legally bound, and in consideration of the
mutual agreements and covenants set forth below the parties agree as follows:
1. THE MERGER.
1.1 The Merger.
(a) On the terms and subject to the conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), Newco will be merged with
and into the Company in accordance with the applicable provisions of the
Texas Business Corporation Act (the "TBCA"), and the separate corporate
existence of Newco will thereupon cease. The Company will be the surviving
corporation in the Merger (as such, the "Surviving Corporation") under the
corporate name it possesses immediately prior to the Effective Time.
(b) At and after the Effective Time, the corporate existence of the
Company with all its rights, privileges, powers and franchises will
continue unaffected and unimpaired by the Merger. The Merger will have the
effects specified in the relevant provisions of the TBCA and in this
Agreement.
1.2 The Closing. Unless this Agreement shall have been terminated pursuant
to the provisions of Article 8, the closing of the transactions contemplated by
this Agreement (the "Closing") will take place at the offices of Fulbright &
Jaworski L.L.P., 2200 Ross Avenue, Suite 2800, Dallas, Texas 75201, at 10:00
a.m., local time, within two business days following the date on which the last
of the conditions (excluding conditions that by their terms cannot be satisfied
until the Closing Date (as defined below)) set forth in Article 7 is satisfied
or waived in accordance herewith, or at such other place, time or date as the
parties may agree. The date on which the Closing occurs is hereinafter referred
to as the "Closing Date".
<PAGE> 66
1.3 Effective Time. On the Closing Date, LLC, Newco and the Company will
cause articles of merger with respect to the Merger (the "Articles of Merger"),
executed in accordance with the relevant provisions of the TBCA, to be filed
with the Secretary of State of the State of Texas as provided in Article 5.04 of
the TBCA. Upon completion of such filing and the issuance of a certificate of
merger by the Secretary of State of the State of Texas as provided in Article
5.04(c) of the TBCA, the Merger will become effective in accordance with the
TBCA. The time and date on which the Merger becomes effective is herein referred
to as the "Effective Time."
1.4 Company Actions. The Company hereby represents that (a) its Board of
Directors (at a meeting duly held on March 15, 1998), based upon the
recommendation of the Special Committee, has adopted resolutions by the
unanimous vote of the directors (with all interested directors of the Company
abstaining upon advice of counsel) recommending that the holders of Company
Common Shares (as defined in Section 3.1) approve and adopt this Agreement and
the transactions contemplated hereby, including (i) the conversion of the par
value of the Company Common Shares from no par value to $.01 par value (the "Par
Value Conversion") and (ii) the Merger, and (b) J.C. Bradford & Company, L.L.C.
("J.C. Bradford") has provided to the Special Committee its opinion that the
Consideration (as defined in Section 3.1) to be received by the holders of
Company Common Shares (other than the Buyout Group) pursuant to the Merger is
fair to such holders from a financial point of view. The Company shall file as
soon as practicable after the date hereof with the Securities and Exchange
Commission (the "SEC"), a preliminary and final definitive proxy statement
(including certain information described in Schedule 13E-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and required to be set
forth in such proxy statement (such preliminary and final definitive proxy
statement, and any amendments or supplements thereto, collectively, the "Proxy
Statement") pursuant to Rule 13e-3(e)(1) and Rule 14a-3 under the Exchange Act)
and shall cause the Proxy Statement to be mailed to the holders of the Company
Common Shares. The Company agrees to provide LLC and its counsel with any
written or oral comments the Company or its counsel may receive from the SEC
with respect to such Proxy Statement promptly after the receipt of such
comments. The Company shall also provide LLC and its counsel a reasonable
opportunity to review each of the filings relating to the Proxy Statement prior
to its filing with the SEC or dissemination to the holders of the Company Common
Shares and to participate, including by way of discussions with the SEC, in the
response of the Company to such comments.
2. ARTICLES OF INCORPORATION, BY-LAWS, DIRECTORS AND OFFICERS OF THE SURVIVING
CORPORATION.
2.1 Articles of Incorporation and By-laws of Surviving Corporation.
(a) The articles of incorporation of the Company, as in effect
immediately prior to the Effective Time, as amended to reflect the Par
Value Conversion and to include the terms of the preferred stock as
described in the Financing Letters, shall become, from and after the
Effective Time, the articles of incorporation of the Surviving Corporation
until amended in accordance with its terms and the TBCA.
(b) The by-laws of the Company, as in effect immediately prior to the
Effective Time, shall become, from and after the Effective Time, the
by-laws of the Surviving Corporation until amended in accordance with their
terms and the TBCA.
2.2 Directors and Officers of Surviving Corporation. The directors and
officers of Newco immediately prior to the Effective Time shall become, from and
after the Effective Time, the directors and officers of the Surviving
Corporation and shall serve in accordance with the articles of incorporation and
by-laws of the Surviving Corporation until his/her successor has been duly
elected or appointed and qualified or until his/her earlier death, resignation
or removal in accordance with the articles of incorporation and the by-laws of
the Surviving Corporation.
2
<PAGE> 67
3. CONVERSION OF SECURITIES.
3.1 Conversion of Securities.
(a) At the Effective Time, each share of Common Stock, (which
immediately prior to the Merger will be converted from no par value to $.01
par value), of the Company (each a "Company Common Share" and collectively,
the "Company Common Shares") issued and outstanding immediately prior to
the Effective Time, other than as described in Sections 3.1(c), 3.1(d) and
3.2 hereof, by virtue of the Merger and without any action on the part of
the holders thereof, will be converted solely and exclusively into the
right to receive $20.70 per share in cash (the "Consideration") and any
dividends payable in accordance with Section 3.3(b).
(b) At the Effective Time, all Company Common Shares to be converted
into the right to receive the Consideration pursuant to this Section 3.1,
by virtue of the Merger and without any action on the part of the holders
thereof, will cease to be outstanding, be canceled and retired and cease to
exist, and each holder of Company Common Shares will thereafter cease to
have any rights with respect to such Company Common Shares (other than the
right to receive any dividends payable in accordance with Section 3.3(b)),
except the right to receive the Consideration for each of the Company
Common Shares, upon the surrender of such certificate in accordance with
Section 3.3, without any interest thereon, as provided in this Agreement or
the rights under Article 5.11 of the TBCA.
(c) At the Effective Time, each Company Common Share issued and
outstanding that is owned by any member of the Buyout Group immediately
prior to the Effective Time, by virtue of the Merger and without any action
on the part of the holder thereof, will be converted into one fully paid
and nonassessable share of common stock, $.01 par value, of the Surviving
Corporation.
(d) At the Effective Time, each Company Common Share issued and
outstanding that is owned by the Company or any of its Subsidiaries (as
defined in Section 4.4) as treasury stock, by virtue of the Merger and
without any action on the part of the holder thereof, will cease to be
outstanding, be canceled and retired and cease to exist without payment of
any Consideration therefor.
(e) At the Effective Time, each share of the capital stock of Newco
issued and outstanding immediately prior to the Effective Time, by virtue
of the Merger and without any action on the part of Newco or the holder
thereof, will cease to be outstanding, be canceled and retired and cease to
exist without payment of any Consideration therefor.
(f) All notes and other debt instruments of the Company which are
outstanding immediately prior to the Effective Time shall continue to be
outstanding subsequent to the Effective Time as debt instruments of the
Surviving Corporation, subject to their respective terms and provisions.
(g) All options and warrants to purchase Company Common Shares and
debt which is convertible into Company Common Shares which are outstanding
immediately prior to the Effective Time (each, a "Company Stock
Derivative") shall continue to be outstanding subsequent to the Effective
Time as options, warrants and convertible debt of the Surviving
Corporation, subject to all expiration, lapse and other terms and
conditions thereof, except that the term of all Company Stock Derivatives
(other than convertible debt and employee incentive stock options) shall be
extended for three years from the date of their current expiration.
3.2 Dissenting Shareholders. Notwithstanding anything in this Agreement to
the contrary, holders of Company Common Shares that have, as of the Effective
Time, complied with all procedures necessary to assert dissenter's rights in
accordance with the TBCA, if applicable, (collectively, the "Dissenting
Shareholders") shall have such rights, if any, as they may have pursuant to
Articles 5.11, 5.12 and 5.13 of the TBCA and such Company Common Shares shall
not be converted or be exchangeable as provided in Section 3.1, but such holders
shall be entitled to receive such payment as may be determined to be due to such
holders pursuant to the TBCA; provided, however, that if any such holder shall
have failed to perfect or shall have effectively withdrawn his right to
appraisal and payment under the TBCA, or if pursuant to Article 5.13.B of the
TBCA, the Company shall have terminated such holder's rights under Article 5.12
of the TBCA, such
3
<PAGE> 68
holder shall be conclusively presumed to have approved and ratified the Merger
and such holder's Company Common Shares shall thereupon be deemed to have been
converted and to have become exchangeable, as of the Effective Time, into the
right to receive, the Consideration, without interest thereon, upon surrender of
the Certificate or Certificates (as defined in Section 3.3) in the manner
provided in Section 3.3. The Company shall give LLC prompt notice of any demand
for dissenter's rights received by the Company (and shall also give LLC prompt
notice of any withdrawals of such demands for dissenter's rights) and LLC shall
have the opportunity and right to participate in and direct all negotiations
with respect to such demands. The Company shall not, except with the prior
written consent of LLC (which consent shall not be unreasonably withheld,
conditioned or delayed), settle or otherwise negotiate or offer to settle any
such demand for dissenter's rights.
3.3 Payment for and Surrender of Company Common Shares.
(a) From time to time as needed by such bank or trust company
designated by LLC and reasonably acceptable to the Company (the "Paying
Agent"), the Surviving Corporation will deposit with the Paying Agent, for
the benefit of the holders of Company Common Shares, cash, cash equivalents
or a combination thereof in an aggregate amount equal to the product of (i)
the number of Company Common Shares issued and outstanding at the Effective
Time (other than the Company Common Shares referred to in Sections 3.1(c)
and (d) and 3.2), multiplied by (ii) the Consideration referred to in
Section 3.1 (being hereinafter referred to as the "Payment Fund"). The
Paying Agent will, pursuant to irrevocable instructions from the Surviving
Corporation, deliver the Consideration contemplated by Section 3.1 out of
the Payment Fund, and, except as provided in this Section 3.3, the Payment
Fund will not be used for any other purpose. The Company will act as paying
agent with respect to payments to holders of Options pursuant to Section
3.1(g). The Paying Agent shall invest any cash included in the Payment
Fund, as directed by the Surviving Corporation, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
the Surviving Corporation.
(b) Promptly after the Effective Time, the Paying Agent will mail to
each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding Company Common Shares
that were converted to the right to receive the Consideration pursuant to
Section 3.1 (the "Certificates") (i) a form of letter of transmittal (which
will specify that delivery will be effected, and risk of loss and title to
the Certificates will pass, only upon proper delivery of the Certificates
to the Paying Agent) and (ii) instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender of
Certificates for cancellation to the Paying Agent, together with such
letter of transmittal duly executed and any other required documents, the
holder of such Certificates will be entitled to receive the Consideration
for each of the Company Common Shares represented by such Certificates, and
the Certificates so surrendered will promptly be canceled. Until so
surrendered, Certificates will represent solely the right to receive the
Consideration plus any declared but unpaid dividends. No interest will be
paid or accrued on the cash payable upon the surrender of the Certificates.
No dividends or other distributions, if any, that are declared prior to the
Effective Time and are payable after the Effective Time to holders of
record of Certificates will be paid to persons entitled by reason of the
Merger to receive the Consideration until such persons surrender their
Certificates. Upon such surrender, there will be paid to the registered
holders of surrendered Certificates such declared but unpaid dividends or
other distributions, if any, on the appropriate payment date. In no event
will the persons entitled to receive such dividends or other distributions
be entitled to receive interest on such dividends or other distributions.
If any Consideration is to be paid to a person whose name is a name other
than that in which the surrendered Certificate in exchange therefor is
registered, it will be a condition of such exchange that the Certificate so
surrendered be properly endorsed and otherwise in proper form for transfer
and that the person requesting such exchange pay to the Paying Agent any
transfer or other taxes required by reason of the payment of such
Consideration in a name other than that of the registered holder of the
Certificate surrendered, or establish to the satisfaction of the Paying
Agent that such tax has been paid or is not applicable. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming such Certificate to be
lost, stolen or destroyed, the Paying Agent will issue in exchange for such
lost, stolen or destroyed Certificate the Consideration deliverable in
respect thereof as determined in accordance with this Agreement, provided
4
<PAGE> 69
that the person to whom the Consideration is paid shall, as a condition
precedent to the payment thereof if required by the Surviving Corporation,
give the Surviving Corporation a bond in such sum as it may direct or
otherwise indemnify the Surviving Corporation in a manner satisfactory to
it against any claim that may be made against the Surviving Corporation
with respect to the Certificate claimed to have been lost, stolen or
destroyed.
(c) Any portion of the Payment Fund which remains unclaimed by the
former shareholders of the Company for 180 days after the Effective Time
will be delivered to the Surviving Corporation and any former shareholders
of the Company will thereafter look only to the Surviving Corporation for
payment of their claim for the Consideration for the Company Common Shares.
(d) Neither LLC, Newco, the Surviving Corporation nor the Paying Agent
shall be liable to any holder of Company Common Shares for such shares (or
dividends or distributions with respect thereto) or cash from the Payment
Fund (or from the Surviving Corporation after the Payment Fund has
terminated) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Immediately prior to the time
as any amounts remaining unclaimed by holders of any such shares would
otherwise escheat to or become property of any Governmental Entity (as
defined below), such amounts shall, to the extent permitted by applicable
law, become the property of the Surviving Corporation free and clear of any
claims or interest of any such holders or their successors, assigns or
personal representatives previously entitled thereto.
3.4 Stock Transfer Books. At the Effective Time, the stock transfer books
of the Company, other than with respect to Company Common Shares held by the
Buyout Group, will be closed and there shall be no further registration of
transfers of shares of Company Common Stock thereafter on the records of the
Company.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents
and warrants to LLC as follows:
4.1 Organization and Qualification. The Company and each of its
Subsidiaries (as defined in Section 4.4) is a corporation or organization duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization and has the requisite power
and authority and all necessary governmental approvals to own, lease and operate
its properties and to carry on its business as it is now being conducted, except
where the failure to be so organized, existing or in good standing or to have
such power, authority and governmental approvals would not, individually or in
the aggregate, have a Company Material Adverse Effect (as defined below). The
Company and each of its Subsidiaries is duly qualified or licensed as a foreign
corporation or organization to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or operated by
it or the nature of its business makes such qualification or licensing
necessary, except for such failures to be so qualified or licensed and in good
standing that would not, individually or in the aggregate, have a Company
Material Adverse Effect. The term "Company Material Adverse Effect" means any
change or effect that is or is reasonably likely to be materially adverse to the
business, operations, properties, financial condition, assets or liabilities of
the Company and its Subsidiaries taken as a whole. The Company has previously
delivered to LLC correct and complete copies of the articles of incorporation
and by-laws (or equivalent governing instruments), as currently in effect, of
the Company and each of its Subsidiaries.
4.2 Authorization, Validity and Effect of Agreement. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and all agreements and documents contemplated hereby to be executed and
delivered by it, and, subject to receipt of necessary shareholder approval, to
consummate the transactions contemplated hereby. Subject only to the approval of
this Agreement, the Merger and the transactions contemplated hereby by the
holders of at least two-thirds of the outstanding Company Common Shares, this
Agreement, the Merger and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by all requisite
corporate action, and no other corporate action on the part of the Company is
necessary to authorize this Agreement or the Merger or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the
5
<PAGE> 70
Company and constitutes, and all agreements and documents contemplated hereby to
be executed and delivered by the Company (when executed and delivered pursuant
hereto) will constitute, the valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
subject to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to creditors' rights generally and (ii) the
availability of injunctive relief and other equitable remedies.
4.3 Capitalization. The authorized capital stock of the Company consists of
20,000,000 Company Common Shares, 4,000,000 shares of cumulative convertible
preferred stock, no par value (the "Company Preferred Shares") and 700 shares of
cumulative preferred stock, no par value (the "Company Junior Preferred
Shares"). As of the close of business on the date hereof, (a) 5,078,028 Company
Common Shares were issued and outstanding, all of which were validly issued,
fully paid and nonassessable and 576,530 shares were held in the Company's
treasury, (b) no Company Preferred Shares or Company Junior Preferred Shares
were outstanding or held in the Company's treasury, (c) no Company Common
Shares, Company Preferred Shares or Company Junior Preferred Shares were held by
Subsidiaries of the Company, (d) a total of 410,536 Company Common Shares were
reserved for future issuance pursuant to outstanding Company Stock Derivatives
whether or not granted under the Company's Amended and Restated 1989 Incentive
Stock Option Plan, Amended and Restated 1994 Incentive Stock Compensation Plan,
1993 Non-Qualified Stock Option Plan, 1993 Non-Employee Director Stock Purchase
Plan and Second Amended and Restated Employee Stock Purchase Plan (collectively,
the "Company Stock Option Plans") and 219,464 shares were reserved for future
grants whether or not under such plans, and (e) Schedule 4.3 is a true and
complete list, as of the date hereof, of the holders of all Company Stock
Derivatives, the number of Company Common Shares subject to each such option,
warrant or convertible debt instrument and the exercise prices thereof. Except
as set forth on Schedule 4.3, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character issued or authorized by
the Company relating to the issued or unissued capital stock of the Company or
any of its Subsidiaries or obligating the Company or any of its Subsidiaries to
issue or sell any shares of capital stock of, or other equity interests in, the
Company or any of its Subsidiaries. All Company Common Shares subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. Except as set forth on Schedule
4.3, there are no outstanding contractual obligations of the Company or any of
its Subsidiaries to repurchase, redeem or otherwise acquire any Company Common
Shares or any capital stock of any its Subsidiaries or to provide funds to, or
make any investment (in the form of a loan, capital contribution or otherwise)
in, any person. Except as set forth on Schedule 4.3, there are no persons with
registration or other similar rights to have any securities (debt or equity) of
the Company registered by the Company under the Securities Act of 1933, as
amended (the "Securities Act").
4.4 Subsidiaries. Schedule 4.4 sets forth a complete and accurate list of
the Subsidiaries of the Company and indicates for each such Subsidiary the
jurisdiction of incorporation or organization. Except as set forth on Schedule
4.4, each of the Company's Subsidiaries is wholly owned by the Company or a
Subsidiary of the Company. Each outstanding share of capital stock of each of
the Company's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and, other than the security interests held by Merrill Lynch &
Co., or any of its affiliates ("Merrill Lynch") as the administrative agent
under the Company's current credit facility, each such share owned by the
Company or another of its Subsidiaries is free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal, agreements,
limitations on the Company's or such other Subsidiary's voting rights, charges
and other encumbrances of any nature whatsoever. As used in this Agreement, the
word "Subsidiary" when used with respect to any party means any corporation or
other organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions.
4.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company do
not, and the consummation by the Company of the transactions contemplated
hereby will not, (i) conflict with or violate the articles of incorporation
or by-laws or equivalent organizational documents of the Company or any of
its Subsidiaries, (ii) subject to making the filings and obtaining the
approvals identified in this Section 4.5,
6
<PAGE> 71
conflict with or violate any law, rule, regulation, order, judgment or
decree (whether United States or foreign) applicable to the Company or any
of its Subsidiaries or by which any property or asset of the Company or any
of its Subsidiaries is bound or affected, or (iii) except as set forth on
Schedule 4.5, result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under,
result in the loss of a material benefit under, or give to others any right
of termination, amendment, acceleration, increased payments or cancellation
of, or result in the creation of a lien or other encumbrance on any
property or asset of the Company pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company is a party or by which the
Company or any property or asset of the Company is bound or affected,
except in the case of clauses (ii) and (iii), for any such conflicts,
violations, breaches, defaults or other occurrences which would not prevent
or delay consummation of any of the transactions contemplated hereby in any
material respect, or otherwise prevent the Company from performing its
obligations under this Agreement in any material respect, and would not,
individually or in the aggregate, have a Company Material Adverse Effect.
(b) The execution and delivery of this Agreement by the Company do
not, and the performance of this Agreement and the consummation by the
Company of the transactions contemplated hereby will not, require any
consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic or
foreign (each a "Governmental Entity") by either the Company or any of its
Subsidiaries, except (i) for (A) applicable requirements, if any, of the
Exchange Act, the Securities Act, and state securities or "blue sky" laws
("Blue Sky Laws"), (B) the filing of the Articles of Merger and related
requirements pursuant to the TBCA, (C) filings and approvals as may be
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act"), (D) filings and consents as may be required under any
environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval, triggered by the Merger or
the other transactions contemplated by this Agreement as set forth on
Schedule 4.5, and (E) applicable requirements, if any, of the Internal
Revenue Code of 1986, as amended (the "Code"), and state, local and foreign
tax laws, and (ii) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not delay consummation of any of the transactions contemplated hereby in
any material respect or prevent the Company from performing its obligations
under this Agreement in any material respect, and would not, individually
or in the aggregate, have a Company Material Adverse Effect.
(c) The affirmative vote of the holders of at least two-thirds of the
outstanding Company Common Shares is the only vote of the holders of any
class or series of capital stock of the Company necessary to approve this
Agreement, the Merger and the transactions contemplated hereby on behalf of
the Company.
4.6 No Brokers. Neither the Company nor any of its officers or directors
has employed any investment banker, business consultant, financial advisor,
broker or finder to act on behalf of the Company in connection with the
transactions contemplated by this Agreement, except for J.C. Bradford (the fees
of which will be paid by the Company), or incurred any liability for any
investment banking, business consultancy, financial advisory, brokerage or
finders' fees or commissions in connection with the transactions contemplated
hereby, except for fees payable to J.C. Bradford. The Company has provided LLC
with a true and correct copy of the engagement letter between the Company and
J.C. Bradford.
4.7 Opinion of Financial Advisor. J.C. Bradford has provided its opinion to
the Company to the effect that, as of the date hereof, the Consideration to be
received by the holders of Company Common Shares (other than the Buyout Group)
in the Merger is fair to such holders from a financial point of view, and a
complete and correct signed written copy of such opinion, promptly upon receipt
thereof, will be delivered to LLC.
4.8 SEC Filings; Financial Statements; Undisclosed Liabilities. Except as
set forth on Schedule 4.8, The Company has made all filings required to be made
under the Exchange Act and the Securities Act with the SEC since December 31,
1995 (the "SEC Filings"). As of their respective dates, the SEC Filings complied
as
7
<PAGE> 72
to form in all material respects with the requirements of the Securities Act, or
the Exchange Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such SEC Filings, and the SEC Filings did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. Except
as set forth on Schedule 4.8, the financial statements set forth in the SEC
Filings comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC promulgated
under the Securities Act or the Exchange Act, as the case may be, and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated in
the notes to such financial statements) and fairly present in all material
respects the consolidated financial position of the Company and its Subsidiaries
at the respective dates thereof and the consolidated results of operations and
cash flows for the respective periods then ended (subject, in the case of
unaudited interim financial statements, to exceptions permitted by Form 10-Q
under the Exchange Act and to normal year-end adjustments). As of August 30,
1997, neither the Company nor any of its Subsidiaries had, and since such date
neither the Company nor any of its Subsidiaries has incurred, any liabilities of
any nature, whether accrued, absolute, contingent or otherwise, whether due or
to become due that are required to be recorded or reflected on a consolidated
balance sheet of the Company under generally accepted accounting principles,
except (i) liabilities that have arisen since August 31, 1997 in the ordinary
course of business, (ii) liabilities that are reflected or reserved against or
disclosed in the financial statements of the Company included in the SEC
Filings, (iii) liabilities that would not, individually or in the aggregate,
have a Company Material Adverse Effect or (iv) as otherwise disclosed to LLC in
writing on or prior to the date hereof.
4.9 Absence of Certain Changes or Events. Except as disclosed in the SEC
Filings filed and publicly available prior to the date hereof, since August 30,
1997, the Company and its Subsidiaries have conducted their respective
businesses in the ordinary course consistent with past practice and as of the
date hereof there has not been (i) any condition, event or occurrence that,
individually or in the aggregate, has resulted in a Company Material Adverse
Effect, (ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
Company's capital stock, (iii) any split, combination or reclassification of any
of its capital stock or any issuance or the authorization of any issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, (iv) except as reflected in Schedule 4.3 and except as set forth
on Schedule 4.9, (x) any granting by the Company or any of its Subsidiaries to
any executive officer or other key employee of the Company or any of its
Subsidiaries of any increase in compensation, except for normal increases in the
ordinary course of business consistent with past practice, (y) any granting by
the Company or any of its Subsidiaries to any such executive officer of any
increase in severance or termination pay, except as was required under any
employment, severance or termination agreements in effect as of August 30, 1997
or (z) any entry by the Company or any of its Subsidiaries into any employment,
severance or termination agreement with any such executive officer except in the
ordinary course of business consistent with past practice, (v) any damage,
destruction or loss, whether or not covered by insurance, that has had or will
have a Company Material Adverse Effect or (vi) except as required by a change in
generally accepted accounting principles, any change in accounting methods,
principles or practices except as required by generally accepted accounting
principles.
5. REPRESENTATIONS AND WARRANTIES OF LLC. LLC represents and warrants to the
Company as follows:
5.1 Organization. LLC is a limited liability company duly organized,
validly existing and in good standing under the laws of Delaware. Newco, when
formed and at the Effective Time, will be a wholly owned subsidiary corporation
of LLC duly incorporated, validly existing and in good standing under the laws
of Texas formed solely for the purpose of engaging in the transactions
contemplated hereby. Except for obligations or liabilities incurred in
connection with its incorporation or organization and the transactions
contemplated hereby, Newco will not incur any obligations or liabilities or
engage in any business or activities of any type or kind whatsoever or enter
into any agreements or arrangements with any person or entity. LLC has
previously delivered to the Company correct and complete copies of the
organizational documents, as currently in effect,
8
<PAGE> 73
of LLC, and will deliver to the Company prior to the Effective Time correct and
complete copies of the articles of incorporation and by-laws of Newco.
5.2 Authorization, Validity and Effect of Agreement. LLC has the requisite
limited liability company power and authority to execute and deliver this
Agreement and all agreements and documents contemplated hereby to be executed
and delivered by it and to consummate the transactions contemplated hereby and
thereby. Newco, when formed and at the Effective Time, will have the requisite
corporate power and authority to execute and deliver all agreements and
documents contemplated hereby to be executed and delivered by it and to
consummate the transactions contemplated hereby and thereby. This Agreement, the
Merger and the consummation by LLC and Newco of the transactions contemplated
hereby have been duly and validly authorized by the Manager and member of LLC
and will be duly and validly authorized by the Board of Directors and
shareholders of Newco, and no other limited liability company action on the part
of LLC is necessary, or other corporate action on the part of Newco will be
necessary, to authorize this Agreement or the Merger or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed by LLC and constitutes, and all agreements and documents contemplated
hereby to be executed and delivered by LLC and Newco (when executed and
delivered pursuant hereto) will constitute, the valid and binding obligations of
LLC and Newco enforceable against each of them in accordance with their
respective terms, subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to creditors' rights
generally and (ii) the availability of injunctive relief and other equitable
remedies.
5.3 Subsidiaries. As of the date hereof, LLC does not own any Subsidiaries.
Prior to the Effective Time, LLC will not own any Subsidiaries other than Newco.
5.4 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by LLC do not, and
the consummation by LLC and Newco of the transactions contemplated hereby
will not, (i) conflict with or violate the organizational documents of LLC
or the articles of incorporation or by-laws of Newco, (ii) conflict with or
violate any law, rule, regulation, order, judgment or decree (whether
United States or foreign) applicable to LLC or Newco or by which any
property or asset of LLC or Newco is bound or affected, or (iii) result in
any breach of or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, result in the loss of
a material benefit under, or give to others any right of termination,
amendment, acceleration, increased payments or cancellation of, or result
in the creation of a lien or other encumbrance on any property or asset of
LLC or Newco pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or
obligation to which LLC or Newco is a party or by which LLC or Newco or any
property or asset of LLC or Newco is bound or affected, except in the case
of clauses (ii) and (iii), for any such conflicts, violations, breaches,
defaults or other occurrences which would not prevent or delay consummation
of any of the transactions contemplated hereby in any material respect, or
otherwise prevent LLC or Newco from performing its obligations under this
Agreement in any material respect, and would not, individually or in the
aggregate, have an LLC/Newco Material Adverse Effect. The term "LLC/Newco
Material Adverse Effect" means any change of effect that is or is
reasonably likely to be materially adverse to the business, operations,
properties, financial condition, assets or liabilities of LLC or Newco.
(b) The execution and delivery of this Agreement by LLC do not, and
the performance of this Agreement and the consummation of the transactions
contemplated hereby by LLC and Newco will not, require any consent,
approval, authorization or permit of, or filing with or notification to,
any Governmental Entity, except (i) for (A) applicable requirements, if
any, of the Exchange Act, the Securities Act and Blue Sky Laws, (B) the
filing of the Articles of Merger and related requirements pursuant to the
TBCA, (C) filings and approvals as may be required under the HSR Act, (D)
such filings and consents as may be required under any environmental,
health or safety law or regulation pertaining to any notification,
disclosure or required approval triggered by the Merger or the transactions
contemplated by this Agreement, and (E) applicable requirements, if any, of
the Code and state, local and foreign tax laws, and (ii) where failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not prevent or delay consummation of any of
the transactions contemplated
9
<PAGE> 74
hereby in any material respect, or otherwise prevent LLC or Newco from
performing its obligations under this Agreement in any material respect,
and would not, individually or in the aggregate, have an LLC/ Newco
Material Adverse Effect.
5.5 No Brokers. Neither LLC nor its Manager has employed, nor Newco nor any
of its directors or officers will employ, any investment banker, business
consultant, financial advisor, broker or finder in connection with the
transactions contemplated by this Agreement, except for Merrill Lynch and Allen
& Company Incorporated ("Allen & Co.") (the fees of which will be paid by LLC),
or incurred any liability for any investment banking, business consultancy,
financial advisory, brokerage or finders' fees or commissions in connection with
the transactions contemplated hereby, except for fees payable to Merrill Lynch
and Allen & Co.
5.6 Financing. LLC has furnished to the Company complete and correct copies
of the Financing Letters which LLC believes, subject to terms and the conditions
set forth therein, will provide (together with the roll-over of Buyout Group's
equity) all of the financing required in order to consummate the Merger (the
"Financing"). LLC has no reason to believe that any conditions to the Financing
will not be satisfied or that the Financing will not be available at and after
the Closing.
5.7 WARN Act. LLC does not intend to implement a "plant closing' or a "mass
layoff", as those terms are defined in the Worker Adjustment and Retraining
Notification Act (29 U.S.C. ss. 2101 et seq.) as amended (the "WARN Act"), in
respect of the Company or any of its Subsidiaries within 90 days after the
Closing Date. The Surviving Corporation shall be solely responsible for giving
any and all notices required by the WARN Act or any similar state law or
regulation because of any action taken by LLC or the Surviving Corporation with
respect to the Company or any of its Subsidiaries occurring on or after the
Closing Date. The parties hereby designate the Closing Date as the "effective
date" for purposes of the WARN Act.
6. COVENANTS.
6.1 Acquisition Proposals.
(a) Upon execution of this Agreement, the Company will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any
Acquisition Proposal (as defined below). Prior to the Effective Time, the
Company agrees that neither it nor any of its Subsidiaries will, nor will
it or any of its Subsidiaries permit their respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) to, initiate, solicit, participate in or encourage, directly
or indirectly, any Acquisition Proposal or, except as set forth below,
engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating
to an Acquisition Proposal, or otherwise facilitate any effort or attempt
to make or implement an Acquisition Proposal. Notwithstanding the
foregoing, in the event the Company receives an unsolicited written
proposal or unsolicited written offer (in either case subject to due
diligence) with respect to an Acquisition Proposal, the Special Committee
or the Board of Directors of the Company shall be entitled to review and
participate in negotiations concerning such proposal and furnish
confidential information and data concerning the Company and its
Subsidiaries to the offeror if it reasonably believes, after consultation
with its counsel and its financial advisor, that there is a substantial
risk that a failure to do so would violate its fiduciary duties to the
shareholders of the Company; provided that (A) the Company shall have
furnished, or concurrently with the provision of such information to such
offeror shall furnish, LLC with all such information provided to such
offeror and (B) the offeror executes a confidentiality agreement with the
Company. The Company shall notify the Special Committee and LLC immediately
of any such unsolicited Acquisition Proposal, or any inquiry or contact
with any person with respect thereto, and shall in such notice indicate in
reasonable detail the identity of the offeror and the terms and conditions
of such proposal and, subject to the fiduciary duties of the Special
Committee under applicable law, shall keep LLC promptly advised of all
developments which could be reasonably expected to culminate in the Special
Committee withdrawing, modifying or amending its recommendation of the
Merger and the other transactions contemplated by this Agreement. In
addition, in the event (i) the Company enters into negotiations with
respect to an unsolicited
10
<PAGE> 75
Acquisition Proposal or (ii) the Company's Board of Directors (upon
recommendation of the Special Committee) shall withdraw its approval of
this Agreement and the transactions contemplated hereby or its
recommendation to the shareholders of the Company to approve the same, then
the Company shall immediately deliver an additional notice of such events
to LLC. Nothing in this Section 6.1 will (x) permit the Company to
terminate this Agreement except as provided in Section 8.1(f), (y) permit
the Company to enter into any agreement to consummate an Acquisition
Proposal for as long as this Agreement remains in effect (it being agreed
that for as long as this Agreement remains in effect, the Company will not
enter into any agreement with any person that provides for, or in any way
facilitates, an Acquisition Proposal except as otherwise permitted herein),
or (z) affect any other obligation of the Company under this Agreement.
(b) For purposes of this Agreement, an "Acquisition Proposal' shall
mean any of the following (other than the transactions among the Company
and LLC contemplated hereunder or which LLC consents to in writing in
advance) involving the Company or any of its Subsidiaries: (i) any merger,
consolidation, share exchange, recapitalization, business combination, or
other similar transaction; (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of all or substantially all of the
assets of the Company and its Subsidiaries, taken as a whole, in a single
transaction or series of transactions; (iii) any tender offer or exchange
offer for all or substantially all of the outstanding shares of capital
stock of the Company or the filing of a registration statement under the
Securities Act in connection therewith; or (iv) any public announcement of
a proposal, plan or intention to do any of the foregoing or any agreement
to engage in any of the foregoing.
(c) LLC shall cause the members of the Buyout Group to notify the
Special Committee immediately in the event a member of the Buyout Group
receives an unsolicited written proposal or unsolicited written offer with
respect to an Acquisition Proposal or any inquiry or contact with any
person with respect thereto.
6.2 Conduct of Business by the Company. Prior to the Effective Time, except
as contemplated by any other provision of this Agreement, unless LLC has
previously consented in writing thereto or unless the Chief Executive Officer of
the Company has previously authorized thereto, the Company:
(a) will, and will cause each of its Subsidiaries to, conduct its
operations in the ordinary and normal course, consistent with past
practice;
(b) will use its reasonable best efforts, and will cause each of its
Subsidiaries to use its reasonable best efforts, to preserve intact their
business organizations and goodwill, keep available the services of their
respective officers and employees and maintain satisfactory relationships
with those persons having business relationships with them;
(c) will not amend its articles of incorporation or by-laws or
comparable governing instruments;
(d) will, upon the occurrence of any event or change in circumstances
as a result of which any representation or warranty of the Company
contained in Article 4 would be untrue or incorrect in any material respect
if such representation or warranty were made immediately following the
occurrence of such event or change in circumstance, promptly (and in any
event within two business days of an executive officer of the Company
obtaining knowledge thereof) notify LLC thereof;
(e) will promptly deliver to LLC true and correct copies of any
report, statement, application or schedule (including any exhibits thereto)
filed with the SEC subsequent to the date of this Agreement;
(f) will not (i) issue any shares of its capital stock other than the
issuance of Company Common Shares issuable upon exercise of Company Stock
Derivatives outstanding on the date of this Agreement (in accordance with
the present terms thereof), effect any stock split or otherwise change its
capitalization as it existed on the date hereof, (ii) grant, confer or
award any option, warrant, conversion right or other equity rights not
existing on the date hereof to acquire any shares of its capital stock,
(iii) grant, confer or award any bonuses or other forms of incentive
compensation to any officer, director or employee, except for cash bonuses
or incentives consistent with past practice or under any existing
11
<PAGE> 76
agreement or automatically under any of the Company Stock Option Plans,
(iv) increase any compensation under any employment agreement with any of
its present or future officers, directors or employees, except for normal
increases for officers and employees consistent with past practice or the
terms of such employment agreement, (v) grant any severance or termination
pay to, or enter into any employment, severance or termination agreement
with any officer, director or employee or amend any such agreement in any
material respect, except for severance arrangements consistent with past
practice with respect to officers and employees terminated by the Company,
or (vi) adopt any new employee benefit plan or program (including any stock
option, stock benefit or stock purchase plan) or amend any existing
employee benefit plan or program in any material respect;
(g) will not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock or other ownership interests or (ii) directly or indirectly redeem,
purchase or otherwise acquire any shares of its capital stock or capital
stock of any of its Subsidiaries, or make any commitment for any such
action;
(h) will not, and will not permit any of its Subsidiaries to, sell,
lease or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) or to acquire any business or assets, except for (i) any
purchase or sale of inventory undertaken in the ordinary course of
business, or (ii) any sale, lease or other disposition of assets in the
ordinary course of business;
(i) will not incur any material amount of indebtedness for borrowed
money or make any loans, advances or capital contributions to, or
investments (other than non-controlling investments in the ordinary course
of business) in, any other person other than a wholly owned Subsidiary of
the Company, or issue or sell any debt securities, other than borrowings
under existing lines of credit in the ordinary course of business;
(j) will not, except pursuant to and in accordance with the capital
budget previously disclosed in writing to LLC, authorize, commit to or make
capital expenditures;
(k) will not mortgage or otherwise encumber or subject to any lien any
properties or assets except for such of the foregoing as are in the
ordinary course of business and would not be reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect;
(l) will not enter into or agree to enter into any contract without
the prior written consent of LLC unless such contract is entered into by
the Company for (i) any purchase or sale of inventory undertaken in the
ordinary course of business, (ii) the sale of accounts receivable that are
more than 180 days past due; or (iii) any other contract in the ordinary
course of business;
(m) will maintain insurance consistent with past practices for its
businesses and properties;
(n) will not make any change in its accounting (including tax
accounting) methods, principles or practices, except as may be required by
generally accepted accounting principles and except, in the case of tax
accounting methods, principles or practices, in the ordinary course of
business of the Company or any of its Subsidiaries; and
(o) will not take or agree in writing or otherwise to take any action
which would make any of the representations or warranties of the Company
contained in this Agreement untrue or incorrect or prevent the Company from
performing or cause the Company not to perform its covenants hereunder.
6.3 Meeting of Shareholders. The Company will take all action necessary in
accordance with applicable law and its articles of incorporation and by-laws to
convene a meeting of its shareholders (the "Shareholders' Meeting") as promptly
as practicable after the date hereof to consider and vote upon the adoption and
approval of the Par Value Conversion, this Agreement and the Merger, the other
transactions contemplated hereby and such other related matters as it deems
appropriate. The Board of Directors of the Company (upon the recommendation of
the Special Committee) will recommend such adoption and approval, and the
Company and the Board (and the Special Committee) will each take all lawful
action to solicit such approval, including, without limitation, the timely
mailing of the Proxy Statement; provided, however, that the Board of
12
<PAGE> 77
Directors of the Company may withdraw, modify or change such recommendation if
the Company receives an Acquisition Proposal and the Board or the Special
Committee reasonably believes, after consultation with its counsel and its
financial advisor, that there is a substantial risk that a failure to do so
would violate its fiduciary duties to the shareholders of the Company. At the
Shareholders' Meeting, LLC shall use its reasonable efforts to cause all Company
Common Shares owned by any members of the Buyout Group to be voted in favor of
the adoption and approval of this Agreement, the Merger and the transactions
contemplated hereby.
6.4 Filings, Other Action. Subject to the terms and conditions herein
provided, the parties will: (a) use all reasonable efforts to cooperate with one
another in (i) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
are required to be obtained prior to the Effective Time from Governmental
Entities in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits or
authorizations, including the Proxy Statement and the information required by
Schedule 13E-3 and Schedule 14A; and (b) use all reasonable efforts to take, or
cause to be taken, all other action and do, or cause to be done, all other
things necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If, at any time after the Effective
Time, any further action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and directors of the parties will take all
such necessary action.
6.5 Access to Information; Confidentiality. From the date hereof to the
Effective Time, the Company shall, and shall cause its Subsidiaries to, subject
to the execution of reasonable confidentiality agreements which the Company may
elect to require, (a) allow all designated officers, attorneys, accountants and
other representatives of LLC reasonable access at all reasonable times upon
reasonable notice to the offices, records and files, correspondence, audits and
properties, as well as to all information relating to commitments, contracts,
titles and financial position, or otherwise pertaining to the business and
affairs, of the Company and its Subsidiaries, as the case may be, (b) furnish to
LLC, LLC's counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as such
persons may reasonably request, (c) instruct the employees, counsel and
financial advisors of the Company to cooperate with each other in the other's
investigation of the business of it and its Subsidiaries and (d) keep LLC fully
appraised and informed of all material developments with respect to the assets,
business activities, financial condition, earnings and prospects of the Company
and its Subsidiaries. LLC will be permitted to make extracts from or to make
copies of such books and records as may be reasonably necessary. LLC shall keep
such information confidential, subject to the requirements of any governmental
or other authorities, except with respect to information that is ascertainable
from public or published information or trade sources.
6.6 Publicity. Each of the parties agrees that it shall not, nor shall any
of their respective affiliates, issue or cause the publication of any press
release or other public announcement with respect to the Merger, this Agreement
or the transactions contemplated hereby without the prior approval of the other
party, except such disclosure as may be required by law or by any listing
agreement with a national securities exchange or NASDAQ; provided, if such
disclosure is required by law or any such listing agreement, such disclosure may
not be made without prior consultation of the other parties.
6.7 Reasonable Efforts; Additional Actions.
(a) Upon the terms and subject to the conditions of this Agreement,
each of the parties hereto shall use all reasonable efforts to take, or
cause to be taken, all action, and to do or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by, and in connection with, this Agreement,
including using all reasonable efforts to (i) obtain all consents,
amendments to or waivers under the terms of any of the Company's
contractual arrangements required by the transactions contemplated by this
Agreement (other than consents, amendments or waivers the failure of which
to obtain will not, individually or in the aggregate, (x) have a Company
Material Adverse Effect, (y) impair the ability of the Company to perform
its obligations under this Agreement in any material respect or (z) delay
in any material respect or prevent the consummation of any of the
13
<PAGE> 78
transactions contemplated by this Agreement), (ii) effect promptly all
necessary or appropriate registrations and filings with Governmental
Entities, including, without limitation, filings and submissions pursuant
to the HSR Act, the Exchange Act and the TBCA, (iii) defend any lawsuits or
other legal proceedings, whether judicial or administrative, challenging
this Agreement or the consummation of the transactions contemplated hereby,
(iv) fulfill or cause the fulfillment of the conditions to Closing set
forth in Article 7 and (v) ensure that the payment of the Consideration is
in compliance with Article 2.38.B of the TBCA. In connection with and
without limiting the foregoing, the Company shall (x) use all reasonable
efforts to ensure that no state takeover statute or similar statute or
regulation (including, without limitation, Article 13.03 of the TBCA) is or
becomes applicable to the Merger, this Agreement or any of the other
transactions contemplated by this Agreement and (y) if any state takeover
statute or similar statute or regulation becomes applicable to the Merger,
this Agreement or any other transaction contemplated by this Agreement, use
all reasonable efforts to ensure that the Merger and the other transactions
contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger, this
Agreement and the other transactions contemplated by this Agreement.
Notwithstanding the foregoing, the Board of Directors of the Company shall
not be prohibited from taking any action permitted by the terms of this
Agreement.
(b) If, at any time after the Effective Time, the Surviving
Corporation shall determine or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation the right, title or interest in, to or under any of
the rights, properties or assets of the Company or Newco acquired or to be
acquired by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of the Company and Newco or
otherwise, all such deeds, bills of sale, assignments and assurances and to
take and do, in the name and on behalf of each of the Company and Newco or
otherwise, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and interest
in, to and under such rights, properties or assets in the Surviving
Corporation or otherwise to carry out this Agreement.
(c) In furtherance of and without limiting the above provisions, each
of the Company and LLC shall as promptly as practicable following the
execution and delivery of this Agreement, but not later than thirty days
from the date hereof, file with the United States Federal Trade Commission
(the "FTC") and the United States Department of Justice ("DOJ") the
notification and report form, if any, required for the transactions
contemplated hereby and any supplemental information requested in
connection therewith pursuant to the HSR Act. Any such notification and
report form and supplemental information shall be in substantial compliance
with the requirements of the HSR Act. Each of the Company and LLC shall
furnish to the other such necessary information and reasonable assistance
as the other may request in connection with its preparation of any filing
or submission which is necessary under the HSR Act. The Company and LLC
shall keep each other apprised of the status of any communications with,
and any inquiries or requests for additional information from, the FTC and
the DOJ and shall comply promptly with any such inquiry or request. Each of
LLC and the Company shall use all reasonable efforts to obtain any
clearance required under the HSR Act for, and to provide assistance to the
other in any antitrust proceedings related to, the consummation of the
transactions contemplated by this Agreement.
6.8 Expenses. Except as provided in Article 8, in the event the Merger is
not consummated, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby will be paid by the party
incurring such expenses. In the event the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including those incurred by LLC and Newco) will be paid by
the Surviving Corporation.
6.9 Insurance; Indemnity.
(a) From and after the Effective Time, the Surviving Corporation will
indemnify, defend and hold harmless, to the fullest extent that the Company
would be required under its presently existing Articles of
14
<PAGE> 79
incorporation, presently existing by-laws and applicable law, each person
who is now or was prior to the date hereof an officer or director of the
Company or any of its Subsidiaries (individually, an "Indemnified Party"
and collectively, the "Indemnified Parties"), against all losses, claims,
damages, liabilities, costs or expenses (including attorneys' fees),
judgments, fines, penalties and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in
their capacities as such occurring at or prior to the Effective Time. In
the event of any such claim, action, suit, proceeding or investigation (an
"Action"), any Indemnified Party wishing to claim indemnification will
promptly notify the Surviving Corporation thereof (provided that failure to
so notify the Surviving Corporation will not affect the obligations of the
Surviving Corporation to provide indemnification except to the extent that
the Surviving Corporation shall have been prejudiced as a result of such
failure). With respect to any Action for which indemnification is
requested, the Surviving Corporation will be entitled to participate
therein at its own expense and, except as otherwise provided below, to the
extent that it may wish, the Surviving Corporation may assume the defense
thereof, with counsel reasonably satisfactory to the Indemnified Party.
After notice from the Surviving Corporation to the Indemnified Party of its
election to assume the defense of an Action, the Surviving Corporation will
not be liable to the Indemnified Party for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the
defense thereof, other than as provided below. The Surviving Corporation
will not settle any Actions without the consent of the Indemnified Party
where such settlement includes an admission of civil or criminal liability
on behalf of an officer or director or requires any payment to be made by
the Indemnified Party. The Indemnified Party will have the right to employ
counsel in any Action, but the fees and expenses of such counsel incurred
after notice from the Surviving Corporation of its assumption of the
defense thereof will be at the expense of the Indemnified Party, unless (i)
the employment of counsel by the Indemnified Party has been authorized by
the Surviving Corporation in writing, (ii) the Indemnified Party will have
reasonably concluded upon the advice of counsel that there may be a
conflict of interest between the Indemnified Party and the Surviving
Corporation in the conduct of the defense of an Action, or (iii) the
Surviving Corporation shall not in fact have employed counsel to assume the
defense of an Action, in each of which cases the reasonable fees and
expenses of counsel selected by the Indemnified Party will be at the
expense of the Surviving Corporation. Notwithstanding the foregoing, the
Surviving Corporation will not be liable for any settlement effected
without its written consent, which will not be unreasonably withheld,
conditioned or delayed, and the Surviving Corporation will not be obligated
pursuant to this Section 6.9(a) to pay the fees and disbursements of more
than one counsel (including local counsel) for all Indemnified Parties in
any single Action, except to the extent two or more of such Indemnified
Parties have conflicting interests in the outcome of such action.
(b) For a period of six years after the Effective Time, the Surviving
Corporation will maintain officers' and directors' liability insurance
covering the Indemnified Parties who are currently covered, in their
capacities as officers and directors, by the Company's existing officers'
and directors' liability insurance policies on terms substantially no less
advantageous to the Indemnified Parties than such existing insurance;
provided, however, that the Surviving Corporation will not be required in
order to maintain or procure such coverage to pay premiums on an annualized
basis in excess of 200% of the current annual premium paid by the Company
for its existing coverage (the "Cap") (which current annual premium the
Company represents and warrants to be approximately $100,000); and
provided, further, that if equivalent coverage cannot be obtained, or can
be obtained only by paying an annual premium in excess of the Cap, the
Surviving Corporation will only be required to obtain as much coverage as
can be obtained by paying premiums on an annualized basis equal to the Cap.
(c) The provisions of this Section 6.9 will survive the consummation
of the Merger and expressly are intended to benefit each of the Indemnified
Parties covered by such Section.
6.10 Employee Benefits. Notwithstanding anything to the contrary contained
herein, from and after the Effective Time, the Surviving Corporation will have
sole discretion over the hiring, promotion, retention and firing of employees of
the Surviving Corporation. Notwithstanding the immediately preceding sentence,
the Surviving Corporation will (i) satisfy all obligations of the Company or any
of its Subsidiaries under any
15
<PAGE> 80
existing severance agreement between the Company or any of its Subsidiaries and
any of their officers or employees and (ii) until the expiration of at least one
year after the Effective Time, satisfy all obligations of the Company or any of
its Subsidiaries under their current respective severance policies. The
Surviving Corporation will provide for the benefit of employees of the Surviving
Corporation who were employees of the Company immediately prior to the Effective
Time "employee benefit plans" within the meaning of Section 3(3) of ERISA (a)
for a period of at least one year after the Effective Time, that are, in the
aggregate, substantially comparable to the "employee benefit plans" provided to
such individuals by the Company or any Subsidiary on the date hereof, and (b)
thereafter that are, at the election of the Surviving Corporation, either (i) in
the aggregate, substantially comparable to the "employee benefit plans" provided
to such individuals by the Company or any Subsidiary on the date hereof or (ii)
in the aggregate, substantially comparable to the "employee benefit plans"
provided to similarly situated employees of the Surviving Corporation or its
Subsidiaries who were not employees of the Company or any Subsidiary immediately
prior to the Effective Time; provided, however, that notwithstanding the
foregoing (A) nothing herein will be deemed to require the Surviving Corporation
to modify the benefit formulas under any pension, profit sharing or savings plan
of the Company or any Subsidiary in a manner that increases the aggregate
expenses thereof as of the date hereof in order to comply with the requirements
of ERISA or the Code, (B) multiemployer pension plans within the meaning of
3(37) of ERISA, employee stock ownership, stock bonus, stock option and similar
equity-based plans, programs and arrangements of the Company or any of its
Subsidiaries are not encompassed within the meaning of the term "employee
benefit plans" hereunder, and (C) nothing herein will obligate the Surviving
Corporation to continue any particular "employee benefit plan" for any period
after the Effective Time.
6.11 Conveyance Taxes. The Company and LLC will cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees and any similar taxes which become payable in
connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time and each party
will pay any such tax or fee which becomes payable by it on or before the
Effective Time.
6.12 Financing. Upon the terms and subject to the conditions of this
Agreement, the Company shall use its commercially reasonable efforts to take, or
cause to be taken, all action, and to do or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary, as promptly as
practicable, proper or advisable to secure the Financing on terms substantially
as outlined in the Financing Letters.
6.13 Newco. Prior to the Effective Time, LLC shall form Newco as a wholly
owned subsidiary incorporated under the laws of Texas.
7. CONDITIONS.
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger will be subject to the
fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement and the transactions contemplated hereby (including
the Par Value Conversion) shall have been approved in the manner required
by applicable law by the shareholders of the Company.
(b) The aggregate number of Company Common Shares owned by those
Company shareholders, if any, other than members of the Buyout Group, who
shall have exercised, or given notice of their intent to exercise, the
rights of dissenting shareholders under the TBCA shall be less than ten
percent (10%) of the total number of outstanding Company Common Shares.
(c) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement or the
effective operation of the business of the Company and its Subsidiaries
after the Effective Time. In the event any such order or injunction shall
have been issued, each party agrees to use its reasonable best efforts to
have any such injunction lifted.
16
<PAGE> 81
(d) The Company shall have received the Financing on terms
substantially as outlined in the Financing Letters and shall have
sufficient financing thereunder to consummate the Merger.
(e) All consents, authorizations, orders and approvals of (or filings
or registrations with) any Governmental Entity required in connection with
the execution, delivery and performance of this Agreement shall have been
obtained or made, except for filings in connection with the Merger and any
other documents required to be filed after the Effective Time and except
where the failure to have obtained or made any such consent, authorization,
order, approval, filing or registration would not have a material adverse
effect on the business, financial condition or results of operations of the
Surviving Corporation following the Effective Time.
7.2 Conditions to Obligation of Company to Effect the Merger. The
obligation of the Company to effect the Merger will be subject to the
fulfillment at or prior to the Effective Time of the following additional
conditions:
(a) (i) The representations and warranties of LLC contained in this
Agreement shall have been true and correct in all material respects as of
the date hereof and (ii) the representations and warranties of LLC and
Newco contained in this Agreement and in any document delivered in
connection herewith shall be true and correct in all material respects (but
without regard to any materiality qualifications or references to material
adverse effect contained in any specific representation or warranty) as of
the Closing Date, except (A) for changes specifically permitted by this
Agreement and (B) that those representations and warranties which address
matters only as of a particular date shall remain true and correct in all
material respects as of such date.
(b) LLC shall have performed or complied with all agreements and
conditions contained in this Agreement required to be performed or complied
with by it on or prior to the Effective Time.
(c) LLC shall have delivered to the Company a certificate, dated the
Closing Date, signed by the President of LLC, certifying as to the
fulfillment of the conditions specified in Section 7.2(a) and (b).
(d) LLC shall have delivered to the Company a certificate, dated the
Closing Date, signed by the President of LLC, certifying that, to its
knowledge, the conditions specified in Section 7.3(a) have been fulfilled;
provided, however, that if the Company is unable to deliver to LLC its
certificate required by Section 7.3(c) as to the fulfillment of the
conditions specified in Section 7.3(a), then the Company shall not be able
to fail to effect the Merger because LLC has failed to deliver the
certificate required by this Section 7.2(d).
(e) LLC shall have obtained all material consents, waivers, approvals,
authorizations or orders and made all filings required in connection with
the authorization, execution and delivery of this Agreement by LLC and the
consummation by it of the transactions contemplated hereby, and all
applicable notice periods shall have expired.
7.3 Conditions to Obligation of LLC and Newco To Effect the Merger. The
obligation of LLC and Newco to effect the Merger will be subject to the
fulfillment at or prior to the Effective Time (or such other date as may be
specified below) of the following additional conditions:
(a) (i) The representations and warranties of the Company contained in
this Agreement shall have been true and correct in all material respects as
of the date hereof and (ii) the representations and warranties of the
Company contained in this Agreement and in any document delivered in
connection herewith shall be true and correct in all material respects (but
without regard to any materiality qualifications or references to material
adverse effect contained in any specific representation or warranty) as of
the Closing Date, except (A) for changes specifically permitted by this
Agreement and (B) that those representations and warranties which address
matters only as of a particular date shall remain true and correct in all
material respects as of such date.
(b) The Company shall have performed or complied with all agreements
and conditions contained in this Agreement required to be performed or
complied with by it on or prior to the Effective Time,
17
<PAGE> 82
unless such failure to perform or comply is due to any act by, or omission
of, LLC or any member of the Buyout Group.
(c) The Company shall have delivered to LLC a certificate, dated the
Closing Date, signed by the Chief Executive Officer of the Company,
certifying as to the fulfillment of the conditions specified in Section
7.3(a) and (b).
(d) From the date of this Agreement through the Effective Time, there
shall not have been any condition, event or occurrence that, individually
or in the aggregate, has resulted in a Company Material Adverse Effect.
(e) The Company shall have obtained all material consents, waivers,
approvals, authorizations or orders and made all filings required in
connection with the authorization, execution and delivery of this Agreement
by the Company and the consummation by it of the transactions contemplated
hereby, and all applicable notice periods shall have expired.
(f) The Company or the Board of Directors of the Company shall have
taken any action needed to be taken to provide that Company Stock
Derivatives will be treated as provided in Section 3.1(g) hereof.
(g) LLC shall have received a valuation of the assets of the Company
from a reputable third party, and such other assurances it deems
reasonable, that the payment of the Consideration is in compliance with
Article 2.38 of the TBCA.
(h) The provisions of Article 13.03 of the TBCA shall not apply to the
Merger, this Agreement and the transactions contemplated hereby.
8. TERMINATION.
8.1 Termination. Notwithstanding the provisions of Article 7, this
Agreement may be terminated and the Merger may be abandoned at any time prior to
the Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the shareholders of the Company or by the member
of LLC:
(a) by mutual written consent duly authorized by the Manager of LLC
and the Special Committee or the Board of Directors of the Company on
behalf of the Company;
(b) by either LLC or the Company if (i) any Governmental Entity shall
have issued any injunction or taken any other action permanently
restraining, enjoining or otherwise prohibiting the consummation of the
Merger or such injunction or other action shall have become final and
nonappealable, or (ii) any required approval of the shareholders of the
Company shall not have been obtained by reason of the failure to obtain the
required vote upon a vote held at a duly held meeting of shareholders or at
any adjournment thereof;
(c) by either LLC or the Company, so long as such party has not
breached its obligations hereunder, if the Merger shall not have been
consummated on or before September 30, 1998; provided, that the right to
terminate this Agreement under this Section 8.1(c) shall not be available
to any party whose failure to fulfill any obligation under this Agreement
has been the cause of or resulted in the failure of the Merger to occur on
or before such date;
(d) by the Company if there has been a material breach of this
Agreement on the part of LLC of its covenants or any of its representations
or warranties contained herein shall be materially inaccurate and such
breach or inaccuracy has not been cured within 10 business days after
written notice thereof from the Company;
(e) by LLC if there has been a material breach of this Agreement on
the part of the Company of its covenants or any of its representations or
warranties contained herein shall be materially inaccurate and such breach
or inaccuracy has not been cured within 10 business days after written
notice thereof from LLC;
18
<PAGE> 83
(f) by the Company if the Company receives an Acquisition Proposal in
writing from any person or group (i) that the Company's Board determines in
its good faith judgment is more favorable to the Company's shareholders
than the Merger and (ii) as a result of which, the Company's Board
reasonably believes, after consultation with its counsel and its financial
advisor, that there is a substantial risk that a failure to terminate this
Agreement would violate its fiduciary duties to the shareholders of the
Company; provided, that such termination pursuant to this clause (f) shall
not be effective unless the Company has made payment of the full fee and
expense reimbursement required by Section 8.2(b) within the earlier of (i)
20 days from the date of termination or (ii) the closing date of the
Acquisition Proposal; notwithstanding the foregoing, nothing in this
Agreement shall prohibit the Company from entering into an agreement with
respect to an Acquisition Proposal prior to the payment of the
aforementioned fee and expense reimbursement.
(g) by LLC if the Company (without the consent of LLC) (i) shall have
withdrawn or modified, in any manner which is adverse to LLC, its
recommendation or approval of the Merger or this Agreement or shall have
resolved to do so or (ii) shall have recommended to the shareholders of the
Company any Acquisition Proposal or any transaction described in the
definition of Acquisition Proposal, or shall have resolved to do so.
8.2 Effect of Termination.
(a) In the event of termination of this Agreement by either the
Company or LLC as provided in Section 8.1, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of
LLC or the Company or their respective affiliates, officers, directors or
shareholders except (i) with respect to this Section 8.2 and Sections 6.8,
6.9 and 6.10 and except for the provisions of Sections 9.3, 9.4, 9.6, 9.8,
9.9, 9.11, 9.12, and 9.13 and (ii) to the extent that such termination
results from the willful breach by a party hereto of any of its
representations or warranties, or of any of its covenants or agreements, in
each case, as set forth in this Agreement.
(b) If this Agreement is terminated pursuant to Sections 8.1(b)(ii)
(provided that the Company Common Shares owned by the members of the Buyout
Group are voted in favor of the transactions contemplated hereby), (e) (as
a result of a willful and material breach of a covenant in Article 6 by the
Company), (f) or (g), and such termination (or the breach giving rise
thereto) was not due to any act by, or omission of, LLC or any member of
the Buyout Group (not including the act of termination), then the Company
shall pay (or reimburse) (not later than one business day after submission
of statements therefor) to LLC all reasonable and customary out-of-pocket
fees, costs and expenses (including reasonable and customary out-of-pocket
fees, costs and expenses of accountants, attorneys, financing sources (as
described in the Financing Letters) incurred by or on behalf of LLC in
connection with the Merger, this Agreement and the transactions
contemplated thereby and hereby.
(c) The parties agree that the agreements contained in this Section
8.2 are an integral part of the transactions contemplated by this Agreement
and constitute reasonable liquidated damages and not a penalty. If the
Company fails to promptly pay to LLC any fee due under Section 8.2(b), in
addition to any amounts paid or payable pursuant to such section, the
Company shall pay the costs and expenses (including reasonable legal fees
and expenses) in connection with any action, including the filing of any
lawsuit or other legal action, taken to collect payment, together with
interest on the amount of any unpaid fee at the prime rate as published in
the Wall Street Journal from time to time, from the date such fee was
required to be paid.
8.3 Extension; Waiver. At any time prior to the Effective Time, and subject
to applicable law, the parties hereto, by action taken or authorized by the
Company's Board of Directors and the LLC's Manager, may, to the extent legally
allowed: (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto; (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto; and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver
19
<PAGE> 84
shall be valid only if set forth in a written instrument signed on behalf of
such party. The failure of any party hereto to assert any of its rights
hereunder shall not constitute a waiver of such rights.
8.4 Sole Remedy. The rights and remedies set forth in Section 8.2 shall be
the sole and exclusive rights and remedies of the parties hereto with respect to
the inaccuracy of a representation or warranty contained in Articles 4 and 5 or
the breach of a covenant contained in Article 6 by the Company (with respect to
the compliance with a covenant in Article 6 that was under the control of a
member of the Buyout Group as an officer of the Company).
9. GENERAL PROVISIONS.
9.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement will not survive the Merger,
provided, however, that the agreements contained in Article 3, Sections 6.8 and
6.9 and this Article 9 will survive the Merger indefinitely.
9.2 Notices. Any notice, request, claim, demand or other communication
required to be given hereunder will be sufficient if in writing, and sent by
facsimile transmission or by courier service (with proof of service), hand
delivery or certified or registered mail (return receipt requested and
first-class postage prepaid), addressed as follows:
If to the Company:
Norwood Promotional Products, Inc.
106 East Sixth Street, Suite 300
Austin, Texas 78701
Attention: Chief Financial Officer
Fax No.: (512) 477-8603
with copies to:
Fulbright & Jaworski L.L.P.
2200 Ross Avenue, Suite 2800
Dallas, Texas 75201
Attention: Linton Barbee, Esquire
Fax No.: (214) 855-8200
If to LLC:
FPK, LLC
106 East Sixth Street, Suite 300
Austin, Texas 78701
Attention: President
Fax No.: (512) 477-8603
with copies to:
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103-6998
Attention: G. Michael Stakias, Esquire
Fax No.: 215-569-5555
or to such other address as any party will specify by written notice so given,
and such notice will be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
9.3 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder will be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except LLC may assign and/or delegate any
or all of its rights and obligations hereunder to Newco or any other party
controlled by LLC. Subject to the preceding sentence, this
20
<PAGE> 85
Agreement will be binding upon and will inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Section 6.9, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
9.4 Entire Agreement. This Agreement, the Exhibits, the Schedules and any
documents delivered by the parties in connection herewith constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior or contemporaneous agreements, written or oral, and
understandings between the parties with respect thereto. No addition to or
modification of any provision of this Agreement will be binding upon any party
hereto unless made in writing and signed by all parties hereto.
9.5 Amendment. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto. The parties hereto may
agree to any amendment or supplement to this Agreement or a waiver of any
provision of this Agreement, either before or after the approval of the
Company's shareholders (and without seeking further shareholder approval), so
long as such amendment, supplement or waiver does not have a material adverse
effect on the Company's shareholders which determination will be made by the
Board of Directors of the Company and will be binding on the Company's
shareholders.
9.6 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas without regard to its rules of
conflict of laws.
9.7 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered will be an
original, but all such counterparts will together constitute one and the same
instrument.
9.8 Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and will be given no substantive or
interpretive effect whatsoever.
9.9 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number will include the plural and vice
versa, and words denoting any gender will include all genders and words denoting
natural persons will include corporations and partnerships and vice versa.
9.10 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, will be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder will not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.11 Incorporation of Schedules. The Schedules attached hereto and referred
to herein are hereby incorporated herein and made a part hereof for all purposes
as if fully set forth herein.
9.12 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction will, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision will be interpreted
to be only so broad as is enforceable.
9.13 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties will be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Texas Court, this being in addition to
any other remedy to which they are entitled at law or in equity.
* * * * * *
21
<PAGE> 86
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
NORWOOD PROMOTIONAL PRODUCTS, INC.
By: /s/ FRANK P. KRASOVEC
----------------------------------
Name: Frank P. Krasovec
Title: Chief Executive Officer
By: /s/ JAMES P. GUNNING, JR.
----------------------------------
Name: James P. Gunning, Jr.
Title: Chief Financial Officer
FPK, LLC
By: /s/ FRANK P. KRASOVEC
----------------------------------
Name: Frank P. Krasovec
Title: President
22
<PAGE> 87
LIST OF SCHEDULES TO MERGER AGREEMENT
Schedule 4.3 Company Stock Derivatives
Schedule 4.4 Company Subsidiaries
Schedule 4.5 Consents
Schedule 4.8 SEC Filings; Financial Statements; Undisclosed Liabilities
Schedule 4.9 Absence of Certain Changes or Events
The Schedules to this Agreement are omitted pursuant to Rule 601(b)(2) of
Regulation S-K. The Registrant agrees to furnish supplementally a copy of any
omitted Schedule to the Securities and Exchange Commission upon request.
23
<PAGE> 88
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment") is
entered into as of April 14, 1998, by and between FPK, LLC, a Delaware limited
liability company ("LLC"), and Norwood Promotional Products, Inc., a Texas
corporation (the "Company").
BACKGROUND
A. LLC and the Company entered into an Agreement and Plan of Merger (the
"Agreement") on March 15, 1998. All capitalized terms used herein have the same
meanings given to them in the Agreement.
B. Each of LLC and the Company desires to amend the Agreement by entering
into this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Section 6.7(c) of the Agreement is hereby amended to read in its
entirety as follows:
"(c) In furtherance of and without limiting the above provisions,
each of the Company and LLC shall as promptly as practicable following
the execution and delivery of this Agreement, but not later than sixty
days from the date hereof, file with the United States Federal Trade
Commission (the "FTC") and the United States Department of Justice
("DOJ") the notification and report form, if any, required for the
transactions contemplated hereby and any supplemental information
requested in connection therewith pursuant to the HSR Act. Any such
notification and report form and supplemental information shall be in
substantial compliance with the requirements of the HSR Act. Each of the
Company and LLC shall furnish to the other such necessary information
and reasonable assistance as the other may request in connection with
its preparation of any filing or submission which is necessary under the
HSR Act. The Company and LLC shall keep each other apprised of the
status of any communications with, and any inquiries or requests for
additional information from, the FTC and the DOJ and shall comply
promptly with any such inquiry or request. Each of LLC and the Company
shall use all reasonable efforts to obtain any clearance required under
the HSR Act for, and to provide assistance to the other in any antitrust
proceedings related to, the consummation of the transactions
contemplated by this Agreement."
2. Except as and to the extent expressly amended by this Amendment,
the Agreement remains in full force and effect in accordance with its
terms.
3. This Amendment may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered will be an
original, but all such counterparts will together constitute one and the
same instrument.
[The remainder of this page intentionally has been left blank.]
24
<PAGE> 89
IN WITNESS WHEREOF, the parties have executed this Amendment and caused the
same to be duly delivered on their behalf on the day and year first written
above.
NORWOOD PROMOTIONAL PRODUCTS,
INC.
By: /s/ FRANK P. KRASOVEC
----------------------------------
Name: Frank P. Krasovec
Title: Chief Executive Officer
By: /s/ JAMES P. GUNNING, JR.
----------------------------------
Name: James P. Gunning, Jr.
Title: Chief Financial Officer
FPK, LLC
By: /s/ FRANK P. KRASOVEC
----------------------------------
Name: Frank P. Krasovec
Title: President
25
<PAGE> 90
APPENDIX B
[LETTERHEAD OF J.C. BRADFORD]
July 22, 1998
Special Committee of the Board of Directors
Norwood Promotional Products, Inc.
106 E. Sixth Street, Suite 300
Austin, TX 78701
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Norwood Promotional Products, Inc. (the
"Company"), other than Frank P. Krasovec and the other shareholders of the
Company who will continue to own shares of common stock in the surviving
corporation following the merger (as defined below) (the "Krasovec Group") (such
shareholders are collectively referred to herein as the "Unaffiliated
Shareholders") of the consideration to be received by such Unaffiliated
Shareholders in connection with the proposed merger (the "Merger") of a
wholly-owned subsidiary ("Merger Sub") of FPK, LLC, a Delaware limited liability
company ("Parent"), with and into the Company pursuant to the Agreement and Plan
of Merger (the "Merger Agreement"), dated as of March 15, 1998, among the
Company and Parent. The terms and conditions of the Merger are more fully set
forth in the Merger Agreement. Capitalized terms used herein, if not otherwise
defined herein, shall have the respective meanings set forth in the Merger
Agreement.
J.C. Bradford & Co., L.L.C., as part of its investment banking business,
engages in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements, and valuations for estate,
corporate, and other purposes. We have acted as financial advisor to the Special
Committee of the Board of Directors of the Company in connection with the
proposed Merger and will receive a fee from the Company for our services.
In conducting our analysis and arriving at our opinion, we have considered
such financial and other information as we deemed appropriate and feasible
including, among other things, the following: (i) the Merger Agreement; (ii) the
historical and current financial position and results of operations of the
Company; (iii) the Revised Projections for the fiscal years beginning September
1, 1997 and ending August 31, 2003, prepared for the Company by its senior
management; (iv) certain financial and securities data of certain other
companies, the securities of which are publicly traded, that we believed to be
comparable to the Company; (v) prices and premiums paid in certain other
acquisitions and transactions that we believed to be relevant; (vi) historical
and current price and trading activity for the Common Stock; and (vii) such
other financial studies, analyses, and investigations as we deemed appropriate
for purposes of our opinion. We also have held discussions with members of the
senior management of the Company regarding the past and current business
operations, financial condition, and future prospects of the Company. With your
permission, we have assumed that financing for the Merger has been irrevocably
obtained on terms previously reviewed by us in commitment letters and "highly
confident" letters from financing sources, and that the Merger Agreement has
been executed and delivered by the parties thereto on terms substantially
similar to those contained in the most recent draft of the Merger Agreement
supplied to and reviewed by us.
We have taken into account our assessment of general economic, market, and
financial and other conditions and our experience in other transactions, as well
as our experience in securities valuation and our knowledge of the promotional
industry generally. Our opinion is necessarily based upon the information made
available to us and conditions as they currently exist and can be evaluated as
of the date hereof. We have relied upon the accuracy and completeness of all of
the financial and other information reviewed by us for purposes of our opinion
and have not assumed any responsibility for, nor undertaken an independent
verification of, such information. With respect to the internal operating data
and financial analyses and
B-1
<PAGE> 91
forecasts supplied to us, we have assumed that such data, analyses, and
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the Company's senior management as to the
recent and likely future performance of the Company. Accordingly, we express no
opinion with respect to such analyses or forecasts or the assumptions on which
they are based.
We were not asked to consider and our opinion does not address the relative
merits of the proposed Merger as compared to any alternative business strategies
that might exist for the Company or the effect of any other transactions in
which the Company might engage. Furthermore, we were not asked to propose, nor
did we propose, the consideration to be received by the Unaffiliated
Shareholders in the Merger. We have not made an independent evaluation or
appraisal of the assets and liabilities of the Company or any of its
subsidiaries or affiliates and have not been provided with any such evaluation
or appraisal.
Based upon and subject to the foregoing, and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Merger Consideration to be received by the Unaffiliated Shareholders in the
Merger is fair to the Unaffiliated Shareholders from a financial point of view.
Very truly yours,
J.C. BRADFORD & CO., L.L.C.
By: /s/ DAVID JONES
----------------------------------
David Jones
Senior Vice President
B-2
<PAGE> 92
APPENDIX C-1
PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION
IMPLEMENTING THE PAR VALUE CONVERSION
The first sentence of Article Four of the Articles of Incorporation, as
amended, of the Corporation is hereby amended to change the par value of the
Common Stock from no par value to $0.01 par value by amending the phrase "common
stock, no par value" to read "common stock, $0.01 par value."
C-1
<PAGE> 93
APPENDIX C-2
PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION
IMPLEMENTING THE SERIAL PREFERRED AMENDMENT
Article Four of the Articles of Incorporation, as amended, of the
Corporation is hereby amended to read in its entirety as follows:
"ARTICLE FOUR
(a) The total number of shares of stock which the Corporation shall
have authority to issue is 21,000,000, consisting of 20,000,000 shares of
common stock, $0.01 par value ("Common Stock"), and 1,000,000 shares of
preferred stock, $0.01 par value ("Preferred Stock").
(b) The Preferred Stock may be issued from time to time in one or more
series. The board of directors of the Corporation is hereby authorized, at
any time and from time to time, to adopt resolutions to issue the shares,
to fix the number of shares, to divide the authorized and unissued shares
of Preferred Stock into one or more series and to establish and alter the
voting powers, designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions of any such series of Preferred Stock, in each case without
the approval of the shareholders of the Corporation. The number of shares
of Preferred Stock of any such series may be increased (but not above the
total number of authorized shares of Preferred Stock) or decreased (but not
below the number of shares thereof then outstanding) by the board of
directors. In case the number of shares shall be decreased, the number of
shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of
shares of such series.
(c) Each holder of shares of Common Stock shall be entitled to one
vote for each share of Common Stock held of record on all matters on which
the holders of shares of Common Stock are entitled to vote. Subject to the
express provisions of the Texas Business Corporation Act and of any
certificate of designation providing for the issuance of any series of
Preferred Stock, the holders of outstanding shares of Common Stock shall
have and possess the exclusive right to notice of shareholders' meetings
and the exclusive power to vote."
C-2
<PAGE> 94
APPENDIX D
ARTICLES 5.12 AND 5.13 OF THE
TEXAS BUSINESS CORPORATION ACT
Art. 5.12 Procedure for Dissent by Shareholders as to Said Corporate
Actions
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1) (a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder
of record as of the effective date of the action notice of the fact and
date of the action and that the shareholder may exercise the shareholder's
right to dissent from the action. The notice shall be accompanied by a copy
of this Article and any articles or documents filed by the corporation with
the Secretary of State to effect the action. If the shareholder shall not
have consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting shareholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the shareholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate
by the corporation (foreign or domestic) or other entity of the fair value
of the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was effected,
upon receipt of notice within sixty (60) days after that date from the
shareholder that the shareholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
D-1
<PAGE> 95
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
Shares acquired by the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be
D-2
<PAGE> 96
treated as provided in the plan of merger and, in all other cases, may be held
and disposed of by the corporation as in the case of other treasury shares.
The provisions of this Article shall not apply to a merger if, on the date
of the filing of the articles of merger, the surviving corporation is the owner
of all the outstanding shares of the other corporations, domestic or foreign,
that are parties to the merger.
In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
Art. 5.13 Provisions Affecting Remedies of Dissenting Shareholders
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
D-3
<PAGE> 97
NORWOOD PROMOTIONAL PRODUCTS, INC.
106 E. SIXTH STREET
SUITE 300
AUSTIN, TEXAS 78701
July 24, 1998
Dear Norwood Promotional Products, Inc. Shareholder:
You are cordially invited and encouraged to attend the Special Meeting of
Shareholders of Norwood Promotional Products, Inc. The meeting will be held on
Wednesday, August 19, 1998 at 10:00 a.m., local time, in the University Room at
the Metropolitan Club, 1300 One American Center, 600 Congress Avenue, Austin,
Texas.
If you cannot personally attend the meeting, please vote your preference on
the proxy card attached below and return it promptly. Your participation in
Norwood Promotional Products, Inc.'s business, whether in person or by proxy, is
an important part of the Company's governance.
I look forward to and appreciate your participation in Norwood Promotional
Products, Inc.'s Special Meeting of Shareholders.
Sincerely,
Frank P. Krasovec
Chairman, President and Chief Executive Officer
Detach Proxy Form Here
-------------------------------------------------------------------------------
ITEM 3. ADOPTION OF MERGER AND APPROVAL OF MERGER AGREEMENT (AS DEFINED IN PROXY
STATEMENT).
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their sole discretion, the Proxies are authorized to vote upon such other
business as may properly come before the special meeting or any adjournment
thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED IN THE SPACES PROVIDED THEREFOR, OR, IF NO
SUCH SPECIFICATION IS MADE, IT WILL BE VOTED FOR ITEMS 1, 2 AND 3.
The matters in Items 1, 2 and 3 are proposed by the Company.
The adoption of the Par Value Conversion (Item 1) is a condition to the
consummation of the Merger under the Merger Agreement (Item 3). The adoption of
the Par Value Conversion (Item 1) is a condition to the adoption of the Serial
Preferred Amendment (Item 2).
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
NORWOOD PROMOTIONAL PRODUCTS, INC.
SIGN HERE ________________________
(Please sign exactly as name
appears hereon)
SIGN HERE ________________________
(Executors, administrators,
trustees, etc. should so
indicate when signing)
DATED ______________________________
E-1
<PAGE> 98
Detach Proxy Form Here
- --------------------------------------------------------------------------------
PROXY NORWOOD PROMOTIONAL PRODUCTS, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS -- AUGUST 19, 1998
The undersigned, revoking all previous proxies, hereby appoints James P.
Gunning, Jr. and Michael Linderman, or either of them, as Proxy or Proxies of
the undersigned, each with the power to appoint his substitute, to vote, as
designated below, all of the shares of Common Stock of Norwood Promotional
Products, Inc. (the "Company") held of record by the undersigned on July 20,
1998, at the special meeting of shareholders to be held at 10:00 a.m., local
time, on August 19, 1998, in the University Room at the Metropolitan Club, 1300
One American Center, 600 Congress Avenue, Austin, Texas, and at any adjournment
or postponement thereof.
ITEM 1. ADOPTION OF PAR VALUE CONVERSION (AS DEFINED IN PROXY STATEMENT).
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 2. ADOPTION OF SERIAL PREFERRED AMENDMENT (AS DEFINED IN PROXY STATEMENT).
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED, AND TO BE SIGNED ON THE OTHER SIDE.)
E-2
<PAGE> 99
APPENDIX F
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended AUGUST 30, 1997
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 (I.R.S. Employer
incorporation or organization) Identification No.)
106 E. SIXTH STREET, SUITE 300, AUSTIN, TEXAS 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (210) 341-9440
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
---
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 24, 1997 was approximately $56,100,000 based upon
the last sales price on November 24, 1997 on the NASDAQ National Market for
the Company's common stock. The registrant had 5,070,043 shares of Common Stock
outstanding on November 24, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION NOT LATER THAN 120 DAYS AFTER THE CLOSE OF
THE REGISTRANT'S FISCAL YEAR ARE INCORPORATED BY REFERENCE INTO PART III OF THIS
FORM 10-K.
<PAGE> 100
NORWOOD PROMOTIONAL PRODUCTS, INC.
INDEX TO FORM 10-K
YEAR ENDED AUGUST 30, 1997
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 51
PART III
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management 51
Item 13. Certain Relationships and Related Transactions 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 51
</TABLE>
2
<PAGE> 101
THE DISCUSSION IN THIS DOCUMENT CONTAINS ANALYSIS OR TRENDS AND OTHER FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. THESE STATEMENTS INVOLVE MANAGEMENT ASSUMPTIONS AND ARE SUBJECT TO
RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER "BUSINESS-RISK FACTORS"
BELOW.
PART I
ITEM 1. BUSINESS
References herein to the "Company" mean Norwood Promotional Products, Inc.,
its predecessors, and its and their subsidiaries, unless the context requires
otherwise.
GENERAL
The Company is a leading supplier of promotional products in the United
States. The Company has grown, through internal growth and selective
acquisitions, from sales of $49.3 million in fiscal 1993 to $175.8 million in
fiscal 1997, and from income from continuing operations of $1.8 million in
fiscal 1993 to $6.1 million in fiscal 1997. The Company has been active in
expanding its product lines in the major product categories and price points in
the promotional products industry through a series of acquisitions. The Company
acquired the certain assets of Wesburn Golf and Country Club, Inc. (the "Wesburn
acquisition") and DM Apparel, Inc. (the "DMA acquisition") in February 1997. The
Company acquired Tee-Off Enterprises, Inc. (the "Tee-Off acquisition") and Alpha
Products, Inc. (the "Alpha acquisition") in January and April 1996,
respectively. The Company acquired the assets of The Bob Allen Companies, Inc.
(the "Bob Allen acquisition"), Designer Plastics, Inc. (the "Designer Line
acquisition"), BTS Group (the "BTS acquisition") and Ocean Specialty
Manufacturing Corporation (the "Ocean acquisition") in March, June, July and
November, 1995, respectively. These acquisitions followed the purchases of the
assets of Key Industries, Inc. (the "Key acquisition") in May 1994 and Barlow
Specialty Advertising, Inc. (the "Barlow acquisition") in May 1992 and the
purchase of all of the stock of ArtMold Products Corporation (the "ArtMold
acquisition") in July 1994.
The Company's operating companies and their major product lines are:
<TABLE>
<CAPTION>
Group Operating Companies Product Lines
- ----- ------------------- -------------
<S> <C>
RADIO CAP GROUP:
Radio Cap Company, Inc. (RCC) RCC(TM), Trendco(TM), Koozie(R) and Alpha Products(TM)
Air-Tex Corporation (Air-Tex) Air-Tex(R), Designer Line(R)_and DM Apparel(TM)
BARLOW GROUP:
Barlow Promotional Products, Inc. (Barlow) Barlow(R) , BTS(TM), Value Line(TM) and Salm(R)
ArtMold Products Corporation (ArtMold) The Action Line(R), Tee-Off(TM) and Wesburn Golf(TM)
Key Industries, Inc. (Key) Econ-O-Line(R) and The California Line(TM)
</TABLE>
3
<PAGE> 102
PROMOTIONAL PRODUCTS INDUSTRY
Promotional products are functional items imprinted with the name, logo or
message of an advertiser and are typically given free by the advertiser to a
target audience to generate goodwill and repeat advertising exposure. The United
States market for promotional products, measured by sales of distributors to
advertisers, has grown from approximately $4.5 billion in 1989 to approximately
$9.5 billion in 1996, according to data published by The Counselor, an industry
trade publication. The promotional products industry is highly fragmented, with
the 20 largest suppliers accounting for approximately 20% of total industry
sales in 1996. The industry includes over 2,500 suppliers, including the
Company, who decorate and customize products, and over 15,000 independent
distributors who solicit orders from and sell directly to advertisers.
The Company believes that the growth of the industry in recent years has
resulted from the greater acceptance by advertisers of promotional products as
an important form of advertising and an increase in the number of distributors.
Promotional product advertising generally represents a lower cost alternative to
more traditional advertising media and, because promotional products are
designed for use or display, they provide repeat exposure of an advertiser's
message to a targeted audience. Some of the largest purchasers of promotional
products are healthcare providers, banks, insurance agencies, pharmaceutical and
high technology companies.
Within the promotional products industry, there are two principal
distribution channels: independent distributors and mail order companies.
Independent distributors solicit orders from and sell directly to advertisers.
Mail order companies sell directly to advertisers through corporate catalogs and
other direct mail advertising, without using outside sales personnel. Orders by
advertisers placed through distributors and by direct mail typically are for
small quantities of custom-imprinted items and require prompt delivery. The
Company sells its products to independent distributors and mail order companies.
Although it periodically evaluates different distribution methods, the Company
currently does not sell directly to advertisers.
STRATEGY
The Company's business strategy is to continue to improve its market
position in each of its existing product lines and to expand into new product
lines and distribution channels. Key elements of this strategy include: (i)
expanding product offerings by developing new products and innovative imprinting
and decorating techniques and applications; (ii) increasing penetration of
existing markets through enhanced customer service and coordinated marketing
efforts among its operating companies; (iii) making selective acquisitions to
add new product lines and expand distribution; (iv) introducing new management
and operating systems to reduce order processing times, increase production
efficiency and increase processing capacities of existing and acquired
businesses; and (v) exploring new markets, primarily through international
marketing and alternative distribution arrangements.
Expanding Product Offerings
The Company has increased the number of products and product lines it
offers through acquisitions and by developing new products and new imprinting
and decorating techniques and applications. Since 1983, the Company has expanded
its product offerings from approximately ten individual products within one
product category to approximately 2,400 products in eight major product
categories. The broad range of its product offerings, in part, has enabled the
Company to expand its primary customer base to more than 11,900 independent
distributors.
4
<PAGE> 103
Enhancing Customer Service and Coordinated Marketing
Providing a high level of service to customers is a key element of the
Company's marketing strategy. The Company offers toll-free telephone service for
orders and other customer needs and places an emphasis on customer service by
sales and order-entry staff. Several of the Company's largest operating
companies have formed key account groups to provide customer service and sales
support to their largest distributors. The Company has also installed systems
providing credit approval at all operating companies for each distributor who
has an account with any other operating company.
While each operating company handles its own customer service, the Company
has begun to coordinate sales and marketing activities among the operating
companies. Over the last two years, the Company has realigned its operating
companies and product lines into two groups: the Radio Cap Group and the Barlow
Group. This realignment is designed to allow the Company's core operating
companies to provide sales and marketing support for smaller operating companies
and new acquisitions. Management of the Company believes that the realignment of
product lines into strategic groups will allow the Company to better coordinate
sales and marketing of all product lines to the Company's large base of
distributors.
The Company has introduced several catalogs on top-selling products from
each of the Company's product lines to demonstrate the scope of the Company's
product offerings and to introduce its products to distributors familiar with
some but not all of the operating companies and their respective product lines.
Sales staff of the operating companies also make joint sales presentations to
distributors. The Company believes that its coordinated marketing efforts will
lead to increased awareness of the Company's brands by distributors and enable
the Company to obtain increased revenue from distributors for its existing
product lines, new products and newly acquired brands.
Making Selective Acquisitions
The Company intends to continue its strategy of making selective
acquisitions to strengthen its position in the fragmented promotional products
industry and to add new product lines and expand distribution. The Company
believes that the competition for the acquisition of suppliers within the
industry is limited. The Company is engaged in ongoing evaluations of and
discussions with third parties regarding possible acquisitions. At the date of
this report, the Company had no binding agreements or commitments with respect
to any acquisitions.
Improving Management and Operating Systems
The promotional products industry is characterized by the processing of a
large number of small, custom- imprinted orders. The Company has become a leader
in the promotional products industry through the rapid fulfillment of customer
orders and in responsive and professional customer service. The Company has
implemented advanced management systems, such as Manufacturing Resource Planning
("MRP II"), a pull order-flow processing system and statistical process
controls. Through these measures, the Company believes it has achieved a
significant reduction in order processing times, increased production efficiency
and increased processing capacities. In addition, various managers from the
operating companies meet regularly to exchange information regarding sales and
marketing trends, imprinting methods, information systems, new technologies and
training.
5
<PAGE> 104
ACQUISITIONS
The promotional products industry is highly fragmented and is characterized
by numerous suppliers and independent distributors. There are over 2,500
suppliers in the industry, most of which are small, closely held or family owned
businesses offering a limited number and range of products. To date, the
industry has not experienced significant consolidation.
The Company seeks acquisitions which it believes will enable it to
accomplish some or all of the following objectives: (i) expand its product
offerings by adding new brands, penetrate a new product category, expand the
number and variety of products in an existing category or cover a major price
point in a specific product category; (ii) broaden its distribution network; or
(iii) leverage its management and operating systems to improve the processing
efficiency of recently acquired businesses.
Since 1983, the Company has diversified its product lines and increased its
market presence through internal growth and a series of strategic acquisitions.
The Company has completed the following acquisitions since 1992:
o In May 1992, the Company completed the Barlow acquisition, including
the Barlow (R) and Salm (R) product lines, adding new products that
enabled the Company to enter the recognition awards and business gifts
and pocket specialties and accessories product categories and to
expand its product offerings to cover all of the major price points in
the promotional products industry.
o In April 1993, the Company acquired a ceramic mug imprinting facility
in Pittsburgh, Pennsylvania. The addition of this facility for mugs
and glassware, which incur significant freight charges when shipped
over long distances, has enabled the Company to be more price
competitive in the Northeastern United States.
o In May 1994, the Company completed the Key acquisition, in which it
acquired a supplier of economically priced promotional products such
as paper products, plastic items, pens, magnets and buttons. The
addition of these products augmented the Company's pocket specialties
and desk and business accessories categories.
o In July 1994, the Company completed the ArtMold acquisition, expanding
its offerings in the writing instruments, pocket specialties and desk
accessories categories, and adding a line of golf items such as tees,
ball markers and divot repair tools.
o In March and June 1995, the Company entered the textiles product
category by adding sport, travel, and tote bags to its product lines
with the Air-Tex and Designer Line acquisitions.
o In July 1995, the Company completed the BTS acquisition, in which it
acquired a supplier of high-quality recognition and gift items. This
acquisition further expanded the Company's high-end recognition awards
and business gifts product line.
o In November 1995, the Company completed the Ocean acquisition
expanding the Company's pocket
6
<PAGE> 105
specialties and desk and business accessories lines.
o In January 1996, the Company completed the Tee-Off acquisition in
which it acquired a supplier of custom imprinted golf balls and
accessories, which augmented the golf accessories offered by the
Company.
o In April 1996, the Company completed the Alpha acquisition, in which
it acquired a supplier of custom imprinted drinkware, further
expanding the Company's product line of insulated beverage products,
mugs and glassware.
o In February 1997, the Company completed the Wesburn acquisition, in
which it acquired a supplier of custom imprinted golf balls. With the
Tee-Off and Wesburn acquisitions, the Company has become a leading
supplier of custom imprinted golf balls.
o In February 1997, the Company completed the DMA acquisition, in which
it acquired a supplier of jackets, further expanding the Company's
wearables product category with a new product line.
PRODUCT CATEGORIES
The Company currently supplies approximately 2,400 custom-imprinted items
to over 11,900 independent distributors nationwide through its operating
companies. The Company's products are primarily marketed at price points ranging
from $0.50 to $50.00 in eight general categories:
o Sporting goods and leisure products: Koozie (R) beverage insulators,
sport bottles, cups and insulated coolers, custom imprinted golf
balls.
o Wearables: golf, fashion and baseball-style caps and other headwear,
jackets.
o Mugs and glassware: porcelain, ironstone and plastic mugs, glassware.
o Textiles: sport, travel and tote bags.
o Writing instruments: pens, pencils, markers and gift sets.
o Recognition awards and business gifts: rosewood, walnut and laminated
wood awards, crystal awards, plaques, brass coasters, briefcases and
portfolios, and other business gift items.
o Pocket specialties and accessories: tape measures, pocket knives, key
chains and holders, buttons, badges, magnets and lapel pins, and other
pocket specialty items.
o Desk and business accessories: desk accessories, note pads and other
paper products, and personal gift items.
The following table sets forth the amount and percentages of the Company's
sales for its product categories over the past three fiscal years.
7
<PAGE> 106
<TABLE>
<CAPTION>
FISCAL YEAR
(Dollars in thousands)
1995 1996 (b) 1997 (b)
-------------------- --------------------- --------------------
% OF % OF % OF
SALES SALES SALES SALES SALES SALES
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sporting goods and leisure products $ 22,678 21.8% $ 34,200 23.7% $ 56,019 31.9%
Wearables 14,523 14.0 15,817 11.0 16,195 9.2
Mugs and glassware 13,027 12.5 17,180 11.9 23,294 13.2
Textiles 9,387 9.0 19,997 13.9 20,671 11.8
Writing instruments 8,672 8.4 8,872 6.2 9,375 5.3
Recognition and business gifts 1,231 1.2 6,049 4.2 6,081 3.5
Pocket specialties and accessories
and desk and business accessories(a) 34,341 33.1 41,932 29.1 44,200 25.1
-------- ------- -------- ------ -------- ------
Total $103,860 100.0% $144,048 100.0% $175,835 100.0%
======== ======= ======== ====== ======== ======
</TABLE>
(a) Separate results for these two product categories are not available for the
periods presented.
(b) Excludes sales from the Alpha Products retail division, which has been
discontinued.
Sporting Goods and Leisure Products
The Company's sporting goods and leisure products consist primarily of
Koozie (R) insulated beverage products, sports bottles and custom imprinted golf
balls.
The Company acquired its Koozie (R) product line in 1984, which originally
consisted of a single product, the Koozie (R) beverage insulator. A Koozie (R)
beverage insulator is a customized colored foam sleeve with a bottom that fits
around a beverage can or bottle for insulation. The Company believes it is the
leading supplier of beverage insulators in the United States promotional
products industry. Since 1984, the Company has expanded this product line to
include 27 products marketed in a variety of colors and styles. Koozie(R)
products accounted for $24.3 million, or 13.8%, of the Company's sales in fiscal
1997.
Through the Alpha acquisition in fiscal 1996, the Company now offers a
wider variety of sports bottles and other insulated beverage products. Sales
from the Alpha Products promotional products division amounted to $17.5 million
in fiscal 1997.
Through the Tee-Off acquisition in fiscal 1996 and the Wesburn acquisition
in fiscal 1997, the Company expanded its golf accessories line to include custom
imprinted golf balls. The Company believes it is a leading supplier of custom
imprinted golf balls in the United States promotional products industry. Sales
from the Tee-Off and Wesburn Golf divisions amounted to $22.6 million in fiscal
1997.
Wearables
The Company's wearables product line consists primarily of golf, fashion
and baseball-style headwear in
8
<PAGE> 107
a wide variety of styles, colors and fabrics. The Company believes that it is a
leading headwear supplier in the United States promotional products industry. A
substantial majority of the Company's headwear is imported, allowing the Company
to compete at lower price points for these items. The Company also manufactures
headwear to enable it to produce customized products with short lead times.
These products are sold primarily under the RCC (TM) brand.
In February 1997, the Company expanded into the jacket product line with
the DMA acquisition. With the DMA acquisition, the Company plans to offer both
import and domestic jackets in a variety of styles, colors and fabrics. Sales
from the DM Apparel division amounted to $1.9 million in fiscal 1997.
Mugs and Glassware
The Company offers a variety of styles of porcelain, ironstone and plastic
mugs, along with glassware. The Company believes that it is a leading supplier
of mugs in the United States promotional products industry. Styles vary in size,
shape and color. In addition to standard color decorations, the Company offers
advertisers the ability to customize their artwork through the use of special
decorations on the mugs, including 22-carat gold and platinum imprints,
microwaveable gold imprints, iridescent inks and certain brighter colored inks.
Textiles
Through the Air-Tex and Designer Line acquisitions in fiscal 1995, the
Company entered the textiles product category by adding sport, travel, and tote
bags. This product line consists of both import and domestic bags marketed under
the tradenames Air-Tex (R) and Designer Line (R).
Writing Instruments
In fiscal 1991, the Company began marketing economically priced writing
instruments, including pens, pencils, and gift sets, along with retractable pens
and highlighters. In fiscal 1992, with the Barlow acquisition, the Company
expanded into marketing higher-priced writing instruments. Through the Key and
ArtMold acquisitions in fiscal 1994, the writing instrument lines were further
expanded to include mid-priced styles which rounded out all price point ranges.
Recognition Awards and Business Gifts
Through the Barlow acquisition in May 1992, the Company began to offer its
recognition and award items and business gifts generally under the
Salm(R)_brand. The products in this line make creative and distinctive awards
and gifts and are generally highly customized. Because it is a high-end product
line, the recognition awards and business gifts are more oriented toward
corporate gifts and awards than strictly to advertising uses. With the BTS
acquisition in fiscal 1995, the Company expanded into products incorporating
decorative brass medallions in items such as coasters, wall and desk plaques,
picture frames, and other custom products.
Pocket Specialties and Accessories
Through the Barlow acquisition in May 1992, the Company began to offer
pocket specialties and
9
<PAGE> 108
accessories. With the Key and ArtMold acquisitions in fiscal 1994 and the Ocean
acquisition in November 1995, the Company now sells products under the Barlow
(R), Econ-O-Line (R), The Action Line (R) and The California Line (TM) brand
names and offers a full complement of items, including tape measures, key chains
and holders, buttons, badges, magnets, pocket knives and lapel pins.
Desk and Business Accessories
Through the Key, ArtMold and Ocean acquisitions, the Company expanded into
economically priced products marketed under the trademarks Econ-O-Line (R), The
Action Line (R) and The California Line (TM). These product lines consist
primarily of items such as note pads, desk calendars and other paper products
and desk accessories and personal gift items.
OPERATIONS
A key to the Company's internal growth has been its ability to process
rapidly a large number of small, custom- imprinted orders at competitive prices
while maintaining a high level of product quality. During fiscal 1997, the
Company processed approximately 500,000 orders with an average order size of
approximately $350. For most products, the Company ships orders on a rapid
response basis, generally within one to two weeks after receipt of an order.
Over the past two years, the Company has realigned its operating companies
into two groups: the Radio Cap Group and the Barlow Group. This realignment
reflects a restructuring of the Company's sales and marketing functions and
other organizational changes that are designed to provide enhanced operational,
sales and marketing support by the Company's existing operating companies for
the more recently acquired operating companies and divisions. For example, in
order to maximize selling efforts, the number of sales staff was increased in
these groups while the territory covered by each salesperson was decreased. This
allows each salesperson to offer a greater variety of products to a more focused
group of distributors. This realignment also makes over 11,900 distributors more
accessible to the smaller operating companies, each of which previously sold to
between 1,500 and 3,000 distributors.
Each operating group has a separate management team, lead by a group
president with substantial experience in the promotional products industry. The
Company has assembled a management team with significant industry experience to
implement its business strategy. The executive officers of the Company and the
group presidents have an average of 14 years experience in the promotional
products industry. The Company gives the management of the operating groups
significant autonomy. The Company believes that it is able to be more responsive
to its distributors, the substantial majority of which are relatively small
operations in a highly fragmented industry, by delegating authority to
management of the operating groups. In particular, each operating company
concentrates its sales and marketing efforts on specific product lines, enabling
it to more effectively penetrate the distribution network. The presence of a
strong management team at each operating group also allows the Company to
maintain the focus of its corporate staff on the continued growth of the Company
and the coordination and implementation of the Company's strategic objectives.
The Company has implemented various management and operational systems at
the operating companies. These systems are continually evaluated by management,
and systems which have proven successful at one operating company are introduced
at other operating companies where appropriate.
10
<PAGE> 109
Strategic Initiatives
During the fourth quarter of 1997, the Company decided to discontinue the
operations of the Alpha Products retail division ("retail division"). Alpha
Products historically had poor operating results prior to the Alpha acquisition
in April 1996. The Company acquired the Alpha Products assets with the intention
of improving its promotional products division, as well as taking advantage of
its retail division. The Alpha Products promotional products division sold to
the same distributor base as the Company. The retail division, however,
represented a new customer base that mainly consisted of mass merchandisers and
convenient stores. The Company hoped to stabilize Alpha Products deteriorating
retail customer base and then introduce some of the Company's existing products
into this retail division, thus creating one or more new distribution networks
for its products.
Following the Alpha acquisition, the Company was able to improve and grow
the Alpha Products promotional division, which is where the Company's management
team has industry experience. The retail division, however, continued to
deteriorate. The retail customer base was in much worse shape than originally
thought and the Company determined that it did not have the expertise to effect
a turnaround in this division. The Company has decided to discontinue the
retail division and is currently negotiating with a prospective buyer for its
assets and business. The Company will close the Lithia Springs, Georgia
facility where Alpha Products is presently located. As a result, the operations
of the Alpha Products promotional products division, which the Company believes
is a viable growing business, will be relocated to other existing Company
facilities.
The Company is also in the process of evaluating other divisions to
determine whether they fit with the Company's business strategy. In first
quarter of fiscal 1998, the Company sold Air-Tex's Bob Allen Sportswear
division. The Bob Allen Sportswear division is a manufacturer of shooting
accessories for the hunting industry. The Company determined that this division
did not fit with the Company's business strategy since it did not serve the
promotional industry and it was not in an industry in which the Company wanted
to participate. The impact of the sale of Bob Allen Sportswear division is not
material to the financial results of the Company.
Management Systems
The Company utilizes a number of management systems designed to reduce
order processing time, enhance planning, lower operating costs and improve
customer service. The MRP II systems in place at various operating companies,
which are based upon sales forecasts, are designed to enable the Company to plan
labor, inventory and other resource requirements in order to meet customers'
delivery requirements and maximize processing efficiency. Certain operating
companies utilize a specially designed pull order-flow processing system
designed to process a large number of orders efficiently and economically.
Additionally, certain operating companies utilize a bar-coding system to monitor
the status of orders within the production cycle. These systems are designed to
enable the Company to quickly respond to customer inquiries and adjust shipping
schedules to meet customer demands.
The Company uses statistical process control ("SPC") to evaluate its
manufacturing processes at each of the operating companies. SPC is designed to
enable the Company to differentiate between statistically insignificant
fluctuations in processing performance and substantive processing problems.
Management believes that SPC serves to focus both management and staff on the
objective of continually enhancing the Company's
11
<PAGE> 110
production processes.
The Company utilizes computer communication technology, such as electronic
data interface system ("EDI") and 'Internet E-mail', designed to improve order
processing and expedite shipments. The Company receives orders electronically
from several of its largest customers through an industry-wide EDI system. RCC
allows its largest customers to obtain real-time information on the status of
their orders through its own EDI and 'Internet E-mail' system.
Product Development
The Company believes that a key to its success is its ability to expand
product offerings by developing new products, imprinting techniques and by
applying existing imprinting and decorating methods to create new products.
The Company is developing new products that should capitalize on its
proprietary SpectraColor printing process, which is designed to provide a low
cost method to process multi-color imprints. The Company continues to work with
suppliers and distributors in all product categories to identify opportunities
to add value to best-selling products without increasing the cost to the
distributor. The Company is also working toward utilizing and joining forces
with a network of other suppliers to provide a more regional presence, creating
shorter lead times and lower freight costs for distributors.
The recent realignment of the operating companies allows for the exchange
of materials and processes. The Company also evaluates materials and processes
from other industries for adaptation into the Company's products. Research into
emerging imprint technologies, including digital direct printing, laser
imaging, heat applied graphics and photopoymer through dimensional graphics is
ongoing.
New overseas supplier relationships are continually being developed to
decrease costs of existing products and assist in the development of new
products and additional product lines in wood, metal, glass and textiles.
Custom Decorating and Manufacturing Processes
Each of the operating companies has a full-service graphic arts department
to assist customers in generating custom graphics. The Company applies custom
graphics to promotional products using a variety of decorating processes such as
silk-screening, screen transfer, embroidering, engraving (including laser
engraving), vinyl screen printing, cloisonne enameling (enamels baked at high
temperatures) and hot stamping. Each arts department is also available to assist
customers or advertisers in creating original artwork. All operating companies
have installed systems to receive customer artwork electronically. The Company
has implemented a system to link the arts departments to allow designs created
for an advertiser at one operating company to be used throughout the Company,
eliminating the need to recreate the same design for that advertiser at other
operating companies. The Company also seeks to improve processing efficiency by
coordinating work flow among various arts departments.
All of the mugs and glassware, plastic molded products and writing
instruments, as well as most caps and other headwear and certain sport, travel
and tote bags sold by the Company are manufactured in blank (i.e. , without
decoration) by third party suppliers according to Company specifications. Koozie
(R) beverage
12
<PAGE> 111
insulators, note pads and other paper products, brass and laminated wood awards,
domestic jackets, and the remaining caps, other headwear, and domestic sport,
travel and tote bags are manufactured by the operating companies at the
Company's production facilities.
Sales and Marketing
During fiscal 1997, the Company sold its products to approximately 11,900
customers, mainly independent promotional product distributors. In fiscal 1997,
the Company's ten largest customers accounted for approximately 12% of the
Company's total sales, and no one customer accounted for more than 3% of sales.
The Company's largest customers are among the largest distributors in the
industry based on sales.
Generally, before a customer orders a product from the Company, the
customer has already received an order for the product from an advertiser. The
Company's products are sold on the basis of purchase orders. Established
customers generally have 30-day payment terms, and newer customers purchase
products from the Company on the basis of payment before processing. As a result
of its credit management practices, the Company has experienced bad debt
expense, as a percentage of sales, of less than 0.25% for each of the past three
fiscal years.
The Company believes that most other promotional products suppliers sell
only through independent multi-line sales representatives who serve more than
one supplier. The Company's operating companies employ a total of 30 salespeople
to market products in regional territories covering the United States, and 139
customer-service personnel to support these salespeople. The Company believes
that this direct sales staff gives the Company a competitive advantage by
allowing more focused selling efforts.
The Company's sales staff attends industry trade shows and makes sales
calls on distributors and other potential customers. Each operating company
distributes annual product catalogs. From time to time, the Company produces an
intercompany product catalog that features the top-selling products from each of
its operating companies. Key employees of the Company and each of its operating
companies also conduct coordinated marketing presentations to distributors
throughout the United States.
SUPPLIERS
During fiscal 1997, the Company derived a significant portion of its sales
from products supplied by manufacturers located in China, Taiwan, Sri Lanka,
Bangladesh, Korea, Japan, Canada, Hong Kong, India, Philippines, Cambodia,
Germany, and Italy. The Company's senior management and agents periodically
visit its foreign suppliers to observe the manufacture of products and to help
ensure timely delivery and compliance with Company manufacturing specifications.
Representatives from the Company's leading suppliers periodically visit the
Company's facilities to review quality standards and product specifications. The
Company is not a party to any long-term contractual arrangements with any
supplier and relies on its long-term relationships to ensure timely delivery of
quality products.
The Company's reliance on foreign sources of supply subjects it to a number
of risks, including transportation delays and interruptions, political and
economic disruptions, the imposition of tariffs, quotas and other import or
export controls, currency fluctuations and changes in governmental policies. The
Company's reliance on foreign suppliers also requires it to order products
further in advance of orders by customers than would generally be the case if
such products were manufactured domestically. There can be no assurance that
13
<PAGE> 112
the Company can replace its suppliers without delay; however, the Company
attempts to reduce the risk of such a delay and to alleviate the problem of
having to order its foreign products further in advance by using its management
systems to predict more accurately the Company's product needs.
The Company relies on one supplier for the insulation material necessary to
make Koozie (R) beverage insulators and certain other Koozie (R) products. The
Company buys insulation material on a purchase order basis and does not have any
contract, agreement or commitment from this supplier to furnish insulation
material. Since the Company began purchasing from this supplier in 1983, the
Company has not experienced any significant disruptions or delays in its supply.
The Company also relies on a single supplier for the laminated wood used in
the BTS(TM) product line. The Company has not experienced any significant
disruptions or delays in its supply.
The Company obtains its other materials from numerous sources. Prices for
materials used by the Company may fluctuate for a variety of reasons. The
Company has not experienced, and does not anticipate, any difficulty in
obtaining an adequate supply of the materials it uses.
BACKLOG
A majority of the Company's orders are processed on a rapid response basis,
generally within one to two weeks after receipt of an order. As a result, the
Company does not believe that the dollar amount of its unfilled customer orders
at any time is a useful indicator of future business activity.
COMPETITION
The promotional products industry is highly fragmented and competitive. The
Company competes with a large number of other promotional products suppliers,
some of which have diversified product offerings, and others that market only a
limited number of products or lines. The Company competes primarily on the basis
of customer service and price. Certain competitors are divisions of
significantly larger companies that have substantially greater financial and
other resources than the Company. While the Company has competitors within each
of its product lines, no one supplier competes with the Company in all of its
lines. In addition, entry into the promotional products industry is generally
not difficult, and new competitors regularly enter the industry. The Company
believes it is difficult to manage and process efficiently large numbers of
small orders and produce a high-quality product and that its processing
efficiency gives the Company a competitive advantage within the industry. The
Company believes its established relationships with distributors gives it an
advantage over its competitors, especially new entrants in the industry. The
promotional products industry also competes against other advertising media,
such as television, radio, newspapers, magazines, billboards and the Internet.
TRADEMARKS
The Company owns a number of trademarks registered with the United States
Patent and Trademark Office and claims various common law trademarks. The
Company considers its trademarks to be important to
14
<PAGE> 113
its business and actively defends and enforces them.
EMPLOYEES
As of November 21, 1997, the Company employed approximately 1,900 persons.
Approximately 120 employees of Key are represented by the Manufacturing,
Production and Service Workers Union of the AFL-CIO, under a collective
bargaining agreement expiring in 1998. The Company considers its employee
relations to be good.
ENVIRONMENTAL MATTERS
The Company's facilities are subject to federal, state and local
environmental laws and regulations, including those relating to discharges to
air, water and land, the treatment, storage and disposal of solid and hazardous
waste and the cleanup of properties affected by hazardous substances. The
Company believes that it is in compliance with such laws and regulations and
does not anticipate any material adverse effect on its operations or financial
condition as a result of its efforts to comply with, or its liabilities under,
such laws and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or equipment. Some risk of
environmental liability is inherent in the Company's business, however, and
there can be no assurance that material environmental costs will not arise in
the future. In particular, the Company might incur capital and other costs to
comply with increasingly stringent environmental laws and enforcement policies.
The Company does not expect such capital and other costs to have a material
adverse effect on the Company's net cash flows.
RISK FACTORS
The Company's business is subject to various risks and uncertainties. The
following factors should be carefully considered in reading this report.
Risks Relating to Growth Strategy
During the past five years, the Company has experienced significant growth.
This growth has resulted from internal growth and from selective acquisitions of
other businesses, both of which continue to be important elements of the
Company's business strategy. There can be no assurance that the Company will be
able to maintain or accelerate its internal growth or that the Company will be
able to manage its expanding operations effectively. The Company's ability to
continue to grow through acquisitions will depend, among other things, on the
availability of suitable acquisition opportunities and the Company's ability to
finance these transactions. There can be no assurance that future acquisitions
can be accomplished on terms favorable to the Company or that the Company will
be able to obtain financing for such acquisitions. The success of the Company's
strategy also depends upon its ability to integrate acquired businesses into its
operations. The Company may acquire companies, brands or product lines that
dilute earnings or that do not generate positive cash flow initially or for some
period of time following their acquisition. In addition, as the Company has
expanded through acquisitions, its management has become more decentralized, and
it relies primarily on the operating companies to implement systems designed to
ensure responsive and efficient operations. The failure of the Company to
implement its growth strategy, to maintain or upgrade operating controls and
systems, to recruit or retain sufficient qualified personnel or to effectively
integrate acquired businesses with the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
15
<PAGE> 114
Reliance on Foreign Sources of Supply
The Company derives a significant portion of its sales from products
supplied by foreign manufacturers. The Company's reliance on foreign sources of
supply subjects it to a number of risks, including, among others, transportation
delays and interruptions, political and economic disruptions, the imposition of
tariffs, quotas and other import or export controls, currency fluctuations and
changes in government policies. The Company's reliance on foreign manufacturers
also requires it to order products further in advance of orders by customers
than would generally be the case if products were manufactured domestically. In
fiscal 1997, a significant portion of the Company's sales were derived from
products, mainly headwear, ceramic mugs, and sport and travel bags, purchased by
the Company from manufacturers located in the People's Republic of China
("China"). China currently enjoys "most favored nation" ("MFN") trading status
with the United States. Under the Trade Act of 1974, the President of the United
States is authorized, upon making specified findings, to waive certain
restrictions that would otherwise render China ineligible for MFN treatment. The
President has waived these provisions each year since 1979. Such waiver is
subject to renewal in June 1998. No assurance can be given that China will
continue to enjoy MFN status in the future. Further, any United States
legislation or action revoking or placing further conditions on China's MFN
status or imposing substantially higher import duties, if enacted or imposed,
could have a material adverse effect on the cost of the Company's headwear,
ceramic mugs, and sport and travel bags. The Company currently has alternative
suppliers of headwear and sport and travel bags (but not ceramic mugs) located
in other countries and continues to evaluate additional sources of supply.
Dependence on Key Personnel
The Company's success depends in part on the efforts of a few key
management personnel, including Frank P. Krasovec, its Chairman, Chief Executive
Officer and President. While Mr. Krasovec currently devotes all of his time to
the Company, he is involved in other businesses and investments from time to
time. If for any reason Mr. Krasovec does not continue to be active in the
Company's management, the Company's operations could be materially adversely
affected. None of the Company's executive officers are subject to employment or
non-competition agreements. The Company does not have key-man life insurance on
any of its executive officers.
Leverage
At August 30, 1997, the Company had total indebtedness of $61.4 million and
additional borrowings of up to $78.0 million were available under its new credit
facility ("1997 Credit Facility"). The Company's ability to satisfy its
financial obligations under its indebtedness outstanding from time to time will
depend on its future operating performance, which is subject to prevailing
economic conditions, levels of interest rates and financial, business and other
factors, many of which are beyond the Company's control. Indebtedness under the
1997 Credit Facility is subject to interest rate fluctuations. Although the
Company currently believes that cash flow from operations and available
borrowing under the 1997 Credit Facility will be sufficient to meet the
Company's working capital and capital expenditure requirements and future debt
service obligations there can be no assurance that this will be the case.
16
<PAGE> 115
Reliance on Sales/Supplier of Certain Products
The Company relies on one supplier for the insulation material necessary to
make Koozie (R) beverage insulators and certain other Koozie (R) products. The
Company believes that competitors who make products similar to Koozie (R)
beverage insulators also purchase their insulation material from this supplier
and that currently there is no other known supplier of this material. The
Company buys insulation material on a purchase order basis and does not have any
contract, agreement or commitment from this supplier to furnish insulation
material. Since the Company began purchasing from this supplier in 1983, the
Company has not experienced any significant disruptions or delays in its supply.
However, any significant interruption in the supply of insulation material or
substantial price increases for this material could have a material adverse
effect on the Company's business and the results of its operations.
Competition
The promotional products industry is highly fragmented and competitive.
Certain competitors in the promotional products industry are affiliated with
significantly larger companies which have greater financial and other resources
than the Company. Entry into the promotional products industry is generally not
difficult, and new competitors regularly enter the industry. The promotional
products industry also competes against other advertising media, such as
television, radio, newspaper, magazines, billboards and the Internet.
17
<PAGE> 116
ITEM 2. PROPERTIES
The Company owns or leases the following physical properties:
<TABLE>
<CAPTION>
SQUARE OWNED OR
COMPANY LOCATION USE FEET LEASED
------- -------- --- --- ------
<S> <C> <C> <C> <C>
Executive Austin, Texas Executive offices 1,860 Leased
Corporate San Antonio, Texas Corporate offices (a) 7,990 Leased
Radio Cap Group:
RCC San Antonio, Texas Sales, production 86,000 Owned
San Antonio, Texas Production 21,500 Leased
San Antonio, Texas Warehouse 89,350 Leased
Pittsburgh, Pennsylvania Production 23,000 Leased
Lithia Springs, Georgia Sales, production (b) 199,950 Leased
Air-Tex Des Moines, Iowa Sales, production 52,500 Owned
Des Moines, Iowa Warehouse 14,810 Leased
Logan, Utah Production (c) 20,400 Leased
Hampton, Arkansas Production 44,100 Leased
Barlow Group:
Barlow Los Angeles, California Sales, production 67,000 Leased
St. Paul, Minnesota Production (d) 38,000 Leased
Reno, Nevada Sales, production 58,000 Leased
Key East Peoria, Illinois Sales, production 49,000 Leased
Chatsworth, California Sales, production 28,260 Leased
ArtMold Cranston, Rhode Island Sales, production 75,000 Leased
Readfield, Wisconsin Sales, production 15,148 Owned
</TABLE>
(a) In August 1997, the Company announced it plans to consolidate its
Corporate offices with its Executive offices in Austin, Texas. This
consolidation is expected to be completed during 1998.
(b) The Company is in the process of closing its Lithia Springs, Georgia
facility. Operations related to the retail division are being
discontinued, while its promotional products division is being
relocated to other existing Company facilities.
(c) The Company is in the process of closing its Logan, Utah facility.
Operations are being relocated to other existing Company facilities.
(d) The Company is in the process of closing its St. Paul, Minnesota
facility. Operations are being relocated to other existing Company
facilities.
The Company believes that its existing facilities are adequate and provide
sufficient operating capacity to meet its current requirements, and does not
anticipate the need for significant expansion in the near future. The Company
expects to be able to extend the terms of its leases as they expire or that
other suitable space will be available, as needed by the Company.
18
<PAGE> 117
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to litigation from time to
time in the ordinary course of business. Although the amount of any liability
with respect to currently pending litigation cannot be determined, in the
opinion of management, such liability will not have a material adverse effect on
the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended August 30, 1997.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock, no par value ("Common Stock"), is listed for
quotation on The Nasdaq Stock Market's National Market ("NASDAQ/NMS") under the
symbol "NPPI." The following table sets forth the high and low closing sales
prices for the Common Stock for the fiscal periods indicated, as reported by the
Nasdaq/NMS.
<TABLE>
<CAPTION>
HIGH LOW
----------- ----------
<S> <C> <C>
Fiscal 1996:
First quarter (ended December 2, 1995) ........................................ 19.00 15.50
Second quarter (ended March 2, 1996) ........................................ 20.50 16.25
Third quarter (ended June 1, 1996) ........................................ 24.00 17.00
Fourth quarter (ended August 31, 1996) ........................................ 22.75 12.75
Fiscal 1997:
First quarter (ended November 30, 1996) ........................................ 18.25 14.00
Second quarter (ended March 1, 1997) ........................................ 21.50 15.25
Third quarter (ended May 31, 1997) ........................................ 17.50 12.50
Fourth quarter (ended August 30, 1997) ........................................ 16.25 12.00
</TABLE>
As of November 24, 1997, there were 71 shareholders of record of the Common
Stock.
The Company has not paid any cash dividends or distributions on its Common
Stock since 1989 and intends to retain earnings for use in its business
expansion. The Company paid dividends to holders of its Preferred Stock between
fiscal 1990 and fiscal 1993. None of the Preferred Stock is currently
outstanding. The Company's 1997 Credit Facility limits the payment of cash
dividends on its capital stock and, in any event, the Company does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data regarding the Company
for the five years ended August 30, 1997 were derived from the consolidated
financial statements of the Company which have been
19
<PAGE> 118
audited by Ernst & Young LLP, independent auditors. The information below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and consolidated financial statements and
notes thereto of the Company included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED (a)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------------------
AUGUST 28, SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, AUGUST 30,
1993 1994 1995 1996 (c) 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA (B):
Sales $ 49,300 $ 62,385 $103,860 $144,048 $175,835
Cost of sales 33,860 43,207 70,963 100,245 125,732
-------- -------- -------- -------- --------
Gross profit 15,440 19,178 32,897 43,803 50,103
Operating expenses:
Sales and marketing 5,678 6,886 11,290 16,441 18,119
General and administrative 4,266 5,065 9,037 12,171 13,125
Amortization expense 724 889 2,119 3,538 3,885
Restructuring and unusual charges -- -- -- 1,640 1,816
-------- -------- -------- -------- --------
Total operating expenses 10,668 12,840 22,446 33,790 36,945
-------- -------- -------- -------- --------
Operating income 4,772 6,338 10,451 10,013 13,158
Interest expense 1,982 1,030 3,619 3,246 3,002
-------- -------- -------- -------- --------
Income before income taxes 2,790 5,308 6,832 6,767 10,156
Provision for income taxes 1,032 1,979 2,800 2,705 4,091
-------- -------- -------- -------- --------
Income from continuing operations before 1,758 4,062 6,065
extraordinary loss 3,329 4,032
Net income $ 1,183(d) $ 3,329 $ 4,032 $ 4,155(f) $ 1,004(f)
======== ======== ======== ======== ========
Income available to common shareholders $ 1,116(e) $ 3,329 $ 4,032 $ 4,155 $ 1,004
Net income per common share:
Primary $ 0.62 $ 0.93 $ 1.11 $ 0.82 $ 0.18
Fully diluted $ 0.50 $ 0.93 $ 1.10 $ 0.82 $ 0.18
Weighted average number of common
shares outstanding:
Primary 1,803 3,576 3,636 5,090 5,500
Fully diluted 2,231 3,576 3,668 5,090 5,500
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 12,246 $ 18,668 $ 31,083 $ 35,248 $ 37,876
Total assets 25,941 55,702 94,859 121,376 135,194
Total debt:
Bank credit facility 6,146 27,100 50,500 33,725 46,990
Other debt and capital leases 1,828 5,097 12,410 13,953 14,432
Total shareholders' equity 13,546 16,871 21,034 57,380 51,276
OTHER DATA:
EBITDA (g) (h) $ 6,597 $ 8,526 $ 14,476 $ 16,686 $ 21,313
Depreciation expense 1,101 1,299 1,906 3,135 4,270
Amortization expense 724 889 2,119 3,538 3,885
Capital expenditures 1,199 1,426 2,073 4,919 4,863
Dividends (i) 132 -- -- -- --
</TABLE>
(a) The Company's fiscal year is a 52- or 53-week period ending on the
Saturday closest to August 31. All references to fiscal 1993, 1994,
1995, 1996
20
<PAGE> 119
and 1997 are to the fiscal years ended August 28, 1993, September 3,
1994, September 2, 1995, August 31, 1996 and August 30, 1997,
respectively.
(b) The Company's results of operations for the periods presented were
significantly affected by the Key and ArtMold acquisitions in fiscal
1994, the Air- Tex, Designer Line and BTS acquisitions in fiscal 1995,
the Ocean, Tee-Off and Alpha acquisitions in fiscal 1996, the Wesburn
and DMA acquisitions in fiscal 1997 and by the public offerings of
Common Stock in June 1993 and December 1995. These factors affect the
comparability of sales and results of operations from period to
period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(c) The fiscal 1996 amounts have been restated to reflect the activity for
the five months of ownership of the Alpha Products retail division as
discontinued operations.
(d) After deducting a one-time charge to earnings of $575,000, net of
taxes, related to the write-off of unamortized debt costs and the
termination of a product financing arrangement in connection with the
Company's initial public offering of Common Stock in June 1993, which
resulted in a reduction in primary and fully diluted earnings per
share of $0.32 and $0.26, respectively.
(e) Reflects the deduction of dividends on outstanding Junior Preferred
Stock which was redeemed in fiscal 1993.
(f) After deducting gain (loss) on discontinued operations, net of tax, of
$93,000 and ($1.96) million in fiscal 1996 and fiscal 1997,
respectively, and estimated loss of $2.86 million on disposal of
discontinued operations, net of tax, in fiscal 1997. Additionally, an
extraordinary loss from debt extinguishment of $241,000, net of tax,
was recognized in fiscal 1997.
(g) EBITDA is defined as income from continuing operations before
extraordinary loss, income taxes, interest expense, depreciation and
amortization. The Company believes that the presentation of EBITDA
facilitates an investor's understanding of the effects on the
Company's operations of amortization of goodwill and other intangibles
and increased interest expense under indebtedness incurred in
connection with various acquisitions which substantially impacted net
income, net income per common share and cash flows. EBITDA should not
be considered by an investor as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a
measure of liquidity. EBITDA is not used in the presentation of
financial statements prepared in accordance with generally accepted
accounting principles.
(h) Excluding the restructuring and unusual charges of $1.6 million in
fiscal 1996 and $1.8 million in fiscal 1997, EBITDA in fiscal 1996 and
fiscal 1997 was $18.3 million and $23.1 million, respectively.
(i) The Company paid dividends to holders of its Preferred Stock between
fiscal 1990 and fiscal 1993. None of the Preferred Stock is currently
outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's fiscal year is a 52- or 53-week period ending on the Saturday
closest to August 31. All references to fiscal 1995, 1996 and 1997 are to the
fiscal years ended September 2, 1995, August 31, 1996 and August 30, 1997,
respectively.
The Company's results of operations for the periods discussed below were
significantly affected by the Air-Tex, Designer Line and BTS acquisitions in
fiscal 1995, the Ocean, Tee-Off and Alpha acquisitions in fiscal 1996, the
Wesburn and DMA acquisitions in fiscal 1997, and the related levels of debt
incurred. The Company has recorded as goodwill the excess of the purchase prices
over the estimated value of the assets acquired and is amortizing this goodwill
over 15 to 25 years. In addition, the Company's financial results were
significantly impacted by the public offering of Common Stock in December 1995
and open market purchases of 575,100 shares of the Company's Common Stock in
fiscal 1997. These factors affect the comparability of sales and results of
operations from period to period.
The Company's sales from continuing operations continued to grow from
$103.9 million during fiscal 1995 to $175.8 million in fiscal 1997, a compound
annual growth rate of 26.6%. This increase was a result of (i) an internal
annual growth rate of 7.1%, or $14.1 million over the two-year period, supported
by internal product line expansion, including expanded product and price point
offerings and (ii) acquisitions, which contributed aggregate sales of $57.8
million over the two-year period. Through the acquisitions, the Company expanded
its product range, both by product type and price points within existing product
categories. By moving into new product areas, both through acquisitions and the
internal development of new products, the Company has gained
21
<PAGE> 120
new independent distributors and increased its business with existing
independent distributors. The Company's strategy is to grow through further
expansion and diversification of its existing product offerings and distributor
base and by making selective acquisitions.
The Company in its ongoing review of its operations has taken several
initiatives in fiscal 1996 and 1997 to restructure its businesses.
In August 1997, the Company decided to discontinue the operations of the
Alpha Products retail division ("retail division") and is actively searching for
a buyer for its assets and business. As a result, the promotional products
division of Alpha Products will be relocated to other existing Company
facilities. The Company is expected to cease operations of the retail division
and relocate the Alpha Products promotional products division by the end of
calendar 1997. The loss on the disposal of the retail division and the closing
of the facility is expected to be approximately $2.9 million (net of tax benefit
of $1.9 million), which includes estimated losses from operations for the retail
division until operations are discontinued. Revenues for the retail division for
the five months of ownership in fiscal year 1996 and for fiscal year 1997 were
$7.9 million and $8.7 million, respectively. Earnings for the retail division
for the five months of ownership in fiscal year 1996 was $93,000 (net of taxes
of $65,000) and a loss of $1.96 million (net of tax benefit of $1.4 million) for
fiscal year 1997.
In the fourth quarter of 1997, the Company recorded restructuring and
unusual nonrecurring or one-time charges of approximately $1,816,000 ($1,084,000
net of tax) based on its decision to consolidate its Corporate offices with its
Executive offices, realign its divisions to capitalize on processing capacity
and product line restructurings, and to write-off certain capitalized costs
associated with its decision to terminate its negotiations related to the
acquisition of the Rou bill Group in the fourth quarter of 1997. The
consolidation of the Corporate offices with its Executive offices is expected to
be completed in early 1998. A provision for closure of the Corporate offices
totaling approximately $350,000, including write-off of certain leasehold
improvements, has been accrued. Additionally, approximately $291,000 has been
accrued for realignment of its divisions, including product line restructurings.
In conjunction with the above activities, a total of $425,000 of severance and
benefits has been accrued. Capitalized professional fees and organizational
costs totaling $750,000 associated with the Rou bill Group acquisition were
expensed in the fourth quarter of 1997.
In the fourth quarter of 1996, the Company recorded restructuring and
unusual nonrecurring or one-time charges of approximately $1,640,000 ($984,000
net of tax) based on its decision to consolidate certain facilities into other
existing facilities, terminate certain employees, and write-off certain
capitalized costs associated with a target acquisition. A provision for closure
of these facilities totaling approximately $890,000, including the write-off of
certain leasehold improvements, has been accrued or paid. Approximately $560,000
of future salary and benefits owed to three terminated employees under their
existing employment agreements was accrued or paid in the fourth quarter of
1996. These employment agreements have remaining terms that expire over the next
year. Additionally, capitalized acquisition related costs of approximately
$190,000 were expensed in the fourth quarter of 1996.
On August 28, 1997, the Company entered into a new credit agreement with a
syndicate of banks and other financial institutions providing for $125.0 million
in secured credit facilities. In conjunction with the repayment of the existing
bank facility debt, the Company recognized an extraordinary loss on the
write-off of the previous bank facility deferred financing and loan origination
costs of approximately $241,000, net of tax
22
<PAGE> 121
benefit of approximately $161,000.
RESULTS OF CONTINUING OPERATIONS
The following information is qualified by reference to, and should be read
in conjunction with, the Company's consolidated financial statements and the
notes thereto included elsewhere herein. The following table presents, for the
periods indicated, selected items from the Company's consolidated statements of
income expressed as a percentage of sales. The fiscal 1996 amounts have been
restated to reflect the activity for the five months of ownership of the Alpha
Products retail division as discontinued operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------
SEPT. 2, AUG. 31, AUG. 30,
1995 1996 1997
-------- -------- --------
STATEMENT OF INCOME DATA:
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 68.3 69.6 71.5
Gross profit 31.7 30.4 28.5
Operating expenses 21.6 22.3 20.0
Restructuring and unusual charges -- 1.1 1.0
Operating income 10.1 7.0 7.5
Interest expense 3.5 2.3 1.7
Income from continuing operations before
income taxes and extraordinary loss 6.6 4.7 5.8
Income from continuing operations before
extraordinary loss 3.9 2.8 3.4
</TABLE>
FISCAL YEAR ENDED AUGUST 30, 1997 COMPARED WITH FISCAL YEAR ENDED AUGUST 31,
1996 (restated for discontinued operations)
Sales for fiscal 1997 increased $31.8 million, or 22.1%, to $175.8 million
from restated $144.0 million in fiscal 1996. Of this increase, $8.1 million was
attributable to increased sales of the Company's existing product lines, $12.6
million was due to inclusion of sales from the Wesburn and DMA acquisitions
which were completed during fiscal 1997, and $11.1 million was attributable to
the full-year impact of the Ocean, Tee-Off and Alpha acquisitions which were
completed in fiscal 1996. Internal sales growth was fueled by, among other
things, the Value Line (TM) product line with sales growth of 41.8% and the
Econ-O-Line (R) product line with sales growth of 16.5% in fiscal 1997.
Cost of goods sold for fiscal 1997 increased $25.5 million, or 25.4%, to
$125.7 million from restated $100.2 million in fiscal 1996. Of this increase,
$5.7 million was attributable to the increased sales of the Company's existing
product lines, $11.3 million was due to the inclusion of sales from the fiscal
1997 acquisitions and $8.5 million was attributable to the inclusion of the
full-year impact of the fiscal 1996 acquisitions. As a majority of the purchase
orders by the Company are denominated in United States dollars, the foreign
currency translation risk is immaterial. The Company believes that there are
relatively minor differences
23
<PAGE> 122
in quality between products manufactured in-house and those imported, while
imported products, as a general rule, are less expensive.
Gross profit for fiscal 1997 increased $6.3 million, or 14.4%, to $50.1
million from restated $43.8 million in fiscal 1996. Gross profit as a percentage
of sales decreased from 30.4% to 28.5%. This decrease is primarily due to the
fiscal 1996 and 1997 acquisitions of imprinted golf ball operations (Tee-Off and
Wesburn Golf), which traditionally have a lower gross profit margin than the
Company's existing businesses. Excluding the gross profit and sales for the
imprinted golf ball operations, gross profit as a percentage of sales decreased
from 30.8% in fiscal 1996 to 30.4% in fiscal 1997.
Total operating expenses for fiscal 1997 increased $3.1 million, or 9.2%,
to $36.9 million from $33.8 million in fiscal 1996. This increase was primarily
attributable to the fiscal 1996 and 1997 acquisitions and the fiscal 1996 and
1997 restructuring and unusual charges. Exclusive of the fiscal 1996 and 1997
restructuring and unusual charges, operating expenses as a percentage of sales
decreased from 22.3% to 20.0%. This decrease is primarily attributable to the
fiscal 1996 and 1997 acquisitions of the imprinted golf ball operations, which
operate with a low overhead structure and to the cost savings achieved from the
restructuring initiatives undertaken in fiscal 1996 and 1997.
Operating income for fiscal 1997 increased $3.2 million, or 32.0%, to $13.2
million from $10.0 million in fiscal 1996. Operating income as a percentage of
sales increased from 7.0% to 7.5%. Exclusive of the 1996 and 1997 restructuring
and unusual charges, operating income as a percentage of sales increased from
8.1% to 8.5%. This increase is mainly attributable to the cost savings achieved
from the restructuring initiatives undertaken in fiscal 1996 and 1997.
Interest expense was $3.0 million in fiscal 1997 compared to $3.2 million
in fiscal 1996. This decrease was attributable to the use of December 1995 stock
offering proceeds to pay down debt, offset by borrowings used to finance the
fiscal 1996 and 1997 acquisitions and open market purchases of 575,100 shares of
the Company's Common Stock.
The Company's effective tax rate was 40.3% in fiscal 1997 as compared with
40.0% in fiscal 1996.
As a result of the above, income from continuing operations for fiscal 1997
increased $2.0 million, or 48.8%, to $6.1 million from $4.1 million in fiscal
1996.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 2,
1995 (restated for discontinued operations)
Sales for fiscal 1996 increased $40.1 million, or 38.6%, to $144.0 million
from $103.9 million in fiscal 1995. Of this increase, $5.7 million was
attributable to increased sales of the Company's existing product lines, $13.8
million was due to inclusion of sales from the Ocean, Tee-Off and Alpha
acquisitions which were completed during fiscal 1996, and $20.6 million was
attributable to the full-year impact of the Air-Tex, Designer Line and BTS
acquisitions, which were completed in fiscal 1995. Internal sales growth was
supported by product line expansion, including the Koozie (R) cooler bag
products introduced by RCC in January 1994, with sales of $7.8 million, and the
Value Line (TM) product line expansion and crystal product offerings introduced
by Barlow in June 1993, with aggregate sales of $5.8 million.
24
<PAGE> 123
Cost of goods sold for fiscal 1996 increased $29.2 million, or 41.1%, to
$100.2 million from $71.0 million in fiscal 1995. Of this increase, $4.9 million
was attributable to the increased sales of the Company's existing product lines,
$11.3 million was due to the inclusion of sales from the fiscal 1996
acquisitions and $13.0 million was attributable to the inclusion of the
full-year impact of the fiscal 1995 acquisitions.
Gross profit for fiscal 1996 increased $10.9 million, or 33.1%, to $43.8
million from $32.9 million in fiscal 1995. Excluding the fiscal 1996
acquisitions, gross profit as a percentage of sales increased from 31.7% to
31.8%. Including the fiscal 1996 acquisitions, gross profit as a percentage of
sales decreased from 31.7% to 30.4%. This decrease was mainly attributable to
fiscal 1996 acquisitions of businesses which operate with lower gross profit
margins than the Company's then existing businesses.
Total operating expenses for fiscal 1996 increased $11.4 million, or 50.9%,
to $33.8 million from $22.4 million in fiscal 1995. This increase was primarily
attributable to the fiscal 1995 and 1996 acquisitions and the fiscal 1996
restructuring and unusual charges. Exclusive of the fiscal 1996 restructuring
and unusual charges, operating expenses as a percentage of sales increased from
21.6%.to 22.3%. This increase is due primarily to additional amortization
expense incurred from the fiscal 1995 and 1996 acquisitions.
Operating income for fiscal 1996 decreased $438,000, or 4.4%, to $10.0
million from $10.5 million in fiscal 1995. Exclusive of the fiscal 1996
restructuring and unusual charges, operating income as a percentage of sales
decreased from 10.1% to 8.1%. This decrease was mainly attributable to the
fiscal 1996 acquisitions of businesses which operate with lower gross profit
margins than the Company's then existing businesses and to lower than expected
performance from the Ocean, Designer Line and Artmold acquisitions.
Interest expense was $3.2 million in fiscal 1996 compared to $3.6 million
in fiscal 1995. This decrease was attributable to lower effective interest rates
and the use of December 1995 stock offering proceeds to pay down debt, offset by
borrowings used to finance the fiscal 1995 and fiscal 1996 acquisitions.
The Company's effective tax rate was 40.0% in fiscal 1996 as compared with
41.0% in fiscal 1995.
As a result of the above, income from continuing operations for fiscal 1996
increased $30,000, or 0.7%, to $4.1 million from $4.0 million in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business activities primarily with borrowings
under bank credit facilities, notes payable to the former owners of acquired
businesses, the sale of Common Stock and cash provided from operations.
On August 28, 1997, the Company entered into a credit agreement with a
syndicate of banks and other financial institutions providing for up to $125.0
million in new credit facilities (collectively, the "1997 Credit Facility"). The
1997 Credit Facility consists of a $40 million senior term loan, all of which
was used to repay the Company's then existing bank facility debt ($40.0 million
outstanding at November 24, 1997), a $60 million senior reducing revolver credit
loan to be used for acquisitions ($0 million outstanding at November 24, 1997)
and a $25 million revolver credit loan to be used for working capital purposes
($2.6 million outstanding
25
<PAGE> 124
at November 24, 1997).
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, issuance of stock, mergers and
acquisitions, and sales of assets. The Company is required to make quarterly
amortization payments on the term loan through maturity at the end of fiscal
2005. The reducing revolver credit facility and the revolver credit facility
terminate at the end of fiscal 2003. See note 8 to the consolidated financial
statements of the Company included elsewhere herein. 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.
On December 20, 1995, the Company completed the sale of 2,015,481 shares of
Common Stock in a public offering. The net proceeds of this offering of
approximately $31 million were used to repay indebtedness outstanding under the
Company's previous bank credit facility.
In connection with certain acquisitions, the Company issued promissory
notes to the former owners of the acquired businesses. At August 30, 1997, the
aggregate principal amount outstanding on these promissory notes amounted to
$6.3 million. These promissory notes are generally payable over five years from
the dates of the respective acquisitions and bear interest at annual rates
ranging from 5.5% to 9.0%. Of these notes, $3.6 million are convertible into
Common Stock at prices ranging from $17.00 to $20.00 per share and $1.1 million
are secured by an irrevocable letter of credit. The Company is also obligated to
make payments aggregating $6.1 million over the next ten years under the terms
of non-compete agreements with certain of the former owners of these acquired
businesses.
During fiscal 1997, net cash provided by operating activities was $8.8
million. The net use of cash in investing activities was $13.4 million,
primarily representing $8.2 million as the aggregate cash consideration paid in
the Wesburn and DMA acquisitions, and $4.9 million in capital expenditures.
Financing activities provided net cash of $5.4 million primarily from borrowings
under the Company's bank credit facilities. The proceeds from the borrowings
were used primarily to finance the Wesburn and DMA acquisitions, as well as open
market purchases of 575,100 shares of the Company's Common Stock.
During fiscal 1996, net cash provided by operating activities was $6.9
million. The net use of cash in investing activities was $23.1 million,
primarily representing $17.6 million as the aggregate cash consideration paid in
the Ocean, Tee-Off and Alpha acquisitions, and $5.0 million in capital
expenditures. Financing activities provided net cash of $15.9 million primarily
from borrowings under the bank credit facility and proceeds from the December
1995 stock offering. The proceeds from the borrowings were used primarily to
finance the Ocean, Tee-Off and Alpha acquisitions.
The Company's principal capital needs will be to finance any future
acquisitions and ongoing capital expenditures. Although the Company currently
believes that cash flow from operations and available borrowings under the 1997
Credit Facility will be sufficient to meet the Company's expected working
capital
26
<PAGE> 125
and capital expenditure requirements and future debt service obligations for the
foreseeable future, there can be no assurance that this will be the case. The
Company believes its fiscal 1998 capital expenditure requirements, excluding
acquisitions, will be approximately $4.0 million. The Company anticipates that
such capital expenditures will be required primarily to acquire additional
processing equipment, management information systems, furniture and fixtures and
leasehold improvements.
SEASONALITY
The Company believes that the promotional products industry traditionally
tends to generate lower sales during the Company's second fiscal quarter. The
Company attempts to offset seasonal demand by offering promotional programs on a
variety of items. The Company generates a significant portion of its revenues
during its third and fourth quarters due in part to the golf season and the
warmer weather of the summer months.
SUPPLEMENTAL DATA
The Company's income from continuing operations before extraordinary loss,
income taxes, interest expense, depreciation and amortization ("EBITDA") grew at
a compound annual growth rate of 23.7%, from $14.5 million in fiscal 1995 to
$23.1 million in fiscal 1997 ($21.3 million in fiscal 1997 net of restructuring
and unusual charges of $1.8 million). The non-cash amortization impact to net
income per share for fiscal 1996 and 1997, after tax, was equal to $0.46 and
$0.47, respectively. The Company believes that the presentation of EBITDA
facilitates an investor's understanding of the effects on the Company's
operations of amortization of goodwill and other intangibles and increased
interest expense under indebtedness incurred in connection with various
acquisitions which substantially impacted net income, net income per common
share and cash flow. EBITDA should not be considered by an investor as an
alternative to net income, as an indicator of the Company's operating
performance or to cash flow as a measure of liquidity. EBITDA is not used in the
presentation of financial statements prepared in accordance with generally
accepted accounting principles.
INFLATION
Inflation affects the cost of goods and services used by the Company. The
competitive environment somewhat limits the ability of the Company to recover
higher costs by raising prices, although the Company does selectively increase
prices for certain products. Moreover, the Company's products are sold to
distributors based on catalog prices. Catalogs are published annually, and the
Company generally is not able to raise prices until a new catalog is published.
The Company attempts to mitigate the adverse effects of future inflation through
selective price increases, improved productivity and cost containment efforts.
NEW FINANCIAL STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is required to be adopted in February
1998. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. The impact on basic and
fully diluted earnings per share is not expected to be material.
Also, in June 1997, the FASB issued SFAS No. 131. "Disclosures about
Segments of an Enterprise and Related Information" SFAS 131 establishes
standards for the reporting of financial information from operating segments in
annual and interim financial statements. This Statement requires that for
evaluating segment performance and deciding how to allocate resources to
segments. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption will have
no material impact on the financial statements. SFAS No. 131 will become
effective for the Company's fiscal year 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
27
<PAGE> 126
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NORWOOD PROMOTIONAL PRODUCTS, INC.
Annual Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of August 31, 1996 and August 30, 1997
Consolidated Statements of Income for the years ended September 2, 1995, August
31, 1996 and August 30, 1997
Consolidated Statements of Shareholders' Equity for the years ended September 2,
1995, August 31, 1996 and August 30, 1997
Consolidated Statements of Cash Flows for the years ended September 2, 1995,
August 31, 1996 and August 30, 1997
Notes to Consolidated Financial Statements
28
<PAGE> 127
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Norwood Promotional Products, Inc.
We have audited the accompanying consolidated balance sheets of Norwood
Promotional Products, Inc. as of August 31, 1996 and August 30, 1997 and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years ended September 2, 1995, August 31, 1996 and August 30, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Norwood
Promotional Products, Inc. at August 31, 1996 and August 30, 1997, and the
consolidated results of their operations and their cash flows for the years
ended September 2, 1995, August 31, 1996 and August 30, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Antonio, Texas
October 10, 1997
29
<PAGE> 128
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 30,
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,861 $ 2,609
Accounts receivable 21,621 24,282
Income taxes receivable -- 551
Other receivables 724 713
Inventories 31,823 32,105
Prepaid expenses and other current assets 2,231 2,464
--------- ---------
Total current assets 58,260 62,724
Property, plant and equipment, net 19,585 21,141
Deferred income taxes 751 2,549
Goodwill 35,266 39,009
Other assets 7,514 9,771
--------- ---------
Total assets $ 121,376 $ 135,194
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 10,269 $ 11,299
Accrued liabilities 5,920 11,197
Income taxes payable 129 --
Current portion of long-term debt 6,378 1,871
Current portion of lease obligation 316 481
--------- ---------
Total current liabilities 23,012 24,848
Long-term debt, excluding current portion 40,447 58,859
Capital lease obligation, excluding current portion 537 211
Shareholders' equity:
Common stock, no par value; 20,000,000 shares
authorized; 5,615,791 and 5,638,789 shares issued at
August 31, 1996 and August 30, 1997, respectively 22,597 22,858
Additional paid-in capital 29,340 29,340
Less cost of treasury stock; 1,430 and 576,530 shares
at August 31, 1996 and August 30, 1997, respectively (8) (7,391)
Retained earnings 5,465 6,469
--------- ---------
57,394 51,276
Less receivables for purchase of common stock (14) --
--------- ---------
Total shareholders' equity 57,380 51,276
--------- ---------
Total liabilities and shareholders' equity $ 121,376 $ 135,194
========= =========
</TABLE>
See accompanying notes
30
<PAGE> 129
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
SEPTEMBER 2, AUGUST 31, AUGUST 30,
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Sales $ 103,860 $ 144,048 $ 175,835
Cost of sales 70,963 100,245 125,732
--------- --------- ---------
Gross profit 32,897 43,803 50,103
Operating expenses:
Sales and marketing 11,290 16,441 18,119
General and administrative 9,037 12,171 13,125
Amortization 2,119 3,538 3,885
Restructuring and unusual charges -- 1,640 1,816
--------- --------- ---------
Total operating expenses 22,446 33,790 36,945
--------- --------- ---------
Operating income 10,451 10,013 13,158
Interest expense 3,619 3,246 3,002
--------- --------- ---------
Income from continuing operations before
income taxes and extraordinary loss 6,832 6,767 10,156
Provision for income taxes 2,800 2,705 4,091
--------- --------- ---------
Income from continuing operations before
extraordinary loss 4,032 4,062 6,065
Discontinued operations:
Gain (loss) from operations, net of tax -- 93 (1,960)
Loss on disposal, net of tax -- -- (2,860)
Extraordinary loss from debt extinguishment,
net of tax -- -- (241)
--------- --------- ---------
Net income $ 4,032 $ 4,155 $ 1,004
========= ========= =========
</TABLE>
31
<PAGE> 130
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
SEPTEMBER 2, AUGUST 31, AUGUST 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) per common share:
Primary:
Income from continuing operations
before extraordinary loss $ 1.11 $ 0.80 $ 1.10
Discontinued operations -- 0.02 (0.88)
Extraordinary loss -- -- (0.04)
---------- ---------- ----------
Net income $ 1.11 $ 0.82 $ 0.18
========== ========== ==========
Fully diluted:
Income from continuing operations
before extraordinary loss $ 1.10 $ 0.80 $ 1.10
Discontinued operations -- 0.02 (0.88)
Extraordinary loss -- -- (0.04)
---------- ---------- ----------
Net income $ 1.10 $ 0.82 $ 0.18
========== ========== ==========
Weighted average number of common shares outstanding:
Primary 3,636,259 5,090,000 5,500,000
Fully diluted 3,668,175 5,090,000 5,500,000
</TABLE>
See accompanying notes
32
<PAGE> 131
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECEIVABLES
FOR
ADDITIONAL RETAINED PURCHASES TOTAL
COMMON STOCK PAID-IN EARNINGS OF COMMON TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) STOCK STOCK EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 3, 1994 3,539 $ 19,613 $ 369 $ (2,722) $ (385) $ (4) $ 16,871
Treasury stock purchases -- -- -- -- (4) -- (4)
Exercise of stock options 3 4 -- -- -- -- 4
Payment on shareholder notes -- -- -- 131 -- 131
Net income -- -- 4,032 -- -- 4,032
-------------------------------------------------------------------------------
Balance at September 2, 1995 3,542 19,617 369 1,310 (254) (8) 21,034
Exercise of stock options -- -- -- -- 3 15 15
Payment on shareholder notes -- -- -- 240 -- -- 240
Conversion of notes payable -- -- -- -- 56 950 950
Sale of common stock 2,015 2,015 28,971 -- -- -- 30,986
Net income -- -- 4,155 -- -- 4,155
-------------------------------------------------------------------------------
Balance at August 31, 1996 5,616 22,597 29,340 5,465 (14) (8) 57,380
Treasury stock purchases -- -- -- -- (7,383) (7,383)
Exercise of stock options 124 -- -- -- -- 124 13
Sale of common stock 137 -- -- -- -- 137 10
Payment on shareholder notes -- -- -- 14 -- -- 14
Net income -- -- 1,004 -- -- 1,004
-------------------------------------------------------------------------------
Balance at August 30, 1997 5,639 $ 22,858 $ 29,340 $ 6,469 $ -- $ (7,391) $ 51,276
===============================================================================
</TABLE>
See accompanying notes
33
<PAGE> 132
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
September 2, August 31, August 30,
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,032 $ 4,155 $ 1,004
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,906 3,135 4,270
Amortization 2,119 3,538 3,885
Loss on disposal of discontinued operations -- -- 4,766
(Gain) loss on disposal of equipment (5) (21) 14
Deferred income taxes (258) (502) (1,798)
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable (2,148) (1,041) (1,274)
Other receivables (431) (97) 11
Inventories (1,671) (2,957) (24)
Prepaid expenses and other assets (219) (141) (415)
Trade accounts payable (1,196) 279 (1,059)
Accrued liabilities 287 1,256 123
Income taxes receivable/payable 532 (738) (659)
--------- --------- ---------
Net cash provided by operating activities 2,948 6,866 8,844
INVESTING ACTIVITIES
Payments on capital leases (302) (601) (401)
Purchases of property, plant and equipment (2,073) (4,919) (4,863)
Proceeds from sale of property, plant and equipment 56 32 45
Acquisitions, net of cash acquired (22,446) (17,596) (8,229)
--------- --------- ---------
Net cash used in investing activities (24,765) (23,084) (13,448)
FINANCING ACTIVITIES
Proceeds from long-term debt 59,684 65,500 120,880
Principal payments on long-term debt (36,119) (80,787) (106,735)
Treasury stock purchases (4) -- (7,383)
Sale of common stock -- 30,986 137
Exercise of stock options 4 1 124
Payment on shareholder notes 131 240 14
Debt issuance fees (191) (35) (1,685)
--------- --------- ---------
Net cash provided by financing activities 23,505 15,905 5,352
--------- --------- ---------
Net change in cash and cash equivalents 1,688 (313) 748
Cash and cash equivalents at beginning of period 486 2,174 1,861
--------- --------- ---------
Cash and cash equivalents at end of period $ 2,174 $ 1,861 $ 2,609
========= ========= =========
Cash paid during the period for:
Interest $ 3,396 $ 3,420 $ 3,898
Income taxes 2,572 2,945 3,197
</TABLE>
See accompanying notes
34
<PAGE> 133
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
1. DESCRIPTION OF THE BUSINESS
Norwood Promotional Products, Inc. (the Company) is engaged in the
manufacture and sale of promotional products and has operations throughout the
United States. Products are manufactured domestically as well as imported and
then decorated with an advertiser's message. The Company's product lines are:
wearables; mugs and glassware; sporting goods and leisure products; writing
instruments; sport, travel and tote bags; jackets; pocket specialties and
accessories; desk and business accessories; recognition awards and business
gifts; buttons, badges, magnets, paper products; and golf related items.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements include the accounts of Norwood
Promotional Products, Inc. and its directly and indirectly wholly owned
subsidiaries, Norcorp, Inc., Radio Cap Company, Inc. (RCC), Barlow Promotional
Products, Inc. (Barlow), Key Industries, Inc. (Key), ArtMold Products
Corporation (ArtMold), Air-Tex Corporation (Air- Tex) and Norwood Travel, Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Accounts Receivable
The Company manufactures and sells promotional products to various
distributors. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations. Bad debt expense approximated
$169,000, $330,000 and $181,000 for the years ended September 2, 1995, August
31, 1996 and August 30, 1997, respectively.
Accounts receivable is shown net of the allowance for doubtful accounts of
$704,000 and $642,000 at August 31, 1996 and August 30, 1997, respectively.
Inventories
Raw materials and purchased finished goods are stated at the lower of cost
(first-in, first-out method) or market. Work-in-process and manufactured
finished goods inventories are stated at the lower of cost (moving average
method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and
betterments are charged to the property accounts while replacements,
maintenance, and repairs which do not improve or extend the lives of the
respective assets are expensed currently. Depreciation is
35
<PAGE> 134
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
provided at amounts calculated to amortize the cost of the assets over their
estimated useful economic lives using the straight-line method. Estimated useful
lives are five to thirty-one years for buildings and improvements and three to
seven years for machinery and equipment.
Federal Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Fiscal Year
The Company has a fiscal year of 52- or 53-week periods that end on the
Saturday closest to August 31. All references to 1995, 1996 and 1997 herein are
to the fiscal years ended September 2, 1995 (52-week period), August 31, 1996
(52-week period) and August 30, 1997 (52-week period), respectively.
Cash Equivalents
Cash equivalents are highly liquid investments with a maturity date no
longer than 90 days.
Fair Value of Financial Instruments
The carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable, and long-term debt
approximates its fair value. The Company estimates the fair value of long-term
debt by discounting the future cash flows of the instrument, using the Company's
incremental rate of borrowing for a similar instrument.
Earnings Per Share
Earnings per common share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period.
The dilutive effect of stock options and common stock warrants are
calculated using the treasury stock method. In determining the dilutive effect
of these stock options and warrants, the common stock equivalents were
calculated based upon the greater of the closing price on the last day of the
year or the average price of the Company's common stock for the year in applying
the treasury stock method to the fully diluted earnings per share calculation.
In February 1997, the FASB issued Statement No. 128, Earnings per Share,
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to
36
<PAGE> 135
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
change the method currently used to compute earnings per share and to restate
prior periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options and warrants will be excluded. In
addition for calculating fully diluted earnings per share, the treasury stock
method will be 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 year.
The impact is expected to result in an increase in primary earnings per share of
$0.01 to $0.03 for 1995, 1996 and 1997. The impact on the calculation of fully
diluted earnings per share is not expected to be material.
Concentration of Foreign Suppliers
The Company derives a significant portion of its sales from products
supplied by Far East manufacturers. While the Company is not dependent on any
single manufacturer in the Far East, the Company could be adversely affected by
political or economic disruptions affecting the business or operations of third
party manufacturers located in the Far East.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassification and Restatement
Certain prior year balances have been reclassified for comparative
purposes. The fiscal 1996 amounts have been restated to reflect the activity for
the five months of ownership of the Alpha Products retail division as
discontinued operations.
3. ACQUISITIONS
On February 14, 1997, the Company acquired substantially all of the assets
of Wesburn Golf (Wesburn) and DM Apparel, Inc. (DMA). In connection with the
acquisition of Wesburn, the Company (through its wholly owned subsidiary
ArtMold) paid $4.8 million in cash, issued $2.0 million in notes payable and
non-compete agreements and assumed or incurred liabilities of $1.8 million. In
connection with the acquisition of DMA, the Company (through its wholly owned
subsidiary Air-Tex) paid $885,000 in cash and assumed or incurred liabilities of
$600,000. Wesburn and DMA are suppliers of promotional products.
On November 20, 1995, January 23, 1996 and April 1, 1996, the Company
acquired substantially all of the assets of Ocean Specialty Manufacturing
Corporation (Ocean), Tee-Off
37
<PAGE> 136
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
Enterprises, Inc. (Tee-Off) and Alpha Products, Inc. (Alpha), respectively. In
connection with the acquisition of Ocean, the Company (through its wholly owned
subsidiary Key) paid $2.5 million in cash, issued $1.0 million in convertible
notes and other debt and assumed or incurred liabilities of $1.4 million. In
connection with the acquisition of Tee-Off, the Company (through its
wholly owned subsidiary ArtMold) paid $6.0 million in cash, issued $1.5 million
in notes and other debt and assumed or incurred liabilities of $1.7 million. In
connection with the acquisition of Alpha, the Company (through its wholly owned
subsidiary RCC) paid $6.7 million in cash and assumed or incurred liabilities of
$3.2 million. Ocean, Tee-Off and Alpha are suppliers of promotional products.
On March 1, 1995, June 13, 1995 and July 31, 1995, the Company acquired
substantially all of the assets of Air- Tex, Designer Plastics, Inc. (Designer)
and BTS Group, Inc. (BTS), respectively. In connection with the acquisition of
Air-Tex, the Company paid $13.3 million in cash, issued $2.5 million in
convertible notes and other debt, issued 60,294 warrants to purchase the
Company's common stock at $17.00 per share and assumed or incurred liabilities
of $2.4 million. In connection with the acquisition of Designer, the Company
(through its wholly owned subsidiary Air-Tex) paid $2.4 million in cash, issued
$1.5 million in notes payable and non-compete agreements and assumed liabilities
of $1.0 million. In connection with the acquisition of BTS, the Company (through
its wholly owned subsidiary Barlow) paid $6.3 million in cash, issued $3.5
million in notes payable and non-compete agreements and assumed liabilities of
$1.4 million. Additionally in 1997, the former owners of BTS received an
additional $500,000 under the non-compete agreement due to certain earnings
goals being achieved. Air-Tex, Designer and BTS are suppliers of promotional
products.
The condensed pro forma results of operations presented below summarize on
an unaudited pro forma basis approximate results of the Company's consolidated
operations for the years ended September 2, 1995, August 31, 1996 and August 30,
1997, assuming that the acquisition of Air-Tex, Designer and BTS occurred at
the beginning of fiscal 1994, the acquisition of Ocean, Tee-Off and Alpha
occurred at the beginning of fiscal 1995 and the acquisition of Wesburn and DMA
occurred at the beginning of fiscal 1996.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Years ended
----------------------------------------
September 2, August 31, August 30,
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Net sales $160,550 $179,941 $184,008
Operating income 11,344 10,414 13,130
Income from continuing operations
before income taxes 4,756 6,108 9,880
Income from continuing operations 2,803 3,695 5,902
Earnings per share from continuing
operations:
</TABLE>
38
<PAGE> 137
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
<TABLE>
<S> <C> <C> <C>
Primary $ 0.77 $ 0.73 $1.07
Fully diluted $ 0.76 $ 0.73 $1.07
</TABLE>
All of the acquisitions were accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair values at the
respective dates of acquisition. The results of Air-Tex, Designer, BTS, Ocean,
Tee-Off, Alpha, Wesburn and DMA have been included in the Company's consolidated
financial statements since their respective acquisition dates.
4. INVENTORIES
Net inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 30,
1996 1997
--------- ---------
<S> <C> <C>
Finished goods:
Imprinted $ 1,347 $ 1,548
Unimprinted 20,245 20,095
--------- ---------
21,592 21,643
Work in process 1,099 1,298
Raw materials 9,132 9,164
--------- ---------
$ 31,823 $ 32,105
========= =========
</TABLE>
Inventory obsolescence reserves were $768,000 and $689,000 at August 31,
1996 and August 30, 1997, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 30,
1996 1997
---------- ----------
<S> <C> <C>
Land $ 478 $ 478
Buildings and improvements 6,863 6,789
Machinery and equipment 20,108 26,843
Machinery and equipment under lease 2,111 1,245
------- ---------
29,560 35,355
Less accumulated depreciation (9,975) (14,214)
------- ---------
$19,585 $ 21,141
======= =========
</TABLE>
39
<PAGE> 138
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
6. GOODWILL AND OTHER ASSETS
Goodwill and other assets consist of the following balances (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 30,
1996 1997
---------- ----------
<S> <C> <C>
Goodwill, less accumulated amortization
of $4,573 and $7,283 $ 35,266 $ 39,009
========== ==========
Non-compete agreement, less accumulated
amortization of $1,943 and $1,771 5,882 6,429
Refinancing and loan origination costs, less
amortization of $245 and $0 488 1,685
Favorable lease, less accumulated amortization of
$291 and $359 119 51
Long-term deposits 960 1,053
Other 65 553
---------- ----------
$ 7,514 $ 9,771
========== ==========
</TABLE>
Goodwill, resulting from business acquisitions, is amortized on a
straight-line method over their estimated useful lives ranging from 15 to 25
years. Other intangible assets are amortized on a straight-line method over
their estimated useful lives ranging from three to ten years.
The carrying value of intangible assets is reviewed if the facts and
circumstances suggest that they may be impaired. If this review indicates that
the intangible assets will not be recoverable, the Company's carrying value of
the intangible assets would be reduced by the estimated shortfall of future
discounted cash flows or to market value.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following balances (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 30,
1996 1997
---------- ----------
<S> <C> <C>
Salaries, wages and bonuses $ 2,554 $ 2,736
Discontinued operations -- 4,763
Restructuring cost 1,028 1,386
Professional fees 136 137
Property tax 298 213
Interest 417 126
Sample rebates 410 300
Miscellaneous 1,077 1,536
---------- ----------
$ 5,920 $ 11,197
</TABLE>
40
<PAGE> 139
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
8. LONG-TERM DEBT
The Company's long-term debt is summarized below (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 30,
1996 1997
---------- ----------
<S> <C> <C>
Senior term note payable, interest at prime or LIBOR plus an interest spread
based on a leverage coverage ratio (8.1% at August 30, 1997), payable
quarterly, principal payable in quarterly installments of $100,000 through
August 2003, then quarterly installments of $4.7 million through August
2005; secured by substantially all assets; subject to certain restrictive
convenants as further described below -- $ 40,000
Senior revolver credit loan, interest at prime or LIBOR plus an interest spread
based on a leverage coverage ratio ($3.7 and $3.29 million at 9.0% and
7.38%, respectively, at August 30, 1997), payable quarterly, principal
payable on August 27, 2003; secured by substantially all assets; subject to
certain restrictive convenants as further described below -- 6,990
Senior reducing revolver credit loan, interest at prime or LIBOR plus an
interest spread based on a leverage coverage ratio, payable quarterly,
principal payable on August 27, 2003; secured by substantially all assets;
subject to certain restrictive convenants as further described below. No
borrowings outstanding at August 30, 1997 -- --
Term note payable to a bank, interest at prime or LIBOR plus an interest spread
based on an interest coverage ratio (7.875% at August 31, 1996). Term note
payable paid in full in 1997 $ 7,525 --
Revolving line of credit to a bank, interest at prime or LIBOR plus an interest
spread based on an interest coverage ratio ($4.4, $4.0 and $3.1 million at
8.50%, 7.598% and 7.625%, respectively, at August 31, 1996). Revolving line
of credit paid in full in 1997 11,450 --
Acquisition note payable to a bank, interest at prime or LIBOR plus an interest
spread based on an interest coverage ratio ($9.0 and $5.75 million at 7.848%
and 7.91%, respectively, at August 31, 1996). Acquisition note payable paid
in full in 1997 14,750 --
</TABLE>
41
<PAGE> 140
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 30,
1996 1997
---------- ----------
<S> <C> <C>
Non-Compete payable to former owners of Air-Tex, Designer, BTS, Ocean, Tee-Off
and Wesburn. Payments are due over the life of each respective Non-Compete
Agreements and range from two to ten years 5,557 6,122
Note payable to a bank, interest at 7%. Note paid in full in 1997 948 --
Notes payable to former owners of Key, interest at 8%, payable quarterly,
balance due May 1, 1999; secured by irrevocable letter of credit issued by
Company's primary lender 1,125 1,125
Notes payable to former owners of Key, interest at 8%, payable quarterly,
balance due May 1, 1999; convertible at $17.00 per share into the Company's
common stock. In May 1996, $950,000 of the notes payable was converted into
55,882 shares of the Company's common stock 1,300 1,300
Notes payable to former owners of Air-Tex, interest at 9%, payable quarterly,
balance due March 1, 2000 200 200
Notes payable to former owners of Air-Tex, interest at 9%, payable quarterly,
balance due March 1, 2000, convertible at $17.00 per share into the
Company's common stock 400 400
Notes payable to former owners of Air-Tex, interest at 6%, payable quarterly,
balance due March 1, 2000, convertible at $17.00 per share into the
Company's common stock 625 625
Notes payable to former owner of Wesburn, interest at 8%, payable annually,
principal payable in five annual installments of $200,000 -- 1,000
Notes payable to former owners of Designer, interest at 7%, payable quarterly,
balance due June 9, 2000, convertible at $17.00 per share into the
Company's common stock 500 500
Notes payable to former owners of BTS, interest at 8%, payable quarterly, balance
due July 14, 2000, convertible at $18.30 per share into the Company's
common stock 500 500
Notes payable to former owners of Ocean, interest at 6%, payable quarterly,
balance due November 17, 2000, convertible at $20.00 per share into the
Company's common stock 300 300
Notes payable to former owners of Tee-Off, interest at 5.5%, payable
bi-annually, balance due January 22, 2001 456 364
Other notes payable 1,189 1,304
---------- ----------
46,825 60,730
Less current maturities 6,378 1,871
---------- ----------
$ 40,447 $ 58,859
========== ==========
</TABLE>
42
<PAGE> 141
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
The aggregate maturities of long-term debt as of August 30, 1997 are as follows
(in thousands):
<TABLE>
<S> <C>
1998 $ 1,871
1999 4,204
2000 5,007
2001 2,681
2002 1,192
Thereafter 45,775
----------
$ 60,730
==========
</TABLE>
On August 28, 1997, the Company entered into a new credit agreement with a
syndicate of banks and other financial institutions providing for up to $125.0
million in new credit facilities (collectively, the "1997 Credit Facility"). The
1997 Credit Facility consists of a $40 million senior term loan used to repay
the Company's previous bank facility debt, a $60 million senior reducing
revolver credit loan to be used for acquisitions and a $25 million revolver
credit loan to be used for working capital purposes. The final maturity of the
term loan portion of the 1997 Credit Facility is the end of fiscal 2005. The
reducing revolver facility and the revolver credit facility under the 1997
Credit Facility each terminate at the end of fiscal 2003. Borrowings under the
1997 Credit Facility are jointly and severally guaranteed by all subsidiaries
of the Company, including acquired or created subsidiaries.
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, issuance of stock, mergers and
acquisitions, and sales of assets. The Company is obligated to pay a commitment
fee ranging from .1875% to .375% of the unused portion of the 1997 Credit
Facility.
In conjunction with the repayment of the previous bank facility debt, the
Company recognized an extraordinary loss on the write-off of the previous bank
facility deferred financing and loan origination costs of approximately
$241,000, net of tax benefit of approximately $161,000.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):
43
<PAGE> 142
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 30,
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 589 $ 1,048
Prepaid expenses 55 13
Catalog and sample expenses 234 223
Other - net 88 77
---------- ----------
Total deferred tax liabilities 966 1,361
Deferred tax assets:
Restructuring costs 465 2,434
Uniform capitalization of inventory costs 268 337
Valuation allowance on inventory 127 148
Vacation accrual 265 322
Bad debt reserve 162 156
Amortization of non-compete agreement 430 513
---------- ----------
Total deferred tax assets 1,717 3,910
---------- ----------
Net deferred tax asset $ 751 $ 2,549
========== ==========
</TABLE>
Management has determined that existing deductible temporary differences
will reverse within three years and may be carried back against prior taxable
earnings. Therefore, it is management's opinion that it is more likely than not
that the entire benefit of existing deductible temporary differences will be
realized and no valuation allowance for deferred tax assets is necessary at
August 30, 1997. Significant components of the provision (benefit) for income
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
SEPTEMBER 2, AUGUST 31, AUGUST 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 2,813 $ 2,994 $ 2,249
State 260 312 130
---------- ---------- ----------
Total current 3,073 3,306 2,379
Deferred:
Federal (225) (491) (1,720)
State (48) (45) (78)
---------- ---------- ----------
Total deferred (273) (536) (1,798)
---------- ---------- ----------
$ 2,800 $ 2,770 $ 581
========== ========== ==========
</TABLE>
The provision for income taxes of $581,000 at August 30, 1997 consists of
$4,091,000 from continuing operations offset by the tax benefit of $3,349,000
from discontinued operations
44
<PAGE> 143
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
and $161,000 from extraordinary loss from debt extinguishment. The provision for
income taxes of $2,770,000 at August 31, 1996 consists of $2,705,000 from
continuing operations and $65,000 from discontinued operations.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------
SEPTEMBER 2, AUGUST 31, AUGUST 30,
1995 1996 1997
------------------- -------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
---------- -- ---------- -- ---------- --
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ 2,323 34 $ 2,301 34 $ 3,453 34
State income taxes, net of federal tax
benefit 212 3 267 4 52 1
Amortization of goodwill 202 3 206 3 206 2
Other - net 63 1 (69) (1) 380 3
---------- -- ---------- -- ---------- --
Provision for income taxes before
discontinued operations and
extraordinary loss 2,800 41 2,705 40 4,091 40
========== == ========== == ========== ==
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company has entered into leases for facilities and office equipment.
Leases that expire generally are expected to be renewed or replaced by other
leases. A summary of minimum lease commitments at August 30, 1997 that have
initial or remaining noncancelable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
Capital Operating
---------- ----------
<S> <C> <C>
1998 $ 437 $ 2,645
1999 215 1,942
2000 74 1,463
2001 14 959
2002 -- 845
Thereafter -- 4,494
---------- ----------
Total minimum lease payments 740 $ 12,348
==========
Less amounts representing interest (48)
----------
Present value of net minimum lease
payments $ 692
==========
</TABLE>
Total expense under operating leases amounted to approximately $1,726,000,
$2,708,000
45
<PAGE> 144
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
and $2,901,000 for the years ended September 2, 1995, August 31, 1996 and August
30, 1997, respectively.
The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to
currently pending litigation cannot be determined, in the opinion of management,
such liability will not have a material adverse effect on the Company's
financial condition or results of operations.
11. STOCK OFFERING
On December 20, 1995, the Company completed the sale of 2,015,481 shares of
Common Stock in a public offering. The net proceeds of this offering of
approximately $31 million were used to repay indebtedness under the previous
bank facility. The Company restated its 1996 Common stock and Additional
paid-in capital accounts to reflect as Additional paid-in capital the net
proceeds received from the sale of the above shares in excess of $1 per share.
12. STOCK OPTIONS AND WARRANTS
The FASB issued Statement No. 123, Accounting for Stock-Based Compensation
(FASB 123), which encourages, but does not require, the recognition of
compensation expense for virtually all stock options based on their fair value
on the date of grant. The Company has elected to continue to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Because the Company has elected to continue
to follow APB 25, FASB 123 requires disclosure of pro forma net income and
earnings per share as if the new fair value accounting method was adopted.
The Company's 1989 and 1994 incentive stock option plans allow the
granting to officers and other key employees incentive stock options and other
stock-based incentive compensation. A total of 330,000 shares of common stock,
which was increased to 550,000 shares in 1997, has been reserved for issuance
under these stock option plans. Under the terms of these plans, the purchase
price of the shares will not be less than the fair market value at the time the
option is granted and each option granted shall become exercisable in three
annual installments beginning on the third anniversary of the date of grant.
The Company also has a non-qualified stock option plan under which it
granted 11,028 options to various employees at not less than fair value at the
date of grant. The options vested on June 4, 1996.
A summary of the Company's stock option activity, and related information for
1995, 1996 and 1997 follows:
46
<PAGE> 145
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
---- --------- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year 144 $1 - $13 234 $1 - $16 300 $1 - $23
Granted 96 $11 - $16 81 $14 - $23 78 $14 - $19
Exercised (3) $1 - $5 (3) $1 (13) $1 - $10
Forfeited (3) $1 - $5 (12) $1 - $16 (46) $1 - $19
---- ---- ----
Outstanding - end of
year 234 $1 - $16 300 $1 - $23 319 $1 - $23
==== ==== ====
Exercisable at end of year 16 $1 - $5 34 $1 - $9 69 $1 - $13
</TABLE>
If the Company had adopted the fair value accounting method under FASB 123,
pro forma net income for 1996 and 1997 would be $4.1 million and $0.8 million,
respectively, and proforma earnings per share for 1996 and 1997 would be $0.80
and $0.14, respectively. Because FASB 123 is applicable only to options granted
subsequent to August 31, 1995, its proforma effect will not be fully reflected
until fiscal 1998. The fair value of these options was estimated using a
Black-Scholes option pricing model with a risk-free interest rate of 6%, a
volatility factor of .30, a dividend yield of 0%, and an expected option life of
six years. The weighted average fair value of options granted during 1996 and
1997 was $7.13 and $6.94, respectively.
On June 23, 1993, the Company issued to its underwriting representatives in
its initial security offering nontransferable warrants to purchase 150,000
shares of the Company's common stock, exercisable for a period of four years
commencing one year from June 23, 1993, at an exercise price of $11.00 per
share.
On November 8, 1993, the Company adopted the Norwood Promotional Products,
Inc. 1993 Non-Employee Director Stock Purchase Plan, which is designed to
attract and retain highly qualified non-employee directors, reserving 30,000
shares of common stock. Under the terms of this plan, each non-employee director
received warrants to purchase 6,000 shares as of the date of adoption or on
their respective date of election, the purchase price of the shares subject to
each warrant granted shall be $11.00 per share, warrants may not be granted
after five years from the date of adoption and all warrants issued may only be
exercised after the first anniversary date through the fifth anniversary date
from the date of grant. During the year ended August 30, 1997, no warrants were
granted under the non-employee director stock purchase plan. Warrants to
purchase 24,000 shares of the Company's Common Stock were exercisable as of
August 30, 1997.
In 1995, 1996 and 1997, certain directors were granted warrants in lieu of
director's fees. The warrants were issued at the fair market value at the date
of grant and are exercisable
47
<PAGE> 146
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
immediately. A total of 12,000, 9,456 and 18,000 warrants were issued to
director's in 1995, 1996 and 1997, respectively. None of these warrants have
been exercised as of August 30, 1997.
13. EMPLOYEE BENEFIT PLAN
The Company adopted the Norwood Promotional Products, Inc. Employee 401(k)
Plan for the purpose of providing retirement benefits for substantially all
employees. Contributions to the Plan are made both by the employees and the
Company. The Company matches 30% of the first $1,000 of an employee's deferred
compensation to a maximum of $300 per year. Company-matched contributions vest
to the employees based upon their number of years of service to the Company.
Contributions to this Plan of $42,000, $77,000 and $117,000 were charged to
expense for the years ended September 2, 1995, August 31, 1996 and August 30,
1997, respectively.
Effective May 9, 1996, the Company adopted the Employee Stock Purchase Plan
of Norwood Promotional Products, Inc. for the purpose of providing substantially
all employees the opportunity to purchase common stock of the Company. During
1997, employees purchased 9,644 shares of common stock under the Employee Stock
Purchase Plan.
The Company does not offer or provide post-retirement health care benefits
to any of its employees.
14. RESTRUCTURING AND UNUSUAL CHARGES
The Company in its ongoing review of its operations has taken several
initiatives in fiscal 1996 and 1997 to restructure its businesses.
In the fourth quarter of 1997, the Company recorded restructuring and
unusual charges of approximately $1,816,000 ($1,084,000 net of tax) based on its
decision to consolidate its Corporate offices with its Executive offices,
realign its divisions to capitalize on processing capacity and product line
restructurings, and to write-off certain capitalized costs associated with its
decision to terminate its negotiations related to the acquisition of the Rou
bill Group in the fourth quarter of 1997. The consolidation of the Corporate
offices with its Executive offices is expected to be completed in early 1998. A
provision for closure of the Corporate offices totaling approximately $350,000,
including write-off of certain leasehold improvements, has been accrued.
Additionally, approximately $291,000 has been accrued for realignment of its
divisions, including product line restructurings. In conjunction with the above
activities, a total of $425,000 of severance and benefits has been accrued.
Capitalized professional fees and organizational costs totaling $750,000
associated with the Rou bill Group acquisition were expensed in the fourth
quarter of 1997.
In the fourth quarter of 1996, the Company recorded restructuring and
unusual charges of approximately $1,640,000 ($984,000 net of tax) based on its
decision to consolidate certain
48
<PAGE> 147
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
facilities into other existing facilities, terminate certain employees, and
write-off certain capitalized costs associated with a target acquisition. A
provision for closure of these facilities totaling approximately $890,000,
including the write-off of certain leasehold improvements, has been accrued or
paid. Approximately $560,000 of future salary and benefits was accrued or paid
in the fourth quarter of 1996. These employment agreements have remaining terms
that expire over the next year. Additionally, capitalized acquisition-related
costs of approximately $190,000 were expensed in the fourth quarter of 1996.
15. DISCONTINUED OPERATIONS
The Company has decided to discontinue the operations of the Alpha Products
retail division ("retail division") and is actively searching for a buyer for
its assets and business. As a result, the promotional products division of Alpha
Products will be relocated to other existing Company facilities. The Company is
expected to cease operations of the retail division and relocate the Alpha
Products promotional products division by the end of calendar 1997. The loss on
the disposal of the retail division and the closing of the existing Alpha
Products facility is expected to be approximately $2.9 million (net of tax
benefit of $1.9 million), which includes estimated losses from operations for
the retail division until operations are discontinued.
Revenues for the retail division for the five months of ownership in fiscal
year 1996 and for fiscal year 1997 were $7.9 million and $8.7 million,
respectively. Earnings for the retail division for the five months of ownership
in fiscal year 1996 was $93,000 (net of taxes of $65,000) and a loss of $1.96
million (net of tax benefit of $1.4 million) for fiscal year 1997.
Net assets of the discontinued retail division at the end of 1996 and 1997
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Accounts receivable $ 1,799 $ 1,210
Inventories 1,547 1,540
Property, plant and
equipment, net 2,208 1,758
Other assets 52 197
-------- --------
$ 5,606 $ 4,705
======== ========
</TABLE>
49
<PAGE> 148
Norwood Promotional Products, Inc.
Notes to Consolidated Financial Statements
September 2, 1995, August 31, 1996 and August 30, 1997
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected results of operations for each of the fiscal quarters during the
year ended August 31, 1996 and August 30, 1997 are as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended August 31, 1996
Net sales $ 33,368 $ 30,086 $ 41,362 $ 39,232
Gross profit 10,623 8,462 13,085 11,633
Income from continuing operations 1,356 88 2,397 221
Income (loss) from discontinued operations -- -- 130 (37)
Net income 1,356 88 2,527 184
Income per common share:
Continuing operations 0.37 0.02 0.42 0.04
Discontinued operations -- -- 0.02 (0.01)
Net Income $ 0.37 $ 0.02 $ 0.44 $ 0.03
Year Ended August 30, 1997
Net sales $ 39,818 $ 35,268 $ 51,816 $ 48,933
Gross profit 12,229 10,007 15,308 12,559
Income from continuing operations 1,902 622 3,325 216
Income (loss) from discontinued operations (462) (457) (549) (492)
Loss on disposal of discontinued operations -- -- -- (2,860)
Extraordinary loss -- -- -- (241)
Net income (loss) 1,440 165 2,776 (3,377)
Income per common share:
Continuing operations 0.33 0.11 0.62 0.04
Discontinued operations (0.08) (0.08) (0.10) (0.65)
Extraordinary loss -- -- -- (0.05)
Net Income (loss) $ 0.25 $ 0.03 $ 0.52 $ (0.66)
</TABLE>
Quarterly results of operations were impacted by business acquisitions as
follows:
<TABLE>
<CAPTION>
INITIAL
ACQUISITIONS DATE ACQUIRED QUARTER IMPACTED
------------ ------------- ----------------
<S> <C> <C>
Ocean November 20, 1995 1st Quarter, 1996
Tee-Off January 23, 1996 2nd Quarter, 1996
Alpha April 1, 1996 3rd Quarter, 1996
Wesburn February 14, 1997 2nd Quarter, 1997
DMA February 14, 1997 2nd Quarter, 1997
</TABLE>
50
<PAGE> 149
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by item 10 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, under the captions "Election of
Directors" and "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by item 11 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, under the caption "Compensation of
Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by item 12 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, under the caption "Principal
Shareholders and Stock Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by item 13 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, under the caption "Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
INDEX TO FINANCIAL STATEMENTS
(a) The following documents are filed as part of this Annual Report or are
incorporated by reference as indicated.
1. The following financial statements are included under Item 8:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of August 31, 1996 and August 30, 1997
51
<PAGE> 150
Consolidated Statements of Income for the years ended September 2, 1995,
August 31, 1996 and August 30, 1997
Consolidated Statements of Shareholders' Equity for the years ended
September 2, 1995, August 31, 1996 and August 30, 1997
Consolidated Statements of Cash Flows for the years ended September 2,
1995, August 31, 1996 and August 30, 1997
Notes to Consolidated Financial Statements
2. The following financial statement schedules are included under Item 14:
Schedule VIII -- Valuation and Qualifying Accounts
3. Exhibits -- See Index to Exhibits on page 55.
(b) Reports on Form 8-K -
The following is the date and description of the events reported on Forms
8-K filed during fourth quarter of 1997:
Date of Earliest Event
Reported on Form 8-K Description
-------------------- -----------
August 11, 1997 Changes in management and termination
of Rou bill Group letter of intent
August12, 1997 Company to discontinue Alpha Products
retail division and other restructuring
and unusual charges
August 12, 1997 Closing of a new $125 million credit
facility
52
<PAGE> 151
SIGNATURES
Pursuant to the requirements of Section 13 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.
NORWOOD PROMOTIONAL PRODUCTS, INC.
By: /s/ FRANK P. KRASOVEC Date: November 18, 1997
-------------------------------
Frank P. Krasovec
Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ FRANK P. KRASOVEC Chairman, Chief Executive Officer, November 18, 1997
- ----------------------------------- President, and Director
Frank P. Krasovec (Principal Executive Officer)
/s/ JAMES P. GUNNING, Jr. Secretary, Treasurer and Chief Financial November 18, 1997
- ----------------------------------- Officer (Principal Financial Officer)
James P. Gunning, Jr.
/s/ ROBERT L. SEIBERT Director November 18, 1997
- -----------------------------------
Robert L. Seibert
/s/ JOHN H. WILSON III Director November 18, 1997
- -----------------------------------
John H. Wilson III
/s/ JOHN H. JOSEPHSON Director November 18, 1997
- -----------------------------------
John H. Josephson
/s/ HAROLD HOLLAND Director November 18, 1997
- -----------------------------------
Harold Holland
/s/ ROY D. TERRACINA Director November 18, 1997
- -----------------------------------
Roy D. Terracina
</TABLE>
53
<PAGE> 152
NORWOOD PROMOTIONAL PRODUCTS, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Charged to -------------------------
Balance at Charged to Other Balance at
Beginning Costs and Accounts Deductions End of
Description of Period Expenses Describe Describe Period
----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 2, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts 227 169 293(3) 149(1) 540
Reserve for inventory obsolescence 414 21 99(3) 139(2) 395
----- ----- ----- ----- -----
Total 641 190 392 288 935
===== ===== ===== ===== =====
Year ended August 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts 540 330 189(4) 355(1) 704
Reserve for inventory obsolescence 395 48 347(4) 22(2) 768
----- ----- ----- ----- -----
Total 935 378 536 377 1,472
===== ===== ===== ===== =====
Year ended August 30, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts 704 181 47(5) 290(1) 642
Reserve for inventory obsolescence 768 84 -- 163(2) 689
----- ----- ----- ----- -----
Total 1,472 265 47 453 1,331
===== ===== ===== ===== =====
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off during year.
(3) Amounts acquired with the purchase of Air-Tex Corporation, Designer
Plastics, Inc. and BTS Group.
(4) Amounts acquired with the purchase of Ocean Specialty Manufacturing
Corporation, Tee-Off Enterprises, Inc. and Alpha Products, Inc.
(5) Amounts acquired with the purchase of Wesburn Golf and DM Apparel, Inc.
54
<PAGE> 153
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended AUGUST 30, 1997
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 (I.R.S. Employer
incorporation or organization) Identification No.)
106 E. SIXTH STREET, SUITE 300, AUSTIN, TEXAS 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 476-7100
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.--
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of November 24, 1997 was approximately $56,100,000 based
upon the last sales price on November 24, 1997 on the NASDAQ National Market
for the Company's common stock. The registrant had 5,070,043 shares of Common
Stock outstanding on November 24, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 154
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Frank P. Krasovec 54 Chairman, President, Chief Executive Officer and Director
James P. Gunning, Jr. 49 Secretary, Treasurer and Chief Financial Officer
Robert L. Siebert (a)(b) 67 Director
John H. Wilson III (a)(b) 55 Director
John H. Josephson (a)(b) 36 Director
Harold Holland 69 Director
Roy D. Terracina 51 Director
</TABLE>
- ------------------
(a) Member of the Compensation Committee
(b) Member of the Audit Committee
Officers are elected to hold office until the annual meeting of the
Board of Directors and serve at the discretion of the Board of Directors. All
directors serve until the next annual meeting of shareholders and until their
successors have been duly elected and qualified.
Frank P. Krasovec has served as Chairman of the Company since October
1989 and has served as its President since August 1997. From 1976 until May
1994 he served as either the Chairman or President of Radio Cap Company, Inc.,
a subsidiary of the Company ("RCC"). From 1984 until December 1996, Mr.
Krasovec was the Chairman of Littlefield Real Estate Company, a real estate
investment firm, and managed other cable television and venture capital
investments. Mr. Krasovec currently devotes his full time to the business
of the Company.
James P. Gunning, Jr. has served as Secretary, Treasurer and Chief
Financial Officer of the Company since August 1997. He served as Treasury
Director of the Company from January 1997 to August 1997. Prior to joining the
Company, Mr. Gunning was the Chief Financial Officer of Blank, Rome, Comisky &
McCauley, a law firm, from July 1989 to January 1997, Senior Vice President and
Corporate Controller of Continental Bancorp, Inc., a bank holding company, from
May 1981 to January 1989, and served in various professional positions with
Touche Ross & Co. (Deloitte & Touche, L.L.P.) from May 1970 to May 1981.
Robert L. Seibert has served as a director of the Company since
October 1989 and was a director of Norwood Products, Inc. (the "Predecessor
Company") from December 1988 to October 1989. From 1978 until his retirement in
December 1994, he served as chairman of Advertising Unlimited, Inc., a supplier
of promotional product calendars. Mr. Seibert has also been a director of
Northstar Guaranty since 1992.
John H. Wilson III has served as a director of the Company since
December 1991. Since April 1983, he has served as President of U.S. Equity
Corporation, a private venture capital company. Mr. Wilson is a Director of
Capital Southwest Corp., Whitehall Corp., Encore Wire Corporation and Palm
Harbor Homes, Inc.
John H. Josephson has served as a director of the Company since June
1993. Mr. Josephson has been employed by Allen & Company Incorporated since
August 1987 and has been a Director of that firm since February 1995. Mr.
Josephson is also a director of Medical Resources, Inc., OFI Holdings, Inc.,
SESAC Holdings, Inc. and Virgol Servicos de Conveniencia, SA.
2
<PAGE> 155
Harold Holland has served as a director of the Company since July
1994. Mr. Holland was the founder of ArtMold in 1960 and served as its
President and Chairman until July 1994 when ArtMold was acquired by the
Company.
Roy D. Terracina has served as a director since November 1996. Mr.
Terracina was the owner and chief executive officer of Sterling Foods, Inc.
from 1984 until he sold the company in 1993. He is currently a partner of
Jungle Labs, a supplier of chemicals to the pet industry. Mr. Terracina is also
a director of Texas Commerce Bank, National Association, United Services
Advisors, Inc. and Mesirow Partners.
In connection with the initial public offering of Common Stock in
1993, the Company agreed with the underwriters to use reasonable best efforts
until June 1998 to maintain a Board of Directors comprising at least five
members, at least two of whom will be unaffiliated with and independent of the
Company.
BOARD COMMITTEES AND MEETINGS
The Board of Directors has standing Audit and Compensation Committees.
The Audit Committee annually recommends to the Board the appointment of
independent certified accountants as auditors for the Company, discusses and
reviews the scope and the fees of the prospective annual audit and reviews the
results with the auditors, reviews compliance with existing major accounting
and financial policies of the Company, reviews the adequacy of the financial
organization of the Company and considers comments by the auditors regarding
internal controls and accounting procedures and management's response to those
comments. The Audit Committee held one meeting during the fiscal year ended
August 30, 1997.
The Compensation Committee members are Messrs. Wilson (Chairman),
Seibert and Josephson. The Compensation Committee reviews and makes
recommendations to the Board regarding salaries, compensation and benefits of
executive officers and key employees of the Company and administers the
Company's stock option plans and employee stock purchase plan. The Compensation
Committee held four meetings during the fiscal year ended August 30, 1997.
The Board of Directors held four meetings during the fiscal year ended
August 30, 1997. During fiscal 1997 each director attended at least 75% of the
meetings of the Board of Directors and the meetings held by the committees of
the Board of Directors on which such director served.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of the Company
receive annual director's fees of $20,000. In addition, members of the Board of
Directors are reimbursed for their expenses for attending Board and committee
meetings. Non-employee directors are given the option of receiving warrants to
purchase shares of Common Stock in lieu of cash director's fees. These warrants
are exercisable at any time during the five-year period following their
issuance. During fiscal year 1997, Messrs. Josephson, Wilson, Holland and
Terracina each received, in lieu of cash director's fees, warrants to purchase
6,000 shares of Common Stock at an exercise price of $16.875 per share.
Pursuant to the Company's Non-Employee Director Stock Purchase Plan,
warrants to purchase 6,000 shares of Common Stock are granted to each Director
who is not an employee of the Company at the time the Director is first elected
to the Board of Directors. These warrants vest one year after they are granted
and are exercisable at any time during the following four years.
3
<PAGE> 156
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning
compensation paid by the Company for services rendered during fiscal years
1995, 1996 and 1997 to the Company's chief executive officer and each other
executive officer who received compensation in excess of $100,000 for fiscal
1997 (collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------------- ------------
Other Securities
Fiscal Annual Underlying
Name Year Salary Bonus Compensation Options/SARs (#)
---- ---- -------- ------- ------------ ------
<S> <C> <C> <C> <C> <C>
Frank P. Krasovec 1997 $269,711 -- $27,539(a) 5,000
Chief Executive Officer, 1996 266,346 -- -- 10,000
President and Chairman 1995 241,680 -- -- 9,000
Robert P. Whitesell(b) 1997 210,465 -- -- 5,000(c)
President and Chief 1996 179,322 -- -- 10,000(c)
Operating Officer 1995 152,884 $45,000 9,000(c)
J. Max Waits(d) 1997 136,466 -- -- 5,000
Treasurer and 1996 121,053 -- -- 8,000
Chief Financial Officer 1995 107,230 32,000 -- 4,500
</TABLE>
- -----------------
(a) Represents the estimated value of personal use of corporate aircraft.
See Item 13. "Certain Relationships and Related Transactions."
(b) Mr. Whitesell resigned his positions as President and Chief Operating
Officer of the Company on August 6, 1997.
(c) All unexercised stock options granted to Mr. Whitesell during fiscal
1995, 1996 and 1997 expired upon his resignation in August 1997.
(d) Mr. Waits served as Treasurer and Chief Financial Officer of the
Company until August 1997. He currently is employed as general manager
of Air-Tex Corporation, a subsidiary of the Company.
4
<PAGE> 157
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the number and
value of unexercised stock options granted during the last completed fiscal
year to each of the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT
SECURITIES OPTIONS/ ASSUMED ANNUAL RATES OF
UNDERLYING SARS GRANTED STOCK PRICE APPRECIATION
OPTIONS/ TO EMPLOYEES EXERCISE OF FOR OPTION TERM
SARS IN FISCAL BASE PRICE EXPIRATION ------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Frank P. Krasovec 5,000 6.4% $16.875 11/15/06 $53,079 $134,512
Robert P. Whitesell(a) 5,000 6.4% 16.875 11/15/06 -- --
J. Max Waits 5,000 6.4% 16.875 11/15/06 53,079 134,512
James P. Gunning, Jr. 5,000 6.4% 16.875 11/15/06 53,079 134,512
</TABLE>
- ---------------------
(a) All unexercised stock options granted to Mr. Whitesell during the last
completed fiscal year were forfeited upon his resignation in August 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
The following table sets forth information concerning the number and
value of unexercised stock options held by named executive officers at August
30, 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
------------------- ----------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Frank P. Krasovec -- -- 2,000/28,000 $2,000/$23,080
Robert P. Whitesell -- -- 2,000/ -- 2,000/ --
J. Max Waits -- -- 5,562/19,100 59,230/11,140
James P. Gunning, Jr. -- -- --/11,000 --/ --
</TABLE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During fiscal 1997, the Compensation Committee of the Board of
Directors was made up of three independent non-employee Directors. The
Committee is responsible for analyzing the performance of the officers of the
Company and making recommendations to the entire Board of Directors concerning
their salaries, benefits and other compensation. The Committee also administers
the Company's stock option and compensation plans.
5
<PAGE> 158
Compensation of officers consists of three elements: (i) base salary,
(ii) annual incentive bonuses and (iii) long-term incentives in the form of
stock options. Annual cash bonuses are paid if the Company or its operating
companies achieve financial targets designed to reflect above-average
performance relative to the promotional products industry and the general
economy. Stock options are used to align the interests of shareholders and
officers by rewarding performance that builds shareholder value. These elements
are combined to build compensation packages that attract, motivate and retain
the management talent necessary to insure the success of the Company.
Base salaries for officers are determined by evaluating the
responsibilities of the position, individual performance by the officer,
contributions to the growth, revenue and earnings of the Company, the
experience of the officer and the number of years of his or her service with
the Company. These salaries are reviewed annually and adjustments are
determined by the Company's performance and the individual's contribution to
that performance.
For fiscal 1997, the Company's incentive bonus plan covered executives
of the Company and five of the Company's operating subsidiaries: ArtMold
Products Corporation, Barlow Promotional Products, Inc., Key Industries, Inc.,
Air-Tex Corporation and Radio Cap Company, Inc. Under the plan, pre-determined
amounts were available for the payment of cash bonuses based on both individual
performance and achievement of operating income targets by the subsidiaries.
Certain officers and other key managers participated in the bonus plans during
fiscal 1997 based upon percentages set for them at the beginning of the fiscal
year.
Stock options are granted to officers from time to time as determined
by the Committee. Stock options are granted with an exercise price not less
than the fair market value of the Common Stock on the date of grant. Options
are generally exercisable between three and ten years from the date granted.
Stock options are an important part of the overall compensation package
provided to officers. Since the full benefit of the compensation package cannot
be realized unless the Common Stock appreciates over the period that the stock
options vest and become exercisable, the Company believes that the grant of
stock options provides incentive for the creation of long-term shareholder
value.
These compensation policies apply to all officers of the Company,
including the named executive officers. Annual base salaries and incentive
bonus targets for executive officers were determined by the entire Board of
Directors, based upon the recommendations of the Compensation Committee and the
Board's evaluation of the factors described above.
Mr. Krasovec's base annual salary was increased by the Board of
Directors to $275,000 effective January 1, 1996. The Compensation Committee
determined not to increase Mr. Krasovec's base compensation for fiscal 1997.
Compensation Committee:
Robert L. Seibert
John H. Wilson III
John H. Josephson
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or has been an officer or
employee of the Company or any of its subsidiaries. There are no persons who
participated in deliberations concerning executive officer compensation in
fiscal 1997 that had any relationship that would require disclosure pursuant to
Item 404 of Regulation S-K as promulgated by the Securities and Exchange
Commission.
No executive officer of the Company served as a member of the
compensation committee (or other Board committee performing similar functions)
or board of directors of another corporation, one of whose executive officers
served on the Company's Compensation Committee or Board of Directors.
6
<PAGE> 159
COMMON STOCK PERFORMANCE GRAPH
The Common Stock began trading publicly on June 16, 1993. The
following performance graph compares the cumulative return since June 16, 1993
of the Common Stock with that of Standard and Poor's 500 Stock Index and a
group of the Company's peer corporations (the "Peer Group"). Each index assumes
$100 invested on June 16, 1993 and is calculated assuming quarterly
reinvestment of dividends and quarterly weighting by market capitalization.
[GRAPH]
<TABLE>
<CAPTION>
Research Data Group Total Return - Data Summary
NPPI Begin: 06/16/93
End: 08/31/97
3678VNPP
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/16/93 8/93 11/93 2/94 5/94 8/94 11/94 2/95 5/95 8/95 11/95 2/96 5/96
NORWOOD PROMOTIONAL PRODS NPPI 100 113 105 127 93 95 100 111 130 141 159 166 189
PEER GROUP PPEER0 100 105 117 114 112 106 98 103 97 103 111 113 143
S & P 500 1500 100 104 105 106 105 110 106 114 126 133 145 154 162
<CAPTION>
<C> <C> <C> <C> <C> <C>
8/96 11/96 2/97 5/97 8/97
NORWOOD PROMOTIONAL PRODS NPPI 132 143 159 133 123
PEER GROUP PPEER0 130 166 128 160 176
S & P 500 1500 158 185 194 209 223
</TABLE>
7
<PAGE> 160
<TABLE>
<CAPTION>
JUNE 16, AUG. 28, SEPT. 3, SEPT. 2, AUG. 31, AUG. 31,
1993 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Norwood Promotional Products, Inc. 100 113 95 141 132 123
Standard & Poor's 500 Stock Index 100 104 106 133 158 223
Peer Group 100 105 107 103 130 176
</TABLE>
The Peer Group is composed of the following companies:
<TABLE>
<CAPTION>
COMPANY NAME SYMBOL
------------ ------
<S> <C>
Ha-Lo Industries, Inc. HALO
Tandy Brands Accessories, Inc. TBAC
Lillian Vernon Corp. LVC
CSS Industries, Inc. CSS
Swiss Army Brands, Inc. SABI
</TABLE>
The Companies above were selected as a Peer Group due to similar
industries and market capitalization.
SECTION 16 COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, directors,
certain officers, and beneficial owners of 10% or more of the Company's Common
Stock are required from time to time to file with the Securities and Exchange
Commission reports on Forms 3, 4 or 5, relating principally to transactions in
Company securities by such persons. Based solely upon a review of Forms 3 and 4
and amendments thereto furnished to the Company during its fiscal year 1997 and
thereafter, Forms 5 and amendments thereto furnished to the Company with
respect to its fiscal year 1997, and written representations received by the
Company from a Director, officer or beneficial owner of more than 10% of the
Common Stock ("reporting persons") that no Form 5 is required, the Company
believes that all reporting persons filed on a timely basis the reports
required by Section 16(a) of the Securities Exchange Act of 1934 during the
Company's fiscal year 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Common Stock (i) as of December 10, 1997 by each Director of the
Company, each named executive officer (as defined in Item 11. "Executive
Compensation"), all current executive officers and Directors of the Company as
a group; and (ii) as of September 30, 1997 by each other person known to the
Company to own beneficially more than five percent of the Common Stock as of
September 30, 1997.
8
<PAGE> 161
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (A)
---------------------------
NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE
------------------------ --------- ----------
DIRECTORS AND EXECUTIVE OFFICERS:
<S> <C> <C>
Frank P. Krasovec (b) 659,917 13.0%
James P. Gunning, Jr 500 *
Robert P. Whitesell 109,023 2.2%
J. Max Waits (c) 13,100 *
Robert L. Seibert (d) 14,587 *
John H. Wilson III (e) 34,651 *
John H. Josephson (f) 24,728 *
Harold Holland (g) 13,000 *
Roy D. Terracina (h) 10,500 *
All directors and executive officers as a group
(Nine persons) 880,006 17.4%
5% SHAREHOLDERS:
Newberger & Berman, L.L.C. (i)(j) 706,500 12.5%
Heartland Advisors, Inc. (i)(k) 486,000 8.6%
Trust Company of the West Group, Inc. (i)(l) 472,400 8.4%
Thomson Horstmann & Bryant, Inc. (i)(m) 460,000 8.1%
</TABLE>
- -------------
*Less than 1%
(a) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to the shares of Common Stock
shown as beneficially owned by them. Beneficial ownership as reported in
the above table has been determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act"). The
percentages are based upon 5,070,598 shares outstanding as of December 10,
1997.
(b) Mr. Krasovec's business address is 106 East Sixth Street, Suite 300,
Austin, Texas 78701. Includes 7,000 shares of Common Stock issuable upon
exercise of options granted to Mr. Krasovec by the Company under the
Company's 1989 Stock Option Plan (the "1989 Plan"), which are exercisable
within 60 days.
(c) Includes 7,862 shares of Common Stock issuable upon exercise of options
granted to Mr. Waits by the Company under the 1989 Plan, which are
exercisable within 60 days.
(d) Includes 6,000 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Seibert by the Company, which are currently exercisable.
(e) Includes 22,728 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Wilson by the Company, which are currently exercisable.
(f) Includes 22,728 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Josephson by the Company, which are immediately
exercisable. Excludes 150,000 shares of Common Stock issuable upon
exercise of warrants held by Allen & Company Incorporated ("Allen"). Mr.
Josephson, a director of Allen, disclaims beneficial ownership of these
shares.
9
<PAGE> 162
(g) Includes 12,000 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Holland by the Company, which are currently exercisable.
(h) Includes 6,000 shares of Common Stock issuable upon exercise of warrants
granted to Mr. Terracina by the Company, which are currently exercisable.
(i) Information regarding beneficial ownership has been obtained from reports
on SEC Schedule 13F and 13G or from the Nasdaq Stock Market. This
information has not been verified by the Company.
(j) The business address of Newberger & Berman, L.L.C. is 605 Third Avenue,
New York, New York 10158-3698.
(k) The business address for Heartland Advisors, Inc. is 790 N. Milwaukee
Street, Milwaukee, Wisconsin 53202-3712.
(l) The business address of Trust Company of the West Group, Inc. is 865
South Figuerga Street, Los Angeles, California 90017.
(m) The business address of Thomson Horstmann & Bryant, Inc. is Park 80
West/Plaza Two, Saddle Brook, New Jersey 07663.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1996, Norcorp, Inc., a subsidiary of the Company ("Norcorp"),
acquired an undivided 12.5% interest in a corporate aircraft. Frank Krasovec,
Chief Executive Officer, President and Chairman of the Company, entered into a
Time Sharing Agreement with Norcorp effective November 1996, which required Mr.
Krasovec to reimburse Norcorp for certain expenses related to his personal use
of the aircraft. In November 1997, the Compensation Committee determined to
modify the Time Sharing Agreement to treat Mr. Krasovec's reimbursable expenses
as additional compensation. These expenses for fiscal 1997 totaled approximately
$27,539. See Item 11. "Executive Compensation."
10
<PAGE> 163
SIGNATURES
Pursuant to the requirements 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.
NORWOOD PROMOTIONAL PRODUCTS, INC.
By: /s/ James P. Gunning, Jr. Date: December 24, 1997
----------------------------------------
James P. Gunning, Jr.
Secretary, Treasurer and
Chief Financial Officer
11
<PAGE> 164
INDEX TO EXHIBITS
Each management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto is indicated by an asterisk (*).
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C> <C>
3.1 -- Articles of Incorporation of the Registrant, as amended.(1)
3.2 -- Amended and Restated Bylaws of the Registrant. (filed herewith)
4.1 -- Specimen stock certificate evidencing the Common Stock.(1)
10.1 -- 1993 Non-qualified Stock Option Plan of the Registrant dated June 4, 1993.(1) (Exhibit 10.18) *
10.2 -- 1993 Non-Employee Director Stock Purchase Plan of the Registrant dated November 8, 1993.(2)
(Exhibit 10.26) *
10.3 -- Employee Stock Purchase Plan of the Registrant dated May 18, 1995, as amended and restated
effective as of May 9, 1996. (3) (Exhibit 4.7) *
10.4 -- Amended and Restated 1989 Incentive Stock Option Plan of the Registrant dated August 23, 1996.
(4) *
10.5 -- Amended and Restated 1994 Incentive Stock Compensation Plan of the Registrant dated August 23,
1996. (4) *
10.6 -- Warrant certificate granted by the Registrant to Allen and Company, Incorporated, dated June
23,1993.(1)
10.7 -- Form of Warrant certificate granted by the Registrant to Directors in lieu of Director's fees.
(filed herewith) *
10.8 -- Lease dated March 26, 1973 by and between Don E. Harley Associates, Inc., and Arthur Salm, Inc.
assigned to Exchange National Bank of Chicago on June 12, 1973, assigned to Barlow Specialty
Advertising, Inc. in June 1986, and assigned to Barlow Promotional Products, Inc. as of May 19,
1992.(1) (Exhibit 10.15)
10.9 -- Lease Agreement by and between Wulfe Investments and Radio Cap Company, Inc. commencing August 1,
1992 relating to certain property located at 817 North Frio in San Antonio, Texas.(l) (Exhibit
10.16)
10.10 -- Lease Agreement by and between the Utah State Retirement Fund and Radio Cap Company, Inc. entered
into November 17, 1992 relating to the space at Rittiman East Business Park, Building 12 at 5519
Business Park in San Antonio.(1) (Exhibit 10.17)
10.11 -- Lease Agreement by and between Joseph S. Scher, not individually, but as Trustee under the
Joseph S. Scher Trust dated April 5, 1993, and Key Acquisition Corp., dated as of May 1, 1994.(5)
(Exhibit 10.20)
10.12 -- Sublease by and between MM Realty Associates II, dated November 1, 1981; First Amendment to
Sublease by and between MM Realty Associates II, dated March 1, 1983; Second Amendment to
Sublease by and between Cranston Partnership (Associates II) formerly MM Realty, dated September
1, 1986 and Assignment of and Third Amendment to Sublease by and between Cranston Partnership,
Measured Marketing Services, Inc. and ArtMold Products Corporation, dated March 1, 1992.(5)
10.13 -- Office Sublease dated May 1995 between the Registrant and Frito Lay, Inc. (6) (Exhibit 10.28)
10.14 -- Standard Industrial Commercial-Tenant Lease-Net effective as of November 20, 1995 between Key
Industries, Inc. and Harris/Newell Family Partnership. (6)
10.15 -- Standard Industrial Commercial-Tenant Lease-Net effective as of February 22, 1996 between Barlow
Promotional Products, Inc. and AMG Holding, Inc. (7) (Exhibit 10.34)
10.16 -- Asset Purchase Agreement dated as of November 17, 1995 among Ocean Specialty Manufacturing
Corporation, Steve Sherlin, Ron Silverstein, Key Industries, Inc. and the Registrant. (6)
(Exhibit 10.30)
10.17 -- Asset Purchase Agreement dated January 22, 1996 among TEE-OFF Enterprises, Inc., James W. Schmidt, Vicki M. Schmidt,
ArtMold Products Corporation and the Registrant (8)
10.18 -- Asset Purchase Agreement dated April 1, 1996 among Alpha Products,. Inc., Aladdin Industries,
Inc., Radio Cap Company, Inc. and the Registrant.(9)
</TABLE>
12
<PAGE> 165
<TABLE>
<C> <C> <C>
10.19 -- Credit Agreement dated as of August 28, 1997 among the Registrant, certain Subsidiary Guarantors
Merrill Lynch & Co. and NationsBank, N.A. (10)
10.20 -- Time Sharing Agreement dated as of August 25, 1997 between Norcorp, Inc. and Frank P. Krasovec
(filed herewith)*
11.1 -- Computation of per share earnings. (11)
21.1 -- Subsidiaries of the Registrant.(6) (Exhibit 22.1)
23.1 -- Consent of Ernst & Young L.L.P. (11)
27.1 -- Financial data schedule. (11)
</TABLE>
(1) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (File No. 33-61740) filed with the Securities and Exchange
Commission on June 16, 1993 and incorporated herein by reference.
(2) Previously filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended November 27, 1993 filed with the Securities and Exchange
Commission on January 10, 1994 and incorporated herein by reference
(3) Previously filed as an Exhibit to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on July 15, 1996 and incorporated herein by
reference.
(4) Previously filed as an Exhibit to the Registrant's Form 10-K for the year
ended August 30, 1996 filed with the Securities and Exchange Commission on
November 26, 1996 and incorporated herein by reference.
(5) Previously filed as an Exhibit to the Registrants Form 10-Q filed with the
Securities and Exchange Commission on May 14, 1994 and incorporated herein by
reference
(6) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on October 17,
1995, as amended by Amendment No. 1 filed with the Securities and Exchange
Commission on November 24, 1995, and incorporated herein by reference.
(7) Previously filed as an Exhibit to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on April 16, 1996 and incorporated herein by
reference.
(8) Previously filed as an Exhibit to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on February 2, 1996 and incorporated herein
by reference.
(9) Previously filed as an Exhibit to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on April 16, 1996 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on September 5, 1997 and incorporated herein
by reference.
(11) Previously filed as an Exhibit to the Registrant's Form 10-K for the year
ended August 30, 1997 filed with the Securities and Exchange Commission on
November 28, 1997.
13
<PAGE> 166
APPENDIX G
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)
<TABLE>
<S> <C>
TEXAS 74-2553074
- ------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
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
<PAGE> 167
NORWOOD PROMOTIONAL PRODUCTS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED MAY 30, 1998
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
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
</TABLE>
2
<PAGE> 168
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
ITEM 1.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
MAY 30, MAY 31, MAY 30, MAY 31,
1998 1997 (a) 1998 1997 (a)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE> 169
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 30, 1998 AUGUST 30, 1997
ASSETS (UNAUDITED) (AUDITED)
------------ ---------------
<S> <C> <C>
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
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 170
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
MAY 30, MAY 31,
1998 1997
-------- --------
<S> <C> <C>
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 ---
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 171
NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
----- ------ ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
===== ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 172
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):
<TABLE>
<CAPTION>
May 30, 1998 May 31, 1997
<S> <C> <C>
Raw materials $ 9,145 $ 9,164
Work in process 962 1,298
Finished goods 25,355 21,643
Total $35,462 $32,105
</TABLE>
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
<PAGE> 173
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
<PAGE> 174
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
<PAGE> 175
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
<PAGE> 176
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
<PAGE> 177
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
<PAGE> 178
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
<PAGE> 179
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:
<TABLE>
<CAPTION>
Date of Earliest Event
Reported on Form 8-K Description
- ---------------------------------------------------------------
<S> <C>
March 15, 1998 Agreement and Plan of Merger by and between
FPK, LLC and Norwood Promotional Products, Inc.
</TABLE>
14
<PAGE> 180
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
<PAGE> 181
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
11.0 -- Computation of earnings per share
27.0 -- Financial data schedule
</TABLE>
