<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended November 29, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the Transition Period From to
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Commission file number 0-21800
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NORWOOD PROMOTIONAL PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
TEXAS 74-2553074
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 E. 6th Street, Suite 300, Austin, Texas 78701
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(Address of Principal executive offices) (Zip Code)
(210) 341-9440
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(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
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,071,169 shares of Common
Stock, no par value, as of January 6, 1998.
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NORWOOD PROMOTIONAL PRODUCTS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED NOVEMBER 29, 1997
<TABLE>
<CAPTION>
PART I Financial Information PAGE NO.
<S> <C> <C>
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 Statements of Shareholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Index to Exhibits 13
</TABLE>
2
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 29, NOVEMBER 30,
1997 1996(a)
<S> <C> <C>
Sales $ 46,964 $ 39,818
Cost of sales 33,744 27,589
Gross profit 13,220 12,229
Operating expenses 9,230 8,377
Operating income 3,990 3,852
Interest expense 863 669
Income before income taxes 3,127 3,183
Provision for income taxes 1,282 1,281
Income from continuing operations 1,845 1,902
Discontinued operations -- (462)
Net income $ 1,845 $ 1,440
Net income per common share:
Primary:
Income from continuing operations $ 0.35 $ 0.33
Discontinued operations -- (0.08)
Net income $ 0.35 $ 0.25
Fully diluted:
Income from continuing operations $ 0.35 $ 0.33
Discontinued operations -- (0.08)
Net income $ 0.35 $ 0.25
Weighted average number of common shares outstanding:
Primary 5,200 5,746
Fully Diluted 5,200 5,746
</TABLE>
(a) Restated for discontinued operations reported in the fourth quarter, 1997.
See accompanying notes
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 29, AUGUST 30,
1997 1997
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,002 $ 2,609
Accounts receivable 22,717 24,282
Income taxes receivable -- 551
Other receivables 725 713
Inventories 32,040 32,105
Prepaid expenses and other current assets 1,916 2,464
Total current assets 58,400 62,724
Property, plant and equipment, net 20,920 21,141
Goodwill 38,320 39,009
Deferred income taxes 2,630 2,549
Other assets 9,063 9,771
Total assets $ 129,333 $ 135,194
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 11,897 $ 11,299
Accrued liabilities 6,025 11,197
Income taxes payable 710 --
Current maturities of long-term debt and capital lease obligations 2,349 2,352
Total current liabilities 20,981 24,848
Long-term debt and capital lease obligations, less current maturities portion 55,148 59,070
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized; 5,646,744 and
5,638,789 shares issued and 5,070,214 and 5,062,259 shares outstanding at
November 29, 1997 and August 30, 1997, respectively 22,941 22,858
Additional paid-in capital 29,340 29,340
Less cost of treasury stock, 576,530 shares at November 29, 1997
and August 30, 1997, respectively (7,391) (7,391)
Retained earnings 8,314 6,469
Total shareholders' equity 53,204 51,276
Total liabilities and shareholders' equity $ 129,333 $ 135,194
</TABLE>
See accompanying notes
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED,IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 29, NOVEMBER 30,
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,845 $ 1,440
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes (81) --
Depreciation 971 1,048
Amortization 1,015 938
Loss on sale of property & equipment 3 --
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable 1,566 1,286
Income taxes receivable 551 --
Inventories 65 450
Prepaid expenses and other 928 (378)
Other receivables (12) 17
Accounts payable 598 (2,122)
Accrued liabilities (5,172) (407)
Income taxes payable 710 680
Net cash provided by operating activities 2,987 2,952
INVESTING ACTIVITIES
Business acquisitions, net of cash -- --
Purchase of property, plant & equipment (752) (1,527)
Proceeds from retirement of property, plant & equipment -- --
Net cash used in investing activities (752) (1,527)
FINANCING ACTIVITIES
Proceeds from long-term debt 8,081 11,040
Payments on long-term debt (12,006) (14,129)
Debt refinancing fees -- --
Proceeds from sale of common stock and shareholder notes 83 7
Net cash used in financing activities (3,842) (3,082)
Net change in cash (1,607) (1,657)
Cash at beginning of period 2,609 1,861
Cash at end of period $ 1,002 $ 204
</TABLE>
See accompanying notes
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
RECEIVABLES FOR
COMMON STOCK ADDITIONAL PURCHASES PURCHASES TOTAL
------------ PAID-IN RETAINED OF COMMON OF TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 30, 1997 5,639 $22,858 $29,340 $ 6,469 $-- $(7,391) $51,276
Sale of common stock 8 83 -- -- -- -- 83
Payment on shareholder notes -- -- -- -- -- -- --
Net Income -- -- -- 1,845 -- -- 1,845
Balance at November 29, 1997 5,647 $22,941 $29,340 $ 8,314 $-- $(7,391) $53,204
</TABLE>
See accompanying notes
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NORWOOD PROMOTIONAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
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. 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 November 29, 1997 and August 30, 1997 consist of (in
thousands):
<TABLE>
<CAPTION>
NOVEMBER 29, AUGUST 30,
1997 1997
<S> <C> <C>
Raw materials $ 8,861 $ 9,164
Work in process 1,494 1,298
Finished goods 21,685 21,643
Total $32,040 $32,105
</TABLE>
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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
consolidated financial statements. The discussion below relates to material
changes in the results of operations for the three months ended November 29,
1997 as compared to the same period ended November 30, 1996, 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 significantly affected by the acquisitions of
TEE-OFF Enterprises, Inc. (acquired in January 1996), Alpha Products, Inc.
(acquired in April 1996) (collectively referred to as the "fiscal 1996
acquisitions"), Wesburn Golf (acquired in February 1997) and DM Apparel, Inc.
(acquired in February 1997) (collectively referred to as the "fiscal 1997
acquisitions"). Reference is made to Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the year ended August 30, 1997 for further details
regarding the significant factors affecting the results of operations and
financial condition of the Company.
THREE MONTHS ENDED NOVEMBER 29, 1997 COMPARED WITH THREE MONTHS ENDED NOVEMBER
30, 1996
Sales for the first quarter of fiscal 1998 increased $7.1 million, or
17.9%, to $46.9 million from $39.8 million (restated for discontinued operations
reported August 1997) in the first quarter of fiscal 1997. Of this increase,
$2.8 million was attributable to increased sales of the Company's existing
product lines, and $4.3 million was due to the fiscal 1997 acquisitions.
Gross profit for the first quarter of fiscal 1998 increased $991,000,
or 8.1%, to $13.2 million from $12.2 million in the first quarter of fiscal
1997. This increase was primarily attributable to the fiscal 1997 acquisitions.
Gross profit as a percentage of sales decreased from 30.7% to 28.1%. This
decrease was primarily attributable to the growth in logo golf ball sales which
have lower gross profit margins offset by lower operating expenses.
Operating expenses for the first quarter of fiscal 1998 increased
$853,000, or 10.2%, to $9.2 million from $8.4 million in the first quarter of
fiscal 1997. This increase was primarily attributable to the fiscal 1997
acquisitions. Operating expenses as a percentage of sales decreased from 21.0%
to 19.7%. 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 quarter of fiscal 1998 increased
$138,000, or 3.6%, to $4.0 million from $3.9 million in the first quarter of
fiscal 1997. Operating income as a percentage of sales decreased from 9.7% to
8.5%. This decrease was mainly attributable to the relocation of the promotional
products division of Alpha Products and to the lower than expected earnings
contribution from the bag product lines. Management believes the latter to be a
timing difference.
Interest expense was $863,000 during the first quarter of fiscal 1998
compared to $669,000 in the first quarter of fiscal 1997. The increase was
attributable to the increase in borrowings used to finance the 1997
acquisitions (February 1997) and to repurchase 575,100 shares of the common
stock in April 1997.
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The Company's effective tax rate was 41.0% during the first quarter of
fiscal 1998 compared with 40.2% in the first quarter of fiscal 1997.
Discontinued operations in fiscal 1997 relates to the Company's
decision to discontinue the operations of the Alpha Products retail division.
The loss attributable to the Alpha Products division in the first quarter of
fiscal 1997 was $462,000.
As a result of the above, first quarter of fiscal 1998 net income
increased $405,000, or 28.1%, to $1.85 million from $1.44 million in the first
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. The RCC Group is comprised of operations producing drinkware, Koozie(R),
headwear and promotional bag products, while the Barlow Group's products
include writing instruments, pocket tools, business gifts and awards, and
desktop and office products. For the first quarter of 1998, the RCC Group
recorded sales of $21.0 million, a 4% increase from sales of $20.3 million in
the same period for 1997. The Barlow Group's sales for the 1998 first quarter
increased 28% to $26.0 million from $20.3 million reported in the 1997 first
quarter. Adjusted for fiscal 1997 acquisitions, Barlow group sales increased
10% from the comparable quarter. The gross profit margin of the RCC Group was
27.5% for the first quarter of fiscal 1998 compared to 29.7% for the same
period of 1997; and for the Barlow Group, the gross profit margin was 28.7%
compared to 31.1% for the same respective periods. The variance for the RCC
Group was due to the start-up of the Alpha Products operations in San Antonio
and the variance for the Barlow Group was due to the increase in logo golf
ball sales. Operating expenses as a percent of sales were approximately 14.0%
in the first quarter of 1998 for both groups compared to approximately 16.4%
for both groups for the same period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business activities primarily with
borrowings under its recently obtained bank credit facilities (the "1997 Credit
Facility"), notes payable to former owners of acquired businesses, the sale of
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, all of
which was used to repay the Company's then existing bank debt ($40.0 million
outstanding at November 29, 1997), a $60.0 million reducing revolving credit
facility to be used for future acquisitions ($ 0 outstanding at November 29,
1997) and a $25 million revolving credit facility to be used for working capital
purposes ($3.3 million outstanding at November 29, 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, 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 $3.0 million and $2.9
million for the first quarter of 1998 and 1997, respectively. Capital
expenditures were approximately $752,000 and $1.5 million for the first quarter
of 1998 and 1997, respectively.
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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 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 18 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, but there can be no assurance
that the Company will actually spend such amounts. 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.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning of Section
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.
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NORWOOD PROMOTIONAL PRODUCTS, INC.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 29, 1997
PART II
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 first quarter of 1998:
Date of Earliest Event
Reported on Form 8-K Description
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September 10, 1997 Credit Agreement dated as of August 28, 1997
11
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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.
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Registrant
Date: January 13, 1998 /s/ James P. Gunning, Jr.
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James P. Gunning, Jr.
Secretary, Treasurer and Chief Financial Officer
12
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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11.1 -- Computation of per share earnings
27.0 -- Financial data schedule
13
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EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
NOVEMBER 29, NOVEMBER 30,
1997 1996
<S> <C> <C>
PRIMARY:
Weighted average common shares outstanding 5,069 5,615
Weighted average common equivalent shares outstanding 131 131
Total 5,200 5,746
Income from continuing operations $ 1,845 $ 1,902
Discontinued operations -- (462)
Net income $ 1,845 $ 1,440
Per share amounts:
Income from continuing operations $ 0.35 $ 0.33
Discontinued operations -- $ (0.08)
Net income $ 0.35 $ 0.35
FULLY DILUTED:
Weighted average common shares outstanding 5,069 5,615
Weighted average common equivalent shares outstanding 131 131
Total 5,200 5,746
Income from continuing operations $ 1,845 $ 1,902
Discontinued operations -- (462)
Net income $ 1,845 $ 1,440
Per share amounts:
Income from continuing operations $ 0.35 $ 0.33
Discontinued operations -- $ (0.08)
Net income $ 0.35 $ 0.35
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT OF NORWOOD PROMOTIONAL PRODUCTS, INC. FOR THE THREE MONTHS
ENDED NOVEMBER 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> NOV-29-1997
<CASH> 1,002
<SECURITIES> 0
<RECEIVABLES> 23,632
<ALLOWANCES> 915
<INVENTORY> 32,040
<CURRENT-ASSETS> 58,400
<PP&E> 36,105
<DEPRECIATION> 15,185
<TOTAL-ASSETS> 129,333
<CURRENT-LIABILITIES> 20,981
<BONDS> 0
0
0
<COMMON> 22,941
<OTHER-SE> 30,263
<TOTAL-LIABILITY-AND-EQUITY> 129,333
<SALES> 46,964
<TOTAL-REVENUES> 46,964
<CGS> 33,744
<TOTAL-COSTS> 33,744
<OTHER-EXPENSES> 9,230
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 863
<INCOME-PRETAX> 3,127
<INCOME-TAX> 1,282
<INCOME-CONTINUING> 1,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,845
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
