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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
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NORWOOD PROMOTIONAL PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
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<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
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(Address of Principal executive offices) (Zip Code)
(512) 476-7100
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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
---
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.
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NORWOOD PROMOTIONAL PRODUCTS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED MAY 30, 1998
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PAGE NO.
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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>
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
ITEM 1.
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<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.
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
MAY 30, 1998 AUGUST 30, 1997
ASSETS (UNAUDITED) (AUDITED)
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<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
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
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NINE MONTHS ENDED
----------------------
MAY 30, MAY 31,
1998 1997
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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
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
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<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
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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):
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<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.
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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.
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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
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.
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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.
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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.
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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.
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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.
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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> 15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Norwood Promotional Products, Inc.
----------------------------------
(Registrant)
Date: July 14, 1998 /s/ James P. Gunning, Jr.
-----------------------------------------------------
James P. Gunning, Jr.
Secretary, Treasurer and Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
11.0 -- Computation of earnings per share
27.0 -- Financial data schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.0 COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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>
BASIC: (b) (b)
Weighted average common shares outstanding 5,080 279 5,075 5,504
Income from continuing operations $ 3,267 $ 3,325 $ 5,542 $ 5,849
Discontinued operations -- (549) -- (1,468)
Net Income $ 3,267 $ 2,776 $ 5,542 $ 4,381
Per share amounts:
Income from continuing operations $ 0.64 $ 0.63 $ 1.09 $ 1.06
Discontinued operations -- (0.10) -- (0.26)
Net Income $ 0.64 $ 0.53 $ 1.09 $ 0.80
DILUTED: (b) (b)
Weighted average common shares outstanding 5,080 5,279 5,075 5,504
Weighted average dilutive potential common
shares outstanding 230 47 147 119
Total 5,310 5,326 5,222 5,623
Income from continuing operations $ 3,267 $ 3,325 $ 5,542 $ 5,849
Discontinued operations -- (549) -- (1,468)
Net Income $ 3,267 $ 2,776 $ 5,542 $ 4,381
Per share amounts:
Income from continuing operations $ 0.62 $ 0.62 $ 1.06 $ 1.04
Discontinued operations -- (0.10) -- (0.26)
Net Income $ 0.62 $ 0.52 $ 1.06 $ 0.78
</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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NORWOOD PROMOTIONAL PRODUCTS, INC. FOR THE NINE MONTHS
ENDED MAY 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> MAY-30-1998
<CASH> 206
<SECURITIES> 0
<RECEIVABLES> 27,115
<ALLOWANCES> 676
<INVENTORY> 35,462
<CURRENT-ASSETS> 65,841
<PP&E> 35,897
<DEPRECIATION> 17,095
<TOTAL-ASSETS> 134,709
<CURRENT-LIABILITIES> 21,723
<BONDS> 0
0
0
<COMMON> 23,029
<OTHER-SE> 33,960
<TOTAL-LIABILITY-AND-EQUITY> 134,709
<SALES> 140,300
<TOTAL-REVENUES> 140,300
<CGS> 101,656
<TOTAL-COSTS> 26,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,936
<INCOME-PRETAX> 9,282
<INCOME-TAX> 3,740
<INCOME-CONTINUING> 5,542
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,542
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.06
</TABLE>
