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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 30, 1996
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
NORWOOD PROMOTIONAL PRODUCTS, INC.
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Inc. (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.)
70 N.E. LOOP 410, SUITE 295 SAN ANTONIO, TEXAS 78216
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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)
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(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: 5,617,039 shares of Common
Stock, no par value, as of January 8, 1997.
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NORWOOD PROMOTIONAL PRODUCTS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED NOVEMBER 30, 1996
PART I Financial Information PAGE NO.
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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
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
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NOVEMBER 30, DECEMBER 2,
1996 1995
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Sales $42,176 $33,368
Cost of sales 30,021 22,745
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Gross profit 12,155 10,623
Operating expenses 8,941 7,196
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Operating income 3,214 3,427
Interest expense 814 1,160
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Income before income taxes 2,400 2,267
Provision for income taxes 960 911
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Net income $ 1,440 $ 1,356
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Net income per common share:
Primary
Fully Diluted $ 0.25 $ 0.37
0.25 0.37
Weighted average number of common
shares outstanding:
Primary 5,746 3,691
Fully Diluted 5,746 3,691
See accompanying notes
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOVEMBER 30, AUGUST 31,
1996 1996
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ASSETS
Current Assets:
Cash and cash equivalents $ 204 $ 1,861
Accounts receivable 20,335 21,621
Other receivables 707 724
Inventories 31,373 31,823
Prepaid expenses and other current assets 2,207 2,231
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Total current assets 54,826 58,260
Property, plant and equipment, net 20,093 19,585
Goodwill 34,577 35,266
Deferred income taxes 751 751
Other assets 7,636 7,514
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Total assets $ 117,883 $ 121,376
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 8,147 $ 10,269
Accrued liabilities 5,513 5,920
Income taxes payable 809 129
Current maturities of long-term debt and capital lease obligations 7,172 6,694
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Total current liabilities 21,641 23,012
Long-term debt and capital lease obligations, less current maturities 37,416 40,984
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized; 5,616,765 and
5,615,791 shares issued and 5,615,335 and 5,614,361 shares outstanding at
November 30, 1996 and August 31, 1996, respectively 51,571 51,568
Additional paid-in capital 369
369
Less cost of treasury stock, 1,430 shares at November 30, 1996
and August 31, 1996, respectively (8) (8)
Retained earnings 6,905 5,465
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58,837 57,394
Less receivables for purchase of common stock (11) (14)
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Total shareholders' equity 58,826 57,380
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Total liabilities and shareholders' equity $ 117,883 $ 121,376
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See accompanying notes
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
------------------------------------
NOVEMBER 30, DECEMBER 2,
1996 1995
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OPERATING ACTIVITIES
Net income $ 1,440 $ 1,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,048 598
Amortization 938 742
(Gain) loss on sale of property & equipment -- (18)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net 1,286 763
Inventory 450 670
Prepaid expenses and other (378) (567)
Other receivables 17 (17)
Accounts payable (2,122) (1,574)
Accrued liabilities (407) (935)
Income taxes payable 680 (85)
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Net cash provided by operating activities 2,952 933
INVESTING ACTIVITIES
Business acquisitions, net of cash -- (3,200)
Purchase of property, plant & equipment (1,527) (831)
Proceeds from retirement of property, plant & equipment -- 26
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Net cash used in investing activities (1,527) (4,005)
FINANCING ACTIVITIES
Proceeds from long-term debt 11,040 10,050
Payments on long-term debt (14,129) (8,993)
Debt refinancing fees -- (11)
Payments on common stock and shareholder notes 7 34
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Net cash provided by financing activities (3,082) 1,080
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Net change in cash (1,657) (1,992)
Cash at beginning of period 1,861 2,174
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Cash at end of period $ 204 $ 182
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See accompanying notes
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NORWOOD PROMOTIONAL PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
RECEIVABLES FOR
COMMON STOCK ADDITIONAL PURCHASES PURCHASES TOTAL
------------ PAID-IN RETAINED OF COMMON OF TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK STOCK EQUITY
------ ------ ---------- --------- --------------- ----------- -------------
Balance at August 31, 1996 5,616 $51,568 $ 369 $ 5,465 $ (14) $ (8) $ 57,380
Purchases of Common Stock 1 3 3
Payment on shareholder notes 3 3
Net Income 1,440 1,440
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Balance at November 30, 1996 5,617 $51,571 $ 369 $ 6,905 $ (11) $ (8) $ 58,826
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See accompanying notes
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NORWOOD PROMOTIONAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 30, 1996 AND DECEMBER 2, 1995
1. SIGNIFICANT ACCOUNTS 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 30, 1996 and August 31, 1996 consist of (in
thousands):
NOVEMBER 30, AUGUST 31,
1996 1996
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Raw materials $10,163 $ 9,132
Work in process 1,002 1,099
Finished goods 20,208 21,592
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Total $31,373 $31,823
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3. ACQUISITIONS
In late November 1996, the Company signed a nonbinding letter of
intent to acquire Roubill Group, a German promotional products company. The
transaction, which is expected to close in the first quarter of calendar 1997,
is subject to the completion of due diligence, the negotiation of a definitive
agreement and other customary closing conditions. There can be no assurance
that this acquisition will be completed.
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Norwood Promotional Products, Inc.
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 30, 1996 as compared to the same period ended December 2, 1995, and to
material changes in the financial condition of the Company occurring since the
prior fiscal year end of August 31,1996. The Company's results of operations
for the periods discussed below were significantly affected by the acquisitions
of Ocean Specialty Manufacturing Corporation (acquired in November 1995),
TEE-OFF Enterprises, Inc. (acquired in January 1996) and Alpha Products, Inc.
(acquired in April 1996) (collectively referred to as the "fiscal 1996
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 31, 1996 for further details
regarding the significant factors affecting the results of operations and
financial condition of the Company.
THREE MONTHS ENDED NOVEMBER 30, 1996 COMPARED WITH THREE MONTHS ENDED
DECEMBER 2, 1995
Sales for the first quarter of fiscal 1997 increased $8.8 million, or
26.4%, to $42.2 million from $33.4 million in the first quarter of fiscal 1996.
Of this increase, $1.7 million was attributable to increased sales of the
Company's core product lines, and $7.1 million was due to the fiscal 1996
acquisitions.
Gross profit for the first quarter of fiscal 1997 increased $1.6
million, or 14.4%, to $12.2 million from $10.6 million in the first quarter of
fiscal 1996. This increase was primarily attributable to the fiscal 1996
acquisitions. Excluding the fiscal 1996 acquisitions, gross profit as a
percentage of sales increased from 31.8% to 32.4%. Including the fiscal 1996
acquisitions, gross profit as a percentage of sales decreased from 31.8% to
28.8%. This decrease was attributable to the fiscal 1996 acquisitions which
operated with lower gross profit percentages than the Company's pre-existing
businesses.
Operating expenses for the first quarter of fiscal 1997 increased $1.7
million, or 24.2%, to $8.9 million from $7.2 million in the first quarter of
fiscal 1996. This increase was primarily attributable to the fiscal 1996
acquisitions. Operating expenses as a percentage of sales decreased from 21.6%
to 21.2%. This decrease is primarily a result of the restructuring effort
undertaken in the fourth quarter of fiscal 1996 and to other cost saving
initiatives undertaken by the subsidiaries.
Operating income for the first quarter of fiscal 1997 decreased
$213,000, or 6.2%, to $3.2 million from $3.4 million in the first quarter of
fiscal 1996. Operating income as a percentage of sales decreased from 10.3% to
7.6%. This decrease was mainly attributable to the fiscal 1996 acquisitions
lower gross profit percentages and to lower than expected contribution from the
Artmold, California Line(TM), and domestic bag product lines.
Interest expense was $814,000 during the first quarter of fiscal 1997
compared to $1.2 million in the first quarter of fiscal 1996. The decrease was
attributable to lower effective interest rates and the use of the proceeds
received from the December 1995 stock offering to pay down debt, offset by
borrowings used to finance the fiscal 1996 acquisitions.
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The Company's effective tax rate was 40.0% during the first quarter of
fiscal 1997 compared with 40.2% in the first quarter of fiscal 1996.
As a result of the above, first quarter of fiscal 1997 net income
increased $84,000, or 6.2%, to $1.44 million from $1.36 million in the first
quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business activities primarily with
borrowings under the bank credit facility (the "Bank Credit Facility"), notes
payable to former owners of acquired businesses, the sale of Common Stock and
cash provided from operations.
The Bank Credit Facility provides for aggregate borrowings of up to
$60.0 million, comprised of a $20.0 million revolving credit facility ($9.6
million outstanding at November 30,1996), a $21.5 million term loan facility
($6.7 million outstanding at November 30, 1996) and an $18.5 million
acquisition loan facility ($14.8 million outstanding at November 30, 1996). The
revolving loan facility is available to finance acquisitions and for working
capital and general corporate purposes. The acquisition loan facility is
available to finance acquisitions.
Pursuant to the terms of the Bank Credit Facility, the Company is
required to maintain certain financial ratios and minimum tangible net worth
and is subject to a prohibition on dividends, and limitations on additional
indebtedness, liens, investments, issuance of stock of subsidiaries, changes in
management and ownership, mergers and acquisitions, sale/leaseback transactions
and sales of assets. An event of default occurs under the Bank Credit Facility
if any person becomes the owner of more than 35.0% of the outstanding capital
stock of the Company, or if within a 12-month period, a majority of the
Company's Board of Directors shall be comprised of new directors. The Company
is required to make quarterly amortization payments on certain amounts
outstanding under the Bank Credit Facility. The final maturity of the Bank
Credit Facility is July 31, 2000. Amounts outstanding under the Bank 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 ratio of the Company's Consolidated Senior Funded Debt to Earnings
Before Interest Taxes and Depreciation (as such terms are defined in the Bank
Credit Facility). Indebtedness under the Bank Credit Facility is secured by a
first lien priority security interest in substantially all the assets of the
Company, including a pledge of the stock of each of the Company's subsidiaries.
Additionally, any entities and assets acquired with financing under the Bank
Credit Facility will serve as security. Borrowings under the Bank Credit
Facility are jointly and severally guaranteed by all subsidiaries acquired or
created by 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 $31.2 million were used to prepay indebtedness under the Bank
Credit Facility. The Company may, subject to certain conditions, reborrow such
amounts from time to time for general corporate purposes, including financing
future acquisitions.
WORKING CAPITAL AND CAPITAL EXPENDITURES
Net cash provided by operating activities was $2.9 million and
$933,000 for the first quarter of 1997 and 1996, respectively. Capital
expenditures were approximately $1.5 million and $831,000 for the first quarter
of 1997 and 1996, 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 borrowings under the Bank
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 1997 capital expenditure requirements will be
approximately $4.5 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, projections of revenues, income,
capital expenditures, 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
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 that the Company will be
able to manage its expanding operations effectively; (ii) a change in risks
inherent in the Company's foreign sourcing of supplies; (iii) the loss of
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 30, 1996
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 1997:
Date of Earliest Event
Reported on Form 8-K Description
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None
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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 8, 1997 /s/ J. Max Waits
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J. Max Waits
Secretary, Treasurer and Chief
Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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10.24(c) -- First Amendment to Amended and Restated Credit Agreement
(schedules have been omitted)
10.24(d) -- Second Amendment to Amended and Restated Credit Agreement
11.1 -- Computation of per share earnings.
27.0 -- Financial data schedule.
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