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EXHIBIT 99(b)(5)
STRICTLY CONFIDENTIAL
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PRESENTATION TO
NORWOOD PROMOTIONAL
PRODUCTS, INC.
December 5, 1997
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TABLE OF CONTENTS
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1. Executive Summary
2. Summary of Indicative Terms
- Senior Credit Facility
- Senior Subordinated Notes
- PIK Preferred Stock with Warrants
3. Transaction Structure and Issues to Consider
Appendices
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A. Recent Stock Price and Earnings Performance
B. Valuation Analysis
C. Detailed Financial Models
-Base Case
-Initial Case
D. Comparable Company Public Multiples Analysis
E. Comparable Company Acquisition Multiples Analysis
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EXECUTIVE SUMMARY
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EXECUTIVE SUMMARY
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o Merrill Lynch & Co. ("Merrill Lynch") reviewed the feasibility of a
leveraged recapitalization (the "Recapitalization") for Norwood Promotional
Products, Inc. ("Norwood")
o Initial constraints included:
- $20 per share purchase price of public shares (4.02 million shares)
- Financing for the Recapitalization to be provided through debt markets
only
- All existing bank debt to be refinanced
- EBITDA for the twelve months ended November 30, 1997 of $23.2 million
- Adjusted EBITDA (including the full year earnings from Wesburn Golf
and adjustment for public company related expenses) of $27.1 million
o The sources and uses of funds for the Initial Case are as follows:
USES OF FUNDS SOURCES OF FUNDS
- ------------------------------------- ------------------------------------
Purchase of Equity $ 80.4 Revolving Credit Facility $ 2.8
Refinance Existing Debt 56.3 A Term Loan 40.0
Estimated Fees and Expenses 6.1 Senior Subordinated Notes 100.0
------ ------
Total Uses of Funds $142.8 Total Sources of Funds $142.8
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EXECUTIVE SUMMARY
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Review of Initial Case
o Pro forma credit statistics:
PRO FORMA
TWELVE MONTHS ENDED
NOVEMBER 30, 1997
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EBITDA/Total Interest Expense 1.7x
EBITDA-CapEx/Total Interest Expense 1.4x
Total Debt/EBITDA 6.2x
Total Debt/Total Book Capitalization 126.3%
o Comments:
* Coverage ratio (EBITDA/Total Interest Expense) at low-end of
leveraged buyout structures
* Leverage ratio (Total Debt/EBITDA) limits future financial
flexibility
* Rating agency concern over substantial negative book equity
* Credit for adjusted EBITDA in credit statistics is dependent on
ability of adjustments to stand up to scrutiny by underwriters,
counsel and prospective investors
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EXECUTIVE SUMMARY
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Description of Base Case
o An alternative scenario ("Base Case") preserves Norwood's
liquidity and financial flexibility
* Financing for the Recapitalization includes $20 million of
contributed equity either in the form of common equity or
pay-in-kind preferred stock with warrants
o The sources and uses of funds for the Base Case as follows:
USES OF FUNDS SOURCES OF FUNDS
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Purchase of Equity $ 80.4 Revolving Credit Facility $ 0.0
Refinance Existing Debt 56.4 A Term Loan 25.0
Estimated Fees and Expenses 6.1 Senior Subordinated Notes 100.0
Excess Cash 2.2 Equity Contribution 20.0
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Total Uses of Funds $145.0 Total Sources of Funds $145.0
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o Pro forma credit statistics:
PRO FORMA
TWELVE MONTHS ENDED
NOVEMBER 30, 1997
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EBITDA/Total Interest Expense 1.9x
EBITDA-CapEx/Total Interest Expense 1.6x
Total Debt/EBITDA 5.4x
Total Debt/Total Book Capitalization 108.5%
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EXECUTIVE SUMMARY
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Review of Base Case
o Capital structure in Base Case is consistent with strategic objectives
* Provides Senior Debt capacity as "dry powder" to make
opportunistic acquisitions
* Appears to strike balance between cost of capital and financial
flexibility
o Attractive market conditions in the high yield sector permits
aggressive financing at attractive levels
o Norwood's guidelines for an optimal capital structure should consider:
* Free cash flow available for debt amortization
* Realization of anticipated synergies and cost savings from
completed acquisitions
* The likelihood of material future acquisitions and timing
o Clearly, a critical consideration in the transaction is the form of
the equity component of the capital structure, as discussed on the
following page
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EXECUTIVE SUMMARY
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Review of Equity Contribution
o Depending on management's objectives, we would recommend that all
forms of equity be committed prior to announcement of the acquisition
of the Company
o The following issues should be considered in the determination of the
appropriate form of equity contribution:
* total number of common shares offered
* impact on pricing and execution of subordinated debt
* the universe of potential buyers
* degree of negotiation by investors
* break-up fees
* required returns
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EXECUTIVE SUMMARY
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M & A Considerations
o The management team and its advisors must have confidence that the
offer price for the shares of NPPI will be deemed by a Special
Committee formed by the Company's Board of Directors and its advisor
to be within a range of fairness after a thorough review has been made
of the Company
o Determination of the fair value of the Company will be difficult
* acquisitions of comparable companies are primarily those made by
Norwood and are small with little publicly disclosed financial
information
* few publicly traded comparable companies exist
* valuation is therefore to be determined primarily by the
discounted cash flow valuation
o It is likely that the Company will be "put in play" on announcement of
tender
* while the value of the Company will be limited without the
current management team, several potential buyers with deep
pockets may have an interest in acquiring the Company
* it will clearly be prudent to be prepared for the event that a
new buyer emerges
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EXECUTIVE SUMMARY
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Next Steps
o Determine appropriate capital structure and form of equity
contribution
o Engage financial advisors
o Identify and approach appropriate equity investors
o Establish timetable and responsibility schedule
o Detailed organizational meeting and commence due diligence
o Initial approach to Board of Directors to form Special Committee of
independent directors
o Prepare filing documents
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SUMMARY OF INDICATIVE TERMS
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SUMMARY OF INDICATIVE TERMS
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Summary of Economic Terms
(Dollars in Millions)
SENIOR EXCHANGEABLE
SENIOR PIK PREFERRED STOCK
SENIOR CREDIT FACILITY SUBORDINATED NOTES WITH WARRANTS
----------------------------- ------------------------- -------------------------
AMOUNT: $50 $100 $20
FACILITY: $25 Revolving Credit Facility -- --
$25 A Term Loan
ASSUMED RATINGS: B1/B+ B3/B- NA
MATURITY: Revolving Credit: 6 years 10 Years 12 Years
A Term Loan: 6 years
SECURITY: Stock/Assets None None
CALL FEATURES: Anytime at Par Non-Call 5 Non-Call 5
INITIAL PRICING(a): LIBOR+ Coupon Coupon
----------------------------- ------------------------- -------------------------
Revolving Credit 9 3/4% - 10% Greater of:
Facility: 250 bps o 12% area
A Term Loan: 250 bps o 225 bps over Senior
Subordinated Notes
Warrants
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12.5%-15.0% of Company
(Sufficient to result in
an IRR of 25%-27%)
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(a) Subject to market conditions at time of pricing.
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SUMMARY OF INDICATIVE TERMS
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Senior Credit Facility
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BORROWER Norwood Promotional Products, Inc. (the
"Company").
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ARRANGER Merrill Lynch & Co.
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LENDERS Merrill Lynch Capital Corporation ("Merrill
Lynch") and a syndicate of lenders acceptable to
the Company and Merrill Lynch.
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CREDIT FACILITIES See "Summary of Economic Terms."
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SECURITY Fully secured by (i) a perfected first priority
lien on, and pledge of, all the capital stock of
the Company and its existing (if applicable) and
hereafter created subsidiaries and (ii) perfected
first priority liens on, and security interests
in, all tangible and intangible properties and
assets of the Company and its existing (if
applicable) and hereafter created or acquired
subsidiaries.
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GUARANTEES The Senior Credit Facility will be guaranteed by
all direct and indirect subsidiaries of the
Company (existing, if applicable, or hereafter
created or acquired) on a senior secured basis.
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USE OF PROCEEDS Borrowings under the Term Loan Facilities will be
used to finance a portion of the funds necessary
to effect the Recapitalization, refinance existing
indebtedness, and provide funds for general
corporate purposes.
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INTEREST RATE Interest will be based, at the option of the
Company, on one, three, or six month LIBOR plus
the applicable margins or Alternate Base Rate
("ABR") plus the applicable margin. For rates, see
"Summary of Economic Terms." Interest shall be
payable at the end of each interest period and, in
any event, at least every three months or 90 days,
as the case may be. The default rate will be the
applicable interest rate per annum plus 200 bps
per annum. Subsequent to the six month anniversary
of the Closing Date, the applicable margin or the
Revolving Credit Facility and Term Loan A shall be
based on a Total Debt/EBITDA performance grid.
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SUMMARY OF INDICATIVE TERMS
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Senior Credit Facility (cont'd)
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COMMITMENT FEES Prior to the Closing Date, a commitment fee of
0.50% per annum shall accrue on the aggregate
amount of the Senior Credit Facility. On and after
the closing date, 0.50% per annum shall accrue on
the unused portion of the Revolving Credit
Facility, payable quarterly in arrears.
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MATURITY AND AMORTIZATION
FACILITY MATURITY AMORTIZATION
------------------------- -------- --------------------------
Revolving Credit Facility 6 Years Bullet maturity
A Term Loan 6 Years Over the life of the loan; exact
amounts to be determined
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AVAILABILITY The Term Loans will be funded with a single draw
at closing. Revolving Credit loans will be
available subject to compliance with certain
customary conditions on and after the closing date
and prior to the Revolving Credit Facility
maturity date.
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MANDATORY PREPAYMENTS The Term Loans shall be prepaid with (i) 75% of
excess cash flow, (ii) 100% of net cash proceeds
from asset sales, (iii) 100% of net cash proceeds
from the issuance of debt and (iv) 50% from the
issuance of equity.
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OPTIONAL PREPAYMENTS Optional prepayments are permitted at any time, in
whole or in part, at the option of the Company, at
par, subject to LIBOR breakage and/or redeployment
costs.
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CONDITIONS PRECEDENT Usual and customary conditions including, but not
limited to:
Satisfaction with all documentation; satisfaction
with the capital and legal structure; absence of
material adverse change; or material adverse
change in financial or syndication markets.
Satisfaction with the continuing due diligence
investigation including, but not limited to,
historical, pro forma and projected financial
statements, legal, tax, accounting, and
environmental issues.
Satisfaction with results of a third party
solvency opinion.
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SUMMARY OF INDICATIVE TERMS
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Senior Credit Facility (cont'd)
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REPRESENTATIONS AND Usual and customary for transactions of this type,
WARRANTIES including, but not limited to, no Default or Event
of Default; absence of material adverse change;
compliance with laws; solvency; no conflicts with
laws; charter documents or agreements; ownership
of properties; and absence of liens and security
interests.
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AFFIRMATIVE COVENANTS Usual and customary for transactions of this type,
including but not limited to, compliance with
laws; performance of obligations; maintenance of
properties in good repair; maintenance of
appropriate and adequate insurance; inspection of
books and properties; payment of taxes and other
liabilities; maintenance of interest rate
protection; notice of defaults; true and complete
disclosure, validity and perfection of security
interests, and delivery of financial statements,
financial projections and compliance certificates.
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NEGATIVE COVENANTS Usual and customary for transactions of this type,
including, but not limited to, limitations on
indebtedness, liens (including negative pledges),
sale-leaseback transactions, loans, investments,
transaction with affiliates, joint ventures,
contingent obligations, restricted payments,
mergers, acquisitions, consolidations, asset
sales, creation of subsidiaries, capital
expenditures, and changes in business conducted.
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FINANCIAL COVENANTS Usual and customary for transactions of this type,
including, but not limited to, maximum total
leverage, minimum interest coverage, and minimum
fixed charge coverage.
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RELATED BUSINESS Acquisitions of business entities shall be subject
ACQUISITIONS among others to the following requirements: (i)
pro forma covenant compliance, (ii) no default or
Event of Default existing or arising from the
transactions, (iii) cash acquisitions shall be in
the same or substantially similar type of business
as existing businesses of the Borrower; (iv)
pledge of all assets acquired and (v) mutually
agreed upon dollar cap per transactions as well as
an aggregate cap.
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EVENTS OF DEFAULT Usual and customary for transactions of this type,
including, but not limited to, nonpayment of
principal, interest, fees or other amounts when
due; default of principle agreements; violation of
covenants; failure of any representation or
warranty to be true in all material respects;
cross-default and cross-acceleration; change in
control; bankruptcy; material judgments; ERISA
events; and invalidity of loan documents, security
interests, or guarantees.
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SUMMARY OF INDICATIVE TERMS
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Senior Credit Facility (cont'd)
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ASSIGNMENTS AND Lenders shall be permitted to assign and
PARTICIPATIONS participate in loans, notes and commitments. Non
pro-rata assignments of loans, notes, and
commitments of the Senior Credit Facility shall be
permitted. Each assignment shall be in a minimum
amount to be determined or proportionately smaller
as the Senior Credit Facility is reduced.
Assignments through novation or otherwise shall be
permitted with the Company's consent (not to be
unreasonably withheld or delayed). Intra-syndicate
assignments shall be permitted in any amount
without the Company's consent. Participations
shall be permitted without restriction.
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PROVISIONS OF An underwriting commitment of the Senior Credit
UNDERWRITING COMMITMENT Facility by Merrill Lynch & Co., including any
affiliates or subsidiaries ("Merrill Lynch") would
be subject to, among other items, approval of
Merrill Lynch's Leverage Transaction Commitment
Committee, completion of Merrill Lynch's credit,
legal, accounting and business due diligence,
absence of a material adverse change with respect
to the Borrower; absence of material adverse change
with respect to financial or capital market
conditions and satisfactory documentation.
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SUMMARY OF INDICATIVE TERMS
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Senior Subordinated Notes
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ISSUER Norwood Promotional Products, Inc. (the "Company").
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ISSUE Senior Subordinated Notes (the "Notes").
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PRINCIPAL AMOUNT See "Summary of Economic Terms".
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MATURITY 2008 (10 years).
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INDICATIVE COUPON See "Summary of Economic Terms".
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INTEREST PAYMENT DATES Semi-annual; interest paid in cash in arrears.
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RANKING The Notes will be senior subordinated obligations
of the Company and will be subordinated in right
of payment to all existing and future senior
indebtedness of the Company.
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MANDATORY REDEMPTION None.
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OPTIONAL REDEMPTION The Notes will be redeemable, at the option of the
Company, in whole or in part, anytime on or after
_____ 2003 (five years from the date of issuance),
at a premium to par, declining thereafter ratably
to par in year eight, together with accrued and
unpaid interest, if any, to the redemption date.
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SUMMARY OF INDICATIVE TERMS
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Senior Subordinated Notes (cont'd)
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OPTIONAL REDEMPTION UPON On or before _____, 2001 (three years after the
A PUBLIC EQUITY OFFERING date of issuance), the Company may redeem up to
30% (to be determined based on size of offering
amount) of the principal amount of the Notes
originally issued at a percentage of par (exact
price to be determined at the time of pricing),
together with accrued and unpaid interest, if any,
to the redemption date, with the net proceeds of
one or more Public Equity Offerings; provided,
however, that in no event will the principal
amount of the Notes outstanding be less than $___
million (to be determined based on size of
offering amount) after consummating such
redemptions.
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SECURITY None.
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CHANGE IN CONTROL In the event of a Change in Control (to be
defined), each holder of Notes may require the
Company to repurchase such holder's Notes at 101%
of the principal amount thereof, together with
accrued and unpaid interest, if any, to the
repurchase date.
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INCURRENCE COVENANTS Covenants may include, but not be limited to, the
following:
-- Limitation on Additional Indebtedness;
-- Limitation on Restricted Payments;
-- Limitation on Transactions with Affiliates;
-- Limitation on Liens;
-- Limitation on Dividends and other Payment
Restrictions Affecting Subsidiaries;
-- Limitation on Disposition of Proceeds of
Asset Sales;
-- Limitation on Mergers, Consolidations or
Sale of Substantially All Assets;
-- Limitation on Guarantees of Indebtedness;
-- Limitation on Certain Other Senior
Subordinated Indebtedness; and
-- Provision of Financial Statements.
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EVENTS OF DEFAULT As are customary for transactions of this nature.
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SUMMARY OF INDICATIVE TERMS
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Senior Exchangeable PIK Preferred Stock with Warrants
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ISSUER Norwood Promotional Products, Inc. (the "Company").
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GROSS PROCEEDS $20 million.
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SECURITIES 200,000 shares of Senior Exchangeable PIK
Preferred Stock (the "Preferred Stock") with
warrants to purchase shares of common stock of the
Company (the "Warrants").
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LIQUIDATION PREFERENCE $100 per share.
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MANDATORY REDEMPTION 12 years (2010).
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USE OF PROCEEDS To provide a portion of the financing for the
acquisition of the Company.
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DIVIDEND(a) The greater of 12% area per annum or 225 bps over
the coupon of the Senior Subordinated Notes due
2008, payable quarterly in kind.
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NUMBER OF WARRANTS(a) The Warrants will be exercisable for approximately
12.5% - 15.0% of the common stock of the Company
on a fully diluted basis as of the date of
issuance after giving effect to such issuance, to
result in an IRR through year five to the
Preferred Stock holders of approximately 25% - 27%.
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WARRANT EXERCISE The Warrants will be exercisable at any time prior
to mandatory redemption.
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WARRANT EXERCISE PRICE Each Warrant entitles the holder thereof to
purchase ___ share(s) of common stock at the
exercise price of $0.01 per share, subject to
certain adjustments.
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WARRANT EXPIRATION The Warrants will expire upon the mandatory
redemption of the Preferred Stock.
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RANKING The Preferred Stock will be senior to all present
and future classes of equity securities.
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(a) Subject to market conditions at the time of pricing.
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SUMMARY OF INDICATIVE TERMS
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Senior Exchangeable PIK Preferred Stock with Warrants (cont'd)
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DIVIDENDS Dividends will be payable quarterly. Prior to five
years after the issue date, dividends may, at the
option of the Company, be paid by issuing
additional shares of Preferred Stock with an
aggregate liquidation preference equal to the
amount of such dividends.
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CHANGE IN CONTROL Upon the occurrence of a Change in Control, the
Company must make an offer to purchase all
outstanding Preferred Stock at 101% of the
liquidation preference, plus all accrued and
unpaid dividends, if any, to the purchase date.
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OPTIONAL REDEMPTION The Preferred Stock will be redeemable at the
option of the Company, in whole or in part, at any
time on or after ____ 2003 (five years from the
date of issuance) at a premium to the aggregate
liquidation preference amount, with the premium
declining ratably to 100% of the aggregate
liquidation preference amount on ____ 2006 (eight
years from the date of issuance), in each case,
together with accrued and unpaid interest, if any,
to the redemption date.
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OPTIONAL REDEMPTION UPON Upon a Public Equity Offering (as defined)
AN EQUITY OFFERING occurring on or before the third anniversary of
the sale of the Preferred Stock, the Company may
redeem up to 100% of the Preferred Stock, at a
premium (to be determined at the time of pricing)
of the liquidation preference, plus accrued and
unpaid dividends, if any, to the redemption date.
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EXCHANGE PROVISION The Preferred Stock will be exchangeable at the
option of the Company into Junior Subordinated
Notes due 2009 pursuant to the covenants contained
in the Senior Subordinated Notes due 2008.
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CERTAIN COVENANTS The Preferred Stock will have covenants consisting
substantially of the following:
Limitation on Payments on any Junior or Parity
Securities;
Limitation on Indebtedness;
Limitation on Mergers, Consolidations or Sale of
Substantially All Assets; and
Provision for Financial Reporting.
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SUMMARY OF INDICATIVE TERMS
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Senior Exchangeable PIK Preferred Stock with Warrants (cont'd)
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VOTING RIGHTS The Preferred Stock will be non-voting, except as
otherwise required by law and except in certain
circumstances described herein, including (i)
amending certain rights of the holders of the
Preferred Stock and (ii) the issuance of any class
of equity securities that ranks senior to or,
in certain circumstances, on a parity with the
Preferred Stock. In addition, if: (i) the Company
fails to pay dividends in cash or, to the extent
permitted, by the issuance of additional Preferred
Stock in respect of six or more quarters in the
aggregate (whether or not consecutive); (ii) the
Company fails to make an Offer to Purchase (as
defined) upon a Change of Control; or (iii) the
Company fails to comply with the covenants
contained in the Certificate of Designations or
make certain payments on its indebtedness, holders
of a majority of the outstanding Preferred Stock,
voting as a class, will be entitled to elect a
number of directors of the Company equal to the
lesser of two directors or that number of
directors constituting at least 25% of the board
of directors of the Company.
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TRANSACTION STRUCTURE AND ISSUES TO CONSIDER
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TRANSACTION STRUCTURE AND ISSUES TO CONSIDER
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Introduction
o The assumed transaction structure is a cash tender offer for shares
not currently owned by Norwood management
o If, as a result of the transaction, Norwood management own
substantially all of the issued and outstanding equity securities of
Norwood, the transaction will be deemed a "going private" transaction
(a Rule 13e-3 transaction), and the buyer will be required to make
Rule 13e-3 and Rule 13e-4 disclosure filings with the SEC
o SEC filings require certain disclosures related to the transaction:
* Details of any transactions between Norwood management or any
other affiliate over the two fiscal years preceding the
transaction with a value greater than 1% of Norwood's sales
* Details of any merger discussions regarding Norwood over two
fiscal years preceding the transaction
* Future plans regarding any merger, reorganization or material
change in policy for Norwood
* Purpose for the transaction, any alternatives considered and
effects of the transaction on the buyer, Norwood and minority
shareholders
* Statement as to whether the filing entity believes the
transaction is fair or unfair to minority shareholders and a
discussion of the material factors upon which this belief is
based
* Disclosure of any reports, opinions or appraisals that are
materially related to the transaction
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TRANSACTION STRUCTURE AND ISSUES TO CONSIDER
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o The likelihood of litigation on behalf of minority shareholders in any
"going private" transaction is high
o Special Committee:
* Litigation risk to directors may be reduced by appointment of a
Special Committee comprised of Norwood independent directors to
evaluate and approve the transaction and to assure that the
transaction is negotiated at arm's length and a fair price is received
by minority shareholders
* Approval by Special Committee is an important factor in determining
procedural fairness under entire fairness test
o A summary of Norwood's current Board of Directors follows on the next page.
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TRANSACTION STRUCTURE AND ISSUES TO CONSIDER
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Board of Directors
DIRECTOR COMPANY AND POSITIONS HELD DIRECTOR SINCE INDEPENDENT
- --------------------- ----------------------------------------------------- -------------- -------------
Frank P. Krasovec Chairman and Chief Executive Officer of Norwood 1989 No
Promotional Products. Also serves as Chairman of
Littlefield Real Estate Company and manages other
personal investments.
Robert L. Seibert Director of Norwood Promotional Products since 1989 Yes
October 1989 and was a director of Norwood
Products, Inc. from December 1988 to October 1989.
Since 1978, he has served as a director of Advertising
Unlimited, Inc., a supplier of promotional product
calendars and served as its Chairman from 1978 to
December 1994. Mr. Siebert has also been a director of
Northstar Guaranty since 1992.
John H. Wilson III Has served as President of the U.S. Equity Corporation, 1991 Yes
a private venture capital company, since April 1983.
Mr. Wilson is also a director of Capital Southwest Corp.,
Whitehall Corp., Encore Wire Corporation and Palm Harbor Homes.
John H. Josephson Has been employed by Allen & Company Incorporated since 1993 Yes
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.
Harold Holland Founder of ArtMold Products Corporation in 1960 and served 1994 No
as its President and Chairman until July 1994, when ArtMold
was acquired by Norwood Promotional Products.
Roy D. Terracina Owner and chief executive officer of Sterling Foods, Inc. 1996 Yes
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.
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TRANSACTION STRUCTURE AND ISSUES TO CONSIDER
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o A fairness opinion is typically required on behalf of Norwood's minority
shareholders
* A key element of the transaction
* Based on a thorough valuation by the financial advisors to the Special
Committee
o Among other things, in determining the fairness of any proposed offer for
Norwood, the Special Committee will likely review:
* Company's financial projections
* Public trading multiples of comparable companies
* Acquisition multiples of comparable companies
* Historical trading levels of Norwood stock
* Potential strategic buyers of Norwood
* Other "going private" transactions
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TRANSACTION STRUCTURE AND ISSUES TO CONSIDER
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Timetable Summary
(assumes a friendly cash tender offer transaction, may vary depending on the
transaction structure)
Weeks 1-2 Preliminary matters, including engagement by
Norwood Management of advisors, due
diligence, review of regulatory issues,
financing structure, tender offer
preparations
Weeks 3-6 Approach Norwood Board of Directors, form
special committee, engagement of separate
advisors for special committee, prepare
tender offer documents (Schedule 13e-4, Offer
to Purchase, side documents), Rule 13e-3
filing and state regulatory filings (if
required)
Continue due diligence
Week 7 Finalize due diligence, prepare fairness
opinion by financial advisors
Week 8 Final organization for launch of tender
offer, Norwood to finalize Schedule 13e-4
Commencement of the tender offer, publish
summary advertisement, issue joint press
release prior to opening of business, file 10
copies of Schedule 13e-4 with the SEC,
commence mailing of Offer to Purchase to
shareholders, state filings, Rule 13e-3
filing, file amendment to 13-D or 13-G as
appropriate
Launch Date + 15 calendar days Receive SEC Comments
Launch Date + 20 business days Close tender offer, Norwood may purchase
shares, issue press release reporting results
of tender offer, file final amendment to
Schedule 13e-4 reporting results of tender
offer
Following Tender Offer Closing File Form 4 (within 10 days of tender offer
closing) to report acquisition of Norwood's
shares, short-form merger (if minority
shareholders own less than 10% of Norwood's
shares)
Shareholder meeting; Certificate of Merger
filed
[LOGO] MERRILL LYNCH -----------------------------------------------------------
22
28
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
29
- --------------------------------------------------------------------------------
RECENT STOCK PRICE AND EARNINGS PERFORMANCE
- --------------------------------------------------------------------------------
30
NORWOOD PROMOTIONAL PRODUCTS
- --------------------------------------------------------------------------------
Daily Stock Price Performance - LTM
[GRAPH]
- ---------------------
Comparable Composite: Cyrk Inc., Equity Marketing, HA-LO Industries and Swiss
Army Brands.
[LOGO] MERRILL LYNCH -----------------------------------------------------------
23
31
NORWOOD PROMOTIONAL PRODUCTS
- --------------------------------------------------------------------------------
Daily Stock Price Performance Since IPO
[GRAPH]
- ---------------------
Comparable Composite: Cyrk Inc., Equity Marketing, HA-LO Industries and Swiss
Army Brands.
[LOGO] MERRILL LYNCH -----------------------------------------------------------
24
32
NORWOOD PROMOTIONAL PRODUCTS
- --------------------------------------------------------------------------------
Analysis of Trading Volume - LTM
PERCENT OF VOLUME WHICH TRADED IN STOCK PRICE RANGE
[CHART]
PERCENT OF VOLUME WHICH TRADED BELOW STOCK PRICE RANGE
[CHART]
[LOGO] MERRILL LYNCH -----------------------------------------------------------
25
33
NORWOOD PROMOTIONAL PRODUCTS
- --------------------------------------------------------------------------------
Analysis of Trading Volume Since IPO
(includes volume from IPO in June 1993 and secondary offering in December 1995)
PERCENT OF VOLUME WHICH TRADED IN STOCK PRICE RANGE
[CHART]
PERCENT OF VOLUME WHICH TRADED BELOW STOCK PRICE RANGE
[CHART]
[LOGO] MERRILL LYNCH -----------------------------------------------------------
26
34
NORWOOD PROMOTIONAL PRODUCTS
- --------------------------------------------------------------------------------
Shareholder Ownership Profile
% OF TOTAL % OF
TOTAL SHARES OUTSTANDING PUBLIC FLOAT
------------ ----------- ------------
INSTITUTIONAL HOLDINGS(a)
TCW Group Incorporated 475,500 9.38% 11.73%
Thomson Horstmann & Bryant 460,000 9.07% 11.34%
Neuberger & Berman 401,600 7.92% 9.90%
T Rowe Price Associates 300,000 5.92% 7.40%
Hathaway & Associates 227,500 4.49% 5.61%
Heartland Advisors Inc. 200,000 3.94% 4.93%
Glickenhaus & Company 140,100 2.76% 3.46%
Dimensional Fund Advisors 131,200 2.59% 3.24%
GHS Management Inc. 127,500 2.51% 3.14%
Putmman Investment Management 112,300 2.21% 2.77%
---------- ------- -------
TOP TEN INSTITUTIONS 2,575,700 50.80% 63.52%
ALL OTHER INSTITUTIONS 460,162 9.08% 11.35%
---------- ------- -------
TOTAL INSTITUTIONAL OWNERSHIP(b) 3,035,862 59.88% 74.87%
INSIDER HOLDINGS(c)
Frank P. Krasovec 652,917 12.88%
John K. Finnell 193,001 3.81%
Robert P. Whitesell 108,023 2.13%
---------- -------
MAJOR INSIDER HOLDINGS 953,941 18.82%
All Other Insider Holdings 61,417 1.21%
---------- -------
TOTAL INSIDERS 1,015,358 20.03%
========== =======
RETAIL HOLDINGS 1,018,823 20.09% 25.13%
---------- ------- -------
TOTAL PUBLIC FLOAT 4,054,685 79.97% 100.00%
---------- ------- =======
TOTAL SHARES OUTSTANDING(d) 5,070,043 100.00%
========== =======
OPTIONS AND WARRANTS OUTSTANDING(e) 353,915
----------
TOTAL SHARES OUTSTANDING INCLUDING OPTIONS AND WARRANTS 5,423,958
==========
- --------------------------------------------------
(a) Source: CDA/Spectrum as of 9/30/97
(b) Includes 13-F institutions, domestic mutual funds, insurance companies,
pension funds, and variable annuities as defined by CDA/Spectrum
(c) Source: Proxy dated 12/20/96 and SEC press releases. Includes direct and
indirect share ownership and excludes options and warrants
(d) Source: Form 10-K dated 8/30/97
(e) Management holds 38% or 134,118 of outstanding options and warrants
[LOGO] MERRILL LYNCH -----------------------------------------------------------
27
35
- --------------------------------------------------------------------------------
VALUATION ANALYSIS
- --------------------------------------------------------------------------------
36
VALUATION ANALYSIS
- --------------------------------------------------------------------------------
Summary of Valuation Methodology
--------------------------------
Preliminary Valuation
Analysis
--------------------------------
- -------------------------------- -------------------------------- --------------------------------
Comparable Public Discounted Cash Comparable
Companies Flow Analysis Acquisitions
- -------------------------------- -------------------------------- --------------------------------
o Analysis of valuations for o Present value of projected o Analysis of pricing of relevant
relevant peer groups unlevered free cash flows acquisitions
o Review of historical and o Terminal multiples of 6.0x-8.0x o Review of historical and
projected trading multiples 2004 LTM EBITDA projected multiples paid
o Adjustments for non- o Discount rates of 11.0%-13.0%
recurring items
[LOGO] MERRILL LYNCH -----------------------------------------------------------
28
37
VALUATION ANALYSIS
- --------------------------------------------------------------------------------
Preliminary Valuation Summary of Norwood
[GRAPH]
IMPLIED LTM NOV-97
MULTIPLES: RESULTS
- ---------------- ---------
1997 Sales 0.75x-1.00x 0.85x-1.10x WACC 11%-13% $182.0
1997 EBITDA 6.0-8.0 EBITDA Multiples 23.2
1997 EBIT 8.0-12.0 6.0x to 8.0x 15.6
1998 Net Income 11.0-16.0 9.0
[LOGO] MERRILL LYNCH -----------------------------------------------------------
29
38
VALUATION ANALYSIS
- --------------------------------------------------------------------------------
Summary of Comparable Companies
COMPANY MARKET VALUE MARKET CAP. DESCRIPTION
- ----------------------------- ---------------- --------------- -----------------------------------------
Bemrose Corporation $289.1 $333.8 Bemrose is the largest supplier of
advertising and promotional products in
the UK. Bemrose produces imprinted
products such as calendars, diaries, pens
and etched crystal for corporate and
retail customers. Clients include British
Airways, Microsoft and Visa International.
Bemrose also prints security documents
such as bank checks, government and
university documents.
Cyrk Inc. $171.9 $174.4 Cyrk designs, develops, manufactures, and
distributes products for promotional
programs and custom-designed sports
apparel and accessories. Promotional
product programs include T-shirts,
pullovers, sports bags, caps and watches.
Cyrk's business is heavily concentrated
with its two largest customers, Pepsi-Cola
and Philip Morris, accounting for 38% and
30% of 1996 net sales, respectively.
Equity Marketing $170.4 $156.9 Equity Marketing designs, develops,
produces and distributes custom toy, gift
and other products based on characters
from television and movies such as cartoon
figurines, plush toys, action vehicles,
and play sets. Equity Marketing sells its
products domestically and internationally
to fast food restaurant chains, oil
companies, and mass market retailers for
use in promotional campaigns.
HA-LO Industries $550.7 $589.2 HA-LO Industries markets and distributes
advertising specialty and promotional
products through a network of eleven
showrooms and 2,500 vendors. Products
include jackets, hats, T-shirts,
calendars, pens, coffee mugs and key
chains. HA-LO also conducts telemarketing
services through a network of 1,400
telephone representatives.
Swiss Army Brands $ 88.3 $ 84.6 Swiss Army Brands is the exclusive U.S.,
Canadian and Caribbean distributor of the
Victorinox Swiss Army Knife, Victorinox
cutlery and Victorinox watches. It also
sells its own line of watches and other
products under its Swiss Army brand. Swiss
Army Brands also imprints its products
with corporate names and logos and sells
its products through distributors to
corporations and other organizations for
promotional purposes.
[LOGO] MERRILL LYNCH -----------------------------------------------------------
30
39
VALUATION ANALYSIS
- --------------------------------------------------------------------------------
P/E Multiples for Comparable Companies
Multiple of Market Value of Multiple of Market
Equity to 1998E EPS(a) Capitalization to LTM EBITDA
- --------------------------- ----------------------------
[CHART] [CHART]
- -----
(a) Calendarized EPS Estimates from First Call; prices as of December 2, 1997.
(b) 1998E EPS Average excludes Norwood. LTM EBITDA Average excludes HA-LO and
Norwood.
[LOGO] MERRILL LYNCH -----------------------------------------------------------
31
40
VALUATION ANALYSIS
- -------------------------------------------------------------------------------
Summary Financial Information
(Dollars in millions except per share data)
FISCAL YEAR ENDED
---------------------------------------------------------------------------------
AUGUST 28, SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, AUGUST 30,
1993 1994(a) 1995 1996(b) 1997(c)
---------- ------------ ------------ ---------- ----------
INCOME STATEMENT
Sales $ 49.3 $ 62.4 $ 103.9 $ 152.0 $ 175.8
Growth 31.9% 26.5% 66.5% 46.3% 15.7%
EBITDA 7.2 8.5 14.5 18.7 23.1
EBIT 5.3 6.3 10.5 12.0 15.0
Interest Expense, Gross 2.0 1.0 3.6 3.5 3.0
Net Income(d) 1.8 3.3 4.0 5.0 7.4
Fully Diluted EPS(d) $ 0.76 $ 0.93 $ 1.10 $ 0.99 $ 1.34
Growth 230.4% 22.4% 18.3% (9.7)% 35.3%
CASH FLOW STATEMENT
Cash Flow(e) 3.5 5.5 7.8 11.2 13.7
Depreciation & Amortization 1.8 2.2 4.0 6.7 8.2
Capital Expenditures 1.2 1.4 2.1 4.9 4.9
BALANCE SHEET
Total Debt(f) 8.0 32.2 62.9 47.7 61.4
Net Debt 7.8 31.7 60.7 45.8 58.8
Shareholders' Equity 13.5 16.9 21.0 57.4 51.3
OPERATING MARGINS
EBITDA Margin 14.5% 13.7% 13.9% 12.3% 13.2%
EBIT Margin 10.8% 10.2% 10.1% 7.9% 8.5%
Net Margin 3.6% 5.3% 3.9% 3.3% 4.2%
SUMMARY CREDIT STATISTICS
EBITDA/Interest Expense, Gross 3.6x 8.3x 4.0x 5.4x 7.7x
Total Debt/EBITDA 1.1x 3.8x 4.3x 2.5x 2.7x
Total Debt/Capitalization 37.1% 65.6% 74.9% 45.4% 54.5%
Net Debt/Capitalization 36.3% 64.6% 72.4% 43.6% 52.2%
- --------------------
(a) Adjusted for extraordinary loss from debt extinguishment of $.58 million,
$.34 million net of tax
(b) Adjusted for restructuring charge of $1.64 million, $.98 million net of tax
(c) Adjusted for extraordinary charge of $1.82 million, $1.08 million net of
tax and refinancing charge of $.24 million
(d) From continuing operations
(e) Cash flow defined as Net Income + Depreciation & Amortization + Deferred
Taxes
(f) Includes capital leases
32
41
VALUATION ANALYSIS
- -------------------------------------------------------------------------------
Acquisition Pricing Matrix
(Dollars in millions, except per share data)
TRANSACTION VALUE AS MULTIPLE OF: OFFER VALUE AS MULTIPLE OF:
--------------------------------- ---------------------------------
OFFER OFFER OFFER NET TRANSACTION LTM LTM LTM 1998 1999 LTM
PRICE PREMIUM VALUE DEBT VALUE SALES EBITDA EBIT EPS EPS BOOK VALUE
- -------- -------- -------- -------- ----------- -------- -------- -------- -------- -------- ----------
$ 15.00 0.0% $ 78.0 $ 55.9 $ 133.9 0.74x 5.8x 8.6x 10.8x 8.7x 1.45x
19.00 26.7% 98.8 55.9 154.7 0.85 6.7 9.9 13.7 11.0 1.84
20.00 33.3% 104.0 55.9 159.9 0.88 6.9 10.3 14.4 11.6 1.93
21.00 40.0% 109.2 55.9 165.1 0.91 7.1 10.6 15.1 12.2 2.03
22.00 46.7% 114.4 55.9 170.3 0.94 7.3 10.9 15.8 12.8 2.13
23.00 53.3% 119.6 55.9 175.5 0.96 7.6 11.3 16.5 13.4 2.22
24.00 60.0% 124.8 55.9 180.7 0.99 7.8 11.6 17.3 13.9 2.32
25.00 66.7% 130.0 55.9 185.9 1.02 8.0 11.9 18.0 14.5 2.42
- ---------------------------------------------------------------------------------------------------------------------------------
NORWOOD DATA $182.0 $23.2 $15.6 $1.39 $1.72 $53.8
=================================================================================================================================
33
42
VALUATION ANALYSIS
- -------------------------------------------------------------------------------
Overview of Potential Buyers
(Dollars in millions except per share data)
BEMROSE HA-LO
CORPORATION HAGEMEYER INDUSTRIES 3M BIC GILLETTE
----------- --------- ---------- --------- -------- --------
INCOME STATEMENT
Sales $321.7 $5,104.9 $292.9 $14,980.0 $1,091.2 $9,902.9
EBITDA 53.1 347.3 26.2 3,501.9 266.6 2,593.6
EBIT 41.6 277.4 21.8 2,620.0 180.6 2,186.0
Interest Expense, Gross 3.4 65.1 0.9 99.0 NA 75.0
Net Income 23.5 175.6 12.3 2,140.0 117.4 1,071.6
CASH FLOW STATEMENT
Cash Flow(a) $36.5 $245.5 $16.1 $3,021.9 $203.5 $1,479.2
Depreciation & Amortization 11.5 69.9 4.4 881.9 86.1 407.6
Capital Expenditures 4.3 134.3 4.4 1,108.8 107.2 917.9
BALANCE SHEET
Market Value $291.3 $16,594.5 $546.6 $40,177.2 $2,019.8 $52,052.2
Market Capitalization 336.0 17,659.7 582.3 41,587.2 1,833.4 53,573.1
Cash 0.0 42.3 2.3 306.0 309.7 102.8
Short Term Debt 0.0 2.8 5.3 585.0 48.4 11.3
Long Term Debt 44.7 1,043.2 32.7 1,131.0 9.4 1,481.9
Minority Interest 0.0 61.4 0.0 0.0 65.5 36.9
Preferred Equity (Liquidation Value) 0.0 0.0 0.0 0.0 0.0 93.6
Shareholders' Equity 87.2 744.6 76.4 6,324.0 1,008.7 5,080.7
SUMMARY CREDIT STATISTICS
EBITDA/Interest Expense, Gross 15.5x 5.3x 28.0x 35.4x NM 34.6x
Total Debt/EBITDA 0.8x 3.0x 1.5x 0.5x 0.2x 0.6x
Total Debt/Capitalization 33.9% 58.5% 34.8% 23.0% 5.7% 22.8%
Net Debt/Capitalization 33.9% 56.1% 32.7% 18.9% NM 21.2%
- -------------------
(a) Cash flow defined as Net Income + Depreciation & Amortization + Deferred
Taxes
34
43
ANALYSIS OF WEIGHTED AVERAGE COST OF CAPITAL - PROMOTIONAL PRODUCTS COMPANIES
- -------------------------------------------------------------------------------
Assumptions
- ----------------------------------------------------------------------------------------------------------------------
Thirty Year Government Bond (at 12/3/97) 6.01% Estimated Future Market Return (b) 13.41%
Historical Spread Between Long Bond & S&P 500(a) 7.40% Estimated Future Risk Free Rate (c) 6.01%
-------
Estimated Differential 7.40%
- ----------------------------------------------------------------------------------------------------------------------
LEVERED TAX NET DEBT TO UNLEVERED LEVERED UNLEVERED
COMPARABLE COMPANIES BETA (d) RATE EQUITY (e) BETA (f) RETURN RETURN
- ---------------------------- ---------- ---------- ----------- ---------- ---------- ----------
Bemrose Corporation 0.50 * 38.5% 9.2% 0.47 * 9.7% 9.5%
Cyrk Inc. (0.04)* 38.5% 0.7% (0.04)* 5.7% 5.7%
Equity Marketing Inc. 1.78 * 38.5% 0.0% 1.78 * 19.2% 19.2%
HA-LO Industries 1.27 38.5% 6.5% 1.22 15.4% 15.0%
Norwood Promotional Products 1.11 38.5% 78.0% 0.75 14.2% 11.6%
Swiss Army Brands 0.60 38.5% 0.9% 0.60 10.5% 10.4%
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE 0.99 38.5% 15.9% 0.86 13.4% 12.3%
======================================================================================================================
----------------------------------------------------------------------
COST OF EQUITY AT VARIOUS UNLEVERED BETA AND CAPITAL RATES
NET DEBT/EQUITY ----------------------------------------------------------------------
CAPITAL STRUCTURES 0.76 0.81 0.86 0.91 0.96
- ------------------ ---------- ----------- ---------- ---------- ----------
10.0% 12.0% 12.3% 12.7% 13.1% 13.5%
20.0% 12.3% 12.7% 13.1% 13.5% 14.0%
30.0% 12.6% 13.1% 13.5% 14.0% 14.4%
40.0% 13.0% 13.4% 13.9% 14.4% 14.8%
50.0% 13.3% 13.8% 14.3% 14.8% 15.3%
60.0% 13.7% 14.2% 14.7% 15.2% 15.7%
70.0% 14.0% 14.5% 15.1% 15.6% 16.1%
80.0% 14.4% 14.9% 15.5% 16.0% 16.6%
----------------------------------------------------------------------------
WEIGHTED AVERAGE COST OF CAPITAL AT VARIOUS UNLEVERED BETA AND CAPITAL RATES
NET DEBT/EQUITY EST. COST ----------------------------------------------------------------------------
CAPITAL STRUCTURES OF DEBT 0.76 0.81 0.86 0.91 0.96
- ------------------ ---------- ---------- ----------- ---------- ---------- ----------
10.0% 7.00% 11.3% 11.6% 12.0% 12.3% 12.7%
20.0% 7.25% 11.0% 11.3% 11.7% 12.0% 12.4%
30.0% 7.50% 10.8% 11.1% 11.5% 11.8% 12.1%
40.0% 7.75% 10.6% 11.0% 11.3% 11.6% 12.0%
50.0% 8.00% 10.5% 10.8% 11.2% 11.5% 11.8%
60.0% 8.25% 10.4% 10.8% 11.1% 11.4% 11.7%
70.0% 8.50% 10.4% 10.7% 11.0% 11.3% 11.6%
80.0% 8.75% 10.4% 10.7% 11.0% 11.3% 11.6%
* Excluded from Average
- --------------------------------------------------------------------------------
(a) Source: Ibbottson & Sinquefeld 1997 Yearbook.
(b) Thirty year government bond yield plus the historical spread between the
long bond and the S&P 500.
(c) Thirty year government bond yield.
(d) Source: Merrill Lynch Beta Book, November 1997 for all except Bemrose
which was obtained from Bloomberg.
(e) Book Value of Net Debt to market Value of Equity.
(f) Unlevered beta equals (Levered Beta/(1 + ((1 - Tax Rate) * Debt/Equity)).
35
44
- --------------------------------------------------------------------------------
DETAILED FINANCIAL MODELS
- --------------------------------------------------------------------------------
45
CONFIDENTIAL BASE CASE
- -------------------------------------------------------------------------------
TRANSACTION SUMMARY - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 1
[Dollars in Millions]
- -------------------------------------------------------------------------------
SOURCES AND USES OF FUNDS
- -------------------------------------------------------------------------------
Sources of Funds Amount Percent Interest Rate
- ---------------- -------- -------- -------------
Revolving Credit Facility $ 0.0 0.0% 8.500%
Undrawn Portion 0.500%
A Term Loan 25.0 17.2% 8.500%
B Term Loan 0.0 0.0% 8.750%
Senior Subordinated Notes 100.0 69.0% 9.875%
PIK Preferred Stock 0.0 0.0% 0.000%
Warrants 0.000%
Common Equity 20.0 13.8%
-------- --------
Total Sources $ 145.0 100.0%
======== ========
Uses of Funds Amount Percent
- ------------- -------- --------
Purchase Price per share $ 20.0
Shares Purchased 4.02
--------
Purchase Price 80.4 55.4%
Refinance Existing Debt 56.4 38.9%
Tender Premium 0.0 0.0%
Estimated Fees & Expenses 6.1 4.2%
Excess Cash 2.2 1.5%
-------- --------
Total Uses $ 145.0 100.0%
======== ========
- -------------------------------------------------------------------------------
SUMMARY INFORMATION
- -------------------------------------------------------------------------------
Year Ended on or about August 31,
------------------------------------------------------------------------------
Pro Forma Projected
LTM -----------------------------------------------------------------------------
11/30/97 1998 1999 2000 2001 2002 2003
--------- ------- ------- ------- ------- ------- -------
Sales $ 182.0 $ 194.6 $ 209.7 $ 225.9 $ 243.4 $ 262.4 $ 282.8
Sales Growth 10.6% 7.7% 7.7% 7.8% 7.8% 7.8%
EBITDA 23.2 26.9 30.6 34.1 38.0 42.3 46.9
Margins
EBITDA Margin 12.7% 13.8% 14.6% 15.1% 15.6% 16.1% 16.6%
Gross Margin 28.6% 28.3% 28.4% 28.5% 28.5% 28.6% 28.6%
Total Interest Expense 12.4 12.2 11.7 11.1 10.5 10.3 10.3
PIK Preferred Cash Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Capital Expenditures 3.6 4.0 4.0 4.0 4.0 4.0 4.0
Revolving Credit Facility 0.0 0.0 0.0 0.0 0.0 0.0 0.0
A Term Loan 25.0 19.7 13.2 4.5 0.0 0.0 0.0
Total Debt 125.0 119.7 113.2 104.5 100.0 100.0 100.0
PIK Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Shareholders' Equity (9.7) (7.2) (2.3) 5.1 15.4 28.6 45.1
Incremental Debt Capacity (2.0x
EBITDA/Total Interest, at 9%) 14.0 39.8 66.8 94.7 120.8 146.3
EBITDA/Total Interest Expense 1.9x 2.2x 2.6x 3.1x 3.6x 4.1x 4.6x
EBITDA/Cash Interest Expense 1.9x 2.3x 2.7x 3.2x 3.7x 4.2x 4.7x
EBITDA-CapEx/Total Interest Expense 1.6x 1.9x 2.3x 2.7x 3.2x 3.7x 4.2x
Total Debt/EBITDA 5.4x 4.4x 3.7x 3.1x 2.6x 2.4x 2.1x
Total Debt/Total Capitalization 108.5% 106.4% 102.1% 95.3% 86.7% 77.7% 68.9%
- -------------------------------------------------------------------------------
SENSITIVITY ANALYSIS
- -------------------------------------------------------------------------------
Purchase Price Per Share $ 20.0 $ 21.0 $ 22.0 $ 23.0 $ 24.0 $ 25.0
Total Debt/LTM EBITDA 5.4x 5.5x 5.6x 5.8x 6.0x 6.2x
46
CONFIDENTIAL BASE CASE
- -------------------------------------------------------------------------------
PROJECTED INCOME STATEMENTS - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 2
[Dollars in Millions]
Year Ended on or about August 31,
------------------------------------------------------------------------------------------
Pro Forma Projected
--------- ------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
---------- ------ ------ ------ ----- ------ ------ ------ ------ ------
Total Sales 176.0 194.6 209.7 225.9 243.4 262.4 282.8 304.9 328.7 354.5
COGS 125.7 139.5 150.1 161.6 174.0 187.4 201.9 217.5 234.4 252.6
S,G & A 31.4 32.2 33.0 34.1 35.0 36.6 37.9 39.2 40.6 42.1
EBITDA 22.5 26.9 30.6 34.1 38.0 42.3 46.9 52.1 57.6 63.7
Depreciation 3.6 4.2 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3
Amortization of Goodwill 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
------ ------ ------ ------ ----- ------ ------ ------ ------ ------
EBIT 15.0 18.8 22.4 26.0 29.9 34.2 38.8 44.0 49.5 55.6
Interest Expense
Revolving Credit Facility 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
A Term Loan 2.1 1.9 1.4 0.8 0.2 0.0 0.0 0.0 0.0 0.0
B Term Loan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Senior Subordinated Notes 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9
Amortization of Financing Fees 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Interest Expense 12.4 12.2 11.7 11.1 10.5 10.3 10.3 10.3 10.3 10.3
Interest Income 0.1 0.1 0.0 0.0 0.2 0.7 1.5 2.4 3.6 4.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income 12.3 12.1 11.6 11.0 10.3 9.6 8.8 7.9 6.7 5.4
Other Expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Pre-Tax Income 2.7 6.7 10.8 15.0 19.6 24.7 30.0 36.1 42.7 50.1
Income Taxes(a) 2.6 4.2 5.9 7.5 9.4 11.4 13.6 16.0 18.6 21.6
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income 0.1 2.5 4.9 7.5 10.2 13.3 16.5 20.1 24.1 28.5
PIK Preferred Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income Available to Common $ 0.1 $ 2.5 $ 4.9 $ 7.5 $ 10.2 $ 13.3 $ 16.5 $ 20.1 $ 24.1 $ 28.5
Notes:
(a) Assumes an effective tax rate of 40.0%.
47
CONFIDENTIAL BASE CASE
- -------------------------------------------------------------------------------
PROJECTED BALANCE SHEET - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 3
(Dollars in Millions)
Year Ended on or about August 31,
-------------------------------------------------------------------------------------------
Pro Forma Projected
--------- -------------------------------------------------------------------------------------------
11/30/97 1998 1999 2000 2001 2002 2003 2004 2005 2006
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Assets
Cash $ 2.7 $ 1.0 $ 1.0 $ 1.0 $ 7.8 $ 21.9 $ 38.8 $ 59.1 $ 83.1 $ 111.1
Other Current Assets(a) 58.8 65.6 70.4 75.6 81.2 87.2 93.7 100.7 108.3 116.5
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total 61.5 66.6 71.4 76.6 89.0 109.1 132.6 159.9 191.4 227.6
PP&E 20.6 20.4 20.2 19.9 19.6 19.4 19.1 18.8 18.6 18.3
Other Fixed Assets 12.9 12.9 12.9 12.9 12.9 12.9 12.9 12.9 12.9 12.9
Goodwill & Intangibles 38.6 34.7 30.9 27.0 23.1 19.3 15.4 11.6 7.7 3.9
Deferred Financing Costs 3.0 2.7 2.4 2.1 1.8 1.5 1.2 0.9 0.6 0.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Assets $ 136.5 $ 137.3 $ 137.7 $ 138.5 $ 146.4 $ 162.1 $ 181.2 $ 204.1 $ 231.2 $ 263.0
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Liabilities
Current Liabilities $ 21.3 $ 24.9 $ 26.8 $ 28.8 $ 31.1 $ 33.5 $ 36.0 $ 38.8 $ 41.8 $ 45.1
Debt:
Existing Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Revolving Credit Facility 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
A Term Loan 25.0 19.7 13.2 4.5 0.0 0.0 0.0 0.0 0.0 0.0
B Term Loan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Senior Subordinated Notes 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Debt 125.0 119.7 113.2 104.5 100.0 100.0 100.0 100.0 100.0 100.0
Other Long-Term Liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
PIK Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Shareholders' Equity (9.7) (7.2) (2.3) 5.1 15.4 28.6 45.1 65.2 89.3 117.9
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Liabilities &
Shareholders' Equity $ 136.5 $ 137.3 $ 137.7 $ 138.4 $ 146.4 $ 162.1 $ 181.2 $ 204.1 $ 231.2 $ 263.0
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
0.0 (0.0) (0.0) (0.0) (0.0) 0.0 (0.0) 0.0 0.0 (0.0)
BALANCE SHEET STATISTICS
- ------------------------------------------------------------------------------------------------------------------------------------
Days Current Assets 122.0 123.1 122.6 122.1 121.7 121.3 121.0 120.6 120.3 120.0
Days Current Liabilities 61.8 65.2 65.2 65.2 65.2 65.2 65.2 65.2 65.2 65.2
====================================================================================================================================
- -----------------
(a) Other Current Assets includes Inventory, Accounts Receivable and Prepaid
Expenses.
48
CONFIDENTIAL BASE CASE
- --------------------------------------------------------------------------------
PROJECTED CASH FLOW STATEMENT - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 4
[Dollars in Millions]
Year Ended on or about August 31,
------------------------------------------------------
Pro Forma Projected
--------- -----------------------------------------
1997 1998 1999 2000 2001
--------- -------- -------- -------- --------
EBITDA $22.5 $26.9 $30.6 $34.1 $38.0
Less:
Capital Expenditures 4.9 4.0 4.0 4.0 4.0
Net Cash Interest Expense 11.8 11.3 10.7 10.0
Cash PIK Preferred Dividends 0.0 0.0 0.0 0.0
Other Expenses 0.0 0.0 0.0 0.0
Taxes 4.2 5.9 7.5 9.4
------ ------ ------ ------
Total 20.0 21.2 22.2 23.4
Plus:
Working Capital Items:
Incr/(Decr) in Non-Cash Current Assets 6.8 4.8 5.2 5.6
(Incr)/Decr in Current Liabilities (3.6) (1.9) (2.1) (2.2)
------ ------ ------ ------
Change in Working Capital 3.2 2.9 3.1 3.4
Other:
Incr/(Decr) in Other Long Term Liabilities 0.0 0.0 0.0 0.0
------ ------ ------ ------
Cash Flow Available for Debt Service 3.7 6.5 8.8 11.3
Incr/(Decr) in Revolving Credit Facility 0.0 0.0 0.0 0.0
Incr/(Decr) in A Term Loan (5.3) (6.5) (8.8) (4.5)
Incr/(Decr) in B Term Loan 0.0 0.0 0.0 0.0
Incr/(Decr) in Senior Subordinated Notes 0.0 0.0 0.0 0.0
------ ------ ------ ------
Net Cash Flow (1.7) 0.0 0.0 6.8
Cash Balance
Minimum Cash Balance 1.0 1.0 1.0 1.0
Beginning Balance 2.7 2.7 1.0 1.0 1.0
Incr/(Decr) 0.0 (1.7) 0.0 0.0 6.8
------ ------ ------ ------ ------
Ending Balance 2.7 1.0 1.0 1.0 7.8
Average Balance 2.7 1.8 1.0 1.0 4.4
Interest Income 5.000% 0.1 0.1 0.1 0.1 0.2
Year Ended on or about August 31,
----------------------------------------------------
Projected
----------------------------------------------------
2002 2003 2004 2005 2006
-------- -------- -------- -------- --------
EBITA $42.3 $46.9 $52.1 $57.6 $63.7
Less:
Capital Expenditures 4.0 4.0 4.0 4.0 4.0
Net Cash Interest Expense 9.3 8.5 7.6 6.4 5.1
Cash PIK Preferred Dividends 0.0 0.0 0.0 0.0 0.0
Other Expenses 0.0 0.0 0.0 0.0 0.0
Taxes 11.4 13.6 16.0 18.6 21.6
----- ----- ----- ----- -----
Total 24.7 26.0 27.5 29.1 30.7
Plus:
Working Capital Items:
Incr/(Decr) in Non-Cash Current Assets 6.0 6.5 7.0 7.6 8.2
(Incr)/Decr in Current Liabilities (2.4) (2.6) (2.8) (3.0) (3.3)
------ ------ ------ ------ ------
Change in Working Capital 3.6 3.9 4.2 4.6 5.0
Other:
Incr/Decr in Other Long Term Liabilities 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
Cash Flow Available for Debt Services 14.0 17.0 20.3 23.9 28.0
Incr/(Decr) in Revolving Credit Facility 0.0 0.0 0.0 0.0 0.0
Incr/(Decr) in A Term Loan 0.0 0.0 0.0 0.0 0.0
Incr/(Decr) in B Term Loan 0.0 0.0 0.0 0.0 0.0
Incr/(Decr) in Senior Subordinated Notes 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
Net Cash Flow 14.0 17.0 20.3 23.9 28.0
Cash Balance
Minimum Cash Balance 1.0 1.0 1.0 1.0 1.0
Beginning Balance 7.8 21.9 38.8 59.1 83.1
Incr/(Decr) 14.0 17.0 20.3 23.9 28.0
------ ------ ------ ------ ------
Ending Balance 21.9 38.8 59.1 83.1 111.1
Average Balance 14.8 30.4 49.0 71.1 97.1
Interest Income 5.000% 0.7 1.5 2.4 3.6 4.9
49
CONFIDENTIAL BASE CASE
- --------------------------------------------------------------------------------
BALANCE SHEET ADJUSTMENTS - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 5
[Dollars in Millions]
Actual Pro Forma
------- Financing Accounting ----------
11/30/97 Adjustments Adjustments 11/30/97
-------- ----------- ----------- ----------
Assets
Cash $ 0.5 $ 88.6 $(86.5) $ 2.7
Other Current Assets 58.8 58.8
------ ------ ------ ------
Total 59.3 88.6 (86.5) 61.5
PP&E 20.6 20.6
Other Long-Term Assets 12.9 12.9
Goodwill & Intangibles 38.6 0.0 38.6
Deferred Financing Costs 0.0 3.0 3.0
------ ------ ------ ------
Total Assets $131.4 $ 88.6 $(83.5) $136.5
====== ====== ====== ======
Liabilities
Current Liabilities $ 21.3 $ 21.5
Debt:
Existing Debt 56.4 (56.4) 0.0
Working Capital Revolver 0.0 0.0 0.0
A Term Loan 0.0 25.0 25.0
B Term Loan 0.0 0.0 0.0
Senior Subordinated Notes 0.0 100.0 100.0
------ ------ ------ ------
Total Debt 56.4 68.6 0.0 125.0
Other Long-Term Liabilities 0.0 0.0
Minority Interests 0.0 0.0
PIK Preferred 0.0 0.0 0.0
Shareholders' Equity 53.8 20.0 (83.5) (9.7)
------ ------ ------ ------
Total Liabilities &
Shareholders' Equity $131.4 $ 88.6 $(83.5) $136.5
====== ====== ====== ======
0.0 0.0 0.0 0.0
50
CONFIDENTIAL BASE CASE
- --------------------------------------------------------------------------------
CAPITALIZATION SCHEDULES -- NORWOOD PROMOTIONAL PRODUCTS, INC. Page 6
[Dollars in Millions]
Year Ended on or about August 31,
---------------------------------------------------------------------
PRO FORMA PROJECTED
LTM ---------------------------------------------------------------------
RATES 11/30/97 1998 1999 2000 2001 2002 2003 2004 2005 2006
------- --------- ----- ----- ----- ----- ----- ----- ----- ----- -----
Revolving Credit Facility 8.500%
Beginning Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Additions/(Payments) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ending Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Undrawn Portion 0.500% 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0
Interest on Undrawn
Portion 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Average Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest Expense 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
A Term Loan 8.500%
Beginning Balance 25.0 25.0 19.7 13.2 4.5 0.0 0.0 0.0 0.0 0.0
Additions/(Payments) 0.0 (5.3) (6.5) (8.8) (4.5) 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ending Balance 25.0 19.7 13.2 4.5 0.0 0.0 0.0 0.0 0.0 0.0
Average Balance 25.0 22.3 16.4 8.8 2.2 0.0 0.0 0.0 0.0 0.0
Interest Expense 2.1 1.9 1.4 0.8 0.2 0.0 0.0 0.0 0.0 0.0
B Term Loan 8.750%
Beginning Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Additions/(Payments) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ending Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Average Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Senior Subordinated Notes 9.875%
Beginning Balance 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Additions/(Payments) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ending Balance 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Average Balance 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Interest Expense 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9
PIK Preferred 0.000%
Beginning Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Accreted Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ending Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Average Balance 0.0 0.0 0.0 0.0
Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
51
CONFIDENTIAL BASE CASE
- --------------------------------------------------------------------------------
INTERNAL RATE OF RETURN OF EQUITY - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 7
[U.S. Dollars in Millions, except per share value]
Projected FYE on or about August 31,
-------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
------- ------- ------- ------- ------- -------
EBITDA $ 26.9 $ 30.6 $ 34.1 $ 38.0 $ 42.3 $ 46.9
FIRM VALUE @ EBITDA MULTIPLE OF:
6.00x $ 161.5 $ 183.4 $ 204.7 $ 228.1 $ 254.1 $ 281.6
7.00x 188.4 213.9 238.8 266.1 296.4 328.6
8.00x 215.3 244.5 272.9 304.2 338.8 375.5
Less: Total Debt $(119.7) $(113.2) $(104.5) $(100.0) $(100.0) $(100.0)
Plus: Cash 1.0 1.0 1.0 7.8 21.9 38.8
Less: Other Deductions -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total Deductions to Equity $(118.7) $(112.2) $(103.5) $ (92.2) $ (78.1) $( 61.2)
EQUITY VALUE @ EBITDA MULTIPLE OF:
6.00x $ 42.8 $ 71.2 $ 101.2 $ 135.9 $ 176.0 $ 220.5
7.00x 69.7 101.7 135.4 174.0 218.3 267.4
8.00x 96.7 132.3 169.5 212.0 260.7 314.3
PRE-TAX IRR SUMMARY ANALYSIS FOR MANAGEMENT'S EQUITY INTEREST
Net Equity Holders
Equity Ownership % EBITDA Multiple 1998 1999 2000 2001 2002 2003
------ ------------------ --------------- ------ ------ ------ ------ ------ ------
$40.8 100.0% 6.00x 4.8% 32.0% 35.3% 35.1% 33.9% 32.4%
7.00x 70.7% 57.8% 49.1% 43.7% 39.8% 36.8%
8.00x 136.6% 80.0% 60.7% 50.9% 44.9% 40.5%
PRE-TAX VALUE ANALYSIS FOR MANAGEMENT'S EQUITY INTEREST
Net Management
Ownership % EBITDA Multiple 1998 1999 2000 2001 2002 2003
-------------- --------------- ------ ------ ------ ------ ------ ------
51.0% 6.00x $21.9 $36.3 $51.7 $69.4 $89.8 $112.5
7.00x 35.6 51.9 69.1 88.8 111.4 136.5
8.00x 49.3 67.5 86.5 108.2 133.0 160.4
52
NORWOOD PROMOTIONAL PRODUCTS
- --------------------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS-EBITDA MULTIPLE METHOD Page 10
(Dollars in millions)
PROJECTED FYE AUGUST 31
--------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004
------- ------- ------- ------- ------- ------- -------
Sales $ 194.6 $ 209.7 $ 225.9 $ 243.4 $ 262.4 $ 282.8 $ 304.9
EBITDA 26.9 30.6 34.1 38.0 42.3 46.9 52.1
Less: Depreciation (4.2) (4.3) (4.3) (4.3) (4.3) (4.3) (4.3)
------- ------- ------- ------- ------- ------- -------
EBITA 22.7 26.3 29.9 33.8 38.1 42.7 47.8
Less: Taxes @ 40.0% (9.1) (10.5) (11.9) (13.5) (15.2) (17.1) (19.1)
------- ------- ------- ------- ------- ------- -------
Tax-effected EBITA 13.6 15.8 17.9 20.3 22.9 25.6 28.7
Plus: Depreciation 4.2 4.3 4.3 4.3 4.3 4.3 4.3
Plus: Change in Deferred Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Capital Expenditures (4.0) (4.0) (4.0) (4.0) (4.0) (4.0) (4.0)
Less: Changes in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Free Cash Flow $ 13.8 $ 16.0 $ 18.2 $ 20.5 $ 23.1 $ 25.9 $ 29.0
A + B = C
-------------- --------------------------- -----------------------------
DISCOUNTED (a) PV OF TERMINAL VALUE AS A
CASH FLOWS MULTIPLE OF 2004 EBITDA (b) FIRM VALUE
--------------------------- -----------------------------
WEIGHTED AVERAGE COST OF CAPITAL 1998-2004 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x
- -------------------------------- -------------- --------------------------- -----------------------------
11.0% $93.8 $150.5 $175.6 $200.7 $244.3 $269.4 $294.5
11.5% 92.1 145.8 170.1 194.5 237.9 262.2 286.5
12.0% 90.4 141.3 164.9 188.5 231.8 255.3 278.9
12.5% 88.8 137.0 159.8 182.7 225.8 248.7 271.5
13.0% 87.3 132.8 155.0 177.1 220.1 242.2 264.4
- D = E
-------------- ---------------------------
NET DEBT TOTAL EQUITY VALUE EQUITY VALUE PER SHARE (c)
--------------------------- -----------------------------
WEIGHTED AVERAGE COST OF CAPITAL 35673 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x
- -------------------------------- -------------- --------------------------- -----------------------------
11.0% $55.9 $188.4 $213.5 $238.6 $37.22 $42.18 $47.13
11.5% 55.9 182.1 206.4 230.7 $35.97 $40.77 $45.57
12.0% 55.9 175.9 199.5 223.0 $34.75 $39.41 $44.06
12.5% 55.9 170.0 192.8 215.7 $33.58 $38.09 $42.60
13.0% 55.9 164.2 186.4 208.5 $32.44 $36.82 $41.19
-----------------------------
PRESENT VALUE OF
TERMINAL VALUE AS A % OF
FIRM VALUE
- ----------------------------
6.0 7.0 8.0
- ---------------------------
61.6% 65.2% 68.1%
61.3% 64.9% 67.9%
61.0% 64.6% 67.6%
60.7% 64.3% 67.3%
60.3% 64.0% 67.0%
- ---------------------------------------
(a) Present values calculated as of August 31, 1997.
(b) Discounted 7 years; based on FYE August 31, 2004 EBITDA of $52.1 million.
(c) Based on 5.1 million shares outstanding.
53
CONFIDENTIAL INITIAL CASE
- -------------------------------------------------------------------------------
TRANSACTION SUMMARY - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 1
[Dollars in Millions]
- -------------------------------------------------------------------------------
SOURCES AND USES OF FUNDS
- -------------------------------------------------------------------------------
Sources of Funds Amount Percent Interest Rate
- ---------------- -------- -------- -------------
Revolving Credit Facility $ 2.8 2.0% 8.500%
Undrawn Portion 0.500%
A Term Loan 40.0 28.0% 8.500%
B Term Loan 0.0 0.0% 8.750%
Senior Subordinated Notes 100.0 70.0% 9.875%
PIK Preferred Stock 0.0 0.0% 0.000%
Warrants 0.000%
Common Equity 0.0 0.0%
-------- --------
Total Sources $ 142.8 100.0%
======== ========
Uses of Funds Amount Percent
- ------------- -------- --------
Purchase Price per share $ 20.0
Shares Purchased 4.02
--------
Purchase Price 80.4 56.3%
Refinancing Existing Debt 56.4 39.4%
Tender Premium 0.0 0.0%
Estimated Fees & Expenses 6.1 4.3%
Excess Cash 0.0 0.0%
-------- --------
Total Uses $ 142.8 100.0%
======== ========
- -------------------------------------------------------------------------------
SUMMARY INFORMATION
- -------------------------------------------------------------------------------
Year Ended on or about August 31,
------------------------------------------------------------------------------
Pro Forma Projected
LTM -----------------------------------------------------------------------------
11/30/97 1998 1999 2000 2001 2002 2003
--------- ------- ------- ------- ------- ------- -------
Sales $ 182.0 $ 194.6 $ 209.7 $ 225.9 $ 243.4 $ 262.4 $ 282.8
Sales Growth 10.6% 7.7% 7.7% 7.8% 7.8% 7.8%
EBITDA 23.2 26.9 30.6 34.1 38.0 42.3 46.9
Margins
EBITDA Margin 12.7% 13.8% 14.6% 15.1% 15.6% 16.1% 16.6%
Gross Margin 28.6% 28.3% 28.4% 28.5% 28.5% 28.6% 28.6%
Total Interest Expense 13.9 13.8 13.5 13.0 12.2 11.2 10.5
PIK Preferred Cash Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Capital Expenditures 3.6 4.0 4.0 4.0 4.0 4.0 4.0
Revolving Credit Facility 2.8 0.7 0.0 0.0 0.0 0.0 0.0
A Term Loan 40.0 40.0 35.3 27.7 17.6 4.5 0.0
Total Debt 142.8 140.7 135.3 127.7 117.6 104.5 100.0
PIK Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Shareholders' Equity (29.7) (28.3) (24.4) (18.1) (9.0) 3.2 18.9
Incremental Debt Capacity (2.0x
EBITDA/Total Interest, at 9%) (4.3) 19.4 45.3 75.4 110.4 144.2
EBITDA/Total Interest Expense 1.7x 1.9x 2.3x 2.6x 3.1x 3.8x 4.5x
EBITDA/Cash Interest Expense 1.7x 2.0x 2.3x 2.7x 3.2x 3.9x 4.6x
EBITDA-CapEx/Total Interest Expense 1.4x 1.7x 2.0x 2.3x 2.8x 3.4x 4.1x
Total Debt/EBITDA 6.2x 5.2x 4.4x 3.7x 3.1x 2.5x 2.1x
Total Debt/Total Capitalization 126.3% 125.1% 122.0% 116.5% 108.3% 97.0% 84.1%
- -------------------------------------------------------------------------------
SENSITIVITY ANALYSIS
- -------------------------------------------------------------------------------
Purchase Price Per Share $ 20.0 $ 21.0 $ 22.0 $ 23.0 $ 24.0 $ 25.0
Total Debt/LTM EBITDA 6.2x 6.3x 6.5x 6.7x 6.9x 7.0x
54
CONFIDENTIAL INITIAL CASE
- -------------------------------------------------------------------------------
PROJECTED INCOME STATEMENTS - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 2
[Dollars in Millions]
Year Ended on or about August 31,
----------------------------------------------------------------------------------------
Pro Forma Projected
--------- ----------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Sales 176.0 194.6 209.7 225.9 243.4 262.4 282.8 304.9 328.7 354.5
COGS 125.7 139.5 150.1 161.6 174.0 187.4 201.9 217.5 234.4 252.6
S,G & A 31.4 32.2 33.0 34.1 35.3 36.6 37.9 39.2 40.6 42.1
EBITDA 22.5 26.9 30.6 34.1 38.0 42.3 46.9 52.1 57.6 63.7
Depreciation 3.6 4.2 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3
Amortization of Goodwill 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
EBIT 15.0 18.8 22.4 26.0 29.9 34.2 38.8 44.0 49.5 55.6
Interest Expense
Revolving Credit Facility 0.4 0.3 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1
A Term Loan 3.4 3.4 3.2 2.7 1.9 0.9 0.2 0.0 0.0 0.0
B Term Loan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Senior Subordinated Notes 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9
Amortization of Financing Fees 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Interest Expense 13.9 13.8 13.5 13.0 12.2 11.2 10.5 10.3 10.3 10.3
Interest Income 0.0 0.0 0.0 0.0 0.0 0.0 0.3 1.1 2.2 3.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Interest Expense 13.9 13.8 13.5 12.9 12.2 11.2 10.2 9.2 8.1 6.9
Other Expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Pre-Tax Income 1.1 5.0 9.0 13.1 17.7 23.0 28.7 34.8 41.3 48.7
Income Taxes(a) 2.0 3.6 5.1 6.8 8.6 10.8 13.0 15.5 18.1 21.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income (0.9) 1.5 3.8 6.3 9.1 12.3 15.7 19.3 23.3 27.7
PIK Preferred Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income Available to Common $ (0.9) $ 1.5 $ 3.8 $ 6.3 $ 9.1 $ 12.3 $ 15.7 $ 19.3 $ 23.3 $ 27.7
Notes:
(a) Assumes an effective tax rate of 40.0%.
55
CONFIDENTIAL INITIAL CASE
- -------------------------------------------------------------------------------
PROJECTED BALANCE SHEET - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 3
[Dollars in Millions]
Year Ended on or about August 31,
-------------------------------------------------------------------------------------------
Pro Forma Projected
--------- -------------------------------------------------------------------------------------------
11/30/97 1998 1999 2000 2001 2002 2003 2004 2005 2006
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Assets
Cash $ 0.5 $ 1.0 $ 1.0 $ 1.0 $ 1.0 $ 1.0 $ 12.6 $ 32.1 $ 55.2 $ 82.4
Other Current Assets(a) 58.8 65.6 70.4 75.6 81.2 87.2 93.7 100.7 108.3 116.5
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total 59.3 66.6 71.4 76.6 82.2 88.2 106.3 132.9 163.6 198.9
PP&E 20.6 20.4 20.2 19.9 19.6 19.4 19.1 18.8 18.6 18.3
Other Fixed Assets 12.9 12.9 12.9 12.9 12.9 12.9 12.9 12.9 12.9 12.9
Goodwill & Intangibles 38.6 34.7 30.9 27.0 23.1 19.3 15.4 11.6 7.7 3.9
Deferred Financing Costs 3.0 2.7 2.4 2.1 1.8 1.5 1.2 0.9 0.6 0.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Assets $ 134.4 $ 137.3 $ 137.7 $ 138.5 $ 139.6 $ 141.2 $ 154.9 $ 177.0 $ 203.3 $ 234.3
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Liabilities
Current Liabilities $ 21.3 $ 24.9 $ 26.8 $ 28.8 $ 31.1 $ 33.5 $ 36.0 $ 38.8 $ 41.8 $ 45.1
Debt:
Existing Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Revolving Credit Facility 2.8 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
A Term Loan 40.0 40.0 35.3 27.7 17.6 4.5 0.0 0.0 0.0 0.0
B Term Loan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Senior Subordinated Notes 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Debt 142.8 140.7 135.3 127.7 117.6 104.5 100.0 100.0 100.0 100.0
Other Long-Term Liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
PIK Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Shareholders' Equity (29.7) (28.3) (24.4) (18.1) (9.0) 3.2 18.9 38.2 61.5 89.2
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Liabilities &
Shareholders' Equity $ 134.4 $ 137.3 $ 137.7 $ 138.4 $ 139.6 $ 141.2 $ 154.9 $ 177.0 $ 203.3 $ 234.3
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
0.0 0.0 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 (0.0)
BALANCE SHEET STATISTICS
- ------------------------------------------------------------------------------------------------------------------------------------
Days Current Assets 122.0 123.1 122.6 122.1 121.7 121.3 121.0 120.6 120.3 120.0
Days Current Liabilities 61.8 65.2 65.2 65.2 65.2 65.2 65.2 65.2 65.2 65.2
====================================================================================================================================
- -----------------
(a) Other Current Assets includes Inventory, Accounts Receivable and Prepaid
Expenses.
56
CONFIDENTIAL INITIAL CASE
- --------------------------------------------------------------------------------
PROJECTED CASH FLOW STATEMENT - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 4
[Dollars in Millions]
Year Ended on or About August 31,
--------- ---------------------------------------------------------------------
Pro Forma Projected
--------- ---------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
--------- ----- ----- ----- ----- ----- ----- ----- ----- -----
EBITDA $22.5 $26.9 $30.6 $34.1 $38.0 $42.3 $46.9 $52.1 $57.6 $63.7
Less:
Capital Expenditures 4.9 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0
Net Cash Interest Expense 13.5 13.2 12.6 11.9 10.9 9.9 8.9 7.8 6.6
Cash PIK Preferred Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Taxes 3.6 5.1 6.8 8.6 10.8 13.0 15.5 18.1 21.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Total 21.1 22.3 23.4 24.5 25.6 26.9 28.3 29.9 31.6
Plus:
Working Capital Items:
Incr/(Decr) in Non-Cash Current Assets 6.8 4.8 5.2 5.6 6.0 6.5 7.0 7.6 8.2
(Incr)/Decr in Current Liabilities (3.6) (1.9) (2.1) (2.2) (2.4) (2.6) (2.8) (3.0) (3.3)
----- ----- ----- ----- ----- ----- ----- ----- -----
Change in Working Capital 3.2 2.9 3.1 3.4 3.6 3.9 4.2 4.6 5.0
Other:
Incr/(Decr) in Other Long Term Liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Cash Flow Available for Debt Service 2.6 5.4 7.6 10.1 13.1 16.1 19.5 23.1 27.2
Incr/(Decr) in Revolving Credit Facility (2.1) (0.7) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Incr/(Decr) in A Term Loan 0.0 (4.7) (7.6) (10.1) (13.1) (4.5) 0.0 0.0 0.0
Incr/(Decr) in B Term Loan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Incr/(Decr) in Senior Subordinated Notes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Net Cash Flow 0.5 0.0 0.0 0.0 0.0 11.6 19.5 23.1 27.2
Cash Balance
Minimum Cash Balance 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Beginning Balance 0.5 0.5 1.0 1.0 1.0 1.0 1.0 12.6 32.1 55.2
Incr/(Decr) 0.0 0.5 0.0 0.0 0.0 0.0 11.6 19.5 23.1 27.2
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ending Balance 0.5 1.0 1.0 1.0 1.0 1.0 12.6 32.1 55.2 82.4
Average Balance 0.5 0.8 1.0 1.0 1.0 1.0 6.8 22.4 43.7 68.8
Interest Income 5.000% 0.0 0.0 0.1 0.1 0.1 0.1 0.3 1.1 2.2 3.4
57
CONFIDENTIAL INITIAL CASE
- --------------------------------------------------------------------------------
BALANCE SHEET ADJUSTMENTS - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 5
[Dollars in Millions]
Actual Pro Forma
--------- Financing Accounting -----------
11/30/97 Adjustments Adjustments 11/30/97
--------- ----------- ----------- -----------
Assets
Cash $ 0.5 $ 86.5 $ (86.5) $ 0.5
Other Current Assets 58.8 58.8
------- -------- --------- -------
Total 59.3 86.5 (86.5) 59.3
PP&E 20.6 20.6
Other Long-Term Assets 12.9 12.9
Goodwill & Intangibles 38.6 0.0 38.6
Deferred Financing Costs 0.0 3.0 3.0
------- -------- --------- -------
Total Assets $ 131.4 $ 86.5 $ (83.5) $ 134.4
======= ======== ========= =======
Liabilities
Current Liabilities $ 21.3 $ 21.3
Debt:
Existing Debt 56.4 (56.4) 0.0
Working Capital Revolver 0.0 2.8 2.8
A Term Loan 0.0 40.0 40.0
B Term Loan 0.0 0.0 0.0
Senior Subordinated Notes 0.0 100.0 100.0
------- -------- --------- -------
Total Debt 56.4 86.5 0.0 142.8
Other Long-Term Liabilities 0.0 0.0
Minority Interests 0.0 0.0
PIK Preferred 0.0 0.0 0.0
Shareholders' Equity 53.8 0.0 (83.5) (29.7)
------- -------- --------- -------
Total Liabilities & Shareholders' Equity $ 131.4 $ 86.5 $ (83.5) $ 134.4
======= ======== ========= =======
0.0 0.0 0.0 0.0
58
CONFIDENTIAL INITIAL CASE
- -------------------------------------------------------------------------------
CAPITALIZATION SCHEDULES - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 6
[Dollars in Millions]
Year Ended on or about August 31,
------------------------------------------------------------------------------
Pro Forma Projected
LTM ------------------------------------------------------------------------------
Rates 11/30/97 1998 1999 2000 2001 2002 2003 2004 2005 2006
------- ---------- ------ ------ ------ ----- ------ ------ ------ ------ ------
Revolving Credit Facility 8.500%
Beginning Balance 2.8 2.8 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Additions/(Payments) 0.0 (2.1) (0.7) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Ending Balance 2.8 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Undrawn Portion 0.500% 22.2 24.3 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0
Interest on Undrawn Portion 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Average Balance 2.8 1.8 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest Expense 0.4 0.3 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1
A Term Loan 8.500%
Beginning Balance 40.0 40.0 40.0 35.3 27.7 17.6 4.5 0.0 0.0 0.0
Additions/(Payments) 0.0 0.0 (4.7) (7.6) (10.1) (13.1) (4.5) 0.0 0.0 0.0
------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Ending Balance 40.0 40.0 35.3 27.7 17.6 4.5 0.0 0.0 0.0 0.0
Average Balance 40.0 40.0 37.7 31.5 22.7 11.1 2.3 0.0 0.0 0.0
Interest Expense 3.4 3.4 3.2 2.7 1.9 0.9 0.2 0.0 0.0 0.0
B Term Loan 8.750%
Beginning Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Additions/(Payments) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Ending Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Average Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Senior Subordinated Notes 9.875%
Beginning Balance 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Additions/(Payments) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Ending Balance 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Average Balance 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Interest Expense 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9 9.9
PIK Preferred 0.000%
Beginning Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Accreted Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Ending Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Average Balance 0.0 0.0 0.0 0.0
Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
59
CONFIDENTIAL INITIAL CASE
- --------------------------------------------------------------------------------
INTERNAL RATE OF RETURN OF EQUITY - NORWOOD PROMOTIONAL PRODUCTS, INC. Page 7
[U.S. Dollars in Millions, except per share value]
Projected FYE on or about August 31,
-------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
EBITDA $ 26.9 $ 30.6 $ 34.1 $ 38.0 $ 42.3 $ 46.9
FIRM VALUE @ EBITDA MULTIPLE OF:
6.00x $ 161.5 $ 183.4 $ 204.7 $ 228.1 $ 254.1 $ 281.6
7.00x 188.4 213.9 238.8 266.1 296.4 328.6
8.00x 215.3 244.5 272.9 304.2 338.8 375.5
Less: Total Debt $(140.7) $ (135.3) $ (127.7) $ (117.6) $ (104.5) $ (100.0)
Plus: Cash 1.0 1.0 1.0 1.0 1.0 12.6
Less: Other Deductions -- -- -- -- -- --
------- -------- -------- -------- -------- --------
Total Deductions to Equity $(139.7) $ (134.3) $ (126.7) $ (116.6) $ (103.5) $ (87.4)
EQUITY VALUE @ EBITDA MULTIPLE OF:
6.00x $ 21.8 $ 49.0 $ 78.0 $ 111.5 $ 150.6 $ 194.2
7.00x 48.7 79.6 112.1 149.5 192.9 241.2
8.00x 75.6 110.2 146.2 187.6 235.3 288.1
Pre-tax IRR Summary Analysis for Management's Equity Interest
- --------------------------------------------------------------------------------------------------------------------------
Net Equity Holders
Equity Ownership % EBITDA Multiple 1998 1999 2000 2001 2002 2003
------ ------------------ --------------- ------ ------ ------ ------ ------ ------
$20.8 100.0% 6.00x 4.6% 53.4% 55.2% 52.1% 48.5% 45.1%
7.00x 133.7% 95.4% 75.2% 63.7% 56.0% 50.4%
8.00x 262.8% 129.9% 91.4% 73.2% 62.4% 54.9%
Pre-tax Value Analysis for Management's Equity Interest
- --------------------------------------------------------------------------------------------------------------------------
Net Management
Ownership % EBITDA Multiple 1998 1999 2000 2001 2002 2003
------------------ --------------- ------ ------ ------ ------ ------ ------
100.0% 6.00x $21.8 $49.0 $78.0 $111.5 $150.6 $194.2
7.00x 48.7 79.6 112.1 149.5 192.9 241.2
8.00x 75.6 110.2 146.2 187.6 235.3 288.1
60
NORWOOD PROMOTIONAL PRODUCTS
- --------------------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS-EBITDA MULTIPLE METHOD Page 10
(Dollars in millions)
PROJECTED FYE AUGUST 31
--------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004
------- ------- ------- ------- ------- ------- -------
Sales $ 194.6 $ 209.7 $ 225.9 $ 243.4 $ 262.4 $ 282.8 $ 304.9
EBITDA 26.9 30.6 34.1 38.0 42.3 46.9 52.1
Less: Depreciation (4.2) (4.3) (4.3) (4.3) (4.3) (4.3) (4.3)
------- ------- ------- ------- ------- ------- -------
EBITA 22.7 26.3 29.9 33.8 38.1 42.7 47.8
Less: Taxes @ 40.0% (9.1) (10.5) (11.9) (13.5) (15.2) (17.1) (19.1)
------- ------- ------- ------- ------- ------- -------
Tax-effected EBITA 13.6 15.8 17.9 20.3 22.9 25.6 28.7
Plus: Depreciation 4.2 4.3 4.3 4.3 4.3 4.3 4.3
Plus: Change in Deferred Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Less: Capital Expenditures (4.0) (4.0) (4.0) (4.0) (4.0) (4.0) (4.0)
Less: Changes in Working Capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- -------
Free Cash Flow $ 13.8 $ 16.0 $ 18.2 $ 20.5 $ 23.1 $ 25.9 $ 29.0
A + B = C
-------------- --------------------------- -----------------------------
DISCOUNTED (a) PV OF TERMINAL VALUE AS A
CASH FLOWS MULTIPLE OF 2004 EBITDA (b) FIRM VALUE
--------------------------- -----------------------------
WEIGHTED AVERAGE COST OF CAPITAL 1998-2004 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x
- -------------------------------- -------------- --------------------------- -----------------------------
11.0% $93.8 $150.5 $175.6 $200.7 $244.3 $269.4 $294.5
11.5% 92.1 145.8 170.1 194.5 237.9 262.2 286.5
12.0% 90.4 141.3 164.9 188.5 231.8 255.3 278.9
12.5% 88.8 137.0 159.8 182.7 225.8 248.7 271.5
13.0% 87.3 132.8 155.0 177.1 220.1 242.2 264.4
- D = E
-------------- ---------------------------
NET DEBT TOTAL EQUITY VALUE EQUITY VALUE PER SHARE (c)
--------------------------- -----------------------------
WEIGHTED AVERAGE COST OF CAPITAL 35673 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x
- -------------------------------- -------------- --------------------------- -----------------------------
11.0% $55.9 $188.4 $213.5 $238.6 $37.22 $42.18 $47.13
11.5% 55.9 182.1 206.4 230.7 $35.97 $40.77 $45.57
12.0% 55.9 175.9 199.5 223.0 $34.75 $39.41 $44.06
12.5% 55.9 170.0 192.8 215.7 $33.58 $38.09 $42.60
13.0% 55.9 164.2 186.4 208.5 $32.44 $36.82 $41.19
-----------------------------
PRESENT VALUE OF
TERMINAL VALUE AS A % OF
FIRM VALUE
- ----------------------------
6.0 7.0 8.0
- ----------------------------
61.6% 65.2% 68.1%
61.3% 64.9% 67.9%
61.0% 64.6% 67.6%
60.7% 64.3% 67.3%
60.3% 64.0% 67.0%
- ----------------------------------
(a) Present values calculated as of August 31, 1997.
(b) Discounted 7 years; based on FYE August 31, 2004 EBITDA of $52.1 million.
(c) Based on 5.1 million shares outstanding.
61
- -------------------------------------------------------------------------------
COMPARABLE COMPANY PUBLIC MULTIPLES ANALYSIS
- -------------------------------------------------------------------------------
62
ANALYSIS OF VALUATION MULTIPLES OF COMPARABLE PROMOTIONAL PRODUCTS COMPANIES
- --------------------------------------------------------------------------------
Public Market Multiples
MARKET VALUE OF EQUITY AS A MULTIPLE OF:
--------------------------------------------
LTM LTM
PRICE MARKET MARKET NET TO 1997E 1998E CASH LFQ
COMPANY DEC-2-97 VALUE CAP.(a) COMMON EPS.(b) EPS(b) FLOW(c) EQUITY
------- -------- ------ ------- ------ ------- ------ ------- ------
U.S. COMPANIES
Cyrk Inc.(d) $ 11.63 $159.1 $160.2 48.2 NA NA 14.4 1.00
Equity Marketing Inc.(d) 29.00 173.2 160.5 20.6 18.6 15.3 17.7 5.36
HA-LO Industries 26.44 546.6 582.3 42.4 35.3 26.2 32.7 7.15
Swiss Army Brands 10.25 84.1 84.9 NM NM 22.8 NM 1.09
EUROPEAN COMPANIES
Bemrose Corporation $ 6.87 $291.3 $336.0 11.6x 10.5x 9.3x 7.7x 3.34x
---------------------------------------------------------------
Minimum(e) 11.6x 10.5x 9.3x 7.7x 1.00x
Mean(e) 30.7 21.4 18.4 18.1 3.59x
Median(e) 31.5 18.6 19.1 16.0 3.34x
Maximum(e) 48.2 35.3 26.2 32.7 7.15x
---------------------------------------------------------------
NORWOOD PROMOTIONAL PRODUCTS $14.88 $75.4 $134.2 10.5x 12.9x 10.9x 5.6x 1.47x
MARKET CAPITALIZATION AS
A MULTIPLE OF:
-------------------------
LTM LTM LTM
COMPANY SALES EBITDA EBIT
------- ------ ------- ------
U.S. COMPANIES
Cyrk Inc.(d) 0.35 8.4 11.5
Equity Marketing Inc.(d) 1.23 11.1 12.2
HA-LO Industries 1.99* 22.2* 26.7*
Swiss Army Brands 0.70 NM* NM
EUROPEAN COMPANIES
Bemrose Corporation 1.04x 6.3x 8.1x
-------------------------
Minimum(e) 0.35x 6.3x 8.1x
Mean(e) 0.83x 8.6 10.6
Median(e) 0.87x 8.4 11.5
Maximum(e) 1.23x 11.1 12.2
-------------------------
NORWOOD PROMOTIONAL PRODUCTS 0.76x 5.8x 9.0x
- ---------------
Dollar amounts in U.S. millions except per share data and if otherwise
stated.
(a) Market Capitalization = Market Value of Equity + Preferred Equity +
Short-Term Debt + Long-Term Debt + Minority Interest - Cash & Marketable
Securities.
(b) Earnings Estimates were obtained from First Call as of Dec-2-97 and
calendarized when necessary.
(c) Cash Flow = Income Available to Common + DD&A + Deferred Taxes + Earnings of
Unconsolidated Subsidiaries.
(d) Insufficient detail available to adjust financials for recent acquisitions.
(e) Summary Multiples exclude numbers that are Negative, Not Available, Not
Meaningful or (*) items.
63
ANALYSIS OF VALUATION MULTIPLES OF COMPARABLE PROMOTIONAL PRODUCTS COMPANIES
- --------------------------------------------------------------------------------
Summary Credit Statistics
CREDIT RATINGS
SENIOR DEBT LTM LTM (EBITDA- TOTAL NEW DEBT/ TOTAL
-------------- EBITDA/ EBITDA/ CAPEX)/ DEBT/ NET DEBT/
COMPANY MOODY'S S&P GROSS INT. NET INT. GROSS INT. TOTAL CAP BOOK CAP EBITDA
- ----------------------------- ------- --- ---------- -------- ---------- --------- --------- ------
Bemrose Corporation - - 15.5x 15.5x 14.3x 33.9% 33.9% 0.8x
Cyrk Inc. - - 4.8 4.9 3.6x 19.3% 0.7% 0.5
Equity Marketing Inc. - - NM NM NM 0.0% NM 0.0
HA-LO Industries - - 28.0 NM 23.4x 33.2% 31.8% 1.3
NORWOOD PROMOTIONAL PRODUCTS - - 7.7 7.7 6.1x 54.5% 53.4% 2.6
Swiss Army Brands - - NM 18.2 NM 2.1% 1.0% 0.0
- ------------------------------------------
Definitions:
Gross Interest = Gross Interest incurred before subtracting (i) capitalized
interest, (ii) interest income.
FFO = Funds From Operations = Net income from continuing operations plus
depreciation, amortization, deferred income taxes, and other noncash
items.
64
ANALYSIS OF VALUATION MULTIPLES OF COMPARABLE PROMOTIONAL PRODUCTS COMPANIES
- -------------------------------------------------------------------------------
Summary Data for Selected Industry Comparables
LTM LTM LFQ
NET TO 1997E 1998E LTM LTM LTM CASH COMMON LTM
COMPANY SHARES COMMON EPS(a) EPS(a) SALES EBITDA EBIT FLOW(b) EQUITY FYE ENDED
- ---------------------------- ------ ------ ------ ------ ------ ------ ----- ------- ------ ------ ------
Bemrose Corporation 42.4 $25.1 $0.66 $0.74 $321.7 $53.1 $41.6 $38.1 $87.2 Dec-96 Jun-97
Cyrk Inc. 13.7 3.3 NA NA 460.7 19.1 14.0 11.1 159.8 Dec-96 Sep-97
Equity Marketing Inc. 6.0 8.4 1.56 1.89 130.9 14.5 13.1 9.8 32.3 Dec-96 Sep-97
HA-LO Industries 20.7 12.9 0.75 1.01 292.9 26.2 21.8 16.7 76.4 Dec-96 Sep-97
NORWOOD PROMOTIONAL PRODUCTS 5.1 7.1 1.15 1.37 175.8 23.1 15.0 13.5 51.3 AUG-97 AUG-97
Swiss Army Brands 8.2 (2.9) 0.00 0.45 121.6 (1.9) (4.0) (2.5) 77.0 Dec-96 Sep-97
- ---------------
Dollar amounts in U.S. millions except per share data and if otherwise stated.
(a) Earnings Estimates were obtained from First Call as of Dec-2-97 and
calendarized when necessary.
(b) Cash Flow = Income Available to Common + DD&A + Deferred Taxes + Earnings of
Unconsolidated Subsidiaries.
65
ANALYSIS OF CAPITAL STRUCTURE OF COMPARABLE PROMOTIONAL PRODUCTS COMPANIES
- --------------------------------------------------------------------------------
Summary Data for Selected Industry Comparables
MARKET CASH & PREFERRED MINORITY MARKET
COMPANY VALUE EQUIVALENTS ST DEBT LT DEBT EQUITY INTEREST CAP.(a)
- ----------------------------- ------ ----------- ------- -------- --------- --------- --------
Bemrose Corporation $291.3 $ 0.0 $ 0.0 $44.7 $0.0 $0.0 $336.0
Cyrk Inc. 159.1 36.9 28.4 9.7 0.0 0.0 160.2
Equity Marketing Inc. 173.2 12.7 0.0 0.0 0.0 0.0 160.5
HA-LO Industries 546.6 2.3 5.3 32.7 0.0 0.0 582.3
NORWOOD PROMOTIONAL PRODUCTS 75.4 2.6 2.4 59.1 0.0 0.0 134.2
Swiss Army Brands 84.1 0.9 1.6 0.0 0.0 0.0 84.9
- ------------------------------------------
Dollar amounts in U.S. millions except per share data and if otherwise stated.
(a) Market Capitalization = Market Value of Equity + Preferred Equity +
Short-Term Debt + Long-Term Debt + Minority Interest - Cash & Marketable
Securities.
66
- --------------------------------------------------------------------------------
COMPARABLE COMPANY ACQUISITION MULTIPLES ANALYSIS
- --------------------------------------------------------------------------------
67
VALUATION ANALYSIS
- --------------------------------------------------------------------------------
Acquisition Multiples for Comparable Manufacturing Companies
(Dollars in millions)
ANNOUNC. OFFER
DATE ACQUIROR TARGET/DESCRIPTION VALUE
- -------- -------- ------------------ -----
1/29/97 Norwood Promotional Products Wesburn Golf $ 7.0
Manufactures logo imprinted golf balls
4/4/96 Norwood Promotional Products Alpha Products 6.7
Manufactures plastic drinking cups
1/23/96 Norwood Promotional Products Tee-Off Enterprises 7.5
Manufactures custom-imprinted golf balls
7/31/95 Norwood Promotional Products BTS Group 9.8
Manufactures signs and advertising
products
4/1/95 Norwood Promotional Products Air-Tex 15.8
Manufactures promotional products
2/22/95 Norwood Promotional Products Designer Plastics 3.9
Manufactures plastic promotional bags
12/14/94 Norwood Promotional Products Bob Allen Companies 16.8
Manufactures luggage
8/10/94 Norwood Promotional Products Ocean Specialty Manufacturing 3.5
3/29/94 Norwood Promotional Products ArtMold Products 13.1
Manufactures promotional products
including keychains, golf tees, hats and
pens
2/22/94 Norwood Promotional Products Key Industries Inc. 9.5
Manufactures promotional and advertising
products
OFFER VALUE TRANSACTION VALUE
AS A MULTIPLE OF: AS A MULTIPLE OF:
-------------------- -------------------
ANNOUNC. TRANS. NET CASH BOOK
DATE VALUE(a) INCOME FLOW(b) VALUE EBITDA EBIT SALES
- -------- -------- ------ ------- ----- ------ ---- -----
1/29/97 $ 7.0 - - - - - 0.44
4/4/96 9.9 - 5.4 - - - 0.61
1/23/96 9.2 6.3 6.3 - - 8.2 1.01
7/31/95 11.2 - - - - 39.6 1.52
4/1/95 18.2 - - - - - -
2/22/95 4.9 - - - - 57.6* 0.91
12/14/94 19.2 316.0* - - - 103.5* 2.41*
8/10/94 4.9 - - - - - 0.67
3/29/94 14.2 - - - - - 1.10
2/22/94 11.9 10.6 10.6 - - - 0.99
-----------------------------------------------------
MAXIMUM 10.6x 10.6x - - 39.6x 1.52x
MEAN 8.4 7.4 - - 23.9 0.91x
MEDIAN 8.4 6.3 - - 23.9 0.95x
MINIMUM 6.3 5.4 - - 8.2 0.44x
-----------------------------------------------------
- ---------------
(a) Transaction Value = Offer Value + Preferred Equity at Liquidation Value +
Long Term Debt + Short Term Debt + Minority Interest - Cash & Marketable
Securities - Exercisable Options Proceeds.
(b) Cash Flow = Net Income + Depreciation & Amortization + Deferred Taxes.
68
VALUATION ANALYSIS
- -------------------------------------------------------------------------------
Acquisition Multiples for Comparable Distributors
(Dollars in millions)
ANNOUNC. OFFER
DATE ACQUIROR TARGET/DESCRIPTION VALUE
- -------- --------------------------------------- ---------------------------------------- -----
6/4/97 HA-LO Industries Lees/Keystone Inc. $ 4.0
Distributor of specialty and premium Distributor of promotional products
promotional products
5/8/97 Cyrk, Inc. Simon Marketing 58.0
Manufacturer of custom-imprinted Global promotion agency and provider of
promotional products and sports apparel custom promotional products
4/8/97 Cyrk, Inc. Tonkin Inc. 22.0
Manufacturer of custom-imprinted Promotional products and catalog company
promotional products and sports apparel
10/29/96 HA-LO Industries Creative Concepts in Advertising 75.9
Distributor of specialty and premium Distributor of promotional products
promotional products
12/22/95 HA-LO Industries Fletcher-Barnhardt & White 10.2
Distributor of specialty and premium Distributor of specialty advertising
promotional products products
OFFER VALUE TRANSACTION VALUE
AS A MULTIPLE OF: AS A MULTIPLE OF:
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ANNOUNC. TRANS. NET CASH BOOK
DATE VALUE (a) INCOME FLOW (b) VALUE EBITDA EBIT SALES
- -------- --------- ------ -------- ----- ------ ---- -----
6/4/97 $ 4.0 -- -- -- -- -- 0.40
5/8/97 39.2 380.9 * 52.6 7.0 10.1 13.4 0.10
4/8/97 22.0 -- -- -- -- -- 0.55
10/29/96 98.8 -- -- -- 169.5 * -- 1.46
12/22/95 13.0 46.8 30.0 8.2 26.6 35.5 0.31
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Maximum 46.8x 52.6x 8.2x 26.6x 35.5x 1.46x
Mean 46.8 41.3 7.6 18.4 24.4 0.56x
Median 46.8 41.3 7.6 18.4 24.4 0.40x
Minimum 46.8 30.0 7.0 10.1 13.4 0.10x
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(a) Transaction Value = Offer Value + Preferred Equity at Liquidation Value +
Long Term Debt + Short Term Debt + Minority Interest - Cash & Marketable
Securities - Exercisable Options Proceeds.
(b) Cash Flow = Net Income + Depreciation & Amortization