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EXHIBIT 99.(d)(5)
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NORWOOD PROMOTIONAL PRODUCTS, INC.
106 EAST SIXTH STREET, SUITE 300
AUSTIN, TX 78701
NOTICE DATED OCTOBER 20, 1998
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TO OUR SHAREHOLDERS:
This Notice to Shareholders is being delivered in connection with the
proposed merger ("Merger") between Norwood Promotional Products, Inc. (the
"Company") and a wholly-owned subsidiary of FPK, LLC ("LLC"), a limited
liability company formed by Frank P. Krasovec ("Krasovec"), the Company's
Chairman and Chief Executive Officer, which was described in the Company's Proxy
Materials dated July 22, 1998. Except as expressly set forth herein, this Notice
is qualified in its entirety by the information contained in the Proxy
Materials. Unless otherwise set forth herein, all capitalized terms used herein
shall have the respective meanings ascribed to them in the Proxy Materials.
This Notice to Shareholders is for your information, and no action is
required of shareholders at this time in connection with the Merger. PLEASE DO
NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. AS SOON AS PRACTICABLE
FOLLOWING THE EFFECTIVE TIME OF THE MERGER, YOU WILL BE SENT INSTRUCTIONS
REGARDING THE PROCEDURES TO EXCHANGE YOUR EXISTING CERTIFICATES EVIDENCING
COMMON STOCK OF THE COMPANY FOR THE MERGER CONSIDERATION.
Recent Developments
The Company's shareholders approved and adopted the agreement and plan
of merger (the "Merger Agreement") between the Company and LLC at a special
meeting of shareholders held on August 19, 1998. Under the Merger Agreement, a
wholly-owned subsidiary of LLC ("Newco") will merge with and into the Company.
At the effective time of the merger, each share of the Company's common stock
(other than shares retained by members of the Buyout Group) will be converted
into $20.70 in cash. The Merger will become effective approximately one business
day after the satisfaction or waiver of the remaining conditions to the Merger
set forth in the Merger Agreement, including the consummation of the financing
for the transaction. At the special shareholders meeting, shareholders also
adopted amendments to the Company's articles of incorporation changing the par
value of its common stock from no par to $0.01 per share and authorizing the
Board of Directors of the Company to establish and issue one or more series of
preferred stock.
In late August 1998, the investment bankers for LLC advised it that due
to a change in high yield debt market conditions, the placement of $100 million
principal amount of senior subordinated notes could not be effected at such
time. The senior subordinated notes constituted a portion of the financing which
was a condition to the Merger Agreement.
In September 1998, in order to fund the Merger, Liberty Capital
Partners, Inc. (together with its affiliates and advisory clients, "Liberty")
delivered a letter of intent to LLC to provide $37 million in subordinated
debt, $20
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million in preferred stock and $3 million in common stock, and Merrill Lynch &
Co. and NationsBank, N.A. delivered a commitment letter to LLC to provide a $25
million revolving credit facility and $75 million in term credit facilities.
This financing replaces the financing which had been previously arranged for the
Merger. The financing is subject to, among other things, completion of due
diligence and the negotiation of satisfactory documentation. In order to provide
LLC with sufficient time to complete the financing, the Company agreed to extend
the date after which it may terminate the Merger Agreement without cause to
October 31, 1998.
As a result of the new financing, the expected sources and uses of
funds to consummate the Merger previously described in the Company's Proxy
Statement dated July 22, 1998 has changed. The Company expects the sources and
uses to be as follows:
Estimated Fees and Expenses; Sources of Funds
Estimated fees and expenses incurred or to be incurred by the Company,
LLC, Newco and the members of the Buyout Group in connection with the Merger
Agreement and the transactions contemplated thereby are approximately as
follows:
Payment of Merger Consideration(1)............................................................ $88,900,000
Financial advisory fees, financing commitment fees and expenses(2)............................ 7,100,000
Legal fees and expenses(3).................................................................... 1,550,000
Accounting and appraisal fees and expenses.................................................... 150,000
SEC filing fees............................................................................... 16,800
Printing and mailing expenses................................................................. 75,000
Paying Agent fees and expenses ............................................................... 1,500
Miscellaneous expenses ....................................................................... 106,700
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TOTAL.......................................................................... $97,900,000
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(1) Includes payment for all outstanding shares of Common Stock other than
those retained by members of the Buyout Group.
(2) Includes the fees and estimated expenses of J.C. Bradford, Merrill
Lynch, Allen & Company Incorporated, Ares and Liberty.
(3) Includes the estimated fees and expenses of legal counsel for the
Special Committee, for the Company, for J.C. Bradford, for Krasovec and
the members of the Buyout Group, for Merrill Lynch, for Ares and for
Liberty.
The total funds required to pay the Merger Consideration of $20.70 per
share to all Public Shareholders, consummate the other transactions contemplated
by the Merger, refinance certain of the Company's current indebtedness and pay
all related fees, costs and expenses is estimated to be approximately $138.7
million, which amount will be obtained by means of certain equity contributions
and borrowings as described below. Except as otherwise stated below, all of such
equity contributions will become effective at the Effective Time, and all of
such borrowings will become available immediately subsequent to the Effective
Time upon satisfaction of the conditions in the loan documents. None of the
equity contributions or borrowings will become effective or available if the
Merger is not consummated for any reason. The terms of and the documentation for
the intended borrowings have not yet been finalized and are still being
negotiated. Accordingly, the description below of such borrowings is preliminary
and not necessarily complete. In any event, the final documentation for such
borrowings might contain terms and conditions that are more or less restrictive
than currently contemplated.
The total financing for the Merger and related costs and expenses,
including $20.3 million in roll-over equity provided by members of the Buyout
Group, will be approximately $159.0 million, of which
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approximately $88.9 million will be required to pay the Merger Consideration to
the Public Shareholders, approximately $40.8 million will be incurred to
refinance certain of the Company's current indebtedness, and approximately $9.0
million will be incurred to pay all expenses of the Company, LLC, Newco and the
members of the Buyout Group in connection with the Merger and the transactions
contemplated thereby. Such funds will be furnished from (i) the Equity
Financing of approximately $46.8 million, consisting of (A) approximately $20.3
million to be provided by the Buyout Group, (B) $3.5 million from the issuance
of Common Stock to an Additional Common Shareholder, (C) $3 million from the
issuance of Common Stock to Liberty and (D) $20 million from the issuance of
Preferred Stock to Liberty, (ii) the $100 million Credit Facilities to be
provided by Merrill Lynch, NationsBank and NMS, consisting of (A) a $75 million
senior secured term loan which will be fully drawn at the Effective Time and
(B) a $25 million senior secured revolving credit facility, of which no more
than approximately $0.2 million will be drawn at the Effective Time, and (iii)
$37 million from the issuance to Liberty of subordinated debt at the Effective
Time. The Company anticipates funding its working capital needs after the
Merger from the senior secured revolving credit facility and from cash flow
generated from operations.
Equity Financing. At the Effective Time, the Equity Financing of
approximately $46.8 million will consist of (A) approximately $20.3 to be
provided by the Buyout Group, (B) $3.5 million from the issuance of Common Stock
to an Additional common Shareholder, (C) $3.0 million from the issuance of
Common Stock to Liberty and (D) $20 million from the issuance of Preferred Stock
to Liberty, as described below:
Common Stock. Of the Equity Financing, (i) approximately $20.3
million will be provided by the members of the Buyout Group, by converting
their Common Stock (valued at the Merger Consideration of $20.70 per share)
into common stock of the Surviving Corporation, (ii) approximately $3.5 million
will be provided through the issuance of new shares of common stock to an
Additional Common Shareholder, and (iii) $3 million will be provided through
the issuance of new shares of Common Stock to Liberty. An employee of Merrill
Lynch is a member of a limited liability company that is anticipated to be an
Additional Common Shareholder. Certain members of the Buyout Group may sell
certain of their shares which they retain under the Merger Agreement
immediately upon consummation of the Merger to Additional Common Shareholders,
which shareholders may include members of the Buyout Group. Michael Linderman,
the Company's former Executive Vice President-Corporate Development, is no
longer a member of the Buyout Group.
Preferred Stock. At the Effective Time, the Surviving
Corporation will issue to Liberty (i) 20,000 shares of the Surviving
Corporation's Preferred Stock with a liquidation preference ("Liquidation
Preference") of $1,000 per share and (ii) warrants to purchase shares of common
stock, for $0.01 per share, representing 15% of the fully diluted common stock
of the Surviving Corporation (the "Preferred Stock Warrants"). The Preferred
Stock will have an annual dividend rate of 10% (the "Dividend Rate"), will have
no voting rights, other than as required by law, and will be ranked senior in
liquidation and payment of dividends to all other classes of capital stock of
the Surviving Corporation, now outstanding or hereafter issued. For the first
five years after issuance, dividends will be payable, at the Surviving
Corporation's option, in additional shares of Preferred Stock or cash.
Thereafter, dividends will be payable in cash. All dividends will accumulate and
will be payable (whether in cash or Preferred Stock) quarterly, in arrears.
Dividends will accumulate on all unpaid dividends at the applicable annual
Dividend Rate.
The Preferred Stock will be redeemable, in whole or in part, at the
option of the Surviving Corporation at any time. The Preferred Stock will be
required to be redeemed on the earlier of the tenth anniversary of the Effective
Date, upon a change in control of the Company or upon a default. Under certain
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conditions, the Surviving Corporation will have the option to exchange the
Preferred Stock at any time for subordinated notes that will have substantially
the same terms as the Preferred Stock.
Credit Facilities. At the Effective Time, Merrill Lynch, NationsBank
and certain other lenders (collectively, the "Lenders") will make available to
the Surviving Corporation senior secured credit facilities in an aggregate
principal amount of $100 million, such Credit Facilities comprising:
Term Loan Facilities. The Lenders will make available term
loan facilities in an aggregate principal amount of $75 million (the "Term Loan
Facilities") comprised of a $35 million Term Loan "A" Facility and a $40 million
Term Loan "B" Facility. The Term Loan A Facility will mature on the fifth
anniversary of the Effective Time. The Term Loan B Facility will mature on the
sixth anniversary of the Effective Time. Amounts outstanding under the Term Loan
Facilities will amortize, beginning with the last business day of the first full
fiscal quarter after the Effective Time, on a quarterly basis during each year
as set forth below:
Fiscal Term Loan A Term Loan B
Year Amount Amount
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1999 $ 3,000,000 $ 400,000
2000 6,000,000 400,000
2001 8,000,000 400,000
2002 8,500,000 400,000
2003 9,500,000 400,000
2004 -- $38,000,000
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$35,000,000 $40,000,000
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The Term Loan Facilities will be available solely on the Effective Time
in a single draw. Amounts borrowed under the Term Loan Facilities that are
repaid or prepaid may not be reborrowed. Borrowings under the Term Loan
Facilities may be prepaid at any time in whole or in part at the option of the
Surviving Corporation, in a minimum principal amount and in multiples to be
agreed upon, without premium or penalty (except, in the case of LIBOR
borrowings, prepayments not made on the last day of the relevant interest
period). Voluntary prepayments under the Term Loan Facilities will be applied
pro rata against the remaining scheduled amortization payments under the Term
Loan A Facility and Term Loan B Facility.
Revolving Facility. The Lenders will make available a
revolving credit facility in an aggregate principal amount of $25 million (the
"Revolving Facility"). The Revolving Facility will mature on the fifth
anniversary of the Effective Time (the "Revolving Facility Maturity Date"). The
Revolving Facility will be available for working capital and general corporate
purposes in the form of revolving loans and letters of credit ("Letters of
Credit") on and after the Effective Time until 30 business days prior to the
Revolving Facility Maturity Date. Amounts repaid under the Revolving Facility
may be reborrowed to the extent of the commitments then in effect. At the
Effective Time, not more than approximately $0.2 million shall be drawn under
the Revolving Facility to consummate the Merger. The unutilized portion of the
commitments under the Revolving Facility may be reduced and Revolving Loans may
be repaid at any time, in each case, at
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the option of the Surviving Corporation, in a minimum principal amount and in
multiples to be agreed upon, without premium or penalty (except, in the case of
LIBOR borrowings, prepayments not made on the last day of the relevant interest
period).
The Credit Facilities will be secured by (i) a perfected first priority
lien on, and pledge of, all the capital stock and intercompany debt of each of
the direct and indirect subsidiaries of the Surviving Corporation existing at
the Effective Time or thereafter created or acquired (except that to the extent
that the pledge thereof would cause material adverse tax consequences, such
pledge with respect to foreign subsidiaries shall be limited to 65% of the
capital stock of "first tier" foreign subsidiaries), and (ii) a perfected first
priority lien on, and security interest in, all of the tangible and intangible
properties and assets (including all real property) of the Surviving Corporation
and its direct and indirect domestic subsidiaries existing at the Effective Time
or thereafter created or acquired, except for those properties and assets which
the Syndication Agent shall determine in its sole discretion that the costs of
obtaining such security interest are excessive in relation to the value of the
security to be afforded thereby (it being understood that none of the foregoing
shall be subject to any other liens or security interests, except for certain
customary exceptions to be agreed upon) (all of such collateral, the
"Collateral").
The Surviving Corporation will be entitled to make borrowings at either
LIBOR or ABR, plus (A) with respect to LIBOR Loans, (i) in the case of loans
under the Revolving Facility, 2.75% per annum; (ii) in the case of loans under
the Term Loan A Facility, 2.75% per annum and (iii) in the case of loans under
the Term Loan B Facility, 3.25% per annum; and (B) with respect to ABR Loans,
(i) in the case of loans under the Revolving Facility, 1.75% per annum (ii) in
the case of loans under the Term Loan A Facility, 1.50% per annum and (iii) in
the case of loan under the Term Loan B Facility, 2.25% per annum. A pricing grid
governing such rates showing stepups/stepdowns in such rates beginning 12 months
after the Effective Time shall be negotiated based upon improved credit
measures.
The Credit Facilities will be subject to a 0.50% per annum commitment
fee on the undrawn amount of the commitment, commencing at the Effective Time.
The Company intends to repay all indebtedness and terminate all commitments to
make extensions of credit under its existing $125 million credit facility
arranged by Merrill Lynch (the "Old Credit Facility"). Other than as described
herein, the Company has no present plans or arrangements to refinance or repay
the Credit Facilities.
Subordinated Debt. At the Effective Time, Liberty will arrange $37
million of the financing in the form of subordinated debt (the "Subordinated
Debt"). The Subordinated Debt will (i) accrue interest at a rate of 12.5% per
annum, payable quarterly, (ii) be pre-payable at any time without the payment of
any premium or penalty, and (iii) be issued with detachable warrants (the
"Subordinated Debt Warrants") to purchase shares of common stock, for $0.01 per
share, representing 20% of the fully diluted common stock of the Surviving
Corporation; provided that if the Subordinated Debt is repaid in full prior to
the third anniversary of the Effective Time, 50% of the Subordinated Debt
Warrants shall be canceled without consideration. Scheduled principal payments
on the Subordinated Debt shall commence after the tenth anniversary of the
Effective Time, or upon the first quarter after the Term Loan Facilities have
been repaid in full.