1
[LOGO]
1996 ANNUAL REPORT
NATIONAL PICTURE & FRAME COMPANY
---------------
Delivering Value and Fashion
in Home Decor
MADE IN U.S.A.
2
Corporate Profile
National Picture & Frame Company is a leading manufacturer of picture frames,
framed art, framed mirrors and other items for home decor. The company's
products are distributed by major retailers, generating revenue of $67
million in fiscal 1996. Headquartered in Greenwood, MS, National Picture &
Frame Company operates two plants and employs approximately 600 people. The
company's common stock trades on the Nasdaq National Market System under the
symbol NPAF.
3
FINANCIAL HIGHLIGHTS
FOR THE FISCAL YEAR ENDED APRIL 30, 1996,
NATIONAL PICTURE & FRAME COMPANY DEMONSTRATED
GROWTH IN SEVERAL KEY AREAS:
- Net sales increased to $67.17 million from
$60.79 million in fiscal 1995
- Operating income grew to $8.66 million from
$8.63 million
- Net income rose to $5.06 million from
$5.03 million
In Thousands
1993 $44,357
1994 $51,293
1995 $60,794
1996 $67,169
In Thousands
1993 $ 3,099
1994 $ 6,369
1995 $ 8,634
1996 $ 8,659
Pro forma(1)
In Thousands
1993 $ 1,571
1994 $ 2,666
1995 $ 5,028
1996 $ 5,061
Pro forma(1)
(1) The 1993 amounts are pro forma assuming acquisition of predecessor and the
initial public offering of the company's common stock occurred on May 1,
1992.
1
4
SHAREHOLDER LETTER
[PHOTO OF JESSE LUXTON]
JESSE LUXTON
President and Chief Executive Officer
Dear Fellow Shareholders:
National Picture & Frame Company became more than a manufacturer of picture
frames in 1996. We expanded our product offerings, strengthening our core lines
so that we could easily switch our focus to reflect changing trends in home
furnishings. The acquisition of Universal Cork at the end of the fiscal year
gave us a new core competency -- cork and other board products -- as well as
increased penetration of important new distribution channels and additional
revenue that will be reflected in fiscal 1997.
Because of this flexibility in core product lines, National increased net sales
about 10 percent, to $67 million compared with $61 million in 1995. By
comparison, the picture frame industry grew only about three to four percent.
Our ability to move quickly and take advantage of growth opportunities sets us
apart from other companies that manufacture only picture frames. One of our
largest selling items in 1996, the windowpane mirror, didn't even exist among
our product offerings in 1995.
Net income increased slightly to $5.1 million for the fiscal year ended April
30, 1996 from $5.0 million for the fiscal year ended April 30, 1995, or $1.02
per share versus $1.01 per share, on 4,973,000 weighted average shares
outstanding compared with 5,000,000 weighted average shares outstanding in the
prior year. Growth
2
5
SHAREHOLDER LETTER
in net income lagged the growth in revenues because we prepared for the future
by strengthening our infrastructure in several important ways. National's
management organization and facilities are now positioned to take the company to
the next level of growth.
NEW MANAGEMENT BRINGS MORE
TALENT TO NATIONAL
During the year, we added key people in some important areas. At the
senior management level, M. Wesley Jordan, Jr. completed his first full year as
chief financial officer. He brought significant expertise in financial
management that allowed us to structure more-favorable banking relationships
(including $30 million agreements with NationsBank and Deposit Guaranty
National Bank), better fulfill our responsibilities as a publicly-held company
and save significant dollars on workers compensation through more-astute risk
management. Wes also thoroughly understands acquisitions and business
valuations, areas that are increasingly important to National.
As our plastics factory acquired more sophisticated equipment and techniques, we
needed an experienced manager. John Barlow came to National as an expert in
polymers, working most recently with Chevron Oil. One of the accomplishments he
spearheaded in 1996 was reducing the density of our plastic moldings, which
substantially increased our yield from styrene. In addition to putting
leading-edge technology into production, he also assumed management of our
three-shift extrusion operation. John's experience helped us reach new
milestones in the extrusion area, including productivity increases that nearly
doubled our extrusion capability -- changes that directly affect our
manufacturing costs.
To better control the cost of raw materials -- which totaled $32.7 million last
year -- as well as other purchasing responsibilities, we brought on board Tom
Walburgh as materials manager. He helped reduce our inventories (excluding
Universal Cork) by approximately $2 million, to approximately $7 million
at year end 1996. This reduction led to more-favorable inventory turns as well
as decreased dependence on outside financing. The integrated manufacturing
system installed in fiscal 1994 has been an important tool for Tom and his
associates.
We also expanded our creative design department, now headed by our new director
of marketing and product development, Chuck Polandick. Chuck is widely regarded
as one of the leading designers of wall decor in the United States, specifically
in mass-market decorator products. With Chuck on board and some new
technology (including digital photography and
3
6
SHAREHOLDER LETTER
computer-aided design software), our design team brought creative new products
to market quickly and successfully.
VALUE AND FASHION REMAIN KEY INITIATIVES
All of these changes helped strengthen our ongoing commitment to delivering
value and fashion in home decor. Our value orientation is rooted in low-cost
production with a fashion focus, bringing product to market quickly with
attractive margins for retailers at compelling prices.
Productivity per employee rose dramatically this year, to $114,000 per person
compared with $100,000 in 1995 and $94,000 in 1994. That's an increase of 21
percent during the past three years. Gross margin remained relatively stable in
the mid-20 percent range.
Capital expenditures on new equipment helped fuel this productivity increase. In
the polystyrene extrusion area, we effectively doubled the extrusion rate on
some types of moldings. In wood, new molders added 62 percent more throughput,
at much higher quality levels. New finishing equipment in the wood factory
increased productivity by 38 percent, reducing the number of steps and the total
time required to finish a piece of molding.
From a sales perspective, increasing net sales 10 percent was only part of the
success we achieved in 1996. During 1996, our product mix changed
significantly, reflecting new trends within the home decor marketplace. While
still staying within the core competencies we've established, we took advantage
of opportunities to sell more framed art and mirrors. Mirrors accounted for $13
million in sales, up from $8 million in the prior year. Net sales from framed
art increased to $9 million from $7 million. Together, these two categories
were responsible for the revenue growth we saw in fiscal 1996.
As mentioned earlier, one of our best-selling items was the windowpane mirror, a
new product in 1996. We identified the trend in home furnishings -- the
"country" look -- that generated demand for this product, and National was well
prepared to take advantage of this new fashion statement. Our expertise in wood
frames and in framed mirrors transferred well. This is only one example of our
ability to adapt and diversify.
Our $2.4 million acquisition of Universal Cork at the end of the fiscal year
exemplifies our commitment to value and fashion in several ways. First, like
National, Universal is a low-cost supplier in its field. Second, cork products
will become another core product group for National where we believe we can
compete with attractive margins and fashion-focused products (framed cork
boards, dry-erase boards and chalk-
4
7
SHAREHOLDER LETTER
boards). Finally, Universal gives us better entry into the home improvement and
hardware stores, which we have targeted for increased growth in fiscal 1997.
Universal Cork also makes sense from a production standpoint, which is another
criteria for success within National. The operations of Universal are being
fully integrated with our Greenwood facilities. The peak seasons of the two
businesses are quite complementary. Universal's highest sales occur
during July and September, which correspond with slow months for National, while
National's sales peak during November and April, which are low months for
Universal. Thus, combining the production of both companies will help even out
capacity utilization.
Our continuity business -- the steady day-in, day-out movement of product that
helps make our business more predictable -- is crucial to National's growth.
Building this portion of our business is very important, because it's
manufacturing friendly and enables us to use our production facilities most
efficiently. Although promotional business may give us entry to new customers,
along with strong profit margins, the continuity business is our bread and
butter.
As we move into fiscal 1997, we expect National to continue these positive
moves. In fiscal 1996, we expanded our structure to accommodate sales growth.
During the coming year, we hope to retain our double-digit revenue growth rate
and move forward with new products and expanded distribution channels. At the
same time, we will build our continuity business with leading retailers in key
distribution channels -- companies like Price/Costco, Michael's, Frank's
Nursery, Lowe's and Target. The people at National are excited about the
opportunities ahead and we look forward to sharing our success with you.
Sincerely,
Jesse C. Luxton
Jesse C. Luxton, President and CEO
July 5, 1996
5
8
VALUE
National has built its reputation by striving to be the low-cost producer in
the areas in which we have chosen to compete -- while retaining our fashion
orientation. Low-cost production is one way that we provide value to
customers, along with the flexibility to meet their rapidly changing needs.
6
9
FOCUS ON VALUE IN HOME DECOR
PRODUCTION IMPROVEMENTS STRENGTHEN POSITION
AS LOW-COST PROVIDER
The volume of frames produced at the Greenwood facilities has established
National as one of the three largest domestic manufacturers of picture frames.
During fiscal 1996, National made 22 million plastic frames, 5.2 million metal
frames and 3.6 million wood frames. Economies of scale bring important cost
savings, much of which can be passed along to the consumer. Automation is used
judiciously, however, giving consideration to any loss of flexibility that would
hamper National's ability to meet customer's needs and stay in touch with
rapidly changing trends in home decor.
We are constantly looking for ways to decrease costs and our efforts in 1996
were no exception. We engineered higher yields with new equipment, some of
which replaced labor with automation. Analyzing our workflow to determine the
absolute minimum number of steps required from production through shipping
led to revised layouts of our factories.
Vertical integration is one key to cost efficiency. In wood frame production,
National is as vertically integrated as necessary, without actually owning
timberland and harvesting trees for lumber. During the past year, increased
productivity resulted from new multi-step ovens. We can now finish wood
moldings in one pass instead of using complicated finishing configurations with
more equipment that were labor intensive and time consuming.
Similarly, in the plastic frame production, National is striving to extrude all
moldings inhouse -- even fancier embossed moldings, a process that was refined
during the past year as part of the EnviroMold(TM) production. Inhouse
extrusion has saved 40 to 50 percent over the cost of purchased moldings (or an
average of 40 to 50 cents per sales unit). During the past year, National
commissioned state-of-the-art technology and tooling that could potentially
double the capacity of all of our plastic extruders, still with a very large
range of molding profiles.
We also developed a method of recycling our polystyrene "sawdust," the minute
particles left over when the frame moldings are mitered. Previously, this
leftover material was unusable because the particles were too small to
reprocess. We discovered a technique that allows us to recycle 100 percent of
our waste, saving money through increased yields as well as lessening
adverse environmental impact.
OTHER PRODUCTION ASPECTS MINIMIZE COSTS,
INCREASE FLEXIBILITY
The company utilizes just-in-time inventory controls for both raw materials and
finished goods, which helps the company remain flexible in producing customized
orders quickly. National expects to improve its ability to acquire large
quantities of raw materials--for example, plans are underway to build a railroad
spur near the plastics factory to cut transportation costs for the delivery of
polystyrene pellets.
Strong purchasing relationships give National access to large quantities of
materials that can be supplied quickly. Volume discounts also result from the
negotiating power of National's large purchases of lumber, polystyrene, paint
and other raw materials. However, many of these materials are highly
sensitive to "commodity" pricing that makes negotiation difficult. By
7
10
FOCUS ON VALUE IN HOME DECOR
partnering with selected vendors National often can bring considerable
cost savings to the production process and thus make its pricing even more
attractive to customers.
COMPUTER SOFTWARE AIDS PLANT EFFICIENCY
National's ability to pinpoint all steps of the production process through
computer software also helps set us apart from competitors. Our integrated
manufacturing system has been in place for two years now and is a valuable
tool. We use this system for scheduling, distribution and purchasing. This
software system helps us look at orders pending as well as forecasts,
projecting what is needed sequentially in terms of labor and materials. It
also gives us real-time information that aids inventory management and cost
estimates. It enables us to serve the increasing number of retailers who
demand 95+ percent fill rates and on-time delivery as a condition for
continuing a growing business relationship.
Radio frequency is another important tool that allows us to know at any given
moment the location of raw materials, work in progress and finished goods
inventory. We achieve this by scanning the bar code on each item and reporting
its movement via radio frequency throughout the production facilities. This
system has been a tremendous help in ensuring that we can manage products
quickly and accurately for on-time and complete shipments.
PRODUCTIVITY AND SAFETY INCREASE
National's work force of 500 to 600 employees (the number fluctuates depending
upon the season) is empowered to make improvements, save money and enhance
safety. Turnover among employees has been dramatically reduced during the past
three years, falling to 18 percent in calendar 1995 from 43 percent in 1993.
More careful screening of potential employees, combined with improvements that
make National a better, safer place to work, contributed to the turnover
reduction -- which of course is a productivity enhancement.
Yield and productivity are carefully measured, and the safety focus is on
prevention. National has received awards for safety and positive audits from
OSHA and the Department of Environmental Quality.
UNIVERSAL CORK'S PRODUCTION TO BE INTEGRATED
WITH WOOD FRAMES
Universal Cork's production will be merged into the Greenwood facility in early
fiscal 1997. The wood factory will be the site of production for the cork
boards, blackboards and dry-erase boards as well as cork sheeting -- an
important product that's growing quickly for crafts and home improvement.
National believes that it can improve productivity and workflow by sharing its
expertise in factory layout, processes and materials acquisition.
On a calendar basis, Universal's seasonal business is almost exactly opposite
National's seasonality. Demand for bulletin boards and blackboards peaks
during the late summer, back-to-school season. Home decor sells most during
the fall and holiday seasons. Thus combining production will make
manufacturing capacity utilization even more efficient.
8
11
FOCUS ON VALUE IN HOME DECOR
HIGH-QUALITY CUSTOMER SERVICE ENHANCES VALUE
Our responsiveness to customers has been one of the key value
definitions for National. The ability to respond quickly and on target has
grown out of our concentrated focus on doing what we do best -- providing a
limited product line at low cost with a fashion focus. We participate only in
areas where we believe we can perform better than anyone else.
Unlike competitors that offer a comprehensive line of products with full-service
representatives -- a system that largely grew out of the greeting card industry
- - -- National gives smart buyers low cost, high quality and quick response. We've
found that many major retailers don't need or want the type of "handholding"
that used to characterize the frame business even five years ago. Back then,
retailers often assigned full responsibility for the frame departments of their
stores to outside suppliers, who would stock and restock with minimal
participation by the stores. Today, retailers get up-to-the-minute reports on
sales from internal information systems, look for ways to integrate every
department with the stores' marketing strategy and seek suppliers who can add
value in price, quality, fashion and quick response. National's price/value
strategy, fashion-forward designs and efficient manufacturing fit very well with
today's competitive, profit-oriented retailers.
In Thousands
1993 $ 3,099
1994 $ 6,369
1995 $ 8,634
1996 $ 8,659
Pro forma
In Thousands
1993 $44,357
1994 $51,293
1995 $60,794
1996 $67,169
9
12
FOCUS ON VALUE IN HOME DECOR
LARGE MASS MERCHANDISERS RESPOND POSITIVELY
TO NATIONAL'S APPROACH
National works closely with our mass-merchant customers, which include Target,
Wal-Mart, Price/Costco, Dollar General and others, to develop the right mix of
product at the right price, fill the order completely and deliver on time.
Working closely with these large mass merchandisers allows us to build
partnerships based on the retailers' marketing, merchandising and promotional
strategies.
Together, National and the retailers concentrate on two types of selling
opportunities. Long-term, "continuity," sales involve maintaining a consistent
assortment of products that need to be restocked regularly. National's
information systems interface electronically with retailers' systems to track
product sales and identify future customer requirements. Short-term,
"promotional," opportunities are often centered around holidays with special
products -- Mother's Day promotions might feature floral frames and
multi-opening photo mats, for example.
Attractive price points (providing retail margins of 40 to 55 percent) and
timely, efficient delivery play key roles in our success with these larger
retailers. National will go to almost any lengths to make it easy for retailers
to stock and sell our products. We routinely fill even complex orders with 50
to 60 SKUs (stock keeping units) within 48 to 72 hours, maintaining an average
fill rate in the 98+ percent range.
VALUE STRATEGY HELPS EXPAND DISTRIBUTION CHANNELS
During the past year, we gained momentum in bringing our value strategy to more
distribution channels. In the coming year, we intend to expand our product
offerings to current customers and to seek expanded distribution channels as
well. The addition of the cork board and dry-erase board products gives our
design team a new challenge, which we've already begun to maximize by using our
expertise in framed wall decor.
We plan to expand our customer base in the coming year by increasing
penetration of important distribution channels. Chief among these are
hardware, home improvement and craft stores. These retailers are among the
fastest-growing channels and National is well prepared to grow with them.
As consolidation takes place in the frame industry, we believe that National
will grow even stronger. Some retailers are dissatisfied with larger companies
that can't or won't service them as well as National. These larger companies
often lack the flexibility to react to retailers' product and merchandising
needs because of burdensome size, bureaucracy and, in some cases, dependence on
unpredictable foreign imports. National retains an entrepreneurial, flexible
marketing approach that complements the service demands and fashion needs of our
most valuable mass-merchant customers.
10
13
At National, our focus on fashion is another important aspect of what we bring
to retailers and their customers. One of the keys to National's growth and
future success is the company's strong creative talent that consistently
generates new products. Whether in wood, polystyrene or metal, frames, art or
mirrors. National has employed creative talent to come up with innovative
solutions that take advantage of the company's manufacturing capabilities while
reflecting current trends in home design.
11
14
FOCUS ON FASHION IN HOME DECOR
National Identifies "Cutting-Edge of
Mainstream" Trends
Knowledge of the marketplace is very important -- not just framed wall decor but
home furnishings overall. Mass merchandisers demand "cutting-edge of
mainstream" designs and National's products are geared to meet this need.
National's products are part of the fast-growing segment of home furnishings.
Industry publications note the increasing popularity of frames as home decor as
well as the tremendous potential for additional growth. More retailers are
increasing shelf space and promotional emphasis to take advantage of this
growth, say industry experts.
This trend continues to be fueled by "point and shoot" cameras including the
newest models that make it easy to choose sizes of finished photos even before
the film is removed from the camera. Industry experts believe that more -- and
larger -- photo prints will enhance the growth of the frame industry. In
addition, the framed mirrors/framed art category is estimated at approximately
$1.5 billion (retail) annually with growth projected at 20 percent per year
during 1996 and 1997.
National has responded by expanding its capabilities in designing and
manufacturing these new products. Unlike many manufacturers, National has
the diversity and flexibility to switch its emphasis among picture frames,
framed art and framed mirrors -- and beginning in 1997, framed cork/board
products.
National attempts to add creative value to every step of production. For
example, even the face papers (inserts between the frame backing and glass,
which often use photographs or other images) are created inhouse, along with the
packaging. In the world of wall decor, marketing experts estimate that the
shopper will make a purchase decision in about 18 seconds. So every aspect of
the National product is designed for instant eye appeal, helping the consumer
see how a picture frame, mirror or piece of framed art will fit into his
or her home decor.
Manufacturing Improvements Support Creative Design
National is known for its technological advances in its EnviroMold(TM)
production, which uses polystyrene to economically produce a variety of frame
profiles and finishes. During 1996, a number of successful treatments led to
increases in volume and revenue from major customers. These included diverse,
fashion-forward foil finishes as well as wood-look "country" colors that sold
well and generated attractive margins for National and the retailers.
National is working on technical innovations that will enable the polystyrene
process to become even more vertically integrated. For example, capital
expenditures made during fiscal 1996 will allow us to manufacture entirely
different frame profiles, some of which are similar to moldings that the company
previously purchased outside or made from more expensive wood.
12
15
FOCUS ON FASHION IN HOME DECOR
WOOD FRAMES COMBINE WITH OTHER MEDIA
FOR FRESH APPROACHES
Wood frames, which are perhaps the core product of the picture frame industry,
achieved an enhanced role at National during 1996. In addition to producing new
colors and finishes, we used wood frames in conjunction with other media, such
as mirrors and art prints, to generate new products.
In fact, one of our best-selling products of 1996 was the popular "windowpane"
mirror (a rectangular mirror framed in wood with a dividing grid that
simulates window mullions). National's production efficiencies allowed us to
initially offer this to our core customers at better costs than those quoted by
other suppliers. We are following this success with other mixed-media products,
such as art prints and mirrors combined in a single frame.
CORK OFFERS NEW CHALLENGES -- AND A NEW CORE PRODUCT LINE
With the acquisition of Universal Cork, National has the chance to use a new
medium to build quality products. Adding fashion frames to bulletin boards and
dry-erase boards is only one way that Universal's products can be enhanced with
National's creative input. We're already working on a range of other products,
many of which will be first-of-their-kind to be produced in cork/dry erase
boards.
In virtually all of our product categories, National achieves what we call "high
perceived value." This simply means that National's framed wall decor looks
very much like higher-priced items but costs far less, for both the retailer and
the customer. Creating fashion-forward design at low cost is one of the
distinctions that sets National apart from the competition.
NATIONAL PICTURE & FRAME PRODUCTS
EnviroMold(tm) Document/Wall Frames 14%
Mirrors 19%
WoodPhoto Frames 4%
Wood Portrait/Wall Frames 17%
Art 13%
Metal Promotional Photo Frames 5%
EnviroMold(tm) Photo Frames 28%
13
16
SELECTED CONSOLIDATED FINANCIAL DATA
Company (1) Predecessor (1)
- - ----------------------------------------------------------------------------------------------------------------
Nine months Three months Fiscal year
Fiscal years ended ended ended ended
April 30, April 30, July 31, April 30,
In thousands, except per share data 1996 1995 1994 1993 1992 1992
- - ----------------------------------------------------------------------------------------------------------------
Net sales $67,169 $60,794 $51,293 $38,035 $ 6,322 $31,289
Operating income 8,659 8,634 6,369 2,639 401 4,003
Net income 5,061 5,028 2,666 557 194 2,288
Net income per share 1.02 1.01 0.60 0.05 -- --
Working capital 14,113 14,695 12,171 6,216 5,542 5,636
Total assets 49,036 42,077 39,179 35,587 24,366 23,492
Total debt(2) 6,677 6,607 8,525 19,524 445 462
Preferred stock -- -- -- 5,370 -- --
Total stockholders' equity 33,572 28,842 23,814 187 13,166 12,972
================================================================================================================
(1) The company was formed in March 1992 and acquired substantially all of the
assets and business of the Predecessor on July 31, 1992.
(2) Includes current and long-term portions of the debt and capital lease
obligations.
14
17
QUARTERLY FINANCIAL DATA
Fiscal Year 1996 (Unaudited)
- - -------------------------------------------------------------------------------------
First Second Third Fourth
In thousands, except per share data Quarter Quarter Quarter Quarter
- - -------------------------------------------------------------------------------------
Net sales $12,832 $17,843 $19,858 $16,636
Operating income 941 2,436 3,514 1,768
Net income 509 1,428 2,102 1,022
Net income per share $ 0.10 $ 0.29 $ 0.42 $ 0.21
Fiscal Year 1995 (Unaudited)
- - -------------------------------------------------------------------------------------
First Second Third Fourth
In thousands, except per share data Quarter Quarter Quarter Quarter
- - -------------------------------------------------------------------------------------
Net sales $13,757 $15,106 $17,689 $14,242
Operating income 1,304 2,118 2,891 2,321
Net income 717 1,239 1,686 1,386
Net income per share $ 0.14 $ 0.25 $ 0.34 $ 0.28
15
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Historically, the Company has generated a greater proportion of its net sales
and profits, and increased working capital needs, in the second and third
quarters of each fiscal year as retailers expand frame inventories for increased
Christmas and spring holiday demand. This seasonal pattern combined with the
effects of new product introductions and the timing of customer orders can cause
the Company's results of operations to vary significantly from quarter to
quarter.
The following discussions compare the results of operations of the Company
for fiscal 1996 to the results of operations of the Company for fiscal 1995 and
the results of operations of the Company for fiscal 1995 to the results of
operations of the Company for fiscal 1994.
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, information derived from
the condensed consolidated statements of income of the Company expressed as a
percentage of net sales for such periods.
YEARS ENDED APRIL 30, 1996 1995 1994
---------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 75.5 73.8 76.2
---------------------------------------------------------------------------
Gross profit 24.5 26.2 23.8
Operating expenses:
Selling 5.9 5.9 6.0
General and administrative 5.2 5.5 4.7
Amortization of intangibles .5 .6 .7
---------------------------------------------------------------------------
Total operating expenses 11.6 12.0 11.4
---------------------------------------------------------------------------
Operating income 12.9 14.2 12.4
Other expenses (.7) (1.0) (2.4)
---------------------------------------------------------------------------
Income before income taxes
and extraordinary charge 12.2 13.2 10.0
Income taxes 4.6 4.9 3.6
---------------------------------------------------------------------------
Income before
extraordinary charge 7.6 8.3 6.4
Extraordinary charge -- -- (1.2)
---------------------------------------------------------------------------
Net income 7.6% 8.3% 5.2%
===========================================================================
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Net sales increased by $6.38 million, or 10.5% for the fiscal year
ended April 30, 1996 compared to the fiscal year ended April 30, 1995. New
product sales were approximately 21% of the net sales for the year ended April
30, 1996.
GROSS PROFIT. Gross profit increased by $0.5 million, or 3.2% for the fiscal
year ended April 30, 1996 as compared to the fiscal year ended April 30,
1995. As a percentage of sales, gross profit decreased from 26.2% to 24.5% for
the same period. This decrease was primarily due to competitive pricing
pressures and increased cost of several key raw material components during a
portion of the year.
SELLING EXPENSES. Selling and marketing expenses increased by $0.3 million,
or 9.2% for the year ended April 30, 1996 as compared to the year ended April
30, 1995. As a percentage of net sales, selling and marketing expenses remained
constant.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $0.2 million, or 9.0% for the year ended April 30, 1996 as compared
to the year ended April 30, 1995. As a percentage of net sales, general and
administrative expenses decreased from 5.5% for fiscal 1995 to 5.2%. This
decrease is primarily due to decreased management bonuses in the year ended
April 30, 1996 as compared to the year ended April 30, 1995.
INTEREST EXPENSE. Interest expense decreased $0.12 million for the year ended
April 30, 1996 as compared to the year ended April 30, 1995, as a result of
the reduction in the revolving loan from the cash generated by operating
activities.
INCOME TAXES. Income taxes increased $0.11 million to $3.10 million for the
fiscal year ended April 30, 1996 compared to the $2.99 million for the
fiscal year ended April 30, 1995. The effective income tax rates remained
relatively constant at approximately 38%.
16
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES. Net sales increased by $9.5 million, or 18.5% for the fiscal year
ended April 30, 1995 compared to the fiscal year ended April 30, 1994. Sales
to new customers accounted for 64% of the sales increase. New product sales
were approximately 26% of the net sales for the year ended April 30, 1995.
GROSS PROFIT. Gross profit increased by $3.7 million, or 30.6% for the fiscal
year ended April 30, 1995 as compared to the fiscal year ended April 30,
1994. As a percentage of sales, gross profit increased from 23.8% to 26.2% for
the same period. This increase was primarily due to changes in the product mix,
the allocation of fixed expense over increased volume, and reduced labor
expenses resulting from the completion of the distribution center in March,
1994.
SELLING EXPENSES. Selling and marketing expenses increased by $0.5 million, or
17.3% for the year ended April 30, 1995 as compared to the year ended April 30,
1994. As a percentage of net sales, selling and marketing expenses decreased
from 6.0% to 5.9% for these periods. These changes are primarily due to the
mix in sales between commissioned and non-commissioned accounts.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $0.9 million, or 39.7% for the year ended April 30, 1995 as
compared to the year ended April 30, 1994. These increases resulted from
increased personnel, a general wage increase, increased management bonuses due
to increased profits, and certain professional and insurance costs associated
with being a public company.
INTEREST EXPENSE. Interest expense decreased $0.6 million for the year ended
April 30, 1995 as compared to the year ended April 30, 1994, as a result of the
repayment of term indebtedness and reduction in the revolving loan from the
proceeds of the Offering.
INCOME TAXES. Income taxes increased $1.12 million to $2.99 million for the
fiscal year ended April 30, 1995 compared to the $1.87 million for the fiscal
year ended April 30, 1994. The effective income tax rates of 37.35% and 36.4%
for 1995 and 1994, respectfully, differ for the periods because the goodwill
amortization for the nine months ended April 30, 1993 was not deductible for
income tax purposes. The Company adopted income tax regulations in March, 1994
that permitted the Company to elect to deduct the amortization of certain
intangibles, including goodwill, for income tax purposes and reflected the prior
period's benefit in the tax provision for fiscal year ended April 30, 1994.
EXTRAORDINARY CHARGE. The application by the Company of the net proceeds of
the Offering to reduce long-term indebtedness incurred in connection with the
Acquisition caused an extraordinary charge of $0.96 million (net of tax benefit
of $0.36 million) to the Company's results of operations in the fiscal year
ended April 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES. On February 16, 1996, the Company entered
into credit agreements with two banks that replaced the prior credit agreement.
The primary credit facility from the first bank provides for borrowings of up
to $10.0 million for working capital and $15.0 million for capital expenditures
and other corporate purposes and is limited in availability based on
inventories, receivables and capital expenditures. Borrowings under the
primary facility will bear interest at the lesser of the bank's prime rate less
1.50% to 1.00% or LIBOR plus 1.50% to 2.00%, with the actual rate being
dependent on the level of funded indebtedness of the Company. Borrowings under
the primary credit facility are secured by inventories, receivables and certain
property, plant and equipment and are due in October 1998. There are no
compensating balance requirements; the company pays an annual commitment fee of
$20,000 for the lines of credit. In addition, the other new credit agreement
provides for a term loan with a second bank in the amount of $5.0 million
payable over 60 months. Borrowings under this facility bear interest at LIBOR
plus 1.50% and are collateralized by real property consisting of a
manufacturing facility located in Greenwood, MS. Both credit agreements set
forth certain financial requirements and other covenant requirements. At April
30, 1996, $8.8 million of unused borrowings were available for working capital,
$15 million were available for capital expenditures, and $4.9 million was owed
on the term loan.
The Company generated $7.3 million in cash flows from operations in fiscal
1996 which was principally used to purchase $4.7 million of property, plant and
equipment and to acquire Universal Cork, Inc. for $2.0 million. Management
anticipates that the budgeted capital expenditures will be funded by cash flows
from operations and additional borrowings under the primary credit facility.
The Company's current ratio was 2.6 to 1 at April 30, 1996 and 3.6 to 1 at
April 30, 1995.
17
20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Picture & Frame Company
We have audited the accompanying consolidated balance sheets of National Picture
& Frame Company and subsidiaries (the "Company") as of April 30, 1996 and
1995, and the related consolidated statements of income, changes in redeemable
preferred stock, common stock and other stockholders' equity and cash flows for
three years in the period ended April 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, the evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the consolidated financial position of the Company at
April 30, 1996 and 1995 and the consolidated results of their operations and
their cash flow for each of the three years in the period ended April 30, 1996,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Jackson, Mississippi
June 12, 1996
18
21
CONSOLIDATED BALANCE SHEETS
April 30,
In thousands, except share data 1996 1995
- - ---------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $198 $336
Accounts receivable less allowance for doubtful accounts of $192 at April 30, 1996 12,739 9,365
and $161 at April 30, 1995 (Note 4)
Inventories (Notes 3 and 4) 7,812 9,295
Prepaid income taxes 439 109
Other prepaid expenses 1,078 874
Deferred income taxes (Note 5) 402 387
- - ---------------------------------------------------------------------------------------------------------------
Total current assets 22,668 20,366
Property, plant, and equipment (Note 4):
Land 30 30
Leasehold interest in buildings and improvements (Note 8) 5,620 5,070
Machinery and equipment 14,958 10,458
- - ---------------------------------------------------------------------------------------------------------------
20,608 15,558
Accumulated depreciation and amortization (4,164) (2,621)
- - ---------------------------------------------------------------------------------------------------------------
16,444 12,937
Goodwill, net 9,752 8,462
Other intangibles, net 172 312
- - ---------------------------------------------------------------------------------------------------------------
Total assets $49,036 $42,077
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,363 $2,976
Accrued expenses 2,028 2,618
Current maturities of long-term debt 1,164 77
- - ---------------------------------------------------------------------------------------------------------------
Total current liabilities 8,555 5,671
Long-term debt, less current maturities (Note 4) 5,513 6,530
Deferred income taxes 1,396 1,034
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 5,000,000; Issued and outstanding shares - none
Common stock, $.01 par value:
Authorized shares - 20,000,000; Issued shares - 5,000,008 at April 30, 1996
and 4,877,572 at April 30, 1995; Outstanding shares - 4,959,938 at April 30, 1996
and 4,877,572 at April 30, 1995 50 49
Nonvoting common stock, $.01 par value:
Authorized shares - 500,000
Issued and outstanding shares - none at April 30, 1996 and 122,014 at April 30, 1995 -- 1
Additional paid-in-capital 21,235 21,232
Retained earnings 12,621 7,560
- - ---------------------------------------------------------------------------------------------------------------
33,906 28,842
Less cost of common stock held in treasury (40,070 shares) (334) --
- - ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 33,572 28,842
- - ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $49,036 $42,077
===============================================================================================================
See accompanying notes.
19
22
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED APRIL 30,
In thousands, except per share data 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------------------
Net sales $67,169 $60,794 $51,293
Cost of goods sold 50,701 44,837 39,079
- - ----------------------------------------------------------------------------------------------------------------
16,468 15,957 12,214
Operating expenses:
Selling 3,944 3,612 3,079
General and administrative 3,459 3,172 2,270
Bad debt expense 50 180 140
Amortization of intangibles 356 359 356
- - ----------------------------------------------------------------------------------------------------------------
7,809 7,323 5,845
- - ----------------------------------------------------------------------------------------------------------------
Operating income 8,659 8,634 6,369
Other income and expense:
Interest expense (497) (615) (1,238)
Other income 1 1 5
- - ----------------------------------------------------------------------------------------------------------------
(496) (614) (1,233)
- - ----------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary charge 8,163 8,020 5,136
Income taxes (Note 5) 3,102 2,992 1,869
- - ----------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 5,061 5,028 3,267
Extraordinary charge from early extinguishment of debt,
net of income taxes of $357 -- -- (601)
- - ----------------------------------------------------------------------------------------------------------------
Net income $5,061 $5,028 $2,666
================================================================================================================
Net income per share:
Income per share before extraordinary charge $1.02 $1.01 $.75
Extraordinary charge -- -- (.15)
- - ----------------------------------------------------------------------------------------------------------------
Net income per share $1.02 $1.01 $.60
================================================================================================================
See accompanying notes.
20
23
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK, COMMON
STOCK AND OTHER STOCKHOLDERS' EQUITY
In thousands, except share data
11% CUMULATIVE NONVOTING
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------- -----------------------------------
- - ------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- - ------------------------------------------------------------------------------------------
Balance at May 1, 1993 49,500 $5,370 2,255,009 $23 -- --
Sale of common stock -- -- 2,250,000 23 -- --
Exercise of warrants -- -- 250,549 2 244,028 $2
Net income for year -- -- -- -- -- --
Dividend accrued on
preferred stock -- 271 -- -- -- --
Redemption of
preferred stock (49,500) (5,641) -- -- -- --
- - ------------------------------------------------------------------------------------------
Balance at April 30, 1994 -- -- 4,755,558 48 244,028 2
Conversion of nonvoting
stock to common stock -- -- 122,014 1 (122,014) (1)
Net income for year -- -- -- -- -- --
- - ------------------------------------------------------------------------------------------
Balance at April 30, 1995 -- -- 4,877,572 49 122,014 1
Conversion of nonvoting
stock to common stock -- -- 122,014 1 (122,014) (1)
Sale of common stock -- -- 422 0 -- --
Purchase of common stock
for treasury -- -- -- -- -- --
Net income for year -- -- -- -- -- --
- - ------------------------------------------------------------------------------------------
Balance at April 30, 1996 -- -- 5,000,008 $50 -- --
==========================================================================================
In thousands, except share data
ADDITIONAL COMMON TOTAL
PAID-IN RETAINED STOCK HELD STOCKHOLDERS'
CAPITAL EARNINGS IN TREASURY EQUITY
- - ----------------------------------------------------------------------------------------
SHARES AMOUNT
- - ----------------------------------------------------------------------------------------
Balance at May 1, 1993 $27 $137 -- -- $187
Sale of common stock 21,209 -- -- -- 21,232
Exercise of warrants (4) -- -- -- --
Net income for year -- 2,666 -- -- 2,666
Dividend accrued on
preferred stock -- (271) -- -- (271)
Redemption of
preferred stock -- -- -- -- --
- - ----------------------------------------------------------------------------------------
Balance at April 30, 1994 21,232 2,532 -- -- 23,814
Conversion of nonvoting
stock to common stock -- -- -- -- --
Net income for year -- 5,028 -- -- 5,028
- - ----------------------------------------------------------------------------------------
Balance at April 30, 1995 21,232 7,560 -- -- 28,842
Conversion of nonvoting
stock to common stock -- -- -- -- --
Sale of common stock 3 -- -- -- 3
Purchase of common stock
for treasury -- -- (40,070) $(334) (334)
Net income for year -- 5,061 -- -- 5,061
- - ----------------------------------------------------------------------------------------
Balance at April 30, 1996 $21,235 $12,621 (40,070) $(334) $33,572
========================================================================================
See accompanying notes.
21
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30,
In thousands 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $5,061 $5,028 $ 2,666
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,543 1,259 846
Amortization of intangible costs 367 359 437
Provision for losses on accounts receivable 50 180 140
Deferred income taxes 377 317 1,217
Extraordinary charge from early extinguishment of debt -- -- 958
Changes in operating assets and liabilities,
net of effects from acquisition of Universal Cork:
(Increase) decrease in receivables (2896) (122) 1194
(Increase) decrease in inventories and prepaid expenses 1,743 (1,593) (2,692)
Increase (decrease) in accounts payable and accrued expenses 1,009 (684) (4,201)
- - ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,254 4,744 565
INVESTING ACTIVITIES
Purchase of property, plant and equipment (4,730) (2,540) (4,742)
Collections on notes receivable -- -- 116
Payment for intangibles -- -- (295)
Acquisition of Universal Cork, net of cash acquired (1,951) -- --
- - ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,681) (2,540) (4,921)
FINANCING ACTIVITIES
Net change in revolving loans (5,217) (1,988) 3,107
Long-term debt issued 5,000 -- --
Purchase of common stock for treasury (334) -- --
Principal payments on long-term debt and capital lease obligations (163) (94) (14,140)
Redemption of 11% cumulative preferred stock -- -- (5,641)
Proceeds from issuance of common stock -- -- 21,232
Issuance of common stock through Employee Stock
Discount Purchase Plan 3 -- --
- - ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (711) (2,082) 4,558
- - ----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (138) 122 202
Cash and cash equivalents at beginning of year 336 214 12
- - ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 198 $336 $ 214
====================================================================================================
Non-cash investing and financing activity -
Capital lease obligations incurred for equipment $ -- $ 164 $ 34
- - ----------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 542 $ 567 $ 1,339
- - ----------------------------------------------------------------------------------------------------
Cash paid during the year for income taxes $ 2,995 $2,272 $ 1,185
- - ----------------------------------------------------------------------------------------------------
See accompanying notes.
22
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Effective August 1, 1992, NPF Company, a wholly-owned subsidiary of National
Picture & Frame Company (the "Company"), acquired substantially all of the
assets and business and assumed certain liabilities of National Picture & Frame
Co. the ("Predecessor") for cash of $21,450. The acquisition was accounted for
using the purchase method of accounting. The accompanying financial statements
presented herein are on the historical cost basis of the Company.
CONSOLIDATION
The Company's consolidated financial statements include the accounts of
National Picture & Frame Company and its wholly-owned subsidiaries, NPF
Company, and Universal Cork, Inc. ("Universal Cork"). All significant
intercompany transactions and accounts have been eliminated in consolidation.
NATURE OF BUSINESS
The Company designs, manufactures and markets a wide variety of picture
frames, framed mirrors, and framed art for sale primarily through major mass
merchant retailers. Credit is extended based upon an evaluation of the
customer's financial condition, and generally collateral is not required.
Sales to one customer and its affiliate accounted for 38%, 36%, and 38%, of net
sales for the years ended April 30, 1996, 1995, and 1994, respectively.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
general accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-our method, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
provided by the straight-line method over the estimated useful lives.
REVENUE RECOGNITION
Revenue is recognized when product is shipped to customers.
GOODWILL
The excess of the cost of acquisitions over the fair value of the net assets
acquired (goodwill) is amortized on a straight-line basis over twenty to forty
years. The accumulated amortization of goodwill was $858, and $628, at April
30, 1996, and 1995, respectively.
OTHER INTANGIBLE COSTS
Costs incurred to obtain long-term financing are amortized on a straight-line
basis over the term of the related debt. Costs incurred to organize the Company
are amortized on a straight-line basis over five years. The accumulated
amortization of other intangible costs was $465 and $339 at April 30, 1996 and
1995, respectively.
INCOME TAXES
Income taxes are accounted for by the Company in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Deferred income taxes relate to temporary differences between assets and
liabilities recognized differently for financial reporting purposes and for
income tax purposes.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to or above the fair value of the shares at the date of
the grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense for the stock option grants.
23
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME PER SHARE
Net income per share is computed by dividing net income applicable to common
stock (net income less dividend requirements for preferred stock of none in
fiscal 1996 and 1995 and $271 in fiscal 1994) by the weighted average number of
common and common equivalent shares outstanding (4,973,000 shares in 1996,
5,000,000 shares in 1995, and 3,983,000 shares in 1994). The Company's
outstanding options are excluded due to their antidilutive effect.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed", which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed. The Company will adopt Statement 121 in the first
fiscal quarter of 1997 and, based on current circumstances, does not believe the
effect of adoption will be material.
2. ACQUISITION OF UNIVERSAL CORK, INC.
Effective April 24, 1996 the Company through its subsidiary, purchased 100% of
the outstanding stock of Universal Cork for cash of $1,951 and notes payable of
$450. The purchase price is subject to adjustment in fiscal 1997 based on
certain provisions of the stock purchase agreement. The acquisition was
accounted for using the purchase method of accounting and resulted in the
recording of $1,517 of goodwill which will be amortized over a period of twenty
years. Prior sales and net income of Universal Cork are considered
insignificant for presentation of pro forma financial information. Universal
Cork manufactures framed cork, dry-erase and black boards as well as other cork
based products.
3. INVENTORIES
Inventories consist of the following:
APRIL 30, 1996 1995
------------------------------------------------------------
Raw materials $ 3,628 $ 3,484
Work-in-process 1,213 1,378
Finished goods 2,971 4,433
----------------------------------------------------------
$ 7,812 $ 9,295
4. CREDIT FACILITIES, LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt consists of the following:
APRIL 30, 1996 1995
---------------------------------------------------------------------
Revolving loan with bank
(weighted average rate of 6.6%
at April 30, 1996 and 8.4% at
April 30, 1995) $1,158 $6,375
Term loan with bank
(weighted average rate of 6.8%
at April 30, 1996) 4,917 ----
Notes Payable 450 ----
Capital lease obligations
at 9.2% with monthly payments
of $6 through November 1998 152 232
---------------------------------------------------------------------
6,677 6,607
Less current maturities 1,164 77
---------------------------------------------------------------------
$5,513 $6,530
=====================================================================
On February 16, 1996, the Company entered into credit agreements with two
banks that replaced the prior credit agreement. The primary credit facility
from the first bank provides for borrowings of up to $25,000 for working
capital, capital expenditures and other corporate purposes and is limited in
availability based on inventories, receivables and capital expenditures.
Borrowings under the primary facility will bear interest at the lesser of a) the
bank's prime rate less 1.50% to 1.00% or
24
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) LIBOR plus 1.50% to 2.00%, with the actual rate being dependent on the level
of funded indebtedness of the Company. Borrowings under the primary credit
facility are secured by inventories, receivables and certain property, plant and
equipment and are due in October 1998. There are no compensating balance
requirements; the Company pays an annual commitment fee of $20 for the lines of
credit. The new credit agreement with the second bank provides for a term loan
in the amount of $5,000 payable over 60 months. Borrowings under this facility
bear interest at LIBOR plus 1.50% and are collateralized by real property
consisting of a manufacturing facility located in Greenwood, MS. Both credit
agreements set forth certain financial requirements and other covenant
requirements.
On April 24, 1996, the Company issued promissory notes for $450 to the
former stockholders of Universal Cork, Inc. in conjunction with the purchase of
that company. Interest is paid quarterly at a rate of 6.625% per annum.
Principal payments of $100 are payable on the first and second anniversary date
of the notes. The remaining balance is payable on the third anniversary.
The aggregate maturities of the long-term debt and capital leases at April
30, 1996, are as follows:
Long-Term Capital
Debt Leases Total
- - ---------------------------------------------------------------
1997 $ 1,100 $ 78 $ 1,178
1998 1,100 78 1,178
1999 2,408 51 2,459
2000 1,000 ---- 1,000
after 2000 917 ---- 917
- - ---------------------------------------------------------------
6,525 207 6,732
Less amounts
representing interest ---- 55 55
- - ---------------------------------------------------------------
$ 6,525 $ 152 $ 6,677
The carrying amounts of the Company's borrowings under its credit
agreements, notes payable and capital leases approximate their fair value.
5. INCOME TAXES
Income tax expense consisted of the following:
Years ended April 30, 1996 1995 1994
---------------------------------------------------------------------
Current:
Federal $ 2,280 $ 2,290 $ 200
State 445 385 95
----------------------------------------------------------------------
2,725 2,675 295
Deferred:
Federal 326 260 1,077
State 51 57 140
----------------------------------------------------------------------
377 317 1,217
----------------------------------------------------------------------
3,102 2,992 1,512
Income taxes allocated
to extraordinary charge ---- ---- 357
----------------------------------------------------------------------
$3,102 $2,992 $1,869
======================================================================
The difference between income taxes at the Company's effective income tax
rate and income taxes at the statutory federal tax rate are as follows:
YEARS ENDED APRIL 30, 1996 1995 1994
- - -----------------------------------------------------------------------------
Statutory federal
income taxes $2,775 $2,727 $1,421
Goodwill amortization ---- ---- (58)
State income taxes, net 327 292 146
Other, net ---- (27) 3
Income taxes allocated to
extraordinary charge ---- ---- 357
----------------------------------------------------------------------------
$3,102 $2,992 $1,869
=============================================================================
25
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and liabilities
are as follows:
APRIL 30, 1996 1995
- - ------------------------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 92 $ 60
Inventories 198 192
Prepaid expenses (46) (61)
Accrued expenses 158 196
- - ------------------------------------------------------------------------------------------------
$ 402 $ 387
================================================================================================
Deferred tax liabilities:
Property, plant
and equipment $ 852 $ 630
Goodwill 544 404
- - ------------------------------------------------------------------------------------------------
$1,396 $1,034
================================================================================================
6. EMPLOYEE BENEFIT PLANS
The Company participates in a multi-employer defined contribution pension plan
covering substantially all union employees after two months of service.
Included in cost of sales is approximately $93, $87 and $74 of expense for the
years ended April 30, 1996, 1995, and 1994, respectively, applicable to this
plan.
Effective August 1, 1992, the Company adopted a defined contribution plan
("the Plan") covering substantially all employees not covered by a collective
bargaining agreement. Under the Plan, participants may elect to contribute from
1% to 15% of their compensation, as defined, and the Company may elect to make
discretionary contributions. Beginning in December 1995, the Company instituted
a matching plan whereby the Company will match up to one-half of each
participating employee's elective contribution, up to a maximum amount of five
hundred dollars per employee. Benefit expense related to the Plan was $121 for
1996 and $100 for the years ended April 30, 1995 and 1994. The Company has
agreed to make a further discretionary contribution of not less than $95 for the
next fiscal year.
As of October 1993, the Company granted options on 350,000 shares of the
Company's common stock to certain members of management and options on 50,000
shares of the Company's common stock to certain other employees under the
Long-Term Incentive Plan of 1993. The options are excercisable beginning in
fiscal 1995 at $10.50 per share.
On August 21, 1995, the Company amended and restated the Long-Term
Incentive Plan of 1993 authorizing the granting of options for an additional
350,000 shares of the Company's common stock. Options granted under the
Long-Term Incentive Plan, as amended and restated, are generally excercisable at
a rate of 20% per year beginning at least one year following the date of the
grant, and if not exercised, expire ten years following the grant. In August
1995 the Company granted options on 40,000 shares to a certain member of
management. These options are excercisable beginning in fiscal 1997 at $9.00
per share.
Effective August 21, 1995, the Company adopted a Non-Employee Directors'
Stock Option Plan, subject to shareholder approval, of up to 125,000 shares.
Each non-employee director may elect to receive all or part of their director
compensation in options to purchase shares of the Company's common stock
equivalent to the cash compensation foregone.
Effective November 1, 1995, the Company adopted the National Picture &
Frame Company Employee Stock Discount Purchase Plan which enables Company
employees having at least one year of service to purchase shares of the
Company's common stock through periodic payroll deduction. Shares are issued
quarterly to participating employees based on 85% of the lessor of the closing
price of the Company's common stock as of the first day or the last day of each
quarter. Compensation expenses related to this plan was insignificant during
1996.
26
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PRO FORMA INCOME PER SHARE
The proceeds from the sale of 2,250,000 shares of common stock in an
underwritten offering in October 1993 were used to retire the 11% cumulative
preferred stock, to repay the term loans and subordinated notes payable and to
reduce the revolving loan from a bank. Pro forma income for the year ended
April 30, 1994, assuming the stock was issued at the beginning of fiscal 1994
is as follows:
Pro forma income per share
before extraordinary charge $ .76
Extraordinary charge (.15)
- - -----------------------------------------------------------
Pro forma income per share $ .61
===========================================================
Pro forma income per share differs from the amounts reported in the
consolidated statement of income for fiscal year 1994 primarily due to
decreased interest expense and dividends on the 11% cumulative preferred stock
had the issuance of common stock occurred at the beginning of fiscal 1993.
8. OTHER MATTERS
The Company leases its principal facilities from a municipality under two
capital leases. One lease has a 99 year term expiring in 2046 with annual
rentals of six hundred dollars. The Company has 19 years remaining at $1 per
year on the second lease. The second lease may be renewed for two additional 20
year periods and one 14 year period for $1 per year. The Company is exempt from
municipal property taxes applicable to the above leases.
In conjunction with the April 24, 1996, acquisition of Universal Cork,
the Company affirmed two Universal Cork operating leases covering real
property used by Universal Cork in their Cleveland, Ohio operations, which
operations are being relocated to Greenwood, MS. These two leases require
aggregate annual rents of $128 in fiscal years 1997 through 1999 and $60 in
fiscal year 2000. Management is currently negotiating a sub-lease under these
operating lease agreements, or alternatively, an early release from the lease
agreements.
In addition, the Company entered into consulting agreements with two
former officers of Universal Cork providing aggregate consulting fees of $125
during fiscal year 1997.
The Company's leasehold interest in buildings and the related
improvements were as follows:
APRIL 30, 1996 1995
- - ---------------------------------------------------------------------
Leasehold interest in
buildings and improvements $5,620 $5,070
Accumulated depreciation
and amortization (537) (317)
- - ---------------------------------------------------------------------
$5,083 $4,753
=====================================================================
Management fee expense to its principal stockholder was $83 for the year
ended April 30, 1994.
27
30
CORPORATE INFORMATION
DIRECTORS
PETER B. FOREMAN
President
Sirius Corporation
DANIEL J. HENNESSY
Principal
Code Hennessy & Simmons, Inc.
JESSE C. LUXTON
President & Chief Executive Officer
National Picture & Frame Company
ARTHUR L. GOESCHEL
Former Chairman
Rexene Corporation
JOHN F. LEVY
Former President and Chief Executive Officer
Waban, Inc.
JON S. VESELY
Managing Director
Code Hennessy & Simmons, Inc.
ANNUAL MEETING
National Picture & Frame Company will hold its annual meeting of
shareholders on Monday, August 19, 1996 at 10:00 a.m. at the company's
corporate facility located at 702 Highway 82 West, Greenwood, MS.
TRANSFER AGENT AND REGISTRAR
Boston EquiServe
Boston, MA
AUDITORS
Ernst & Young LLP
Jackson, MS
FORM 10-K
A copy of the Company's Form 10-K, excluding exhibits, as filed with the SEC,
may be obtained by addressing a request to the Corporate Secretary.
STOCK LISTING AND PRICE RANGE
National Picture & Frame Company common stock is traded on the Nasdaq Stock
Market under the stock symbol NPAF. The approximate number of shareholders on
July 3, 1996 was 860. The following table indicates the high and low closing
prices for the common stock during the four quarters of 1996 and 1995. National
Market quotations are based on actual sales prices.
PRICE RANGE
YEAR ENDED APRIL 30, 1996 HIGH LOW
First Quarter $10.25 $8.25
Second Quarter 10.00 7.75
Third Quarter 9.75 8.50
Fourth Quarter 10.50 8.88
YEAR ENDED APRIL 30, 1995
First Quarter $ 9.75 $7.75
Second Quarter 10.50 8.75
Third Quarter 10.50 9.38
Fourth Quarter 11.25 9.50
Supplemental Information
For additional information please contact:
NATIONAL PICTURE & FRAME COMPANY
M. Wesley Jordan, Jr., CFO
National Picture & Frame Company,
1500 Commerce Street, Greenwood, MS 38930-1910
601/453-6686
The forward-looking statements in this annual report contain
projections that could be adversely affected by significant changes in National
Picture & Frame Company's operating environment and marketplace. These factors
could include, but are not limited to, a decrease in demand for framed wall
decor, loss of market share by major retail customers, cutbacks in overall
consumer spending, increasing prices of raw materials such as wood and
polystyrene and higher labor cost.
(C) 1996 National Picture & Frame Company
28
31
ABOUT THE FRONT COVER:
Bordered with National's popular Citation frame, a typical "face paper" insert
contains the National logo along with a bar code for computer scanning, which
has been an important component in communicating electronically with
retailers, and the "Made in U.S.A." tag line that we proudly display on each
item we sell.
32
[NATIONAL LOGO]
PICTURE & FRAME COMPANY
1500 Commerce Street, Greenwood, Mississippi 38930-1910
601/453-6686