1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
---------
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2000
Commission File No. 333-51569
PARAGON CORPORATE HOLDINGS INC.
-------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1845312
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
CO-REGISTRANTS AND SUBSIDIARY GUARANTORS
A.B.Dick Company Delaware 04-3892065
Curtis Industries, Inc. Delaware 13-3583725
Itek Graphix Corp. Delaware 04-2893064
Curtis Sub, Inc. Delaware 34-1737529
Paragon Corporate Holdings Inc. A.B.Dick Company CI, Inc. f/k/a
7400 Caldwell Avenue 7400 Caldwell Avenue Curtis Industries, Inc.
Niles, Illinois 60714 Niles, Illinois 60714 6140 Parkland Boulevard
(847) 779-2500 (847) 779-1900 Mayfield Heights, Ohio 44124
(440) 446-9700
Itek Graphix Corp. Curtis Sub, Inc.
7400 Caldwell Avenue 6140 Parkland Boulevard
Niles, Illinois 60714 Mayfield Heights, Ohio 44124
(847) 779-1900 (440) 446-9700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
As of April 30, 2000, there were 1,000 shares of the registrant's Class A common
stock outstanding.
As of April 30, 2000, there were 19,000 shares of the registrant's Class B
common stock outstanding.
2
INDEX
PARAGON CORPORATE HOLDINGS INC.
Page
Number
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets 2
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations 3
Three Months ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows 4
Three Months ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
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4
Paragon Corporate Holdings Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 15,394 $ 15,341
Short-term investments 1,001 3,610
Accounts receivable, net 46,373 35,943
Inventories 56,574 45,924
Other current assets 5,545 1,923
-------- --------
Total current assets 124,887 102,741
Property, plant and equipment, net 21,532 20,363
Goodwill, net 62,591 30,692
Other assets 4,915 6,860
-------- --------
$213,925 $160,656
======== ========
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Revolving credit facility $ 23,871 $ 10,219
Accounts payable 27,227 18,813
Accrued compensation 10,844 6,034
Accrued interest 5,534 2,767
Accrued other 18,116 11,934
Deferred service revenue 14,446 6,037
Due to GEC 818 852
Current portion of long-term debt
and capital lease obligations 2,699 1,498
-------- --------
Total current liabilities 103,555 58,154
Senior Notes 115,000 115,000
Other long-term debt and capital lease
obligations, less current portion 1,930 1,849
Retirement obligations 11,909 3,546
Other long-term liabilities 6,439 2,296
Stockholder's equity (deficit):
Common stock, no par value, Authorized 2,000 shares of
Class A (voting) and 28,000 shares of Class B
(non-voting); issued and outstanding 1,000 shares
of Class A and 19,000 shares of Class B, at stated
value 1 1
Paid-in capital 47 47
Retained earnings (deficit) (24,280) (19,506)
Accumulated other comprehensive loss (676) (731)
-------- --------
Total stockholder's equity (deficit) (24,908) (20,189)
-------- --------
$213,925 $160,656
======== ========
See notes to condensed consolidated financial statements.
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5
Paragon Corporate Holdings Inc.
Condensed Consolidated Statements of Operations
(In Thousands)
Three Months Ended
------------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
(Unaudited)
Net revenue $57,160 $42,944
Cost of revenue 43,115 31,442
------- -------
Gross profit 14,045 11,502
COSTS AND EXPENSES:
Sales and marketing expenses 6,462 6,203
General and administrative expenses 6,875 4,826
Research and development 894 781
Depreciation and amortization 1,259 561
Management fee 92 69
Acquisition, relocation and severance costs 481 753
------- -------
16,063 13,193
------- -------
Operating loss (2,018) (1,691)
Interest income 48 503
Interest expense (3,563) (3,311)
Other income (expense) (140) 22
------- -------
Loss from continuing operations before income taxes (5,673) (4,477)
Income tax expense (benefit) 6 (29)
------- -------
Net loss from continuing operations (5,679) (4,448)
Discontinued operations (Note D):
Income from discontinued operations, net of
income taxes 905 993
------- -------
Net loss $(4,774) $(3,455)
======= =======
See notes to condensed consolidated financial statements.
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Paragon Corporate Holdings Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Three Months Ended
------------------------------------------
March 31, 2000 March 31, 1999
-------------- --------------
(Unaudited)
Operating activities:
Net loss $ (4,774) $(3,455)
Adjustments to reconcile net loss
to net cash used in operating activities:
Provision for depreciation and amortization 2,501 1,671
Changes in operating assets and liabilities (894) (1,107)
-------- -------
Net cash used in operating activities (3,167) (2,891)
Investing activities:
Acquisition of business, net of cash acquired (11,830) --
Purchases of property, plant and equipment (846) (2,278)
Decrease in short-term investments 2,631 1,169
-------- -------
Net cash used in investing activities (10,045) (1,109)
Financing activities:
Borrowings on revolving credit line 13,652 2,500
Increase (decrease) in amounts due to GEC (34) 100
Proceeds from long-term borrowings 40 808
Principal payments on long-term borrowings (442) (406)
-------- -------
Net cash provided by financing activities 13,216 3,002
Effect of exchange rate changes on cash 49 (191)
-------- -------
Increase (decrease) in cash and cash equivalents 53 (1,189)
Cash and cash equivalents at beginning of period 15,341 7,462
-------- -------
Cash and cash equivalents at end of period $15,394 $ 6,273
======= =======
See notes to condensed consolidated financial statements.
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Paragon Corporate Holdings Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands)
A. ORGANIZATION
Paragon Corporate Holdings Inc. ("the Company") is a Delaware holding company
organized in September 1996. The Company has no independent operations or
investments other than its investments in its subsidiaries, except that the
Company has temporarily invested, at the holding company level, the residual
proceeds from the Senior Notes issued during 1998. NES Group, Inc. is the sole
stockholder of the Company.
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month periods ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes of Paragon Corporate Holdings
Inc. set forth in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
C. ACQUISITION
On January 27, 2000, the Company completed the acquisition of all the
outstanding common stock of Multigraphics, Inc. ("Multigraphics"), a supplier of
high quality pre-press, press and post-press equipment, supplies, and technical
services to the printing industry. Pursuant to the Merger Agreement, the Company
paid $1.25 in cash per share, or $3.6 million, and assumed $7.4 million of
outstanding debt of Multigraphics. The aggregate purchase price was $12.3
million including expenses of the transaction. In addition, the Company loaned
$2.0 million to Multigraphics pursuant to a promissory note agreement executed
by Multigraphics on September 29, 1999. The excess of purchase price over net
assets acquired has been assigned a preliminary value of approximately $32.4
million and will be written off over thirty years. The allocation of purchase
price was based on preliminary estimates, and will be revised upon final
determination of the fair values of the assets and liabilities acquired.
Following the acquisition, all of the assets of Multigraphics were transferred
to A.B. Dick.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of Multigraphics are included in the
consolidated financial statements from the date of acquisition. The following
pro forma information presents the results of operations for the three-month
periods ended March 31, 2000 and 1999, respectively, as though the acquisition
had occurred on January 1, 1999. The pro forma amounts give effect to certain
adjustments, principally goodwill amortization and depreciation expense related
to the write-off of redundant computer equipment, software, and leasehold
improvements. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on January 1,
1999:
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8
Three Months Ended
---------------------------------
March 31, March 31,
2000 1999
--------- ---------
Net revenues $65,170 $72,415
Operating loss from continuing operations (2,162) (943)
Net loss (5,100) (3,238)
D. DISCONTINUED OPERATION
On April 27, 2000, the Company entered into a definitive agreement to sell
substantially all of the assets and related liabilities of its wholly-owned
subsidiary, CI, Inc. f/k/a Curtis Industries, Inc. ("Curtis") which comprises
entirely the Company's automotive and industrial supplies segment. The
transaction closed on May 10, 2000 and the Company received proceeds of
$62.1 million subject to a net worth adjustment. The sale is expected to result
in a gain which will be recognized in the second quarter of 2000.
The disposition of Curtis represents the disposal of a segment of a business
under APB Opinion No. 30. Accordingly, the consolidated statements of operations
have been restated to reflect the results of Curtis as a discontinued operation.
Net revenues of Curtis were $21.2 million and $20.4 million for the three-month
periods ended March 31, 2000 and 1999, respectively. The consolidated balance
sheet includes net assets of discontinued operations of $51.2 million at March
31, 2000.
E. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows:
Three Months Ended
---------------------------------
March 31, March 31,
2000 1999
--------- ---------
Net loss $(4,774) $(3,455)
Foreign currency translation adjustment 33 (191)
Unrealized gain on marketable securities 22 --
------- -------
Comprehensive loss $(4,719) $(3,646)
======= =======
G. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, short-term investments, trade
receivables and payables approximates fair value because of the short maturity
of these instruments. The carrying amount of the revolving credit facility
approximates fair value. The carrying amount of the senior notes exceeds its
fair value at March 31, 2000 by $77,050. The fair value has been determined
using the market price of the related securities at March 31, 2000. On March 31,
2000, the Company amended its revolving credit agreement temporarily increasing
its credit line under the agreement to $37.0 million from $32.0 million.
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H. INVENTORIES
Domestic inventories, which represent approximately 77% of total consolidated
inventory, are determined on the last-in, first-out (LIFO) basis and foreign
inventories are determined on the first-in, first-out (FIFO) basis. Where
necessary, reserves are provided to value inventory at the lower of cost or
market.
Inventories are summarized as follows:
March 31, December 31,
2000 1999
--------- ------------
Raw materials and work in process $ 5,928 $ 5,527
Finished goods 47,809 37,290
LIFO reserve 2,837 3,107
------- -------
$56,574 $45,924
======= =======
I. INCOME TAXES
The Company and certain of its domestic subsidiaries have elected Subchapter S
Corporation status for United States income tax purposes. On March 14, 2000,
A.B.Dick Company ("A.B.Dick"), a wholly-owned subsidiary of the Company, elected
C Corporation status for United States income tax purposes effective January 1,
2000. Accordingly, as of January 1, 2000, A.B.Dick recognized its existing
deferred income taxes. For 1999, the Company's United States operations were not
subject to income taxes as separate entities and the Company's United States
income is included in the income tax returns of the Stockholder. Under the terms
of the Tax Payment Agreement with the Stockholder, the Company makes
distributions to the stockholder for payment of income taxes as required. The
foreign subsidiaries of A.B.Dick and Curtis are subject to foreign income taxes.
For the three-month periods ended March 31, 2000 and 1999, the Company had
foreign income tax expense (benefit) of $6 and $(29), respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The net operating loss
and AMT credit carryforwards principally resulted from the Company's acquisition
of Multigraphics. The acquired carryforwards are subject to the Section 382
limitations imposed by the Internal Revenue Code of 1986, as amended, and the
regulations thereunder. The net operating loss carryforwards expire beginning
in the year 2000. Where the Company has determined that it is more likely than
not that the net deferred tax assets will not be realized, a valuation allowance
has been established.
Significant components of the Company's deferred income tax assets and
liabilities pertaining to A.B. Dick and its foreign subsidiaries at March 31,
2000 are as follows:
Deferred income tax assets:
Accrued liabilities $ 6,136
Capitalized research and development 1,271
Property, plant and equipment 749
Allowance for doubtful accounts 320
AMT credit carryforward 1,800
Net operating loss carryforward 85,715
Other 3,400
--------
99,391
Valuation allowance (93,748)
--------
Total deferred income tax assets 5,643
Deferred income tax liabilities:
Inventory (5,281)
Other (362)
--------
Total deferred income tax liabilities (5,643)
--------
Net deferred income taxes $ 0
========
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J. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company's domestic operating subsidiaries, all of which are directly or
indirectly wholly owned, are the only guarantors of Senior Notes. The guarantees
are full, unconditional and joint and several. Separate financial statements of
these guarantor subsidiaries are not presented as management has determined that
they would not be material to investors.
The Company's foreign and non-operating domestic subsidiaries are not guarantors
of the Senior Notes. Summarized consolidating balance sheets as of March 31,
2000 and December 31, 1999 for the Company, the guarantor subsidiaries, and the
non-guarantor subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
BALANCE SHEET DATA
(MARCH 31, 2000):
Current assets:
Cash and cash equivalents $ 9,832 $ 3,577 $ 1,985 $ -- $ 15,394
Short-term investments 1,001 -- -- -- 1,001
Accounts receivable, net 38,025 36,377 10,025 (38,054) 46,373
Inventories -- 46,459 11,102 (987) 56,574
Other 153 4,596 796 -- 5,545
-------- -------- ------- --------- --------
Total current assets 49,011 91,009 23,908 (39,041) 124,887
Property, plant and equipment, net 5 20,173 1,354 -- 21,532
Goodwill, net -- 62,538 53 -- 62,591
Investment in subsidiaries 66,636 15,028 -- (81,664) --
Other assets 4,051 859 5 -- 4,915
Intercompany -- -- -- -- --
-------- -------- ------- --------- --------
$119,703 $189,607 $25,320 $(120,705) $213,925
======== ======== ======= ========= ========
Current liabilities:
Revolving credit facility $ 23,871 $ -- $ -- $ -- $ 23,871
Accounts payable -- 24,504 2,723 -- 27,227
Accrued expenses 5,739 22,894 5,861 -- 34,494
Deferred service revenue -- 13,180 1,266 -- 14,446
Due to GEC -- 818 -- -- 818
Current portion of long-term debt
and capital lease obligations -- 1,862 837 -- 2,699
Intercompany -- 44,225 (5,135) (39,090) --
-------- -------- ------- --------- --------
Total current liabilities 29,610 107,483 5,552 (39,090) 103,555
Senior Notes 115,000 -- -- -- 115,000
Other long-term debt and capital lease
obligations, less current portion -- 1,768 162 -- 1,930
Retirement obligations -- 7,509 4,400 -- 11,909
Other long-term liabilities -- 3,385 3,054 -- 6,439
Stockholder's equity (deficit) (24,907) 69,462 12,152 (81,615) (24,908)
-------- -------- ------- --------- --------
$119,703 $189,607 $25,320 $(120,705) $213,925
======== ======== ======= ========= ========
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J. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
BALANCE SHEET DATA
(DECEMBER 31, 1999):
Current assets:
Cash and cash equivalents $ 7,760 $ 5,396 $ 2,185 $ -- $ 15,341
Short-term investments 3,610 -- -- -- 3,610
Accounts receivable, net 31,254 26,155 9,788 (31,254) 35,943
Inventories - 35,880 10,238 (194) 45,924
Other 398 889 636 -- 1,923
-------- -------- ------- --------- --------
Total current assets 43,022 68,320 22,847 (31,448) 102,741
Property, plant and equipment, net 5 19,040 1,318 -- 20,363
Goodwill, net -- 30,637 55 -- 30,692
Investment in subsidiaries 58,488 15,028 -- (73,516) --
Other assets 6,839 17 4 -- 6,860
Intercompany -- -- -- -- --
-------- -------- ------- --------- --------
$108,354 $133,042 $24,224 $(104,964) $160,656
======== ======== ======= ========= ========
Current liabilities:
Revolving credit facility $ 10,219 $ -- $ -- $ -- $ 10,219
Accounts payable -- 16,167 2,646 -- 18,813
Accrued expenses 3,324 13,968 3,443 -- 20,735
Deferred service revenue -- 4,942 1,095 -- 6,037
Due to GEC -- 852 -- -- 852
Current portion of long-term debt
and capital lease obligations -- 1,448 50 -- 1,498
Intercompany -- 27,123 5,163 (32,286) --
-------- -------- ------- --------- --------
Total current liabilities 13,543 64,500 12,397 (32,286) 58,154
Senior notes 115,000 -- -- -- 115,000
Other long-term debt and capital lease
obligations, less current portion -- 1,717 132 -- 1,849
Retirement obligations -- 3,539 7 -- 3,546
Other long-term liabilities -- 2,296 -- -- 2,296
Stockholder's equity (deficit) (20,189) 60,990 11,688 (72,678) (20,189)
-------- -------- ------- --------- --------
$108,354 $133,042 $24,224 $(104,964) $160,656
======== ======== ======= ========= ========
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J. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of income for the three months ended March
31, 2000 and 1999, respectively, for the Company, the guarantor subsidiaries,
and the non-guarantor subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------- ------------ -------
INCOME STATEMENT DATA:
(THREE MONTHS ENDED MARCH 31, 2000):
Net revenue $ -- $47,878 $10,295 $(1,013) $57,160
Cost of revenue -- 36,480 7,648 (1,013) 43,115
------- ------- ------- ------ -------
Gross profit -- 11,398 2,647 -- 14,045
Total operating expenses 692 12,300 2,971 100 16,063
------- ------- ------- ------ -------
Operating income (loss) (692) (902) (324) (100) (2,018)
Interest income (expense), net (2,729) (795) 9 -- (3,515)
Other income (expense) 81 (73) (148) -- (140)
------- ------- ------- ------ -------
Loss from continuing operations
before income taxes (benefit) (3,340) (1,770) (463) (100) (5,673)
Income tax (benefit) -- 7 (1) -- 6
------- ------- ------- ------ -------
Loss from continuing operations (3,340) (1,777) (462) (100) (5,679)
Discontinued operations:
Income from discontinued
operations, net of tax -- 949 (144) 100 905
------- ------- ------- ------ -------
Net loss $(3,340) $ (828) $ (606) $ -- $(4,774)
======= ======= ======= ====== =======
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------- ------------ -------
INCOME STATEMENT DATA:
(THREE MONTHS ENDED MARCH 31, 1999):
Net revenue $ -- $31,934 $11,010 $ -- $42,944
Cost of revenue -- 23,400 8,042 -- 31,442
------- ------- ------- ------ -------
Gross profit -- 8,534 2,968 -- 11,502
Total operating expenses 224 9,640 3,329 -- 13,193
------- ------- ------- ------ -------
Operating income (loss) (224) (1,106) (361) -- (1,691)
Interest income (expense), net (2,459) (364) 15 -- (2,808)
Other income (expense) -- (5) 27 -- 22
------- ------- ------- ------ -------
Loss from continuing operations
before income taxes (benefit) (2,683) (1,475) (319) -- (4,477)
Income tax (benefit) -- 18 (47) -- (29)
------- ------- ------- ------ -------
Loss from continuing operations (2,683) (1,493) (272) -- (4,448)
Discontinued operations:
Income from discontinued
operations, net of tax -- 1,043 (59) 9 993
------- ------- ------- ------ -------
Net loss $(2,683) $ (450) $ (331) $ 9 $(3,455)
======= ======= ======= ====== =======
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J. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of cash flows for the three months ended
March 31, 2000 and 1999, respectively, for the Company, the guarantor
subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------- ------------ --------
CASH FLOW DATA:
(THREE MONTHS ENDED MARCH 31, 2000):
Net cash used in operating activities $ 2,137 $(15,677) $10,373 $ -- $ (3,167)
Investing activities:
Acquisition of business, net of cash acquired (11,830) -- -- -- (11,830)
Purchases of property, plant and equipment -- (661) (185) -- (846)
Decrease in short-term investments 2,631 -- -- -- 2,631
-------- ------- ------- ----- --------
Net cash provided by (used in)
investing activities (9,199) (661) (185) -- (10,045)
Financing activities:
Borrowings on revolving credit facilities 13,652 -- -- -- 13,652
Decrease in amounts due to GEC -- (34) -- -- (34)
Proceeds from long-term borrowings -- - 40 -- 40
Principal payments on long-term borrowings -- (423) (19) -- (442)
Intercompany (4,518) 14,948 (10,430) -- --
-------- ------- ------- ----- --------
Net cash provided by (used in)
financing activities 9,134 14,491 (10,409) -- 13,216
Effect of exchange rate changes on cash -- 28 21 -- 49
-------- ------- ------- ----- --------
Increase (decrease) in cash and
cash equivalents 2,072 (1,819) (200) -- 53
Cash and cash equivalents at beginning
of period 7,760 5,396 2,185 -- 15,341
-------- ------- ------- ----- --------
Cash and cash equivalents at end of period $ 9,832 $ 3,577 $ 1,985 $ -- $ 15,394
======== ======= ======= ===== ========
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Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------- ------------ -------
CASH FLOW DATA:
(THREE MONTHS ENDED MARCH 31, 1999):
Net cash used in operating activities $ 191 $(3,040) $ (42) $ -- $(2,891)
Investing activities:
Purchases of property, plant, and equipment -- (1,986) (292) -- (2,278)
Decrease in short-term investments 1,169 -- -- -- 1,169
------- ------- ------- ------ -------
Net cash provided by (used in)
investing activities 1,169 (1,986) (292) -- (1,109)
Financing activities:
Borrowings on revolving credit facilities 2,500 -- -- -- 2,500
Decrease in amounts due to GEC
and affiliates -- 100 -- -- 100
Proceeds from long-term borrowings -- 588 220 -- 808
Principal payments on long-term borrowings -- (406) -- -- (406)
Intercompany (3,852) 5,540 (1,688) -- -
------- ------- ------- ------ -------
Net cash provided by (used in)
financing activities (1,352) 5,822 (1,468) -- 3,002
Effect of exchange rate changes on cash -- (221) 30 -- (191)
------- ------- ------- ------ -------
Increase (decrease) in cash and
cash equivalents 8 575 (1,772) -- (1,189)
Cash and cash equivalents at beginning
of period 28 4,174 3,260 -- 7,462
------- ------- ------- ------ -------
Cash and cash equivalents at end of period $ 36 $ 4,749 $ 1,488 $ -- $ 6,273
======= ======= ======= ====== =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For further information, refer to the consolidated financial statements and
footnotes of Paragon Corporate Holdings Inc. set forth in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
GENERAL
The Company, through its wholly-owned subsidiary, A.B.Dick Company ("A.B.Dick"),
is engaged in the manufacture and distribution of printing equipment and
supplies. During April 2000, the Company entered into a definitive agreement to
sell substantially all of the assets of the CI, Inc. f/k/a Curtis Industries,
Inc. ("Curtis") subsidiary previously reported as the automotive and industrial
supplies segment. The transaction closed on May 10, 2000 and the Company
received proceeds of $62.1 million subject to a net worth adjustment. The sale
is expected to result in a gain which will be recognized in the second quarter
of 2000. The results of operations for Curtis have been reported as a
discontinued operation. The following discussion and analysis of operating
results excludes the results of Curtis. The Company's printing equipment and
supplies business is a leading manufacturer, marketer, and distributor of
printing products for the global quick print, small commercial, and in-plant
printing markets.
On January 27, 2000, the Company acquired all of the outstanding common stock of
Multigraphics, Inc. ("Multigraphics"). The acquisition has been accounted for as
a purchase and, accordingly, the consolidated financial statements include the
results of Multigraphics' operations since the date of acquisition.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999:
NET REVENUE
For the three months ended March 31, 2000, net revenue increased $14.3 million
or 33.3% to $57.2 from $42.9 million for the quarter ended March 31, 1999. The
increase was principally attributable to the inclusion of the results of
operations of Multigraphics since the date of acquisition. Following the
acquisition, all of the assets of Multigraphics were transferred to A.B. Dick.
Multigraphics, net revenue decreased by $1.6 million or 3.8%. Printing equipment
sales increased $1.9 million or 12.7% over the prior year to $17.2 million. The
Multigraphics acquisition accounted for $2.1 million of the increase, and this
was partially offset by sales declines in Asia, Latin America, and certain
European markets due to weaker demand levels. Printing supplies sales increased
$6.3 million or 35.8% from the prior year to $24.1 million. The increase was
attributable to the inclusion of Multigraphics sales of $7.4 million, offset by
weakness in certain international markets, a decline in the supply stream of
previously discontinued domestic equipment, and lower optical equipment supplies
sales. The decrease in supply sales on discontinued products was partially
offset by increases in sales of digital equipment supplies. Repair parts and
service revenues increased $5.9 million or 59.2% to $15.8 million, $6.3 million
relating to Multigraphics, and a decrease of $0.4 million due to the ongoing
impact of discontinuance of A.B.Dick's line of distributed copier equipment and
digital duplicators.
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GROSS PROFIT
Gross profit increased $2.5 million or 21.7% to $14.0 million for the quarter
ended March 31, 2000. Gross profit as a percentage of sales was 24.6% during the
first quarter of 2000 compared to 26.8% for the same period last year. Excluding
the impact of the Multigraphics acquisition, gross profit and gross profit
percentage were $10.2 million and 24.8%, respectively. The decrease in gross
profit percentage is attributable to lower fixed cost absorption in 2000 on
manufactured equipment due to reduced volume, increased freight costs, and an
increase in inventory valuation allowances on discounted products. Service
margins were lower due to decreased installations and service contracts on
previously discontinued equipment.
COSTS AND EXPENSES
Costs and expenses increased by $2.9 million to $16.1 million for the quarter
ended March 31, 2000 from $13.2 million for the quarter ended March 31, 1999.
The acquisition of Multigraphics accounted for $3.5 million of the increase.
Costs and expenses for 2000 include $0.5 million in charges primarily for
severance costs for A.B.Dick following the acquisition of Multigraphics. For the
first quarter of 1999, relocations and severance costs for A.B.Dick were $0.8
million. Excluding Multigraphics, costs and expenses in 2000 compared to 1999
decreased by $0.6 million due to reductions in sales and marketing expenses, and
relocation and severance costs, offset by higher depreciation and amortization
expense.
OPERATING LOSS
The operating loss increased $0.3 million to $2.0 million for the quarter ended
March 31, 2000 from $1.7 million for the quarter ended March 31, 1999. The
increase in operating loss from 1999 resulted primarily from lower revenues and
gross profits for A.B.Dick, partially offset by lower A.B.Dick operating
expenses.
RESTRUCTURING CHARGE
In connection with the acquisition of Multigraphics, the Company is formulating
plans for the integration of Multigraphics operations into it's A.B.Dick
business. As part of this integration, the Company anticipates that it will
incur additional restructuring costs of approximately $1.5 million comprised
primarily of employee termination and relocation costs which will be expensed
during the remainder of 2000. Employee termination costs and other costs
pertaining to Multigraphics that qualify under EITF 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination, are included in
the purchase price allocation.
INTERNATIONAL OPERATIONS
The Company transacts business in a number of countries throughout the world and
has facilities in the United States, Canada, the United Kingdom, the
Netherlands, and Belgium. As a result, the Company is subject to business risks
inherent in non-U.S. operations, including political and economic uncertainty,
import and export limitations, exchange controls, and currency fluctuations. The
Company believes that the risks related to its foreign operations are mitigated
by the relative political and economic stability of the countries in which its
largest foreign operations are located. As the U.S. dollar strengthens and
weakens against foreign currencies in which the Company transacts business, its
financial results will be affected. The principal foreign currencies in which
the Company transacts business are the Japanese yen, the Canadian dollar, the
British pound sterling, the Dutch guilder, and the Belgium franc. The
fluctuation of the U.S. dollar versus other currencies resulted in increases
(decreases) to stockholder's equity of approximately $0.1 million and $(0.2)
million for the three months ended March 31, 2000 and 1999, respectively.
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IMPACT OF THE YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 compliant. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or products and services of third parties. The
Company will continue to monitor its mission critical computer applications and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $3.1 million and $2.9 million for the
quarters ended March 31, 2000 and 1999, respectively. The increase in net cash
used in operating activities in 2000 was principally the result of the increase
in net losses incurred in 2000 to $4.8 million from $3.5 million in 1999. The
net loss in 2000 is due to operating losses for A.B.Dick and interest costs
associated with the issuance of $115.0 million of senior notes on
April 1, 1998. Net cash used in operating activities in 1999 was also primarily
attributable to operating losses for A.B.Dick and interest on the senior notes
mentioned above.
The net cash used in investing activities was $10.0 million and $1.1 million for
the quarters ended March 31, 2000 and 1999, respectively. The 2000 amount
reflects the cash cost of the Multigraphics acquisition of $11.8 million and
liquidation of short-term investments of $2.6 million primarily to fund
property, plant, and equipment purchases of $0.8 million and operations. For
1999, net cash used in investing activities includes the liquidation of
short-term investments of $1.2 million used primarily to fund property, plant,
and equipment purchases of $2.3 million.
Net cash provided by financing activities was $13.2 million and $3.0 million for
the quarters ended March 31, 2000 and 1999, respectively. The net cash provided
by financing activities in 2000 was primarily the result of borrowings of $13.7
million used to fund the Multigraphics acquisition and operating losses. The net
cash provided by financing activities in 1999 was primarily the result of
borrowings on revolving credit lines of $2.5 million.
The Company's primary capital requirements (excluding acquisitions) consist of
working capital, capital expenditures and debt service. The Company expects
current financial resources and funds from operations to be adequate to meet
current cash requirements. At March 31, 2000, the Company had cash, cash
equivalents and short-term investments of $16.4 million and unused credit
facilities of $7.7 million available for its use. At December 31, 1999, the
Company was in violation of certain financial covenants under the terms of the
revolving credit agreement. During March 2000, the Company received waivers of
these covenants through June 29, 2000 and it also amended future covenant
requirements to reflect the Company's current financial outlook and the
acquisition of Multigraphics. Additionally, on March 31, 2000, the Company
amended its revolving credit agreement, temporarily increasing its credit line
under the agreement to $37.0 million from $32.0 million.
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives, or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward-looking statements include, without limitation, statements
regarding the Company's Year 2000
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compliance program and future prospects of the business. Such forward-looking
statements are subject to uncertainties and factors relating to the Company's
operations and business environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed in or
implied by such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company assumed its securities that are available for sale are similar
enough to aggregate those securities for presentation purposes. Under the terms
of the bond indenture, the Company's short-term investments are limited to,
among others, securities issued by or insured by the full faith and credit of
the U.S. government, certificates of deposit or eurodollar time deposits or
commercial paper having the highest rating available from Moody's or Standard &
Poor's. Maturities can be between six months and one year from the date of
purchase, except that maturities in excess of six months cannot exceed 40% of
the total investments.
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in the U.S.
interest rates affect interest earned on the Company's cash equivalents and
short-term investments as well as interest paid on a portion of its debt. To
mitigate the impact of fluctuations in U.S. interest rates, the Company
generally maintains the majority of its debt as fixed rate by borrowing on a
long-term basis.
The Company's earnings are also affected by fluctuations in the value of the
U.S. dollar as compared to foreign currencies, predominantly in European
countries. An additional risk relates to product shipped between the Company's
European subsidiaries. In addition to the impact on the intercompany balances,
changes in exchange rates also affect volume of sales or the foreign currency
sales price as competitors products become more or less attractive.
The carrying amount of cash and cash equivalents, short-term investments, trade
receivables and payables approximates fair value because of the short maturity
of these instruments. The carrying amount of the revolving credit facility
approximates fair value. The carrying amount of the senior notes exceeds its
fair value at March 31, 2000 by $77,050. The fair value has been determined
using the market price of the related securities at March 31, 2000.
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
(b) Exhibit 27 - Financial Data Schedule
(c) Reports on Form 8-K filed in the first quarter of 2000
Form 8-K Current Report dated February 11, 2000, regarding the
acquisition of Multigraphics, Inc.
Form 8-K/A Amendment No. 1 to Current Report dated April 11,
2000 (amending the current report on Form 8-K filed on February
11, 2000) containing the required financial statements and pro
forma financial information.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON CORPORATE HOLDINGS INC.
By: /s/ Frank D. Zaffino
--------------------------------
FRANK D. ZAFFINO
President and Chief Executive Officer and Director (As duly
authorized representative and Principal Executive Officer)
PARAGON CORPORATE HOLDINGS INC.
By: /s/ Gregory T. Knipp
--------------------------------
GREGORY T. KNIPP
Acting Chief Financial Officer (As duly authorized representative
and as Principal Financial and Accounting Officer)
A.B.DICK COMPANY
By: /s/ Gregory T. Knipp
--------------------------------
GREGORY T. KNIPP
Chief Financial Officer (As duly authorized representative
and as Principal Financial and Accounting Officer)
CURTIS INDUSTRIES, INC.
By: /s/ Gregory T. Knipp
--------------------------------
GREGORY T. KNIPP
(As duly authorized representative and as Acting
Principal Financial and Accounting Officer)
ITEK GRAPHIX CORP.
By: /s/ Frank D. Zaffino
--------------------------------
FRANK D. ZAFFINO
President and Chief Executive Officer (As duly authorized
Officer)
Date: May 15, 2000
--------------------------------
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PARAGON CORPORATE HOLDINGS INC.
INDEX OF EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation of Paragon Corporate Holdings Inc., as currently in effect. *
3.2 By-Laws of Paragon Corporate Holdings Inc. as currently in effect *
3.3 Certificate of Incorporation of A.B.Dick Company, as currently in effect *
3.4 By-Laws of A.B.Dick Company, as currently in effect. *
3.5 Certificate of Incorporation of Curtis Industries, Inc. as currently in effect. *
3.6 By-Laws of Curtis Industries, Inc. as currently in effect. *
3.7 Certificate of Incorporation of Itek Graphix Corp. , as currently in effect. *
3.8 By-Laws of Itek Graphix Corp., as currently in effect. *
3.9 Certificate of Incorporation of Curtis Sub, Inc., as currently in effect. *
3.10 By-Laws of Curtis Sub, Inc., as currently in effect. *
4.1 Indenture, dated as of April 1, 1998, among Paragon Corporate Holdings Inc., A.B.Dick *
Company, Curtis Industries, Inc., Itek Graphix Corp., Curtis Sub, Inc and Norwest Bank
Minnesota, National Association, as Trustee (containing, as exhibits, specimens of the
Series A Notes and the Series B Notes).
4.4 (a) Credit and Security Agreement, dated as of April 1, 1998 amended by Amendment *
I, between Paragon Corporate Holdings Inc. and Key Corporate Capital Inc.
(b) Amendment I, dated as of March 17, 1999, to the Credit and Security Agreement, *
dated as of April 1, 1998 between Paragon Corporate Holdings Inc. and Key
Corporate Capital Inc.
(c) Waiver and Amendment to the Credit and Security Agreement, dated March 29, **
2000, between Paragon Corporate Holdings Inc. and Key Corporate Capital, Inc.
10.1 Agreement and Plan of Merger, dated as of November 6, 1997, among Paragon Corporate *
Holdings Inc., Curtis Industries, Inc. and Curtis Acquisition Group.
10.2 Management Agreement, dated as of April 1, 1998, between Paragon Corporate Holdings Inc. *
and NESCO, Inc.
10.3 Tax Payment Agreement, dated as of April 1, 1998, among Paragon Corporate Holdings Inc., *
A.B.Dick Company, Curtis Industries, Inc., Itek Graphix Corp., Curtis Sub, Inc. and NES
Group, Inc.
10.4 Severance and Non-Competition Agreement dated February 28, 1996 between Curtis *
Industries, Inc. and A. Keith Drewett.
10.5 Agreement dated July 2, 1998 among Curtis Industries, Inc., Paragon Holdings Inc. and ***
A. Keith Drewett.
10.6 Agreement and plan of merger, dated September 29, 1999 between Multi Acquisition Corp., ****
a wholly-owned subsidiary of Paragon Corporate Holdings Inc., and Multigraphics, Inc.
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for the three months ended March 31, 1999
27.3 Restated Financial Data Schedule for the twelve months ended December 31, 1999
27.4 Restated Financial Data Schedule for the twelve months ended December 31, 1998
27.5 Restated Financial Data Schedule for the twelve months ended December 31, 1997
* Incorporated by reference from Form S-4 Registration Number 333-51569 filed
under the Securities Act of 1933, as amended
** Incorporated by reference from Form 10-K File Number 333-51569 filed
March 31, 2000
*** Incorporated by reference from Amendment No. 2 to Form S-4 Registration
Number 333-51569 filed July 17, 1998 under the Securities Act of 1933, as
amended
**** Incorporated by reference from Appendix A of Schedule 14A filed December 6,
1999, by Multigraphics, Inc.
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