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 June 30, 1999
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 Curtis Industries, Inc.
7400 Caldwell Avenue 7400 Caldwell Avenue 6140 Parkland Boulevard
Niles, Illinois 60714 Niles, Illinois 60714 Mayfield Heights, Ohio 44124
(847) 779-2500 (847) 779-1900 (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 July 31, 1999, there were 1,000 shares of the registrant's Class A common
stock outstanding.
As of July 31, 1999, there were 19,000 shares of the registrant's Class B
common stock outstanding.
2
INDEX
PARAGON CORPORATE HOLDINGS INC.
Part I Financial Information Page Number
Item 1 Financial Statements (Unaudited)...........................................1
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998........................................2
Condensed Consolidated Statements of Operations
Three and Six Months ended June 30, 1999 and 1998..........................3
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 1999 and 1998....................................4
Notes to Condensed Consolidated Financial Statements....................5-13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................14-18
Item 3 Quantitative and Qualitative Disclosures About Market Risk................18
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K..........................................19
Signatures...........................................................................20
3
Part I. Financial Information
Item I. Financial Statements (Unaudited)
1
4
Paragon Corporate Holdings Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
June 30, 1999 December 31, 1998
------------------- -------------------
(Unaudited)
Assets:
Current Assets:
Cash and cash equivalents $ 7,075 $ 7,462
Short-term investments 16,222 21,534
Accounts receivable, net 38,868 40,579
Inventories 46,640 48,094
Other 2,412 2,458
--------- ---------
Total current assets 111,217 120,127
Property, plant and equipment, less
accumulated depreciation 20,463 18,700
Goodwill 31,275 31,861
Other assets 4,474 4,721
--------- ---------
$ 167,429 $ 175,409
========= =========
Liabilities and Stockholder's Equity:
Current liabilities:
Accounts payable $ 19,879 $ 23,471
Accrued compensation 6,698 8,302
Accrued other 14,906 16,362
Deferred service revenue 6,446 6,502
Due to GEC 864 1,724
Current portion of long-term debt 1,047 997
--------- ---------
Total current liabilities 49,840 57,358
Senior Notes 115,000 115,000
Long-term debt, less current portion 7,308 1,886
Retirement obligations 3,668 3,641
Other long-term liabilities 2,469 2,643
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) (9,755) (4,279)
Accumulated other comprehensive loss (1,149) (888)
--------- ---------
Total stockholder's equity (deficit) (10,856) (5,119)
--------- ---------
$ 167,429 $ 175,409
========= =========
See notes to condensed consolidated financial statements.
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5
Paragon Corporate Holdings Inc.
Condensed Consolidated Statement of Operations
(In Thousands)
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------------ ---------------- ------------------ ---------------
(Unaudited) (Unaudited)
Net revenue $ 65,446 $ 69,129 $ 128,814 $ 133,077
Cost of revenue 41,682 42,057 81,721 80,030
--------- --------- --------- ---------
Gross profit 23,764 27,072 47,093 53,047
COSTS AND EXPENSES
Sales and marketing expenses 10,957 11,222 21,600 22,180
General and administrative expenses 9,198 9,874 19,372 19,908
Research and development 970 790 1,751 1,551
Depreciation and amortization 1,602 1,384 3,273 2,615
Management fee 123 285 192 921
Relocation and severance costs -- 558 753 909
--------- --------- --------- ---------
22,850 24,113 46,941 48,084
--------- --------- --------- ---------
Operating income 914 2,959 152 4,963
Interest expense, net (2,821) (3,097) (5,617) (4,714)
Other income (expense) (26) (61) 48 (163)
--------- --------- --------- ---------
Income (loss) before income
taxes and extraordinary item (1,933) (199) (5,417) 86
Income taxes 88 225 59 440
--------- --------- --------- ---------
Loss before extraordinary item (2,021) (424) (5,476) (354)
Extraordinary item -- 1,280 -- 1,280
--------- --------- --------- ---------
Net loss $ (2,021) $ (1,704) $ (5,476) $ (1,634)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
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6
Paragon Corporate Holdings Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Six Months Ended
June 30, 1999 June 30, 1998
---------------- -------------
(Unaudited)
Operating activities:
Net loss $ (5,476) $ (1,634)
Adjustments to reconcile net loss
to net cash used in operating activities:
Extraordinary item -- 1,280
Provision for depreciation and amortization 3,273 2,615
Changes in operating assets and liabilities (3,525) (3,709)
--------- ---------
Net cash used in operating activities (5,728) (1,448)
Investing activities:
Purchases of property, plant and equipment (3,034) (3,607)
Payments of acquisition liabilities (134) (1,217)
Decrease (increase) in short-term investments 5,312 (23,538)
Acquisition of business -- (219)
--------- ---------
Net cash provided by (used in) investing activities 2,144 (28,581)
Financing activities:
Increase (decrease) in amounts due to GEC and affiliates (860) 55
Decrease in long-term borrowings (514) (40,683)
Proceeds from bond offering -- 115,000
Payment of bond issue costs -- (4,516)
Payment on revolving credit lines -- (26,084)
Borrowings on revolving credit lines 4,832 --
Dividend distribution -- (10,000)
--------- ---------
Net cash provided by financing activities 3,458 33,772
Effect of exchange rate changes on cash (261) (89)
--------- ---------
Increase (decrease) in cash and cash equivalents (387) 3,654
Cash and cash equivalents at beginning of period 7,462 3,283
--------- ---------
Cash and cash equivalents at end of period $ 7,075 $ 6,937
========= =========
See notes to condensed consolidated financial statements.
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7
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 and six month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. 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, 1998.
C. 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.
D. COMPREHENSIVE LOSS
The components of comprehensive loss for the three and six month periods
ended June 30, 1999 and 1998 are as follows:
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
----- ---- ---- ----
Net loss $(2,021) $(1,704) $(5,476) $(1,634)
Foreign currency translation
adjustment (70) (244) (261) (89)
------- ------- ------- -------
Comprehensive loss $(2,091) $(1,948) $(5,737) $(1,723)
======= ======= ======= =======
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8
E. 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 long-term debt and senior notes
exceeds its fair value at June 30, 1999 by $49,400. The fair value has been
determined using the market price of the related securities at June 30, 1999.
F. INVENTORIES
Domestic inventories, which represent approximately 80% 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:
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials and work in process $ 6,573 $ 6,768
Finished goods 40,526 41,638
LIFO reserve (459) (312)
-------- -------
$ 46,640 $ 48,094
======== ========
G. INCOME TAXES
The Company and its domestic subsidiaries have elected Subchapter S Corporation
status for United States income tax purposes. Accordingly, the Company's United
States operations are not subject to income taxes as separate entities. 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
if required.
H. SEGMENT INFORMATION
Paragon operates in two industry segments: Printing Equipment and Supplies and
Automotive and Industrial Supplies.
The Company's printing equipment and supplies business segment is a leading
manufacturer of printing products for the global quick print and small
commercial printing markets. This business has three product lines: (i)
pre-press, press and other related equipment, (ii) supplies, and (iii)
after-market repair service and replacement parts. The Company manufactures its
own products that are sold under the A. B. Dick(R) and Itek Graphix(R) brand
names, and distributes certain products manufactured by third parties. The
Company's printing equipment and supplies business segment sells its products
and services through a network of branches and independent distributors in the
United States, its subsidiaries in Canada, the United Kingdom, the Netherlands
and Belgium and independent distributors in other countries.
The Company's automotive and industrial supplies distribution business segment
supplies a wide range of products including (i) automotive security products,
key cutting equipment and key blanks, and non-model specific automotive parts
and (ii) maintenance, repair and operating supplies, including fasteners,
connectors, chemicals and tools. The Company generally markets its products
under its proprietary brand names, Curtis(R) and Mechanics Choice(R). Customers
of the Company's distribution business include independent auto dealerships and
industrial accounts throughout the U.S., Canada and the United Kingdom.
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9
H. SEGMENT INFORMATION (CONTINUED)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Net revenues:
Printing equipment and supplies $ 44,310 $ 48,844 $ 87,254 $ 92,483
Automotive and industrial supplies 21,136 20,285 41,560 40,594
--------- --------- --------- ---------
Total net revenue $ 65,446 $ 69,129 $ 128,814 $ 133,077
========= ========= ========= =========
Depreciation and amortization:
Printing equipment and supplies $ 494 $ 424 $ 1,055 $ 765
Automotive and industrial supplies 1,108 960 2,218 1,850
--------- --------- --------- ---------
Total depreciation and amortization $ 1,602 $ 1,384 $ 3,273 $ 2,615
========= ========= ========= =========
Operating income (loss):
Printing equipment and supplies $ (1) $ 2,463 $ (1,468) $ 4,053
Automotive and industrial supplies 1,054 627 1,909 1,058
Corporate (139) (131) (289) (148)
--------- --------- --------- ---------
914 2,959 152 $ 4,963
Interest expense, net (2,821) (3,097) (5,617) (4,714)
Other income (expense) (26) (61) 48 (163)
--------- --------- --------- ---------
Income (loss) before taxes $ (1,933) $ (199) $ (5,417) $ 86
========= ========= ========= =========
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10
I. Guarantor and Non-Guarantor Subsidiaries
The Company's domestic 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 subsidiaries are not guarantors of the Senior Notes.
Summarized consolidating balance sheets as of June 30, 1999 and December 31,
1998 for the Company, the guarantor subsidiaries, and the non-guarantor, foreign
subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ --------------- -------------- --------------
BALANCE SHEET DATA
(JUNE 30, 1999):
Current assets:
Cash and cash equivalents $ 91 $ 4,715 $ 2,269 $ -- $ 7,075
Short-term investments 16,222 -- -- -- 16,222
Accounts receivable, net -- 28,299 10,569 -- 38,868
Inventories -- 36,682 10,138 (180) 46,640
Other 334 1,189 889 -- 2,412
--------- --------- --------- --------- ---------
Total current assets 16,647 70,885 23,865 (180) 111,217
Property, plant and
equipment, net -- 19,428 1,035 -- 20,463
Goodwill -- 31,219 56 -- 31,275
Investment in subsidiary 68,066 13,803 -- (81,869) --
Other assets 4,446 21 7 -- 4,474
Intercompany 22,610 -- -- (22,610) --
--------- --------- --------- --------- ---------
$ 111,769 $ 135,356 $ 24,963 $(104,659) $ 167,429
========= ========= ========= ========= =========
Current liabilities:
Accounts payable $ -- $ 17,317 $ 2,562 $ -- $ 19,879
Accrued expenses 2,793 15,846 2,968 (3) 21,604
Deferred service revenue -- 5,050 1,396 -- 6,446
Due to GEC -- 864 -- -- 864
Intercompany -- 18,742 4,904 (23,646) --
Current portion of long- --
term debt -- 998 49 -- 1,047
--------- --------- --------- --------- ---------
Total current liabilities 2,793 58,817 11,879 (23,649) 49,840
Senior Notes 115,000 -- -- -- 115,000
Long-term debt, less
current portion 4,832 2,322 154 -- 7,308
Retirement obligations -- 3,637 31 -- 3,668
Other long-term liabilities -- 2,469 -- -- 2,469
Stockholder's equity (deficit) (10,856) 68,111 12,899 (81,010) (10,856)
--------- --------- --------- --------- ---------
$ 111,769 $ 135,356 $ 24,963 $(104,659) $ 167,429
========= ========= ========= ========= =========
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11
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ --------------- ------------- -----------
BALANCE SHEET DATA
(DECEMBER 31, 1998):
Current assets:
Cash and cash equivalents $ 28 $ 4,174 $ 3,260 $ -- $ 7,462
Short-term investments 21,534 -- -- -- 21,534
Accounts receivable, net -- 29,736 10,843 -- 40,579
Inventories -- 38,688 9,610 (204) 48,094
Other 393 972 1,093 -- 2,458
--------- --------- --------- --------- ---------
Total current assets 21,955 73,570 24,806 (204) 120,127
Property, plant and
equipment, net -- 17,849 851 -- 18,700
Goodwill -- 31,801 60 -- 31,861
Investment in subsidiary 74,118 13,803 -- (87,921) --
Other Assets 4,709 4 8 -- 4,721
Intercompany 11,898 -- -- (11,898) --
--------- --------- --------- --------- ---------
$ 112,680 $ 137,027 $ 25,725 $(100,023) $ 175,409
========= ========= ========= ========= =========
Current liabilities:
Accounts payable $ -- $ 20,399 $ 3,072 $ -- $ 23,471
Accrued expenses 2,799 18,710 3,158 (3) 24,664
Deferred service revenue -- 5,237 1,265 -- 6,502
Due to GEC -- 1,724 -- -- 1,724
Current portion of
long-term debt -- 997 -- -- 997
Intercompany -- 8,016 4,917 (12,933) --
--------- --------- --------- --------- ---------
Total current liabilities 2,799 55,083 12,412 (12,936) 57,358
Senior notes 115,000 -- -- -- 115,000
Long-term debt,less
current portion -- 1,886 -- -- 1,886
Retirement obligations -- 3,627 14 -- 3,641
Other long-term liabilities -- 2,643 -- -- 2,643
Stockholder's equity (deficit) (5,119) 73,788 13,299 (87,087) (5,119)
--------- --------- --------- --------- ---------
$ 112,680 $ 137,027 $ 25,725 $(100,023) $ 175,409
========= ========= ========= ========= =========
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12
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of income for the three months ended June
30, 1999 and 1998, respectively, for the Company, the guarantor subsidiaries,
and the non-guarantor, foreign subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
----------- -------------- ------------- ------------ -----------
INCOME STATEMENT DATA:
(THREE MONTHS ENDED JUNE 30, 1999):
Net revenue $ -- $ 51,222 $ 14,300 $ (76) $ 65,446
Cost of revenue -- 32,059 9,715 (92) 41,682
-------- -------- -------- -------- --------
Gross profit -- 19,163 4,585 16 23,764
Total operating expenses 139 18,153 4,558 -- 22,850
-------- -------- -------- -------- --------
Operating income (loss) (139) 1,010 27 16 914
Interest income (expense) (2,471) (367) 17 -- (2,821)
Other income (expense) -- (68) 42 -- (26)
-------- -------- -------- -------- --------
Income (loss) before income
taxes (benefit) (2,610) 575 86 16 (1,933)
Income taxes -- 5 83 -- 88
-------- -------- -------- -------- --------
Net income (loss) $ (2,610) $ 570 $ 3 $ 16 $ (2,021)
======== ======== ======== ======== ========
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
----------- -------------- --------------- ------------ ------------
INCOME STATEMENT DATA:
(THREE MONTHS ENDED JUNE 30, 1998):
Net revenue $ -- $ 53,587 $ 15,621 $ (79) $ 69,129
Cost of revenue -- 31,854 10,293 (90) 42,057
-------- -------- -------- -------- --------
Gross profit -- 21,733 5,328 11 27,072
Total operating expenses 131 19,323 4,659 -- 24,113
-------- -------- -------- -------- --------
Operating income (loss) (131) 2,410 669 11 2,959
Interest income (expense) (2,748) (396) 47 -- (3,097)
Other income (expense) -- 15 (76) -- (61)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and extraordinary
item (2,879) 2,029 640 11 (199)
Income taxes -- -- 225 -- 225
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item (2,879) 2,029 415 11 (424)
Extraordinary item 170 1,110 -- -- 1,280
-------- -------- -------- -------- --------
Net income (loss) $ (3,049) $ 919 $ 415 $ 11 $ (1,704)
======== ======== ======== ======== ========
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13
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of income for the six months ended June 30,
1999 and 1998, respectively, for the Company, the guarantor subsidiaries, and
the non-guarantor, foreign subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- ------------
INCOME STATEMENT DATA:
(SIX MONTHS ENDED JUNE 30, 1999):
Net revenue $ -- $ 100,707 $ 28,265 $ (158) $ 128,814
Cost of revenue -- 62,539 19,365 (183) 81,721
--------- --------- --------- --------- ---------
Gross profit -- 38,168 8,900 25 47,093
Total operating expenses 289 37,301 9,351 -- 46,941
--------- --------- --------- --------- ---------
Operating income (loss) (289) 867 (451) 25 152
Interest income (expense) (4,930) (728) 41 -- (5,617)
Other income (expense) -- (70) 118 -- 48
--------- --------- --------- --------- ---------
Income (loss) before income
taxes (5,219) 69 (292) 25 (5,417)
Income taxes -- 23 36 -- 59
--------- --------- --------- --------- ---------
Net income (loss) $ (5,219) $ 46 $ (328) $ 25 $ (5,476)
========= ========= ========= ========= =========
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
----------- -------------- -------------- ------------ -----------
INCOME STATEMENT DATA:
(SIX MONTHS ENDED JUNE 30, 1998):
Net revenue $ -- $ 102,871 $ 30,360 $ (154) $ 133,077
Cost of revenue -- 60,158 20,048 (176) 80,030
--------- --------- --------- --------- ---------
Gross profit -- 42,713 10,312 22 53,047
Total operating expenses 148 38,699 9,237 -- 48,084
--------- --------- --------- --------- ---------
Operating income (loss) (148) 4,014 1,075 22 4,963
Interest income (expense) (3,195) (1,621) 102 -- (4,714)
Other income (expense) -- (109) (54) -- (163)
--------- --------- --------- --------- ---------
Income (loss) before
income taxes and extraordinary
item (3,343) 2,284 1,123 22 86
Income taxes -- -- 440 -- 440
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item (3,343) 2,284 683 22 (354)
Extraordinary item 170 1,110 -- -- 1,280
--------- --------- --------- --------- ---------
Net income (loss) $ (3,513) $ 1,174 $ 683 $ 22 $ (1,634)
========= ========= ========= ========= =========
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14
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of cash flows for the six months ended June
30, 1999 and 1998, respectively, for the Company, the guarantor subsidiaries,
and the non-guarantor, foreign subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
---------- ------------- -------------- ------------ ----------
CASH FLOW DATA:
(SIX MONTHS ENDED JUNE 30, 1999):
Net cash used in operating activities $(4,903) $ (700) $ (125) $ -- $(5,728)
Investing activities:
Purchases of property, plant and
equipment -- (2,631) (403) -- (3,034)
Payment of acquisition liabilities -- (134) -- -- (134)
Decrease in short-term investments 5,312 -- -- -- 5,312
------- ------- ------- ------ -------
Net cash provided by (used in)
investing activities 5,312 (2,765) (403) -- 2,144
Financing activities:
Decrease in amounts due to GEC
and affiliates -- (860) -- -- (860)
Increase (decrease) in long-term
borrowings -- (717) 203 -- (514)
Borrowings on revolving credit lines 4,832 -- -- -- 4,832
Intercompany (5,178) 5,772 (594) -- --
------- ------- ------- ------ -------
Net cash provided by (used in)
financing activities (346) 4,195 (391) -- 3,458
Effect of exchange rate changes on cash -- (189) (72) -- (261)
------- ------- ------- ------ -------
Increase (decrease) in cash and cash
equivalents 63 541 (991) -- (387)
Cash and cash equivalents at beginning
of period 28 4,174 3,260 -- 7,462
------- ------- ------- ------ -------
Cash and cash equivalents at end of
period $ 91 $ 4,715 $ 2,269 $ -- $ 7,075
======= ======= ======= ====== =======
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15
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
---------- ------------- ------------- ------------ -----------
CASH FLOW DATA:
(SIX MONTHS ENDED JUNE 30, 1998):
Net cash provided by (used in)
operating activities $ (3,876) $ 2,702 $ (274) $ -- $ (1,448)
Investing activities:
Purchases of property, plant and
equipment -- (3,532) (75) -- (3,607)
Payment of acquisition liabilities -- (1,217) -- -- (1,217)
Increase in short-term investments (23,538) -- -- -- (23,538)
Acquisition of business -- (219) -- -- (219)
--------- --------- --------- --------- ---------
Net cash used in investing activities (23,538) (4,968) (75) -- (28,581)
Financing activities:
Increase in amounts due to GEC
and affiliates -- 55 -- -- 55
Increase (decrease) in long-term borrowings (20,056) (21,205) 578 -- (40,683)
Proceeds from bond offering 115,000 -- -- -- 115,000
Payment of bond issue costs (4,516) -- -- -- (4,516)
Payment on revolving credit lines -- (26,084) -- -- (26,084)
Intercompany (52,858) 52,570 288 -- --
Dividend distribution (10,000) -- -- -- (10,000)
--------- --------- --------- --------- ---------
Net cash provided by financing activities 27,570 5,336 866 -- 33,772
Effect of exchange rate changes on cash -- 25 (114) -- (89)
--------- --------- --------- --------- ---------
Increase in cash and cash equivalents 156 3,095 403 -- 3,654
Cash and cash equivalents at beginning
of period 28 1,173 2,082 -- 3,283
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period $ 184 $ 4,268 $ 2,485 $ -- $ 6,937
========= ========= ========= ========= =========
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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, 1998.
GENERAL
The Company, through its two wholly-owned subsidiaries, Curtis Industries Inc.
("Curtis") and A.B. Dick Company ("A.B. Dick") is engaged in (i) the
distribution of automotive and industrial supplies and (ii) the manufacture and
distribution of printing equipment and supplies. The Company's distribution
business supplies consumable, high margin, multiple-purpose products used in
the automotive and industrial markets, with an increasing focus on providing
value-added logistics services. The Company's printing equipment and supplies
business is a leading manufacturer and marketer of printing products for the
global quick print and small commercial graphics markets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30 1999, COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998:
NET REVENUE
For the quarter ended June 30, 1999, net revenue decreased $3.7 million or 5.4%
to $65.4 million from $69.1 million for the quarter ended June 30, 1998.
Automotive and industrial sales increased $0.8 million or 3.9% over the prior
year to $21.1 million primarily the result of an increase in U.S. National
Account sales of $0.4 million or 13.1%. Printing equipment sales were down $2.2
million or 11.5% over the prior year to $16.9 million. The decrease was
attributable to weak demand in domestic, Asian and certain European markets as
well as an expired distribution agreement in Canada, partially offset by
increases in Holland. Supplies sales were down $1.1 million or 5.8% to $17.8
million due to an expired distribution agreement in Canada, a decline in the
supply stream on previously discontinued lines of equipment and competitive
pressures on optical equipment supplies, partially offset by increases in
digital equipment supplies. The Company is presently pursuing other supply
products. Repair Parts and Service revenues decreased $1.2 million or 11.1%
primarily due to the discontinuance of A.B. Dick's line of Konica copier
equipment and Ricoh digital duplicators.
GROSS PROFIT
Gross profit decreased $3.3 million or 12.2% for the quarter ended June 30,
1999 as compared to the same period a year earlier. Gross profit margin was
36.4% during the second quarter 1999 compared to 39.2% for the same period last
year. A.B. Dick's gross profit decreased by $3.7 million and gross margin
decreased 5.2%. The gross margin decrease is primarily attributable to lower
margins on purchased equipment sales, lower costs in 1998 associated with yen
denominated purchases for equipment and supplies, the impact of an expired
distribution agreement in Canada and lower margins in service due to decreased
installations and service contracts on discontinued equipment. Curtis' gross
profit increased $0.4 million with gross margin decreasing by 0.4% primarily
the result of product mix.
COSTS AND EXPENSES
Costs and expenses decreased by $1.2 million to $22.9 million for the quarter
ended June 30, 1999 from $24.1 million from the second quarter a year earlier.
The decrease is partially attributable to non-recurring expenses of $0.6 million
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related to relocation and the continuation of cost reduction initiatives
implemented during 1998.
OPERATING INCOME
Operating income was $0.9 million and $3.0 million for the quarter ended June
30, 1999 and 1998, respectively, a decrease of $2.1 million or 70.0%. The 1999
amount includes operating income from Curtis of $1.1 million. For A.B. Dick,
costs and expenses approximated gross profit. The primary factors contributing
to the decline in operating results from the same period a year earlier are the
decreases in revenues and gross profit, offset by lower operating costs, for
A.B. Dick.
SIX MONTHS ENDED JUNE 30 1999, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998:
NET REVENUE
For the six months ended June 30, 1999, net revenue decreased $4.3 million or
3.2% to $128.8 million from $133.1 million for the six months ended June 30,
1998. Automotive and industrial sales increased $1.0 million or 2.5% over the
prior year to $41.6 million primarily the result of an increase in U.S. National
Account sales of $0.7 million or 10.6%. Printing equipment sales were down $0.9
million or 2.7% over the prior year to $32.2 million. The decrease was
attributable to weak demand in domestic, Asian and certain European markets as
well as an expired distribution agreement in Canada, partially offset by
increases in Holland. Supplies sales were down $2.7 million or 7.1% to $35.5
million due to an expired distribution agreement in Canada, a decline in the
supply stream on previously discontinued lines of equipment and competitive
pressures on optical equipment supplies, partially offset by increases in
digital equipment supplies. Repair Parts and Service revenues decreased $1.7
million or 8.0% primarily due to the discontinuance of A.B. Dick's line of
Konica copier equipment and Ricoh digital duplicators.
GROSS PROFIT
Gross profit decreased $5.9 million or 11.1% for the year-to-date period ended
June 30, 1999 as compared to the same period a year earlier. Gross profit margin
was 36.6% for the six months ended June 30, 1999 compared to 39.8% for the same
period last year. A.B. Dick's gross profit decreased by $6.5 million and gross
margin decreased 5.6%. The gross margin decrease is primarily attributable to
lower margins on purchased equipment sales, lower costs in 1998 associated with
yen denominated purchases, the impact of an expired distribution agreement in
Canada and lower margins in service due to decreased installations and service
contracts on discontinued equipment. Curtis' gross profit increased $0.6 million
with a corresponding increase of 0.1% in gross margin.
COSTS AND EXPENSES
Costs and expenses decreased by $1.2 million to $46.9 million for the six
months ended June 30, 1999 from $48.1 million for the same period a year
earlier. The decrease is attributable to a change in the basis of the
management fee calculation as well as the continuation of cost reduction
initiatives implemented during 1998.
OPERATING INCOME
Operating income was $0.2 million and $5.0 million for the six months ended
June 30, 1999 and 1998, respectively, a decrease of $4.8 million or 96.0%. The
1999 amount includes operating income from Curtis of $1.9 million and operating
loss from A.B. Dick of $1.5 million. The primary factors contributing to the
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decline in operating results from the same period a year earlier are the
decreases in revenues and gross profit, offset by lower operating costs, for
A.B. Dick.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has been addressing the Year 2000 issue since mid 1997 with
internal project teams and outside consultants. The plan to resolve the
problems involves four phases: assessment, remediation, testing and
implementation. The plan was further subdivided to review separately: computer
hardware, software, facilities and the supply chain.
The assessment phase in the computer hardware and software categories has been
completed. Due to the extensive modifications to the original version of the
financial and manufacturing systems in place at A.B. Dick and the planned
reorganization and relocation, it was determined that the most effective
remediation was to replace the software with a current version and upgrade the
hardware being used. The manufacturer of the new version of the integrated
financial and manufacturing software has provided assurances to the Company that
their software will process date logic and date handling according to the
standards established by the Company. The international operations for A. B.
Dick have performed similar assessment and remediation efforts. The remediation
efforts, testing and implementation are in process at the A.B. Dick locations. A
substantial portion of the project is completed with the remainder projected to
be completed by the third quarter of 1999. The Curtis financial and distribution
systems were modified to accommodate the four-date digit code, which was
completed in December 1998. During the first quarter of 1999, the systems were
tested and implemented and are operational in accordance with the standards
established by the Company. The Company's Year 2000 efforts have had a minimal
impact on the normal operating systems of the Company.
An assessment was performed on the hardware and software utilized in the
equipment used in the manufacturing process. Based on this assessment, the
Company believes that none of the systems in use had date sensitive functions,
which would be impacted by the millennium change.
The Company performed an evaluation of all domestic and international suppliers
to identify all mission critical vendors. These vendors have been contacted and
have been requested to provide assurances that their operations will be prepared
for the millennium change and will provide an uninterrupted supply of components
and services. The Company anticipates responses to the requests from its
critical vendors by the third quarter of 1999.
While the Company continues to focus on solutions for Year 2000 issues, and
expects to complete its Year 2000 project in a timely manner, the Company is in
the process of identifying potential major business interruptions that could
reasonably result from Year 2000 issues and will develop contingency plans
designed to address such potential interruptions. The Company may also develop
contingency plans designed to generally help protect the Company from
unanticipated Year 2000 business interruptions. Contingency plans are
anticipated to include, for example, the identification of alternate suppliers
or service providers, increases in levels of raw material and finished goods
inventories and the development of alternate procedures. The
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Company's contingency plans will be developed and modified over time as it
receives better information regarding the Year 2000 status of its systems and
embedded technology and third party readiness.
The most reasonable worst case scenario which could result from the failure of
the Company or its customers, vendors or other key third parties to adequately
address Year 2000 issues would include a temporary interruption or curtailment
in the Company's manufacturing or distribution operations at one or more of its
facilities. Such failures could also cause a delay or curtailment in the
processing of orders and invoices and the collection of revenues, as well as
the inability to maintain accurate accounting records, and lead to increased
costs and loss of sales. If these failures would occur depending upon their
duration and severity, they could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's plans to complete the Year 2000 modifications are based on
management's best estimate, which were derived utilizing various assumptions of
future events including the continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected
completion dates are based on the original plan and the estimated time required
to complete the remaining work. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes and
similar uncertainties.
The information above contains certain forward-looking statements, including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are advised that forward-looking statements about
the Year 2000 should be read in conjunction with the Company's disclosure under
the heading Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $5.7 million and $1.4 million for the
six months ended June 30, 1999 and 1998, respectively. The net cash used in
operating activities in 1999 and 1998 was principally the result of net losses
incurred of $5.5 million and $1.6 million, respectively. The net losses in 1999
and 1998 are mainly due to increased interest costs as a result of the issuance
of $115.0 million of senior notes on April 1, 1998 and a decline in gross
margin.
The net cash provided by (used in) investing activities was $2.1 million and
($28.6) million for the six months ended June 30, 1999 and 1998, respectively.
The 1999 amount includes a decrease in short-term investments of $5.3 million
and property, plant and equipment purchases of $3.0 million. The primary
components of the 1998 investing activities were an increase in short-term
investments of $23.5 million, property, plant and equipment purchases of $3.6
million and payments on acquisition related liabilities of $1.2 million.
Net cash provided by financing activities was $3.5 million and $33.8 million
for the six months ended June 30, 1999 and 1998, respectively. The net cash
provided by financing activities in 1999 was primarily the result of borrowings
on revolving credit lines of $4.8 million. The 1998 net cash from financing
activities was the result of the issuance of $115.0 million of senior notes,
offset by the reduction of long-term borrowings of $40.7 million and reduction
of revolving lines of credit by $26.1 million. The bond issuance costs paid
were $4.5 million and the Company made a dividend distribution to its sole
stockholder in the amount of $10.0 million.
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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 continuing operations to be adequate
to meet current cash requirements. At June 30, 1999 the Company had cash, cash
equivalents and short-term investments of $23.3 million and unused credit
facilities of $23.1 million available for its use. At June 30, 1999, the Company
was in violation of certain covenants under the terms of the revolving credit
agreement, for which it received a waiver. The Company is currently negotiating
an amendment to the covenants in the revolving credit agreement.
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 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 long-term debt and senior notes
exceeds its fair value at June 30, 1999 by $49,400. The fair value has been
determined using the market price of the related securities at June 30, 1999.
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1999
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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/Edward J. Suchma
______________________________
EDWARD J. SUCHMA
Chief Financial Officer (As duly authorized representative
and as Principal Financial and Accounting Officer)
A.B. DICK COMPANY
By: /s/Kenneth J. Giacomino
______________________________
KENNETH J. GIACOMINO
Chief Financial Officer (As duly authorized representative
and as Principal Financial and Accounting Officer)
CURTIS INDUSTRIES, INC.
By: /s/James Waters
_______________________________
JAMES WATERS
Vice President of Finance (As duly authorized
representative and as Principal Financial and Accounting
Officer)
ITEK GRAPHIX CORP.
By: /s/Edward J. Suchma
_______________________________
EDWARD J. SUCHMA
President and Chief Executive Officer (As duly authorized
Officer)
Date: August 16, 1999
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