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 September 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 October 31, 1999, there were 1,000 shares of the registrant's Class A
common stock outstanding.
As of October 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
September 30, 1999 and December 31, 1998...................................2
Condensed Consolidated Statements of Operations
Three and Nine Months ended September 30, 1999 and 1998....................3
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 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)
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
Assets:
Current Assets:
Cash and cash equivalents $ 9,523 $ 7,462
Short-term investments 17,637 21,534
Accounts receivable, net 38,509 40,579
Inventories 48,409 48,094
Other 2,212 2,458
--------- ---------
Total current assets 116,290 120,127
Property, plant and equipment, less
accumulated depreciation 20,448 18,700
Goodwill 30,986 31,861
Other assets 4,339 4,721
--------- ---------
$ 172,063 $ 175,409
========= =========
Liabilities and Stockholder's Equity:
Current liabilities:
Accounts payable $ 20,595 $ 23,471
Accrued compensation 7,063 8,302
Accrued interest 5,534 2,767
Accrued other 12,362 13,595
Deferred service revenue 6,742 6,502
Due to GEC 825 1,724
Current portion of long-term debt 1,044 997
--------- ---------
Total current liabilities 54,165 57,358
Senior Notes 115,000 115,000
Long-term debt, less current portion 11,158 1,886
Retirement obligations 3,701 3,641
Other long-term liabilities 2,378 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) (13,546) (4,279)
Accumulated other comprehensive loss (841) (888)
--------- ---------
Total stockholder's equity (deficit) (14,339) (5,119)
--------- ---------
$ 172,063 $ 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 Nine Months Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
(Unaudited) (Unaudited)
Net revenue $ 59,335 $ 65,565 $ 188,149 $ 198,642
Cost of revenue 36,943 39,957 118,664 119,987
--------- --------- --------- ---------
Gross profit 22,392 25,608 69,485 78,655
COSTS AND EXPENSES
Sales and marketing expenses 10,462 10,919 32,062 33,099
General and administrative expenses 9,430 8,622 28,802 28,530
Research and development 808 740 2,559 2,291
Depreciation and amortization 1,999 1,421 5,272 4,036
Management fee 68 248 260 1,169
Restructure, relocation and severance costs 880 931 1,633 1,840
--------- --------- --------- ---------
23,647 22,881 70,588 70,965
--------- --------- --------- ---------
Operating income (loss) (1,255) 2,727 (1,103) 7,690
Interest expense, net (2,623) (2,472) (8,240) (7,186)
Other income (expense) 57 (55) 105 (218)
--------- --------- --------- ---------
Income (loss) before foreign tax and
extraordinary item (3,821) 200 (9,238) 286
Foreign tax expense (benefit) (30) 86 29 526
--------- --------- --------- ---------
Income (loss) before extraordinary item (3,791) 114 (9,267) (240)
Extraordinary item - - - 1,280
--------- --------- --------- ---------
Net Income (loss) $ (3,791) $ 114 $ (9,267) $ (1,520)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
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6
Paragon Corporate Holdings Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited)
Operating activities:
Net loss $ (9,267) $ (1,520)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Extraordinary item - 1,280
Provision for depreciation and amortization 5,272 4,036
Gain on sale of equipment - (845)
Changes in operating assets and liabilities (368) 345
--------- ---------
Net cash provided by (used in) operating activities (4,363) 3,296
Investing activities:
Purchases of property, plant and equipment (4,563) (6,255)
Proceeds from sale of equipment - 858
Payments of acquisition liabilities (224) (2,525)
Decrease (increase) in short-term investments 3,897 (23,330)
Acquisition of business - (1,095)
--------- ---------
Net cash used in investing activities (890) (32,347)
Financing activities:
Decrease in amounts due to GEC and affiliates (899) (141)
Decrease in long-term borrowings (781) (40,614)
Proceeds from bond offering - 115,000
Payment of bond issue costs - (5,192)
Payment on revolving credit lines - (26,084)
Borrowings on revolving credit lines 8,947 -
Dividend distribution - (10,000)
--------- ---------
Net cash provided by financing activities 7,267 32,969
Effect of exchange rate changes on cash 47 (158)
--------- ---------
Increase (decrease) in cash and cash equivalents 2,061 3,760
Cash and cash equivalents at beginning of period 7,462 3,283
--------- ---------
Cash and cash equivalents at end of period $ 9,523 $ 7,043
========= =========
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 nine month periods ended
September 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 INCOME (LOSS)
The components of comprehensive income (loss) for the three and nine month
periods ended September 30, 1999 and 1998 are as follows:
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
------- ------- ------- -------
Net Income (loss) $(3,791) $ 114 $(9,267) $(1,520)
Foreign currency translation adjustment 308 (69) 47 (158)
------- ------- ------- -------
Comprehensive Income (loss) $(3,483) $ 45 $(9,220) $(1,678)
======= ======= ======= =======
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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 September 30, 1999 by $74,750. The fair value has been
determined using the market price of the related securities at September 30,
1999.
F. INVENTORIES
Domestic inventories, which represent approximately 78% 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:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials and work in process $ 6,414 $ 6,768
Finished goods 42,503 41,638
LIFO reserve (508) (312)
------- -------
$48,409 $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 Nine months ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Net revenues:
Printing equipment and supplies $ 38,064 $ 44,599 $ 125,318 $ 137,082
Automotive and industrial supplies 21,271 20,966 62,831 61,560
--------- --------- --------- ---------
Total net revenue $ 59,335 $ 65,565 $ 188,149 $ 198,642
========= ========= ========= =========
Depreciation and amortization:
Printing equipment and supplies $ 867 $ 414 $ 1,922 $ 1,179
Automotive and industrial supplies 1,132 1,007 3,350 2,857
--------- --------- --------- ---------
Total depreciation and amortization $ 1,999 $ 1,421 $ 5,272 $ 4,036
========= ========= ========= =========
Operating income (loss):
Printing equipment and supplies $ (2,255) $ 1,553 $ (3,723) $ 5,606
Automotive and industrial supplies 1,192 1,314 3,101 2,372
Corporate (192) (140) (481) (288)
--------- --------- --------- ---------
(1,255) 2,727 (1,103) 7,690
Interest expense, net (2,623) (2,472) (8,240) (7,186)
Other income (expense) 57 (55) 105 (218)
--------- --------- --------- ---------
Income (loss) before taxes $ (3,821) $ 200 $ (9,238) $ 286
========= ========= ========= =========
I. ACQUISITION & COMMITMENTS
On September 29, 1999, the Company entered into an agreement to purchase all the
outstanding shares of Multigraphics, Inc. Under the terms of the agreement,
Paragon will acquire Multigraphics for $1.25 in cash per share of common stock.
The transaction will be accounted for as a purchase and is expected to close
during the first quarter of 2000. The transaction is subject to stockholder
approval, expiration of the Hart-Scott-Rodino antitrust review period, and other
customary conditions. There are no assurances that the merger agreement will
result in a transaction.
On September 30, 1999, the Company committed $2.0 million to Multigraphics, Inc.
pursuant to a promissory note agreement executed by Multigraphics, Inc.
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10
J. 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 September 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
(SEPTEMBER 30, 1999):
Current assets:
Cash and cash equivalents $ 46 $ 7,532 $ 1,945 $ - $ 9,523
Short-term investments 17,637 - - - 17,637
Accounts receivable, net - 28,306 10,203 - 38,509
Inventories - 37,871 10,732 (194) 48,409
Other 428 1,153 631 - 2,212
--------- --------- --------- --------- ---------
Total current assets 18,111 74,862 23,511 (194) 116,290
Property, plant and
equipment, net 5 19,378 1,065 - 20,448
Goodwill - 30,928 58 - 30,986
Investment in subsidiary 64,284 13,803 - (78,087) -
Other assets 4,314 19 6 - 4,339
Intercompany 28,472 - - (28,472) -
--------- --------- --------- --------- ---------
$ 115,186 $ 138,990 $ 24,640 $(106,753) $ 172,063
========= ========= ========= ========= =========
Current liabilities:
Accounts payable $ - $ 18,064 $ 2,531 $ - $ 20,595
Accrued expenses 5,578 16,264 3,120 (3) 24,959
Deferred service revenue - 5,429 1,313 - 6,742
Due to GEC - 825 - - 825
Intercompany - 24,123 5,384 (29,507) -
Current portion of long- -
term debt - 993 51 - 1,044
--------- --------- --------- --------- ---------
Total current liabilities 5,578 65,698 12,399 (29,510) 54,165
Senior Notes 115,000 - - - 115,000
Long-term debt, less
current portion 8,947 2,062 149 - 11,158
Retirement obligations - 3,694 7 - 3,701
Other long-term liabilities - 2,378 - - 2,378
Stockholder's equity (deficit) (14,339) 65,158 12,085 (77,243) (14,339)
--------- --------- --------- --------- ---------
$ 115,186 $ 138,990 $ 24,640 $(106,753) $ 172,063
========= ========= ========= ========= =========
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11
J. 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
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of income for the three months ended
September 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 SEPTEMBER 30, 1999):
Net revenue $ - $ 47,285 $ 12,154 $ (104) $ 59,335
Cost of revenue - 28,932 8,100 (89) 36,943
-------- -------- -------- -------- --------
Gross profit - 18,353 4,054 (15) 22,392
Total operating expenses 192 18,304 5,151 - 23,647
-------- -------- -------- -------- --------
Operating income (loss) (192) 49 (1,097) (15) (1,255)
Interest income (expense) (2,277) (362) 16 - (2,623)
Other income (expense) - 109 (52) - 57
-------- -------- -------- -------- --------
Income (loss) before foreign tax (2,469) (204) (1,133) (15) (3,821)
Foreign tax expense (benefit) - 14 (44) - (30)
-------- -------- -------- -------- --------
Net income (loss) $ (2,469) $ (218) $ (1,089) $ (15) $ (3,791)
======== ======== ======== ======== ========
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
INCOME STATEMENT DATA:
(THREE MONTHS ENDED SEPTEMBER 30, 1998):
Net revenue $ - $ 51,530 $ 14,140 $ (105) $ 65,565
Cost of revenue - 30,565 9,480 (88) 39,957
-------- -------- -------- -------- --------
Gross profit - 20,965 4,660 (17) 25,608
Total operating expenses 140 18,352 4,389 - 22,881
-------- -------- -------- -------- --------
Operating income (loss) (140) 2,613 271 (17) 2,727
Interest income (expense) (2,282) (213) 23 - (2,472)
Other income (expense) - 125 (180) - (55)
-------- -------- -------- -------- --------
Income (loss) before foreign tax (2,422) 2,525 114 (17) 200
Foreign tax expense (benefit) - - 86 - 86
-------- -------- -------- -------- --------
Net income (loss) $ (2,422) $ 2,525 $ 28 $ (17) $ 114
======== ======== ======== ======== ========
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13
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of income for the nine months ended
September 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:
(NINE MONTHS ENDED SEPTEMBER 30, 1999):
Net revenue $ - $ 147,992 $ 40,419 $ (262) $ 188,149
Cost of revenue - 91,471 27,465 (272) 118,664
--------- --------- --------- --------- ---------
Gross profit - 56,521 12,954 10 69,485
Total operating expenses 481 55,605 14,502 - 70,588
--------- --------- --------- --------- ---------
Operating income (loss) (481) 916 (1,548) 10 (1,103)
Interest income (expense) (7,207) (1,090) 57 - (8,240)
Other income (expense) - 39 66 - 105
--------- --------- --------- --------- ---------
Income (loss) before foreign tax (7,688) (135) (1,425) 10 (9,238)
Foreign tax expense (benefit) - 37 (8) - 29
--------- --------- --------- --------- ---------
Net income (loss) $ (7,688) $ (172) $ (1,417) $ 10 $ (9,267)
========= ========= ========= ========= =========
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
INCOME STATEMENT DATA:
(NINE MONTHS ENDED SEPTEMBER 30, 1998):
Net revenue $ - $ 154,401 $ 44,500 $ (259) $ 198,642
Cost of revenue - 90,723 29,528 (264) 119,987
--------- --------- --------- --------- ---------
Gross profit - 63,678 14,972 5 78,655
Total operating expenses 288 57,051 13,626 - 70,965
--------- --------- --------- --------- ---------
Operating income (loss) (288) 6,627 1,346 5 7,690
Interest income (expense) (5,477) (1,834) 125 - (7,186)
Other income (expense) - 16 (234) - (218)
--------- --------- --------- --------- ---------
Income (loss) before foreign tax
and extraordinary item (5,765) 4,809 1,237 5 286
Foreign tax expense (benefit) - - 526 - 526
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item (5,765) 4,809 711 5 (240)
Extraordinary item 170 1,110 - - 1,280
--------- --------- --------- --------- ---------
Net income (loss) $ (5,935) $ 3,699 $ 711 $ 5 $ (1,520)
========= ========= ========= ========= =========
11
14
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of cash flows for the nine months ended
September 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:
(NINE MONTHS ENDED SEPTEMBER 30, 1999):
Net cash provided by (used in)
operating activities $(4,549) $ 1,304 $(1,118) $ - $(4,363)
Investing activities:
Purchases of property, plant and
equipment (5) (4,072) (486) - (4,563)
Proceeds from sale of equipment - - - - -
Payment of acquisition liabilities - - - - -
Increase in short-term investments 3,897 - - - 3,897
Acquisition of businesses - (224) - - (224)
------- ------- ------- --------- -------
Net cash provided by (used in)
investing activities 3,892 (4,296) (486) - (890)
Financing activities:
Decrease in amounts due to GEC
and affiliates - (899) - - (899)
Increase (decrease) in long-term
borrowings - (981) 200 - (781)
Borrowings on revolving credit lines 8,947 - - - 8,947
Intercompany (8,272) 8,385 (113) - -
------- ------- ------- --------- -------
Net cash provided by (used in)
financing activities 675 6,505 87 - 7,267
Effect of exchange rate changes on cash - (155) 202 - 47
------- ------- ------- --------- -------
Increase (decrease) in cash and cash
equivalents 18 3,358 (1,315) - 2,061
Cash and cash equivalents at beginning
of period 28 4,174 3,260 - 7,462
------- ------- ------- --------- -------
Cash and cash equivalents at end of
period $ 46 $ 7,532 $ 1,945 $ - $ 9,523
======= ======= ======= ========= =======
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15
J. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ ---------
CASH FLOW DATA:
(NINE MONTHS ENDED SEPTEMBER 30, 1998):
Net cash provided by (used in)
operating activities $ (3,630) $ 5,582 $ 1,344 $ - $ 3,296
Investing activities:
Purchases of property, plant and
equipment - (6,186) (69) - (6,255)
Proceeds from sale of equipment - 858 858
Payment of acquisition liabilities - (2,525) - - (2,525)
Increase in short-term investments (23,330) - - - (23,330)
Acquisition of business - (233) (862) - (1,095)
--------- --------- --------- -------- ---------
Net cash provided by (used in)
investing activities (23,330) (8,086) (931) - (32,347)
Financing activities:
Decrease in amounts due to GEC
and affiliates - (141) - - (141)
Decrease in long-term borrowings (20,014) (20,600) - - (40,614)
Proceeds from bond offering 115,000 - - - 115,000
Payment of bond issue costs (5,192) - - - (5,192)
Payment on revolving credit lines - (26,084) - - (26,084)
Intercompany (52,808) 52,812 (4) - -
Dividend distribution (10,000) - - - (10,000)
--------- --------- --------- -------- ---------
Net cash provided by (used in)
financing activities 26,986 5,987 (4) - 32,969
Effect of exchange rate changes on cash - 82 (240) - (158)
--------- --------- --------- -------- ---------
Increase (decrease) in cash and
cash equivalents 26 3,565 169 - 3,760
Cash and cash equivalents at beginning
of period 28 1,173 2,082 - 3,283
--------- --------- --------- -------- ---------
Cash and cash equivalents at end of
period $ 54 $ 4,738 $ 2,251 $ - $ 7,043
========= ========= ========= ======== =========
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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 printing markets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998:
NET REVENUE
For the three months ended September 30, 1999, net revenue decreased $6.2
million or 9.5% to $59.3 million from $65.5 million for the three months ended
September 30, 1998. Automotive and industrial sales increased $0.3 million or
1.4 % over the prior year, to $21.3 million, primarily the result of an increase
in U.S. National Account sales of $0.4 million. Printing equipment sales were
down $4.8 million or 29.2% over the prior year to $11.8 million. The decrease
was attributable to weak demand in domestic and most European markets and the
discontinuance of certain product lines, as well as an expired distribution
agreement in Canada. Printing supplies sales were down $1.1 million or 6.3% to
$16.6 million due to an expired distribution agreement in Canada, a decline in
the supply stream on previously discontinued domestic equipment and competitive
pricing pressures on optical equipment supplies. The decrease in supplies sales
was partially offset by increases in digital equipment supplies. Repair parts
and service revenues decreased $0.6 million or 5.8% primarily due to the
discontinuance of A.B.Dick's line of distributed copier equipment and digital
duplicators.
GROSS PROFIT
Gross profit decreased $3.2 million or 12.6% to $22.4 million for the three
months ended September 30, 1999 from $25.6 million for the three months ended
September 30, 1998. Gross profit as a percent of sales was 37.7% during the
third quarter 1999 compared to 39.1% for the same period last year. Curtis'
gross profit was $12.1 million for the third quarter of 1999 and 1998. Curtis
gross profit as a percent of sales decreasing by 1.1% primarily the result of
product and channel mix. A.B.Dick's gross profit decreased by $3.2 million due
to lower sales. Gross profit as a percent of sales decreased 3.2% to 27.0%. The
decrease in gross profit percent results from increased manufacturing variances
in 1999 due to reduced volume and lower margins in service due to decreased
installations and service contracts on discontinued equipment.
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COSTS AND EXPENSES
Costs and expenses increased by $0.8 million to $23.6 million for the three
months ended September 30, 1999 from $22.8 million for the three months ended
September 30, 1998. The increase is attributable to higher depreciation and
amortization, general and administrative and research and development costs,
offset by the continuation of cost reduction initiatives implemented in 1998.
Additionally, costs and expenses for 1999 include $0.8 million in restructuring
charges for A.B.Dick's Belgium subsidiary and $0.1 million in severance costs
for U.S. operations. Expenses for 1998 reflect $0.9 million for relocation and
severance expenses related to A.B Dick.
OPERATING INCOME
Operating income decreased $4.0 million from $2.7 million for the three months
ended September 30, 1998 to a loss of $1.3 million for the three months ended
September 30, 1999. The 1999 amount includes operating income from Curtis of
$1.2 million. Operating income for A.B.Dick decreased $3.8 million from $1.5
million for the three months ended September 30, 1998, to a loss of $2.3 million
for the three months ended September 30, 1999 as a result of the factors
discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998:
NET REVENUE
For the nine months ended September 30, 1999, net revenue decreased $10.5
million or 5.3% to $188.1 million from $198.6 million for the nine months ended
September 30, 1998. Automotive and industrial sales increased $1.3 million or
2.1% over the prior year to $62.8 million, primarily the result of an increase
in U.S. National Account sales of $1.0 million or 10.3%. Printing equipment
sales were down $5.7 million or 11.5% over the prior year to $44.0 million. The
decrease was attributable to continued weak demand in domestic and certain
European and Asian markets as well as an expired distribution agreement in
Canada, partially offset by increases in Holland. Printing supplies sales were
down $3.8 million or 6.8% to $52.1 million due to an expired distribution
agreement in Canada, a decline in the supply stream on previously discontinued
domestic equipment and competitive pricing pressures on optical equipment
supplies, partially offset by increases in digital equipment supplies. Repair
parts and service revenues decreased $2.3 million or 7.2% primarily due to the
discontinuance of A.B.Dick's line of distributed copier equipment and digital
duplicators.
GROSS PROFIT
Gross profit decreased $9.2 million or 11.6% for the nine months ended September
30, 1999 as compared to the same period a year earlier. Gross profit as a
percent of sales was 36.9% for the nine months ended September 30, 1999 compared
to 39.6% for the same period last year. Curtis' gross profit increased $0.5
million or 1.4% compared to the same period last year. A.B.Dick's gross profit
decreased by $9.7 million and gross profit as a percent of sales decreased 4.8%
to 26.8%. The gross profit decrease is primarily attributable to lower sales.
The decrease in gross profit percent results mainly from lower cost in 1998 due
to yen denominated purchases, increased 1999 variances on manufactured equipment
due to reduced volume and lower margins in service due to decreased
installations and service contracts on discontinued equipment.
COSTS AND EXPENSES
Costs and expenses decreased by $0.4 million to $70.6 million for the nine
months ended September 30, 1999 from $71.0 million for the same period a year
earlier. The decrease is attributable to lower management fee expense of $0.9
million, and continuation of cost reduction
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initiatives implemented during 1998 of $0.7 million, offset by increased
depreciation and amortization of $1.2 million. Additionally, costs and expenses
for 1999 include $0.8 million in restructuring charges for A.B.Dick's Belgium
subsidiary, and $0.8 million in relocation and severance costs relating to U.S.
operations. Expenses for 1998 reflect $1.8 million for relocation and severance
costs related to A.B.Dick.
OPERATING INCOME
Operating income decreased $8.8 million from $7.7 million for the nine months
ended September 30, 1998 to a loss of $1.1 million for the nine months ended
September 30, 1999. The 1999 amount includes operating income from Curtis of
$3.1 million and operating loss from A.B.Dick of $3.7 million. The primary
factors contributing to the decline in operating income 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.B.Dick expects to complete the Year 2000 activities within a timeframe that
will enable its material information systems to function without significant
disruption in Year 2000. 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. 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 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
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uninterrupted supply of components and services. The Company believes that based
on its year-to-date review, no significant disruption to operations will occur.
Continued monitoring of our supplier base will remain ongoing through the end of
the year. The Company's contingency plans include management of inventory safety
stocks, identification of alternative supplies or service providers where
applicable, and insourcing of certain components if required.
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 provided by (used in) operating activities were $(4.4) million and $3.3
million for the nine months ended September 30, 1999 and 1998, respectively. The
net cash used in operating activities in 1999 was principally the result of net
losses incurred of $(9.3) million. The net loss in 1999 is due to interest costs
resulting from the issuance of $115.0 million of senior notes on April 1, 1998
and operating losses for A.B.Dick. The net cash provided by operating activities
in 1998 resulted principally from a net loss from operations offset by
provisions for depreciation and amortization expenses.
The net cash used in investing activities was $0.9 million and $32.3 million for
the nine months ended September 30, 1999 and 1998, respectively. The 1999 amount
includes a decrease in short-term investments of $3.9 million and property,
plant, and equipment purchases of $4.6 million. The primary components of the
1998 investing activities were an increase in short-term investments of $23.3
million, property, plant and equipment purchases of $6.3 million, payments on
acquisition related liabilities of $2.5 million, and acquisition of business of
$1.1 million.
Net cash provided by financing activities was $7.3 million and $33.0 million for
the nine months ended September 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 $8.9 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 $40.6 million and reduction
of revolving lines of credit
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by $26.1 million. The bond issuance costs paid were $5.2 million and the Company
made a dividend distribution to its sole stockholder in the amount of $10.0
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 September 30, 1999 the Company had cash, cash
equivalents and short-term investments of $27.2 million and unused credit
facilities of $17.6 million available for its use. At September 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 September 30, 1999 by $74,750. The fair value has been
determined using the market price of the related securities at September 30,
1999.
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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) No reports on Form 8-K were filed during the quarter ended
September 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.
Edward J. Suchma
By: ______________________________
EDWARD J. SUCHMA
Chief Financial Officer (As duly authorized representative
and as Principal Financial and Accounting Officer)
A.B.DICK COMPANY
Kenneth J. Giacomino
By: ______________________________
KENNETH J. GIACOMINO
Chief Financial Officer (As duly authorized representative
and as Principal Financial and Accounting Officer)
CURTIS INDUSTRIES, INC.
Idelle K. Wolf
By: _______________________________
IDELLE K. WOLF
Chief Operating Officer (As duly authorized representative
and as Principal Financial and Accounting Officer)
ITEK GRAPHIX CORP.
Edward J. Suchma
By: _______________________________
EDWARD J. SUCHMA
President and Chief Executive Officer (As duly authorized
Officer)
November 15, 1999
Date:___________________________________
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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.
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 Stock Purchase Agreement, dated as of December 19, 1996, between
Paragon Corporate Holdings Inc. and GEC Incorporated.*
10.3 Management Agreement, dated as of April 1, 1998, between Paragon
Corporate Holdings Inc. and NESCO, Inc.*
10.4 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.*
10.5 Agreement dated November 10, 1995 between A.B.Dick Company and Gerald J
McConnell.*
10.6 Severance and Non-Competition Agreement dated February 28, 1996 between
Curtis Industries, Inc. and A. Keith Drewett.*
10.7 Severance and Non-Competition Agreement dated February 28, 1996 between
Curtis Industries, Inc. and Maurice P. Andrien, Jr. as amended April
22, 1998.*
10.8 Agreement dated July 2, 1998 among Curtis Industries, Inc., Paragon
Holdings Inc. and A. Keith Drewett.**
27 Financial Data Schedule
* Incorporated by reference from Form S-4 Registration Number 333-51569 filed
under the Securities Act of 1933, as amended
** 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