<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
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
7400 Caldwell Avenue 7400 Caldwell Avenue
Niles, Illinois 60714 Niles, Illinois 60714
(847) 779-2500 (847) 779-1900
Curtis Industries, Inc.
6140 Parkland Boulevard
Mayfield Heights, Ohio 44124
(440) 446-9700
Itek Graphix Corp. Curtis Sub, Inc.
7400 Caldwell Avenue 6140 Parkland Boulevard
Niles, Illinois 60714 Mayfield Heights, Ohio 44124
(847) 779-1900 (440) 446-9700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 2000 was $-0-.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
As of March 15, 2000, there were 1,000 shares of the registrant's Class A common
stock outstanding.
As of March 15, 2000, there were 19,000 shares of the registrant's Class B
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PARAGON CORPORATE HOLDINGS INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item Page
Number Number
------ ------
PART I
1 Business 1
2 Properties 3
3 Legal Proceedings 3
4 Submission of Matters to a Vote of Security Holders 4
PART II
5 Market for Registrant's Common Stock and 4
Related Stockholder Matters
6 Selected Financial Data 4
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
7a Quantitative and Qualitative Disclosures 11
about Market Risk
8 Financial Statements and Supplemental Data 12
9 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 36
PART III
10 Directors and Executive Officers of the Registrant 37
11 Executive Compensation 38
12 Security Ownership of Certain Beneficial Owners 40
and Management
13 Certain Relationships and Related Transactions 40
PART IV
14 Exhibits, Financial Statement Schedules and Reports 42
on Form 8-K
15 Signatures 43
16 Index of Exhibits 44
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Paragon Corporate Holdings Inc. (hereinafter referred to as the "Company") is a
holding company organized in September 1996 under the Delaware General
Corporation law. The Company conducts all of its business through its
subsidiaries.
The Company commenced operations on January 17, 1997 through the acquisition on
that date of the common stock of A.B.Dick Company and its wholly owned
subsidiaries (collectively "A.B.Dick"), from General Electric Company Ltd.
("GEC"). A.B.Dick is engaged in the manufacture, sale, distribution and service
of offset presses, cameras and plate makers and related supplies for the graphic
arts and printing industry. On December 5, 1997, the Company acquired all of the
common stock of Curtis Industries, Inc. ("Curtis"), a national distributor of
products to the automotive and industrial markets.
The Company's printing equipment and supplies business segment is a leading
manufacturer and distributor 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.
ACQUISITIONS
The Company's acquisition strategy is to conclude acquisitions that will add
complementary product lines, expand its technological capabilities, broaden its
geographic reach or otherwise support its business strategy. There can be no
assurance that the Company will be successful in consummating any acquisition on
terms favorable to the Company, if at all. On September 29, 1999, the company
entered into an agreement to acquire all the outstanding shares of
Multigraphics, Inc. ("Multigraphics"), a provider of equipment, supplies and
service to the graphic arts industry. The transaction was completed on January
27, 2000 and will be accounted for as a purchase. During 1998, the Company
consummated two small transactions, which added complementary pre-press
products and supplies and strengthened the company's foreign distribution of
its printing equipment and supplies business.
CUSTOMERS
The Company's printing equipment and supplies products are marketed to
commercial, franchise and independent print shops, in-plant print shops and
governmental and educational institutions throughout the world. Customers for
printing supplies include franchisees of national quick print chains,
independent quick print shops and small commercial shops and check printers. The
Company's automotive and industrial supplies distribution products are marketed
to fleet operators, independent auto dealerships, selected retail outlets and
industrial accounts throughout the world. The Company's printing products are
sold to more than 12,000 customers and its automotive and industrial
distribution products to more than 55,000 customers, with no one customer
accounting
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for more than 1.1% of the Company's 1999 net revenues. The Company believes this
diversity in its client base minimizes its reliance on any one customer.
COMPETITION
The Company's printing equipment and supplies business competes, with respect to
its manufactured products, against a number of other manufacturers of pre-press
equipment and offset presses and with re-sellers of used presses, primarily on
the basis of quality and price. Some of these competitors have significantly
greater financial and other resources than the Company. The Company's pre-press
and offset press equipment also competes, to a limited extent, with alternate
technologies such as color laser printers, copiers and other duplicating
equipment. In addition, in the markets for supplies, service and parts, the
Company competes against a wide variety of national, regional and local
distributors of graphic arts and printing supplies and related service,
primarily on the basis of availability and service.
The Company's distribution business competes with OEMs and other national
distributors, as well as a large number of regional and local distributors.
Because of the similarity of product types, competitive advantage among national
distributors is determined primarily by sales representative performance and
reliability, product presentation, product quality, order fill rate, breadth of
product line, speed of delivery and, to a lesser extent, price. Regional and
local distributors also compete with the Company on the basis of these factors,
but price and delivery are more important factors at this level.
SUPPLIERS
All materials used by the Company's printing equipment and supplies business to
manufacture products are readily available in the marketplace, and the Company
is not dependent upon any single supplier for any materials essential to the
manufacture of any of these products. The Company has been able to obtain an
adequate supply of raw materials and no shortage of raw materials is currently
anticipated.
The Company's distribution business distributes products from a large and
diverse supply base. In 1999, based on the Company's net revenues, no single
supplier accounted for more than 8.3% of the Company's supply of products.
BACKLOG
Backlog at December 31, 1999 was $4.6 million, an increase of $1.3 million, or
40.5% from $3.3 million at December 31, 1998. The increase is primarily due to
the timing of shipment of certain prepress components and presses acquired from
third party manufacturers. The Company expects the majority of the backlog to
ship during 2000. Since a majority of the orders in the automotive and
industrial supplies distribution business are shipped within 24 hours of receipt
of the order, no significant backlog exists for these products at December 31,
1999 or 1998.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,800 employees,
approximately 1,350 of whom were located in the United States. The Company
believes its relations with its employees are good. The Company's employees are
not subject to collective bargaining agreements.
ENVIRONMENTAL AND HEALTH SAFETY MATTERS
The Company is subject to a variety of environmental standards imposed by
federal, state, local and foreign environmental laws and regulations. The
Company also is subject to the federal Occupational Health and Safety Act and
similar foreign and state laws. The Company periodically reviews its procedures
and policies for compliance with environmental and health and safety laws and
regulations and believes that it is in substantial compliance with all such
material laws and regulations applicable to its operations. Historically, the
costs of
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compliance with environmental, health and safety requirements have not been
material to the results of operations or the financial position of the
Company.
ITEM 2. PROPERTIES.
As of December 31, 1999 the Company conducts its operations through the
following primary facilities:
APPROX. PRINCIPAL OWNED/
LOCATION SQ.FOOTAGE FUNCTION LEASED
UNITED STATES:
Niles, Illinois 54,000 Headquarters; Administration Leased(1)
Niles, Illinois 156,000 Manufacturing; warehouse Leased(2)
Des Plaines, Illinois 87,000 Warehouse Leased(3)
Rochester, New York 194,000 Manufacturing Leased(4)
Shelbyville, Kentucky 100,000 Warehouse; packaging Owned
Atlanta, Georgia 60,000 Warehouse Leased(5)
Sparks, Nevada 50,000 Warehouse Owned
Mayfield Heights, Ohio 34,000 Administrative Leased(6)
CANADA:
Rexdale, Ontario 67,000 Administration; warehouse Owned
Mississauga, Ontario 38,000 Administration; warehouse Leased(7)
UNITED KINGDOM:
Brentford, 26,000 Administration; warehouse Leased(8)
Andover 15,000 Administration; warehouse Leased(9)
BELGIUM:
Brussels 11,000 Administration; warehouse Leased(10)
THE NETHERLANDS:
Maarssen 25,000 Administration; warehouse Leased(11)
- - -----------------
(1) Expires in July, 2008.
(2) Expires in July, 2003.
(3) Expires in August, 2003.
(4) Expires in April, 2007.
(5) Expires in February, 2003.
(6) Expires in November, 2006.
(7) Expires in August, 2001.
(8) Expires in September, 2003.
(9) Expires in November, 2012.
(10) Expires in December, 2004.
(11) Expires in March, 2003.
The Company believes that all of its property and equipment is in a condition
appropriate for its operations and that it has sufficient capacity to meet its
current operational needs.
ITEM 3. LEGAL PROCEEDINGS.
On April 30, 1997, four former and current distributors of A.B.Dick filed a suit
against A.B.Dick, the Predecessor Company, alleging, among other things,
breach of distributorship contracts and unfair and deceptive trade practices.
The plaintiffs allege that the former parent of A.B.Dick decided to exit the
U.S. market for printing equipment and related supplies and services by the
sale or closing of A.B.Dick and as part of such plan pursued strategies
designed to eliminate or significantly weaken A.B.Dick distributors engaged
under distributorship contracts during the four year period ended April 30,
1997. The Company intends to vigorously defend this case although there can be
no assurance as to the eventual outcome.
GEC Incorporated has agreed to fully indemnify the Company against all costs and
liabilities in connection with any litigation that is pending or may be brought
against A.B.Dick and arises out of events occurring prior to the closing of the
A.B.Dick acquisition, including the case mentioned in the previous paragraph,
for all amounts in excess of $250,000 up to an aggregate liability of
$15,000,000.
In addition, both A.B.Dick and Curtis are parties to routine litigation
incidental to their businesses, some of which is covered by insurance. The
Company does not believe that any such pending litigation will have a material
adverse effect upon its results of operations or financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1999, NES Group, Inc., the Company's sole
shareholder, by written consent, re-elected all members of the Company's Board
of Directors.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company is a direct wholly-owned subsidiary of NES Group, Inc. There is no
established public trading market for the Company's common stock. As of March
15, 2000, the Company had one shareholder. The Company paid no dividends in
1999, and a $10.0 million cash dividend in 1998. See Note G, "Financing
Arrangements," to the Consolidated Financial Statements, Part II, Item 8, for
limitations on dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents (i) consolidated financial data of the Company for
the years ended December 31, 1999 and 1998 and for the period from January 17,
1997 through December 31, 1997, and (ii) consolidated financial data of A.B.Dick
(Predecessor Company) for the period from April 1, 1996 through January 16,
1997 and for the year ended March 31, 1996, which have been derived from the
audited consolidated financial statements of A.B.Dick. The Company believes
that the financial data of A.B.Dick for the periods prior to January 17, 1997,
the date on which A.B.Dick was acquired by the Company (the "Acquisition
Date"), is not comparable in certain respects with the financial data of
A.B.Dick subsequent to such date. Prior to the Acquisition Date, A.B.Dick
maintained a defined benefit pension plan for its manufacturing employees.
This plan was overfunded as of March 31, 1995 and, accordingly, pension credits
of $5.1 million were recognized for the fiscal year ended March 31, 1996 and
$7.0 million were recognized for the period from April 1, 1996 through
January 16, 1997. In connection with the sale of A.B.Dick on January 16, 1997,
GEC assumed all existing obligations under this plan. Prior to the Acquisition
Date, A.B.Dick also provided post-retirement health care benefits to certain
retirees. Net periodic post-retirement benefit costs of approximately $4.7
million for the fiscal year ended March 31, 1996 and approximately $3.5 million
for the period April 1, 1996 through January 16, 1997 were allocated to
A.B.Dick by GEC based upon actuarial valuations. In connection with the sale of
A.B.Dick on January 16, 1997, GEC assumed all existing obligations under the
post-retirement health care benefits plan. The information presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements as described elsewhere herein.
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<TABLE>
<CAPTION>
(Dollars in Thousands)
A.B.DICK
THE COMPANY (PREDECESSOR COMPANY)
----------------------------------------- ---------------------------
Fiscal Year Fiscal Year Jan. 17, 1997 April 1, 1996 Fiscal Year
Ended Ended Through Through Ended
Dec. 31, Dec. 31, Dec. 31, Jan. 16, March 31,
1999 1998 1997 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue $ 248,668 $ 268,624 $ 193,216 $ 157,414 $ 215,363
Gross profit 89,865 104,666 63,565 42,356 62,526
Acquisition, relocation and severance
costs (1) 1,633 2,705 1,400 -- --
Operating income (loss) (3,962) 9,983 10,999 (617) (6,034)
Interest expense 12,383 11,311 2,598 205 162
Net income (loss) (15,227) (1,883) 8,554 (1,106) (6,404)
OTHER DATA:
Cash provided by (used in) operating
activities (10,594) 1,509 15,085 7,481 8,523
Cash provided by (used in) investing
activities 9,328 (27,574) (28,684) (3,960) (5,528)
Cash provided by (used in) financing
activities 8,934 30,565 15,253 (26,479) (4,468)
Depreciation and amortization 7,270 5,496 1,481 7,053 8,922
Capital expenditures 6,542 9,979 1,860 3,960 5,528
Ratio of earnings to fixed charges (2) -- 1.0x 3.8x -- --
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY A.B.DICK
---------------------------------------------------- ---------------
(Predecessor
Company)
As of December 31, Jan. 17, As of March 31,
------------------------------------ ------- ---------------
1999 1998 1997 1997 1996
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $ 18,951 $ 28,996 $ 7,459 $ 8,280 $ 25,912
Total assets 160,656 175,409 138,075 58,041 116,561
Long-term debt, including current portion 118,347 117,883 70,616 8,016 2,007
Stockholder's equity (deficit) (20,189) (5,119) 7,131 48 77,138
</TABLE>
(1) For 1999, represents non-recurring charges related to A.B.Dick severance
and reorganization costs. For 1997 and 1998, represents non-recurring
charges related to compensation agreements with certain executives in
connection with the Curtis acquisition. In addition, in 1998, represents
costs incurred in connection with the relocation of A.B.Dick operations as
required by the A.B.Dick purchase agreement.
(2) Earnings consist of income before income taxes plus fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing
costs and one-third of the rent expense from operating leases, which
management believes is a reasonable approximation of an interest factor.
Earnings were inadequate to cover fixed charges in the fiscal year ended
December 31, 1999 and the period from April 1, 1996 through January 16,
1997 and the year ended March 31, 1996 by $15,391, $455, and $5,463,
respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The consolidated financial statements of the Company include the
operations of the acquired subsidiaries from their respective dates of
acquisition. A.B.Dick was acquired on January 17, 1997 and Curtis was acquired
on December 5, 1997. The 1997 statement of operations for the Company
represents the 49-week period from January 17, 1997 through
December 31, 1997.
The following table sets forth, on a comparative basis, certain income statement
data for the Company for the years ended December 31, 1999 and 1998 and the
period from January 17, 1997 through December 31, 1997. The information has been
derived from the audited consolidated financial statements of the Company .
<TABLE>
<CAPTION>
PARAGON CORPORATE HOLDINGS INC.
-------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED % OF YEAR ENDED % OF JAN. 17, 1997 % OF
DEC. 31, NET DEC. 31, NET THROUGH NET
1999 REVENUE 1998 REVENUE DEC. 31, 1997 REVENUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Printing equipment and supplies $165,158 $187,488 $186,315
Automotive and industrial supplies 83,510 81,136 6,901
-------- -------- --------
Net revenue 248,668 100.0% 268,624 100.0% 193,216 100.0%
Cost of revenue:
Printing equipment and supplies 123,225 129,904 126,817
Automotive and industrial supplies 35,578 34,054 2,834
-------- -------- --------
Cost of revenue 158,803 163,958 129,651
-------- -------- --------
Gross profit 89,865 36.1% 104,666 39.0% 63,565 32.9%
Sales and marketing expense 42,275 17.0% 44,383 16.5% 26,386 13.7%
General and administrative expense 38,785 15.6% 37,630 14.0% 17,603 9.1%
Research and development 3,631 1.5% 3,046 1.1% 3,755 1.9%
Depreciation and amortization 7,270 2.9% 5,496 2.1% 1,481 0.8%
Management fee 233 0.1% 1,423 0.5% 1,941 1.0%
Acquisition, relocation and
severance costs 1,633 0.6% 2,705 1.0% 1,400 0.7%
-------- -------- --------
Total expenses 93,827 37.7% 94,683 35.2% 52,566 27.2%
-------- -------- --------
Operating income (loss) $ (3,962) (1.6)% $ 9,983 3.8% $ 10,999 5.7%
======== ======== ========
</TABLE>
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YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998.
NET REVENUE.
Net revenue decreased $19.9 million or 7.4% from $268.6 in 1998 to $248.7
million in 1999. The decrease was principally due to lower printing equipment
and supplies sales which declined by $22.3 million from the prior year. Printing
equipment sales were down $11.1 million or 16.1% over the prior year to $57.9
million primarily due to weaker demand in domestic and most European markets as
well as an expired distribution agreement in Canada. Printing supplies sales
were down $7.3 million or 9.6% to $68.5 million in 1999 due to an expired
distribution agreement in Canada, a decline in the supply stream on previously
discontinued domestic equipment and lower optical equipment supplies sales,
partially offset by increases in digital equipment supplies sales. Service and
repair parts revenues decreased $3.9 million or 9.1% primarily due to the
discontinuance of A.B.Dick's line of distributed copier equipment and digital
duplicators. Automotive and industrial supplies revenue increased $2.4 million
or 2.9% over the prior year, to $83.5 million primarily as result of an increase
in U.S. National Account sales.
GROSS PROFIT.
Gross profit decreased $14.8 million or 14.1% to $89.9 million compared to
$104.7 million from the prior year. Gross profit as a percent of sales was 36.1%
in 1999 compared to 39.0% in 1998 primarily due to lower printing equipment and
supplies margin. A.B.Dick's gross profit decreased $15.6 million and gross
profit as a percent of sales decreased by 5.3 percentage points to 25.4%. The
decrease in gross profit percent resulted mainly from lower cost in 1998 due to
yen denominated purchases, increased costs in 1999 on manufactured equipment due
to reduced volume, and increased freight costs. Service margins were lower due
to decreased installations and service contracts on previously discontinued
equipment. Curtis' gross profit increased $0.9 million or 1.8% from last year
due to increased sales.
COSTS AND EXPENSES.
Costs and expenses decreased by $0.9 million to $93.8 million in 1999 from $94.7
million for 1998. Sales, marketing, general and administrative expense, and
management fees reductions totaling $2.1 million were offset by increases in
depreciation and amortization and research and development expense totaling $2.3
million. Acquisition, relocation and severance costs were $1.6 million in 1999
and consisted of $0.8 million of severance and pension costs associated with the
reorganization of A.B.Dick's Belgium subsidiary, and $0.8 million in relocation
and severance costs related to A.B.Dick. A majority of these costs were paid in
1999. In 1998, acquisitions, relocation and severance expenses were $2.7 million
related primarily to costs associated with relocation of the A.B.Dick facilities
and severance costs with certain executives.
OPERATING INCOME.
Operating income decreased $14.0 million from $10.0 million in 1998 to a loss of
$4.0 million in 1999. The 1999 amount includes operating income from Curtis of
$4.4 million and an operating loss from A.B.Dick of $7.7 million. The primary
factors contributing to the decline in operating income when compared to the
same period a year earlier are the decreases in revenues and gross profits,
partially offset by lower operating costs, for A.B.Dick.
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YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE PERIOD FROM JANUARY 17, 1997
THROUGH DECEMBER 31, 1997.
NET REVENUE.
Net revenue increased $75.4 million or 39.0% from $193.2 in 1997 to $268.6
million in 1998. The increase was principally due to the acquisition of Curtis,
which accounted for $81.1 million in sales for the year ended December 31, 1998
compared to $6.9 million in 1997. Printing equipment sales were up $4.4 million
or 6.8% over the prior year to $69.0 million primarily due to increases in the
domestic sales of press equipment. Supplies sales were down $2.1 million or 2.7%
to $75.8 million in 1998 compared to $77.9 million in 1997. The discontinuance
of certain domestic equipment lines and the introduction of a new plate product
by a competitor in the pre-press market were the principal reasons for the
revenue decline. Service and repair parts revenues decreased by $1.1 million
primarily due to the discontinuance of the Konica copier equipment line and a
trend among customers to switch from preventive service contracts to purchased
service calls.
GROSS PROFIT.
Gross profit was $104.7 million compared to $63.6 million from the prior year.
The increase of $41.1 million or 64.6% was principally due to the acquisition of
Curtis, which had a gross margin of $47.1 million in 1998 compared to $4.1
million in 1997. Gross profit margin percentage was 39.0% during 1998 compared
to 32.9% for the same period last year. The addition of the Curtis busines
accounted for the significant improvement in the gross margin as a percentage of
revenues. The A.B.Dick margins decreased by $1.9 million or 1.2% as a percent of
revenue primarily due to the change in the mix of sales of the various products
and services.
COSTS AND EXPENSES.
Costs and expenses increased by $42.1 million to $94.7 million in 1998 from
$52.6 million in 1997. The acquisition of Curtis contributed $39.4 million to
the increase in costs and expenses. A.B.Dick sales, marketing, general and
administrative expense increases were offset by reductions in research and
development and management fee. Acquisition and relocation expenses were $2.7
million during 1998 compared to $1.4 million in 1997. This increase was
primarily due to the costs associated with the relocation of the A.B.Dick
facilities during the year and non-recurring charges related to compensation
arrangements with certain executives.
OPERATING INCOME.
Operating income decreased $1.0 million or 9.1% from $11.0 million in 1997 to
$10.0 million in 1998. In 1998 the amount includes an increase in operating
income from Curtis of $4.2 million. The operating income generated in 1998 by
A.B.Dick decreased $2.1 million due to the relocation of its facilities and
approximately $2.7 million due to the change in the mix of product sales and
services compared to 1997. Corporate administrative expenses increased by $0.4
in 1998 compared to 1997.
EXTRAORDINARY ITEM.
An extraordinary expense of $1.3 million was recorded during the second quarter
of 1998 related to the write-off of deferred financing costs and fees associated
with the early extinguishment of certain of the Company's debt.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided (used) by operating activities was ($10.6) million, $1.5
million and $15.1 million for the years ended December 31, 1999, 1998 and the
period from January 17, 1997 through December 31, 1997, respectively. The
decrease in net cash from operating activities in 1999 was principally the
result of net losses incurred of $15.2 million. The net loss in 1999 is
primarily due to A.B.Dick operating losses and increased interest costs as a
result of the issuance of $115.0 million of senior notes on April 1, 1998. The
decrease in net cash from operating activities in 1998 as compared to 1997 was
principally the result of decreased net income. The decline in net income is
mainly due to the increased interest costs on the $115.0 million of senior
notes noted above. The net cash provided from operating activities
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in 1997 is primarily due to net income of $8.6 million and the reduction of
inventories of $6.0 million.
Net cash provided by (used in) investing activities was $9.3 million, ($27.6)
million and ($28.7) million for the years ended December 31, 1999, 1998 and the
period from January 17, 1997 through December 31, 1997, respectively. Net cash
provided by investing activities in 1999 includes liquidation of short-term
investments of $17.9 million primarily used for debt service, a $2.0 million
loan to Multigraphics, and to partially fund capital expenditures of $6.5
million. The net cash used in investing activities in 1998 includes increases
in short-term investments of $17.4 million, and property, plant and equipment
purchases of $10.0 million, approximately $5.8 million of which related to the
relocation of the A.B.Dick facilities. The primary components of net cash used
in investing activities in 1997 were $19.5 million for accounts receivable
related to the A.B.Dick acquisition; $1.9 million for property, plant, and
equipment purchases; $4.4 million for payment of acquisition-related
liabilities, and $4.9 million related to the acquisition of Curtis.
Net cash provided by financing activities was $8.9 million, $30.6 million and
$15.3 million for the years ended December 31, 1999, 1998 and the period from
January 17, 1997 through December 31, 1997, respectively. Net cash provided by
financing in 1999 includes an increase in the revolving lines of credit of $10.2
million incurred primarily to fund A.B.Dick operating losses, borrowings of $0.6
million under a term note, offset by a reduction of $0.4 million in long-term
borrowings and a decrease of $0.9 million in amount due to GEC and affiliates.
The increase in 1998 is the result of the issuance of the $115.0 million of
senior notes, offset by the reduction of long-term borrowings of $41.9 million
and revolving lines of credit by $26.1 million, and a payment of bond issuance
costs of $5.2 million and a dividend to the sole shareholder in the amount of
$10.0 million. The increase in cash provided by financing activities for 1997
was principally due to increases in borrowings on revolving credit lines.
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 December 31, 1999 the company had cash, cash
equivalents and short-term investment of $19.0 million and unused credit
facilities of $18.7 million available for its use. At December 31, 1999, the
company was in violation of certain financial covenants under the terms of the
revolving credit agreement. During March 2000, the Company received waivers of
these convenants through June 29, 2000 and it also amended future covenant
requirements to reflect the Company's current financial outlook and the
acquisition of Multigraphics.
INTERNATIONAL OPERATIONS
The Company transacts business in a number of countries throughout the world and
has facilities in the United States, Canada, the United Kingdom, The
Netherlands, and Belgium. As a result, the Company is subject to business risks
inherent in non-U.S. operations, including political and economic uncertainty,
import and export limitations, exchange controls, and currency fluctuations. The
Company believes that the risks related to its foreign operations are mitigated
by the relative political and economic stability of the countries in which its
largest foreign operations are located. As the U.S. dollar strengthens and
weakens against foreign currencies in which the Company transacts business, its
financial results will be affected. The principal foreign currencies in which
the Company transacts business are the Canadian dollar, the British pound
sterling, the Dutch guilder, and the Belgium franc. The fluctuation of the U.S.
dollar versus other currencies resulted in increases (decreases) to
stockholder's equity of approximately $0.2 million and $(0.3) million for the
years ended December 31, 1999 and 1998, respectively.
IMPACT OF THE YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 compliant. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company has experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change. The
Company expended approximately $3.4 million to upgrade its information systems
which included achieving Year 2000 compliance.
9
<PAGE> 12
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or products and
ervices of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
ENVIRONMENTAL MATTERS
The Company is subject to various laws and governmental regulations concerning
environmental matters and employee safety and health in the United States and
other countries. U.S. federal environmental legislation having particular impact
on the Company includes the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, the Clean Air Act, the Clean Water Act, the Safe
Drinking Water Act and the Comprehensive Environmental Response, Compensation
and Liability Act (also known as Superfund). The Company also is subject to
regulation by the Occupational Safety and Health Administration (OSHA)
concerning employee safety and health matters. The United States Environmental
Protection Agency (EPA), OSHA and other federal agencies have the authority to
promulgate regulations that have an impact on the Company's operations.
In addition to these federal activities, various states have been delegated
certain authority under the aforementioned federal statutes. Many state and
local governments have adopted environmental and employee safety and health laws
and regulations, some of which are similar to federal requirements. State and
federal authorities may seek fines and penalties for violation of these laws and
regulations. As part of its continuing environmental program, the Company has
been able to comply with such proceedings and orders without any materially
adverse effect on its business.
The Company is committed to a long-term environmental protection program that
reduces emissions of hazardous materials into the environment, as well as to the
remediation of identified existing environmental concerns.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which, as amended by FASB Statement 137, is
required to be adopted no later than January 1, 2001. The Company does not
anticipate that the adoption of this Statement will have a significant effect
on its results of operations or financial position.
IMPACT OF INFLATION
Although inflation has slowed in recent years, it is still a factor in our
economy and the Company continues to seek ways to mitigate its impact. To the
extent permitted by competition, the Company passes increased costs on to its
customers by increasing sales prices over time.
The Company uses the last in-first out (LIFO) method of accounting for its
domestic inventories. Under this method, the cost of products sold reported in
the financial statements approximates current costs and thus provides a closer
matching of revenue and expenses in periods of increasing costs.
The Company's properties have been acquired over the past three years and have a
useful life ranging from three years for equipment to forty years for
buildings. Assets acquired in prior years will, of course, be replaced at
higher costs but this will take place over many years. Again, these new assets
will result in higher depreciation charges; but in many cases, due to
technological improvements, there will be operating cost savings as well. The
Company considers these matters in setting its pricing policies.
SUBSEQUENT EVENT
On January 27, 2000, the Company completed the acquisition of all of the
outstanding common stock of Multigraphics, Inc. a supplier of
high quality pre-press, press, and post-press equipment,
10
<PAGE> 13
supplies, and technical services to the printing industry. Pursuant to the
Merger Agreement, the Company paid $1.25 in cash per share, or $3.6 million, and
assumed $7.4 million of outstanding debt of Multigraphics. In addition, the
Company loaned $2.0 million to Multigraphics pursuant to a promissory note
agreement executed by Multigraphics on September 29, 1999. The acquisition will
be accounted for under the purchase method of accounting whereby the purchase
price will be allocated to the assets acquired and liabilities assumed based
upon their estimated fair values. The purchase price allocation has not been
completed as of March 30, 2000. For the fiscal year ended July 31, 1999,
Multigraphics had net sales of approximately $107 million and operating income
of approximately $1.8 million.
In connection with the acquisition, the Company is formulating plans for the
integration of Multigraphics operations into its printing and supplies business
segment. As part of this integration, the Company anticipates that it will incur
restructuring costs of approximately $1.5 million comprised primarily of
employee termination and relocation costs which will be expensed during 2000.
Employee termination costs and other costs pertaining to Multigraphics that
qualify under EITF 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination, will be included in the purchase price
allocation.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's plans and
results of operations will be affected by the Company's ability to manage its
growth and inventory and (iii) other risks and uncertainties indicated from time
to time in the Company's filings with the Securities and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK AND RISK MANAGEMENT POLICIES
The following discussion provides information concerning the Company's financial
instruments that are sensitive to changes in interest rates. The Company's
available for sale securities of $3.6 million at December 31, 1999 are carried
at fair value and invested primarily in United States corporate debt securities.
Expected maturities range from one to ten years with rates of return averaging
between 4.8% to 5.7%. Interest earned on these securities, which are similar
enough to aggregate for presentation purposes, is not material to the results of
operations of the Company.
Substantially all of the Company's long-term debt consists of $115 million of
series B Senior Notes due in April, 2008. The notes carry interest at a fixed
rate of 9 5/8%, payable semi-annually. The notes are redeemable at the option of
the Company, in whole or in part, any time on or after 2003, subject to certain
call premiums. The carrying amount of the notes exceeded its fair value at
December 31, 1999 and 1998 by $78,200 and $19,600, respectively. The fair value
has been determined using the market price of the related securities at
December 31, 1999 and 1998.
The Company's $32 million credit agreement is fully revolving until its maturity
in 2003. The credit agreement bears variable interest at an initial rate equal
to either 1) the bank's prime rate plus 75 basis points or 2) LIBOR plus 275
basis points, at the option of the Company. The weighted average interest rate
for borrowings under this facility was 8.9% in 1999.
The Company's interest income and expense are most sensitive to changes in the
U.S. interest rates, which impact interest earned on the Company's cash
equivalents and available for sale securities as well as interest paid on
borrowings under the revolving credit facility. The Company has mitigated the
impact of interest rate fluctuations by issuing substantially all of its long
term debt at fixed interest rates with a single maturity in 2008.
The Company's earnings are also affected by fluctuations in the value of the
U.S. dollar as compared to foreign currencies, predominantly in Japan, and to a
lesser extent, 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.
11
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Report of Independent Auditors and the consolidated financial statements of
Paragon Corporate Holdings Inc. for the years ended December 31, 1999 and 1998
and for the eleven-month and fifteen-day period ended December 31, 1997 are
included herein.
<PAGE> 15
PARAGON CORPORATE HOLDINGS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Report of Independent Auditors 14
Consolidated Balance Sheets 15
as of December 31, 1999 and 1998
Consolidated Statements of Operations 16
for the years ended December 31, 1999 and 1998
and for the eleven-month and fifteen-day period ended December 31, 1997
Consolidated Statements of Stockholder's Equity (Deficit) 17
for the years ended December 31, 1999 and 1998
and for the eleven-month and fifteen-day period ended December 31, 1997
Consolidated Statements of Cash Flows 18
for the years ended December 31, 1999 and 1998
and for the eleven-month and fifteen-day period ended December 31, 1997
Notes to Consolidated Financial Statements 19
</TABLE>
13
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
To The Stockholder
Paragon Corporate Holdings Inc.
We have audited the accompanying consolidated balance sheets of Paragon
Corporate Holdings Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholder's equity (deficit) and cash
flows for the years ended December 31, 1999 and 1998 and for the eleven-month
and fifteen-day period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paragon Corporate
Holdings Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1999 and 1998 and
for the eleven-month and fifteen-day period ended December 31, 1997 in
conformity with accounting principles generally accepted in the United States.
/s/Ernst & Young LLP
Cleveland, Ohio
March 30, 2000
14
<PAGE> 17
Paragon Corporate Holdings Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,341 $ 7,462
Short-term investments 3,610 21,534
Accounts receivable, less allowances of
$2,264 and $1,498 in 1999 and
1998, respectively 35,943 40,579
Inventories 45,924 48,094
Other current assets 1,923 2,458
-------- --------
Total current assets 102,741 120,127
Property, plant and equipment, net 20,363 18,700
Goodwill, net 30,692 31,861
Other assets 6,860 4,721
-------- --------
$160,656 $175,409
======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Revolving credit facilities $ 10,219 $ -
Accounts payable 18,813 23,471
Accrued compensation 6,034 8,302
Accrued other 14,701 16,362
Deferred service revenue 6,037 6,502
Due to GEC 852 1,724
Current portion of long-term debt and
capital lease obligations 1,498 997
-------- --------
Total current liabilities 58,154 57,358
Senior Notes 115,000 115,000
Other long-term debt and capital lease
obligations, less current portion 1,849 1,886
Retirement obligations 3,546 3,641
Other long-term liabilities 2,296 2,643
-------- --------
180,845 180,528
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) (19,506) (4,279)
Accumulated other comprehensive loss (731) (888)
-------- --------
Total stockholder's equity (deficit) (20,189) (5,119)
-------- --------
$160,656 $175,409
======== ========
</TABLE>
See notes to consolidated financial statements
15
<PAGE> 18
Paragon Corporate Holdings Inc.
Consolidated Statements of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
Period From
Jan. 17, 1997
Year Ended Year Ended through
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net revenue $248,668 $268,624 $193,216
Cost of revenue 158,803 163,958 129,651
-------- -------- --------
Gross profit 89,865 104,666 63,565
COSTS AND EXPENSES
Sales and marketing expenses 42,275 44,383 26,386
General and administrative expenses 38,785 37,630 17,603
Research and development 3,631 3,046 3,755
Depreciation and amortization 7,270 5,496 1,481
Management fee 233 1,423 1,941
Acquisition, relocation and severance costs 1,633 2,705 1,400
-------- -------- --------
93,827 94,683 52,566
-------- -------- --------
Operating income (loss) (3,962) 9,983 10,999
Interest income 1,044 1,728 789
Interest expense (12,383) (11,311) (2,598)
Other income (expense) (90) (258) 139
-------- -------- --------
Income (loss) before foreign income
taxes and extraordinary item (15,391) 142 9,329
Foreign income tax expense (benefit) (164) 745 775
-------- -------- --------
Income (loss) before extraordinary item (15,227) (603) 8,554
Extraordinary item -- (1,280) --
-------- -------- --------
Net income (loss) $(15,227) $ (1,883) $ 8,554
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 19
Paragon Corporate Holdings Inc.
Consolidated Statements of Stockholder's Equity (Deficit)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Paid-In Earnings Comprehensive
Stock Capital (Deficit) Income (Loss) Total
------ ------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 17, 1997 $1 $47 $ -- $ -- $ 48
Comprehensive income:
Net income 8,554 8,554
Foreign currency translation adjustment (521) (521)
--------
Total comprehensive income 8,033
Accrued dividend for stockholder's
income taxes (950) (950)
---- --- -------- ----- -------
Balance at December 31, 1997 1 47 7,604 (521) 7,131
Comprehensive loss:
Net loss (1,883) (1,883)
Foreign currency translation adjustment (321) (321)
Minimum pension liability (46) (46)
--------
Total comprehensive loss (2,250)
Dividend distribution to stockholder (10,000) (10,000)
---- --- -------- ----- --------
Balance at December 31, 1998 1 47 (4,279) (888) (5,119)
Comprehensive loss:
Net loss (15,227) (15,227)
Foreign currency translation adjustment 165 165
Minimum pension liability 46 46
Unrealized losses on available-for-sale
securities (54) (54)
--------
Total comprehensive loss (15,070)
---- --- -------- ----- --------
Balance at December 31, 1999 $1 $47 $(19,506) $(731) $(20,189)
==== === ======== ===== ========
</TABLE>
See notes to consolidated financial statements
17
<PAGE> 20
Paragon Corporate Holdings Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Period From
Jan. 17, 1997
Year Ended Year Ended through
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(15,227) $ (1,883) $ 8,554
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Extraordinary item -- 1,280 --
Provision for depreciation and amortization 7,270 5,496 1,481
Gain on sale of equipment -- (845) --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 4,636 (2,758) (205)
(Increase) decrease in inventory 1,830 (63) 6,029
Increase in other assets 44 (1,128) (877)
Increase (decrease)in accounts payable (4,658) 9,328 1,193
(Decrease) in other liabilities (4,489) (7,918) (1,090)
-------- -------- --------
Net cash provided by (used in) operating
activities (10,594) 1,509 15,085
INVESTING ACTIVITIES:
Accounts receivable used in connection with the
acquisition of A.B.Dick Company -- -- (19,489)
Loan to Multigraphics (2,000) -- --
Purchases of property, plant and equipment (6,542) (9,979) (1,860)
Proceeds from the sale of equipment -- 858 --
(Increase) decrease in short-term investments 17,870 (17,358) 1,954
Payment of acquisition liabilities -- -- (4,379)
Acquisition of businesses, less cash acquired -- (1,095) (4,910)
-------- -------- --------
Net cash provided by (used in) investing
activities 9,328 (27,574) (28,684)
FINANCING ACTIVITIES:
Borrowings (payments) on revolving credit
facilities 10,219 (26,084) 18,603
Decrease in amounts due to GEC and affiliates (872) (1,221) (2,436)
Proceeds from issuance of Senior Notes -- 115,000 --
Payment of bond issuance cost -- (5,241) --
Dividend distribution -- (10,000) --
Proceeds from long-term borrowings 808 -- --
Principal payments on long-term borrowings (1,221) (41,889) (914)
-------- -------- --------
Net cash provided by financing activities 8,934 30,565 15,253
Effect of exchange rate changes on cash 211 (321) (521)
-------- -------- --------
Increase in cash and cash equivalents 7,879 4,179 1,133
Cash and cash equivalents at beginning of period 7,462 3,283 2,150
-------- -------- --------
Cash and cash equivalents at end of period $ 15,341 $ 7,462 $ 3,283
======== ======== ========
</TABLE>
See notes to consolidated financial statements
18
<PAGE> 21
PARAGON CORPORATE HOLDINGS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Dollars in Thousands)
A. ORGANIZATION
Paragon Corporate Holdings Inc. (hereinafter referred to as 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. ACQUISITIONS
The Company commenced operations on January 17, 1997 through the acquisition on
that date of the common stock of A.B.Dick Company and its wholly owned
subsidiaries (collectively "A.B.Dick"), from General Electric Company Ltd.
("GEC").
Under the terms of the stock purchase agreement, A.B.Dick transferred to GEC
$19,489 of domestic accounts receivable (which were collected by A.B.Dick during
1997 and remitted to GEC) and the Niles manufacturing and headquarters
facilities, which had a carrying amount of $3,500. GEC agreed to let the Company
use these facilities until the Company moved to new manufacturing, headquarters
and distribution facilities during 1998. GEC also agreed to fund up to $1,500 in
severance costs incurred in 1997 and to reimburse the Company in 1998 for moving
costs up to $2,000. These amounts have been reflected in the allocation of the
purchase price.
Restructuring reserves of $6,000 were included in the purchase price allocation
in accordance with the Company's business plans to substantially reorganize the
A.B.Dick operations. These reserves represented accruals for severance of
administrative and operating employees and occupancy costs to be incurred in
1997 and 1998 for idle manufacturing and headquarters facilities prior to the
relocation of operations in 1998. As of December 31, 1998, the Company expended
all of the amounts provided for in the purchase price allocation. In the first
quarter of 1999, the Company completed the physical relocation of its
headquarters, distribution center and manufacturing activities.
Since the fair value of the net assets acquired exceeded the purchase price by
approximately $16,359, the historical book values of the acquired property,
plant and equipment ($12,900) were recorded on the January 17, 1997 opening
balance sheet at zero. The remaining excess ($3,459) of fair value of net assets
acquired over purchase price is classified as other long-term liabilities and is
being amortized into income over ten years. This transaction was accounted for
under the purchase method of accounting.
On December 5, 1997, the Company acquired all the common stock of Curtis
Industries, Inc. ("Curtis"), a national distributor of products in the
automotive and industrial markets, for a purchase price of $22,200 composed
primarily of $6,500 in cash and $15,700 in seller notes. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
results of operations of Curtis are included in the consolidated financial
statements since the date of acquisition.
The following unaudited pro forma results of operations assume the acquisition
of Curtis occurred on January 1, 1997. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
the results of operations which actually would have resulted had the acquisition
occurred on January 1, 1997:
19
<PAGE> 22
Period from
Jan. 17, 1997
through
Dec. 31, 1997
--------------
Net revenues $267,419
Costs and expenses 250,295
Acquisition costs 1,400
Operating income 15,724
Net Income 8,700
During 1998, the Company acquired two businesses, which added complementary
products and increased distribution for the Company's foreign printing equipment
and supplies business. The cost of the acquisitions, net of cash acquired, was
$1,095. The acquisitions have been accounted for as purchases with the acquired
assets and liabilities recorded at estimated fair value at the date of
acquisition. The acquired companies operating results have been included in the
statement of operations since their respective date of acquisition. Proforma
results of operations assuming the acquisitions occurred on January 1, 1997 have
not been presented as the impact of these acquisitions was not material.
On January 27, 2000, the Company completed the acquisition of all of the
outstanding common stock of Multigraphics, Inc. ("Multigraphics"), a supplier of
high quality pre-press, press, and post-press equipment, supplies, and technical
services to the printing industry. Pursuant to the Merger Agreement, the Company
paid $1.25 in cash per share, or $3.6 million, and assumed $7.4 million of
outstanding debt of Multigraphics. In addition, the Company loaned $2.0 million
to Multigraphics pursuant to a promissory note agreement executed by
Multigraphics on September 29, 1999. The acquisition will be accounted for under
the purchase method of accounting whereby the purchase price will be allocated
to the assets acquired and liabilities assumed based upon their estimated fair
values. The purchase price allocation has not been completed as of March 30,
2000. For the fiscal year ended July 31, 1999, Multigraphics had net sales of
approximately $107 million and operating income of approximately $1.8 million.
C. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash Equivalents and Investments
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The Company's
available-for-sale securities are comprised primarily of corporate debt
securities and commercial paper and have maturities ranging from less than one
year to ten years.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in other comprehensive income. Interest, dividends,
realized gains and losses, and declines in value judged to be other than
temporary, are recognized in net income (loss). The cost of securities sold is
based on the specific identification method.
Accounts Receivable
Provisions for credit losses were approximately $1,546, $760 and $1,124 for the
years ended December 31, 1999 and 1998, and for the period from January 17, 1997
through December 31, 1997, respectively. Accounts written off were approximately
$780, $1,173 and $124 for the years ended December 31, 1999 and 1998 and the
period from January 17, 1997 through December 31, 1997, respectively.
Inventories
Domestic inventories, which represent approximately 75% and 80% of total
consolidated inventory at December 31, 1999 and 1998, respectively, are
determined on the last-in, first-out (LIFO) basis and foreign
20
<PAGE> 23
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.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short-term investments, trade
receivables and payables approximates fair value because of the short maturity
of these instruments. The carrying amount of the revolving credit facility
approximates fair value. The carrying amount of long-term debt exceeds its fair
value at December 31, 1999 and 1998 by $78,200 and $19,600, respectively. The
fair value has been determined using the market price of the related securities
at December 31, 1999 and 1998.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents and short-term investments with
financial institutions. The Company's policy is designed to limit exposure to
any one investment type. The Company performs periodic evaluations of the
relative credit standing of the various investments that are contained in the
Company's investment portfolio.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base. The Company does not require collateral for trade accounts receivable.
Property, Plant and Equipment
Property, plant and equipment are stated at cost (See Note B). Depreciation is
computed using the straight-line method based on the expected useful lives of
the assets, which are as follows:
Building and improvements 15 to 40 years
Machinery and equipment 3 to 18 years
Rental equipment 3 years
Goodwill
Goodwill is being amortized on a straight-line basis over 30 years. Accumulated
amortization was $2,762 and $1,585 at December 31, 1999 and 1998, respectively.
The ongoing value and remaining useful life of goodwill are subject to periodic
evaluation and the Company currently expects the carrying amounts to be fully
recoverable.
Impairment of Long-lived Assets
Impairment of long-lived assets and related goodwill is recognized when events
or changes in circumstances indicate that the carrying amount of the asset, or
related groups of assets, may not be recoverable and the Company's estimate of
undiscounted cash flows over the assets remaining estimated useful life are less
than the assets carrying value. Measurement of the amount of impairment may be
based on appraisal, market values of similar assets or estimated discounted
future cash flows resulting from the use and ultimate disposition of the asset.
No impairment has been recorded in the consolidated financial statements.
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 terms of the tax payment agreement with the stockholder, the
Company makes distributions to the stockholder for payment of income taxes. No
amount was accrued or paid for the years ended December 31, 1999 and 1998. At
December 31, 1997, the Company accrued dividends totaling $950, for the payment
of stockholder's income taxes, which was paid in 1998. On March 14, 2000,
A.B.Dick elected C Corporation status for United States income tax purposes
effective January 1, 2000. Pursuant to FASB 109, "Accounting For Income Taxes",
A.B. Dick will recognize existing deferred income taxes of approximately
$1 million in future periods. This recognition will have no impact on operating
income or EBITDA of A.B. Dick Company.
21
<PAGE> 24
The foreign subsidiaries of A.B.Dick and Curtis are subject to foreign income
taxes. Accordingly, deferred taxes have been provided for the expected future
tax consequences of temporary differences in the foreign subsidiaries between
the carrying amount and tax basis of assets and liabilities. Where the Company
has determined that it is more likely than not that deferred assets will not be
realized, a valuation allowance has been established. For the years ended
December 31, 1999 and 1998, and for the period January 17, 1997 through December
31, 1997, the Company paid foreign income taxes of $258, $557 and $824,
respectively.
Revenue Recognition
For the majority of its operations, the Company recognizes revenues upon
shipment of its equipment and products. A.B.Dick receives advance payments for
service contracts and recognizes income on a straight line basis over the
contract term as service is provided. Deferred revenues are recorded on the
balance sheet related to these advance payments.
Product Warranty
A.B.Dick's products (pre-press, press and post-press equipment, copiers, repair
parts and supplies) are subject to varying warranty periods. A reserve for
estimated future warranty obligations is included in accrued expenses based on
historical rates of warranty claims.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the
years ended December 31, 1999 and 1998 and the period from January 17, 1997
through December 31, 1997 amounted to $2,376, $2,795 and $1,832, respectively.
Management Fee
Operations include management fees charged by Nesco, Inc., an affiliate of the
stockholder of the Company, to provide management, legal, financial, strategic
planning, business development and other services to the Company. Effective
April 1, 1998, the Company and Nesco, Inc. entered into a new management
agreement under which the Company has agreed to pay Nesco, Inc. fees for such
services equal to 5% of earnings before interest, taxes, depreciation,
amortization and other income and expense.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are translated
at current exchange rates, while revenue and expenses are translated at average
rates prevailing during the period. The effects of exchange rate fluctuations
have been reported in other comprehensive income. Gains and losses from foreign
currency transactions are included in net income (loss). Foreign currency
exchange gains (losses) for the years ended December 31, 1999, 1998 and the
period from January 17, 1997 through December 31, 1997 were not material.
Comprehensive Income (Loss)
Accumulated other comprehensive loss at December 31, 1999 consists of $677
relating to foreign currency translation adjustments and $54 relating to
unrealized losses on available-for-sale securities. Accumulated other
comprehensive loss at December 31, 1998 consists of $842 relating to foreign
currency translation adjustments and $46 relating to minimum pension liability
adjustments.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by FASB Statement 137, is
required to be adopted no later than January 1, 2001. Since it is the Company's
intent not to use derivatives, management believes that the adoption of the new
Statement will not have a significant effect on the results of operations or
financial position of the Company.
Use of Estimates
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of any
contingent assets or liabilities, at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
22
<PAGE> 25
Reclassifications
Certain amounts from the prior year financial statements have been reclassified
to conform to current year presentation.
D. INVESTMENTS
The following is a summary of available-for-sale securities:
Unrealized Unrealized Estimated
DECEMBER 31, 1999 Cost Gains Losses Fair Value
------ ----- ------ ----------
U.S. corporate debt securities $2,631 $-- $ 29 $2,602
Other debt securities 1,033 -- 25 1,008
------ --- ------ ------
$3,664 -- $ 54 $3,610
====== === ====== ======
Unrealized Unrealized Estimated
DECEMBER 31, 1998 Cost Gains Losses Fair Value
------- ------- ------ ----------
U.S. corporate securities $ 2,999 $ -- $ -- $ 2,999
Commercial paper 18,535 -- -- 18,535
------- ------- ------- -------
$21,534 $ -- $ -- $21,534
======= ======= ======= =======
In 1999 and 1998, the gross realized gains on sales of available-for-sale
securities totaled $1 and $195, respectively, and the gross realized losses
totaled $73 and $198, respectively. The net adjustment to unrealized holding
losses on available-for-sale securities, included as a component of
comprehensive income totaled approximately $54 in 1999.
The amortized cost and estimated fair value of debt securities at December 31,
1999, by contractual maturity, are shown below.
Estimated
Cost Fair Value
------ ----------
Due after one year through five years $2,663 $2,610
Due after five years through ten years 1,001 1,000
------ ------
$3,664 $3,610
====== ======
E. INVENTORIES
Inventories are summarized as follows:
December 31, December 31,
1999 1998
------------ ------------
Raw materials and work in process $ 5,527 $ 6,768
Finished goods 37,290 38,111
LIFO reserve 3,107 3,215
------- -------
$45,924 $48,094
======= =======
23
<PAGE> 26
F. PROPERTY, PLANT AND EQUIPMENT
Property and equipment (See Notes B and C) is summarized as follows:
December 31, December 31,
1999 1998
------------ ------------
Land $ 371 $ 371
Buildings and improvements 7,559 6,823
Machinery and equipment 15,144 11,018
Rental assets 7,254 4,836
------- -------
30,328 23,048
Less: accumulated depreciation 9,965 4,348
------- -------
$20,363 $18,700
======= =======
Depreciation expense for the years ended December 31, 1999 and 1998 and for the
eleven-month and fifteen-day period ended December 31, 1997, was $6,101, $4,330,
and $1,062, respectively.
G. FINANCING ARRANGEMENTS
Long-term debt included the following:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
PARAGON:
9 5/8% Series B Senior Notes, interest
payable semi-annually, due April, 2008 $115,000 $115,000
CURTIS:
Capital lease obligations 377 49
A.B.DICK:
Term loan payable in monthly installments
through February 2004; interest rate of 11% 499 --
Term loan payable in monthly installments
through March 2004; interest rate of 8% 182 --
Capital lease obligations 2,289 2,834
-------- --------
Total debt 118,347 117,883
Less: current portion 1,498 997
-------- --------
Total long-term debt $116,849 $116,886
======== ========
</TABLE>
The aggregate maturities of the long-term debt for each of the five years
subsequent to December 31, 1999 are as follows:
Year Ending
December 31:
2000 $ 1,498
2001 786
2002 514
2003 406
2004 124
Thereafter 115,019
The Revolving Credit Facility is classified as a current liability on the
balance sheet to comply with the accounting requirements. However, the
Revolving Credit Facility amount of $10,219 expires in 2003.
On April 1, 1998, the Company issued $115 million of 9 5/8% Series A Senior
Notes due 2008. On September 1, 1998, the Company completed an exchange of all
of the 9 5/8% Series A Senior Notes for 9 5/8% Series B Senior Notes due 2008
("Series B Notes" or "Senior Notes"). The Series B Senior Notes are registered
under the Securities Act of 1933 and are redeemable at the option of the
Company, in whole or in part, any time on or after 2003 subject to certain call
premiums. Interest on the Senior Notes is payable semi-annually in arrears. The
Senior Notes are unsecured obligations of the Company and are guaranteed by the
domestic subsidiaries of the Company and contain various restrictive covenants
that, among other things, place limitations on the sale of assets,
24
<PAGE> 27
payment of dividends, incurring additional indebtedness and restrict
transactions with affiliates. Debt issuance costs of $4,917 have been
capitalized and are being amortized over the life of the Senior Notes. The
proceeds of the Senior Notes were utilized as follows:
Gross proceeds of Senior Notes $115,000
Repayment of term loans (39,649)
Repayment of revolving credit (26,084)
facilities
Dividend paid to stockholder (10,000)
Fees and expenses (5,241)
--------
Excess cash from proceeds $ 34,026
========
The Company and Key Corporate Capital Inc. ("Key") are parties to a credit
facility and security agreement dated April 1, 1998 and amended as of December
31, 1998, pursuant to which Key has provided the Company a revolving line of
credit equal to $32.0 million (the "Credit Agreement"). The availability under
the Credit Agreement is equal to the sum of (i) 85% of the eligible Curtis
accounts receivable, plus 80% of the eligible A.B.Dick accounts receivable, plus
(ii) 60% of the eligible Curtis inventory (capped at $6.4 million), plus 60% of
the eligible A.B.Dick inventory (capped at $9.6 million), less (iii) reserves
and outstanding letters of credit. The Credit Agreement is guaranteed by Curtis
and A.B.Dick pursuant to separate credit guaranty agreements with Key. The
Credit Agreement is secured by liens on accounts receivable and inventory of
Curtis and A.B.Dick, pursuant to separate security agreements between Key and
each of Curtis and A.B.Dick. The Credit Agreement contains certain financial and
other covenants which, among other things, establish minimum EBITDA and fixed
charge ratios. These financial covenants were amended in March 2000 to reflect
the Company's current financial outlook and the acquisition of Multigraphics.
The Credit Agreement is fully revolving until its final maturity in 2003. The
Credit Agreement bears interest at a rate determined according to a sliding
scale under which the rate adjusts based upon the Company's performance. The
Credit Agreement bears interest at an initial rate equal to (i) Key's prime
rate plus 75 basis points, or (ii) LIBOR plus 275 basis points, at the option
of the Company. At December 31, 1999, $10.2 million was outstanding under the
Revolving Credit Facility. A fee of 3/8% per annum is charged on the unused
portion of the Revolving Credit Facility. At December 31, 1999 and 1998 there
were $3.1 million and $3.7 million of letters of credit outstanding,
respectively. The weighted average interest rate for this facility was 8.9% in
1999. At December 31, 1999, the Company was in violation of the minimum EBITDA
and fixed charge ratio covenants for which it received waivers through June 29,
2000.
During the years ended December 31, 1999 and 1998 and the eleven-month and
fifteen-day period ended December 31, 1997, the Company paid interest of $11,523
and $9,727 and $1,242, respectively.
An extraordinary expense of $1,280 was recorded during the second quarter of
1998 related to the write-off of deferred financing costs and fees associated
with the early extinguishment of certain of the Company's debt.
H. LEASE COMMITMENTS
The Company leases certain facilities and equipment which generally provide that
the Company pay the insurance, maintenance and property taxes related to the
leases. In the normal course of business, the Company expects that, as leases
expire, they will be renewed or replaced by other leases. The leases generally
provide for renewal options and various escalation clauses.
25
<PAGE> 28
As of December 31, 1999, minimum lease payments under capitalized leases and
non-cancelable operating leases are as follows:
Capital Operating
Leases Leases
------ ------
Year Ending December 31:
2000 $1,544 $ 5,254
2001 723 4,764
2002 403 4,357
2003 246 3,196
2004 118 1,836
Thereafter 20 4,080
------ -------
Total minimum lease payments $3,054 $23,487
=======
Imputed interest 388
Present value of minimum ------
lease payments (including current
portion of $1,346) $2,666
======
The above lease commitments have not been reduced by aggregate minimum sublease
rentals of $745 due in the future under non-cancelable subleases.
The Company had $4,066, $4,682 and $2,226 of rental expense for the years ended
December 31, 1999 and 1998, and for the period from January 17, 1997 through
December 31, 1997, respectively.
Assets held under capitalized leases and included in machinery and equipment
were $2,107 and $2,074, net of accumulated amortization of $1,093 and $248 at
December 31, 1999 and 1998, respectively. Amortization of these assets is
included in depreciation expense in the statement of operations. During 1999 and
1998, the Company incurred capital lease obligations of $876 and $2,240, for the
acquisition of property, plant and equipment.
In connection with the relocation of its operations, A.B. Dick entered into a
lease agreement during the first quarter of 1998 for new headquarters facilities
with an affiliate of the Company. The lease has a term of 10 years and requires
monthly rental payments of approximately $35, has one five-year renewal option
and provides for rental increases of 3% per year commencing with the second
lease year.
In December 1996, Curtis entered into a lease agreement with an affiliate of the
Company. The lease has a ten year term, requires monthly rental payments of $37,
has two five-year renewal options and provides for rental increases in year four
and year eight of the lease.
I. SEGMENT INFORMATION
The Company has two reportable segments: printing equipment and supplies and
automotive and industrial supplies. The Company's printing equipment and
supplies business consists of operating units that sell equipment, repair parts
and supplies and provide maintenance and repair service support on equipment.
These products are sold directly through a network of branches and independent
distributors to the global quick print and small commercial printing customers
in the United States, Canada, the United Kingdom, the Netherlands and Belgium,
as well as other European countries. The Company's automotive and industrial
supplies business distributes automotive security products, non-model specific
automotive parts and maintenance, repair and operating supplies. Customers
include independent auto dealerships and industrial accounts throughout North
America and the United Kingdom.
26
<PAGE> 29
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest, gains and losses on the Company's
investment portfolio and income taxes. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. The Company's reportable segments are business units that
offer different products and services. The reportable segments are each managed
separately because they manufacture and distribute distinct products in distinct
markets.
<TABLE>
<CAPTION>
Period From
Jan. 17, 1997
Year Ended Year Ended through
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues:
Printing equipment and supplies $165,158 $187,488 $186,315
Automotive and industrial supplies 83,510 81,136 6,901
-------- -------- --------
Total net revenues $248,668 $268,624 $193,216
======== ======== ========
Depreciation and amortization:
Printing equipment and supplies $ 2,705 $ 1,610 $ 1,210
Automotive and industrial supplies 4,565 3,886 271
-------- -------- --------
Total depreciation and amortization $ 7,270 $ 5,496 $ 1,481
======== ======== ========
Operating income (loss):
Printing equipment and supplies $ (7,728) $ 7,278 $ 12,104
Automotive and industrial supplies 4,352 3,126 328
-------- -------- --------
(3,376) 10,404 12,432
Corporate expenses (676) (679) (1,294)
Interest income (expense), net (11,339) (9,583) (1,809)
-------- -------- --------
Income (loss) before taxes and
extraordinary item $(15,391) $ 142 $ 9,329
======== ======== ========
Segment assets:
Printing equipment and supplies $ 72,539 $ 79,448 $ 66,014
Automotive and industrial supplies 69,505 69,297 67,440
-------- -------- --------
142,044 148,745 133,454
Corporate assets 49,866 38,562 4,621
Intersegment accounts receivable (31,254) (11,898) --
-------- -------- --------
Total assets $160,656 $175,409 $138,075
======== ======== ========
Capital expenditures:
Printing equipment and supplies $ 3,392 $ 6,853 $ 1,338
Automotive and industrial supplies 3,150 3,126 522
-------- -------- --------
Total capital expenditures $ 6,542 $ 9,979 $ 1,860
======== ======== ========
</TABLE>
The Company's principal operations are in the United States, but it also
maintains operating subsidiaries in Belgium, the Netherlands, Canada and the
United Kingdom.
Net revenues are attributed to countries based on the location of the subsidiary
where the sale occurs. Transfers between geographic areas are accounted for at
market with appropriate adjustments made to inventory carrying values in
consolidation. Identifiable assets represent long-lived assets that are used in
the Company's operations in each geographic area at year end.
27
<PAGE> 30
The Company's financial data by geographic area for the years ended December 31,
1999 and 1998 and the period from January 17, 1997 through December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
Period From
Jan. 17, 1997
Year Ended Year Ended through
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues:
Domestic $199,982 $208,551 $154,934
Foreign:
Canada 22,278 28,072 21,397
Belgium 3,615 4,256 3,910
United Kingdom 21,462 23,967 17,157
Other 5,487 4,150 309
Elimination between geographic areas (4,156) (372) (4,491)
-------- -------- --------
Total net revenues $248,668 $268,624 $193,216
======== ======== ========
Operating income (loss):
Domestic $ (544) $ 8,342 $ 8,863
Foreign:
Canada (30) 1,024 1,402
Belgium (1,289) (245) (291)
United Kingdom (1,276) 479 798
Other (831) 410 250
Elimination between geographic areas 8 (27) (23)
-------- -------- --------
Total operating income (loss) $ (3,962) $ 9,983 $ 10,999
======== ======== ========
Long-lived assets:
Domestic $ 19,045 $ 17,849 $ 9,351
Foreign:
Canada 437 983 369
Belgium 22 81 --
United Kingdom 545 686 91
Other 314 (899) 187
-------- -------- --------
Total long-lived assets $ 20,363 $ 18,700 $ 9,998
======== ======== ========
</TABLE>
J. CONTINGENCIES
On April 30, 1997, four former and current distributors of A.B.Dick filed a suit
against A.B.Dick, the Predecessor Company, alleging, among other things, breach
of distributorship contracts and unfair and deceptive trade practices. The
plaintiffs have requested that the case be given class action status with
respect to all A.B.Dick distributors engaged under distributorship contracts
during the four-year period ended on April 30, 1997. The Company intends to
vigorously defend this case although there can be no assurance as to the
eventual outcome.
GEC has agreed to fully indemnify the Company against all costs and liabilities
in connection with any litigation that is pending or may be brought against
A.B.Dick arising out of events occurring prior to the closing of the A.B.Dick
acquisition, including the case mentioned in the previous paragraph for all
amounts in excess of $250 up to an aggregate liability of $15,000. In addition,
both A.B.Dick and Curtis are parties to routine litigation incidental to their
businesses, some of which is covered by insurance. The Company does not believe
that any such pending litigation will have a material adverse effect upon its
results of operations or financial condition.
K. EMPLOYEE BENEFIT PLANS
Effective March 1, 1997, the A.B.Dick established a defined contribution plan
that includes an employee 401(k)-contribution provision covering certain
employees of A.B.Dick. The plan provides for employee contributions ranging from
1%-15% of employee's compensation, subject to statutory limitation, as well as a
matching Company contribution equal to 25% of the employee's contribution but
limited to 6% of compensation. The
28
<PAGE> 31
Company contribution for the years ended December 31, 1999 and 1998, and for the
eleven-month and fifteen-day period ended December 31, 1997, was approximately
$311, $314, and $600, respectively.
Curtis has deferred compensation agreements with certain former executives,
which provide for payments of a fixed level of compensation on a monthly basis
from retirement until death. Curtis also maintains a Supplemental Executive
Retirement Plan in which one former executive participates. Expense recognized
for the executive deferred compensation and Supplemental Executive Retirement
Plans for 1999, 1998 and 1997 were $73, $161 and $5, respectively.
Additionally, Curtis has a deferred compensation plan for the benefit of sales
representatives attaining specified sales goals. Curtis credits eligible
participant's accounts with a percentage of their annual earnings. The annual
amount credited to participant accounts vests at the rate of 5% per annum.
Eligible participants over the age of 55 vest at an accelerated rate. Expense
under this plan was $161 in 1999, $222 in 1998 and $17 in 1997.
Curtis also maintains a 401(k) retirement savings plan covering substantially
all employees. Contributions to the 401(k) plan are based upon a percentage of
each participant's compensation. The plan provides for employee contributions
ranging from 1% - 15% of employee's compensation, subject to statutory
limitation as well as a matching company contribution which is based on a
formula defined in the plan document. The expense for the plan in 1999, 1998 and
1997 were $270, $250 and $22 respectively.
Liabilities recorded for the outstanding contributions to these Plans at
December 31, 1999 were $2,239 and $2,150 at December 31, 1998.
Curtis maintains a defined benefit pension plan and a postretirement benefit
plan for certain former UAW manufacturing employees. The following table sets
forth the plans' funded status and amounts recognized in the Company's balance
sheet as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Post-retirement
Pension Benefits Benefits
------------------------- -------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Beginning balance $2,387 $2,428 $ 1,433 $ 1,406
Interest cost 138 141 95 100
Actuarial (gain) loss (246) 22 348 40
Benefits paid (199) (204) (135) (113)
------ ------ ------- -------
Ending balance $2,080 $2,387 $ 1,741 $ 1,433
Change in plan assets:
Beginning balance $1,992 $2,081 $ -- $ --
Actual return on plan assets 95 115 -- --
Employer contributions 10 -- 135 113
Benefits paid (199) (204) (135) (113)
------ ------ ------- -------
Ending balance $1,898 $1,992 $ -- $ --
------ ------ ------- -------
Projected benefit obligation in
excess of plan assets $ (182) $ (395) $(1,741) $(1,433)
Unrecognized net actuarial (gain) loss (162) 0 388 40
Minimum pension liability adjustment -- 46 -- --
------ ------ ------- -------
Accrued benefit cost (balance sheet) $ (344) $ (349) $(1,353) $(1,393)
====== ====== ======= =======
</TABLE>
29
<PAGE> 32
Assumptions used in the accounting for the employee benefit plans are shown in
the following table as weighted-averages:
1999 1998
---- ----
Pension benefits:
Discount rate 7.25% 6.0%
Expected return on plan assets 7.0 % 7.0%
Postretirement benefits:
Discount rate 7.5 % 7.5%
For measurement purposes, a 9% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2000. The rate was assumed to
decrease to 5.5% by 2007.
<TABLE>
<CAPTION>
Post-retirement
Pension Benefits Benefits
-------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Interest cost $ 138 $ 141 $95 $100
Expected return on plan assets (133) (139) -- --
----- ----- --- ----
Net periodic benefit cost $ 5 $ 2 $95 $100
===== ===== === ====
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported. A one-percentage-point change in assumed health care cost trend rates
would change the accumulated postretirement benefit obligation as of December
31, 1999 by approximately $100. The effect on this change on the interest
expense component of the net postretirement benefit expense for 1999 would be an
increase or decrease of approximately $5.
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
The Company's domestic subsidiaries, all of which are directly or indirectly
wholly owned, are the only guarantors of the 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 condensed, consolidating financial statements for the Company, the
guarantor subsidiaries and the non-guarantor, foreign subsidiaries are as
follows:
30
<PAGE> 33
<TABLE>
<CAPTION>
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(DECEMBER 31, 1999):
Current assets:
Cash and cash equivalents $ 7,760 $ 5,396 $ 2,185 $ -- $ 15,341
Short-term investments 3,610 -- -- -- 3,610
Accounts receivable, net 31,254 26,155 9,788 (31,254) 35,943
Inventories -- 35,880 10,238 (194) 45,924
Other 398 889 636 -- 1,923
-------- -------- ------- --------- --------
Total current assets 43,022 68,320 22,847 (31,448) 102,741
Property, plant and equipment, net 5 19,040 1,318 -- 20,363
Goodwill -- 30,637 55 -- 30,692
Investment in subsidiaries 58,488 15,028 -- (73,516) --
Other assets 6,839 17 4 -- 6,860
Intercompany -- -- -- -- --
-------- -------- ------- --------- --------
Total Assets $108,354 $133,042 $24,224 $(104,964) $160,656
======== ======== ======= ========= ========
Current liabilities:
Revolving credit facility $ 10,219 $ -- $ -- $ -- $ 10,219
Accounts payable -- 16,167 2,646 -- 18,813
Accrued expenses 3,324 13,968 3,443 -- 20,735
Deferred service revenue -- 4,942 1,095 -- 6,037
Due to GEC -- 852 -- -- 852
Current portion of long-term debt -- 1,448 50 -- 1,498
and capital lease obligations
Intercompany -- 27,123 5,163 (32,286) --
-------- -------- ------- --------- --------
Total current liabilities 13,543 64,500 12,397 (32,286) 58,154
Senior notes 115,000 -- -- -- 115,000
Other long-term debt and capital lease
obligations, less current portion -- 1,717 132 -- 1,849
Retirement obligations -- 3,539 7 -- 3,546
Other long-term liabilities -- 2,296 -- -- 2,296
Stockholder's equity (deficit) (20,189) 60,990 11,688 (72,678) (20,189)
-------- -------- ------- --------- --------
Total liabilities and stockholder's equity $108,354 $133,042 $24,224 $(104,964) $160,656
======== ======== ======= ========= ========
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
(YEAR ENDED DECEMBER 31, 1999):
Net revenue $ -- $199,982 $52,842 $(4,156) $248,668
Cost of revenue -- 126,147 36,820 (4,164) 158,803
-------- -------- ------- ----- --------
Gross profit -- 73,835 16,022 8 89,865
Total operating expenses 586 73,794 19,447 -- 93,827
-------- -------- ------- ----- --------
Operating income (loss) (586) 41 (3,425) 8 (3,962)
Interest income (expense), net (9,871) (1,536) 68 -- (11,339)
Other income (expense) -- (81) (9) -- (90)
-------- -------- ------- ----- --------
Income (loss) before foreign income taxes (10,457) (1,576) (3,366) 8 (15,391)
Foreign income taxes -- 49 (213) -- (164)
-------- -------- ------- ----- --------
Net income (loss) $(10,457) $ (1,625) $(3,153) $ 8 $(15,227)
======== ======== ======= ===== ========
CASH FLOW DATA
(YEAR ENDED DECEMBER 31, 1999):
Net cash provided by (used in)
operating activities $(10,069) $ 1,079 $(1,604) $ -- $(10,594)
Investing activities:
Loan to Multigraphics (2,000) -- -- -- (2,000)
Purchases of property, plant and equipment -- (5,682) (860) -- (6,542)
Decrease in short-term investments 17,870 -- -- -- 17,870
Acquisition of businesses, less cash acquired -- -- -- -- --
-------- -------- ------- ----- --------
Net cash used in investing activities 15,870 (5,682) (860) -- 9,328
Financing activities:
Borrowings made on revolving credit facility 10,219 -- -- -- 10,219
Intercompany (8,288) 7,444 844 -- --
Decrease in amounts due to GEC and affiliates -- (872) -- -- (872)
Proceeds from long-term borrowings -- 588 220 -- 808
Principal payments long-term borrowings -- (1,183) (38) -- (1,221)
-------- -------- ------- ----- --------
Net cash provided by financing activities 1,931 5,977 1,026 -- 8,934
Effect of exchange rate on cash -- (152) 363 -- 211
-------- -------- ------- ----- --------
Increase in cash and cash equivalents 7,732 1,222 (1,075) -- 7,879
Cash and cash equivalents at beginning
of period 28 4,174 3,260 -- 7,462
-------- -------- ------- ----- --------
Cash and cash equivalents at end of period $ 7,760 $ 5,396 $ 2,185 $ -- $ 15,341
======== ======== ======= ===== ========
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
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 subsidiaries 74,118 13,803 -- (87,921) --
Other assets 4,709 4 8 -- 4,721
Intercompany 11,898 -- -- (11,898) --
-------- -------- ------- --------- --------
Total Assets $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)
-------- -------- ------- --------- --------
Total liabilities and stockholder's equity $112,680 $137,027 $25,725 $(100,023) $175,409
======== ======== ======= ========= ========
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
(YEAR ENDED DECEMBER 31, 1998):
Net revenue $ -- $208,551 $60,445 $(372) $268,624
Cost of revenue -- 124,041 40,262 (345) 163,958
-------- -------- ------- ----- --------
Gross profit -- 84,510 20,183 (27) 104,666
Total operating expenses 421 75,747 18,515 -- 94,683
-------- -------- ------- ----- --------
Operating income (loss) (421) 8,763 1,668 (27) 9,983
Interest income (expense), net (7,741) (2,006) 164 -- (9,583)
Other income (expense) -- (518) 260 -- (258)
-------- -------- ------- ----- --------
Income (loss) before foreign income taxes
and extraordinary item (8,162) 6,239 2,092 (27) 142
Foreign income taxes -- 51 694 -- 745
-------- -------- ------- ----- --------
Income (loss) before extraordinary item (8,162) 6,188 1,398 (27) (603)
Extraordinary item (170) (1,110) -- -- (1,280)
-------- -------- ------- ----- --------
Net income (loss) $ (8,332) $ 5,078 $ 1,398 $ (27) $ (1,883)
======== ======== ======= ===== ========
CASH FLOW DATA
(YEAR ENDED DECEMBER 31, 1998):
Net cash provided by (used in)
operating activities $ (8,204) $ 9,429 $ 284 $ -- $ 1,509
Investing activities:
Purchases of property, plant and equipment -- (9,434) (545) -- (9,979)
Proceeds from the sale of equipment -- 858 -- -- 858
Increase in short-term investments (17,358) -- -- -- (17,358)
Acquisition of businesses, less cash acquired -- (233) (862) -- (1,095)
-------- -------- ------- ----- --------
Net cash used in investing activities (17,358) (8,809) (1,407) -- (27,574)
Financing activities:
Payments on revolving credit lines -- (26,084) -- -- (26,084)
Intercompany (52,497) 49,785 2,712 -- --
Proceeds from bond offering 115,000 -- -- -- 115,000
Payment of bond issue cost (5,241) -- -- -- (5,241)
Decrease in amounts due to GEC and affiliates -- (1,221) -- -- (1,221)
Dividend distribution (10,000) -- -- -- (10,000)
Decrease in long-term borrowings (21,700) (20,189) -- -- (41,889)
-------- -------- ------- ----- --------
Net cash provided by financing activities 25,562 2,291 2,712 -- 30,565
Effect of exchange rate on cash -- 90 (411) -- (321)
-------- -------- ------- ----- --------
Increase in cash and cash equivalents -- 3,001 1,178 -- 4,179
Cash and cash equivalents at beginning
of period 28 1,173 2,082 -- 3,283
-------- -------- ------- ----- --------
Cash and cash equivalents at end of period $ 28 $ 4,174 $ 3,260 $ -- $ 7,462
======== ======== ======= ===== ========
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(DECEMBER 31, 1997):
Current assets:
Cash and cash equivalents $ 28 $ 1,173 $ 2,082 $ -- $ 3,283
Short-term investments 4,176 -- -- -- 4,176
Accounts receivable, net -- 29,230 8,778 (187) 37,821
Inventories -- 39,494 8,496 78 48,068
Other -- 900 635 -- 1,535
------- -------- ------- -------- --------
Total current assets 4,204 70,797 19,991 (109) 94,883
Property, plant and equipment, net -- 9,351 647 -- 9,998
Goodwill -- 32,008 64 -- 32,072
Investment in subsidiaries 31,437 11,581 -- (43,018) --
Other assets 417 698 7 -- 1,122
Intercompany -- 4,000 -- (4,000) --
------- -------- ------- -------- --------
Total assets $36,058 $128,435 $20,709 $(47,127) $138,075
======= ======== ======= ======== ========
Current liabilities:
Accounts payable $ -- $ 11,475 $ 2,668 $ -- $ 14,143
Accrued expenses 3,227 22,345 2,430 597 28,599
Deferred service revenue -- 5,903 1,057 -- 6,960
Due to GEC -- 945 -- -- 945
Restructuring and severance reserves -- 3,121 -- -- 3,121
Current portion of long-term debt 1,000 2,495 -- -- 3,495
Intercompany 4,000 -- -- (4,000) --
------- -------- ------- -------- --------
Total current liabilities 8,227 46,284 6,155 (3,403) 57,263
Long-term debt, less current portion 20,700 46,421 -- -- 67,121
Retirement obligations -- 3,414 37 -- 3,451
Other long-term liabilities -- -- -- 3,109 3,109
Intercompany -- (1,155) 2,190 (1,035) --
Stockholder's equity 7,131 33,471 12,327 (45,798) 7,131
------- -------- ------- -------- --------
Total liabilities and stockholder's equity $36,058 $128,435 $20,709 $(47,127) $138,075
======= ======== ======= ======== ========
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
(JANUARY 17, 1997 THROUGH DECEMBER 31, 1997):
Net revenue $ -- $154,934 $42,773 $(4,491) $193,216
Cost of revenue -- 104,150 29,969 (4,468) 129,651
------- -------- ------- ------- --------
Gross profit -- 50,784 12,804 (23) 63,565
Total operating expenses 33 41,888 10,645 -- 52,566
------- -------- ------- ------- --------
Operating income (loss) (33) 8,896 2,159 (23) 10,999
Interest income (expense), net 146 (2,079) 124 -- (1,809)
Other income (expense) -- (36) 175 -- 139
------- -------- ------- ------- --------
Income (loss) before foreign income taxes 113 6,781 2,458 (23) 9,329
Foreign income taxes -- -- 775 -- 775
------- -------- ------- ------- --------
Net income (loss) $ 113 $ 6,781 $ 1,683 $ (23) $ 8,554
======= ======== ======= ======= ========
CASH FLOW DATA
(JANUARY 17, 1997 THROUGH DECEMBER 31, 1997):
Net cash provided by operating activities: $ 563 $ 12,668 $ 1,854 $ -- $ 15,085
Investing activities:
Accounts receivable used in connection with
acquisition of A. B. Dick -- (19,489) -- -- (19,489)
Acquisition of businesses, less of cash acquired (2,589) (3,076) 755 -- (4,910)
Purchases of property, plant and equipment -- (1,405) (455) -- (1,860)
Payments of acquisition liabilities -- (4,379) -- -- (4,379)
Decrease in short-term investments 1,954 -- -- -- 1,954
------- -------- ------- ------- --------
Net cash provided by (used in) investing
activities (635) (28,349) 300 -- (28,684)
Financing activities:
Borrowings on revolving credit lines -- 18,603 -- -- 18,603
Intercompany -- -- -- -- --
Increase in amounts due to GEC and affiliates -- (2,436) -- -- (2,436)
Decrease in long-term borrowings -- (914) -- -- (914)
------- -------- ------- ------- --------
Net cash provided by financing activities -- 15,253 -- -- 15,253
Effect of exchange rate on cash -- -- (521) -- (521)
------- -------- ------- ------- --------
Increase (decrease) in cash and cash equivalents (72) (428) 1,633 -- 1,133
Cash and cash equivalents at beginning of period 100 1,601 449 -- 2,150
------- -------- ------- ------- --------
Cash and cash equivalents at end of period $ 28 $ 1,173 $ 2,082 $ -- $ 3,283
======= ======== ======= ======= ========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
36
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and
executive officers of the Company.
Name Age Position with the Company
- - ---- --- -------------------------
Frank D. Zaffino 59 President and Chief Executive Officer
and Director
A. Keith Drewett 53 Vice President
Gregory T. Knipp 44 Acting Chief Financial Officer
John H. Fountain 36 Chairman of the Board
Donald F. Hastings 71 Director
John J. Kahl, Jr. 58 Director
John R. Tomsich 33 Director
Robert J. Tomsich 69 Director
James W. Wert 53 Director
Set forth below is a brief description of the business experience of each
director and executive officer of the Company.
MR. ZAFFINO has served as President and Chief Executive Officer of the Company
since December 1999. Mr. Zaffino previously served as General Manager, Global
Equipment Manufacturing, and Vice President of the Eastman Kodak Company based
in Rochester, New York, from 1985 to 1999. Mr. Zaffino served in various
capacities within Kodak including Manager of Manufacturing and Materials
Management; Superintendent of Parts Manufacturing and Department Head of Instant
Camera Assembly.
MR. DREWETT has served as Vice President of the Company since March 1998. Mr.
Drewett has served as President and Chief Executive Officer of Curtis since July
1998. Mr. Drewett previously served as President-Automotive and Industrial
Division of Curtis from May 1992 and Senior Vice President of Curtis from May
1997 to July 1998.
MR. KNIPP has served as the Acting Chief Financial Officer of the Company and
Chief Financial Officer of A.B. Dick Company since February 2000. Mr. Knipp
served as the Chief Financial Officer of Multigraphics, Inc from May 1997 to
February 2000. Mr. Knipp previously served Multigraphics, Inc. as Treasurer
from 1995 to 1997 and Assistant Treasurer from 1994 to 1995. From 1981 to 1987,
Mr. Knipp was the Cash Manager of Woodland Services Co., a spin-off company of
Masonite Corporation. Prior to 1981, Mr. Knipp was an auditor with Peat Marwick
Mitchell & Co.
MR. FOUNTAIN has served as Chairman of the Board of Directors of the Company
since March 1998 and a member of the Board's Executive Committee since May 1998.
Mr. Fountain served as Secretary and Treasurer of the Company since its
inception in September 1996 through March 1998, as Vice President from November
1996 to present, and as director since January 1997. Mr. Fountain has been a
Vice President of Nesco, Inc. since 1993. Mr. Fountain is the son-in-law of Mr.
Robert Tomsich.
MR. HASTINGS has served as a Director of the Company since March 1998. Mr.
Hastings served as Chairman of Lincoln Electric Company, a welding products
manufacturer, from 1992 through 1997, and Chief Executive Officer of Lincoln
Electric Company from 1992 through 1996. Mr. Hastings also serves as a director
of Continental Global Group, Inc.
MR. KAHL, JR. has served as a Director of the Company since March 1998. Mr. Kahl
is Chairman and Chief Executive Officer of Manco, Inc., a manufacturer of
pressure sensitive tapes for household and automotive repairs, mailing and
shipping supplies, weatherstripping and related home energy products and labels.
Mr. Kahl also serves as a director of Applied Industrial Technologies Inc. and
Royal Appliance Mfg. Co.
37
<PAGE> 40
MR. JOHN TOMSICH has served as a Director of the Company since January 1997 and
served as a Vice President of the Company since its inception through March
1998. In addition, Mr. John Tomsich has served as Vice President of Nesco, Inc.
since 1995 and in various other management positions with Nesco, Inc. since
1990. Mr. John Tomsich also serves as director of Continental Global Group, Inc.
Mr. John Tomsich is the son of Mr. Robert Tomsich.
MR. ROBERT TOMSICH has served as a Director of the Company since its inception
and served as President of the Company from its inception to March 1998. In
addition, Mr. Robert Tomsich has served as President and a Director of Nesco,
Inc. (including predecessors of Nesco, Inc.) since 1956. Mr. Robert Tomsich also
serves as director of Continental Global Group, Inc. Mr. Robert Tomsich is the
father of Mr. John Tomsich and the father-in-law of Mr. John Fountain.
MR. WERT has served as a Director of the Company from January to April 1997 and
since March 1998 and as Chair of the Board's Executive Committee since May 1998.
Prior to his service with the Company, Mr. Wert held a variety of executive
management positions with KeyCorp, a financial services company based in
Cleveland, Ohio, and KeyCorp's predecessor, Society Corporation. Mr. Wert served
as Senior Executive Vice President and Chief Investment Officer of KeyCorp from
1995 to 1996. Prior to that time, he served as Senior Executive Vice President
and Chief Financial Officer of KeyCorp. for two years and Vice Chairman,
Director and Chief Financial Officer of Society Corporation for four years. Mr.
Wert also serves as a director of Continental Global Group, Inc. and as Chairman
of the Executive and Compensation Committees of the Board of Directors, of
Park-Ohio Industries, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation of
the Company's Chief Executive Officer and the other most highly compensated
officers of the Company having total annual salary and bonus in excess of
$100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- OTHER ANNUAL
PRINCIPAL POSITION PERIOD ENDED SALARY BONUS COMPENSATION(1)
------------------ ------------ ------ ----- ---------------
<S> <C> <C> <C> <C>
Gerald J. McConnell, December 31, 1999 $ 81,442(2) $ --- $247,040
President and December 31, 1998 300,390 --- 8,410
Chief Executive Officer December 31, 1997 259,135(3) 125,000 18,952
A. Keith Drewett, December 31, 1999 $214,583 $157,500 $ 28,844
Vice President December 31, 1998 183,500 84,000 374,541
December 31, 1997 160,000 42,560 12,472
Frank D. Zaffino December 31, 1999 $ -- -- --
President and December 31, 1998 -- -- --
Chief Executive Officer December 31, 1997 -- -- --
Edward J. Suchma, December 31, 1999 $207,692(4) $ -- $ 23,482
Vice President and December 31, 1997 20,193 -- --
Chief Financial Officer(4) December 31, 1996 -- -- --
</TABLE>
(1) Amounts shown for the year and period ended December 31, 1999 reflect
contributions made by A.B.Dick or Curtis on behalf of the named executives
under the applicable 401(k) plan, life insurance premiums paid, car
payments and miscellaneous payments made on behalf of the named executives,
as follows:
38
<PAGE> 41
<TABLE>
<CAPTION>
Mr. McConnell Mr. Drewett Mr. Suchma
<S> <C> <C> <C>
401(k) Plan $ 2,500 $ 2,923 $ --
Life Insurance Premiums 675 3,999 675
Car Payments and Miscellaneous 22,809 21,922 22,807
Severance 221,056 -- --
</TABLE>
(2) Mr. McConnell resigned his position effective April 7, 1999.
(3) Reflects 49-week period from January 17, 1997 to December 31, 1997 at
annual salary of $275,000.
(4) Mr. Suchma resigned his positions with A.B.Dick effective February 11,
2000.
DIRECTOR COMPENSATION
Each director of the Company not employed by the Company or any entity
affiliated with the Company is entitled to receive $25,000 per year for serving
as a director of the Company. The director of the Executive Committee receives
an additional $25,000 per year for his services. In addition, the Company will
reimburse such directors for their travel and other expenses incurred in
connection with attending meetings of the Board of Directors.
EMPLOYMENT, SEVERANCE AND BONUS AGREEMENTS
On November 10, 1995, A.B.Dick entered into a letter agreement with Gerald J.
McConnell providing for Mr. McConnell's employment as President and Chief
Executive Officer of A.B.Dick. Mr. McConnell resigned his position with A.B.Dick
effective April 7, 1999 and, in accordance with the agreement, he will receive
continued salary payments (at a rate of $302,500 per year) for the period of
April 7, 1999 through April 7, 2000, and continued participation in all employee
benefit plans until April 7, 2000 (having an estimated value of $26,000), or
until he receives equivalent coverage and benefits from a subsequent employer,
if earlier. Thus, the maximum aggregate benefits payable to Mr. McConnell under
the agreement are approximately $328,500. Under the agreement, Mr. McConnell is
not permitted to compete against A.B.Dick or any of its subsidiaries for a
period of twelve months following the termination or expiration of the
agreement.
On July 2, 1998, Curtis entered into a letter agreement with A. Keith Drewett
providing for Mr. Drewett's employment as President and Chief Executive Officer
of Curtis. The agreement provides for an initial base salary at the rate of
$200,000 per year. Mr. Drewett is eligible to participate in the bonus
compensation plan available to executive officers of Curtis, under which bonuses
are determined in the discretion of the Curtis Board of Directors. If Mr.
Drewett's employment is terminated for any reason other than for cause, or if
Mr. Drewett ceases to be employed by Curtis on account of death or permanent
disability, or if Mr. Drewett voluntarily ceases his employment with Curtis for
any reason on or after December 6, 1998, then Curtis will be required to pay Mr.
Drewett severance payments calculated upon his base salary for twenty-four
months, to pay bonuses earned prior to such termination or cessation of
employment, and to continue his participation in all employee benefit plans for
such twenty-four month period or until he receives substantially comparable
coverage and benefits from a subsequent employer, if earlier. The agreement
precludes Mr. Drewett from competing with Curtis, the Company or its
subsidiaries, or from soliciting or employing any employee, officer or agent of
Curtis, the Company or its subsidiaries, for twelve months following cessation
of employment with Curtis. If Mr. Drewett were to separate from Curtis under the
circumstances described above, at his current
39
<PAGE> 42
annual salary of $225,000, the maximum aggregate benefits payable to him under
the agreement (including assumed continuation of employee benefit plan
participation for twenty-four months at an estimated value of $26,500) would be
approximately $476,500, plus bonuses earned, if any, prior to his cessation of
employment.
In connection with the Curtis Acquisition, Mr. Drewett and Curtis also entered
into a Bonus Award Agreement on December 6, 1997. The agreement requires Curtis
to pay Mr. Drewett quarterly payments of $5,915 through September 3, 1999,
followed by a payment of $343,915 on December 3, 1999. The Company guaranteed
the payment of all amounts payable to Mr. Drewett under the Bonus Award
Agreement. In March 1998, Curtis paid all amounts due or that would become due
in the future under the Bonus Award Agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the outstanding
equity securities of the Company as of March 15, 2000:
NUMBER OF SHARES TITLE OF CLASS NAME AND ADDRESS
OF BENEFICIAL OWNER
1,000 Class A, Common NES Group, Inc. (1)
Stock, no par value 6140 Parkland Blvd.
Mayfield Hts., OH 44124
19,000 Class B, Common NES Group, Inc. (1)
Stock, no par value 6140 Parkland Blvd.
Mayfield Hts., OH 44124
(1) All of the Company's issued and outstanding capital stock is owned by NES
Group, Inc. which is 100% owned by Mr. Robert J. Tomsich. Mr. Tomsich may
be deemed to be the beneficial owner of the Company's capital stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMMON OWNERSHIP
The Company is a Delaware corporation formed in September, 1996. All of the
outstanding capital stock of the Company is beneficially owned by NES Group,
Inc., which is beneficially owned by Robert J. Tomsich. Mr. Tomsich also
beneficially owns all the outstanding capital stock of Nesco, Inc., which has
entered into a management agreement with the Company as described below.
In 1998, the Company used a portion of the proceeds of the Series A Notes
Offering to fund a dividend. As the Company's sole stockholder, NES Group,
Inc. was the recipient of such dividend.
TAX PAYMENT AGREEMENT
The Company and the Subsidiary Guarantors have entered into a tax payment
agreement with NES Group, Inc. providing for monthly payments by each entity to
NES Group, Inc. in an amount equal to the greater of (i) the total federal,
state, local and, under certain circumstances, foreign income tax liability
attributable to such entity's operations for the monthly period, determined on
an annualized basis, and (ii) one-twelfth the total federal, state, local and
foreign income tax rates imposed by Section 1 of the Internal Revenue Code of
1986, as amended, and by the equivalent provisions of state, local and foreign
income tax laws. These tax payments will not recognize any future carry-forward
or carry-back tax benefits to the Company and the Subsidiary
40
<PAGE> 43
Guarantors. Future direct and indirect Subsidiaries of the Company also will
become parties to the tax payment agreement.
MANAGEMENT AGREEMENT
The Company and Nesco, Inc. have entered into a management agreement (the
"Management Agreement"), the material terms of which are summarized below.
Under the Management Agreement, Nesco, Inc. has agreed to provide general
management oversight services on a regular basis for the benefit of the
Company, in regard to business activities involving financial results, legal
issues and long-term planning relative to current operations and acquisitions.
Business development services will include assistance in identifying and
acquiring potential acquisition candidates, including negotiations and
contractual preparations in connection therewith. Financial planning will
include assistance in developing banking relationships and monitoring cash
investments through professional money management accounts. Under the terms of
the Management Agreement, the Company has agreed to pay Nesco, Inc. a
management fee for such services equal to 5% of the Company's earnings before
interest and estimated taxes, depreciation, amortization and other expense
(income). Prior to entering into the Management Agreement, the management fee
was 1.0% of net revenue. The management fee will be payable in monthly
installments. The Management Agreement will remain in effect until terminated
by either party upon not less than 60 days' written notice prior to an
anniversary date of the Management Agreement. The Company believes there are
efficiency benefits from having these management services provided by Nesco,
Inc. and believes that the terms of the management agreement are reasonable.
Due to the specialized nature of these services and the efficiencies associated
with provision of such services by Nesco, Inc., the Company has not undertaken
to determine whether more favorable terms could be obtained from an unrelated
third party.
The Company will also separately employ, as required, independent auditors,
outside legal counsel and other consulting services. Such services will be paid
directly by the Company.
CURTIS OFFICE LEASE
Lander Enterprises Co. L.P., an affiliate of the Company ("Lander"), and Curtis
have entered into a lease agreement (the "Lease") for Curtis' headquarters in
Mayfield Heights, Ohio. The initial term of the Lease expires on November 22,
2006, and Curtis has the option to renew for two additional five-year terms.
Curtis is obligated to pay Lander monthly rent of $37,333 during the first three
years of the Lease term, $44,800 during the years four through seven and $53,200
during years eight through ten. Rent for any renewal term shall be equal to 95%
of fair market rent at the time of renewal. Curtis has a right of first refusal
on any additional space that becomes available for lease in the building during
the Lease terms and has an option to lease additional space in the building
commencing in the sixth year of the Lease. At the end of the fifth year of the
Lease, Curtis will receive a credit of $5.00 per square foot to complete any
refurbishing Curtis deems necessary or desirable. Lander has furnished Curtis
with a cash allowance of $0.5 million to fund build-out costs, repayable in 120
equal monthly installments of $6,552. The Company believes this transaction is
on terms that are no less favorable than those that would have been obtained in
a comparable transaction with an unrelated person. The remaining balance of the
promissory note evidencing the cash allowance was discharged with the proceeds
of the Series A Notes Offering.
A.B.DICK OFFICE LEASE
Par Realty Ltd., L.P., an affiliate of the Company ("Par"), and A.B.Dick have
entered into a lease agreement (the "A.B.Dick Lease") for A.B.Dick's new
headquarters in Niles, Illinois. The initial term of the A.B.Dick Lease extends
for ten years from the date A.B.Dick takes possession of the premises, which
took place on July 1, 1998. A.B.Dick has the option to extend the term for one
additional five-year period at the expiration of the initial term. The monthly
rent payable by A.B.Dick to Par under the A.B.Dick Lease is approximately
$35,000, which will increase 3% per year commencing with the second lease year.
The Company believes this transaction is on terms that are no less favorable
than those that would have been obtained in a comparable transaction with an
unrelated person.
41
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) Documents filed as part of this report:
1. Consolidated Financial Statements (included in Item 8).
Report of Independent Auditors dated March 30, 2000
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998 and for the eleven-month and fifteen-day period ended
December 31, 1997
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended December 31, 1999 and 1998 and for the eleven-month and
fifteen-day period ended December 31, 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 and for the eleven-month and fifteen-day period ended
December 31, 1997.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Financial statement schedules have been omitted because they are either
not applicable or the required information has been disclosed in the
consolidated financial statements or the related footnotes.
3. Exhibits Required to be filed by Item 601 of Regulation S-K.
The information required by this paragraph is contained in the Index of
Exhibits to this report which is incorporated herein by reference.
(B) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
42
<PAGE> 45
ITEM 15. SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) the Securities Act of 1994,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 30th day of March, 2000.
PARAGON CORPORATE HOLDINGS INC.
By: /s/ Frank D. Zaffino
--------------------------------------
Name: Frank D. Zaffino
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Frank D. Zaffino President and Chief Executive Officer and Director March 30, 2000
- - ------------------------------------ (Principal Executive Officer)
Frank D. Zaffino
/s/ A. Keith Drewett Vice President March 30, 2000
- - ------------------------------------
A.Keith Drewett
/s/ Gregory T. Knipp Acting Chief Financial Officer March 30, 2000
- - ------------------------------------ (Principal Financial and Accounting Officer)
Gregory T. Knipp
/s/ John H. Fountain Director March 30, 2000
- - ------------------------------------
John H. Fountain
/s/ Donald F. Hastings Director March 30, 2000
- - ------------------------------------
Donald F. Hastings
/s/ John J. Kahl, Jr. Director March 30, 2000
- - ------------------------------------
John J. Kahl, Jr.
/s/ John R. Tomsich Director March 30, 2000
- - ------------------------------------
John R. Tomsich
/s/ Robert J. Tomsich Director March 30, 2000
- - ------------------------------------
Robert J. Tomsich
/s/ James W. Wert Director March 30, 2000
- - ------------------------------------
James W. Wert
</TABLE>
Supplemental Information to be furnished with reports filed pursuant to Section
15(d) of the Act by Registrants which have not registered securities pursuant to
Section 12 of the Act.
No annual report to security holders covering the registrant's last fiscal year
and no proxy statement, form or proxy or other soliciting material with respect
to any annual or other meeting of security holders has been or will be sent to
security holders.
43
<PAGE> 46
PARAGON CORPORATE HOLDINGS INC.
FORM 10-K
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C> <C>
3.1 Certificate of Incorporation of Paragon Corporate Holdings Inc., as currently in effect. *
3.2 By-Laws of Paragon Corporate Holdings Inc. as currently in effect *
3.3 Certificate of Incorporation of A.B.Dick Company, as currently in effect *
3.4 By-Laws of A.B.Dick Company, as currently in effect. *
3.5 Certificate of Incorporation of Curtis Industries, Inc. as currently in effect. *
3.6 By-Laws of Curtis Industries, Inc. as currently in effect. *
3.7 Certificate of Incorporation of Itek Graphix Corp., as currently in effect. *
3.8 By-Laws of Itek Graphix Corp., as currently in effect. *
3.9 Certificate of Incorporation of Curtis Sub, Inc., as currently in effect. *
3.10 By-Laws of Curtis Sub, Inc., as currently in effect. *
4.1 Indenture, dated as of April 1, 1998, among Paragon Corporate Holdings Inc., A.B.Dick *
Company, Curtis Industries, Inc., Itek Graphix Corp., Curtis Sub, Inc and Norwest Bank
Minnesota, National Association, as Trustee (containing, as exhibits, specimens of the
Series A Notes and the Series B Notes).
4.4 (a) Credit and Security Agreement, dated as of April 1, 1998 amended by Amendment *
I, between Paragon Corporate Holdings Inc. and Key Corporate Capital Inc.
(b) Amendment I, dated as of March 17, 1999, to the Credit and Security Agreement, *
dated as of April 1, 1998 between Paragon Corporate Holdings Inc. and Key
Corporate Capital Inc.
(c) Waiver and Amendment to the Credit and Security Agreement dated March 29, 2000
between Paragon Corporate Holdings Inc. and Key Corporate Capital Inc.
10.1 Agreement and Plan of Merger, dated as of November 6, 1997, among Paragon Corporate *
Holdings Inc., Curtis Industries, Inc. and Curtis Acquisition Group.
10.2 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 Agreement dated July 2, 1998 among Curtis Industries, Inc., Paragon Holdings Inc. and **
A. Keith Drewett.
10.8 Agreement and plan of merger, dated September 29, 1999 between Multi Acquisition Corp., ***
a wholly-owned subsidiary of Paragon Corporate Holdings Inc., and Multigraphics, Inc.
12 Statement regarding computation of ratios of earnings to fixed charges
21 Subsidiaries of registrant
27 Financial Data Schedule
</TABLE>
* 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
*** Incorporated by reference from Appendix A of Schedule 14A filed December 6,
1999 by Multigraphics, Inc.
44
<PAGE> 1
Exhibit 4.4(c)
[KEY LOGO]
KEYBANK
127 Public Square
Cleveland, OH 44114-1306
March 28, 2000
Mr. Gregory T. Knipp
Paragon Corporate Holdings, Inc.
7400 Caldwell Avenue
Niles, Il 60714
RE: Paragon Corporate Holdings, Inc./A.B. Dick Company Covenant Waivers
Dear Greg:
Reference is hereby made to that certain Credit and Security Agreement
("Agreement") dated as of April 1, 1998 as amended on March 17, 1999, between
Paragon Corporate Holdings, Inc. ("Paragon") and Key Corporate Capital Inc.
("KCCI"). Unless otherwise defined herein, each of the capitalized terms used
herein and not otherwise defined herein shall have the meaning ascribed such
term in the Agreement.
Pursuant to recent discussions, Paragon has notified KCCI of certain covenant
violations under Section 8.4(a) and 8.4(b) of the Agreement for the period
ended December 31, 1999 and March 31, 2000. Section 8.4(a) states that the
Consolidated EBITDA of A.B. Dick as at the end of any Cumulative Four Fiscal
Quarter Period ending after the Closing Date shall not be less than
$10,250,000. Section 8.4(b) states that the Consolidated Fixed Charge Coverage
Ratio for Paragon and AB Dick as at the end of any Cumulative Four Fiscal
Quarter Period shall not be less than 1.20 to 1.0.
In response to your request, KCCI hereby waives any remedies it may have with
respect to the specific covenant violations existing under the aforementioned
sections of the Agreement for the period ended December 31, 1999 and March 31,
2000. This waiver shall not apply to any other Covenant violation or Event of
Default except for the specifically aforementioned covenant violations. Nothing
herein shall be construed or implied that KCCI will grant a waiver of the
covenant violations of these or any other provisions of the Agreement in the
future.
The violated covenants will be amended as follows:
- - --------------------------------------------------------------------------------
Amended
Covenant Requirement
- - --------------------------------------------------------------------------------
A.B. Dick: $2,050M for the six-month period ending
Section 8.4(a) June 30, 2000
Min. Consolidated EBITDA $5,700M for the nine-month period ending
September 30, 2000
$11,000M for the twelve-month period ending
December 31, 2000 and each rolling four
quarters thereafter
<PAGE> 2
March 28, 2000 - Paragon Corporate Holdings, Inc. Covenant Waivers
<TABLE>
<S> <C>
A.B. DICK: Greater than or equal to 0.50 for the six-month period ending June, 30 2000
Section 8.4(b) Greater than or equal to 1.20 for the nine-month period ending September 30, 2000
Fixed Charge Coverage Greater than or equal to 1.20 for the twelve-month period ending December 31, 2000
and each rolling four quarters thereafter
PARAGON CORP. HOLDINGS: No covenant for the six-month period ending June 30, 2000
(CONSOLIDATED): Greater than or equal to 0.25 for the nine-month period ending September 30, 2000
Section 8.4(b) Greater than or equal to 0.50 for the twelve-month period ending December 31, 2000
Fixed Charge Coverage Greater than or equal to 1.20 for the three-month period ending March 31, 2001 and
each quarter thereafter calculated on a cumulative basis through the twelve-month
period ending December 31, 2001
Greater than or equal to 1.20 for each rolling four quarters thereafter
</TABLE>
The execution of this letter shall serve as acknowledgement that the foregoing
waiver shall not affect the continued legality, validity, and binding effects of
the Agreement in its entirety and that the Agreement and each of the loan
documents continue to be freely enforceable in accordance with their terms and
are hereby ratified and confirmed by Paragon. If the foregoing is acceptable to
you, kindly acknowledge your agreement thereto by executing and returning this
letter to my attention.
Very truly yours,
/s/ Christine A. Schoaf
Christine A. Schoaf
Assistant Vice President
Structured Finance
Please execute in the space below to acknowledge the waivers for the specific
covenant violations mentioned above as well as the continued legality and
validity of the Agreement in its entirety.
ACCEPTED AND AGREED TO AS OF THIS
29TH DAY OF MARCH, 2000
PARAGON CORPORATE HOLDINGS, INC.
BY: /s/ Frank D. Zaffino
ITS: President and CEO
<PAGE> 1
EXHIBIT 12
PARAGON CORPORATE HOLDINGS INC.
COMPUTATION of RATIO of EARNINGS to FIXED CHARGES
(In thousands, except for ratios)
<TABLE>
<CAPTION>
THE COMPANY A.B.DICK
---------------------------------------------------------- ---------------------
Period from Period from (Predecessor Company)
Year Ended Year Ended Jan. 17, 1997 April 1, 1996 Fiscal Year
Dec. 31, Dec. 31, through through Ended March 31,
1999 1998 Dec. 31, 1997 Jan. 16, 1997 1996
---------- ---------- ------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
Computation of earnings:
Income (loss) before foreign
income taxes and extraordinary item $(15,391) $ 142 $ 9,329 $(455) $(5,463)
Amortization of deferred financing costs 526 365 214 -- --
Interest expense 12,383 10,946 2,384 205 162
Portion of rent expense representative
of an interest factor 1,352 1,530 742 765 728
-------- ------- ------- ----- -------
Earnings $ (1,130) $12,983 $12,669 $ 515 $(4,573)
======== ======= ======= ===== =======
Computation of Fixed Charges:
Amortization of deferred financing costs $ 526 $ 365 $ 214 $ -- $ --
Interest expense 12,383 10,946 2,384 205 162
Portion of rent expense representative
of an interest factor 1,352 1,530 742 765 728
-------- ------- ------- ----- -------
Fixed Charges $ 14,261 $12,841 $ 3,340 $ 970 $ 890
======== ======= ======= ===== =======
Ratio of Earnings to Fixed Charges (1) 1.01 3.79 (1) (1)
======== ======= ======= ===== =======
</TABLE>
(1) Earnings were inadequate to cover fixed charges
45
<PAGE> 1
EXHIBIT 21
PARAGON CORPORATE HOLDINGS INC.
SUBSIDIARIES of the REGISTRANT at MARCH 15, 2000
<TABLE>
<CAPTION>
Jursidiction
of Incorporation
Subsidiaries (1) or Organization Parent Company
- - ---------------------------------------- --------------------- ------------------------------------
<S> <C> <C>
A. B. Dick Company Delaware Paragon Corporate Holdings Inc.
A. B. Dick Company of Canada, Ltd. Canada A. B. Dick Company
A. B. Dick N.V. Belgium A. B. Dick Company
A. B. Dick Netherlands B.V. Netherlands A. B. Dick Company
A. B. Dick B.V. Netherlands A. B. Dick Company
A. B. Dick U.K. Limited United Kingdom A. B. Dick Company
Itek Graphix Corp. Delaware A. B. Dick Company
Curtis Industries, Inc. Delaware Paragon Corporate Holdings Inc.
Curtis Industries of Canada, Ltd. Canada Curtis Industries, Inc.
Curtis Industries (U.K.), Ltd. United Kingdom Curtis Industries, Inc.
Curtis Sub., Inc. Delaware Curtis Industries, Inc.
</TABLE>
(1) Each of the subsidiaries listed is 100% owned by its parent company.
46
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary finacial information extracted from the financial
statements listed on pages 17 and 18 of this Form 10-k and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001060513
<NAME> PARAGON CORPORATE HOLDINGS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,341
<SECURITIES> 3,610
<RECEIVABLES> 38,208
<ALLOWANCES> 2,265
<INVENTORY> 45,924
<CURRENT-ASSETS> 102,741
<PP&E> 30,328
<DEPRECIATION> 9,965
<TOTAL-ASSETS> 160,656
<CURRENT-LIABILITIES> 58,154
<BONDS> 115,000
0
0
<COMMON> 1
<OTHER-SE> (19,459)
<TOTAL-LIABILITY-AND-EQUITY> 160,656
<SALES> 248,668
<TOTAL-REVENUES> 248,668
<CGS> 158,803
<TOTAL-COSTS> 158,803
<OTHER-EXPENSES> 1,866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,838
<INCOME-TAX> (164)
<INCOME-CONTINUING> (15,227)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,227)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
