1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended June 30, 1998
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.
5700 West Touhy Avenue A.B. Dick Company
Niles, Illinois 60714 5700 West Touhy Avenue
(847) 779-2500 Niles, Illinois 60714
(847) 779-1900
Curtis Industries, Inc. Itek Graphix Corp.
6140 Parkland Boulevard 5700 West Touhy Avenue
Mayfield Heights, Ohio 44124 Niles, Illinois 60714
(440) 446-9700 (847) 779-1900
Curtis Sub, Inc.
6140 Parkland Boulevard
Mayfield Heights, Ohio 44124
(440) 446-9700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( ) No ( X )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
As of July 31, 1998, there were 1,000 shares of the registrant's Class A common
stock outstanding.
As of July 31, 1998, there were 19,000 shares of the registrant's Class B common
stock outstanding.
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INDEX
PARAGON CORPORATE HOLDINGS INC.
Part I Financial Information Page Number
Item 1 Financial Statements (Unaudited)..................................................1
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997...............................................2
Condensed Consolidated Statements of Income
Three Months ended June 30, 1998 and 1997
Six Months ended June 30, 1998 and the period from
January 17, 1997 through June 30, 1997.........................................3
Condensed Consolidated Statements of Cash Flows Six Months
ended June 30, 1998 and the period from January 17, 1997
through June 30, 1997.......................................................4
Notes to Condensed Consolidated Financial Statements...........................5-13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................14-17
Part II Other Information
Item 2 Change in Securities.............................................................18
Item 6 Exhibits and Reports on Form 8-K.................................................18
Signature...................................................................................19
3
Part I. Financial Information
Item I. Financial Statements (Unaudited)
1
4
Paragon Corporate Holdings Inc.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
ASSETS:
Current Assets:
Cash and cash equivalents $ 6,937 $ 3,283
Short-term investments 27,714 4,176
Accounts receivable, net 39,715 37,821
Inventories 50,690 48,068
Other 1,596 1,535
--------- ---------
Total current assets 126,652 94,883
Property, plant and equipment, less
accumulated depreciation 12,372 9,998
Goodwill 32,290 32,072
Other assets 4,436 1,122
--------- ---------
$ 175,750 $ 138,075
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Accounts payable $ 20,774 $ 14,143
Accrued expenses 24,338 28,599
Deferred service revenue 6,505 6,960
Due to GEC 3,000 945
Restructuring and severance reserves 2,468 3,121
Current portion of long-term debt 747 3,495
--------- ---------
Total current liabilities 57,832 57,263
Senior Notes 115,000 --
Long-term debt, less current portion 1,102 67,121
Retirement obligations 3,474 3,451
Other long-term liabilities 2,934 3,109
Stockholder's equity:
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) (4,030) 7,604
Accumulated other comprehensive loss (610) (521)
--------- ---------
Total stockholder's equity (deficit) (4,592) 7,131
--------- ---------
$ 175,750 $ 138,075
========= =========
See notes to condensed consolidated financial statements.
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5
Paragon Corporate Holdings Inc.
Condensed Consolidated Statements of Income
(In thousands)
Period from
Six Months January 17, 1997
Three Months Ended Ended through
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
NET REVENUE
Equipment $ 19,166 $ 17,430 $ 33,059 $ 32,192
Service 6,810 7,695 13,201 13,935
Repair parts 3,988 4,241 8,029 7,758
Supplies 18,880 21,028 38,194 37,807
Automotive and industrial 20,285 -- 40,594 --
--------- --------- --------- ---------
Total net revenue 69,129 50,394 133,077 91,692
COST OF REVENUE
Equipment 14,034 12,274 24,199 22,788
Service 5,087 5,537 10,143 9,998
Repair parts 1,695 1,759 3,298 3,235
Supplies 12,580 14,040 25,068 25,231
Automotive and industrial 8,661 -- 17,322 --
--------- --------- --------- ---------
Total cost of revenue 42,057 33,610 80,030 61,252
--------- --------- --------- ---------
Gross profit 27,072 16,784 53,047 30,440
COSTS AND EXPENSES
Sales and marketing expenses 11,222 6,734 22,180 11,662
General and administrative expenses 9,874 4,531 19,908 8,429
Research and development 790 1,142 1,551 1,994
Depreciation and amortization 1,384 360 2,615 685
Management fee 285 511 921 924
Relocation costs 558 -- 909 --
--------- --------- --------- ---------
24,113 13,278 48,084 23,694
--------- --------- --------- ---------
Operating income 2,959 3,506 4,963 6,746
Interest expense, net (3,097) (650) (4,714) (984)
Other income (expense) (61) 81 (163) 19
--------- --------- --------- ---------
Income (loss) before foreign income
taxes and extraordinary item (199) 2,937 86 5,781
Foreign income taxes 225 210 440 370
--------- --------- --------- ---------
Income (loss) before extraordinary
item (424) 2,727 (354) 5,411
Extraordinary item 1,280 -- 1,280 --
--------- --------- --------- ---------
Net income (loss) $ (1,704) $ 2,727 $ (1,634) $ 5,411
========= ========= ========= =========
See notes to condensed consolidated financial statements.
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6
Paragon Corporate Holdings Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Period from
January 17, 1997
Six Months Ended through
June 30, 1998 June 30, 1997
------------- -------------
(Unaudited)
Operating activities:
Net income (loss) $ (1,634) $ 5,411
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Extraordinary item 1,280 --
Provision for depreciation and amortization 2,548 685
Changes in operating assets and liabilities (3,642) 3,634
--------- ---------
Net cash provided by (used in) operating activities (1,448) 9,730
Investing activities:
Accounts receivable used in connection with the
acquisition of A.B. Dick Company -- (19,489)
Purchases of property, plant and equipment (3,607) (1,439)
Payments of acquisition liabilties (1,217) (708)
Increase in short-term investments (23,538) (45)
Acquisition of business (219) --
--------- ---------
Net cash used in investing activities (28,581) (21,681)
Financing activities:
Borrowings on revolving credit lines 12,529
Amounts due to GEC and affiliates 55 (1,181)
Decrease in long-term borrowings (40,683) --
Proceeds from bond offering 115,000 --
Payment of bond issue costs (4,516) --
Payment on revolving credit lines (26,084) --
Dividend distribution (10,000) --
--------- ---------
Net cash provided by financing activities 33,772 11,348
Effect of exchange rate changes on cash (89) (208)
--------- ---------
Increase (decrease) in cash and cash equivalents 3,654 (811)
Cash and cash equivalents at beginning of period 3,283 2,150
--------- ---------
Cash and cash equivalents at end of period $ 6,937 $ 1,339
========= =========
See notes to condensed consolidated financial statements.
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Paragon Corporate Holdings Inc.
Notes to Consolidated Financial Statements
A. ORGANIZATION
Paragon Corporate Holdings Inc. ("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"). The Company is a holding company with no
assets or operations other than its investments in its subsidiaries. NES Group,
Inc. is the sole stockholder of the Company. 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.
In connection with the acquisition of A.B. Dick, additional restructuring
reserves of $6,000 were included in the purchase price allocation in accordance
with the Company's business plans to substantially reorganize its operations.
These reserves represent 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. Through June 30, 1998, the Company has paid approximately $4.1 million
of these expenses.
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. 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:
Three months ended Period from January 17, 1997
June 30, 1997 through June 30, 1997
------------- ---------------------
Net revenues $ 70,446 $131,257
Costs and expenses 64,203 122,098
Operating income 4,843 7,759
Net income 3,058 4,506
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes of Paragon Corporate Holdings Inc. and
subsidiaries for the year ended December 31, 1997, included in Amendment No. 2
to the Form S-4 Registration Statement (Registration Statement No. 333-51569)
filed by the Company on July 17, 1998.
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C. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
D. ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement 130, Reporting Comprehensive Income,
which establishes new rules for the reporting and display of comprehensive
income and its components. Statement 130 requires the Company's foreign currency
translation adjustments to be included in other comprehensive income and the
disclosure of total comprehensive income. The Company adopted Statement 130 in
the first quarter of 1998 with no impact on net income or stockholder's equity.
The components of comprehensive income for the three month and six month periods
ended June 30, 1998 and 1997 and period from January 17, 1997 through June 30,
1997 are as follows:
Period from
January 17, 1997
Three months ended Six months through
June 30 June 30 ended June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) $(1,704) $ 2,727 $(1,634) $ 5,411
Foreign currency translation
adjustment (244) 89 (89) (208)
------- ------- ------- -------
Comprehensive income (loss) $(1,948) $ 2,816 $(1,723) $ 5,203
======= ======= ======= =======
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in years
beginning after June 15, 1999. Statement 133 requires all derivatives to be
recognized as either assets or liabilities in the balance sheet and be measured
at fair value. The Company is currently evaluating Statement 133 and because the
Company expects to have a minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a material effect on
earnings or the financial position of the Company.
E. INVENTORIES
Domestic inventories, which represent approximately 80% of total consolidated
inventory, are determined on the last-in, first-out (LIFO) basis and foreign
inventories are determined on the first-in, first-out (FIFO) basis. Where
necessary, reserves are provided to value inventory at the lower of cost or
market.
Inventories are summarized as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Raw materials and work in process $ 10,520 $ 9,295
Finished goods 40,860 39,363
LIFO reserve (690) (590)
-------- --------
$ 50,690 $ 48,068
======== ========
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9
F. DEBT ISSUANCE AND SUBSEQUENT EVENT
On April 1, 1998, the Company issued $115 million of Series A Senior Notes due
2008. Interest on the notes is payable semi-annually in cash in arrears. The
Senior 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 Senior Notes 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, payment of dividends, incurring additional indebtedness and restrict
transactions with affiliates. The proceeds from the notes, net of costs and
expenses, were used to retire $70,410 of existing debt and make a dividend
distribution to the sole stockholder of $10,000.
Pursuant to a Prospectus dated July 22, 1998 the Company made an offer to
exchange 9 5/8% Series B Notes due 2008 ("Series B Notes") for the $115 million
of Series A Notes. All of the Series A Notes were exchanged for Series B Notes
pursuant to the exchange offer which closed on August 24, 1998. The form and
terms of the Series B Notes are the same as the form and terms of the Series A
Notes, except that the Series B Notes have been registered under the Securities
Act of 1933.
G. INCOME TAXES
The Company and its domestic subsidiaries have elected Subchapter S Corporation
status for United States income tax purposes. Accordingly, the Company's United
States operations are not subject to income taxes as separate entities. The
Company's United States income is included in the income tax returns of the
stockholder. Under the terms of the Tax Payment Agreement with the Stockholder,
the Company makes distributions to the stockholder for payment of income taxes.
The Company has foreign subsidiaries located in Canada, the United Kingdom,
Holland, Belgium and the Netherlands. For the six months ended, June 30, 1998
and for the period January 17, 1997 through June 30, 1997, the Company recorded
foreign income taxes of $440 and $370 respectively.
H. 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.
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I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company's domestic subsidiaries, all of which are directly or indirectly
wholly owned, are the only guarantors of Senior Notes. The guarantees are full,
unconditional and joint and several. Separate financial statements of these
guarantor subsidiaries are not presented as management has determined that they
would not be material to investors.
The Company's foreign subsidiaries are not guarantors of the Senior Notes.
Summarized consolidating balance sheets as of June 30, 1998 and December 31,
1997 for the Company, the guarantor subsidiaries, and the non-guarantor, foreign
subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------- ------------ -----------
BALANCE SHEET DATA
(JUNE 30, 1998):
Current assets:
Cash and cash equivalents $ 184 $ 4,268 $ 2,485 $ -- $ 6,937
Short-term investments 27,714 -- -- -- 27,714
Accounts receivable, net -- 29,876 9,839 -- 39,715
Inventories -- 41,959 8,888 (157) 50,690
Other 105 777 714 -- 1,596
--------- --------- --------- --------- ---------
Total current assets 28,003 76,880 21,926 (157) 126,652
Property, plant and
equipment, net -- 11,389 983 -- 12,372
Goodwill -- 32,227 63 -- 32,290
Investment in subsidiary 74,736 13,803 -- (88,539) --
Other assets 4,185 244 7 -- 4,436
Intercompany 6,345 -- -- (6,345) --
--------- --------- --------- --------- ---------
$ 113,269 $ 134,543 $ 22,979 $ (95,041) $ 175,750
========= ========= ========= ========= =========
Current liabilities:
Accounts payable $ -- $ 17,561 $ 3,213 $ -- $ 20,774
Accrued expenses 2,861 19,132 2,648 (303) 24,338
Deferred service revenue -- 5,339 1,166 -- 6,505
Due to GEC -- 3,000 -- -- 3,000
Restructuring and
severance reserves -- 2,468 -- -- 2,468
Intercompany -- 4,602 2,478 (7,080) --
Current portion of long-
term debt -- 747 -- -- 747
--------- --------- --------- --------- ---------
Total current liabilities 2,861 52,849 9,505 (7,383) 57,832
Long-term debt, less
current portion -- 1,102 -- -- 1,102
Senior Notes 115,000 -- -- -- 115,000
Retirement obligations -- 3,474 -- -- 3,474
Other long-term liabilities -- 2,934 -- -- 2,934
Stockholder's equity (deficit) (4,592) 74,184 13,474 (87,658) (4,592)
--------- --------- --------- --------- ---------
$ 113,269 $ 134,543 $ 22,979 $ (95,041) $ 175,750
========= ========= ========= ========= =========
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11
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ -----------
BALANCE SHEET DATA
(DECEMBER 31, 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 subsidiary 31,437 11,581 -- (43,018) --
Deferred charges 417 698 7 -- 1,122
Intercompany -- 4,000 -- (4,000) --
--------- --------- --------- --------- ---------
$ 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
Intercompany 4,000 -- -- (4,000) --
Current portion of
long-term debt 1,000 2,495 -- -- 3,495
--------- --------- --------- --------- ---------
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
--------- --------- --------- --------- ---------
$ 36,058 $ 128,435 $ 20,709 $ (47,127) $ 138,075
========= ========= ========= ========= =========
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I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of income for the three months ended June
30, 1998 and 1997, respectively, for the Company, the guarantor subsidiaries,
and the non-guarantor, foreign subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ -------------- ------------ ---------
INCOME STATEMENT DATA:
(THREE MONTHS ENDED JUNE 30, 1998):
Net revenue $ -- $ 53,587 $ 15,621 $ (79) $ 69,129
Cost of revenue -- 31,854 10,293 (90) 42,057
-------- -------- -------- -------- --------
Gross profit -- 21,733 5,328 11 27,072
Total operating expenses 131 19,323 4,659 -- 24,113
-------- -------- -------- -------- --------
Operating income (loss) (131) 2,410 669 11 2,959
Interest (expense), net (2,748) (396) 47 -- (3,097)
Other income (expense) -- 15 (76) -- (61)
-------- -------- -------- -------- --------
Income (loss) before foreign
income taxes and extraordinary
item (2,879) 2,029 640 11 (199)
Foreign income taxes -- -- 225 -- 225
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item (2,879) 2,029 415 11 (424)
Extraordinary item 170 1,110 -- -- 1,280
-------- -------- -------- -------- --------
Net income (loss) $ (3,049) $ 919 $ 415 $ 11 $ (1,704)
======== ======== ======== ======== ========
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ----------
INCOME STATEMENT DATA:
(THREE MONTHS ENDED JUNE 30, 1997):
Net revenue $ -- $ 38,990 $ 11,404 $ -- $ 50,394
Cost of revenue -- 25,559 8,051 -- 33,610
-------- -------- -------- ------------ ----------
Gross profit -- 13,431 3,353 -- 16,784
Total operating expenses 15 10,500 2,763 -- 13,278
-------- -------- -------- ------------ ----------
Operating income (loss) (15) 2,931 590 -- 3,506
Interest (expense), net (152) (537) 39 -- (650)
Other income (expense) -- 38 43 -- 81
-------- -------- -------- ------------ ----------
Income (loss) before foreign
income taxes (167) 2,432 672 -- 2,937
Foreign income taxes -- -- 210 -- 210
-------- -------- -------- ------------ ----------
Net income (loss) $ (167) $ 2,432 $ 462 $ -- $ 2,727
======== ======== ======== ============ ==========
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13
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of income for the six months ended June 30,
1998 and the period from January 17, 1997 through June 30, 1997, respectively,
for the Company, the guarantor subsidiaries, and the non-guarantor, foreign
subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------- ------------ ---------
INCOME STATEMENT DATA:
(SIX MONTHS ENDED JUNE 30, 1998):
Net revenue $ -- $ 102,871 $ 30,360 $ (154) $ 133,077
Cost of revenue -- 60,158 20,048 (176) 80,030
--------- --------- --------- --------- ---------
Gross profit -- 42,713 10,312 22 53,047
Total operating expenses 148 38,699 9,237 -- 48,084
--------- --------- --------- --------- ---------
Operating income (loss) (148) 4,014 1,075 22 4,963
Interest (expense), net (3,195) (1,621) 102 -- (4,714)
Other income (expense) -- (109) (54) -- (163)
--------- --------- --------- --------- ---------
Income (loss) before foreign
income taxes and
extraordinary item (3,343) 2,284 1,123 22 86
Foreign income taxes -- -- 440 -- 440
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item (3,343) 2,284 683 22 (354)
Extraordinary item 170 1,110 -- -- 1,280
--------- --------- --------- --------- ---------
Net income (loss) $ (3,513) $ 1,174 $ 683 $ 22 $ (1,634)
========= ========= ========= ========= =========
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------- ------------ ---------
INCOME STATEMENT DATA:
(PERIOD FROM JANUARY 17, 1997
THROUGH JUNE 30, 1997):
Net revenue $ -- $ 71,490 $ 20,202 $ -- $ 91,692
Cost of revenue -- 47,020 14,232 -- 61,252
--------- --------- --------- --------- ---------
Gross profit -- 24,470 5,970 -- 30,440
Total operating expenses 16 18,826 4,852 -- 23,694
--------- --------- --------- --------- ---------
Operating income (loss) (16) 5,644 1,118 -- 6,746
Interest (expense), net (250) (785) 51 -- (984)
Other income (expense) -- (69) 88 -- 19
--------- --------- --------- --------- ---------
Income (loss) before foreign
income taxes (266) 4,790 1,257 -- 5,781
Foreign income taxes -- -- 370 -- 370
--------- --------- --------- --------- ---------
Net income (loss) $ (266) $ 4,790 $ 887 $ -- $ 5,411
========= ========= ========= ========= =========
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I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Summarized consolidating statements of cash flows for the six months ended June
30, 1998 and the period from January 17, 1997 through June 30, 1997,
respectively, for the Company, the guarantor subsidiaries, and the
non-guarantor, foreign subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ ---------
CASH FLOW DATA:
(SIX MONTHS ENDED JUNE 30, 1998):
Net cash provided by (used in)
operating activities $ (3,876) $ 2,702 $ (274) $ -- $ (1,448)
Investing activities:
Purchases of property, plant and
equipment (net) -- (3,532) (75) -- (3,607)
Payment of acquisition liabilities -- (1,217) -- -- (1,217)
Increase in short-term investments (23,538) -- -- -- (23,538)
Acquisition of business -- (219) -- -- (219)
--------- --------- --------- ---------- ---------
Net cash used in investing activities (23,538) (4,968) (75) -- (28,581)
Financing activities:
Increase in amounts due to GEC
and affiliates -- 55 -- -- 55
Decrease in long-term borrowings (20,056) (21,205) 578 -- (40,683)
Proceeds from bond offering 115,000 -- -- -- 115,000
Payment of bond issue costs (4,516) -- -- -- (4,516)
Payment on revolving credit lines -- (26,084) -- -- (26,084)
Intercompany (52,858) 52,570 288 -- --
Dividend distribution (10,000) -- -- -- (10,000)
--------- --------- --------- ---------- ---------
Net cash provided by financing activities 27,570 5,336 866 -- 33,772
Effect of exchange rate changes on cash -- 25 (114) -- (89)
--------- --------- --------- ---------- ---------
Increase (decrease) in cash and cash
equivalents 156 3,095 403 -- 3,654
Cash and cash equivalents at beginning
of period 28 1,173 2,082 -- 3,283
--------- --------- --------- ---------- ---------
Cash and cash equivalents at end of
period $ 184 $ 4,268 $ 2,485 $ -- $ 6,937
========= ========= ========= ========== =========
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I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
---------- -------------- -------------- ------------ ---------
CASH FLOW DATA:
(PERIOD FROM JANUARY 17, 1997 THROUGH
JUNE 30, 1997):
Net cash provided by (used in)
operating activities $ (37) $ 7,439 $ 2,328 $ -- $ 9,730
Investing activities:
Purchases of property, plant and
equipment (net) -- (1,020) (419) -- (1,439)
Accounts receivable used in
connection with acquisition -- (19,489) -- -- (19,489)
Payment of acquisition liabilities -- (708) -- -- (708)
Increase in short-term investments (45) -- -- -- (45)
-------- -------- -------- -------- --------
Net cash used in investing activities (45) (21,217) (419) -- (21,681)
Financing activities:
Borrowings on revolving credit lines -- 10,033 2,496 -- 12,529
Cash distributions to GEC and affiliates -- (1,181) -- -- (1,181)
Intercompany -- 3,769 (3,769) -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities -- 12,621 (1,273) -- 11,348
Effect of exchange rate changes on cash -- 27 (235) -- (208)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents (82) (1,130) 401 -- (811)
Cash and cash equivalents at beginning
of period 100 1,601 449 -- 2,150
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period $ 18 $ 471 $ 850 $ -- $ 1,339
======== ======== ======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes included in Amendment No. 2 to the
Company's Form S-4 Registration Number 333-51569, dated July 17, 1998 relating
to the exchange of the Company's Series A Senior Notes for the Series B Senior
Notes.
GENERAL
The Company, through its two wholly-owned subsidiaries, Curtis Industries Inc.
("Curtis") and A.B. Dick Company ("A.B. Dick") is engaged in (i) the
distribution of automotive and industrial supplies and (ii) the manufacture and
distribution of printing equipment and supplies. The Company's distribution
business supplies consumable, high margin, multiple-purpose products used in the
automotive and industrial markets, with an increasing focus on providing
value-added logistics services. The Company's printing equipment and supplies
business is a leading manufacturer and marketer of printing products for the
global quick print and small commercial graphics markets.
The Company acquired all of the capital stock of A.B. Dick on January 17, 1997.
The Company acquired all of the capital stock of Curtis on December 5, 1997. The
acquisitions were accounted for as purchases and the results of operations
include the Company, A.B. Dick and Curtis from the dates of their respective
acquisitions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30 1998, COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997:
NET REVENUE
Net revenue increased $18.7 million or 37.1% to $69.1 million in 1998 from $50.4
million in 1997. The increase was principally due to the acquisition of Curtis,
which accounted for $20.3 million in sales for the quarter. Printing equipment
sales were up $1.7 million or 10.0% over the prior year to $19.1 million. The
increase was primarily due to increased domestic sales of press equipment of
$2.8 million offset by an international sales decrease of $1.1 million, due to
the weaknesses in the Asian markets. Supplies sales were down $2.1 million to
$18.9 million due to the impact of the discontinuance of certain domestic
equipment lines and the introduction of a new plate product by a competitor in
the pre-press market. The Company is presently pursuing other supply products.
Service revenues decreased by $0.9 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 increased $10.3 million or 61.3% in 1998 as compared to 1997. Gross
profit margin percentage was 39.2% during 1998 compared to 33.3% for the same
period last year. The addition of the Curtis business accounted for $11.6
million of the increase in gross margin dollars and the significant improvement
in the gross margin as a percentage of revenues. The A.B. Dick margins decreased
by $1.3 million and gross margin as a percent of revenue was reduced
approximately 1.7% due to the change in the mix of sales of the various products
and services.
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17
COSTS AND EXPENSES
Costs and expenses increased by $10.8 million to $24.1 million from $13.3
million from the year earlier. The acquisition of Curtis contributed $11.0
million to the increase while cost saving programs and consolidation of
activities at A.B. Dick reduced costs and expenses by $0.9 million. A portion of
the decrease is attributable to the change in basis of the calculation of the
management fee. This was offset by relocation expenses and corporate
administrative expenses of $0.6 million and $0.1 million, respectively, during
1998.
EXTRAORDINARY ITEM
An extraordinary expense of $1.3 million was recorded during the three months
ended June 30, 1998 related to the write-off of deferred financing costs and
fees associated with the early extinguishment of certain of the Company's debt.
OPERATING INCOME
Operating income decreased $0.5 million or 14.3% from $3.5 million in 1997 to
$3.0 million in 1998. In 1998, the amount includes operating income from Curtis
of $0.6 million. The operating income generated by A.B. Dick decreased by
approximately $1.1 million from 1997 due to the decreases in sales revenues and
the impacts on the costs and expenses resulting from the relocation of
facilities.
Although there can be no guarantee of future forecasts and prospects, based on
the Company's current financial forecast which included consideration for
future cost savings, the international markets and the general U.S. economy,
management believes that operating income before interest, taxes, depreciation
and amortization, and other income (expense) will increase for the second half
of 1998 over the first half of 1998. The Company further believes that third
quarter 1998 will increase over the second quarter 1998 and the fourth quarter
1998 will be the Company's strongest quarter in 1998. The Company's ability to
meet these projections can be significantly impacted by events outside of its
control, including continued deterioration of the Asian economies.
SIX MONTHS ENDED JUNE 30 1998, COMPARED TO THE PERIOD FROM JANUARY 17, 1997
THROUGH JUNE 30, 1997:
PRESENTATION
The financial statements presented in this document include comparative 1997
financial statements for the Company, which include the operations of the
acquired subsidiaries from their respective date of acquisition. A.B. Dick was
acquired on January 17, 1997 and Curtis was acquired on December 5, 1997. The
historical 1997 income statement and other financial information for the Company
refer to the 23-week period from January 17, 1997 through June 30, 1997.
NET REVENUE
Net revenue increased $41.4 million or 45.1% from $91.7 for 1997 to $133.1
million for 1998. The increase was principally due to the acquisition of Curtis,
which accounted for $40.6 million in sales for the first half of the year.
Printing equipment sales were up $0.9 million or 2.6% over the prior year to
$33.1 million primarily due to increases in the domestic sales of press
equipment. Supplies sales increased by $0.4 million to $38.2 million. Service
revenues decreased by $0.7 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. Repair parts sales
increased by $0.2 million.
GROSS PROFIT
Gross profit was $53.0 million compared to $30.4 million from the prior year. An
increase of $22.6 million or 74.3% was principally due to the acquisition of
Curtis, which had a gross margin of $23.3 million for the six months ended June
30, 1998. Gross profit margin percentage was 39.9% during 1998 compared to 33.2%
for the same period last year. The addition of the Curtis business accounted for
the significant improvement in the gross margin as a percentage of revenues. The
A.B. Dick margins decreased by $0.7 million primarily due to the change in the
mix of sales of the various products and services.
15
18
COSTS AND EXPENSES
Costs and expenses increased by $24.4 million to $48.1 million in 1998 from
$23.7 million for the period January 17, 1997 through June 30, 1997. The
acquisition of Curtis contributed $22.2 million to the increase in costs and
expenses. Relocation expenses and corporate administrative expenses were $1.2
million during 1998.
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.
OPERATING INCOME
Operating income decreased $1.7 million or 25.4% from $6.7 million in 1997 to
$5.0 million in 1998. In 1998 the amount includes operating income from Curtis
of $1.1 million. The operating income generated by A.B. Dick decreased by
approximately $2.8 million from the period January 17, 1997 through June 30,
1997, due primarily to the changes in sales mix and relocation of facilities.
YEAR 2000 ISSUES
The Company is aware of the issues associated with being compliant with the year
2000 computer programming. A company-wide taskforce is reviewing all systems to
ensure that they do not malfunction as a result of the Year 2000 compliance. The
Company is in the process of replacing some systems and upgrading others. While
the current cost of this effort is still being evaluated, the Company does not
expect the cost to be material.
The Company expects to complete its Year 2000 activities within a timeframe that
will enable its information systems to function without significant disruption
in Year 2000. In addition, the Company is in the process of obtaining assurances
from third parties that are critical to its business, such as customers and
vendors, regarding their Year 2000 compliance. If assurances are not received
from critical vendors regarding their Year 2000 compliance, alternative sources
will be selected. Failure of the Company or such third parties to achieve Year
2000 compliance can result in disruption of the Company's operations that could
have a material adverse effect on the Company's financial condition or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was ($1.4) million and $9.7
million for the six months ended June 30, 1998 and 1997, respectively. The net
cash used in operating activities in 1998 was principally the result of
decreased net income and a net increase in operating assets and liabilities of
$3.6 million. The decline in net income is mainly due to increased interest
costs as a result of the issuance of $115.0 million of 9 5/8% Senior Notes on
April 1, 1998. Net cash provided from operating activities in 1997 was
principally due to net income of $5.4 million and a decrease in net operating
assets and liabilities of $3.6 million.
The net cash used in investing activities was $28.6 million and $21.7 for the
six months ended June 30, 1998 and 1997, respectively. The 1998 amounts include
an increase in short-term investments of $23.5 million, property, plant and
equipment purchases of $3.6 million and payments on acquisition related
liabilities of $1.2 million. The primary components of the 1997 investing
16
19
activities were $19.5 million for accounts receivable related to the A.B. Dick
acquisition, $1.4 million for property, plant and equipment purchases and $0.8
million for payment of acquisition related liabilities.
Net cash provided by financing activities was $33.8 million and $ 11.4 million
for the six months ended June 30, 1998 and 1997, respectively. The net cash
provided by financing activities 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 $40.7 million and reduction of revolving lines of credit by $26.1 million.
The bond issuance costs paid were $4.5 million and the Company made a dividend
distribution to its sole stockholder in the amount of $10.0 million. The 1997
net cash from financing activities was principally from increases in borrowings
on the revolving lines of credit.
The Company's primary capital requirements (excluding acquisitions) consist of
capital expenditures and debt service. The Company expects current financial
resources and funds from continuing operations to be adequate to meet current
cash requirements. At June 30, 1998 the Company had cash, cash equivalents and
short-term investments of $34.7 million and unused credit facilities of $29.5
million available for its use.
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives, or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward-looking statements include, without limitation, statements
regarding the Company's Year 2000 compliance program and future prospects of the
business. Such forward-looking statements are subject to uncertainties and
factors relating to the Company's operations and business environment, all of
which are difficult to predict and many of which are beyond the control of the
Company, that could cause actual results of the Company to differ materially
from those matters expressed in or implied by such forward-looking statements.
17
20
Part II. Other Information
Item 2. Changes in Securities
During the three-month period ended June 30, 1998, the registrant on
April 1, 1998, sold for cash $115,000,000 of 9 5/8% Series A Senior
Notes due April 1, 2008. The initial purchasers of the Notes were
Donaldson, Lufkin & Jenrette Securities Corporation and CIBC
Oppenheimer. The aggregate offering price was $115,000,000 with
aggregate discounts and commission of $3,450,000. Exemption from
registration was under section 4(2) of the Securities Act of 1933.
On July, 17, 1998, the Company filed Amendment No. 2 to the Form S-4
Registration Statement with the Securities and Exchange Commission.
The Registration Statement set forth terms of an Offer to Exchange
Series B Senior Notes for Series A Senior Notes. Pursuant to such
Offer all of the Series A Senior Notes were exchanged for Series B
Senior Notes. The exchange offer closed on August 24, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See index of exhibits
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1998
18
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON CORPORATE HOLDINGS INC.
By: /s/ FRANK J. RZICZNEK
----------------------
FRANK J. RZICZNEK
Chief Financial Officer (As duly authorized
representative and as Principal Financial and Accounting
Officer)
A.B. DICK COMPANY
By: /s/ RONALD NIERZWICKI
-----------------------
RONALD NIERZWICKI
Vice President and Controller (As duly authorized
representative and as Principal Financial and Accounting
Officer)
CURTIS INDUSTRIES, INC.
By: /s/ JAMES WATERS
-----------------
JAMES WATERS
Vice President of Finance (As duly authorized
representative and as Principal Financial and Accounting
Officer)
ITEK GRAPHIX CORP.
By: /s/ RONALD NIERZWICKI
----------------------
RONALD NIERZWICKI
Vice President and Controller (As duly authorized
representative and as Principal Financial and Accounting
Officer)
Date: September 1, 1998
19
22
PARAGON CORPORATE HOLDINGS INC.
FORM 10-Q
INDEX OF EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
3.1 Certificate of Incorporation of Paragon Corporate Holdings Inc.., as currently in effect. *
3.2 By-Laws of Paragon Corporate Holdings Inc. as currently in effect *
3.3 Certificate of Incorporation of A.B. Dick Company, as currently in effect *
3.4 By-Laws of A.B. Dick Company, as currently in effect. *
3.5 Certificate of Incorporation of Curtis Industries, Inc. as currently in effect. *
3.6 By-Laws of Curtis Industries, Inc. as currently in effect. *
3.7 Certificate of Incorporation of Itek Graphix Corp. , as currently in effect. *
3.8 By-Laws of Itek Graphix Corp., as currently in effect. *
3.9 Certificate of Incorporation of Curtis Sub, Inc., as currently in effect. *
3.10 By-Laws of Curtis Sub, Inc., as currently in effect. *
4.1 Indenture, dated as of April 1, 1998, among Paragon Corporate Holdings Inc., A.B. Dick *
Company, Curtis Industries, Inc., Itek Graphix Corp., Curtis Sub, Inc and Norwest Bank
Minnesota, National Association, as Trustee (containing , as exhibits, specimens of the
Series A Notes and the Series B Notes).
4.2 Purchase Agreement, dated as of March 27, 1998, among Paragon Corporate Holdings Inc., *
A.B. Dick Company, Curtis Industries, Inc., Itek Graphix Corp., Curtis Sub, Inc., and
Donaldson. Lufkin & Jenrette Securities Corporation and CIBC Oppenheimer Corp., as
Initial Purchasers, relating to the Series A Notes.
4.3 Registration Rights 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 Donaldson. Lufkin & Jenrette Securities Corporation and CIBC
Oppenheimer Corp., as Initial Purchasers.
4.4 Credit and Security Agreement, dated as of April 1, 1998 between Paragon Corporate *
Holdings Inc. and Key Corporate Capital Inc.
10.1 Agreement and Plan of Merger, dated as of November 6, 1997, among Paragon Corporate *
Holdings Inc., Curtis Industries, Inc. and Curtis Acquisition Group.
10.2 Stock Purchase Agreement, dated as of December 19, 1996, between Paragon Corporate *
Holdings Inc. and GEC Incorporated.
10.3 Management Agreement, dated as of April 1, 1998, between Paragon Corporate Holdings Inc. *
and NESCO, Inc.
10.4 Tax Payment Agreement, dated as of April 1, 1998, among Paragon Corporate Holdings Inc., *
A.B. Dick Company, Curtis Industries, Inc., Itek Graphix Corp., Curtis Sub, Inc. and
NES Group, Inc.
10.5 Agreement dated November 10, 1995 between A.B. Dick Company and Gerald J. McConnell. *
10.6 Severance and Non-Competition Agreement dated February 28, 1996 between Curtis *
Industries, Inc. and A. Keith Drewett.
10.7 Severance and Non-Competition Agreement dated February 28, 1996 between Curtis *
Industries, Inc. and Maurice P. Andrien, Jr. as amended April 22, 1998.
10.8 Agreement dated July 2, 1998 among Curtis Industries, Inc., Paragon Holdings Inc. and A.
Keith Drewett. **
12 Statement regarding computation of ratio of earnings to fixed charges.
27 Financial Data Schedule
<FN>
* Incorporated by reference from Form S-4 Registration Number 333-51569 filed May 1, 1998
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