10-Q 1 l90949ae10-q.txt PARAGON CORPORATE HOLDINGS & CO-FILERS FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2001 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 CI, Inc. Delaware 13-3583725 Itek Graphix Corp. Delaware 04-2893064 Curtis Sub, Inc. Delaware 34-1737529 Paragon Corporate Holdings Inc. A.B.Dick Company CI, Inc. 7400 Caldwell Avenue 7400 Caldwell Avenue 6140 Parkland Boulevard Niles, Illinois 60714 Niles, Illinois 60714 Mayfield Heights, Ohio 44124 (847) 779-2500 (847) 779-1900 (440) 446-9700 Itek Graphix Corp. Curtis Sub, Inc. 7400 Caldwell Avenue 6140 Parkland Boulevard Niles, Illinois 60714 Mayfield Heights, Ohio 44124 (847) 779-1900 (440) 446-9700

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practical date. As of November 14, 2001, there were 4,200,000 shares of the registrant's common stock outstanding. INDEX PARAGON CORPORATE HOLDINGS INC. Page Number ---------- PART I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets 2 September 30, 2001 and December 31, 2000 Condensed Consolidated Statements of Operations 3 Three and Nine Months ended September 30, 2001 and 2000 Condensed Consolidated Statements of Cash Flows 4 Nine Months ended September 30, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 5 Item 2 Management's Discussion and Analysis of Financial 15 Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk 21 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 22 Signatures 23 I Part I. Financial Information Item 1. Financial Statements (Unaudited) 1 Paragon Corporate Holdings Inc. Condensed Consolidated Balance Sheets (Dollars in Thousands)

See notes to condensed consolidated financial statements. 2 Paragon Corporate Holdings Inc. Condensed Consolidated Statements of Operations (In Thousands)

See notes to condensed consolidated financial statements. 3 Paragon Corporate Holdings Inc. Condensed Consolidated Statements of Cash Flows (In Thousands)

See notes to condensed consolidated financial statements. 4 Paragon Corporate Holdings Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (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 and redeemed in 2001 and the net proceeds from the sale of its Curtis Industries Inc. ("Curtis") subsidiary sold in 2000. As of September 30, 2001, N.E.S. Investment Co. owns 83% of the Company. B. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes of Paragon Corporate Holdings Inc. set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. C. ACQUISITION On January 27, 2000, the Company completed the acquisition of all the outstanding common stock of Multigraphics, Inc., 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 ($3.6 million) and assumed $7.4 million of outstanding debt of Multigraphics which was refinanced by the Company at the date of acquisition. The aggregate purchase price was $12.5 million including expenses of the transaction. The excess of purchase price over net assets acquired has been assigned a value of approximately $36.1 million and is being amortized over thirty years. In connection with the acquisition of Multigraphics, the Company anticipated that it would incur restructuring costs of approximately $2.2 million comprised primarily of employee termination and relocation costs. Since the acquisition, the Company incurred and paid $2.4 million of these costs, which represents substantially all of the costs to complete the integration. Employee termination costs and contractual obligations pertaining to the integration of Multigraphics that qualified under EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, and thus included in the purchase price allocation, amounted to $4.5 million. Since the acquisition, amounts paid and charged against this liability were $2.0 million in 2000 and $1.0 million in 2001. 5 D. DISCONTINUED OPERATIONS On April 27, 2000, the Company entered into a definitive agreement to sell substantially all of the assets and related liabilities of its wholly-owned subsidiary, Curtis, which comprised entirely the Company's automotive and industrial supplies segment. The transaction closed on May 10, 2000 and the Company received proceeds of $61.0 million resulting in $10.3 million gain which was recognized in the second quarter of 2000. The disposition of Curtis represents the disposal of a segment of a business under APB Opinion No. 30. Accordingly, the consolidated statements of operations reflect the results of Curtis as a discontinued operation. Net revenues of Curtis were $27.7 million for the nine-month period ended September 30, 2000. E. MERGER AND RESTRUCTURING On August 1, 2001, A.B.Dick completed the merger with Rhemai B.V. ("Rhemai"), a Netherlands company engaged in the manufacture and distribution of equipment and supplies to the graphic arts industry. Under the terms of the Merger Agreement, A.B.Dick exchanged all of the outstanding common stock of its wholly-owned subsidiaries, A.B.Dick Netherlands B.V. and A.B.Dick N.V. and a cash payment of $20 thousand for a 55% interest in the share capital of Rhemai, whose name was subsequently changed to A.B.Dick AM. The accounting for this transaction as a purchase business combination resulted in the partial sale of A.B.Dick's subsidiaries, A.B.Dick Netherlands B.V. and A.B.Dick B.V. A.B.Dick has a 55% controlling interest in A.B.Dick AM and, accordingly, A.B.Dick AM has been consolidated in the financial statements of the Company since the completion of the transaction. The 45% interest in A.B.Dick AM by the former shareholders of Rhemai is being accounted for as a minority interest. The allocation of purchase price for A.B.Dick AM is based on preliminary estimates and will be adjusted based upon the final determination of the fair value of the assets acquired and liabilities assumed. The minority interests in subsidiary on the balance sheet reflects the initial investment of the minority shareholders' of A.B.Dick AM along with their proportional share of the earnings or losses of the subsidiary since the acquisition. The minority interests in the results of operations of subsidiaries represents the minority shareholders' share of the losses of A.B.Dick AM. In connection with the merger with A.B.Dick AM, the Company anticipates that it will incur restructuring costs of approximately $1.0 million comprised primarily of employee and lease termination costs. Since the merger, the Company incurred $0.8 of these costs of which $0.4 million were paid as of September 30, 2001. F. FINANCING ARRANGEMENTS During August 2001, the Company redeemed $109.2 million of its $115.0 million of Senior Notes for a cash payment of $34.5 million and $25.0 million of new non-interest bearing notes payable. The Company used a portion of the net cash proceeds from its sale of Curtis to extinguish the debt. This early extinguishment resulted in an extraordinary gain of $43.6 million net of the direct costs of the transaction of $3.0 million and the write-off of the associated debt issuance costs of $3.1 million. Income taxes have not been provided for the extraordinary gain as the extinguishment of debt represents a tax-free transaction to the Company under current provisions of the Internal Revenue Code. The $25 million of non-interest bearing notes are payable only upon the occurrence of certain events as defined under the terms of notes and are convertible to an equity interest in A.B.Dick at the option of the holders of a majority of the notes. 6 The $5.8 million of Senior Notes outstanding at September 30, 2001 continues to require a semi-annual interest payment on October 1 and April 1 in arrears; however, the Senior Notes indenture has been amended whereby substantially all of the restrictive covenants have been eliminated. The carrying amount of cash and cash equivalents, trade receivables, and payables approximates fair value because of the short maturity of these instruments. The carrying amount of the revolving credit facility approximates fair value. The carrying amount of the Senior Notes exceeds its fair value at September 30, 2001 by $4.0 million. The fair value has been determined using the market price of the related securities at September 30, 2001. At September 30, 2001, the Company was in violation of certain financial covenants under the terms of the Credit Agreement for which it has received waivers through September 30, 2001. G. 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. H. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss) are as follows:

I. INVENTORIES Domestic inventories, which represent approximately 71% of total consolidated inventory, are determined on the last-in, first-out (LIFO) basis and foreign inventories are determined on the first-in, first-out (FIFO) basis. Where necessary, reserves are provided to value inventory at the lower of cost or market. Inventories are summarized as follows: September 30, December 31, 2001 2000 -------------------- ------------------- Raw materials and work in process $ 8,339 $ 8,678 Finished goods 28,959 36,654 LIFO reserve (2,046) (1,538) -------------------- ------------------- $ 35,252 $ 43,794 ==================== =================== J. INCOME TAXES On March 14, 2000, A.B.Dick, a wholly-owned subsidiary of the Company, elected C Corporation status for United States income tax purposes effective January 1, 2000. Accordingly, as of January 1, 2000, A.B.Dick recognized its existing deferred income taxes. 7 On July 14, 2000, the Company elected C Corporation status for United States income tax purposes effective May 12, 2000. The Company did not have any deferred income taxes. Prior to these elections, the Company and its wholly-owned subsidiary, A.B.Dick, were treated as Subchapter S Corporations for United States income tax purposes. The Company has subsidiaries located in the United Kingdom, Canada, Belgium and the Netherlands which are subject to income taxes in their respective countries. For the three months ended September 30, 2001 and 2000, the Company recorded foreign income tax expense of $11 and $31 respectively, related to its foreign subsidiaries. For the nine months ended September 30, 2001 and 2000, the Company recorded foreign income tax expense of $29 and $131 respectively, related to its foreign subsidiaries. Where the Company has determined that it is more likely than not that the net deferred tax assets will not be realized, a valuation allowance has been established. 8 L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES The Company's domestic operating subsidiaries, all of which are directly or indirectly wholly owned, are the only guarantors of Senior Notes. The guarantees are full, unconditional and joint and several. Separate financial statements of these guarantor subsidiaries are not presented as management has determined that they would not be material to investors. The Company's foreign subsidiaries and Multigraphics LLC are not guarantors of the Senior Notes. Summarized consolidating balance sheets as of September 30, 2001 and December 31, 2000 for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

9 L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED

10 L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED Summarized consolidating statements of operations for the three months ended September 30, 2001 and 2000, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

11 L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED Summarized consolidating statements of operations for the nine months ended September 30, 2001 and 2000, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED 12 Summarized consolidating statements of cash flows for the nine months ended September 30, 2001 and 2000, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

14 M. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The provisions of SFAS No. 141 are effective for all business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS No. 142 is effective January 1, 2002 and applies to all goodwill and other intangibles assets recognized in the Company's statement of financial position at that date, regardless of when those assets were initially recognized. SFAS No. 141 requires that any unamortized deferred credit related to an excess of cost arising from any prior business combinations be recognized as a cumulative effect of a change in accounting principle upon the adoption of SFAS No. 142. At September 30, 2001, the Company has a $1.7 million unamortized deferred credit arising from the Company's acquisition of A. B. Dick recorded in other long-term liabilities. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The transition provisions in SFAS No. 142 provide that goodwill and intangible assets with indefinite lives acquired in a business combination completed after June 30, 2001 will not be amortized. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of SFAS No. 142 is expected to result in a decrease in net loss of approximately $1.0 million per year. During 2002, the Company will perform the first of the required impairment tests under SFAS No. 142 of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company's current policy for measuring goodwill impairment is based upon an analysis of undiscounted cash flows. Under SFAS No. 142, the goodwill must be assigned to reporting units and measured for impairment based upon the fair values of the reporting units. The Company has not yet determined its reporting units under SFAS No. 142 and what the effect of these new impairment tests will be on its consolidated financial position or results of operations. In October 2001, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued. This statement, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The Company is analyzing the effect of this statement and does not expect it to have a material effect on the Company's consolidated financial position, results of operations, or cash flows. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For further information, refer to the consolidated financial statements and footnotes of Paragon Corporate Holdings Inc. set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. GENERAL The Company, through its wholly-owned subsidiaries, is engaged in the manufacture, sale, distribution and service of offset presses, cameras and plate makers and related supplies for 15 the graphic arts and printing industry. On May 10, 2000, the Company sold substantially all of the assets and liabilities of its Curtis Industries, Inc.("Curtis") subsidiary previously reported as the automotive and industrial segment. The results of operations for Curtis have been reported as a discontinued operation. On January 27, 2000, the Company acquired 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 service to the printing industry. The acquisition has been accounted for as a purchase and, accordingly, the consolidated financial statements include the results of Multigraphics since the date of acquisition. On August 1, 2001, A.B.Dick completed the merger with Rhemai B.V. ("Rhemai"), a Netherlands company engaged in the manufacture and distribution of equipment and supplies to the graphic arts industry. Under the terms of the Merger Agreement, A.B.Dick exchanged all of the outstanding common stock of its wholly-owned subsidiaries, A.B.Dick Netherlands B.V. and A.B.Dick N.V. and a cash payment of $20 thousand for a 55% interest in the share capital of Rhemai, whose name was subsequently changed to A.B.Dick AM. The accounting for this transaction as a purchase business combination resulted in the partial sale of A.B.Dick's subsidiaries, A.B.Dick Netherlands B.V. and A.B.Dick B.V. A.B.Dick has a 55% controlling interest in A.B.Dick AM and, accordingly, A.B.Dick AM has been consolidated in the financial statements of the Company since the completion of the transaction. The 45% interest in A.B.Dick AM by the former shareholders of Rhemai is being accounted for as a minority interest. The allocation of purchase price for A.B.Dick AM is based on preliminary estimates and will be adjusted based upon the final determination of the fair value of the assets acquired and liabilities assumed. The minority interests in subsidiary on the balance sheet reflects the initial investment of the minority shareholders of A.B.Dick AM along with their proportional share of the earnings or losses of the subsidiary since the acquisition. The minority interests in the results of operations of subsidiaries represents the minority shareholders' share of the earnings or losses of A.B.Dick AM. In connection with the merger with A.B.Dick AM, the Company anticipates that it will incur restructuring costs of approximately $1.0 million comprised primarily of employee and lease termination costs. Since the merger, the Company incurred $0.8 of these costs of which $0.4 million were paid as of September 30, 2001. RESULTS OF CONTINUING OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000: NET REVENUE For the three months ended September 30, 2001, net revenue decreased $1.7 million or 3.0% to $54.4 million from $56.1 million for the quarter ended September 30, 2001. The overall decline in revenues was partially offset by the merger of A.B.Dick AM in August 2001. Repair parts and service revenues decreased $1.2 million primarily due to lower demand of repair parts and lower revenues from service contracts. Printing supplies sales decreased $0.9 million or 3.7% from the prior year. The decrease is attributable to weaker demand in domestic and certain European markets. Offsetting these revenue declines were increases of printing equipment revenues of $0.4 million or 2.6%. This increase in equipment revenues is primarily due to increased sales of the Company's manufactured digital pre-press products. 16 GROSS PROFIT Gross profit decreased $1.5 million or 10.8% to $12.8 million for the quarter ended September 30, 2001. Gross profit as a percentage of sales was 23.4% during the third quarter of 2001 compared to 25.5% for the same period last year. The decrease in gross profit percentage is attributable to increased freight costs, increase in inventory valuation allowances on discontinued products, and lower service contract revenues which in large part fall through to the gross profit line. These higher costs and allowances were partially offset by lower field service costs, increased operating efficiencies, and revenue fallthrough from incremental revenues from the merger of A.B.Dick AM in August 2001. COSTS AND EXPENSES Costs and expenses of $14.7 million for the quarter ended September 30, 2001 decreased $1.0 million to $15.7 million for the quarter ended September 30, 2000. Sales and marketing costs decreased $0.9 million or 12.4% primarily due to lower promotional spending and lower compensation (including commissions). General and administrative expenses decreased $0.6 million to $5.1 million or 10.8% as a result of eliminating redundant functions. Offsetting this decrease was the increase in relocation and severance costs of $0.6 million primarily due to the consolidation of European operations in conjunction with the merger with A.B.Dick A.M. OPERATING LOSS The operating loss increased $0.6 million to $2.0 million for the quarter ended September 30, 2001 from $1.4 million for the quarter ended September 30, 2000. The increase in operating loss from 2000 resulted primarily from lower revenues and gross profits, partially offset by lower operating expenses. NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000: NET REVENUE For the nine months ended September 30, 2001, net revenue decreased $10.9 million or 6.2% to $165.0 from $175.9 million for the nine months ended September 30, 2000. Weaker demand more than offset the positive effects of having the Multigraphics acquisition in the operating results for the nine months in the current year (compared to approximately eight months in the prior year) and the merger with A.B.Dick AM in August 2001. Printing equipment sales decreased $6.3 million or 12.6% over the prior year to $43.9 million. Printing supplies sales decreased $3.6 million or 4.8% from the prior year. The decrease in both equipment and supplies was primarily attributable to weaker demand in domestic and certain European markets for the Company's analog products. Repair parts and service revenues decreased $1.0 million or 2.0% to $50.3 million primarily due to lower demand of repair parts and lower revenues from service contracts. 17 GROSS PROFIT Gross profit decreased $5.3 million or 11.9% to $39.4 million for the nine months ended September 30, 2001. Gross profit as a percentage of sales decreased to 23.9% from 25.5% compared to the same period last year. The decrease in gross profit percentage is attributable to increased freight costs, lower fixed cost absorption in 2001 on manufactured equipment due to reduced volume, an increase in inventory valuation allowances on discontinued products, and lower prepaid service contract revenues which in large part fall through to the gross profit line. These higher costs and allowances were partially offset by higher service margins resulting from lower field service costs and increased operating efficiencies. The Company believes that its margin percentage may decrease in the future as its sales shift from higher margin analog products to lower margin digital products. To offset lower margins, the Company continues to seek increased operating efficiencies and lower expenses. COSTS AND EXPENSES Costs and expenses decreased by $4.0 million or 8.0% to $46.1 million for the nine months ended September 30, 2001 from $50.1 million for the nine months ended September 30, 2000. Sales and marketing costs decreased $1.8 million or 8.8% primarily due to lower compensation (including commissions). General and administrative expenses decreased $2.5 million or 12.0% as a result of eliminating redundant functions and efficiencies gained through operational improvements. Offsetting these decreases were increases in research and development costs of $0.2 million and restructuring costs of $0.2 million primarily due to the merger with A.B.Dick AM in August 2001. OPERATING LOSS The operating loss increased $1.3 million to $6.6 million for the nine months ended September 30, 2001 from $5.3 million for the nine months ended September 30, 2000. The increase in operating loss from 2000 resulted primarily from lower revenues and gross profits partially offset by lower operating expenses. RESTRUCTURING CHARGE In connection with the acquisition of Multigraphics, the Company anticipated that it would incur restructuring costs of approximately $2.2 million comprised primarily of employee termination and relocation costs. Since the acquisition, the Company incurred and paid $2.4 million of these costs, which represents substantially all of the costs to complete the integration. Employee termination costs and contractual obligations pertaining to the integration of Multigraphics that qualified under EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, and thus included in the purchase price allocation, amounted to $4.5 million. Since the acquisition, amounts paid and charged against this liability were $2.0 million in 2000 and $1.0 million in 2001. In connection within the merger of A.B.Dick AM, the Company anticipates that it will incur restructuring costs of approximately $1.0 million comprised primarily of employee and lease termination costs. Since the merger, the Company incurred $0.8 of these costs of which $0.4 million were paid as of September 30, 2001. 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 18 currencies in which the Company transacts business, its financial results will be affected. The principal foreign currencies in which the Company transacts business are the Japanese yen, the Canadian dollar, the British pound sterling, the Dutch guilder, and the Belgian franc. The fluctuation of the U.S. dollar versus other currencies resulted in decreases to stockholder's equity of approximately $0.6 million and $0.3 million for the nine months ended September 30, 2001 and 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $8.8 million and $12.6 million for the nine months ended September 30, 2001 and 2000, respectively. The net cash used in operating activities in 2001 was principally the result of a $10.3 net loss before extraordinary items, reduction of accounts payable of $8.5 million, and a decrease in accrued liabilities of $8.8 million. These uses were offset by decreases in inventory and accounts receivable of $9.3 million and $2.5 million, respectively. The net income in 2001 is due to gain on early extinguishment of debt offset by operating losses and interest costs on the senior notes. Net cash used in operating activities in 2000 was also primarily attributable to operating losses and interest on the senior notes mentioned above. The net cash (used in) provided by investing activities was ($0.6) million and $58.0 million for the nine months ended September 30, 2001 and 2000, respectively. The 2001 net cash (used in ) operations is primarily the purchases of property, plant, and equipment of $0.7 million. The 2000 amount reflects the payment for the Multigraphics acquisition of $4.6 million and the proceeds from the sale of the net assets of Curtis Industries of $60.5 million. Net cash used in financing activities was $31.8 million and $4.2 million for the nine months ended September 31, 2001 and 2000, respectively. The net cash used in financing activities in 2001 was a $34.5 million payment for extinguishment of senior notes and $2.2 million of principal payments on long-term borrowings, offset by $4.9 million of borrowings on the Company's revolving credit facility. The net cash used in financing activities in 2000 was the result $7.4 million payment of debt assumed in the acquisition, $4.5 million distribution for taxes, and $2.1 million principal payments on long-term borrowings offset by $9.8 million borrowings on the Company's revolving credit facility. The Company's primary capital requirements (excluding acquisitions) consist of working capital, capital expenditures and debt service. The Company expects current financial resources and funds from operations to be adequate to meet current cash requirements. At September 30, 2001, the Company had cash and cash equivalents of $15.8 million and unused credit facilities of approximately $1.7 million available for its use. At September 30, 2001, the Company was in violation of certain financial covenants under the terms of the Credit Agreement for which it has received waivers through September 30, 2001. During August 2001, the Company redeemed $109.2 million of its $115.0 million of Senior Notes for a cash payment of $34.5 million and $25.0 million of new non-interest bearing notes payable. The Company used a portion of the net cash proceeds from its sale of Curtis to extinguish the debt. This early extinguishment resulted in an extraordinary gain of $43.6 million net of the direct costs of the transaction of $3.0 million and the write-off of the associated debt issuance costs of $3.1 million. Income taxes have not been provided for the extraordinary gain as the extinguishment of debt represents a tax-free transaction to the Company under current provisions of the Internal Revenue Code. The $25 million of non-interest bearing notes are payable only upon the occurrence of certain events as defined under the terms of notes and are convertible to an equity interest in A.B.Dick at the option of the holders of a majority of the notes. 19 The $5.8 million of Senior Notes outstanding at September 30, 2001 continues to require a semi-annual interest payment on October 1 and April 1 in arrears; however, the Senior Notes indenture has been amended whereby substantially all of the restrictive covenants have been eliminated. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The provisions of SFAS No. 141 are effective for all business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS No. 142 is effective January 1, 2002 and applies to all goodwill and other intangibles assets recognized in the Company's statement of financial position at that date, regardless of when those assets were initially recognized. SFAS No. 141 requires that any unamortized deferred credit related to an excess of cost arising from any prior business combinations be recognized as a cumulative effect of a change in accounting principle upon the adoption of SFAS No. 142. At September 30, 2001, the Company has a $1.7 million unamortized deferred credit arising from the Company's acquisition of A. B. Dick recorded in other long-term liabilities. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The transition provisions in SFAS No. 142 provide that goodwill and intangible assets with indefinite lives acquired in a business combination completed after June 30, 2001 will not be amortized. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of SFAS No. 142 is expected to result in a decrease in net loss of approximately $1.0 million per year. During 2002, the Company will perform the first of the required impairment tests under SFAS No. 142 of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company's current policy for measuring goodwill impairment is based upon an analysis of undiscounted cash flows. Under SFAS No. 142, the goodwill must be assigned to reporting units and measured for impairment based upon the fair values of the reporting units. The Company has not yet determined its reporting units under SFAS No. 142 and what the effect of these new impairment tests will be on its consolidated financial position or results of operations. In October 2001, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued. This statement, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The Company is analyzing the effect of this statement and does not expect it to have a material effect on the Company's consolidated financial position, results of operations, or cash flows. 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 20 anticipated events or trends and expectations and beliefs relating to matters that are not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by such forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in the U.S. interest rates affect interest earned on the Company's cash equivalents as well as interest paid on a portion of its debt. To mitigate the impact of fluctuations in U.S. interest rates, the Company generally maintains the majority of its debt as fixed rate by borrowing on a long-term basis. The Company's earnings are also affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominantly in European countries. An additional risk relates to product shipped between the Company's European subsidiaries. In addition to the impact on the intercompany balances, changes in exchange rates also affect volume of sales or the foreign currency sales price as competitors products become more or less attractive. The carrying amount of cash and cash equivalents, trade receivables and payables approximates fair value because of the short maturity of these instruments. The carrying amount of the revolving credit facility approximates fair value. The carrying amount of the senior notes exceeds its fair value at September 30, 2001 by $4.0 million. The fair value has been determined using the market price of the related securities at September 30, 2001. 21 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Index of Exhibits (b) Reports on Form 8-K filed in the second quarter of 2001 NONE 22 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/ Brian J. Longe ---------------------------------------- BRIAN J. LONGE President and Chief Executive Officer and Director (As duly authorized representative and Principal Executive Officer) PARAGON CORPORATE HOLDINGS INC. By: /s/ Gregory T. Knipp ---------------------------------------- GREGORY T. KNIPP Chief Financial Officer (As duly authorized representative and as Principal Financial and Accounting Officer) A.B.DICK COMPANY By: /s/ Gregory T. Knipp ---------------------------------------- GREGORY T. KNIPP Chief Financial Officer (As duly authorized representative and as Principal Financial and Accounting Officer) ITEK GRAPHIX CORP. By: /s/ Brian J. Longe_ ---------------------------------------- BRIAN J. LONGE President and Chief Executive Officer (As duly authorized Officer) Date: November 14, 2001 23 PARAGON CORPORATE HOLDINGS INC. FORM 10-K INDEX OF EXHIBITS

PARAGON CORPORATE HOLDINGS INC 10-Q