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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, 2002
Commission File No. 1-15729
PARAGON TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 22-1643428
- --------------------------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Kuebler Road, Easton, PA 18040
- --------------------------------------------------- ---------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-3205
---------------------
Indicate by checkmark 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 12 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
--- ---
Number of shares of common stock, par value $1.00 per share, outstanding as of
October 28, 2002: 4,244,916.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(In Thousands, Except Share Data)
(UNAUDITED)
September 30, December 31,
2002 2001
------------------- ------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 6,748 6,114
Receivables:
Trade (net of allowance for doubtful
accounts of $283 as of September 30,
2002 and $54 as of December 31,
2001) 5,015 7,093
Notes and other receivables 1,359 630
------ ------
Total receivables 6,374 7,723
------ ------
Costs and estimated earnings in excess
of billings 220 244
Inventories:
Raw materials 981 1,731
Work-in-process 142 254
Finished goods 276 408
------ ------
Total inventories 1,399 2,393
------ ------
Deferred income tax benefits 1,780 2,077
Prepaid expenses and other current assets 740 649
------ ------
Total current assets 17,261 19,200
------ ------
Property, plant and equipment, at cost:
Land 27 27
Buildings and improvements 3,727 3,727
Machinery and equipment 4,287 5,059
------ ------
8,041 8,813
Less: accumulated depreciation (5,705) (6,112)
------ ------
Net property, plant and equipment 2,336 2,701
------ ------
Investment in joint venture 1,720 1,667
Excess of cost over fair value of net
assets acquired, less amortization
of $1,053 as of September 30, 2002
and December 31, 2001 17,657 17,657
Other assets, at cost less accumulated
amortization of $126 as of September 30,
2002 and $94 as of December 31, 2001 86 118
------ ------
Total assets $ 39,060 41,343
====== ======
See accompanying notes to consolidated financial statements.
2
Item 1. Financial Statements (Continued)
- ------- --------------------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(In Thousands, Except Share Data)
(UNAUDITED)
September 30, December 31,
2002 2001
------------------- ------------------
Liabilities and Stokholders' Equity
- -----------------------------------
Current liabilities:
Current installments of long-term debt $ 2,300 2,305
Accounts payable 2,969 3,319
Customers' deposits and billings in excess
of costs and estimated earnings for
completed and uncompleted contracts 2,331 3,345
Accrued salaries, wages, and commissions 544 676
Income taxes payable 2 46
Accrued royalties payable 108 92
Accrued product warranties 1,092 863
Accrued pension and retirement
savings plan liabilities 1,160 1,122
Accrued restructuring expenses 222 494
Accrued other liabilities 1,371 1,126
------ ------
Total current liabilities 12,099 13,388
------ ------
Long-term liabilities:
Long-term debt, excluding current
installments:
Term loan 5,175 6,900
Subordinated notes payable 3,000 3,000
------ ------
Total long-term debt 8,175 9,900
Other long-term liability 431 412
Deferred income taxes payable 1,213 628
Deferred compensation 19 134
------ ------
Total long-term liabilities 9,838 11,074
------- ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and
outstanding 4,244,916 shares as
of September 30, 2002 and 4,221,635
shares as of December 31, 2001 4,245 4,222
Additional paid-in capital 7,231 7,071
Retained earnings 5,905 5,841
Accumulated other comprehensive loss (258) (253)
------ ------
Total stockholders' equity 17,123 16,881
------ ------
Total liabilities and stockholders' equity $ 39,060 41,343
====== ======
See accompanying notes to consolidated financial statements.
3
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2002 and September 30, 2001
(In Thousands, Except Share And Per Share Data)
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
Net sales $ 9,010 12,796 29,670 38,947
Cost of sales 7,119 9,499 22,404 28,994
--------- --------- --------- ---------
Gross profit on sales 1,891 3,297 7,266 9,953
--------- --------- --------- ---------
Selling, general and
administrative
expenses 2,251 2,213 6,774 7,899
Product development
costs 94 86 253 402
Amortization of
goodwill - 117 - 351
Restructuring
expenses - - - 1,538
Interest expense 265 310 803 1,001
Interest income (35) (35) (88) (215)
Equity in income of
joint ventures (11) (148) (53) (373)
Other income, net (4) (81) (528) (283)
--------- --------- --------- ---------
2,560 2,462 7,161 10,320
--------- --------- --------- ---------
Earnings (loss) before
income taxes (669) 835 105 (367)
Income tax expense
(benefit) (267) 366 41 (155)
--------- --------- --------- ---------
Net earnings (loss) $ (402) 469 64 (212)
========= ========= ========= =========
Basic earnings
(loss) per share $ (.09) .11 .02 (.05)
========= ========= ========= =========
Diluted earnings
(loss) per share $ (.09) .11 .01 (.05)
========= ========= ========= =========
Weighted average
shares outstanding 4,235,887 4,214,191 4,227,911 4,207,575
Dilutive effect of
stock options - 26,375 65,696 33,474
Dilutive effect of
phantom stock units - 15,617 4,692 17,381
--------- --------- --------- ---------
Weighted average
shares outstanding
assuming dilution 4,235,887 4,256,183 4,298,299 4,258,430
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Nine Months Ended September 30, 2002 and September 30, 2001
(In Thousands)
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
Net earnings (loss) $ (402) 469 64 (212)
Other comprehensive
income (loss), net of tax:
Cash flow hedge:
Cumulative effect of
adoption of FAS 133 - - - (96)
Change in fair value
during the period (49) (132) (5) (182)
----- ----- ----- -----
Total other
comprehensive
income (loss) (49) (132) (5) (278)
----- ----- ----- -----
Comprehensive
income (loss) $ (451) 337 59 (490)
===== ===== ===== =====
See accompanying notes to consolidated financial statements.
5
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2002 and September 30, 2001
(In Thousands, Except Share Data)
Nine Months Ended
----------------------------------------
September 30, September 30,
2002 2001
------------------- -------------------
Cash flows from operating activities:
Net earnings (loss) $ 64 (212)
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation of plant and equipment 488 547
Amortization of intangibles 32 383
Gain on disposition of equipment (94) -
Equity in income of joint ventures (53) (373)
Issuance of 18,281 and 9,926 common
shares, respectively, as noncash
interest payments on subordinated
notes 150 75
Issuance of 12,390 common shares
as payment of employee's bonus - 111
Change in operating assets and liabilities:
Receivables 1,224 (2,641)
Costs and estimated earnings in
excess of billings 24 442
Inventories 994 199
Prepaid expenses and other current
assets (91) 73
Other noncurrent assets - 1
Accounts payable (350) (68)
Customers' deposits and billings in
excess of costs and estimated
earnings for completed and
uncompleted contracts (1,014) (333)
Accrued salaries, wages, and
commissions (132) (1,274)
Income taxes payable (44) (369)
Accrued royalties payable 16 (166)
Accrued product warranties 229 (102)
Accrued pension and retirement
savings plan liabilities 38 481
Accrued restructuring expenses (272) 709
Accrued other liabilities 245 397
Deferred income taxes 896 11
Deferred compensation (115) (36)
------ -----
Net cash provided (used) by
operating activities 2,235 (2,145)
------ -----
Cash flows from investing activities:
Proceeds from the disposition of equipment 200 -
Proceeds from the divestment of a
joint venture 125 -
Additions to property, plant and equipment (229) (530)
------ -----
Net cash provided (used) by investing activities 96 (530)
------ -----
See accompanying notes to consolidated financial statements.
6
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended September 30, 2002 and September 30, 2001
(In Thousands, Except Share Data)
Nine Months Ended
----------------------------------------
September 30, September 30,
2002 2001
------------------- -------------------
Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan 33 30
Repayment of long-term debt (1,730) (1,519)
------ -----
Net cash used by financing activities (1,697) (1,489)
------ -----
Increase (decrease) in cash and
cash equivalents 634 (4,164)
Cash and cash equivalents,
beginning of period 6,114 7,925
------ -----
Cash and cash equivalents,
end of period $ 6,748 3,761
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 618 809
====== =====
Income taxes $ 51 471
====== =====
See accompanying notes to consolidated financial statements.
7
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2002 and September 30, 2001
(1) The information contained in this Form 10-Q report is unaudited. In the
opinion of the management of Paragon Technologies, Inc. ("Paragon" or the
"Company"), the interim financial statements furnished reflect all
adjustments and accruals that are necessary to present a fair statement of
results for the interim periods. The financial statements include the
accounts of the Company and Ermanco Incorporated ("Ermanco"), a wholly
owned subsidiary company, after elimination of intercompany balances and
transactions. Results for interim periods are not necessarily indicative of
results expected for the fiscal year. This quarterly report should be read
in conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements of the Company and the related Notes
thereto appearing in our annual report on Form 10-K, as amended, for the
year ended December 31, 2001, as filed with the Securities and Exchange
Commission. Refer to the Company's Form 10-K, as amended, for the year
ended December 31, 2001 for more complete financial information.
(2) Restructuring
-------------
During the second quarter of 2001, the Company restructured its business
operations and recorded a charge of $1,538,000 for restructuring costs. In
conjunction with the restructuring plan, the Company reduced the number of
office associates by 14 and discontinued production operations at its
Easton, Pennsylvania facility. All production employees working in the
Easton, Pennsylvania manufacturing plant were laid off by the end of
November 2001. Prior to the restructuring, the Company employed
approximately 20 production employees, with an additional 27 individuals on
an extended layoff. The restructuring charges included costs of $678,000
for severance and other personnel costs, $562,000 for pension expense
associated with the curtailment of the Company's defined benefit plan for
the Company's Easton, Pennsylvania production employees, and $298,000 for
plant closure and professional service fees related to the restructuring.
The restructuring charges were determined based on formal plans approved by
the Company's management and the Board of Directors.
The liability related to the curtailment of the defined benefit plan is
recorded as accrued pension and retirement savings plan liabilities on the
consolidated balance sheets.
The major components of the restructuring charge and remaining accruals are
as follows:
Balance at Cash Balance at
December 31, 2001 Payments September 30, 2002
---------------------- -------------- -------------------------
Severances $ 274,000 (178,000) 96,000
Other 220,000 (94,000) 126,000
------- -------- -------
$ 494,000 (272,000) 222,000
======= ======= =======
(3) Major Segments of Business
--------------------------
Operating segments are defined as components of an enterprise in which
separate financial information is available and evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company identified such segments based on both
management responsibility and types and products offered for sale. The
Company operates in two major market segments.
8
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2002 and September 30, 2001
The Company's Easton, Pennsylvania operations (hereafter referred to as "SI
Systems") is a specialized systems integrator supplying SI Systems' branded
automated material handling systems to manufacturing, order selection, and
distribution operations. The systems are marketed, designed, sold,
installed, and serviced by its own staff or agents, generally as
labor-saving devices to improve productivity, quality, and reduce costs. SI
Systems also operates as a project manager in connection with the
installation, integration, and service of its products, generally utilizing
subcontractors. SI Systems' branded products are utilized to automate the
movement or selection of products and are often integrated with other
automated equipment such as conveyors and robots. SI Systems' branded
integrated material handling solutions involve both standard and specially
designed components and include integration of non-proprietary automated
handling technologies so as to provide turnkey solutions for its customers'
unique material handling needs. SI Systems' staff develops and designs
computer control programs required for the efficient operation of the
systems. SI Systems' branded products are sold to customers located in
North America, including the U.S. government.
The Company's Spring Lake, Michigan operations (hereafter referred to as
"Ermanco") is a manufacturer of Ermanco branded light to medium duty unit
handling conveyor products, serving the material handling industry through
a worldwide network of approximately 100 experienced material handling
equipment distributors and licensees. Ermanco also provides complete
conveyor systems for a variety of applications, including distribution and
manufacture of computers and electronic products, utilizing primarily its
own manufactured conveyor products, engineering services by its own staff
or subcontractors, and subcontracted installation services. Ermanco
supplies material handling systems and equipment to both national and
international markets. Ermanco offers services ranging from the delivery of
basic transportation conveyors to turnkey installations of complex, fully
automated work-in-process production lines and distribution centers,
utilizing sophisticated, custom-designed controls software. Many of
Ermanco's sales are to distributors who have non-exclusive agreements with
the Company.
The Company's systems vary in configuration and capacity. Historically,
system prices across the Company's product lines have ranged from $100,000
to several million dollars per system. Systems and aftermarket sales by
brand during the three and nine months ended September 30, 2002 and
September 30, 2001 are as follows (in thousands):
For the three months ended September 30, 2002:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Systems sales $ 2,706 5,363 8,069 89.5%
Aftermarket sales 630 311 941 10.5%
------ ------ ------ -----
Total sales $ 3,336 5,674 9,010 100.0%
====== ====== ====== =====
As a % of total sales 37.0% 63.0% 100.0%
For the three months ended September 30, 2001:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Systems sales $ 2,583 8,338 10,921 85.3%
Aftermarket sales 1,373 502 1,875 14.7%
------ ------ ------ -----
Total sales $ 3,956 8,840 12,796 100.0%
====== ====== ====== =====
As a % of total sales 30.9% 69.1% 100.0%
9
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2002 and September 30, 2001
For the nine months ended September 30, 2002:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Systems sales $ 8,411 17,560 25,971 87.5%
Aftermarket sales 2,345 1,354 3,699 12.5%
------ ------ ------ -----
Total sales $ 10,756 18,914 29,670 100.0%
====== ====== ====== =====
As a % of total sales 36.3% 63.7% 100.0%
For the nine months ended September 30, 2001:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Systems sales $ 11,004 22,691 33,695 86.5%
Aftermarket sales 3,746 1,506 5,252 13.5%
------ ------ ------ -----
Total sales $ 14,750 24,197 38,947 100.0%
====== ====== ====== =====
As a % of total sales 37.9% 62.1% 100.0%
The Company's products are sold through its own sales personnel, along with
a network of distributors and licensees. Domestic and international sales
by brand during the three and nine months ended September 30, 2002 and
September 30, 2001 are as follows (in thousands):
For the three months ended September 30, 2002:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Domestic sales $ 3,299 5,308 8,607 95.5%
International sales 37 366 403 4.5%
------ ------ ------ -----
Total sales $ 3,336 5,674 9,010 100.0%
====== ====== ====== =====
For the three months ended September 30, 2001:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Domestic sales $ 3,878 7,790 11,668 91.2%
International sales 78 1,050 1,128 8.8%
------ ------ ------ -----
Total sales $ 3,956 8,840 12,796 100.0%
====== ====== ====== =====
For the nine months ended September 30, 2002:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Domestic sales $ 10,567 17,484 28,051 94.5%
International sales 189 1,430 1,619 5.5%
------ ------ ------ -----
Total sales $ 10,756 18,914 29,670 100.0%
====== ====== ====== =====
For the nine months ended September 30, 2001:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Domestic sales $ 14,050 20,562 34,612 88.9%
International sales 700 3,635 4,335 11.1%
------ ------ ------ -----
Total sales $ 14,750 24,197 38,947 100.0%
====== ====== ====== =====
10
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2002 and September 30, 2001
The Company also engages in sales with the U.S. government, which is one of
the Company's major customers. Sales to the U.S. government during the
three and nine months ended September 30, 2002 and September 30, 2001 are
as follows (in thousands):
As a %
of Total Sales
-----------------
For the three months ended September 30, 2002 $ 376 4.2%
For the three months ended September 30, 2001 1,412 11.0%
As a %
of Total Sales
-----------------
For the nine months ended September 30, 2002 $ 3,102 10.5%
For the nine months ended September 30, 2001 5,806 14.9%
The Company identifies operating segments based on the types of products
offered for sale as follows:
For the Three Months Ended
September 30, 2002 (In Thousands): SI Systems Ermanco Total
- ------------------------------------------- ------------------- ----------------- -----------
Sales $ 3,336 5,674 9,010
Earnings (loss) before interest
expense, interest income, equity
in income of joint ventures, and
income taxes (43) (407) (450)
Total assets 8,809 30,251 39,060
Capital expenditures 34 21 55
Depreciation and amortization
expense 68 112 180
For the Three Months Ended
September 30, 2001 (In Thousands): SI Systems Ermanco Total
- ------------------------------------------- ------------------- ----------------- -----------
Sales $ 3,956 8,840 12,796
Earnings before interest
expense, interest income, equity
in income of joint ventures, and
income taxes 376 586 962
Total assets 12,438 31,214 43,652
Capital expenditures 57 280 337
Depreciation and amortization
expense 104 229 333
11
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2002 and September 30, 2001
For the Nine Months Ended
September 30, 2002 (In Thousands): SI Systems Ermanco Total
- ------------------------------------------- ------------------- ----------------- -----------
Sales $ 10,756 18,914 29,670
Earnings (loss) before interest
expense, interest income, equity
in income of joint ventures,
and income taxes 1,075 (308) 767
Total assets 8,809 30,251 39,060
Capital expenditures 55 174 229
Depreciation and amortization
expense 208 312 520
For the Nine Months Ended
September 30, 2001 (In Thousands): SI Systems Ermanco Total
- ------------------------------------------- ------------------- ----------------- -----------
Sales $ 14,750 24,197 38,947
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income
taxes (before restructuring
expenses) 559 1,025 1,584
Restructuring expenses 1,538 - 1,538
Total assets 12,438 31,214 43,652
Capital expenditures 121 409 530
Depreciation and amortization
expense 311 619 930
(4) New Accounting Pronouncements
-----------------------------
Effective January 1, 2002, the Company adopted Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"), which
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at least
annually. Impairment losses, if any, will be measured as of January 1, 2002
and recognized as the cumulative effect of a change in accounting principle
in 2002. FAS 142 also requires that intangible assets with determinable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values and reviewed for impairment in accordance
with Statement No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-Lived Assets to Be Disposed Of."
As of January 1, 2002, the Company had unamortized goodwill of $17,657,000,
all of which was attributable to Ermanco. FAS 142 requires that the Company
completes a first phase of the impairment review for goodwill by June 30,
2002. The required review was completed during the second quarter of 2002
and did not indicate any impairment.
12
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2002 and September 30, 2001
(4) New Accounting Pronouncements (Continued)
-----------------------------
Comparison to Prior Year "As Adjusted"
--------------------------------------
The following table presents prior year reported amounts adjusted to
eliminate the effect of goodwill amortization in accordance with FAS 142.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net earnings (loss) $(402,000) 469,000 64,000 (212,000)
Add back: goodwill amortization,
net of tax - 66,000 - 203,000
------- ------- ------- -------
Adjusted net earnings (loss) $(402,000) 535,000 64,000 (9,000)
======= ======= ======= =======
Basic net earnings (loss) per share:
Reported net earnings (loss)
per share $ (.09) .11 .02 (.05)
Add back: goodwill amortization,
net of tax - .02 - .05
------- ------- ------- -------
Adjusted net earnings
(loss) per share $ (.09) .13 .02 -
======= ======= ======= =======
Diluted net earnings (loss) per share:
Reported net earnings (loss)
per share $ (.09) .11 .01 (.05)
Add back: goodwill amortization,
net of tax - .02 - .05
------- ------- ------- -------
Adjusted net earnings
(loss) per share $ (.09) .13 .01 -
======= ======= ======= =======
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Statement also supersedes APB No.
30 provisions related to the accounting and reporting for the disposal of a
segment of a business. This Statement establishes a single accounting
model, based on the framework established in SFAS No. 121, for long-lived
assets to be disposed of by sale. The Statement retains most of the
requirements in SFAS No. 121 related to the recognition of impairment of
long-lived assets to be held and used. This Statement was adopted by the
Company on January 1, 2002 and did not have any impact on the Company's
financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS 146) which addresses financial accounting and reporting for costs
associated with exit or disposal activities. This statement nullifies
Emerging Issues Task Force Issue 94-3. "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred and establishes that fair value
is the objective for initial measurement of the liability. The Statement is
effective for exit or disposal activities that are initiated after December
31, 2002, with early adoption encouraged.
13
Item 1. Financial Statements (Continued)
- ------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2002 and September 30, 2001
(5) Other Comprehensive Loss
------------------------
The Company is exposed to market risk from changes in interest rates, and
uses an interest rate swap to hedge this risk. The seven-year interest rate
swap has a notional amount of $4,600,000 and is classified as a cash flow
hedge of forecasted variable rate interest payments on a portion of the
Company's term loan. Gains and losses on the interest rate swap are
deferred in accumulated other comprehensive loss. The fair value of the
interest rate swap at September 30, 2002 was a liability of approximately
$431,000. The separate components of other comprehensive loss are as
follows (in thousands):
Gross Tax Effect Net
----- ---------- ---
Accumulated other comprehensive
loss at December 31, 2001 $ 412 159 253
Other comprehensive loss 19 14 5
--- --- ---
Accumulated other comprehensive
loss at September 30, 2002 $ 431 173 258
=== === ===
The Company uses derivative financial instruments as risk management tools
and not for speculative purposes.
(6) Long-Term Debt
- --- --------------
The Company was in violation of the covenant related to its Funds Flow
Coverage Ratio and received waivers from its principal bank for the
covenant violation for the quarters ended June 30, 2002 and September 30,
2002. During August 2002, the Company entered into an arrangement to amend
its credit agreements with its principal bank relative to future covenant
requirements and the maintenance of a minimum cash balance covenant. In
August 2002, the line of credit agreement was amended to extend the
expiration date of the facility to June 30, 2003 and decrease the amount
available under the facility. During November 2002, the Company prepaid,
without penalty, $1,200,000 of the term loan reducing the balance of the
term loan to $5,987,500 and placed $1,150,000 in escrow with the Company's
principal bank. Beginning with the quarter ended December 31, 2002, the
escrow amount will be reduced by $287,500 every quarter and applied to the
principal portion of the term loan until the escrow amount reaches zero at
September 30, 2003. The Company will resume making equal quarterly payments
of $575,000 plus accrued interest beginning with the quarter ended December
31, 2003. The Company also amended its credit agreements relative to future
covenant requirements, the minimum cash balance covenant was reduced to
$4,000,000, and certain conditions were added regarding the sale of the
Company's Easton facility. In November 2002, the line of credit agreement
was also amended to decrease the amount available under the facility to
$1,000,000.
The Company remains prohibited from making any cash payments of
subordinated debt and interest through the quarter ended September 30,
2003, and beginning with the quarter ended December 31, 2003 interest
payments on the subordinated debt may be made in the form of cash if the
Company is in full compliance with all the financial covenants set forth in
the Loan Agreement, as amended, with the Company's principal bank. The
Company intends to satisfy its quarterly interest obligations on
subordinated debt with the issuance of the Company's common stock in the
event the Company's principal bank does not grant waivers regarding the
making of cash payments of interest on subordinated debt.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents increased to $6,748,000 at
September 30, 2002 from $6,114,000 at December 31, 2001. The increase resulted
from cash provided by operating activities totaling $2,235,000, proceeds of
$200,000 from the disposition of equipment, and proceeds of $125,000 from the
divestment of a joint venture. Partially offsetting the increase in cash and
cash equivalents from these sources was the repayment of long-term debt of
$1,730,000 and purchases of capital equipment of $229,000. Funds used by
operating activities during the nine months ended September 30, 2001 were
$2,145,000.
Acquisition of Ermanco Incorporated
- -----------------------------------
On September 30, 1999, the Company acquired all of the outstanding common
stock of Ermanco. Under the terms of the Stock Purchase Agreement, the Company
acquired all of the outstanding common stock of Ermanco for a purchase price of
$22,801,000 consisting of $15,301,000 in cash, $3,000,000 in promissory notes
payable to the fourteen stockholders of Ermanco, and 481,284 shares of the
Company's common stock with a value of $4,500,000 based on the average closing
price of $9.35 of the Company's common stock for the five trading days
immediately preceding the date of the Stock Purchase Agreement, August 6, 1999.
In order to complete the Ermanco acquisition, the Company obtained
financing from its principal bank. The Company entered into a line of credit
facility which may not exceed the lesser of $1,000,000, as amended, or an amount
based on a borrowing base formula tied principally to accounts receivable,
inventory, fair market value of the Company's property and plant, and
liquidation value of equipment. This amount will be reduced by the unpaid
principal balance of the term loan described below. The line of credit facility
is to be used primarily for working capital purposes. As of September 30, 2002,
the Company did not have any borrowings under the line of credit facility, and
the facility expires effective June 30, 2003.
The Company financed $14,000,000 of the acquisition through a seven-year
term loan from its bank. During the first two years of the term loan, the
Company was obligated to repay equal quarterly payments of $312,500 plus accrued
interest. After September 30, 2001, the Company commenced making equal quarterly
payments of $575,000 plus interest, continuing until the loan is fully repaid.
In connection with the most recent amendment, the Company prepaid, without
penalty, $1,200,000 of the term loan reducing the balance of the term loan to
$5,987,500 and placed $1,150,000 in escrow with the Company's principal bank.
Beginning with the quarter ended December 31, 2002, the escrow amount will be
reduced by $287,500 every quarter and applied to the principal portion of the
term loan until the escrow amount reaches zero at September 30, 2003. The
Company will resume making equal quarterly payments of $575,000 plus accrued
interest beginning with the quarter ended December 31, 2003. The interest rate
on the term loan is variable at a rate equal to the three-month LIBOR Market
Index Rate plus three percent, which was 4.80% as of September 30, 2002. The
Company also entered into an interest rate swap agreement for a portion of the
term loan to hedge the floating interest rate. At September 30, 2002, the
notional amount of the seven-year interest rate swap was $4,600,000, and it
fixes interest at a rate of 9.38%. As of September 30, 2002, the liability
associated with the fair value of the cash flow hedge was approximately
$431,000.
To obtain the line of credit and term loan, the Company granted the bank a
security interest in all personal property, including, without limitation, all
accounts, deposits, documents, equipment, fixtures, general intangibles, goods,
instruments, inventory, letters of credit, money, securities, and a first
mortgage on all real estate. The line of credit facility and term loan contain
various restrictive covenants relating to additional indebtedness, asset
acquisitions or dispositions, investments, guarantees, payment of dividends,
maintenance of certain financial ratios, and as amended, maintenance of a
minimum cash balance covenant of $4,000,000. The Company was in compliance with
all covenants or obtained appropriate waivers as of September 30, 2002 (See Note
6).
15
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
Acquisition of Ermanco Incorporated (Continued)
- -----------------------------------
On September 30, 1999, the Company also issued promissory notes to fourteen
stockholders of Ermanco, two of which are directors of the Company (Messrs.
Shulman and Kirschner), in the aggregate principal amount of $3,000,000. The
notes have a term of seven years and bear interest at an annual rate of ten
percent through September 30, 2002, twelve percent from October 1, 2002 through
September 30, 2004, and fourteen percent from October 1, 2004 through September
30, 2006. The weighted average interest rate on the promissory notes is 11.714%
over the term of the notes. Interest shall be payable quarterly, in cash or
under certain conditions, in the Company's common stock upon approval of the
Company's Board of Directors. The promissory notes may be prepaid prior to the
end of the seven-year term provided that there is no debt outstanding under the
Company's line of credit facility and term loan. From July 1, 2001 through
September 30, 2003, the Company has been and will be prohibited from making any
cash payments on subordinated debt and interest. However, the bank waived the
restriction from paying interest on the subordinated debt in the form of cash
for the quarter ended December 31, 2001 and the quarter ended March 31, 2002.
Beginning with the quarter ended December 31, 2003 interest payments on the
subordinated debt may be made in the form of cash if the Company is in full
compliance with all the financial covenants set forth in the Loan Agreement, as
amended, with the Company's principal bank. The Company intends to satisfy its
quarterly interest obligations on subordinated debt with the issuance of the
Company's common stock in the event the Company's principal bank does not grant
waivers regarding the making of cash payments of interest on subordinated debt.
The Company was in violation of the covenant related to its Funds Flow
Coverage Ratio and received waivers from its principal bank for the covenant
violation for the quarters ended June 30, 2002 and September 30, 2002. During
August 2002, the Company entered into an arrangement to amend its credit
agreements with its principal bank relative to future covenant requirements and
the maintenance of a minimum cash balance covenant. In August 2002, the line of
credit agreement was amended to extend the expiration date of the facility to
June 30, 2003 and decrease the amount available under the facility. During
November 2002, the Company prepaid, without penalty, $1,200,000 of the term loan
reducing the balance of the term loan to $5,987,500 and placed $1,150,000 in
escrow with the Company's principal bank. Beginning with the quarter ended
December 31, 2002, the escrow amount will be reduced by $287,500 every quarter
and applied to the principal portion of the term loan until the escrow amount
reaches zero at September 30, 2003. The Company will resume making equal
quarterly payments of $575,000 plus accrued interest beginning with the quarter
ended December 31, 2003. The Company also amended its credit agreements relative
to future covenant requirements, the minimum cash balance covenant was reduced
to $4,000,000, and certain conditions were added regarding the sale of the
Company's Easton facility. In November 2002, the line of credit agreement was
also amended to decrease the amount available under the facility to $1,000,000.
Commitments and Contingencies
- -----------------------------
Ermanco's operations are located in a 94,000 square foot steel building in
Spring Lake, Michigan. The building is leased from an organization that is
affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement requires fixed
monthly rentals of $32,858 (with annual increases of 2.5%), which includes a
variable portion based on the lessor's borrowing rate and the unpaid mortgage
balance. The terms of the lease require the payment of all taxes, insurance, and
other ownership related costs of the property. The lease expires on September
30, 2004.
The Company also leases certain automobiles and office equipment, office
space, computer equipment, and software under various operating leases with
terms extending through September 2007.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
Commitments and Contingencies (Continued)
- -----------------------------
On March 4, 1996, SI/BAKER established a $3,000,000 line of credit facility
(the "Facility") with its principal bank (the "bank"). Under the terms of the
Facility, SI/BAKER's parent companies, Paragon Technologies, Inc. and McKesson
Automation Systems Inc., have each provided a limited guarantee and surety in an
amount not to exceed $1,000,000 for a combined guarantee of $2,000,000 to the
bank for the payment and performance of the related note, including any further
renewals or modifications of the facility. As of September 30, 2002, SI/BAKER
did not have any borrowings under the Facility, and the Facility expires
effective June 30, 2003.
Other Liquidity and Capital Resource Matters
- --------------------------------------------
The Company anticipates that its financial resources, consisting of cash
generated from operations and borrowings available under its credit facility
will be adequate to satisfy its future cash requirements through the next year.
If the Company is unable to meet the terms of its financial covenants relating
to its outstanding indebtedness and is unable to receive a waiver from its
lender, a default could result under the Company's borrowing agreements. A
default may result in the acceleration of the Company's indebtedness and cause
the Company's debt to become immediately due and payable. If acceleration
occurs, the Company may not be able to repay its debt, and the Company may not
be able to borrow sufficient additional funds to refinance such debt. Sales
volume, as well as cash liquidity, may experience fluctuations due to the
unpredictability of future contract sales and the dependence upon a limited
number of large contracts with a limited number of customers. For these reasons,
cash liquidity beyond a twelve-month period is difficult for the Company to
forecast with reasonable accuracy.
The Company plans to consider all strategic alternatives to increase
stockholder value, including expansion opportunities as they arise, although the
ongoing operating results of the Company, the restrictive covenants associated
with the financing obtained from the Company's principal bank, the economics of
the expansion, and the circumstances justifying the expansion will be key
factors in determining the amount of resources the Company will devote to
further expansion.
Results Of Operations
- ---------------------
(a) Nine Months Ended September 30, 2002 Versus Nine Months Ended September 30,
---------------------------------------------------------------------------
2001
----
The Company's net earnings for the nine months ended September 30, 2002 was
$64,000 compared to a net loss of $212,000 for the nine months ended September
30, 2001. Contributing to the net earnings for the nine months ended September
30, 2002 was other income from the short-term licensing of certain real property
of $300,000 and a gain on the sale of excess fixed assets of $94,000, and the
application of the non-amortization provision of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," whereby
goodwill is no longer amortized thereby resulting in an increase to pre-tax
income of $351,000. Contributing to the net loss for the nine months ended
September 30, 2001 were restructuring charges of $1,538,000.
Net Sales and Gross Profit on Sales
- -----------------------------------
Net sales of $29,670,000 for the nine months ended September 30, 2002
decreased 23.8% compared to net sales of $38,947,000 for the nine months ended
September 30, 2001. The sales decrease of $9,277,000 was primarily attributable
to a lower volume of orders associated with the current economic slowdown and
competitive pricing pressures. The net sales decrease was comprised of a
decrease in Ermanco's branded sales of approximately $5,283,000 and a decrease
in SI Systems' branded sales of approximately $3,994,000 for the nine months
ended September 30, 2002 when compared to the nine months ended September 30,
2001. The decline in Ermanco branded sales was primarily due to the prior year
comparable period containing a greater
17
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
- ---------------------
(a) Nine Months Ended September 30, 2002 Versus Nine Months Ended September 30,
---------------------------------------------------------------------------
2001
----
Net Sales and Gross Profit on Sales (Continued)
- -----------------------------------
amount of sales related to distributors and companies in the technology sector.
The decline in SI Systems' branded sales was primarily due to the prior year
comparable period containing a greater amount of sales related to the LO-TOW(R)
product line. Contributing to the reduction of approximately $2,640,000 in
LO-TOW(R) sales for the nine months ended September 30, 2002 was a decrease of
approximately $2,800,000 in sales related to the U.S. Postal Service. The
Company's business is dependent upon a limited number of large contracts with a
limited number of customers. This dependence can cause unexpected fluctuations
in sales volume. Various external factors affect the customers' decision-making
process on expanding and upgrading their current production or distribution
sites. The customers' timing and placement of new orders is often affected by
factors such as the current economy, current interest rates, and future
expectations. The Company believes that its business is not subject to
seasonality, although the rate of new orders can vary substantially from month
to month. Fluctuations in the Company's sales and earnings occur with increases
or decreases in major installations, since the Company recognizes sales on a
percentage of completion basis for its system contracts.
Gross profit, as a percentage of sales, was 24.5% for the nine months ended
September 30, 2002 compared to 25.6% for the nine months ended September 30,
2001. Gross profit, as a percentage of sales, for the nine months ended
September 30, 2002 was unfavorably impacted by 1.9% due to the underabsorption
of overhead costs caused by a decline in sales volume. Gross profit, as a
percentage of sales, for the nine months ended September 30, 2002, when compared
to the nine months ended September 30, 2001, was favorably impacted by
approximately 0.7% as a result of the reversal of previously established
contract accruals due to changes in cost estimates.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses of $6,774,000 were lower by
$1,125,000 for the nine months ended September 30, 2002 than in the nine months
ended September 30, 2001. The decrease of $1,125,000 was comprised of cost
savings of approximately $525,000, attributable to the Company's restructuring
of its business operations in the prior fiscal year and emphasis on cost
reduction. Also contributing to the reduction in selling, general and
administrative expenses was a reduction of approximately $325,000 in marketing
expenses associated with marketing research and the Company's participation in a
biannual industry trade show in the first quarter of the prior fiscal year,
$200,000 of compensation expense based on profit performance, and $310,000 of
charges during the second quarter of the prior fiscal year related to a
strategic transaction that was not completed. Partially offsetting the
aforementioned favorable variance was $150,000 of provision related to
increasing the allowance for doubtful accounts associated with possible
uncollectible receivables.
Product Development Costs
- -------------------------
Product development costs, including patent expense, of $253,000 were lower
by $149,000 for the nine months ended September 30, 2002 than in the nine months
ended September 30, 2001. Development programs in the nine months ended
September 30, 2002 were aimed at improvements to the Company's sortation and
accumulation conveyor technologies and the Order Picking, Fulfillment, and
Replenishment product line. Development programs in the nine months ended
September 30, 2001 included enhancements to the Company's Order Picking,
Fulfillment, and Replenishment product line and development efforts related to
NBS 30(TM) and NBS 90(TM), narrow belt sorters, that were introduced in the
material handling marketplace during the first quarter of 2001.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- ---------------------
(a) Nine Months Ended September 30, 2002 Versus Nine Months Ended September 30,
---------------------------------------------------------------------------
2001 (Continued)
----
Amortization of Goodwill
- ------------------------
Amortization of goodwill represented costs associated with the acquisition
of Ermanco. Due to the application of the non-amortization provision of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," goodwill is no longer amortized after December 31, 2001 as
compared to amortization expense of $351,000 for the nine months ended September
30, 2001.
Restructuring Expenses
- ----------------------
During the second quarter of 2001, the Company restructured its business
operations and recorded a charge of $1,538,000 for restructuring costs. In
conjunction with the restructuring plan, the Company reduced the number of
office associates by 14 and discontinued production operations at its Easton,
Pennsylvania facility. All production employees working in the Easton,
Pennsylvania manufacturing plant were laid off by the end of November 2001.
Prior to the restructuring, the Company employed approximately 20 production
employees, with an additional 27 individuals on an extended layoff. The
restructuring charges included costs of $678,000 for severance and other
personnel costs, $562,000 for pension expense associated with the curtailment of
the defined benefit plan for the Company's Easton, Pennsylvania production
employees, and $298,000 for plant closure and professional service fees relating
to the restructuring. The restructuring charges were determined based on formal
plans approved by the Company's management and the Board of Directors.
Interest Expense and Interest Income
- ------------------------------------
Interest expense of $803,000 was lower by $198,000 for the nine months
ended September 30, 2002 than in the nine months ended September 30, 2001. The
decrease in interest expense was attributable to the reduced level of term debt
due to principal payments and lower interest rates.
Interest income of $88,000 for the nine months ended September 30, 2002
decreased by $127,000, when compared to the nine months ended September 30,
2001. The decrease in interest income was primarily attributable to a reduction
in the level of interest rates pertaining to short-term investments.
Equity in Income of Joint Ventures
- ----------------------------------
Equity in income of joint ventures represents the Company's proportionate
share of its investment in the SI/BAKER joint venture and prior to January 1,
2002 its investment in the SI-Egemin joint venture, that are accounted for under
the equity method. The net unfavorable variance of $320,000 in the equity in
income of joint ventures for the nine months ended September 30, 2002 as
compared to the nine months ended September 30, 2001 was comprised of decreased
earnings of approximately $384,000 attributable to the SI/BAKER joint venture
and decreased losses of approximately $64,000 attributable to the SI-Egemin
joint venture.
The unfavorable variance of $384,000 for the nine months ended September
30, 2002 in the equity in income of the SI/BAKER joint venture was attributable
to a decline in sales of approximately $3,629,000, an increase of $107,000 in
product development costs, an increase of $107,000 in selling, general and
administrative expenses, and a reduction of $108,000 in interest income as
compared to the nine months ended September 30, 2001. The sales decrease was
primarily attributable to a larger backlog of orders at the beginning of the
prior fiscal year and a lower volume of orders received during the first nine
months of 2002, primarily associated with the current economic slowdown.
SI/BAKER increased product development costs aimed at enhancing the Company's
product offerings, while selling, general and administrative expenses primarily
19
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- ---------------------
(a) Nine Months Ended September 30, 2002 Versus Nine Months Ended September 30,
---------------------------------------------------------------------------
2001
----
Equity in Income of Joint Ventures (Continued)
- ----------------------------------
rose due to the addition of resources aimed at expanding the customer base. The
unfavorable variance in interest income was primarily attributable to a
reduction in the level of funds and interest rates pertaining to short-term
investments. Partially offsetting the aforementioned unfavorable variances was a
reduction of $146,000 in revenue-based royalty costs due to the parent
companies.
The Company divested of its investment in the SI-Egemin joint venture at
the end of calendar year 2001. The favorable variance of $64,000 for the nine
months ended September 30, 2002 in the equity in income of the SI-Egemin joint
venture was attributable to the prior fiscal year containing operating expenses
of the joint venture.
Other Income, Net
- -----------------
The favorable variance of $245,000 in other income, net for the nine months
ended September 30, 2002 as compared to the nine months ended September 30, 2001
was primarily attributable to $300,000 of short-term licensing income received
during the first half of 2002 relating to certain real property of the Company's
Easton, Pennsylvania facility. Also contributing to the favorable variance in
other income, net for the nine months ended September 30, 2002 was a gain on the
sale of excess fixed assets associated with the Company's Easton, Pennsylvania
facility during the first quarter of 2002 of approximately $100,000. Partially
offsetting the favorable variance in other income, net was a reduction of
revenue-based royalty income from the Company's SI/BAKER joint venture and
license agreements related to international conveyor system sales.
Income Tax Expense
- ------------------
The Company recognized income tax expense of $41,000 during the nine months
ended September 30, 2002, compared to the recognition of an income tax benefit
of $155,000 in the comparable prior year period. The income tax benefit
recognized for the nine months ended September 30, 2001 represented the
carryback of losses experienced during the nine months of 2001 against prior
year income. Income tax expense for the first nine months of 2002 was generally
recorded at statutory federal and state tax rates.
Backlog of Orders
- -----------------
The total backlog of orders at September 30, 2002 was approximately
$9,845,000. During the nine months ended September 30, 2002, the Company
received orders totaling approximately $26,174,000.
(b) Three Months Ended September 30, 2002 Versus Three Months Ended September
-------------------------------------------------------------------------
30, 2001
--------
With the exception of the following Statement of Operations captions,
changes in the third quarter of calendar year 2002 compared to the prior year
were consistent with those previously noted above for the nine month period.
The Company's net loss for the three months ended September 30, 2002 was
$402,000 compared to net earnings of $469,000 for the three months ended
September 30, 2001. Contributing to the net loss for the three months ended
September 30, 2002 was a decrease in sales of $3,786,000 due to the current
economic slowdown, and severance costs of $171,000 due to a reduction in office
associates.
20
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- ---------------------
(b) Three Months Ended September 30, 2002 Versus Three Months Ended September
-------------------------------------------------------------------------
30, 2001 (Continued)
--------
Net Sales and Gross Profit on Sales
- -----------------------------------
Net sales of $9,010,000 for the three months ended September 30, 2002
decreased 29.6% compared to net sales of $12,796,000 for the three months ended
September 30, 2001. The sales decrease of $3,786,000 was primarily attributable
to a lower volume of orders associated with the current economic slowdown. The
net sales decrease was comprised of a decrease in SI Systems branded sales of
approximately $620,000 and a decrease in Ermanco branded sales of approximately
$3,166,000 for the three months ended September 30, 2002 when compared to the
three months ended September 30, 2001. The decline in SI Systems branded sales
was primarily due to the prior year comparable period containing a greater
amount of aftermarket sales related to Cartrac(R) products. The decline in
Ermanco branded sales was primarily due to the prior year comparable period
containing a greater amount of sales to distributors and companies in the
technology sector.
Gross profit, as a percentage of sales, was 21.0% for the three months
ended September 30, 2002 compared to 25.8% for the three months ended September
30, 2001. Gross profit, as a percentage of sales, for the three months ended
September 30, 2002 was unfavorably impacted by approximately 2% due to the
underabsorption of overhead costs caused by a decline in sales volume. Gross
profit, as a percentage of sales, for the three months ended September 30, 2001
was favorably impacted by approximately 2.0% as a result of the reversal of
previously established contract accruals due to changes in cost estimates.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses of $2,251,000 were higher by
$38,000 for the three months ended September 30, 2002 than in the three months
ended September 30, 2001. The increase was primarily attributable to $171,000 of
expenses pertaining to a reduction of office associates during the third quarter
of 2002, partially offset by a reduction in compensation expense of
approximately $130,000 based on profit performance.
Other Income, Net
- -----------------
The unfavorable variance of $77,000 in other income, net for the three
months ended September 30, 2002 as compared to the three months ended September
30, 2001 was primarily attributable to a reduction of revenue-based royalty
income from the Company's SI/BAKER joint venture and license agreements related
to international conveyor system sales.
Income Tax Expense
- ------------------
The Company recognized an income tax benefit of $267,000 during the three
months ended September 30, 2002 compared to the recognition of income tax
expense of $366,000 during the three months ended September 30, 2001. The income
tax benefit recognized for the three months ended September 30, 2002 represented
the carryback of losses experienced during the three months ended September 30,
2002 against prior period income. Income tax expense for the three months ended
September 30, 2001 was generally recorded at statutory federal and state tax
rates.
21
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- ---------------------
Cautionary Statement
- --------------------
Certain statements contained herein are not based on historical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 or by the Securities and Exchange Commission
rules, regulations, and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. Among other things,
they regard the Company's acquisition activities, earnings, liquidity, financial
condition, and certain operational matters. Words or phrases denoting the
anticipated results of future events, such as "anticipate," "believe,"
"estimate," "expect," "may," "will," "will likely," "are expected to," "will
continue," "should," "project," and similar expressions that denote uncertainty,
are intended to identify such forward-looking statements. The Company's actual
results, performance, or achievements could differ materially from the results
expressed in, or implied by, such "forward-looking statements": (1) as a result
of risks and uncertainties identified in connection with those forward-looking
statements, including those factors identified herein, and in the Company's
other publicly filed reports; (2) as a result of risks associated with the
Company's restructuring, including the failure to achieve anticipated operating
savings, and the possibility that the restructuring charges will be greater than
anticipated; (3) as a result of factors over which the Company has no control,
including the strength of domestic and foreign economies, sales growth,
competition, and certain costs increases; or (4) if the factors on which the
Company's conclusions are based do not conform to the Company's expectations.
Quantitative and Qualitative Disclosures
- ----------------------------------------
The Company's primary interest rate market risk exposure is from changes in
interest rates. The Company's policy is to manage interest rate exposure through
the use of a combination of fixed and floating rate debt instruments, and since
September 30, 1999, an interest rate swap agreement. Generally, the Company
seeks to match the terms of its debt with its purpose. The Company uses a
variable rate line of credit facility to provide working capital for operations.
On September 30, 1999, the Company entered into an interest rate swap agreement
for 50% of its new term loan from its principal bank to effectively convert half
of the term loan from a variable rate note to a fixed rate note. A standard
interest rate swap agreement involves the payment of a fixed rate times a
notional amount by one party in exchange for a floating rate times the same
notional amount from another party. The counterpart to the swap agreement is the
Company's principal bank.
The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risk, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments, including
the interest rate swap agreement, are material to its results of operations.
22
Item 4. Controls and Procedures
- ------- -----------------------
(a) Evaluation Of Disclosure Controls And Procedures
------------------------------------------------
The Company's Chief Executive Officer and its Chief Financial Officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a
date within 90 days of filing date of the quarterly report (the "Evaluation
Date"), have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company would be made known to them by others within
the Company, particularly during the period in which this quarterly report was
being prepared.
(b) Changes in Internal Controls
----------------------------
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
and procedures subsequent to the Evaluation Date, nor any significant
deficiencies or material weaknesses in such internal controls and procedures
requiring corrective actions.
23
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits:
10.23 Amended and Restated Executive Employment Agreement
with Leon C. Kirschner dated as of August 28, 2002
(filed herewith).
10.24 Sixth Amendment to Line of Credit Note and Loan
Agreement dated August 9, 2002 (filed herewith).
99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 signed by William R.
Johnson, President and CEO, and Ronald J. Semanick,
Chief Financial Officer and Vice President -
Finance and Treasurer (filed herewith).
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 2002.
24
Paragon Technologies, Inc. and Subsidiary
SIGNATURE
---------
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 TECHNOLOGIES, INC.
/S/ William R. Johnson
-----------------------------------------------
William R. Johnson
President & CEO
/S/ Ronald J. Semanick
-----------------------------------------------
Ronald J. Semanick
Chief Financial Officer
Dated: November 14, 2002
------------------------
25
CERTIFICATION
I, William R. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Paragon
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
---------------------
/s/ William R. Johnson
- ----------------------------
William R. Johnson
President and CEO
26
CERTIFICATION
I, Ronald J. Semanick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Paragon
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
------------------------------
/s/ Ronald J. Semanick
- -------------------------------------
Ronald J. Semanick
Chief Financial Officer, and
Vice President - Finance and Treasurer
27