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. 1-15729
PARAGON TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Pennsylvania 22-1643428
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Kuebler Road, Easton, PA 18040
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-3205
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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 31, 2001: 4,221,635.
---------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
------ --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
(UNAUDITED)
September 30, December 31,
2001 2000
------------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents, principally
time deposits $ 3,761 7,925
Receivables:
Trade (net of allowance for doubtful
accounts of $98 as of September 30,
2001 and $54 as of December 31,
2000) 8,838 7,040
Notes and other receivables 1,144 301
------ ------
Total receivables 9,982 7,341
------ ------
Costs and estimated earnings in excess
of billings 1,223 1,665
------ ------
Inventories:
Raw materials 1,957 2,198
Work-in-process 363 340
Finished goods 527 508
------ ------
Total inventories 2,847 3,046
------ ------
Deferred income tax benefits 2,326 2,326
Prepaid expenses and other current assets 474 547
------ ------
Total current assets 20,613 22,850
------ ------
Property, plant and equipment, at cost:
Land 27 27
Buildings and improvements 3,746 3,746
Machinery and equipment 6,871 6,341
------ ------
10,644 10,114
Less: accumulated depreciation (7,881) (7,334)
------ ------
Net property, plant and equipment 2,763 2,780
------ ------
Investments in joint ventures 2,373 2,000
Excess of cost over fair value of net assets
acquired, less amortization of $935 as of
September 30, 2001 and $585 as of
December 31, 2000 17,775 18,125
Other assets, at cost less accumulated
amortization of $84 as of September 30,
2001 and $210 as of December 31, 2000 128 162
------ ------
Total assets $ 43,652 45,917
====== ======
See accompanying notes to consolidated financial statements.
2
Item 1. Financial Statements (Continued)
------ --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
(UNAUDITED)
September 30, December 31,
2001 2000
------------------- ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 2,302 1,521
Accounts payable 4,344 4,412
Customers' deposits and billings in excess
of costs and estimated earnings for
completed and uncompleted contracts 4,113 4,446
Accrued salaries, wages, and commissions 856 2,130
Income taxes payable - 369
Accrued royalties payable 87 253
Accrued product warranties 755 857
Accrued pension and retirement
savings plan liabilities 1,169 688
Accrued restructuring expenses 709 -
Accrued other liabilities 914 517
------ ------
Total current liabilities 15,249 15,193
------ ------
Long-term liabilities:
Long-term debt, excluding current
installments:
Term loan 7,475 9,775
Subordinated notes payable 3,000 3,000
Other 480 5
------ ------
Total long-term debt 10,955 12,780
Deferred income taxes payable 637 823
Deferred compensation 105 141
------ ------
Total long-term liabilities 11,697 13,744
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and
outstanding 4,221,635 shares as
of September 30, 2001 and 4,194,869
shares as of December 31, 2000 4,222 4,195
Additional paid-in capital 7,071 6,882
Retained earnings 5,691 5,903
Accumulated other comprehensive loss (278) -
------ ------
Total stockholders' equity 16,706 16,980
------ ------
Total liabilities and stockholders' equity $ 43,652 45,917
====== ======
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, 2001 and September 30, 2000
(In Thousands, Except Share And Per Share Data)
Three Months Ended Nine Months Ended
---------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------- ----------------- ----------------- -----------------
Net sales $ 12,796 13,473 38,947 48,506
Cost of sales 9,499 9,286 28,994 35,371
--------- --------- --------- ---------
Gross profit on sales 3,297 4,187 9,953 13,135
--------- --------- --------- ---------
Selling, general and
administrative
expenses 2,213 2,506 7,899 7,764
Product development
costs 86 28 402 137
Amortization of
goodwill 117 119 351 352
Restructuring
expenses - - 1,538 337
Interest expense 310 400 1,001 1,237
Interest income (35) (126) (215) (262)
Equity in income of
joint ventures (148) (45) (373) (116)
Other income, net (81) (81) (283) (290)
--------- --------- --------- ---------
2,462 2,801 10,320 9,159
--------- --------- --------- ---------
Earnings (loss) before
income taxes 835 1,386 (367) 3,976
Income tax expense
(benefit) 366 538 (155) 1,571
--------- --------- --------- ---------
Net earnings (loss) $ 469 848 (212) 2,405
========= ========= ========= =========
Basic earnings (loss)
per share $ .11 .20 (.05) .57
========= ========= ========= =========
Diluted earnings (loss)
per share $ .11 .20 (.05) .56
========= ========= ========= =========
Weighted average
shares outstanding 4,214,191 4,194,869 4,207,575 4,188,208
Dilutive effect of
stock options 26,375 1,649 33,474 1,626
Dilutive effect of
phantom stock units 15,617 14,673 17,381 15,587
--------- --------- --------- ---------
Weighted average
shares outstanding
assuming dilution 4,256,183 4,211,191 4,258,430 4,205,421
========= ========= ========= =========
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, 2001 and September 30, 2000
(In Thousands)
Three Months Ended Nine Months Ended
---------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----------------- ----------------- ----------------- -----------------
Net earnings (loss) $ 469 848 (212) 2,405
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 (132) - (182) -
------ ------ ------ ------
Total other
comprehensive
income (loss) (132) - (278) -
------ ------ ------ ------
Comprehensive
income (loss) $ 337 848 (490) 2,405
====== ====== ====== ======
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, 2001 and September 30, 2000
(In Thousands, Except Share Data)
Nine Months Ended
----------------------------------------
September 30, September 30,
2001 2000
------------------- -------------------
Cash flows from operating activities:
Net earnings (loss) $ (212) 2,405
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by
operating activities:
Depreciation of plant and equipment 547 452
Amortization of intangibles 383 401
Gain on disposition of equipment - (2)
Equity in income of joint ventures (373) (116)
Issuance of 9,926 and 9,991 common
shares, respectively, as noncash
interest payment on subordinated notes 75 75
Issuance of 12,390 common shares
as payment of employee's bonus 111 -
Change in operating assets and liabilities:
Receivables (2,641) 121
Costs and estimated earnings in
excess of billings 442 704
Inventories 199 230
Prepaid expenses and other current
assets 73 197
Other noncurrent assets 1 2
Accounts payable (68) (398)
Customers' deposits and billings in
excess of costs and estimated
earnings for completed and
uncompleted contracts (333) (791)
Accrued salaries, wages, and
commissions (1,274) 238
Income taxes payable (369) 930
Accrued royalties payable (166) (61)
Accrued pension and retirement
savings plan liabilities 481 159
Accrued product warranties (102) 36
Accrued restructuring expenses 709 -
Accrued other liabilities 397 (659)
Deferred income taxes payable 11 -
Deferred compensation (36) (110)
------ ------
Net cash provided (used) by
operating activities (2,145) 3,813
------ ------
Cash flows from investing activities:
Proceeds from the disposition of equipment - 2
Investment in SI-Egemin joint venture - (106)
Additional consideration paid in connection
with Ermanco acquisition - (231)
Additions to property, plant and equipment (530) (248)
------ ------
Net cash used by investing activities (530) (583)
------ ------
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, 2001 and September 30, 2000
(In Thousands, Except Share Data)
Nine Months Ended
----------------------------------------
September 30, September 30,
2001 2000
------------------- -------------------
Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan 30 -
Repayment of long-term debt (1,519) (2,414)
------ ------
Net cash used by financing activities (1,489) (2,414)
------ ------
Increase (decrease) in cash and
cash equivalents (4,164) 816
Cash and cash equivalents,
beginning of period 7,925 6,242
------ ------
Cash and cash equivalents,
end of period $ 3,761 7,058
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 809 1,474
====== ======
Income taxes $ 471 619
====== ======
Supplemental disclosures of noncash investing and financing activities:
Adjustment to excess of cost
over fair value of net assets acquired
due to a change in the estimated
fair value of land acquired. $ - 70
====== ======
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, 2001 and September 30, 2000
(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. Refer to the Company's Form 10-K, as
amended for the year ended December 31, 2000 for more complete financial
information.
(2) SI/BAKER, INC.
--------------
Paragon Technologies, Inc., and McKesson Automation Systems Inc.
("McKesson Automation") are co-venturers in a joint venture
named SI/BAKER, INC. ("SI/BAKER" or the "joint venture"). The SI/BAKER
joint venture draws upon the automated materials handling
systems experience of Paragon Technologies, Inc. and the automated pill
counting and dispensing products of McKesson Automation
to provide automated pharmacy systems. Each member company contributed
$100,000 in capital to fund the joint venture.
The joint venture designs and installs computer controlled, fully
automated, integrated systems for managed care and central fill pharmacy
operations. The joint venture's systems are viewed as labor saving devices,
which address the issues of improved productivity and cost reduction.
Systems can be expanded as customers' operations grow and they may be
integrated with a wide variety of components to meet specific customer
needs.
Schedule A contains the SI/BAKER, INC. financial statements. The
information contained in the SI/BAKER, INC. financial statements is
unaudited. In the opinion of management, the interim financial statements
furnished reflect all adjustments and accruals that are necessary to
present a fair statement of results for the interim periods.
(3) Ermanco Incorporated
--------------------
On September 30, 1999, the Company completed the acquisition of all of the
outstanding common stock of Ermanco, which now operates as a wholly-owned
subsidiary of the Company. Ermanco, headquartered in Spring Lake, Michigan,
designs and installs complete conveying systems for a variety of
manufacturing and warehousing applications. 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 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. The Company
financed $14,000,000 of the acquisition through term debt. The acquisition
required a net cash outlay of $2,264,000.
8
Item 1. Financial Statements (Continued)
------ --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2001 and September 30, 2000
The acquisition was accounted for as a purchase in accordance with APB No.
16 and, accordingly, the acquired assets and assumed liabilities have been
recorded at their estimated fair value at the date of acquisition. The
amount of excess of cost over fair value of net assets acquired associated
with the acquisition was $18,710,000 and is being amortized over a period
of 40 years.
(4) Restructuring
-------------
On June 25, 2001, the Company announced a restructuring of its business
operations aimed at maximizing revenues, increasing operational
efficiencies, and minimizing costs. The Company's marketing and sales
operation have been consolidated to go to market as a single Company with a
multiple brand, multiple channel strategy. In conjunction with the
restructuring plan, the Company reduced the number of office associates by
fourteen and will discontinue production operations at its Easton,
Pennsylvania facility. All production employees working in the Easton,
Pennsylvania manufacturing plant will be laid off. Layoffs began in
September 2001, and will be completed on or before November 30, 2001. Prior
to the restructuring, the Company employed approximately 20 production
employees, with an additional 27 individuals on an extended layoff.
Currently, the Company employs approximately three production employees.
In the second quarter of 2001, the Company recorded a charge of $1,538,000
for restructuring costs. The restructuring charge 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 Easton, Pennsylvania production employees, and $298,000 for
plant closure, and legal and professional service fees expected to be
incurred relating to the restructuring. The restructuring charges were
determined based on formal plans approved by the Company's management and
the Board of Directors using the information available at the time.
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 sheet. As of September 30, 2001, $709,000 remained in
the restructuring accrual. Through the third quarter of 2001, there was
approximately $267,000 in cash payments made against the restructuring
accrual.
The major components of the restructuring charge and remaining accruals are
as follows:
Balance at Cash Balance at
June 30, 2001 Payments September 30, 2001
------------------ -------------- -------------------------
Severances $ 678,000 (239,000) 439,000
Other 298,000 ( 28,000) 270,000
------- ------- -------
$ 976,000 (267,000) 709,000
======= ======= =======
9
Item 1. Financial Statements (Continued)
------ --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2001 and September 30, 2000
(5) 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. On June 25, 2001, the Company announced a
restructuring of its business operations aimed at maximizing revenues,
increasing operational efficiencies, and minimizing costs. The Company's
marketing and sales operation have been consolidated to go to market as a
single Company with a multiple brand, multiple channel strategy.
The Company's Easton, Pennsylvania operations (hereafter referred to as "SI
Systems") is a systems integrator supplying SI Systems' branded automated
materials handling systems to manufacturing, order selection, and
distribution operations. The systems are designed, sold, manufactured,
installed, and serviced by its own staff or by others for SI Systems, at
its direction, generally as labor-saving devices to improve productivity
and reduce costs. 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 materials handling solutions involve both standard and specially
designed components and include integration of non-proprietary automated
handling technologies so as to provide solutions for its customers' unique
materials 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 light to medium duty unit handling conveyor
products, serving the materials handling industry through local independent
distributors in North America. 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. The systems
product line of the Ermanco brand accounts for approximately 55% of
Ermanco's total revenues, and the balance is from resale to distributors
who have non-exclusive agreements with the Company.
The Company's products are sold on a fixed price basis. Generally, contract
terms provide for progress payments, and a portion of the purchase price is
withheld by the buyer until the system has been accepted. Generally,
contract terms are net 30 days for product and parts sales, with
progressive payments for system-type projects.
The Company's business is dependent upon a limited number of large
contracts with certain customers. This dependence can cause unexpected
fluctuations in sales volume. Along with sales recognized on the percentage
of completion accounting method, the monthly rate of new orders can also
vary substantially, causing fluctuations in the current backlog of orders
and future revenue recognition. Various external factors affect the
customers' decision-making process on expanding or 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.
10
Item 1. Financial Statements (Continued)
------ --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2001 and September 30, 2000
The Company identifies operating segments based on the types of products
offered for sale as follows:
For the Nine Months Ended Automated Materials Conveyor
September 30, 2001 (In Thousands): Handling Systems Systems Total
----------------------------------- ------------------- ---------- ---------
Sales $ 14,751 24,196 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
For the Nine Months Ended Automated Materials Conveyor
September 30, 2000 (In Thousands): Handling Systems Systems Total
----------------------------------- ------------------- ---------- ---------
Sales $ 23,163 25,343 48,506
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income taxes
(before restructuring expenses) 2,983 2,189 5,172
Restructuring expenses 337 - 337
Total assets 14,774 29,811 44,585
Capital expenditures 83 165 248
Depreciation and amortization
expense 303 550 853
Intersegment sales for the nine months ended September 30, 2001 and
September 30, 2000 totaled $0 and $108,000, respectively.
For the Three Months Ended Automated Materials Conveyor
September 30, 2001 (In Thousands): Handling Systems Systems Total
----------------------------------- ------------------- ---------- ---------
Sales $ 3,956 8,840 12,796
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income taxes
(before restructuring expenses) 376 586 962
Restructuring expenses - - -
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, 2001 and September 30, 2000
For the Three Months Ended Automated Materials Conveyor
September 30, 2000 (In Thousands): Handling Systems Systems Total
----------------------------------- ------------------- ---------- ---------
Sales $ 7,942 5,531 13,473
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income taxes
(before restructuring expenses) 1,602 13 1,615
Restructuring expenses - - -
Total assets 14,774 29,811 44,585
Capital expenditures 6 24 30
Depreciation and amortization
expense 101 185 286
Intersegment sales for the three months ended September 30, 2001 and
September 30, 2000 totaled $0 and $20,000, respectively.
(6) New Accounting Pronouncements
-----------------------------
Effective January 1, 2001, the Company adopted Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (FAS 133). This standard requires that all
derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging
relationships. The net cumulative effect of adopting FAS 133 as of January
1, 2001 was approximately a $96,000 loss to accumulated 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 $5,750,000 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 other comprehensive income. The fair value of the interest rate
swap at September 30, 2001 was a liability of approximately $475,000.
The Company uses derivative financial instruments as risk management tools
and not for speculative purposes.
In July 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets." Statement 142 will require
that goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. The statement requires an
evaluation of intangible assets and their useful lives and a transitional
impairment test for goodwill and certain intangible assets. After
transition, the impairment tests will be performed annually. The statement
will be adopted beginning 2002. Because of the effort needed to comply with
adopting Statement 142, it is not practicable to fully determine the impact
of adopting this Statement on the Company's financial statements at this
time. The Company currently records $468,000 of goodwill amortization
annually.
12
Item 1. Financial Statements (Continued)
------ --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2001 and September 30, 2000
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144), which supersedes both FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (Statement 121) and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (Opinion 30), for the disposal of a segment of a business (as
previously defined in that Opinion). Statement 144 retains the fundamental
provisions in Statement 121 for recognizing and measuring impairment losses
on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated
with Statement 121. For example, Statement 144 provides guidance on how a
long-lived asset that is used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held for
sale, and prescribes the accounting for a long-lived asset that will be
disposed of other than by sale. Statement 144 retains the basic provisions
of Opinion 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). Unlike Statement 121, an
impairment assessment under Statement 144 will never result in a write-down
of goodwill. Rather, goodwill is evaluated for impairment under Statement
No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions for
the quarter ending March 31, 2002. Management does not expect the adoption
of Statement 144 for long-lived assets held for use to have a material
impact on the Company's financial statements because the impairment
assessment under Statement 144 is largely unchanged from Statement 121.
(7) Other Comprehensive Loss
------------------------
The separate components of other comprehensive loss are as follows (in
thousands):
Gross Tax Effect Net
----- ---------- ---
Cumulative impact of
adoption of FAS 133 $ 165 69 96
Other comprehensive loss 310 128 182
--- --- ---
Accumulated other comprehensive
loss at September 30, 2001 $ 475 197 278
=== === ===
13
Item 1. Financial Statements (Continued)
------ --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Nine Months Ended September 30, 2001 and September 30, 2000
(8) Long-Term Debt
--------------
As of June 30, 2001, the Company was in violation of the covenants related
to its Funds Flow Coverage Ratio and its subordination agreement. Effective
June 30, 2001, the Company received a waiver of certain loan covenants. On
September 28, 2001, the Company entered into an amendment to the term loan
and line of credit agreements relative to future covenant requirements, a
variable term loan interest rate increase to LIBOR plus 3%, and limitations
on the cash payment of interest on subordinated debt until the Company is
in compliance with all the financial covenants as originally set forth in
the Loan Agreement with the Company's principal bank.
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 decreased to $3,761,000 at
September 30, 2001 from $7,925,000 at December 31, 2000. The decrease resulted
from cash used by operating activities totaling $2,145,000, primarily related to
payments associated with interest on acquisition financing and the Company's
calendar year 2000 profit-based incentive plans. In addition, the overall
decrease in cash was attributable to the repayment of long-term debt of
$1,519,000, and purchases of capital equipment totaling $530,000. Funds provided
by operating activities during the nine months ended September 30, 2000 were
$3,813,000.
On September 30, 1999, the Company completed the acquisition of all the
outstanding common stock of Ermanco Incorporated ("Ermanco"). Ermanco,
headquartered in Spring Lake, Michigan, designs and installs complete conveying
systems for a variety of manufacturing and warehousing applications.
In order to complete the Ermanco acquisition, the Company obtained
financing from its principal bank. The Company entered into a new three-year
line of credit facility which may not exceed the lesser of $6,000,000 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, 2001,
the Company did not have any borrowings under the line of credit facility.
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 will make equal quarterly
payments of $575,000, plus interest until the loan has been fully repaid. 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 5.6% as of September 30,
2001. The Company also entered into an interest rate swap agreement for a
portion of the term loan to hedge the floating interest rate. The seven-year
interest rate swap for $5,750,000 is at a fixed rate of 9.38%. During the second
quarter of fiscal 2001, the Company prepaid, without penalty, $575,000 of the
term loan. Also, on July 27, 2000, the Company prepaid, without penalty,
$1,150,000 of the term loan. Therefore, since the inception of the term loan,
the Company prepaid, without penalty, $1,725,000 of the term loan.
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
14
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Liquidity and Capital Resources (Continued)
-------------------------------
credit facility and term loan contain various restrictive covenants relating to
additional indebtedness, asset acquisitions or dispositions, investments,
guarantees, payment of dividends, and maintenance of certain financial ratios.
As of September 30, 2001, the Company was in compliance with all covenants, as
amended (see Note 8).
The Company also issued promissory notes to fourteen stockholders of
Ermanco 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 in years one
through three, twelve percent in years four and five, and fourteen percent in
years six and seven. 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
its line of credit facility and term loan. Since July 1, 2001, the Company has
been and will be prohibited from making any cash payments of subordinated debt
and interest until the Company is in full compliance with all the financial
covenants as originally set forth in the Loan Agreement with the Company's
principal bank. The Company intends to satisfy its quarterly interest
obligations with the issuance of the Company's common stock.
On March 4, 1996, SI/BAKER established a line of credit facility (the
"facility") with its principal bank (the "bank"). Under the terms of the
$3,000,000 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, 2001, SI/BAKER did not have any borrowings under the facility, and the
facility expires effective August 31, 2002.
The Company anticipates that its financial resources, consisting of
borrowings under its credit facility and cash generated from operations, will be
adequate to satisfy its future cash requirements through the next twelve months.
Due to the unpredictability of future contract sales, the dependence upon a
limited number of large contracts with certain customers, sales volume, as well
as cash liquidity, may experience fluctuations. 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 expansion opportunities as they arise,
although 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. The Company did not have any material capital commitments as
of September 30, 2001.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
---------------------
(a) Nine Months Ended September 30, 2001 Versus Nine Months Ended September 30,
---------------------------------------------------------------------------
2000
----
Net sales of $38,947,000 for the nine months ended September 30, 2001
decreased 19.7% compared to net sales of $48,506,000 for the nine months ended
September 30, 2000, primarily due to the current economic slowdown. The sales
decrease for the nine months ended September 30, 2001 was primarily experienced
by the Company's SI Systems' brand, which encountered an equivalent reduction in
sales among all of its product lines, when compared to the nine months ended
September 30, 2000. The Company's business is dependent upon a limited number of
large contracts with certain customers. This dependence can cause unexpected
fluctuations in sales volume. Along with sales recognized on the percentage of
completion accounting method, the monthly rate of new orders can also vary
substantially, causing fluctuations in the current backlog of orders and future
revenue recognition. Various external factors affect the customers'
decision-making process on expanding or 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.
Gross profit, as a percentage of sales, was 25.6% for the nine months ended
September 30, 2001 compared to 27.1% for the nine months ended September 30,
2000. Gross profit on sales for the nine months ended September 30, 2001 was
favorably impacted by the reversal of approximately $720,000 in previously
established contract accruals due to changes in cost estimates. Gross profit on
sales for the nine months ended September 30, 2000 was impacted by the favorable
performance on several contracts, principally for the Company's higher margin
proprietary product lines, initiated in the prior fiscal year that were
completed or nearing completion during the nine months ended September 30, 2000.
Partially offsetting the impact of the favorable performances on several
contracts was the recognition of additional losses, primarily during the second
quarter of fiscal 2000, on a major contract where significant cost overruns,
resulting in losses, were experienced.
Selling, general and administrative expenses of $7,899,000 were higher by
$135,000 for the nine months ended September 30, 2001 than in the nine months
ended September 30, 2000. The increase is primarily attributable to
approximately $310,000 of charges during the second quarter of 2001 related to a
strategic transaction that was not completed, and approximately $175,000 of
expenses during the first quarter of 2001 pertaining to the reduction of
associates due to the current economic slowdown. Partially offsetting the
increase were costs savings attributable to the Company's restructuring of its
business operations and continued emphasis on cost reduction.
Product development costs of $402,000 were higher by $265,000 for the nine
months ended September 30, 2001 than in the nine months ended September 30,
2000. Development programs in the nine months ended September 30, 2001 included
enhancements to the Company's Order Picking, Fulfillment, and Replenishment
product line and also development efforts related to NBS 30(TM), NBS 90(TM), and
NBS 90-SP(TM) narrow belt sorters. Development progress in the nine months ended
September 30, 2000 included enhancements to the Company's conveyor technology,
and horizontal transportation and Order Picking, Fulfillment, and Replenishment
product lines.
During the second quarter ended June 30, 2001, the Company announced a
restructuring of 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 fourteen and will discontinue
production operations at its Easton, Pennsylvania facility. All production
employees working in the Easton, Pennsylvania manufacturing plant will be laid
off. Layoffs began in September 2001, and will be completed on or before
November 30, 2001. Prior to the restructuring, the Company employed
approximately twenty production employees, with an additional 27 individuals on
an extended layoff. The Company currently employs approximately three
16
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
---------------------
(a) Nine Months Ended September 30, 2001 Versus Nine Months Ended September 30,
---------------------------------------------------------------------------
2000 (Continued)
----
production employees. 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 collective bargaining personnel, and $298,000 for facility
closure, and legal and professional service fees expected to be incurred
relating to the restructuring. The restructuring charges were determined based
on formal plans approved by the Company's management and the Board of Directors
using the information available at the time.
Restructuring expenses of $337,000 for the nine months ended September 30,
2000 was associated with a restructuring initiative, whereby the Company reduced
the number of associates by sixteen.
Interest expense of $1,001,000 was lower by $236,000 for the nine months
ended September 30, 2001 than in the nine months ended September 30, 2000. The
decrease in interest expense was attributable to the reduced level of term debt
due to principal prepayments and lower interest rates.
Interest income of $215,000 for the nine months ended September 30, 2001
decreased by $47,000, when compared to the nine months ended September 30, 2000.
The decrease in interest income was attributable to a reduction in the level of
funds and interest rates pertaining to short-term investments.
Equity in income of joint ventures represents the Company's proportionate
share of its investments in the SI-Egemin and SI/BAKER joint ventures that are
being accounted for under the equity method. The net favorable variance of
$257,000 in the equity in income of joint ventures for the nine months ended
September 30, 2001 as compared to the nine months ended September 30, 2000 was
comprised of increased earnings of approximately $163,000 attributable to the
SI/BAKER joint venture. In addition to the increased earnings of the SI/BAKER
joint venture were the decreased losses of approximately $94,000 attributable to
the SI-Egemin joint venture.
The favorable variance of $163,000 for the nine months ended September 30,
2001 in the equity in income of the SI/BAKER joint venture was attributable to
favorable performance on several contracts initiated in prior fiscal years that
were completed or nearing completion during the nine months ended September 30,
2001 plus (1) a reduction of $48,000 in revenue-based royalty costs due to the
parent companies, and (2) an increase of $47,000 in interest income. Partially
offsetting these favorable variances was an increase of $223,000 in product
development expenses.
The favorable variance of $94,000 for the nine months ended September 30,
2001 in the equity in income of the SI-Egemin joint venture was primarily
attributable to a reduction in operating expenses of the joint venture.
The Company recognized an income tax benefit of $155,000 during the nine
months ended September 30, 2001, compared to the incurrence of income tax
expense of $1,571,000 in the comparable prior year period. The income tax
benefit recognized for the nine months ended September 30, 2001 represented the
carryback of current fiscal year losses against prior year income. Income tax
expense for the nine months ended September 30, 2000 was generally recorded at
statutory federal and state tax rates expected to apply for that fiscal year.
The total backlog at September 30, 2001 was approximately $16,530,000.
During the nine months ending September 30, 2001, the Company received orders
totaling approximately $32,565,000.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
---------------------
(b) Three Months Ended September 30, 2001 Versus Three Months Ended September
-------------------------------------------------------------------------
30, 2000
--------
With the exception of the following Statement of Operations captions,
changes in the third quarter of calendar year 2001 compared to the prior year
were consistent with those previously noted above for the nine-month period.
Net sales of $12,796,000 for the three months ended September 30, 2001
decreased 5.0% compared to net sales of $13,473,000 for the three months ended
September 30, 2000, primarily due to the current economic slowdown. The sales
decrease for the three months ended September 30, 2001 was experienced by the
Company's SI Systems' brand. Partially offsetting the decline in SI Systems'
brand sales for the three months ended September 30, 2001 was an increase in
sales for the Company's Ermanco brand, primarily to distributors and a
technology firm, when compared to the three months ended September 30, 2000.
Selling, general and administrative expenses of $2,213,000 were lower by
$293,000 for the three months ended September 30, 2001 than in the three months
ended September 30, 2000. The decrease in selling, general and administrative
expenses is primarily attributable to decreases of approximately $210,000 of
those expenses based on revenue and profit performance, and approximately
$70,000 of product promotion and marketing expenses.
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; (4) if the factors on which the
Company's conclusions are based do not conform to the Company's expectations.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Quantitative and Qualitative Disclosures
----------------------------------------
The Company's primary 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 its new term loan from its principal bank to effectively convert a portion
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.
-------------------------------------------
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
------ --------------------------------
(a) Exhibits-- None.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 2001.
19
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, 2001
-----------------------
20
Schedule A
----------
SI/BAKER, INC.
Financial Statements
September 30, 2001
21
SI/BAKER, INC.
Balance Sheets
September 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
(UNAUDITED)
September 30, December 31,
2001 2000
------------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents, principally
time deposits $ 3,969 4,681
Receivables:
Trade 2,398 1,001
Other receivables 209 65
----- -----
Total receivables 2,607 1,066
----- -----
Costs and estimated earnings
in excess of billings 530 1,873
Deferred income tax benefits 409 409
Prepaid expenses and other current
assets 121 36
----- -----
Total current assets 7,636 8,065
----- -----
Machinery and equipment, at cost 258 222
Less: accumulated depreciation 170 147
----- -----
Net machinery and equipment 88 75
----- -----
Equipment leased to customer - 487
Less: accumulated depreciation - 487
----- -----
Net equipment leased to customer - -
----- -----
Deferred income tax benefits 8 8
----- -----
Total assets $ 7,732 8,148
===== =====
22
SI/BAKER, INC.
Balance Sheets
September 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
(UNAUDITED)
September 30, December 31,
2001 2000
------------------- ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable:
Trade $ 478 663
Affiliated companies 104 56
----- -----
Total accounts payable 582 719
----- -----
Customers' deposits and billings in
excess of costs and estimated
earnings 1,082 1,459
Accrued salaries, wages, and
commissions 310 358
Income taxes payable 7 127
Accrued royalties payable 131 766
Accrued product warranties 1,111 1,055
Accrued other liabilities 60 88
----- -----
Total current liabilities 3,283 4,572
----- -----
Stockholders' equity:
Common stock, $1 par value; authorized
1,000 shares; issued 200 shares - -
Additional paid-in capital 200 200
Retained earnings 4,249 3,376
----- -----
Total stockholders' equity 4,449 3,576
----- -----
Total liabilities and
stockholders' equity $ 7,732 8,148
===== =====
23
SI/BAKER, INC.
Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2001 and September 30, 2000
(In Thousands)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---------------- --------------- --------------- ---------------
Net sales $ 3,266 2,714 9,515 10,732
Cost of sales 2,405 2,149 6,844 8,817
----- ----- ----- ------
Gross profit on sales 861 565 2,671 1,915
----- ----- ----- ------
Selling, general and
administrative expenses 252 206 799 748
Product development
costs 32 10 308 85
Royalty expense to
parent companies 131 109 381 429
Interest income (36) (24) (142) (95)
Other income, net (60) (47) (130) (143)
----- ----- ----- ------
319 254 1,216 1,024
----- ----- ----- ------
Earnings before
income taxes 542 311 1,455 891
Income tax expense 217 114 582 344
----- ----- ----- ------
Net earnings $ 325 197 873 547
===== ===== ===== ======
24
SI/BAKER, INC.
Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2001 and September 30, 2000
(In Thousands)
Nine Months Ended
-----------------------------------------
September 30, September 30,
2001 2000
-------------------- -------------------
Cash flows from operating activities:
Net earnings $ 873 547
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation of machinery and
equipment and leased equipment 23 43
Changes in operating assets and
liabilities:
Receivables (1,541) (466)
Costs and estimated earnings
in excess of billings 1,343 381
Prepaid expenses and other
current assets (85) (51)
Accounts payable (137) (283)
Customers' deposits and
billings in excess of costs
and estimated earnings (377) (437)
Accrued salaries, wages, and
commissions (48) (73)
Income taxes payable (120) (97)
Accrued royalties payable (635) 164
Accrued product warranties 56 151
Accrued other liabilities (28) (4)
----- -----
Net cash used by operating activities (676) (125)
----- -----
Cash flows from investing activities:
Additions to machinery and equipment (36) (25)
----- -----
Net cash used by investing activities (36) (25)
----- -----
Decrease in cash and cash equivalents (712) (150)
Cash and cash equivalents,
beginning of period 4,681 2,895
----- -----
Cash and cash equivalents,
end of period $ 3,969 2,745
===== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 739 10
===== =====
Interest $ - -
===== =====
25