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 March 31, 2003
Commission File No. 1-15729
PARAGON TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 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
--- ---
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Number of shares of common stock, par value $1.00 per share, outstanding as of
April 30, 2003: 4,266,377.
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(In Thousands, Except Share Data)
(UNAUDITED)
March 31, December 31,
2003 2002
------------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents...................... $ 8,221 5,385
Restricted cash................................. 969 865
Receivables:
Trade (net of allowance for doubtful
accounts of $251 as of March 31,
2003 and $221 as of December
31, 2002)................................... 3,085 4,285
Notes and other receivables................... 85 940
------ ------
Total receivables........................... 3,170 5,225
------ ------
Costs and estimated earnings in excess
of billings................................... 197 128
Inventories:
Raw materials................................. 1,436 975
Work-in-process............................... 83 109
Finished goods................................ 174 291
------ ------
Total inventories........................... 1,693 1,375
------ ------
Deferred income tax benefits.................... 1,489 1,771
Prepaid expenses and other current assets....... 665 695
------ ------
Total current assets........................ 16,404 15,444
------ ------
Property, plant and equipment, at cost:
Land - 27
Buildings and improvements...................... 228 3,768
Machinery and equipment......................... 3,775 4,291
------ ------
4,003 8,086
Less: accumulated depreciation................. 2,364 5,877
------ ------
Net property, plant and equipment............. 1,639 2,209
------ ------
Investment in joint venture........................ 1,487 1,325
Goodwill........................................... 17,657 17,657
Other assets, at cost less accumulated
amortization of $160 as of March 31,
2003 and $143 as of December 31, 2002........... 51 68
------ ------
Total assets....................................... $ 37,238 36,703
====== ======
See accompanying notes to consolidated financial statements.
2
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(In Thousands, Except Share Data)
(UNAUDITED)
March 31, December 31,
2003 2002
------------------- ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt.......... $ 1,725 1,437
Accounts payable................................ 2,787 2,403
Customers' deposits and billings
in excess of costs and
estimated earnings ........................... 2,146 2,271
Accrued salaries, wages, and
commissions................................... 415 544
Income taxes payable............................ 634 154
Accrued royalties payable....................... 110 114
Accrued product warranties...................... 901 894
Accrued pension and retirement
savings plan liabilities...................... 22 170
Accrued restructuring expenses.................. 188 216
Deferred gain on sale-leaseback................. 187 -
Accrued other liabilities....................... 1,031 1,269
------ ------
Total current liabilities................... 10,146 9,472
------ ------
Long-term liabilities:
Long-term debt, excluding current
installments:
Term loan................................... 2,300 4,263
Subordinated notes payable.................. 3,000 3,000
------ ------
Total long-term debt...................... 5,300 7,263
Other long-term liability....................... 357 401
Deferred gain on sale-leaseback................. 623 -
Deferred income taxes payable................... 1,828 1,713
Deferred compensation........................... 29 25
------ ------
Total long-term liabilities................... 8,137 9,402
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and
outstanding 4,266,377 shares as
of March 31, 2003 and 4,256,098
shares as of December 31, 2002.............. 4,266 4,256
Additional paid-in capital.................... 7,393 7,313
Retained earnings............................. 7,515 6,504
Accumulated other comprehensive loss.......... (219) (244)
------ ------
Total stockholders' equity.................. 18,955 17,829
------ ------
Total liabilities and stockholders' equity.. $ 37,238 36,703
====== ======
See accompanying notes to consolidated financial statements.
3
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2003 and 2002
(In Thousands, Except Share And Per Share Data)
Three Months Ended
------------------------------------
March 31, March 31,
2003 2002
---------------- -----------------
Net sales................................................... $ 8,564 10,752
Cost of sales............................................... 6,360 7,863
------ ------
Gross profit on sales....................................... 2,204 2,889
------ ------
Selling, general and
administrative
expenses................................................. 1,997 2,341
Product development
costs.................................................... 163 66
Restructuring
charges (credits)........................................ (170) -
Interest expense............................................ 218 272
Interest income............................................. (24) (36)
Equity in income of
joint venture............................................ (162) (6)
Other income, net........................................... (1,496) (321)
------ ------
526 2,316
------ ------
Earnings before
income taxes............................................. 1,678 573
Income tax expense.......................................... 667 230
------ ------
Net earnings................................................ $ 1,011 343
====== ======
Basic earnings
per share................................................ $ .24 .08
====== ======
Diluted earnings
per share................................................ $ .23 .08
====== ======
Weighted average
shares outstanding....................................... 4,256,098 4,222,885
Dilutive effect of
stock options............................................ 62,067 101,255
Dilutive effect of
phantom stock units...................................... - 11,730
--------- ---------
Weighted average
shares outstanding
assuming dilution........................................ 4,318,165 4,335,870
========= =========
See accompanying notes to consolidated financial statements.
4
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended March 31, 2003 and 2002
(In Thousands)
Three Months Ended
------------------------------------
March 31, March 31,
2003 2002
---------------- -----------------
Net earnings...................................................... $ 1,011 343
Other comprehensive income (loss), net of tax:
Interest rate swap:
Change in fair value
of derivative, net
of tax................................................. (8) (10)
------ ------
Total other
comprehensive
income (loss).................................... (8) (10)
------ ------
Comprehensive
income........................................... $ 1,003 333
====== ======
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 Three Months Ended March 31, 2003 and 2002
(In Thousands, Except Share Data)
Three Months Ended
----------------------------------------
March 31, March 31,
2003 2002
------------------- -------------------
Cash flows from operating activities:
Net earnings ........................................ $ 1,011 343
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation of plant and equipment.............. 147 160
Amortization of intangibles...................... 17 10
Gain on disposition of property,
plant and equipment, net of unearned
profit on sale-leaseback....................... (1,363) (108)
Amortization of deferred gain on sale-
leaseback...................................... (16) -
Restructuring credit............................. (170) -
Equity in income of joint venture................ (162) (6)
Issuance of common shares as interest
payment on subordinated notes.................. 90 -
Change in operating assets and liabilities:
Receivables.................................. 2,055 (331)
Costs and estimated earnings in
excess of billings........................ (69) (1,093)
Inventories.................................. (318) 334
Deferred income tax benefits................. 282 -
Prepaid expenses and other
current assets............................ 30 280
Accounts payable............................. 384 176
Customers' deposits and billings
in excess of costs and estimated
earnings for completed and
uncompleted contracts..................... (125) 602
Accrued salaries, wages, and
commissions............................... (129) (90)
Income taxes payable......................... 480 6
Accrued royalties payable.................... (4) 3
Accrued pension and retirement
savings plan liabilities.................. 22 23
Accrued product warranties................... 7 80
Accrued restructuring expenses............... (28) (100)
Accrued other liabilities.................... (238) 42
Deferred income taxes payable ............... 96 -
Deferred compensation........................ 4 (130)
------ ------
Net cash provided by operating activities............ 2,003 201
------ ------
Cash flows from investing activities:
Proceeds from the disposition of
property, plant and equipment ..................... 2,734 198
Proceeds from the divestment of a
joint venture...................................... - 125
Additions to property, plant and equipment........... (122) (72)
------ ------
Net cash provided by investing activities............ 2,612 251
------ ------
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 Three Months Ended March 31, 2003 and 2002
(In Thousands, Except Share Data)
Three Months Ended
----------------------------------------
March 31, March 31,
2003 2002
------------------- -------------------
Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan............. - 33
Increase in restricted cash........................ (104) -
Repayment of long-term debt........................ (1,675) (578)
------ ------
Net cash used by financing activities.......... (1,779) (545)
------ ------
Increase (decrease) in cash and
cash equivalents................................. 2,836 (93)
Cash and cash equivalents,
beginning of period.............................. 5,385 6,114
------ ------
Cash and cash equivalents,
end of period.................................... $ 8,221 6,021
====== ======
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest..................................... $ 114 809
====== ======
Income taxes................................. $ (1,061) 471
====== ======
See accompanying notes to consolidated financial statements.
7
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
(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, 2002, as filed with the Securities and Exchange
Commission. Refer to the Company's Form 10-K for the year ended December
31, 2002 for more complete financial information.
(2) Restructuring
-------------
In 2001, the Company restructured its business operations, including
curtailment of a defined benefit plan, and recorded a charge of $1,538,000
for restructuring costs. The Company received approval from the Pension
Benefit Guaranty Corporation in 2002 to terminate the defined benefit plan.
In December 2002, the Company partially settled its obligations by making
lump-sum distributions to those participants who elected that payment
option and correspondingly recorded a restructuring credit of $859,000. In
February 2003, the Company settled its remaining obligations by purchasing
annuities for those participants who elected that payment option and
correspondingly recorded a restructuring credit of $170,000.
A roll-forward of restructuring activities is as follows (in thousands):
Beginning Ending
Balance Charge/ Cash Balance
January 1 (Credit) Spending Reclassification March 31
------------ ------------- ------------ ------------------- ------------
2003............ $ 216 (170) (28) 170 188
2002............ $ 494 - (100) - 394
The $188,000 restructuring accrual at March 31, 2003 relates to severance
and other personnel costs and professional fees for the 2001 restructuring
that are still expected to be paid.
The amount reclassified out of the restructuring accrual was previously
included in accrued pension and retirement savings plan liabilities.
(3) Warranty
--------
The Company's products are warranted against defects in materials and
workmanship for a specified period. The Company provides an accrual for
estimated future warranty costs and potential product liability claims
based upon a percentage of cost of sales and warranty experience.
8
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
A roll-forward of warranty activities is as follows (in thousands):
Additions
Beginning Charged to Ending
Balance Costs and Balance
January 1 Expenses (1) Deductions (2) March 31
------------- ------------------ ----------------- --------------
2003.................. $ 894 74 (67) 901
2002.................. $ 863 124 (44) 943
(1) Costs include materials and incidental costs, but exclude any services.
(2) Payments of warranty costs and reversal of unused expired warranty
accruals.
(4) 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 of products offered for sale. The
Company operates in two major market segments.
SI Systems
----------
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, assembly, 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 its
systems and for optimizing distribution operations. SI Systems' branded
products are sold to customers located primarily in North America,
including the U.S. government.
Ermanco
-------
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 and sortation 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
9
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
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 months ended March 31, 2003 and 2002 are as follows
(in thousands):
For the three months ended March 31, 2003:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Systems sales................ $ 2,607 4,777 7,384 86.2%
Aftermarket sales............ 765 415 1,180 13.8%
------ ------ ------ -----
Total sales.................. $ 3,372 5,192 8,564 100.0%
====== ====== ====== =====
As a % of total sales........ 39.4% 60.6% 100.0%
For the three months ended March 31, 2002:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Systems sales................ $ 3,040 6,389 9,429 87.7%
Aftermarket sales............ 859 464 1,323 12,3%
------ ------ ------ -----
Total sales.................. $ 3,899 6,853 10,752 100.0%
====== ====== ====== =====
As a % of total sales........ 36.3% 63.7% 100.0%
The Company's products are sold worldwide through its own sales personnel,
along with a network of independent distributors and licensees. Domestic
and international sales by brand during the three months ended March 31,
2003 and 2002 are as follows (in thousands):
For the three months ended March 31, 2003:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Domestic sales............... $ 3,283 4,966 8,249 96.3%
International sales.......... 89 226 315 3.7%
------ ------ ------ -----
Total sales.................. $ 3,372 5,192 8,564 100.0%
====== ====== ====== =====
For the three months ended March 31, 2002:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Domestic sales............... $ 3,809 6,487 10,296 95.8%
International sales.......... 90 366 456 4.2%
------ ------ ------ -----
Total sales.................. $ 3,899 6,853 10,752 100.0%
====== ====== ====== =====
10
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
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 months ended March 31, 2003 and 2002 are as follows (in
thousands):
As a %
of Total Sales
-----------------
For the three months ended March 31, 2003.............. $ 124 1.4%
For the three months ended March 31, 2002.............. 1,641 15.3%
The Company identifies operating segments based on the types of products
offered for sale as follows:
For the Three Months Ended
March 31, 2003 (In Thousands): SI Systems Ermanco Total
------------------------------------------- ---------------- ----------- -----------
Sales..................................... $ 3,372 5,192 8,564
Earnings before interest expense,
interest income, equity in income of
joint venture, and income taxes......... 1,586 124 1,710
Total assets.............................. 8,620 28,618 37,238
Capital expenditures...................... 26 96 122
Depreciation and amortization
expense................................. 47 100 147
For the Three Months Ended
March 31, 2002 (In Thousands): SI Systems Ermanco Total
------------------------------------------- ---------------- ----------- -----------
Sales..................................... $ 3,899 6,853 10,752
Earnings before interest expense,
interest income, equity in income of
joint venture, and income taxes......... 697 106 803
Total assets.............................. 10,300 31,453 41,753
Capital expenditures...................... 15 57 72
Depreciation and amortization
expense................................. 60 100 160
All of the Company's sales originate in the United States, and there are no
long-lived assets existing outside the United States. International sales
were $315,000 and $456,000 for the three months ended March 31, 2003 and
2002, respectively.
(5) New Accounting Pronouncements
-----------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 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)." FAS 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.
11
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others." This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after
December 31, 2002 and did not have an effect on the Company's financial
statements. The disclosure requirements were effective for our 2002
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation.
The Interpretation applies immediately to variable interests in variable
interest entities entered into after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003.
The application of this interpretation did not have an effect on the
Company's financial statements.
(6) 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 interest rate swap has a
notional amount of $4,025,000, expires in 2006, 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 (loss). The fair value of the
interest rate swap at March 31, 2003 was a liability of approximately
$357,000. The Company estimates that approximately $240,000 of the interest
rate swap will be reclassified into earnings in the next 12 months.
Gross Tax Effect Net
----- ---------- ---
Accumulated other comprehensive
loss at December 31, 2002.................. $ (401) (157) (244)
Loss reclassified from other
comprehensive income....................... 58 25 33
Change in fair value of derivative............ (14) (6) (8)
--- --- ---
Accumulated other comprehensive
loss at March 31, 2003..................... $ (357) (138) (219)
=== === ===
The Company uses derivative financial instruments as risk management tools
and not for speculative purposes.
12
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
(7) Sale-Leaseback
--------------
In February 2003, the Company sold its Easton, Pennsylvania facility.
Significant terms of the agreement of sale include a sales price of
$2,925,000 and a leaseback of 25,000 square feet of office space for five
years by the Company. The sale-leaseback resulted in a gain of $2,189,000,
of which $1,363,000 of the gain was recorded in Other income in the
Statement of Operations for the three months ended March 31, 2003. The
remaining gain of $826,000 is deferred and will be recognized as a
reduction in rent expense over the term of the lease. During the three
months ended March 31, 2003, $16,000 of the deferred gain was recognized.
Future contractual obligations over the remaining term of the lease are as
follows:
2003............................... $ 155,000
2004............................... 211,000
2005............................... 218,000
2006............................... 224,000
2007............................... 231,000
2008............................... 34,000
---------
Total............................ $ 1,073,000
=========
(8) 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.
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.
In accordance with the loan agreement in connection with the
sale-leaseback, the Company prepaid, without penalty, $1,387,500 of the
term loan, reducing the balance of the term loan to $4,312,500, and
increased the escrow amount by $387,500 to $1,252,500. As of March 31,
2003, the balance of the term loan was $4,025,000, and the escrow amount
was $969,000.
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 issued 10,279 shares of common stock in the three months ended
March 31, 2003. 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.
13
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
(9) Stock-Based Compensation
------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("FAS 148"), which amends SFAS
No. 123, to provide alternative methods of accounting for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements.
The Company grants stock options for a fixed number of shares to employees
and non-employee directors with an exercise price equal to the fair value
of the shares at the date of grant. The Company has elected to continue to
account for its stock-based compensation plans under the guidelines of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense on options
granted to employees for the stock option grants. The Company recognizes
compensation expense on options granted to non-employee directors. To date,
the effect of options granted to non-employee directors has been
immaterial. Additional disclosure as required under the guidelines of SFAS
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), is included
below. If the Company had elected to recognize stock-based compensation
expense for options granted to employees based on the fair value of granted
options at the grant date (as determined under FAS 123), net earnings (in
thousands) and basic earnings per share for the three months ended March
31, 2003 and 2002, would have been as follows:
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
2003 2002
---------------- ----------------
Net earnings, as reported................................. $ 1,011 343
Deduct: total stock-based employee
compensation determined under
fair value method, net of related
tax effects............................................ (72) (71)
----- -----
Pro forma net earnings.................................... $ 939 272
===== =====
Earnings per share:
Basic-- as reported.................................... $ .24 .08
=== ===
Basic-- pro forma...................................... $ .22 .06
=== ===
Diluted-- as reported.................................. $ .23 .08
=== ===
Diluted-- pro forma.................................... $ .22 .06
=== ===
The above pro forma net earnings and basic and diluted earnings per share
were computed using the fair value of granted options at the date of grant
as calculated by the Black-Scholes option pricing method. No options were
granted to employees during the three months ended March 31, 2003 and the
year ended December 31, 2002.
The Company also grants phantom stock units to its directors as deferred
compensation. Such awards are redeemable in cash or the Company's common
stock at the director's option and are accounted for in accordance with APB
Opinion No. 25 as stock appreciation rights. Expense for the phantom stock
unit plan was $0 and $2,000 for the three months ended March 31, 2003 and
2002, respectively.
------------------------------------
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 $8,221,000 at March
31, 2003 from $5,385,000 at December 31, 2002. The increase resulted from cash
provided by operating activities totaling $2,003,000, and proceeds of $2,734,000
from the disposition of property, plant and equipment. Partially offsetting the
increase in cash and cash equivalents from these sources was the repayment of
long-term debt of $1,675,000, purchases of capital equipment of $122,000, and an
increase of $104,000 in restricted cash as an escrow deposit on current
installments of long-term debt. Funds provided by operating activities during
the three months ended March 31, 2002 were $201,000.
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 March 31, 2003, the
Company did not have any borrowings under the line of credit facility, and the
facility expires effective June 30, 2003. The line of credit facility is not
critical to the Company's operations.
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 an amendment entered into in 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. The Company will
resume making 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 3%,
which was 4.29% as of March 31, 2003. The Company also entered into an interest
rate swap agreement for a portion of the term loan to hedge the floating
interest rate. At March 31, 2003, the notional amount of the seven-year interest
rate swap was $4,025,000, and it fixes interest at a rate of 9.38%. As of March
31, 2003, the liability associated with the fair value of the cash flow hedge
was approximately $357,000.
In February 2003, the Company sold its Easton, Pennsylvania facility.
Significant terms of the agreement of sale include a sales price of $2,925,000
and also a leaseback of 25,000 square feet of office space for five years by the
Company. In accordance with the loan agreement in connection with the sale, the
Company prepaid, without penalty, $1,387,500 of the term loan, reducing the
balance of the term loan to $4,312,500, and increased the escrow amount by
$387,500 to $1,252,500. As of March 31, 2003, the balance of the term loan was
$4,025,000, and the escrow amount was $969,000.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Acquisition of Ermanco Incorporated (Continued)
-----------------------------------
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, inclusive of restricted cash. The
Company was in compliance with all covenants as of March 31, 2003.
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 10%
through September 30, 2002, 12% from October 1, 2002 through September 30, 2004,
and 14% 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. Since 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 fourth 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 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.
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 a limited liability company
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 current collective bargaining agreement for manufacturing employees at
the Company's Spring Lake, Michigan facility expires on May 31, 2003. The
Company has opened negotiations with the collective bargaining group and
anticipates a successful conclusion.
In connection with the February 2003 sale of the Company's Easton,
Pennsylvania facility, the Company entered into a leaseback arrangement for
25,000 square feet of office space. The leasing agreement requires fixed monthly
rentals of $17,188 (with annual increases of 3%). The terms of the lease also
require the payment of a proportionate share of the facility's operating
expenses. The lease expires on February 21, 2008.
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 March 31, 2003, 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, 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.
The Company plans to consider all strategic alternatives to increase
shareholder 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
---------------------
Three Months Ended March 31, 2003 Versus Three Months Ended March 31, 2002
--------------------------------------------------------------------------
The Company's net earnings for the three months ended March 31, 2003 were
$1,011,000 compared to net earnings of $343,000 for the three months ended March
31, 2002. Contributing to the net earnings for the three months ended March 31,
2003 was other income from the sale-leaseback of the Company's Easton,
Pennsylvania facility of $1,363,000, and a restructuring credit of $170,000
pertaining to the final settlement of the remaining pension obligations
associated with the Company's terminated pension plan. Contributing to net
earnings for the three months ended March 31, 2002 was other income from the
short-term licensing of certain real property of $150,000, and a gain on the
sale of excess fixed assets of $108,000.
Net Sales and Gross Profit on Sales
-----------------------------------
Net sales of $8,564,000 for the three months ended March 31, 2003 decreased
20.3% compared to net sales of $10,752,000 for the three months ended March 31,
2002. The sales decrease of $2,188,000 was primarily attributable to a smaller
backlog of orders entering fiscal 2003 ($6,924,000 versus a $13,342,000 backlog
beginning fiscal 2002) associated with the economic slowdown. The sales decrease
was comprised of a decrease in Ermanco's branded sales of $1,661,000 and a
decrease in SI Systems' branded sales of $527,000 for the three months ended
March 31, 2003, when compared to the three months ended March 31, 2002. The
Company's business is largely 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
17
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
---------------------
Three Months Ended March 31, 2003 Versus Three Months Ended March 31, 2002
--------------------------------------------------------------------------
Net Sales and Gross Profit on Sales (Continued)
-----------------------------------
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 25.7% for the three months
ended March 31, 2003 compared to 26.9% for the three months ended March 31,
2002. Gross profit, as a percentage of sales, for the three months ended March
31, 2003 was favorably impacted by approximately 1% due to a reduction in
overhead costs during the first quarter of 2003 as compared to the first quarter
of 2002. Gross profit, as a percentage of sales, for the three months ended
March 31, 2002 was favorably impacted by approximately 2% 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 $1,997,000 were lower by
$344,000 for the three months ended March 31, 2003 than in the three months
ended March 31, 2002. The decrease of $344,000 was comprised of cost savings of
approximately $360,000 attributable to the Company's restructuring of its
business operations in the prior fiscal year and an emphasis on cost reduction.
Also contributing to the higher selling, general and administrative expenses in
the three months ended March 31, 2002, were approximately $70,000 in
professional fees primarily associated with enhancing operational efficiency.
Partially offsetting the aforementioned favorable variance was approximately
$125,000 in marketing expenses associated with the Company's participation in a
biannual industry trade show in the first quarter of 2003.
Product Development Costs
-------------------------
Product development costs, including patent expense, of $163,000 were
higher by $97,000 for the three months ended March 31, 2003 than in the three
months ended March 31, 2002. Development programs in the three months ended
March 31, 2003 included the new NBA-23(TM) narrow belt accumulation conveyor,
computer software for warehousing and distribution center operations, and
improvements to the Company's Order Picking, Fulfillment, and Replenishment
systems. Development programs in the three months ended March 31, 2002 were
aimed at enhancements to the Company's sortation and accumulation conveyor
technologies.
Restructuring Charges (Credits)
-------------------------------
In 2001, the Company restructured its business operations, including
curtailment of a detailed benefit plan, and recorded a charge of $1,538,000 for
restructuring costs. The Company received approval from the Pension Benefit
Guaranty Corporation in 2002 to terminate the defined benefit plan. In December
2002, the Company partially settled its obligations by making lump-sum
distributions to those participants who elected that payment option and
correspondingly recorded a restructuring credit of $859,000 during the fourth
quarter of 2002. In February 2003, the Company settled its remaining obligations
by purchasing annuities for those participants who elected that payment option
and correspondingly recorded a restructuring credit of $170,000 during the three
months ended March 31, 2003.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
---------------------
Three Months Ended March 31, 2003 Versus Three Months Ended March 31, 2002
--------------------------------------------------------------------------
(Continued)
Interest Expense and Interest Income
------------------------------------
Interest expense of $218,000 was lower by $54,000 for the three months
ended March 31, 2003 than for the three months ended March 31, 2002. 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 $24,000 for the three months ended March 31, 2003
decreased by $12,000, when compared to the three months ended March 31, 2002.
The decrease in interest income was attributable to a reduction in the level of
interest rates pertaining to short-term investments.
Equity in Income of Joint Venture
---------------------------------
Equity in income of joint venture represents the Company's proportionate
share (50%) of its investment in the SI/BAKER joint venture that is being
accounted for under the equity method. The favorable variance of $156,000 for
the three months ended March 31, 2003 in the equity in income of the SI/BAKER
joint venture was primarily due to its sales of $4,169,000 as compared to the
three months ended March 31, 2002 of $2,421,000, plus a reduction of $237,000 in
product development expenses. The increase in sales for the three months ended
March 31, 2003 compared to the three months ended March 31, 2002 was due to a
significant amount of progress made on orders received during the first quarter
of 2003. Partially offsetting the favorable variance was SI/BAKER's increases of
(1) $36,000 in selling, general and administrative expenses, and (2) $70,000 in
revenue-based royalty costs due to the parent companies.
Other Income, Net
-----------------
The favorable variance of $1,175,000 in other income, net for the three
months ended March 31, 2003 as compared to the three months ended March 31, 2002
was primarily attributable to the gain on the sale-leaseback of the Company's
Easton, Pennsylvania facility of approximately $1,363,000, and an increase in
revenue-based royalty income from the Company's SI/BAKER joint venture of
$35,000. Partially offsetting the favorable variance in other income, net was
the prior year comparable period containing income from the short-term licensing
of certain real property relating to the Company's Easton, Pennsylvania facility
of $150,000, and a gain on the sale of excess fixed assets associated with the
Company's Easton, Pennsylvania facility of $108,000.
Income Tax Expense
------------------
The Company recognized income tax expense of $667,000 during the three
months ended March 31, 2003, compared to income tax expense of $230,000 in the
comparable prior year period. Income tax expense was generally recorded at
statutory federal and state tax rates.
Backlog of Orders
-----------------
The total backlog of orders at March 31, 2003 was approximately
$10,100,000. During the three months ended March 31, 2003, the Company received
orders totaling approximately $11,740,000.
------------------------------------
19
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
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 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 has available
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.
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.
20
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits:
10.27 Agreement of Sale between J. G. Petrucci
Company, Inc. or its Assigns and Paragon
Technologies, Inc. dated November 8, 2002
(filed herewith).
10.28 Amendment I to Agreement of Sale between J. G.
Petrucci Company, Inc. and Paragon Technologies,
Inc. dated January 2, 2003 (filed herewith).
10.29 Amendment II to Agreement of Sales between Triple
Net Investments XIII, L.P. and Paragon
Technologies, Inc. dated January 13, 2003
(filed herewith).
10.30 Amendment III to Agreement of Sale between Triple
Net Investments, XIII, L.P. and Paragon
Technologies, Inc. dated January 17, 2003
(filed herewith).
10.31 Lease Agreement between Triple Net Investments
XIII, L.P. and Paragon Technologies, Inc. dated
February 21, 2003 (filed herewith).
99 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) The following report on Form 8-K was filed during the quarter
ended March 31, 2003:
On February 21, 2003, Paragon Technologies, Inc. completed
the sale of its Easton, Pennsylvania building to Triple Net
Investments XIII, L.P. Significant terms of the agreement of
sale include a sales price of $2,925,000 and also a leaseback
of approximately 25,000 square feet of office space for five
years by Paragon Technologies. A Form 8-K was filed on March
3, 2003 regarding this sale-leaseback transaction.
21
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: May 14, 2003
------------
22
SECTION 302 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: May 14, 2003
-----------------------------------
/s/ William R. Johnson
------------------------------------------
William R. Johnson
President and CEO
23
SECTION 302 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: May 14, 2003
-----------------------------------
/s/ Ronald J. Semanick
------------------------------------------
Ronald J. Semanick
Chief Financial Officer, and
Vice President - Finance and Treasurer
24