UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2005
Commission File No.: 1-15729
------
PARAGON TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 22-1643428
-------------------------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Kuebler Road, Easton, Pennsylvania 18040
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-3205
---------------------
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by checkmark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate by checkmark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the Registrant's Common Stock as of November
4, 2005 was 3,748,819.
[PARAGON LOGO]
Paragon Technologies, Inc.
TABLE OF CONTENTS
Page
Number
-----------
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets (Unaudited)............................ 1
Consolidated Statements of Operations (Unaudited).................. 3
Consolidated Statements of Cash Flows (Unaudited).................. 4
Notes to Consolidated Financial Statements (Unaudited)............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 23
Item 4. Controls and Procedures............................................... 23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........... 24
Item 3. Defaults Upon Senior Securities....................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................... 25
Item 5. Other Information..................................................... 25
Item 6. Exhibits.............................................................. 26
SIGNATURES.............................................................................. 27
EXHIBIT INDEX........................................................................... 28
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets (UNAUDITED)
September 30, 2005 and December 31, 2004
(In Thousands, Except Share Data)
September 30, December 31,
2005 2004
------------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents...................... $ 341 1,702
Short-term investments......................... 23,015 1,900
------------------- ------------------
Total cash and cash equivalents and
short-term investments.................... 23,356 3,602
------------------- ------------------
Receivables:
Trade (net of allowance for doubtful
accounts of $0 as of September 30,
2005 and December 31, 2004)................. 3,571 1,636
Notes and other receivables................... 290 244
------------------- ------------------
Total receivables........................... 3,861 1,880
------------------- ------------------
Costs and estimated earnings in excess
of billings................................... 405 92
Inventories:
Raw materials................................. 106 110
Work-in-process............................... 159 47
Finished goods................................ 176 195
------------------- ------------------
Total inventories........................... 441 352
------------------- ------------------
Current assets of business held for sale........ - 7,017
Deferred income tax benefits.................... 373 627
Prepaid expenses and other current assets....... 423 232
------------------- ------------------
Total current assets........................ 28,859 13,802
------------------- ------------------
Property, plant and equipment, at cost:
Machinery and equipment......................... 1,098 1,191
Less: accumulated depreciation................. 887 1,002
------------------- ------------------
Net property, plant and equipment............. 211 189
------------------- ------------------
Non-current assets of business held
for sale........................................ - 18,704
Deferred income tax benefits....................... 229 272
Other assets....................................... 10 10
------------------- ------------------
Total assets....................................... $ 29,309 32,977
=================== ==================
See accompanying notes to consolidated financial statements.
1
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets (UNAUDITED)
September 30, 2005 and December 31, 2004
(In Thousands, Except Share Data)
September 30, December 31,
2005 2004
--------------------- -------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable................................ $ 1,809 1,446
Customers' deposits and billings
in excess of costs and
estimated earnings ........................... 2,275 1,242
Accrued salaries, wages, and
commissions................................... 199 100
Income taxes payable............................ 2,025 58
Accrued product warranty........................ 181 490
Deferred gain on sale-leaseback................. 165 165
Current liabilities of business held for sale... - 2,453
Accrued other liabilities....................... 1,532 954
--------------------- -------------------
Total current liabilities................... 8,186 6,908
--------------------- -------------------
Long-term liabilities:
Deferred gain on sale-leaseback................. 234 358
Long-term liabilities of business held for
sale.......................................... - 2,403
--------------------- -------------------
Total long-term liabilities................. 234 2,761
--------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and
outstanding 3,943,269 shares as
of September 30, 2005 and 4,265,310
shares as of December 31, 2004............ 3,943 4,265
Additional paid-in capital.................... 7,739 7,996
Retained earnings............................. 9,207 11,047
--------------------- -------------------
Total stockholders' equity.................. 20,889 23,308
--------------------- -------------------
Total liabilities and stockholders' equity.. $ 29,309 32,977
===================== ===================
See accompanying notes to consolidated financial statements.
2
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
(In Thousands, Except Share and Per Share Data)
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------ ----------------- ------------------------------------
Net sales........................... $ 4,101 3,111 11,696 8,520
Cost of sales....................... 2,974 2,014 8,587 5,681
------------------ ----------------- ------------------------------------
Gross profit on sales............... 1,127 1,097 3,109 2,839
------------------ ----------------- ------------------------------------
Selling, general and
administrative expenses.......... 1,179 1,020 3,363 2,944
Product development costs........... 6 36 29 160
Interest expense.................... - - 1 -
Interest income..................... (101) (10) (175) (61)
Other income, net................... (57) (23) (133) (88)
------------------ ----------------- ------------------------------------
1,027 1,023 3,085 2,955
------------------ ----------------- ------------------------------------
Income (loss) from
continuing operations before
income taxes..................... 100 74 24 (116)
Income tax expense (benefit)........ 39 29 9 (45)
------------------ ----------------- ------------------------------------
Income (loss) from
continuing operations............ 61 45 15 (71)
Income from discontinued
operations, net of
income taxes..................... 80 420 1,029 1,006
------------------ ----------------- ------------------------------------
Net income.......................... $ 141 465 1,044 935
================== ================= ====================================
Basic earnings (loss) per share:
Income (loss) from
continuing operations.......... $ .01 .01 - (.02)
Income from discontinued
operations..................... .02 .10 .25 .24
------------------ ----------------- ------------------------------------
Net income....................... $ .03 .11 .25 .22
================== ================= ====================================
Diluted earnings (loss) per share:
Income (loss) from
continuing operations.......... $ .01 .01 - (.02)
Income from discontinued
operations..................... .02 .10 .24 .23
------------------ ----------------- ------------------------------------
Net income....................... $ .03 .11 .24 .21
================== ================= ====================================
Weighted average
shares outstanding............... 4,122,715 4,290,310 4,209,117 4,282,681
Dilutive effect of
stock options.................... 58,636 63,710 55,682 77,672
------------------ ----------------- ------------------------------------
Weighted average
shares outstanding
assuming dilution................ 4,181,351 4,354,020 4,264,799 4,360,353
================== ================= ====================================
See accompanying notes to consolidated financial statements.
3
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2005 and 2004
(In Thousands, Except Share Data)
Nine Months Ended
----------------------------------------
September 30, September 30,
2005 2004
------------------- -------------------
Cash flows from operating activities:
Net income ......................................... $ 1,044 935
Less: Income from discontinued operations.......... 1,029 1,006
------------------- -------------------
Income (loss) from continuing operations............ 15 (71)
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Depreciation of plant and equipment............. 66 80
Amortization of deferred gain on sale-
leaseback..................................... (124) (124)
Other non-cash items affecting
earnings...................................... 13 30
Change in operating assets and liabilities:
Receivables................................. (1,981) (1,087)
Costs and estimated earnings in
excess of billings....................... (313) 192
Inventories................................. (89) (255)
Deferred tax expenses....................... 297 267
Prepaid expenses and other
current assets........................... (191) (55)
Accounts payable............................ 363 311
Customers' deposits and billings
in excess of costs and estimated
earnings................................. 1,033 (208)
Accrued salaries, wages, and
commissions.............................. 99 67
Income taxes payable........................ 1,967 (922)
Accrued product warranty.................... (309) (157)
Accrued other liabilities................... 578 (39)
Deferred compensation....................... - 5
------------------- -------------------
Net cash provided (used) by
operating activities.............................. 1,424 (1,966)
------------------- -------------------
Cash flows from investing activities:
Proceeds from the sale of Ermanco,
net of transaction costs.......................... 22,022 -
Proceeds from sales of short-term
investments....................................... 4,570 -
Purchases of short-term investments................. (25,685) -
Additions to property, plant and equipment.......... (88) (56)
------------------- -------------------
Net cash provided (used) by investing
activities........................................ 819 (56)
------------------- -------------------
See accompanying notes to consolidated financial statements.
4
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended September 30, 2005 and 2004
(In Thousands, Except Share Data)
Nine Months Ended
----------------------------------------
September 30, September 30,
2005 2004
------------------- -------------------
Cash flows from financing activities:
Repurchase and retirement of
common stock..................................... (3,995) (181)
Sale of common shares in connection with
employee incentive stock option plan............. 519 38
------------------- -------------------
Net cash used by
financing activities......................... (3,476) (143)
------------------- -------------------
Cash provided (used) by
discontinued operations.......................... (128) 307
------------------- -------------------
Decrease in cash and
cash equivalents................................. (1,361) (1,858)
Cash and cash equivalents,
beginning of period.............................. 1,702 5,591
------------------- -------------------
Cash and cash equivalents,
end of period.................................... $ 341 $ 3,733
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest..................................... $ 1 $ -
=================== ===================
Income taxes................................. $ 480 $ 616
=================== ===================
See accompanying notes to consolidated financial statements.
5
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
(1) In the opinion of the management of Paragon Technologies, Inc. ("Paragon"
or the "Company"), the unaudited 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 that was sold on August 5, 2005, after
elimination of intercompany balances and transactions. Certain prior year
amounts have been reclassified to conform to the current year's
presentation. Results for interim periods are not necessarily indicative of
results expected for the full 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 for the year ended
December 31, 2004 as filed with the Securities and Exchange Commission.
Refer to the Company's annual report on Form 10-K for the year ended
December 31, 2004 for more complete financial information. See Note 2 of
the Notes to Consolidated Financial Statements for further information
regarding the sale of substantially all of the assets and liabilities of
Ermanco.
Use of Estimates
----------------
The preparation of the financial statements, in conformity with U.S.
generally accepted accounting principles, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. The judgments made in assessing the appropriateness of the
estimates and assumptions utilized by management in the preparation of the
financial statements are based on historical and empirical data and other
factors germane to the nature of the risk being analyzed. Materially
different results may occur if different assumptions or conditions were to
prevail. Estimates and assumptions are mainly utilized to establish the
appropriateness of the inventory reserve, warranty reserve, and revenue
recognition.
(2) Discontinued Operations -- Sale of Ermanco
------------------------------------------
On May 20, 2005, the Company and Ermanco entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") with TGW Transportgerate GmbH,
an Austrian corporation ("Buyer Parent"), and Malibu Acquisition, Inc., a
Michigan corporation and wholly owned subsidiary of Buyer Parent ("Buyer"),
pursuant to which Paragon agreed to sell to Buyer substantially all of the
assets and liabilities of Ermanco, Paragon's conveyor and sortation
subsidiary located in Spring Lake, Michigan. The terms of the Asset
Purchase Agreement provided that Buyer pay cash in the amount of $23
million (subject to a working capital adjustment and an accounts receivable
adjustment) and assume certain liabilities of Ermanco, as more fully
described in the Asset Purchase Agreement, a copy of which was filed with
the Securities and Exchange Commission on July 1, 2005. In approving the
sale of the assets and liabilities of Ermanco, Paragon's Board of Directors
received an opinion from its financial advisor, Boenning & Scattergood,
Inc., that the consideration received by Paragon in the transaction was
fair from a financial point of view to the stockholders of Paragon. At a
Special Meeting of Stockholders held on August 3, 2005, the Company
received approval from its stockholders to sell substantially all of the
assets and liabilities of Ermanco.
On August 5, 2005, the Company completed the sale of substantially all of
the assets and liabilities of Ermanco, and received cash consideration of
$23,055,000 (subject to a working capital adjustment and an accounts
receivable adjustment). Transaction costs associated with the sale of the
assets and liabilities of Ermanco were approximately $1,033,000. On October
20, 2005, the Company paid approximately
6
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
$467,000 to the Buyer in connection with the working capital adjustment.
Therefore, the Company received cash consideration of $21,555,000, net of
transactions costs and the working capital adjustment in connection with
the sale of the assets and liabilities of Ermanco, thereby resulting in a
pre-tax loss on the sale of approximately $978,000. The cash consideration
received by the Company is subject to an accounts receivable adjustment
based on collections of outstanding accounts receivable after August 5,
2005.
Ermanco and Paragon indemnified the Buyer and Buyer Parent for, among other
things, a breach of any representation, warranty, covenant, or agreement
set forth under the terms of the Asset Purchase Agreement. Paragon and
Ermanco will have no liability to Buyer or Buyer Parent with respect to
claims for breaches of representations and/or warranties until the
aggregate amount of loss relating to such breaches exceeds $230,000, and
then only for such amount that exceeds $230,000. The overall aggregate
indemnification liability of Paragon and Ermanco shall not exceed
$5,750,000. At the closing of the asset sale, Paragon delivered to the
Buyer an irrevocable letter of credit in the amount of $2 million as
security for its indemnification obligations. The letter of credit shall
remain in place for a period of one year following the closing of the asset
sale or longer in the event of any pending dispute thereunder; provided,
however, that if a dispute remains pending longer than the one year period
following the closing of the asset sale, the amount of the letter of credit
shall be reduced to an amount not less than an amount sufficient to resolve
such dispute. If applicable, the reduced letter of credit shall remain in
place following the one year anniversary of the closing of the asset sale
until any pending dispute has been resolved.
Ermanco and Paragon agreed that for a period of 3 years following the
closing of the transaction, each will not solicit any employee, customer,
or supplier of Buyer to leave Buyer's employment or alter its business
dealings with the Buyer.
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
the results of operations for Ermanco's business activities are reported as
a discontinued operation and accordingly, the accompanying consolidated
financial statements have been reclassified to report separately the
assets, liabilities and operating results of this discontinued operation.
7
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
The following are the condensed results of operations for Ermanco (in
thousands):
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------------ ----------------- ----------------- -----------------
Net sales........................... $ 6,732 7,643 28,132 22,448
================== ================= ================= =================
Income from operations
before income taxes.............. $ 575 701 2,584 1,683
Income tax expense.................. 207 281 929 677
------------------ ----------------- ----------------- -----------------
Income from operations
after income taxes............... 368 420 1,655 1,006
------------------ ----------------- ----------------- -----------------
Loss on sale before
income taxes..................... (451) - (978) -
Income tax benefit.................. (163) - (352) -
------------------ ----------------- ----------------- -----------------
Loss on sale after income
tax benefit...................... (288) - (626) -
------------------ ----------------- ----------------- -----------------
Income from discontinued
operations....................... $ 80 420 1,029 1,006
================== ================= ================= =================
The following is condensed balance sheet data pertaining to Ermanco (in
thousands):
As of As of
September 30, December 31,
2005 2004
-------------------- ----------------------
Current assets of business held for sale:
Receivables...................................... $ - 4,120
Inventories...................................... - 1,264
Other current assets............................. - 1,633
-------------------- ----------------------
Total current assets of business
held for sale................................ $ - 7,017
==================== ======================
Net property, plant and equipment................ $ - 1,047
Goodwill......................................... - 17,657
-------------------- ----------------------
Total non-current assets of business
held for sale................................ $ - 18,704
==================== ======================
Current liabilities of business held for sale:
Accounts payable................................. $ - 1,554
Other current liabilities........................ - 899
-------------------- ----------------------
Total current liabilities of business held
for sale..................................... $ - 2,453
==================== ======================
Long-term liabilities of business held for sale:
Deferred income taxes payable.................... $ - 2,403
==================== ======================
8
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
(3) Short-Term Investments
----------------------
The Company's short-term investments are comprised of debt securities, all
classified as trading, that are carried at cost, which
approximates fair value of the investments at period end. These debt
securities include state and municipal bonds. The short-term investments
are on deposit with a major financial institution and are supported by
letters of credit.
(4) Accrued Product Warranty
------------------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements
and the type of system sold, with a typical warranty period of one year.
The Company provides an accrual for estimated future warranty costs and
potential product liability claims based upon a percentage of cost of
sales, typically two percent of the cost of the system being sold, and a
detailed review of products still in the warranty period.
A roll-forward of warranty activities is as follows (in thousands):
Beginning Ending
Balance Charge/ Balance
January 1 (Credit) Spending September 30
-------------- ------------- ------------- --------------------
2005................... $ 490 (252) (57) 181
2004................... $ 714 (18) (139) 557
(5) Business Operations
-------------------
Company Overview
----------------
Paragon provides a variety of material handling solutions, including
systems, technologies, products, and services for material flow
applications. The Company's capabilities include horizontal transportation,
rapid dispensing, order fulfillment, computer software, sortation,
integrating conveyors and conveyor systems, and aftermarket services.
SI Systems
----------
The Company's Easton, Pennsylvania operation (hereafter referred to as "SI
Systems") is a specialized systems integrator supplying SI Systems branded
automated material handling systems to manufacturing, assembly, order
fulfillment, and distribution operations customers located primarily in
North America, including the U.S. government. The SI Systems automated
material handling systems are marketed, designed, sold, installed, and
serviced by its own staff or subcontractors as labor-saving devices to
improve productivity, quality, and reduce costs. SI Systems 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. The SI Systems engineering staff develops and
designs computer control programs required for the efficient operation of
the systems and for optimizing manufacturing, assembly, and fulfillment
operations.
9
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
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 during
the three and nine months ended September 30, 2005 and 2004 are as follows
(in thousands):
For the three months ended September 30, 2005 and 2004:
September 30, 2005 September 30, 2004
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
Systems sales................. $ 3,285 80.1% $ 2,191 70.4%
Aftermarket sales............. 816 19.9% 920 29.6%
-------------- ------------- -------------- --------------
Total sales................ $ 4,101 100.0% $ 3,111 100.0%
============== ============= ============== ==============
For the nine months ended September 30, 2005 and 2004:
September 30, 2005 September 30, 2004
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
Systems sales................. $ 9,301 79.5% $ 6,020 70.7%
Aftermarket sales............. 2,395 20.5% 2,500 29.3%
-------------- ------------- -------------- --------------
Total sales................ $ 11,696 100.0% $ 8,520 100.0%
============== ============= ============== ==============
The Company's products are sold worldwide through its own sales personnel.
Domestic and international sales during the three and nine months ended
September 30, 2005 and 2004 are as follows (in thousands):
For the three months ended September 30, 2005 and 2004:
September 30, 2005 September 30, 2004
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
Domestic sales................ $ 4,055 98.9% $ 2,852 91.7%
International sales........... 46 1.1% 259 8.3%
-------------- ------------- -------------- --------------
Total sales................ $ 4,101 100.0% $ 3,111 100.0%
============== ============= ============== ==============
For the nine months ended September 30, 2005 and 2004:
September 30, 2005 September 30, 2004
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
Domestic sales................ $ 11,107 95.0% $ 7,282 85.5%
International sales........... 589 5.0% 1,238 14.5%
-------------- ------------- -------------- --------------
Total sales................ $ 11,696 100.0% $ 8,520 100.0%
============== ============= ============== ==============
All of the Company's sales originate in the United States, and there are no
long lived assets existing outside the United States.
10
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
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 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. The Company
believes that its business is not subject to seasonality, although the rate
of new orders can vary substantially from month to month. Since the Company
recognizes sales on a percentage of completion basis for its systems
contracts, fluctuations in the Company's sales and earnings occur with
increases or decreases in major installations.
(6) Recently Issued Accounting Pronouncements
-----------------------------------------
In November 2004, the Financial Accounting Standards Board issued SFAS No.
151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4" ("FAS 151").
FAS 151 provides for certain fixed production overhead cost to be reflected
as a period cost and not capitalized as inventory. FAS 151 is effective for
the beginning of 2006. The adoption of FAS 151 is not expected to have a
material impact on the Company's financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised) "Share-Based Payment" ("FAS 123R"). FAS 123R addresses all
forms of share-based payment awards, including shares issued under employee
stock purchase plans, stock options, restricted stock, and stock
appreciation rights. It will require companies to recognize in the
statement of operations the grant-date fair value of stock options and
other equity-based compensation issued to employees, but expresses no
preference for a type of valuation model. The statement eliminates the
intrinsic value-based method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, that the
Company currently uses. The Company is required to adopt FAS 123R beginning
in 2006. The adoption of FAS 123R is not expected to have a material impact
on the Company's financial statements.
In May 2005, the Financial Accounting Standard Board issued SFAS No. 154,
"Accounting Changes and Error Corrections - A Replacement of APB Opinion
No. 20 and FASB Statement No. 3" ("FAS 154"). FAS 154 requires
retrospective application to prior periods' financial statements for
changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
This statement also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. FAS
154 also requires that a change in depreciation, amortization, or depletion
method for long-lived non-financial assets be accounted for as a change in
accounting estimate affected by a change in accounting principle. This
statement is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made in fiscal
years beginning after the date this statement was issued. The Company is
required to adopt the provisions of this statement, as applicable,
beginning in 2006.
11
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
(7) Sale-Leaseback
--------------
SI Systems' principal office is located in a 173,000 square foot, concrete,
brick, and steel facility in Easton, Pennsylvania. 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 for five years. The leasing agreement requires fixed monthly
rentals of $18,234 (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 leasing agreement is secured with a $200,000 letter
of credit. The lease expires on February 21, 2008. In accordance with SFAS
No. 13 and SFAS No. 28, the leaseback does not meet the criteria for
classification as a capital lease; hence, it is classified as an operating
lease. The sale-leaseback resulted in a total gain of $2,189,000, of which
$1,363,000 was recorded as a gain in 2003. The seller-lessee (Company)
retained more than a minor part (25,000 square feet) but less than
substantially all of the use of the property (173,000 square feet) through
the leaseback and realized a profit on the sale in excess of the present
value of the minimum lease payments over the lease term. The present value
of the stream of lease payments utilizing the Company's incremental
borrowing rate of 10.0% was $826,000. The $826,000 of deferred profit is
amortized in equal amounts as a reduction in rent expense over the
five-year term of the lease. During the three months ended September 30,
2005 and 2004, $41,000 and $41,000, respectively, of the deferred gain was
recognized. During the nine months ended September 30, 2005 and 2004,
$124,000 and $124,000, respectively, of the deferred gain was recognized.
(8) Line of Credit
--------------
The Company has a line of credit facility which may not exceed $5,000,000,
and is to be used primarily for working capital purposes. Interest on the
line of credit facility is at the LIBOR Market Index Rate plus 1.4%.
Effective August 5, 2005, due to the issuance of a $2,000,000 letter of
credit in connection with the sale of Ermanco, the amount of available line
of credit was reduced to $2,800,000. As of September 30, 2005, the Company
did not have any borrowings under the line of credit facility, and the line
of credit facility expires effective June 30, 2006.
The line of credit facility contains various non-financial covenants and is
secured by all accounts receivables and inventory. The Company was in
compliance with all covenants as of September 30, 2005.
(9) Stock Repurchase Program
------------------------
On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. On August 3,
2005, the Company's Board of Directors amended the program by increasing
the amount it has authorized management to repurchase to up to $5,000,000.
On August 31, 2005, the Company's Board of Directors amended the program by
increasing the amount it has authorized management to repurchase to up to
$8,828,000. During the three and nine months ended September 30, 2005, the
Company had repurchased 404,700 shares of common stock at a weighted
average cost, including brokerage commissions, of $9.87 per share. Cash
expenditures for the stock repurchases during the three and nine months
ended September 30, 2005 were $3,995,482. As of September 30, 2005, the
Company had repurchased 439,400 shares of common stock at a weighted
average cost, including brokerage commissions, of $9.83 per share. Cash
expenditures for the stock repurchases were
12
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
$4,321,114. As of September 30, 2005, $4,506,886 remained available for
repurchases under the stock repurchase program. Based on market conditions
and other factors, additional repurchases may be made from time to time, in
compliance with SEC regulations, in the open market or through privately
negotiated transactions at the discretion of the Company. There is no
expiration date with regards to the stock repurchase program. All shares of
common stock that were repurchased by the Company during the three and nine
months ended September 30, 2005 were subsequently retired.
(10) Stock-Based Compensation
------------------------
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.
Additional disclosure as required under the guidelines of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), as amended by FAS
148, 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 income (in thousands) and basic and diluted earnings per share for the
three and nine months ended September 30, 2005 and 2004, would have been as
follows:
Three Months Ended Nine Months Ended
------------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
----------------- ------------------- ----------------- ------------------
Net income, as reported........... $ 141 465 1,044 935
Deduct: total stock-based
employee compensation
determined under fair value
method, net of related tax
effects........................ (5) (29) (27) (92)
----------------- ------------------- ----------------- ------------------
Pro forma net income.............. $ 136 436 1,017 843
================= =================== ================= ==================
Earnings per share:
Basic -- as reported............ $ .03 .11 .25 .22
================= =================== ================= ==================
Basic -- pro forma.............. $ .03 .10 .24 .20
================= =================== ================= ==================
Diluted -- as reported.......... $ .03 .11 .24 .21
================= =================== ================= ==================
Diluted -- pro forma............ $ .03 .10 .24 .19
================= =================== ================= ==================
The above pro forma net income 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 and nine months ended September 30,
2005 and the year ended December 31, 2004.
(11) Legal Proceedings
-----------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or
liquidity.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the unaudited
consolidated financial statements for the period ended September 30, 2005, and
the cautionary statements and consolidated financial statements and related
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. The discussion and analysis contains "forward-looking
statements" based on management's current expectations, assumptions, estimates,
and projections. These forward-looking statements involve risks and
uncertainties. The Company's actual results could differ materially from those
included in these "forward-looking statements" 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.
---------------------------------
Business Overview
-----------------
Paragon Technologies, Inc. provides a variety of material handling
solutions, including systems, technologies, products, and services for material
flow applications. Founded in 1958, the Company's material handling solutions
are based on core technologies in horizontal transportation and order
fulfillment and are aimed at improving productivity for manufacturing, assembly,
and distribution center operations.
On August 5, 2005, the Company completed the sale of substantially all of
the assets and liabilities of Ermanco, and received cash consideration of
$23,055,000 (subject to a working capital adjustment and an accounts receivable
adjustment). Transaction costs associated with the sale of the assets and
liabilities of Ermanco were approximately $1,033,000. On October 20, 2005, the
Company paid $467,000 to the Buyer in connection with the working capital
adjustment. Therefore, the Company received cash consideration of $21,555,000,
net of transaction costs and the working capital adjustment in connection with
the sale of the assets and liabilities of Ermanco, thereby resulting in a
pre-tax loss of approximately $978,000. The cash consideration received by the
Company is subject to an accounts receivable adjustment based on collections of
outstanding accounts receivable after August 5, 2005. See Note 2 of the Notes to
Consolidated Financial Statements for further information regarding the sale of
substantially all of the assets and liabilities of Ermanco. The discussion that
follows reflects the operations of the Company following the sale of
substantially all of the assets and liabilities of Ermanco.
---------------------------------
14
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
Key Performance Metrics Relevant to the Company
-----------------------------------------------
Capacity Utilization
--------------------
Capacity Utilization, as documented in the Federal Reserve Statistical
Release(1), is a key economic indicator that the Company follows as a barometer
that may lead to capital spending for material handling systems. Capacity
Utilization attempts to measure what percent of available capacity is actually
being utilized. Management believes that when Capacity Utilization rises above
80%, as occurred in fiscal 2000, the Company may see an increase in rate of new
orders, and therefore, an increase in backlog and sales may also occur. The
backlog of orders represents the uncompleted portion of systems contracts along
with the value of parts and services from customer purchase orders related to
goods that have not been shipped or services that have not been rendered.
Backlog is generally indicative of customer demand for the Company's products.
As the demand for the Company's products increases, the backlog of orders, the
rate of new orders, and sales also typically increases. The following table
depicts the Company's backlog, orders, sales, and Capacity Utilization for the
nine months ended September 30, 2005, and for the years ended December 31, 2004,
2003, 2002, 2001, and 2000:
Nine Months
Ended Year Ended December 31,
September 30, ----------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001 2000
--------------- ------ ------ ------ ------ ------
Backlog of orders - Beginning... $ 5,514 4,052 4,834 7,666 16,353 15,403
Add: orders.................. 15,848 13,164 11,301 12,074 10,321 30,599
Less: sales.................. 11,696 11,702 12,083 14,906 19,008 29,649
--------------- ------ ------ ------ ------ ------
Backlog of orders - Ending...... $ 9,666 5,514 4,052 4,834 7,666 16,353
=============== ====== ====== ====== ====== ======
Capacity Utilization(1)......... 79.3% 78.0% 74.9% 75.6% 77.4% 82.6%
Current Ratio
-------------
Prior to the sale of Ermanco, the Company's current ratio, which is the
ratio of current assets to current liabilities, had been relatively consistent.
Management of the Company monitors the current ratio as a measure of determining
liquidity and believes the current ratio illustrates that the Company's
financial resources are adequate to satisfy its future cash requirements through
the next year. The following table depicts the Company's current assets, current
liabilities, and current ratio as of September 30, 2005 and as of December 31,
2004, 2003, 2002, 2001, and 2000:
As of As of December 31,
September 30, ---------------------------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001 2000
------------------- ---------- ----------- ----------- ---------- ----------
Current assets............... $ 29,309 13,802 14,720 15,444 19,200 22,850
------------------- ---------- ----------- ----------- ---------- ----------
Current liabilities.......... 8,186 6,908 9,583 9,416 13,357 15,193
Current ratio................ 3.58 2.00 1.54 1.64 1.44 1.50
15
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
Debt to Equity Ratio
--------------------
With an emphasis over the past several years on generating cash flows to
eliminate the Company's senior and subordinated debt, the Company has eliminated
its financial leverage as evidenced by its debt to equity ratio, which is the
ratio of total debt to stockholders' equity. Management believes the absence of
debt provides greater protection for its stockholders and enhances the Company's
ability to obtain additional financing, if required. The following table
illustrates the calculation of the debt to equity ratio as of September 30, 2005
and as of December 31, 2004, 2003, 2002, 2001, and 2000:
As of As of December 31,
September 30, ---------------------------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001 2000
------------------- ---------- ----------- ----------- ---------- ----------
Current installments of
long-term debt............. $ - - - 1,437 2,305 1,521
Long-term debt............... - - - 7,623 9,900 12,780
------------------- ---------- ----------- ----------- ---------- ----------
Total debt................... - - - 8,700 12,205 14,301
------------------- ---------- ----------- ----------- ---------- ----------
Total stockholders'
equity..................... $ 20,889 23,308 22,061 17,885 16,912 16,980
=================== ========== =========== =========== ========== ==========
Debt to equity ratio......... - - - .49 .72 .84
---------------------------------
Critical Accounting Policies and Estimates
------------------------------------------
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses, and other financial information, including the related disclosure
of commitments and contingencies at the date of our financial statements. Actual
results may, under different assumptions and conditions, differ significantly
from our estimates.
We believe that our accounting policies related to revenue recognition on
system sales, warranty, and inventories are our "critical accounting policies."
These policies have been reviewed with the Audit Committee of the Board of
Directors and are discussed in greater detail below.
Revenue Recognition on Systems Sales
------------------------------------
Revenues on systems contracts, accounted for in accordance with SOP 81-1 of
the American Institute of Certified Public Accountants, are recorded on the
basis of the Company's estimates of the percentage of completion of individual
contracts. Gross margin is recognized on the basis of the ratio of aggregate
costs incurred to date to the most recent estimate of total costs. As contracts
may extend over one or more years, revisions in cost and profit estimates during
the course of the work are reflected in the accounting periods in which the
facts requiring revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued. As of
September 30, 2005, there are no contracts that are anticipated to result in a
loss.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
Revenue Recognition on Systems Sales (Continued)
------------------------------------
The Company believes that it has the ability to reasonably estimate the
total costs and applicable gross profit margins at the inception of the contract
for all of its systems contracts. However, where cost estimates change, there
could be a significant impact on the amount of revenue recognized. The Company's
failure to estimate accurately can result in cost overruns which will result in
the loss of profits if the Company determines that it has significantly
underestimated the costs involved in completing contracts. The Company has not
had any significant cost overruns resulting in loss of profits during the three
and nine months ended September 30, 2005.
Accrued Product Warranty
------------------------
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements and
the type of system sold, with a typical warranty period of one year. The Company
provides an accrual for estimated future warranty costs and potential product
liability claims based upon a percentage of cost of sales, typically two percent
of the cost of the system being sold, and a detailed review of products still in
the warranty period. Historically, the level of warranty reserve has been
appropriate based on management's assessment of estimated future warranty
claims. However, if unanticipated warranty issues arise in the future, there
could be a significant impact on the recorded warranty reserve. The recorded
warranty reserve as of September 30, 2005 was $181,000.
Inventories
-----------
Inventories are valued at the lower of average cost or market. The Company
provides an inventory reserve determined by a specific identification of
individual slow moving items and other inventory items based on historical
experience. The reserve is considered to be a write-down of inventory to a new
cost basis. Upon disposal of inventory, the cost and related inventory reserve
are removed from the accounts. Historically, the level of inventory reserve has
been appropriate based on management's assessment of estimated future inventory
disposals.
---------------------------------
(a) Results of Operations - Nine Months Ended September 30, 2005 Compared
---------------------------------------------------------------------
to the Nine Months Ended September 30, 2004
-------------------------------------------
Net Sales and Gross Profit on Sales
-----------------------------------
2005 2004
------------------ ------------------
Net sales............................................ $11,696,000 8,520,000
Cost of sales........................................ 8,587,000 5,681,000
------------------ ------------------
Gross profit on sales................................ $3,109,000 2,839,000
================== ==================
Gross profit as a percentage of sales................ 26.6% 33.3%
================== ==================
The increase in sales was associated with a larger backlog of orders
entering fiscal 2005 when compared to the backlog of orders entering fiscal
2004. Contributing to the increase in sales was progress made on contracts
received prior to the start of the year and during the first half of 2005 in
accordance with contract completion requirements associated with customers in
the vehicle assembly and health and beauty aids marketplace as a result of a
demand for the Company's products in these industry sectors.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
(a) Results of Operations - Nine Months Ended September 30, 2005 Compared
---------------------------------------------------------------------
to the Nine Months Ended September 30, 2004 (Continued)
-------------------------------------------
Net Sales and Gross Profit on Sales (Continued)
-----------------------------------
Gross profit, as a percentage of sales, for the nine months ended
September 30, 2005, when compared to the nine months ended September 30, 2004,
was unfavorably impacted by approximately 8.0% due to competitive pricing
pressures and product mix, along with the impact of the favorable performance on
the Company's contracts that were completed or nearing completion in the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2005. Partially offsetting the aforementioned unfavorable variance was a
1.3% reduction in overhead costs as a percentage of sales due to the higher
sales volume to cover fixed overhead costs in the nine months ended September
30, 2005.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $3,363,000 were higher by
$419,000 for the nine months ended September 30, 2005 than for the nine months
ended September 30, 2004. The increase was attributable to the addition of
resources aimed at expanding the customer base and an increase in salaries and
fringe benefits totaling $249,000, an increase of $50,000 in commission expenses
related to the Company's enhanced revenue performance, and an increase of
$94,000 in consulting and marketing expenses primarily associated with product
promotion, marketing research, and participation in trade shows primarily during
the first half of fiscal 2005.
Product Development Costs
-------------------------
Product development costs, including patent expense, of $29,000 were lower
by $131,000 for the nine months ended September 30, 2005 than for the nine
months ended September 30, 2004. Development programs in the nine months ended
September 30, 2005 and September 30, 2004 were primarily aimed at improvements
to the Company's Order Fulfillment systems technologies. Order Fulfillment
development efforts, that were essentially completed during the nine months
ended September 30, 2004 and incorporated into the Company's Order Fulfillment
product offerings, were centered on the development of an innovative computer
control system, along with DISPEN-SI-MATIC(TM) software and hardware
enhancements aimed at promoting workplace efficiencies for the Company's
customers. Order Fulfillment development efforts during the nine months ended
September 30, 2005 were primarily additional modifications and enhancements to
the Company fiscal 2004 development initiatives.
Interest Income
---------------
Interest income of $175,000 was higher by $114,000 for the nine months
ended September 30, 2005 than for the nine months ended September 30, 2004. The
increase in interest income was primarily attributable to the higher level of
funds available for investment as a result of the cash proceeds from the recent
sale of substantially all of the assets and liabilities of Ermanco.
Other Income, Net
-----------------
The favorable variance of $45,000 in other income, net for the nine months
ended September 30, 2005 as compared to the nine months ended September 30, 2004
was primarily attributable to an increase in royalty income from a license
agreement related to material handling equipment sales.
Income Tax Expense (Benefit)
---------------------------
The Company recognized income tax expense of $9,000 during the nine months
ended September 30, 2005 compared to an income tax benefit of $(45,000) during
the nine months ended September 30, 2004. Income tax expense (benefit) was
generally recorded at statutory federal and state tax rates.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
(b) Results of Operations - Three Months Ended September 30, 2005 Compared
----------------------------------------------------------------------
to the Three Months Ended September 30, 2004
--------------------------------------------
Net Sales and Gross Profit on Sales
-----------------------------------
2005 2004
------------------ ------------------
Net sales............................................ $ 4,101,000 3,111,000
Cost of sales........................................ 2,974,000 2,014,000
------------------ ------------------
Gross profit on sales................................ $ 1,127,000 1,097,000
================== ==================
Gross profit as a percentage of sales................ 27.5% 35.3%
================== ==================
The increase in sales was associated with a larger backlog of orders
entering the third quarter of 2005, when compared to the backlog of orders
entering the third quarter of 2004. Contributing to the increase in sales was
progress made on contracts received prior to the start of the third quarter of
2005 in accordance with contract completion requirements associated with
customers in the vehicle assembly and health and beauty aids marketplace as a
result of a demand for the Company's products in these industry sectors.
Gross profit, as a percentage of sales, for the three months ended
September 30, 2005, when compared to the three months ended September 30, 2004,
was unfavorably impacted by approximately 8.1% due to competitive pricing
pressures and product mix, along with the impact of the favorable performance on
the Company's contracts that were completed or nearing completion in the three
months ended September 30, 2004 as compared to the three months ended September
30, 2005. Partially offsetting the aforementioned unfavorable variance was a
0.3% reduction in overhead costs as a percentage of sales due to the higher
sales volume to cover fixed overhead costs in the three months ended September
30, 2005.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $1,179,000 were higher by
$159,000 for the three months ended September 30, 2005 than for the three months
ended September 30, 2004. The increase was attributable to the addition of
resources aimed at expanding the customer base and an increase in salaries and
fringe benefits totaling $127,000, and an increase of $43,000 in professional
fees and shareholder relations expenses. Partially offsetting the aforementioned
unfavorable variance was a decrease of $24,000 in marketing expenses primarily
associated with trade shows and product promotion.
Product Development Costs
-------------------------
Product development costs, including patent expense, of $6,000 were lower
by $30,000 for the three months ended September 30, 2005 than for the three
months ended September 30, 2004. Development programs in the three months ended
September 30, 2005 and September 30, 2004 were primarily aimed at improvements
to the Company's Order Fulfillment systems technologies. Order Fulfillment
development efforts, that were essentially completed during the quarter ended
September 30, 2004 and incorporated into the Company's Order Fulfillment product
offerings, were centered on the development of an innovative computer control
system, along with DISPEN-SI-MATIC(TM) software and hardware enhancements aimed
at promoting workplace efficiencies for the Company's customers. Order
Fulfillment development efforts during the three months ended September 30, 2005
were primarily additional modifications and enhancements to the Company fiscal
2004 development initiatives.
Interest Income
---------------
Interest income of $101,000 was higher by $91,000 for the three months
ended September 30, 2005 than for the three months ended September 30, 2004. The
increase in interest income was primarily attributable to the higher level of
funds available for investment as a result of the cash proceeds from the recent
sale of substantially all of the assets and liabilities of Ermanco.
19
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
(b) Results of Operations - Three Months Ended September 30, 2005 Compared
----------------------------------------------------------------------
to the Three Months Ended September 30, 2004 (Continued)
--------------------------------------------
Other Income, Net
-----------------
The favorable variance of $34,000 in other income, net for the three months
ended September 30, 2005 as compared to the three months ended September 30,
2004 was primarily attributable to an increase in royalty income from a license
agreement related to material handling equipment sales.
Income Tax Expense
------------------
The Company recognized income tax expense of $39,000 during the three
months ended September 30, 2005 compared to income tax expense of $29,000 during
the three months ended September 30, 2004. Income tax expense was generally
recorded at statutory federal and state tax rates.
---------------------------------
Liquidity and Capital Resources
-------------------------------
The Company's cash and cash equivalents and short-term investments at
September 30, 2005 were $23,356,000, representing 79.7% of total assets, up from
$3,602,000, or 10.9% of total assets, at December 31, 2004. The increase was
primarily due to cash proceeds of $22,022,000 from the sale of Ermanco, net of
transaction costs, and cash provided by operating activities totaling
$1,424,000, partially offset by the repurchase and retirement of common stock of
$3,995,000.
Cash provided by operating activities totaling $1,424,000 during the nine
months ended September 30, 2005 was primarily due the following factors:
o An increase in customers' deposits and billings in excess of costs and
estimated earnings in the amount of $1,033,000 in accordance with
contractual requirements associated with customers in the vehicle
assembly and entertainment marketplace;
o An increase in income taxes payable in the amount of $1,967,000
primarily associated with the gain on the sale of Ermanco for income
tax purposes;
o An increase in accrued other liabilities in the amount of $578,000, of
which $467,000 was associated with the working capital adjustment
in connection with the sale of Ermanco;
o Partially offset by an increase in accounts receivable in the amount of
$1,981,000 in accordance with contractual requirements associated with
customers in the vehicle assembly and entertainment marketplace.
Cash used by operating activities totaling $1,966,000 during the nine
months ended September 30, 2004 was primarily due the following factors:
o A decrease in income taxes payable in the amount of $922,000 primarily
associated with the payment of income taxes based on the Company's
fiscal 2003 profitability; and
o An increase in accounts receivable in the amount of $1,087,000 in
accordance with contractual requirements associated with customers in
the health and beauty aids and entertainment marketplace.
The Company's line of credit facility may not exceed $5,000,000 and is to
be used primarily for working capital purposes. Effective August 5, 2005, due to
the issuance of a $2,000,000 letter of credit in connection with the sale of
substantially all of the assets and liabilities of Ermanco, the amount of
available line of credit was reduced to $2,800,000. The line of credit facility
contains various non-financial covenants and is secured by all accounts
receivables and inventory. As of September 30, 2005, the Company did not have
any borrowings under the line of credit facility, and the line of credit
facility expires effective June 30, 2006.
20
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
(b) Results of Operations - Three Months Ended September 30, 2005 Compared
----------------------------------------------------------------------
to the Three Months Ended September 30, 2004 (Continued)
--------------------------------------------
Liquidity and Capital Resources (Continued)
-------------------------------
During the nine months ended September 30, 2005, the Company received cash
consideration of approximately $22,022,000, net of transaction costs, in
connection with the sale of substantially all of the assets and liabilities of
Ermanco. The Company anticipates that its financial resources, consisting of
cash generated from operations, its line of credit, and the sale of Ermanco will
be adequate to satisfy its future cash requirements through the next year. 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 is currently exploring various business strategies designed to
enhance the value of the Company's assets for its stockholders. The Company has
retained the investment banking firm, Boenning & Scattergood, Inc., to advise
the Company in evaluating its strategic options. The Company is continuing to
evaluate and actively explore a range of possible options, including
transactions intended to provide liquidity and maximize stockholder value, and
consider the acquisition of complementary assets and/or businesses. The Company
may not be able to effect any of these strategic options on favorable terms or
at all.
---------------------------------
Contractual Obligations
-----------------------
The Company's leases 25,000 square feet in Easton, Pennsylvania for use as
its principal office. The leasing agreement requires fixed monthly rentals of
$18,234 (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
leasing agreement is secured with a $200,000 letter of credit. The lease expires
on February 21, 2008.
Future contractual obligations and commercial commitments at September 30,
2005 as noted above are as follows:
Payments Due by Period
-----------------------------------------------------------------
Total 2005 2006 2007 2008 2009
--------------- ----------- ----------- ------------- ----------- ----------
Contractual obligations:
Operating leases........... $ 544,000 55,000 224,000 231,000 34,000 -
--------------- ----------- ----------- ------------- ----------- ----------
Total...................... $ 544,000 55,000 224,000 231,000 34,000 -
=============== =========== =========== ============= =========== ==========
Amount of Commitment
Expiration Per Period
Total Amounts -------------------------------------------------------------------
Committed 2005 2006 2007 2008 2009
-------------------- ----------- ------------ ------------- ----------- ----------
Other commercial
commitments:
Letters of credit..... $ 2,200,000 - 2,200,000 - - -
21
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
Off-Balance Sheet Arrangements
------------------------------
As of September 30, 2005, the Company had no off-balance sheet arrangements
in the nature of guarantee contracts, retained or contingent interests in assets
transferred to unconsolidated entities (or similar arrangements serving as
credit, liquidity, or market risk support to unconsolidated entities for any
such assets), or obligations (including contingent obligations) arising out of
variable interests in unconsolidated entities providing financing, liquidity,
market risk, or credit risk support to the Company, or that engage in leasing,
hedging, or research and development services with the Company.
Recently Issued Accounting Pronouncements
-----------------------------------------
In November 2004, the Financial Accounting Standards Board issued SFAS No.
151, "Inventory Costs an Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS
151 provides for certain fixed production overhead cost to be reflected as a
period cost and not capitalized as inventory. FAS 151 is effective for the
beginning of 2006. The adoption of FAS 151 is not expected to have a material
impact on the Company's financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised) "Share-Based Payment" ("FAS 123R"). FAS 123R addresses all forms
of share-based payment awards, including shares issued under employee stock
purchase plans, stock options, restricted stock, and stock appreciation rights.
It will require companies to recognize in the statement of operations the
grant-date fair value of stock options and other equity-based compensation
issued to employees, but expresses no preference for a type of valuation model.
The statement eliminates the intrinsic value-based method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, that the Company currently uses. The Company is required to
adopt FAS 123R beginning in 2006. The adoption of FAS 123R is not expected to
have a material impact on the Company's financial statements.
In May 2005, the Financial Accounting Standard Board issued SFAS No. 154,
"Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20
and FASB Statement No. 3" ("FAS 154"). FAS 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. This statement also requires
that retrospective application of a change in accounting principle be limited to
the direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change. FAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived non-financial assets be
accounted for as a change in accounting estimate affected by a change in
accounting principle. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this statement was issued. The
Company is required to adopt the provisions of this statement, as applicable,
beginning in 2006.
22
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (Continued)
---------------------
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 earnings, liquidity, financial condition, review of
strategic alternatives, and other 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 factors over which the Company
has no control, including the strength of domestic and foreign economies, sales
growth, competition, and certain costs increases; or (3) if the factors on which
the Company's conclusions are based do not conform to the Company's
expectations.
---------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------- ----------------------------------------------------------
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 are material
to its results of operations.
Item 4. Controls and Procedures
------- -----------------------
(a) Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including its Chief Executive
Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness
of the Company's disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") as of September 30, 2005. Based on
that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act, is
accumulated and communicated to the Company's management, including the
Company's CEO and CFO, to allow timely decisions regarding required
disclosure, and is recorded, processed, summarized and reported as
specified in Securities and Exchange Commission rules and forms.
(b) Change in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation of such controls
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect the
Company's internal control over financial reporting.
23
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
------- -----------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------
The following table represents the periodic repurchases of equity
securities made by the Company during the three months ended September 30, 2005:
-------------------------------------------------------------------------------------------------------
Total Number Approximate
Average of Shares Approximate Dollar Value
Price Paid Repurchased Dollar Value of Shares
Total Per Share as Part of a of Shares That May Yet
Number (Including Publicly Purchased Be Purchased
Fiscal of Shares Brokerage Announced Under the Under the
Period Repurchased Commissions) Program Program Program
-------------------------------------------------------------------------------------------------------
7/1/05 - 7/31/05 - $ - - $ - $ 674,368
8/1/05 - 8/31/05 359,200 $ 9.75 359,200 $ 3,502,200 $ 5,000,168
9/1/05 - 9/30/05 45,500 $ 10.84 45,500 $ 493,282 $ 4,506,886
-------------------------------------------------------------------------------------------------------
On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. On August 3, 2005,
the Company's Board of Directors amended its existing stock repurchase program
by increasing the amount it has authorized management to repurchase from up to
$1,000,000 of the Company's common stock to up to $5,000,000. On August 31,
2005, the Company's Board of Directors amended its existing stock repurchase
program by increasing the amount it has authorized management to repurchase from
up to $5,000,000 of the Company's common stock to up to $8,828,000. During the
three and nine months ended September 30, 2005, the Company had repurchased
404,700 shares of common stock at a weighted average cost, including brokerage
commissions, of $9.87 per share. Cash expenditures for the stock repurchases
during the three and nine months ended September 30, 2005 were $3,995,482. As of
September 30, 2005, the Company had repurchased 439,400 shares of common stock
at a weighted average cost, including brokerage commissions, of $9.83 per share.
Cash expenditures for the stock repurchases were $4,321,114. As of September 30,
2005, $4,506,886 remained available for repurchases under the stock repurchase
program. Based on market conditions and other factors, additional repurchases
may be made from time to time, in compliance with SEC regulations, in the open
market or through privately negotiated transactions at the discretion of the
Company. There is no expiration date with regards to the stock repurchase
program.
Item 3. Defaults Upon Senior Securities
------- -------------------------------
Not applicable.
24
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on August 3, 2005
with the following item being submitted to a vote of stockholders:
1. The election of five directors to the Board of Directors.
Details of the proposal noted above were provided to stockholders in the
form of a Notice of Annual Meeting and Proxy Statement dated and mailed on July
5, 2005, with such solicitation being in accordance with Section 14 of the
Securities and Exchange Act of 1934, as amended, and the regulations promulgated
thereunder.
There was no solicitation in opposition to the management's nominees listed
in the Proxy Statement, and all the management's nominees were elected.
The voting results on the election of directors are set forth as follows:
1. Election of Directors:
Name of Nominee Votes For Votes Withheld Non-Voting
--------------- --------- -------------- ----------
L. Jack Bradt 3,384,401 552,380 350,004
Theodore W. Myers 3,698,227 238,554 350,004
Anthony W. Schweiger 3,686,627 250,154 350,004
Steven Shulman 3,462,361 474,420 350,004
Leonard S. Yurkovic 3,455,751 481,030 350,004
---------------------------------
The Company held a Special Meeting of Stockholders on August 3, 2005 to
approve the sale of substantially all of the assets and liabilities of Ermanco
Incorporated to Malibu Acquisition, Inc., a Michigan corporation, pursuant to
the terms of the Asset Purchase Agreement dated May 20, 2005, by and among
Ermanco Incorporated, a Michigan corporation, Paragon Technologies, Inc., a
Delaware corporation, Malibu Acquisition, Inc., a Michigan corporation, and TGW
Transportgerate GmbH, an Austrian corporation.
Details of the proposal were provided to stockholders in the form of a
Notice of Special Meeting and Proxy Statement dated and mailed on July 1, 2005,
with such solicitation being in accordance with Section 14 of the Securities and
Exchange Act of 1934, as amended, and the regulations promulgated thereunder.
The proposal was duly approved by the stockholders of the Company. The closing
of the sale of substantially all of the assets and liabilities of Ermanco
occurred on August 5, 2005. See Note 2 of the Notes to Consolidated Financial
Statements for further information regarding the sale of substantially all of
the assets and liabilities of Ermanco.
The voting results on the proposal were as follows:
Votes For Votes Against Abstentions Non-Voting
--------- ------------- ----------- ----------
3,433,182 24,552 2,587 826,464
Item 5. Other Information
Not applicable.
25
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
31.1 Certification by Chief Executive Officer pursuant
to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 signed by Leonard S. Yurkovic, President
and CEO (filed herewith).
31.2 Certification by Chief Financial Officer pursuant
to Rule 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 signed by Ronald J. Semanick, Chief
Financial Officer and Vice President - Finance and
Treasurer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 signed by Leonard S.
Yurkovic, President and CEO (filed herewith).
32.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 signed by Ronald J.
Semanick, Chief Financial Officer and Vice
President - Finance and Treasurer (filed herewith).
26
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON TECHNOLOGIES, INC.
/s/ Leonard S. Yurkovic
-----------------------------------------------
Leonard S. Yurkovic
President & CEO
/s/ Ronald J. Semanick
-----------------------------------------------
Ronald J. Semanick
Chief Financial Officer
Dated: November 14, 2005
--------------------
27
EXHIBIT INDEX
-------------
Exhibits
--------
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 signed by Leonard S.
Yurkovic, President and CEO (filed herewith).
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 signed by Ronald J.
Semanick, Chief Financial Officer and Vice President -
Finance and Treasurer (filed herewith).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 signed by Leonard S. Yurkovic, President and CEO
(filed herewith).
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 signed by Ronald J. Semanick, Chief Financial
Officer and Vice President - Finance and Treasurer
(filed herewith).
28