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, 2001
Commission File No. 1-15729
PARAGON TECHNOLOGIES, INC.
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(Exact Name Of Registrant As Specified In Its Charter)
Pennsylvania 22-1643428
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Kuebler Road, Easton, PA 18040
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-3205
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Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of common stock, par value $1.00 per share, outstanding as of
March 31, 2001: 4,210,959.
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
March 31, 2001 and December 31, 2000
(In Thousands, Except Share Data)
March 31, December 31,
2001 2000
------------ ------------
Assets
------
Current assets:
Cash and cash equivalents, principally
time deposits $ 7,515 7,925
Receivables:
Trade (net of allowance for doubtful
accounts of $69 as of March 31, 2001
and $54 as of December 31, 2000) 5,797 7,040
Notes and other receivables 301 301
------ ------
Total receivables 6,098 7,341
------ ------
Costs and estimated earnings in excess
of billings 1,628 1,665
------ ------
Inventories:
Raw materials 1,748 2,198
Work-in-process 328 340
Finished goods 529 508
------ ------
Total inventories 2,605 3,046
------ ------
Deferred income tax benefits 2,326 2,326
Prepaid expenses and other current assets 690 547
------ ------
Total current assets 20,862 22,850
------ ------
Property, plant and equipment, at cost:
Land 27 27
Buildings and improvements 3,746 3,746
Machinery and equipment 6,483 6,341
------ ------
10,256 10,114
Less: accumulated depreciation (7,505) (7,334)
------ ------
Net property, plant and equipment 2,751 2,780
------ ------
Investments in joint ventures 2,028 2,000
Excess of cost over fair value of net assets
acquired, less amortization of $701 as of
March 31, 2001 and $585 as of
December 31, 2000 18,009 18,125
Other assets, at cost less accumulated
amortization of $64 as of March 31, 2001
and $210 as of December 31, 2000 159 162
------ ------
Total assets $ 43,809 45,917
====== ======
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 (Unaudited)
March 31, 2001 and December 31, 2000
(In Thousands, Except Share Data)
March 31, December 31,
2001 2000
------------ ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 1,782 1,521
Accounts payable 3,983 4,412
Customers' deposits and billings in excess
of costs and estimated earnings for
completed and uncompleted contracts 4,625 4,446
Accrued salaries, wages, and commissions 890 2,130
Income taxes payable - 369
Accrued royalties payable 81 253
Accrued product warranties 909 857
Accrued pension and retirement
savings plan liabilities 610 688
Accrued other liabilities 705 517
------ ------
Total current liabilities 13,585 15,193
------ ------
Long-term liabilities:
Long-term debt, excluding current installments:
Term loan 9,000 9,775
Subordinated notes payable 3,000 3,000
Other 283 5
------ ------
Total long-term debt 12,283 12,780
Deferred income taxes payable 719 823
Deferred compensation 143 141
------ ------
Total long-term liabilities 13,145 13,744
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and outstanding
4,210,959 shares as of March 31, 2001
and 4,194,869 shares as of
December 31, 2000 4,211 4,195
Additional paid-in capital 7,002 6,882
Retained earnings 6,029 5,903
Accumulated other comprehensive loss,
net of tax effect of $115 (163) -
------ ------
Total stockholders' equity 17,079 16,980
------ ------
Total liabilities and stockholders' equity $ 43,809 45,917
====== ======
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, 2001 and March 31, 2000
(In Thousands, Except Share And Per Share Data)
Three Months Ended
----------------------------
March 31, March 31,
2001 2000
------------ ------------
Net sales $ 13,930 18,344
Cost of sales 10,337 13,912
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Gross profit on sales 3,593 4,432
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Selling, general and administrative
expenses 2,941 2,390
Product development costs 199 49
Amortization of goodwill 117 117
Employee severance and
termination benefits - 337
Interest expense 364 421
Interest income (114) (61)
Equity in income of joint ventures (28) (24)
Other income, net (90) (86)
--------- ---------
3,389 3,143
--------- ---------
Earnings before income taxes 204 1,289
Income tax expense 78 517
--------- ---------
Net earnings $ 126 772
========= =========
Basic earnings per share $ .03 .18
========= =========
Diluted earnings per share $ .03 .17
========= =========
Weighted average shares outstanding 4,198,892 4,184,878
Dilutive effect of stock options 57,312 2,246
Dilutive effect of phantom stock units 18,096 18,120
--------- ---------
Weighted average shares outstanding
assuming dilution 4,274,300 4,205,244
========= =========
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, 2001 and March 31, 2000
(In Thousands)
Three Months Ended
-------------------------
March 31, March 31,
2001 2000
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Net earnings $ 126 772
Other comprehensive income (loss), net of tax:
Cash flow hedge:
Cumulative effect of adoption of FAS 133 (96) -
Net loss arising during the period (67) -
--- ---
Net loss on cash flow hedge (163) -
--- ---
Total other comprehensive loss (163) -
--- ---
Comprehensive income (loss) $ (37) 772
=== ===
See accompanying notes to consolidated financial statements.
- 5 -
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2001 and March 31, 2000
(In Thousands, Except Share Data)
Three Months Ended
-------------------------
March 31, March 31,
2001 2000
--------- ---------
Cash flows from operating activities:
Net earnings $ 126 772
Adjustments to reconcile net earnings to
net cash provided (used) by
operating activities:
Depreciation of plant and equipment 171 150
Amortization of intangibles 126 133
Gain on disposition of equipment - (2)
Equity in income of joint ventures (28) (24)
Issuance of 12,390 common shares
as payment of employee's bonus 111 -
Change in operating assets and liabilities,
net of effects of the acquisition of
Ermanco Incorporated:
Receivables 1,243 (3,657)
Costs and estimated earnings in
excess of billings 37 151
Inventories 441 (545)
Deferred income tax benefits - -
Prepaid expenses and other current
assets (143) 232
Other noncurrent assets (7) 1
Accounts payable (429) 651
Customers' deposits and billings in
excess of costs and estimated
earnings for completed and
uncompleted contracts 179 (1,913)
Accrued salaries, wages, and
commissions (1,240) (390)
Income taxes payable (369) 535
Accrued royalties payable (172) (193)
Accrued pension and retirement
savings plan liabilities (78) 31
Accrued product warranties 52 50
Accrued other liabilities 188 (453)
Deferred income taxes payable 11 -
Deferred compensation 2 (20)
----- -----
Net cash provided (used) by
operating activities 221 (4,491)
----- -----
Cash flows from investing activities:
Proceeds from the disposition of equipment - 2
Additional consideration paid in connection
with Ermanco acquisition - (231)
Additions to property, plant and equipment (142) (115)
----- -----
Net cash used by investing activities (142) (344)
----- -----
See accompanying notes to consolidated financial statements.
- 6 -
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Three Months Ended March 31, 2001 and March 31, 2000
(In Thousands, Except Share Data)
Three Months Ended
-------------------------
March 31, March 31,
2001 2000
--------- ---------
Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan 25 -
Repayment of long-term debt (514) (630)
----- -----
Net cash used by financing activities (489) (630)
----- -----
Decrease in cash and cash equivalents (410) (5,465)
Cash and cash equivalents,
beginning of period 7,925 6,242
----- -----
Cash and cash equivalents,
end of period $ 7,515 777
===== =====
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 337 780
===== =====
Income taxes $ 465 36
===== =====
See accompanying notes to consolidated financial statements.
- 7 -
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2001 and March 31, 2000
(1) The information contained in this Form 10-Q report is unaudited. In the
opinion of management, the interim financial statements furnished reflect
all adjustments and accruals that are necessary to a fair statement of
results for the interim periods presented. The financial statements include
the accounts of the Company and Ermanco Incorporated ("Ermanco"), a wholly
owned subsidiary company, after elimination of intercompany balances and
transactions. Results for interim periods are not necessarily indicative of
results expected for the fiscal year. Refer to the Company's Form 10-K, as
amended for the year ended December 31, 2000 for more complete financial
information.
On February 9, 2000, the Board of Directors of the Company approved an
amendment to Article 1 of the Company's Articles of Incorporation to change
the name of the Company from SI Handling Systems, Inc. to Paragon
Technologies, Inc. ("Paragon" or the "Company"). Paragon consists of two
separate brands: SI Systems (formerly referred to as "SI Easton") and
Ermanco Incorporated ("Ermanco"). This amendment became effective on April
5, 2000.
On March 9, 2000, the Company's common stock began trading on the American
Stock Exchange (AMEX) under the symbol "PTG." Prior to this date, the
Company's common stock was traded on The Nasdaq Stock Market under the
symbol "SIHS."
(2) SI/BAKER, INC.
--------------
Paragon Technologies, Inc., and McKesson Automated Prescription Systems,
Inc. ("McKesson APS"), formerly known as Automated Prescription
Systems, Inc., are co-venturers in a joint venture named SI/BAKER,
INC. ("SI/BAKER" or the "joint venture"). The SI/BAKER joint venture
draws upon the automated materials handling systems experience of
Paragon Technologies, Inc. and the automated pill counting and
dispensing products of McKesson APS to provide automated pharmacy
systems. Each member company contributed $100,000 in capital to fund
the joint venture.
The joint venture designs and installs computer controlled, fully
automated, integrated systems for managed care and central fill pharmacy
operations. The joint venture's systems are viewed as labor saving devices,
which address the issues of improved productivity and cost reduction.
Systems can be expanded as customers' operations grow and they may be
integrated with a wide variety of components to meet specific customer
needs.
Schedule A contains the SI/BAKER, INC. financial statements. The
information contained in the SI/BAKER, INC. financial statements is
unaudited. In the opinion of management, the interim financial statements
furnished reflect all adjustments and accruals that are necessary to a fair
statement of results for the interim periods presented.
- 8 -
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2001 and March 31, 2000
(3) Ermanco Incorporated
--------------------
On September 30, 1999, the Company completed the acquisition of all of the
outstanding common stock of Ermanco, which now operates as a wholly-owned
subsidiary of the Company. Ermanco, headquartered in Spring Lake, Michigan,
designs and installs complete conveying systems for a variety of
manufacturing and warehousing applications. Under the terms of the Stock
Purchase Agreement, the Company acquired all of the outstanding common
stock of Ermanco for a purchase price of $22,801,000 consisting of
$15,301,000 in cash, of which $1,551,000 was held in escrow ($801,000 was
released in January 2000, and the remaining balance of $750,000 was
released in March 2001), $3,000,000 in promissory notes payable to fourteen
stockholders of Ermanco, and 481,284 shares of the Company's common stock
with a value of $4,500,000 based on the average closing price of $9.35 of
the Company's common stock for the five trading days immediately preceding
the date of the Stock Purchase Agreement, August 6, 1999. The Company
financed $14,000,000 of the acquisition through term debt. The acquisition
required a net cash outlay of $2,264,000.
The acquisition was accounted for as a purchase in accordance with APB No.
16 and, accordingly, the acquired assets and assumed liabilities have been
recorded at their estimated fair value at the date of acquisition. The
amount of excess of cost over fair value of net assets acquired associated
with the acquisition was $18,710,000 and is being amortized over a period
of 40 years.
(4) 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's Easton, Pennsylvania operations (hereafter referred to as "SI
Systems") is a systems integrator supplying automated materials handling
systems to manufacturing, order selection, and distribution operations. The
systems are designed, sold, manufactured, installed, and serviced by its
own staff or by others for SI Systems, at its direction, generally as
labor-saving devices to improve productivity and reduce costs. SI Systems'
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' integrated materials handling solutions involve both
standard and specially designed components and include integration of
non-proprietary automated handling technologies so as to provide solutions
for its customers' unique materials handling needs. SI Systems' staff
develops and designs computer control programs required for the efficient
operation of the systems.
SI Systems derives a majority of its sales from customers located in North
America, including the U.S. government. SI Systems' business is dependent
upon a limited number of large contracts with certain customers. This
dependence can cause unexpected fluctuations in sales volume. Along with
sales recognized on the percentage of completion accounting method, the
monthly rate of new orders can also vary substantially, causing
fluctuations in the current backlog of orders and future revenue
recognition. Various external factors affect the customers' decision-making
process on expanding or upgrading their current production or distribution
sites. The customers' timing and placement of new orders is often affected
by factors, such as the current economy, current interest rates, and future
expectations.
- 9 -
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2001 and March 31, 2000
Ermanco is a manufacturer of light to medium duty unit handling conveyor
products, serving the materials handling industry through local independent
distributors in North America. Ermanco also provides complete conveyor
systems for a variety of applications, including distribution, and
manufacture of computers and electronic products, utilizing primarily its
own manufactured conveyor products, engineering services by its own staff
or subcontracted, and subcontracted installation services. The systems
product line of Ermanco accounts for approximately 55% of Ermanco's total
revenues, and the balance is from resale distribution.
SI Systems' products are sold on a fixed price basis. Generally, contract
terms provide for progress payments and a portion of the purchase price is
withheld by the buyer until the system has been accepted. Ermanco's
products and services are also sold on a fixed price basis. Many of
Ermanco's sales are to distributors who have non-exclusive agreements with
the Company. Generally, contract terms are net 30 days for product sales,
with progressive payments for system-type projects.
Prior to the acquisition, the Company operated in one major market segment. With
the addition of the Ermanco operations, the Company now operates in two major
market segments, and products are sold worldwide as follows:
For the Three Months Ended Automated Materials Conveyor
March 31, 2001 (In Thousands): Handling Systems Systems Total
---------------------------------------------- ------------------- ---------- ----------
Sales $ 6,224 7,706 13,930
Earnings before interest expense, interest
income, equity in income of joint
ventures, and income taxes 333 93 426
Total assets 13,906 29,903 43,809
Capital expenditures 49 93 142
Depreciation and amortization expense 103 194 297
For the Three Months Ended Automated Materials Conveyor
March 31, 2000 (In Thousands): Handling Systems Systems Total
---------------------------------------------- ------------------- ---------- ----------
Sales $ 7,740 10,604 18,344
Earnings before interest expense, interest
income, equity in income of joint
ventures, and income taxes 301 1,324 1,625
Total assets 13,354 30,261 43,615
Capital expenditures 25 90 115
Depreciation and amortization expense 101 182 283
Geographic segment information was as follows (in thousands):
For the Three Months Ended Europe and
March 31, 2001 (In Thousands): Domestic Asia Canada Total
--------------------------------------- ---------- ---------- ---------- ----------
Sales $ 12,042 1,590 298 13,930
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income taxes 426 - - 426
Total assets 43,809 - - 43,809
Capital expenditures 142 - - 142
Depreciation and amortization expense 297 - - 297
Intersegment sales for the three months ended March 31, 2001 totaled $0.
- 10 -
Item 1. Financial Statements (Continued)
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Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2001 and March 31, 2000
Geographic segment information was as follows (in thousands):
For the Three Months Ended Europe and
March 31, 2000 (In Thousands): Domestic Asia Canada Total
--------------------------------------- ---------- ---------- ---------- ----------
Sales $ 16,828 1,243 273 18,344
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income taxes 1,625 - - 1,625
Total assets 43,615 - - 43,615
Capital expenditures 115 - - 115
Depreciation and amortization expense 283 - - 283
Intersegment sales for the three months ended March 31, 2000 totaled $3,000.
(5) New Accounting Pronouncements
-----------------------------
Effective January 1, 2001, the Company adopted Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (FAS 133). This standard requires that all
derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging
relationships. The net cumulative effect of adopting FAS 133 as of January
1, 2001 was approximately a $96,000 loss to accumulated other comprehensive
loss.
The Company is exposed to market risk from changes in interest rates, and
uses an interest rate swap to hedge this risk. The seven-year interest rate
swap has a notional amount of $7,000,000 and is classified as a cash flow
hedge of forecasted variable rate interest payments on a portion of the
Company's term loan. Gains and losses on the interest rate swap are
deferred in other comprehensive income. The fair value of the interest rate
swap at March 31, 2001 was a liability of approximately $278,000.
The Company uses derivative financial instruments as risk management tools
and not for speculative purposes.
(6) Other Comprehensive Loss
------------------------
The separate components of other comprehensive loss are as follows (in
thousands):
Gross Tax Effect Net
----- ---------- ---
Cumulative impact of
adoption of FAS 133 $ 165 69 96
Other comprehensive loss 113 46 67
--- --- ---
Accumulated other comprehensive
loss at March 31, 2001 $ 278 115 163
=== --- ===
- 11 -
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Liquidity and Capital Resources
-------------------------------
The Company's cash and cash equivalents decreased to $7,515,000 at March
31, 2001 from $7,925,000 at December 31, 2000. The decrease resulted from the
repayment of long-term debt of $514,000 and purchases of capital equipment
totaling $142,000. Partially offsetting the decrease in cash and cash
equivalents from these uses was cash provided by operating activities totaling
$221,000 and proceeds of $25,000 from the sale of common stock in connection
with the Company's Incentive Stock Option and Equity Compensation Plans. Funds
used by operating activities during the three months ended March 31, 2000 were
$4,491,000.
On September 30, 1999, the Company completed the acquisition of all the
outstanding common stock of Ermanco Incorporated ("Ermanco"). Ermanco,
headquartered in Spring Lake, Michigan, designs and installs complete conveying
systems for a variety of manufacturing and warehousing applications.
In order to complete the Ermanco acquisition, the Company obtained
financing from its principal bank. The Company entered into a new three-year
line of credit facility which may not exceed the lesser of $6,000,000 or an
amount based on a borrowing base formula tied principally to accounts
receivable, inventory, fair market value of the Company's property and plant,
and liquidation value of equipment, plus an amount equal to $2,500,000. This
amount will be reduced by $625,000 every six months during the first two years
of the line of credit facility until such amount reaches zero, minus 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, 2001, the
Company did not have any borrowings under the line of credit facility.
The Company financed $14,000,000 of the acquisition through a seven-year
term loan from its bank. During the first two years of the term loan, the
Company will repay equal quarterly payments of $312,500 plus accrued interest.
After the second anniversary of the September 30, 1999 Closing Date, the Company
will make equal quarterly payments of $575,000, plus interest. The interest rate
on the term loan is variable at a rate equal to the three-month LIBOR Market
Index Rate, plus three percent (7.90%) as of March 31, 2001. The Company also
entered into an interest rate swap agreement for fifty percent of the term loan
to hedge the floating interest rate. The seven-year interest rate swap for
$7,000,000 is at a fixed rate of 9.38%. On July 27, 2000, the Company prepaid,
without penalty, $1,150,000 of the term loan with the variable interest rate.
The prepayment consisted of two quarterly payments of $575,000 pertaining to the
final year of the term loan.
To obtain the line of credit and term loan, the Company granted the bank a
security interest in all personal property, including, without limitation, all
accounts, deposits, documents, equipment, fixtures, general intangibles, goods,
instruments, inventory, letters of credit, money, securities, and a first
mortgage on all real estate. The line of credit facility and term loan contain
various restrictive covenants relating to additional indebtedness, asset
acquisitions or dispositions, investments, guarantees, payment of dividends, and
maintenance of certain financial ratios. The Company was in compliance with all
covenants as of March 31, 2001.
The Company also issued promissory notes to fourteen stockholders of
Ermanco in the aggregate principal amount of $3,000,000. The notes have a term
of seven years and bear interest at an annual rate of ten percent in years one
through three, twelve percent in years four and five, and fourteen percent in
years six and seven. The weighted average interest rate on the promissory notes
is 11.714% over the term of the notes. Interest shall be payable quarterly, in
cash or under certain conditions, in the Company's common stock upon approval of
the Company's Board of Directors. The promissory notes may be prepaid prior to
the end of the seven-year term provided that there is no debt outstanding under
its line of credit facility and term loan.
- 12 -
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Liquidity and Capital Resources (Continued)
-------------------------------
On March 4, 1996, SI/BAKER established a line of credit facility (the
"facility") with its principal bank (the "bank"). Under the terms of the
$3,000,000 facility, SI/BAKER's parent companies, Paragon Technologies, Inc. and
McKesson Automated Prescription 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, 2001, SI/BAKER did not have any borrowings under the facility,
and the facility expires effective August 31, 2001.
The Company anticipates that its financial resources, consisting of
borrowings under its credit facility, cash generated from operations, and term
debt will be adequate to satisfy its future cash requirements through the next
twelve months. Due to the unpredictability of future contract sales, the
dependence upon a limited number of large contracts with certain customers,
sales volume, as well as cash liquidity, may experience fluctuations. For these
reasons, cash liquidity beyond a twelve-month period is difficult for the
Company to forecast with reasonable accuracy.
The Company plans to consider expansion opportunities as they arise,
although ongoing operating results of the Company, the restrictive covenants
associated with the financing obtained from the Company's principal bank, the
economics of the expansion, and the circumstances justifying the expansion will
be key factors in determining the amount of resources the Company will devote to
further expansion. The Company did not have any material capital commitments as
of March 31, 2001.
Results Of Operations
---------------------
Three Months Ended March 31, 2001 Versus Three Months Ended March 31, 2000
--------------------------------------------------------------------------
Net sales of $13,930,000 for the three months ended March 31, 2001
decreased 24.1% compared to net sales of $18,344,000 for the three months ended
March 31, 2000, primarily due to both a smaller backlog of orders at December
31, 2000 versus a larger backlog of orders at December 31, 1999 and the recent
economic slowdown. The net sales decrease of $4,414,000 was comprised of a
decrease in Ermanco's sales of approximately $2,898,000 and a decrease in SI
Systems' sales of approximately $1,516,000 for the three months ended March 31,
2001 when compared to the three months ended March 31, 2000. Ermanco's decline
in sales was primarily due to the prior year comparable period containing a
greater amount of sales related to a manufacturer of computer equipment in
connection with projects that were completed in fiscal 2000. SI Systems
experienced a decline in sales across several of its product lines, with the
majority of the decrease in the Order Picking, Fulfillment, and Replenishment
product line. Partially offsetting the decrease in SI Systems' sales across a
majority of its product lines, was an increase in SI Systems Lo-Tow(R) sales of
approximately $487,000. SI Systems' business is dependent upon a limited number
of large contracts with certain customers. This dependence can cause unexpected
fluctuations in sales volume. Along with sales recognized on the percentage of
completion accounting method, the monthly rate of new orders can also vary
substantially, causing fluctuations in the current backlog of orders and future
revenue recognition. Various external factors affect the customers'
decision-making process on expanding or upgrading their current production or
distribution sites. The customers' timing and placement of new orders is often
affected by factors, such as the current economy, current interest rates, and
future expectations.
- 13 -
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
---------------------
Three Months Ended March 31, 2001 Versus Three Months Ended March 31, 2000
--------------------------------------------------------------------------
(Continued)
Gross profit, as a percentage of sales, was 25.8% for the three months
ended March 31, 2001 compared to 24.2% for the three months ended March 31,
2000. The increase in the gross profit percentage for the three months ended
March 31, 2001 was attributable to favorable performance on several contracts,
principally SI Systems' higher margin proprietary products, initiated in the
prior fiscal year that were completed during the three months ended March 31,
2001, along with the reversal of approximately $240,000 in previously
established contract accruals due to changes in cost estimates. Gross profit on
sales for the three months ended March 31, 2000 was unfavorably impacted by the
recognition of approximately $1,125,000 in sales at no gross profit margin on
three major contracts.
Selling, general and administrative expenses of $2,941,000 were higher by
$551,000 for the three months ended March 31, 2001 than in the three months
ended March 31, 2000. The increase of $551,000 was comprised of approximately
$185,000 in costs associated with the Company's enhanced sales and marketing
efforts, and approximately $175,000 of expenses associated with employee
terminations due to sluggishness associated with the recent economic slowdown.
Also contributing to the increase in selling, general and administrative
expenses during the three months ended March 31, 2001 was the result of the
prior year comparable period containing a reduction in selling, general and
administrative expenses of approximately $66,000 due to the reversal of
previously recognized expenses associated with phantom stock units related to
the Company's Directors' Deferred Compensation Plan.
Product development costs of $199,000 were higher by $150,000 for the three
months ended March 31, 2001 than in the three months ended March 31, 2000.
Development programs in the three months ended March 31, 2001 included
enhancements to the Company's Order Picking, Fulfillment, and Replenishment
product line and also development efforts related to two new products, NBS
30(TM) and NBS 90(TM), narrow belt sorters, that were introduced in the
materials handling marketplace during the first quarter of 2001. Development
programs in the three months ended March 31, 2000 included enhancements to the
Company's horizontal transportation and Order Picking, Fulfillment, and
Replenishment product lines.
Employee severance and termination benefits of $337,000 for the three
months ended March 31, 2000 was associated with a restructuring initiative,
whereby the Company separated approximately sixteen employees. There were no
restructuring charges for the three months ended March 31, 2001.
Interest expense of $364,000 was lower by $57,000 for the three months
ended March 31, 2001 than in the three months ended March 31, 2000. The decrease
in interest expense was primarily attributable to the reduced level of term debt
due to principal prepayments.
Interest income of $114,000 for the three months ended March 31, 2001
increased by $53,000, when compared to the three months ended March 31, 2000.
The increase in interest income was primarily attributable to higher level of
funds available for short-term investments during the three months ended March
31, 2001.
The Company incurred income tax expense of $78,000 during the three months
ended March 31, 2001, compared to income tax expense of $517,000 in the
comparable prior year period. Income tax expense was generally recorded at
statutory federal and state tax rates expected to apply for each fiscal year.
The total backlog of orders at March 31, 2001 was approximately
$17,850,000. During the three months ending March 31, 2001, the Company received
orders totaling approximately $8,867,000.
- 14 -
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 and uncertainties
associated with the Ermanco acquisition, including the failure to realize
anticipated benefits of such acquisition, the failure to integrate Ermanco
successfully with the Company, and any unforeseen complications related to the
Ermanco acquisition; (3) 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; (4) 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; (5) 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 uses a
variable rate line of credit facility to provide working capital for operations.
On September 30, 1999, the Company entered into an interest rate swap agreement
for 50% of its new term loan from its principal bank to effectively convert half
of the term loan from a variable rate note to a fixed rate note. A standard
interest rate swap agreement involves the payment of a fixed rate times a
notional amount by one party in exchange for a floating rate times the same
notional amount from another party. The counterpart to the swap agreement is the
Company's principal bank.
The Company does not believe that its exposures to interest rate risk or
foreign currency exchange risk, risks from commodity prices, equity prices and
other market changes that affect market risk sensitive instruments, including
the interest rate swap agreement, are material to its results of operations.
- 15 -
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits-- None.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 2001.
- 16 -
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, 2001
------------------
- 17 -
Schedule A
----------
SI/BAKER, INC.
Financial Statements
March 31, 2001
- 18 -
SI/BAKER, INC.
Balance Sheets (Unaudited)
March 31, 2001 and December 31, 2000
(In Thousands, Except Share Data)
March 31, December 31,
2001 2000
------------ ------------
Assets
------
Current assets:
Cash and cash equivalents, principally
time deposits $ 4,081 4,681
Receivables:
Trade 2,487 1,001
Other receivables 53 65
----- -----
Total receivables 2,540 1,066
----- -----
Costs and estimated earnings
in excess of billings 1,937 1,873
Deferred income tax benefits 409 409
Prepaid expenses and other current
assets 283 36
----- -----
Total current assets 9,250 8,065
----- -----
Machinery and equipment, at cost 233 222
Less: accumulated depreciation 155 147
----- -----
Net machinery and equipment 78 75
----- -----
Equipment leased to customer - 487
Less: accumulated depreciation - 487
----- -----
Net equipment leased to customer - -
----- -----
Deferred income tax benefits 8 8
----- -----
Total assets $ 9,336 8,148
===== =====
- 19 -
SI/BAKER, INC.
Balance Sheets (Unaudited)
March 31, 2001 and December 31, 2000
(In Thousands, Except Share Data)
March 31, December 31,
2001 2000
------------ ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable:
Trade $ 1,056 663
Affiliated companies 14 56
----- -----
Total accounts payable 1,070 719
----- -----
Customers' deposits and billings in
excess of costs and estimated
earnings 2,541 1,459
Accrued salaries, wages, and
commissions 107 358
Income taxes payable - 127
Accrued royalties payable 747 766
Accrued product warranties 1,119 1,055
Accrued other liabilities 51 88
----- -----
Total current liabilities 5,635 4,572
----- -----
Stockholders' equity:
Common stock, $1 par value; authorized
1,000 shares; issued 200 shares - -
Additional paid-in capital 200 200
Retained earnings 3,501 3,376
----- -----
Total stockholders' equity 3,701 3,576
----- -----
Total liabilities and
stockholders' equity $ 9,336 8,148
===== =====
- 20 -
SI/BAKER, INC.
Statements of Operations (Unaudited)
Three Months Ended March 31, 2001 and March 31, 2000
(In Thousands)
Three Months Ended
----------------------------
March 31, March 31,
2001 2000
------------ ------------
Net sales $ 2,931 3,433
Cost of sales 2,425 2,875
----- -----
Gross profit on sales 506 558
----- -----
Selling, general and
administrative expenses 263 269
Product development costs 20 16
Royalty expense to parent companies 117 137
Interest income (66) (43)
Other income, net (36) (45)
----- -----
298 334
----- -----
Earnings before income taxes 208 224
Income tax expense 83 91
----- -----
Net earnings 125 133
===== =====
- 21 -
SI/BAKER, INC.
Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2001 and March 31, 2000
(In Thousands)
Three Months Ended
----------------------------
March 31, March 31,
2001 2000
------------ ------------
Cash flows from operating activities:
Net earnings $ 125 133
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation of machinery and
equipment and leased equipment 8 25
Changes in operating assets and
liabilities: (1,474) (78)
Receivables
Costs and estimated earnings
in excess of billings (64) 1,267)
Prepaid expenses and other
current assets (247) (75)
Accounts payable 351 8
Customers' deposits and
billings in excess of costs
and estimated earnings 1,082 871
Accrued salaries, wages, and
commissions (251) (9)
Income taxes payable (127) (103)
Accrued royalties payable (19) 114
Accrued product warranties 64 116
Accrued other liabilities (37) 3
----- -----
Net cash used
by operating activities (589) (262)
----- -----
Cash flows from investing activities:
Additions to machinery and equipment (11) (7)
----- -----
Net cash used by investing activities (11) (7)
----- -----
Decrease in cash and
cash equivalents (600) (269)
Cash and cash equivalents,
beginning of period 4,681 2,895
----- -----
Cash and cash equivalents,
end of period 4,081 2,626
===== =====
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes 361 254
===== =====
Interest - -
===== =====
- 22 -