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 June 30, 2001
Commission File No. 1-15729
PARAGON TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Pennsylvania 22-1643428
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Kuebler Road, Easton, PA 18040
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 610-252-3205
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 August 8, 2001: 4,211,709.
---------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
(UNAUDITED)
June 30, December 31,
2001 2000
------------ ------------
Assets
------
Current assets:
Cash and cash equivalents, principally
time deposits $ 4,203 7,925
Receivables:
Trade (net of allowance for doubtful
accounts of $84 as of June 30, 2001
and $54 as of December 31, 2000) 7,739 7,040
Notes and other receivables 1,163 301
------ ------
Total receivables 8,902 7,341
------ ------
Costs and estimated earnings in excess
of billings 1,544 1,665
------ ------
Inventories:
Raw materials 1,820 2,198
Work-in-process 648 340
Finished goods 301 508
------ ------
Total inventories 2,769 3,046
------ ------
Deferred income tax benefits 2,326 2,326
Prepaid expenses and other current assets 451 547
------ ------
Total current assets 20,195 22,850
------ ------
Property, plant and equipment, at cost:
Land 27 27
Buildings and improvements 3,746 3,746
Machinery and equipment 6,534 6,341
------ ------
10,307 10,114
Less: accumulated depreciation (7,677) (7,334)
------ ------
Net property, plant and equipment 2,630 2,780
------ ------
Investments in joint ventures 2,225 2,000
Excess of cost over fair value of net assets
acquired, less amortization of $818 as of
June 30, 2001 and $585 as of
December 31, 2000 17,892 18,125
Other assets, at cost less accumulated
amortization of $74 as of June 30, 2001
and $210 as of December 31, 2000 141 162
------ ------
Total assets $ 43,083 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
June 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
(UNAUDITED)
June 30, December 31,
2001 2000
------------ ------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 2,042 1,521
Accounts payable 3,835 4,412
Customers' deposits and billings in excess
of costs and estimated earnings for
completed and uncompleted contracts 3,907 4,446
Accrued salaries, wages, and commissions 1,050 2,130
Income taxes payable -- 369
Accrued royalties payable 81 253
Accrued product warranties 813 857
Accrued pension and retirement
savings plan liabilities 1,180 688
Accrued restructuring expenses 976 --
Accrued other liabilities 715 517
------ ------
Total current liabilities 14,599 15,193
------ ------
Long-term liabilities:
Long-term debt, excluding current installments:
Term loan 8,050 9,775
Subordinated notes payable 3,000 3,000
Other 254 5
------ ------
Total long-term debt 11,304 12,780
Deferred income taxes payable 730 823
Deferred compensation 157 141
------ ------
Total long-term liabilities 12,191 13,744
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and outstanding
4,211,709 shares as of June 30, 2001
and 4,194,869 shares as of
December 31, 2000 4,212 4,195
Additional paid-in capital 7,006 6,882
Retained earnings 5,221 5,903
Accumulated other comprehensive loss (146) --
------ ------
Total stockholders' equity 16,293 16,980
------ ------
Total liabilities and stockholders' equity $ 43,083 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 Six Months Ended June 30, 2001 and June 30, 2000
(In Thousands, Except Share And Per Share Data)
Three Months Ended Six Months Ended
----------------------------- --------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 12,221 16,689 26,151 35,033
Cost of sales 9,158 12,173 19,495 26,085
--------- --------- --------- ---------
Gross profit on sales 3,063 4,516 6,656 8,948
--------- --------- --------- ---------
Selling, general and
administrative
expenses 2,745 2,868 5,686 5,258
Product development
costs 117 60 316 109
Amortization of goodwill 117 117 234 233
Restructuring expenses 1,538 - 1,538 337
Interest expense 327 416 691 837
Interest income (66) (75) (180) (136)
Equity in income of
joint ventures (196) (48) (225) (72)
Other income, net (113) (123) (202) (208)
--------- --------- --------- ---------
4,469 3,215 7,858 6,358
--------- --------- --------- ---------
Earnings (loss) before
income taxes (1,406) 1,301 (1,202) 2,590
Income tax expense
(benefit) (598) 516 (520) 1,033
--------- --------- --------- ---------
Net earnings (loss) $ (808) 785 (682) 1,557
========= ========= ========= =========
Basic earnings (loss)
per share $ (.19) .19 (.16) .37
========= ========= ========= =========
Diluted earnings (loss)
per share $ (.19) .19 (.16) .36
========= ========= ========= =========
Weighted average
shares outstanding 4,211,522 4,184,878 4,204,385 4,184,878
Dilutive effect of
stock options 14,328 819 32,750 1,430
Dilutive effect of
phantom stock units 19,728 12,544 18,928 15,874
--------- --------- --------- ---------
Weighted average
shares outstanding
assuming dilution 4,245,578 4,198,241 4,256,063 4,202,182
========= ========= ========= =========
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 Six Months Ended June 30, 2001 and June 30, 2000
(In Thousands)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net earnings (loss) $ (808) 785 (682) 1,557
Other comprehensive income
(loss), net of tax:
Cash flow hedge:
Cumulative effect of
adoption of FAS 133 - - (96) -
Change in fair value
during the period 17 - (50) -
----- ----- ----- -----
Total other comprehensive
income (loss) 17 - (146) -
----- ----- ----- -----
Comprehensive income
(loss) $ (791) 785 (828) 1,557
===== ===== ===== =====
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 Six Months Ended June 30, 2001 and June 30, 2000
(In Thousands, Except Share Data)
Six Months Ended
----------------------------
June 30, June 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ (682) 1,557
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by
operating activities:
Depreciation of plant and equipment 343 301
Amortization of intangibles 254 266
Gain on disposition of equipment - (2)
Equity in income of joint ventures (225) (72)
Issuance of 12,390 common shares
as payment of employee's bonus 111 -
Change in operating assets and liabilities:
Receivables (1,561) (1,645)
Costs and estimated earnings in
excess of billings 121 1,071
Inventories 277 721
Prepaid expenses and other current
assets 96 364
Other noncurrent assets - 1
Accounts payable (577) (394)
Customers' deposits and billings in
excess of costs and estimated
earnings for completed and
uncompleted contracts (539) (256)
Accrued salaries, wages, and
commissions (1,080) 196
Income taxes payable (369) 554
Accrued royalties payable (172) (125)
Accrued pension and retirement
savings plan liabilities 492 62
Accrued product warranties (44) (1)
Accrued restructuring expenses 976 -
Accrued other liabilities 198 (563)
Deferred income taxes payable 10 -
Deferred compensation 16 (114)
------ ------
Net cash provided (used) by
operating activities (2,355) 1,921
------ ------
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 (193) (218)
------ ------
Net cash used by investing activities (193) (447)
------ ------
See accompanying notes to consolidated financial statements.
6
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Six Months Ended June 30, 2001 and June 30, 2000
(In Thousands, Except Share Data)
Six Months Ended
----------------------------
June 30, June 30,
2001 2000
------------ ------------
Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan 30 -
Repayment of long-term debt (1,204) (947)
------ ------
Net cash used by financing activities (1,174) (947)
------ ------
Increase (decrease) in cash and
cash equivalents (3,722) 527
Cash and cash equivalents,
beginning of period 7,925 6,242
------ ------
Cash and cash equivalents,
end of period $ 4,203 6,769
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 643 1,095
====== ======
Income taxes $ 464 307
====== ======
See accompanying notes to consolidated financial statements.
7
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Six Months Ended June 30, 2001 and June 30, 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 Automation Inc. ("McKesson
Automation"), formerly known as McKesson 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 Automation to provide automated pharmacy systems. Each
member company contributed $100,000 in capital to fund the joint venture.
The joint venture designs and installs computer controlled, fully
automated, integrated systems for managed care and central fill pharmacy
operations. The joint venture's systems are viewed as labor saving devices,
which address the issues of improved productivity and cost reduction.
Systems can be expanded as customers' operations grow and they may be
integrated with a wide variety of components to meet specific customer
needs.
Schedule A contains the SI/BAKER, INC. financial statements. The
information contained in the SI/BAKER, INC. financial statements is
unaudited. In the opinion of management, the interim financial statements
furnished reflect all adjustments and accruals that are necessary to a fair
statement of results for the interim periods presented.
8
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Six Months Ended June 30, 2001 and June 30, 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, $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) Restructuring
-------------
On June 25, 2001, the Company announced a restructuring to its business
operations aimed at maximizing revenues, increasing operational
efficiencies, and minimizing costs. The Company's marketing and sales
operation will be consolidated to go to market as one Company with a
multiple brand, multiple channel strategy. In conjunction with the
restructuring plan, the Company reduced the number of office associates by
fourteen and will discontinue production operations at its Easton,
Pennsylvania facility. All production employees working in the Easton,
Pennsylvania manufacturing plant will be laid off. Layoffs are expected to
begin on August 31, 2001, and will be completed on or before November 30,
2001. The Company currently employs approximately 20 production employees,
with an additional 27 individuals on an extended layoff.
In the second quarter of 2001, the Company recorded a charge of $1,538,000
for restructuring costs. The restructuring charge included costs of
$678,000 for severance and other personnel costs, $562,000 for pension
expense associated with the curtailment of the Company's defined benefit
plan for the Easton, Pennsylvania production employees, and $298,000 for
plant closure, and legal and professional service fees expected to be
incurred relating to the restructuring. The restructuring charges were
determined based on formal plans approved by the Company's management and
the Board of Directors using the information available at the time.
Management of the Company believes this provision will be adequate to cover
any future costs incurred relating to the restructuring.
As of June 30, 2001, $1,538,000 remained in the restructuring accrual.
Through the second quarter of 2001, there have been no payments made
against the restructuring accrual.
9
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Six Months Ended June 30, 2001 and June 30, 2000
The major components of the restructuring charge and remaining accruals is
as follows:
Balance at
Provision Amounts Applied June 30, 2001
----------------- ----------------- -----------------
Severances $ 678,000 - 678,000
Pension curtailment 562,000 - 562,000
Other 298,000 - 298,000
--------- ---- ---------
$ 1,538,000 - 1,538,000
========= ==== =========
(5) Major Segments of Business
--------------------------
Operating segments are defined as components of an enterprise in which
separate financial information is available and evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. On June 25, 2001, the Company announced a
restructuring to its business operations aimed at maximizing revenues,
increasing operational efficiencies, and minimizing costs. The Company's
marketing and sales operation will be consolidated to go to market as one
Company with a multiple brand, multiple channel strategy.
The Company's Easton, Pennsylvania operations (hereafter referred to as "SI
Systems") is a systems integrator supplying SI Systems' branded automated
materials handling systems to manufacturing, order selection, and
distribution operations. The systems are designed, sold, manufactured,
installed, and serviced by its own staff or by others for SI Systems, at
its direction, generally as labor-saving devices to improve productivity
and reduce costs. SI Systems' branded products are utilized to automate the
movement or selection of products and are often integrated with other
automated equipment, such as conveyors and robots. SI Systems' branded
integrated materials handling solutions involve both standard and specially
designed components and include integration of non-proprietary automated
handling technologies so as to provide solutions for its customers' unique
materials handling needs. SI Systems' staff develops and designs computer
control programs required for the efficient operation of the systems. SI
Systems' branded products are sold to customers located in North America,
including the U.S. government.
The Company's Spring Lake, Michigan operations (hereafter referred to as
"Ermanco") is a manufacturer of light to medium duty unit handling conveyor
products, serving the materials handling industry through local independent
distributors in North America. Ermanco also provides complete conveyor
systems for a variety of applications, including distribution, and
manufacture of computers and electronic products, utilizing primarily its
own manufactured conveyor products, engineering services by its own staff
or subcontracted, and subcontracted installation services. The systems
product line of the Ermanco brand accounts for approximately 55% of
Ermanco's total revenues, and the balance is from resale to distributors
who have non-exclusive agreements with the Company.
The Company's products are sold on a fixed price basis. Generally, contract
terms provide for progress payments, and a portion of the purchase price is
withheld by the buyer until the system has been accepted. Generally,
contract terms are net 30 days for product and parts sales, with
progressive payments for system-type projects.
10
Item 1. Financial Statements (Continued)
------- -------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Six Months Ended June 30, 2001 and June 30, 2000
The Company's business is dependent upon a limited number of large
contracts with certain customers. This dependence can cause unexpected
fluctuations in sales volume. Along with sales recognized on the percentage
of completion accounting method, the monthly rate of new orders can also
vary substantially, causing fluctuations in the current backlog of orders
and future revenue recognition. Various external factors affect the
customers' decision-making process on expanding or upgrading their current
production or distribution sites. The customers' timing and placement of
new orders is often affected by factors, such as the current economy,
current interest rates, and future expectations.
The Company identifies operating segments based on management
responsibility and types of products offered for sale as follows:
For the Six Months Ended Automated Materials Conveyor
June 30, 2001 (In Thousands): Handling Systems Systems Total
--------------------------------------- ------------------- -------- --------
Sales $ 10,795 15,356 26,151
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income taxes
(before restructuring expenses) 183 440 623
Restructuring expenses 1,538 - 1,538
Total assets 12,366 30,717 43,083
Capital expenditures 64 129 193
Depreciation and amortization
expense 207 390 597
For the Six Months Ended Automated Materials Conveyor
June 30, 2000 (In Thousands): Handling Systems Systems Total
--------------------------------------- ------------------- -------- --------
Sales $ 15,221 19,812 35,033
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income taxes
(before restructuring expenses) 1,380 2,176 3,556
Restructuring expenses 337 - 337
Total assets 15,843 29,301 45,144
Capital expenditures 77 141 218
Depreciation and amortization
expense 202 365 567
Geographic segment information was as follows (in thousands):
For the Six Months Ended Europe and
June 30, 2001 (In Thousands): Domestic Asia Canada Total
--------------------------------------- ---------- ---------- ---------- ----------
Sales $ 23,839 2,042 270 26,151
Earnings before interest
expense, interest income,
equity in income of joint
ventures, and income taxes
(before restructuring expenses) 623 - - 623
Restructuring expenses 1,538 - - 1,538
Total assets 43,083 - - 43,083
Capital expenditures 193 - - 193
Depreciation and amortization
expense 597 - - 597
11
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Six Months Ended June 30, 2001 and June 30, 2000
Intersegment sales for the six months ended June 30, 2001 totaled $0.
Geographic segment information was as follows (in thousands):
For the Six Months Ended Europe and
June 30, 2000 (In Thousands): Domestic Asia Canada Total
--------------------------------------- ---------- ---------- ---------- ----------
Sales $ 32,587 1,951 495 35,033
Earnings before interest
expense, interest income,
equity in income of joint
ventures, and income taxes
(before restructuring expenses) 3,556 - - 3,556
Restructuring expenses 337 - - 337
Total assets 45,144 - - 45,144
Capital expenditures 218 - - 218
Depreciation and amortization expense 567 - - 567
Intersegment sales for the six months ended June 30, 2000 totaled $88,000.
(6) New Accounting Pronouncements
-----------------------------
Effective January 1, 2001, the Company adopted Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (FAS 133). This standard requires that all
derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging
relationships. The net cumulative effect of adopting FAS 133 as of January
1, 2001 was approximately a $96,000 loss to accumulated other comprehensive
loss.
The Company is exposed to market risk from changes in interest rates, and
uses an interest rate swap to hedge this risk. The seven-year interest rate
swap has a notional amount of $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 June 30, 2001 was a liability of approximately $249,000.
The Company uses derivative financial instruments as risk management tools
and not for speculative purposes.
In July 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets." This statement replaces the
requirement to amortize intangible assets with indefinite lives and
goodwill with a requirement for an impairment test. The statement requires
an evaluation of intangible assets and their useful lives and a
transitional impairment test for goodwill and certain intangible assets.
After transition, the impairment tests will be performed annually. The
statement will be adopted beginning 2002. Because of the effort needed to
comply with adopting Statement 142, it is not practicable to reasonably
estimate the impact of adopting this Statement on the Company's financial
statements at this time.
12
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Six Months Ended June 30, 2001 and June 30, 2000
(7) Other Comprehensive Loss
The separate components of other comprehensive loss are as follows (in
thousands):
Gross Tax Effect Net
----- ---------- ---
Cumulative impact of
adoption of FAS 133 $ 165 69 96
Other comprehensive loss 84 34 50
--- --- ---
Accumulated other comprehensive
loss at June 30, 2001 $ 249 103 146
=== === ===
(8) Long-Term Debt
--------------
As of June 30, 2001, the Company was in violation of the covenants related
to its Funds Flow Coverage Ratio and its subordination agreement. Effective
June 30, 2001, the Company received a waiver of certain loan covenants and
is prohibited from making any cash payments of subordinated debt and
interest until the Company is in full compliance with all the financial
covenants as originally set forth in the Loan Agreement with the Company's
principal bank.
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 $4,203,000 at June 30,
2001 from $7,925,000 at December 31, 2000. The decrease resulted from cash used
by operating activities totaling $2,355,000, primarily related to payments
associated with the Company's calendar year 2000 profit-based incentive plans
and interest on acquisition financing, the repayment of long-term debt of
$1,204,000, and purchases of capital equipment totaling $193,000. Funds provided
by operating activities during the six months ended June 30, 2000 were
$1,921,000.
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 June 30, 2001, the
Company did not have any borrowings under the line of credit facility.
The Company financed $14,000,000 of the acquisition through a seven-year
term loan from its bank. During the first two years of the term loan, the
Company 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 two and one-half percent (6.21%) as of June 30, 2001. The
Company also entered into an interest rate swap agreement for fifty percent of
the term loan to hedge the floating interest rate.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Liquidity and Capital Resources (Continued)
-------------------------------
The seven-year interest rate swap for $7,000,000 is at a fixed rate of 9.38%.
During the second quarter of fiscal 2001, the Company prepaid, without penalty,
$575,000 of the term loan with the variable interest rate. Also, on July 27,
2000, the Company prepaid, without penalty, $1,150,000 of the term loan with the
variable interest rate. Therefore, since the inception of the term loan, the
Company prepaid, without penalty, $1,725,000 of the term loan with the variable
interest rate.
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. As of June 30, 2001, the Company was in
violation of the covenants related to its Funds Flow Coverage Ratio and its
subordination agreement. The Company was in compliance with all other covenants
and obtained appropriate waivers from the lender related to the aforementioned
violated covenants as of June 30, 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. Effective July 1, 2001, the Company
is prohibited from making any cash payments of subordinated debt and interest
until the Company is in full compliance with all the financial covenants as
originally set forth in the Loan Agreement with the Company's principal bank.
The Company intends to satisfy its quarterly interest obligations with the
issuance of the Company's common stock.
On March 4, 1996, SI/BAKER established a line of credit facility (the
"facility") with its principal bank (the "bank"). Under the terms of the
$3,000,000 facility, SI/BAKER's parent companies, Paragon Technologies, Inc. and
McKesson Automation 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 June 30, 2001, SI/BAKER did not
have any borrowings under the facility, and the facility expires effective
August 31, 2002.
The Company anticipates that its financial resources, consisting of
borrowings under its credit facility and cash generated from operations, will be
adequate to satisfy its future cash requirements through the next twelve months.
Due to the unpredictability of future contract sales, the dependence upon a
limited number of large contracts with certain customers, sales volume, as well
as cash liquidity, may experience fluctuations. For these reasons, cash
liquidity beyond a twelve-month period is difficult for the Company to forecast
with reasonable accuracy.
The Company plans to consider expansion opportunities as they arise,
although ongoing operating results of the Company, the restrictive covenants
associated with the financing obtained from the Company's principal bank, the
economics of the expansion, and the circumstances justifying the expansion will
be key factors in determining the amount of resources the Company will devote to
further expansion. The Company did not have any material capital commitments as
of June 30, 2001.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
---------------------
(a) Six Months Ended June 30, 2001 Versus Six Months Ended June 30, 2000
--------------------------------------------------------------------
Net sales of $26,151,000 for the six months ended June 30, 2001 decreased
25.4% compared to net sales of $35,033,000 for the six months ended June 30,
2000, primarily due to the recent economic slowdown. The sales decrease for the
six months ended June 30, 2001 was experienced across both of the Company's
brands, SI Systems and Ermanco, when compared to the six months ended June 30,
2000. The prior year comparable period contained a greater amount of sales
related to a manufacturer of computer equipment and the federal government. The
Company's business is dependent upon a limited number of large contracts with
certain customers. This dependence can cause unexpected fluctuations in sales
volume. Along with sales recognized on the percentage of completion accounting
method, the monthly rate of new orders can also vary substantially, causing
fluctuations in the current backlog of orders and future revenue recognition.
Various external factors affect the customers' decision-making process on
expanding or upgrading their current production or distribution sites. The
customers' timing and placement of new orders is often affected by factors, such
as the current economy, current interest rates, and future expectations.
Gross profit, as a percentage of sales, was 25.5% for the six months ended
June 30, 2001 compared to 25.5% for the six months ended June 30, 2000. Gross
profit on sales for the six months ended June 30, 2001 was impacted by the
reversal of approximately $480,000 in previously established contract accruals
due to changes in cost estimates. Gross profit on sales for the six months ended
June 30, 2000 was impacted, primarily during the second quarter of fiscal 2000,
by the favorable performance on several contracts, principally for the Company's
higher margin proprietary product lines, initiated in the prior fiscal year that
were completed or nearing completion during the six months ended June 30, 2000.
Offsetting the impact of the favorable performances on several contracts was the
recognition of additional losses, primarily during the second quarter of fiscal
2000, on a major contract where significant cost overruns, resulting in losses,
were experienced during the ten months ended December 31, 1999.
Selling, general and administrative expenses of $5,686,000 were higher by
$428,000 for the six months ended June 30, 2001 than in the six months ended
June 30, 2000. The increase is primarily attributable to approximately $330,000
of charges during the second quarter of 2001 related to a strategic transaction
that was not completed, and approximately $175,000 of expenses during the first
quarter of 2001 associated with the reduction of associates due to the recent
economic slowdown.
Product development costs of $316,000 were higher by $207,000 for the six
months ended June 30, 2001 than in the six months ended June 30, 2000.
Development programs in the six months ended June 30, 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 2001. Development progress in the six months ended June 30, 2000 included
enhancements to the Company's conveyor technology, and horizontal transportation
and Order Picking, Fulfillment, and Replenishment product lines.
During the second quarter ended June 30, 2001, the Company announced a
restructuring to its business operations and recorded a charge of $1,538,000 for
restructuring costs. In conjunction with the restructuring plan, the Company
reduced the number of office associates by fourteen and will discontinue
production operations at its Easton, Pennsylvania facility. All production
employees working in the Easton, Pennsylvania manufacturing plant will be laid
off. Layoffs are expected to begin on August 31, 2001, and will be completed on
or before November 30, 2001. The Company currently employs approximately twenty
production employees with an additional twenty-seven individuals on an extended
layoff. The restructuring charges included costs of $678,000 for severance and
other personnel costs, $562,000 for pension expense
15
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
---------------------
(a) Six Months Ended June 30, 2001 Versus Six Months Ended June 30, 2000
--------------------------------------------------------------------
(Continued)
associated with the curtailment of the Company's defined benefit plan for the
Company's Easton, Pennsylvania collective bargaining personnel, and $298,000 for
facility closure, and legal and professional service fees expected to be
incurred relating to the restructuring. The restructuring charges were
determined based on formal plans approved by the Company's management and the
Board of Directors using the information available at the time. Management of
the Company believes this provision will be adequate to cover any future costs
incurred relating to the restructuring.
Restructuring expenses of $337,000 for the six months ended June 30, 2000
was associated with a restructuring initiative, whereby the Company reduced the
number of associates by sixteen.
Interest expense of $691,000 was lower by $146,000 for the six months ended
June 30, 2001 than in the six months ended June 30, 2000. The decrease in
interest expense was primarily attributable to the reduced level of term debt
due to principal prepayments.
Interest income of $180,000 for the six months ended June 30, 2001
increased by $44,000, when compared to the six months ended June 30, 2000. The
increase in interest income was attributable to higher level of funds, primarily
during the first quarter of 2001, available for short-term investments during
the six months ended June 30, 2001.
Equity in income of joint ventures represents the Company's proportionate
share of its investments in the SI-Egemin and SI/BAKER joint ventures that are
being accounted for under the equity method. The net favorable variance of
$153,000 in the equity in income of joint ventures for the six months ended June
30, 2001 as compared to the six months ended June 30, 2000 was comprised of
increased earnings of approximately $99,000 attributable to the SI/BAKER joint
venture. In addition to the increased earnings of the SI/BAKER joint venture
were the decreased losses of approximately $54,000 attributable to the SI-Egemin
joint venture.
The favorable variance of $99,000 for the six months ended June 30, 2001 in
the equity in income of the SI/BAKER joint venture was attributable to favorable
performance on several contracts initiated in prior fiscal years that were
completed or nearing completion during the six months ended June 30, 2001 plus
(1) a reduction of $70,000 in revenue-based royalty costs due to the parent
companies, and (2) an increase of $35,000 in interest income. Partially
offsetting these favorable variances was an increase of $201,000 in product
development expenses.
The favorable variance of $54,000 for the six months ended June 30, 2001 in
the equity in income of the SI-Egemin joint venture was primarily attributable
to a reduction in operating expenses of the joint venture.
The Company recognized an income tax benefit of $520,000 during the six
months ended June 30, 2001, compared to the incurrence of income tax expense of
$1,033,000 in the comparable prior year period. The income tax benefit
recognized for the six months ended June 30, 2001 represented the carryback of
current fiscal year losses against prior year income. Income tax expense for the
six months ended June 30, 2000 was generally recorded at statutory federal and
state tax rates expected to apply for that fiscal year.
The total backlog at June 30, 2001 was approximately $19,904,000. During
the six months ending June 30, 2001, the Company received orders totaling
approximately $23,142,000.
With the exception of the following Statement of Operations captions,
changes in the second quarter of calendar year 2001 compared to the prior year
were consistent with those previously noted above for the six-month period.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations (Continued)
---------------------
(b) Three Months Ended June 30, 2001 Versus Three Months Ended June 30, 2000
------------------------------------------------------------------------
Gross profit as a percentage of sales was 25.1% for the three months ended
June 30, 2001 compared to 27.1% for the three months ended June 30, 2000. The
decrease in the gross profit percentage for the three months ended June 30, 2001
was primarily attributable to the underabsorption of fixed costs due to a
reduction in sales volume.
Selling, general and administrative expenses of $2,745,000 were lower by
$123,000 for the three months ended June 30, 2001 than in the three months ended
June 30, 2000. The decrease in selling, general and administrative expenses is
primarily attributable to decreases of approximately $200,000 of those expenses
based on revenue and profit performance, and approximately $240,000 of product
promotion and marketing expenses. Partially offsetting the decrease in selling,
general and administrative expenses was approximately $330,000 of charges during
the second quarter of 2001 related to a strategic transaction that was not
completed.
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.
17
PART II -- OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The Company's Annual Meeting of Shareholders was held on June 26, 2001 with
the following items being submitted to a vote of shareholders:
1. The election of eight directors to the Board of Directors.
2. The approval of the proposed amendment to the 1997 Equity Compensation
Plan to increase the number of shares of the Company's common stock
reserved for grants under the Plan by 300,000.
3. The recommendation that the Board of Directors take all necessary steps
to reincorporate the Company from Pennsylvania to Delaware.
Details of the proposals noted above were provided to shareholders in the
form of a Notice of Annual Meeting and Proxy Statement dated and mailed on May
29, 2001, with such solicitation being in accordance with Regulation 14 of the
Securities and Exchange Act of 1934.
There was no solicitation in opposition to the management's nominees listed
in the Proxy Statement, and all the management's nominees were elected.
Proposal Number 2 for the approval of the amendment to the 1997 Equity
Compensation Plan and Proposal Number 3 for the recommendation that the Board of
Directors take all necessary steps to reincorporate the Company from
Pennsylvania to Delaware were duly approved by the shareholders.
The voting results on the three matters noted above are set forth as
follows:
1. Election of Directors:
Name of Nominee Votes For Votes Withheld Non-Voting
--------------- --------- -------------- ----------
L. Jack Bradt 2,507,598 1,516,910 186,451
Elmer D. Gates 2,443,422 1,581,086 186,451
Michael J. Gausling 2,395,969 1,628,539 186,451
Gilman J. Hallenbeck 3,791,309 233,199 186,451
William R. Johnson 2,338,309 1,686,199 186,451
Leon C. Kirschner 3,644,234 380,274 186,451
Anthony W. Schweiger 3,791,309 233,199 186,451
Steven Shulman 3,766,309 258,199 186,451
2. Approval of the amendment to the 1997 Equity Compensation Plan:
Votes For Votes Against Abstentions Non-Voting
--------- ------------- ----------- ----------
1,765,943 1,702,015 134,560 608,441
3. Recommendation that the Board of Directors take all necessary steps to
reincorporate from Pennsylvania to Delaware:
Votes For Votes Against Abstentions Non-Voting
--------- ------------- ----------- ----------
3,302,614 287,120 12,784 608,441
Item 5. Other Information
------- -----------------
Effective June 25, 2001, Leon C. Kirschner became the Chief Operating
Officer of the Company.
Effective June 25, 2001, Gordon A. Hellberg became Vice President - Sales
of the Company.
Effective June 25, 2001, Lee F. Schomberg became Vice President - Marketing
of the Company.
On July 24, 2001, Michael J. Gausling resigned from the Board of Directors
of the Company due to a combination of business commitments and personal
considerations.
18
PART II-- OTHER INFORMATION (Continued)
---------------------------
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
June 30, 2001.
19
Paragon Technologies, Inc. and Subsidiary
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARAGON TECHNOLOGIES, INC.
/S/ William R. Johnson
------------------------------
William R. Johnson
President & CEO
/S/ Ronald J. Semanick
------------------------------
Ronald J. Semanick
Chief Financial Officer
Dated: August 13, 2001
---------------------
20
Schedule A
SI/BAKER, INC.
Financial Statements
June 30, 2001
21
SI/BAKER, INC.
Balance Sheets
June 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
(UNAUDITED)
June 30, December 31,
2001 2000
----------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents, principally
time deposits $ 3,538 4,681
Receivables:
Trade 2,399 1,001
Other receivables 44 65
------ -----
Total receivables 2,443 1,066
----- -----
Costs and estimated earnings
in excess of billings 318 1,873
Deferred income tax benefits 409 409
Prepaid expenses and other current
assets 50 36
----- -----
Total current assets 6,758 8,065
----- -----
Machinery and equipment, at cost 232 222
Less: accumulated depreciation 163 147
----- -----
Net machinery and equipment 69 75
----- -----
Equipment leased to customer - 487
Less: accumulated depreciation - 487
----- -----
Net equipment leased to customer - -
----- -----
Deferred income tax benefits 8 8
----- -----
Total assets $ 6,835 8,148
===== =====
22
SI/BAKER, INC.
Balance Sheets
June 30, 2001 and December 31, 2000
(In Thousands, Except Share Data)
(UNAUDITED)
June 30, December 31,
2001 2000
----------------- ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable:
Trade $ 287 663
Affiliated companies 20 56
----- -----
Total accounts payable 307 719
----- -----
Customers' deposits and billings in
excess of costs and estimated
earnings 746 1,459
Accrued salaries, wages, and
commissions 250 358
Income taxes payable 87 127
Accrued royalties payable 155 766
Accrued product warranties 1,140 1,055
Accrued other liabilities 26 88
----- -----
Total current liabilities 2,711 4,572
----- -----
Stockholders' equity:
Common stock, $1 par value; authorized
1,000 shares; issued 200 shares - -
Additional paid-in capital 200 200
Retained earnings 3,924 3,376
----- -----
Total stockholders' equity 4,124 3,576
----- -----
Total liabilities and
stockholders' equity $ 6,835 8,148
===== =====
23
SI/BAKER, INC.
Statements of Operations (Unaudited)
Six Months Ended June 30, 2001 and June 30, 2000
(In Thousands)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales $ 3,318 4,585 6,249 8,018
Cost of sales 2,014 3,793 4,439 6,668
----- ----- ----- -----
Gross profit on sales 1,304 792 1,810 1,350
----- ------ ----- -----
Selling, general and
administrative expenses 284 273 547 542
Product development
costs 256 59 276 75
Royalty expense to
parent companies 133 183 250 320
Interest income (40) (28) (106) (71)
Other income, net (34) (51) (70) (96)
----- ------ ----- -----
599 436 897 770
----- ------ ----- -----
Earnings before
income taxes 705 356 913 580
Income tax expense 282 139 365 230
----- ------ ----- -----
Net earnings $ 423 217 548 350
===== ====== ====== =====
24
SI/BAKER, INC.
Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2001 and June 30, 2000
(In Thousands)
Six Months Ended
---------------------------------------
June 30, June 30,
2001 2000
----------------- ------------------
Cash flows from operating activities:
Net earnings $ 548 350
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation of machinery and
equipment and leased equipment 16 35
Changes in operating assets and
liabilities:
Receivables (1,377) (1,691)
Costs and estimated earnings
in excess of billings 1,555 917
Prepaid expenses and other
current assets (14) (160)
Accounts payable (412) 494
Customers' deposits and
billings in excess of costs
and estimated earnings (713) 3
Accrued salaries, wages, and
commissions (108) (50)
Income taxes payable (40) (110)
Accrued royalties payable (611) 36
Accrued product warranties 85 118
Accrued other liabilities (62) 12
------ -----
Net cash used by operating activities (1,133) (46)
------ -----
Cash flows from investing activities:
Additions to machinery and equipment (10) (21)
------ -----
Net cash used by investing activities (10) (21)
------ -----
Increase (decrease) in cash and
cash equivalents (1,143) (67)
Cash and cash equivalents,
beginning of period 4,681 2,895
------ -----
Cash and cash equivalents,
end of period 3,538 2,828
===== =====
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes 412 375
===== =====
Interest - 7
===== =====
25