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, 2002
Commission File No. 1-15729
PARAGON TECHNOLOGIES, INC.
--------------------------------------------------------------------------------
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 22-1643428
--------------------------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Kuebler Road, Easton, PA 18040
--------------------------------------------------- ---------------------
(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 May 10, 2002: 4,226,635.
---------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
(In Thousands, Except Share Data)
(UNAUDITED)
March 31, December 31,
2002 2001
------------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents $ 6,021 6,114
Receivables:
Trade (net of allowance for doubtful
accounts of $83 as of March 31,
2002 and $54 as of December 31,
2001) 7,220 7,093
Notes and other receivables 709 630
------ ------
Total receivables 7,929 7,723
------ ------
Costs and estimated earnings in excess
of billings 1,337 244
Inventories:
Raw materials 1,429 1,731
Work-in-process 268 254
Finished goods 362 408
------ ------
Total inventories 2,059 2,393
------ ------
Deferred income tax benefits 2,077 2,077
Prepaid expenses and other current assets 369 649
------ ------
Total current assets 19,792 19,200
------ ------
Property, plant and equipment, at cost:
Land 27 27
Buildings and improvements 3,727 3,727
Machinery and equipment 4,154 5,059
------ ------
7,908 8,813
Less: accumulated depreciation (5,385) (6,112)
------ ------
Net property, plant and equipment 2,523 2,701
------ ------
Investments in joint ventures 1,673 1,667
Excess of cost over fair value of net assets
acquired, less amortization of $1,053 as of
March 31, 2002 and December 31, 2001 17,657 17,657
Other assets, at cost less accumulated
amortization of $104 as of March 31,
2002 and $94 as of December 31, 2001 108 118
------ ------
Total assets $ 41,753 41,343
====== ======
See accompanying notes to consolidated financial statements.
2
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
(In Thousands, Except Share Data)
(UNAUDITED)
March 31, December 31,
2002 2001
------------------- ------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 2,302 2,305
Accounts payable 3,495 3,319
Customers' deposits and billings in excess
of costs and estimated earnings for
completed and uncompleted contracts 3,947 3,345
Accrued salaries, wages, and commissions 586 676
Income taxes payable 52 46
Accrued royalties payable 95 92
Accrued product warranties 943 863
Accrued pension and retirement
savings plan liabilities 1,145 1,122
Accrued restructuring expenses 394 494
Accrued other liabilities 1,168 1,126
------ ------
Total current liabilities 14,127 13,388
------ ------
Long-term liabilities:
Long-term debt, excluding current
installments:
Term loan 6,325 6,900
Subordinated notes payable 3,000 3,000
------ ------
Total long-term debt 9,325 9,900
Other long-term liability 343 412
Deferred income taxes payable 656 628
Deferred compensation 4 134
------ ------
Total long-term liabilities 10,328 11,074
------ ------
Stockholders' equity:
Common stock, $1 par value; authorized
20,000,000 shares; issued and
outstanding 4,226,635 shares as
of March 31, 2002 and 4,221,635
shares as of December 31, 2001 4,227 4,222
Additional paid-in capital 7,099 7,071
Retained earnings 6,184 5,841
Accumulated other comprehensive loss (212) (253)
------ ------
Total stockholders' equity 17,298 16,881
------ ------
Total liabilities and stockholders' equity $ 41,753 41,343
====== ======
See accompanying notes to consolidated financial statements.
3
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2002 and March 31, 2001
(In Thousands, Except Share And Per Share Data)
Three Months Ended
------------------------------------
March 31, March 31,
2002 2001
---------------- ----------------
Net sales $ 10,752 13,930
Cost of sales 7,863 10,337
--------- ----------
Gross profit on sales 2,889 3,593
--------- ----------
Selling, general and
administrative
expenses 2,341 2,941
Product development
costs 66 199
Amortization of
goodwill - 117
Interest expense 272 364
Interest income (36) (114)
Equity in income of
joint ventures (6) (28)
Other income, net (321) (90)
--------- ----------
2,316 3,389
--------- ----------
Earnings before
income taxes 573 204
Income tax expense 230 78
--------- ----------
Net earnings $ 343 126
========= =========
Basic earnings
per share $ .08 .03
========= =========
Diluted earnings
per share $ .08 .03
========= =========
Weighted average
shares outstanding 4,222,885 4,198,892
Dilutive effect of
stock options 101,255 57,312
Dilutive effect of
phantom stock units 11,730 18,096
--------- ----------
Weighted average
shares outstanding
assuming dilution 4,335,870 4,274,300
========= =========
See accompanying notes to consolidated financial statements.
4
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended March 31, 2002 and March 31, 2001
(In Thousands)
Three Months Ended
------------------------------------
March 31, March 31,
2002 2001
---------------- ----------------
Net earnings $ 343 126
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 41 (67)
----- -----
Total other
comprehensive
income (loss) 41 (163)
----- -----
Comprehensive
income (loss) $ 384 (37)
===== =====
See accompanying notes to consolidated financial statements.
5
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2002 and March 31, 2001
(In Thousands, Except Share Data)
Three Months Ended
------------------------------------
March 31, March 31,
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net earnings $ 343 126
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation of plant and equipment 160 171
Amortization of intangibles 10 126
Gain on disposition of equipment (108) -
Equity in income of joint ventures (6) (28)
Issuance of 12,390 common shares
as payment of employee's bonus - 111
Change in operating assets and liabilities:
Receivables (331) 1,243
Costs and estimated earnings in
excess of billings (1,093) 37
Inventories 334 441
Prepaid expenses and other current
assets 280 (143)
Other noncurrent assets - (7)
Accounts payable 176 (429)
Customers' deposits and billings in
excess of costs and estimated
earnings for completed and
uncompleted contracts 602 179
Accrued salaries, wages, and
commissions (90) (1,240)
Income taxes payable 6 (369)
Accrued royalties payable 3 (172)
Accrued product warranties 80 52
Accrued pension and retirement
savings plan liabilities 23 (78)
Accrued restructuring expenses (100) -
Accrued other liabilities 42 188
Deferred income taxes payable - 11
Deferred compensation (130) 2
----- -----
Net cash provided by
operating activities 201 221
----- -----
Cash flows from investing activities:
Proceeds from the disposition of equipment 198 -
Proceeds from the divestment of a
joint venture 125 -
Additions to property, plant and equipment (72) (142)
----- -----
Net cash provided (used) by investing activities 251 (142)
----- -----
See accompanying notes to consolidated financial statements.
6
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Three Months Ended March 31, 2002 and March 31, 2001
(In Thousands, Except Share Data)
Three Months Ended
------------------------------------
March 31, March 31,
2002 2001
---------------- ----------------
Cash flows from financing activities:
Sale of common shares in connection with
employee incentive stock option plan 33 25
Repayment of long-term debt (578) (514)
----- -----
Net cash used by financing activities (545) (489)
----- -----
Decrease in cash and
cash equivalents (93) (410)
Cash and cash equivalents,
beginning of period 6,114 7,925
----- -----
Cash and cash equivalents,
end of period $ 6,021 7,515
===== =====
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 248 337
===== =====
Income taxes $ 34 465
===== =====
See accompanying notes to consolidated financial statements.
7
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2002 and March 31, 2001
(1) The information contained in this Form 10-Q report is unaudited. In the
opinion of the management of Paragon Technologies, Inc. ("Paragon" or the
"Company"), the interim financial statements furnished reflect all
adjustments and accruals that are necessary to present a fair statement of
results for the interim periods. The financial statements include the
accounts of the Company and Ermanco Incorporated ("Ermanco"), a wholly
owned subsidiary company, after elimination of intercompany balances and
transactions. Results for interim periods are not necessarily indicative of
results expected for the fiscal year. This quarterly report should be read
in conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements of the Company and the related Notes
thereto appearing in our annual report on Form 10-K, as amended, for the
fiscal year ended December 31, 2001, as filed with the Securities and
Exchange Commission. Refer to the Company's Form 10-K, as amended, for the
year ended December 31, 2001 for more complete financial information.
(2) Restructuring
-------------
During the second quarter of 2001, the Company restructured 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 discontinued production operations at its
Easton, Pennsylvania facility. All production employees working in the
Easton, Pennsylvania manufacturing plant were laid off by the end of
November 2001. Prior to the restructuring, the Company employed
approximately 20 production employees, with an additional 27 individuals on
an extended layoff. 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 Company's Easton, Pennsylvania production employees, and $298,000 for
plant closure and professional service fees related to the restructuring.
The restructuring charges were determined based on formal plans approved by
the Company's management and the Board of Directors.
The liability related to the curtailment of the defined benefit plan is
recorded as accrued pension and retirement savings plan liabilities on the
consolidated balance sheet.
The major components of the restructuring charge and remaining accruals are
as follows:
Balance at Cash Balance at
December 31, 2001 Payments March 31, 2002
---------------------- -------------- -------------------------
Severances $ 274,000 (78,000) 196,000
Other 220,000 (22,000) 198,000
------- ------- -------
$ 494,000 (100,000) 394,000
======= ======= =======
(3) 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 and products offered for sale. The
Company operates in two major market segments.
8
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2002 and March 31, 2001
The Company's Easton, Pennsylvania operations (hereafter referred to as "SI
Systems") is a specialized systems integrator supplying SI Systems' branded
automated material handling systems to manufacturing, order selection, and
distribution operations. The systems are marketed, designed, sold,
installed, and serviced by its own staff or agents, generally as
labor-saving devices to improve productivity, quality, and reduce costs. SI
Systems also operates as a project manager in connection with the
installation, integration, and service of its products, generally utilizing
subcontractors. SI Systems' branded products are utilized to automate the
movement or selection of products and are often integrated with other
automated equipment such as conveyors and robots. SI Systems' branded
integrated material handling solutions involve both standard and specially
designed components and include integration of non-proprietary automated
handling technologies so as to provide turnkey solutions for its customers'
unique material handling needs. SI Systems' staff develops and designs
computer control programs required for the efficient operation of 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 Ermanco branded light to medium duty unit
handling conveyor products, serving the material handling industry through
a worldwide network of approximately 100 experienced material handling
equipment distributors and licensees. Ermanco also provides complete
conveyor systems for a variety of applications, including distribution and
manufacture of computers and electronic products, utilizing primarily its
own manufactured conveyor products, engineering services by its own staff
or subcontractors, and subcontracted installation services. Ermanco
supplies material handling systems and equipment to both national and
international markets. Ermanco offers services ranging from the delivery of
basic transportation conveyors to turnkey installations of complex, fully
automated work-in-process production lines and distribution centers,
utilizing sophisticated, custom-designed controls software. Many of
Ermanco's sales are to distributors who have non-exclusive agreements with
the Company.
The Company's systems vary in configuration and capacity. Historically,
system prices across the Company's product lines have ranged from $100,000
to several million dollars per system. Systems and aftermarket sales by
brand during the three months ended March 31, 2002 and March 31, 2001 are
as follows (in thousands):
For the three months ended March 31, 2002:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Systems sales $ 3,040 6,389 9,429 87.7%
Aftermarket sales 859 464 1,323 12.3%
------ ------ ------ -----
Total sales $ 3,899 6,853 10,752 100.0%
====== ====== ====== =====
As a % of total sales 36.3% 63.7% 100.0%
For the three months ended March 31, 2001:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Systems sales $ 5,019 7,121 12,140 87.2%
Aftermarket sales 1,205 585 1,790 12.8%
------ ------ ------ -----
Total sales $ 6,224 7,706 13,930 100.0%
====== ====== ====== =====
As a % of total sales 44.7% 55.3% 100.0%
9
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2002 and March 31, 2001
The Company's products are sold through its own sales personnel, along with
a network of distributors and licensees. Domestic and international sales
by brand during the three months ended March 31, 2002 and March 31, 2001
are as follows (in thousands):
For the three months ended March 31, 2002:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Domestic sales $ 3,809 6,487 10,296 95.8%
International sales 90 366 456 4.2%
------ ------ ------ -----
Total sales $ 3,899 6,853 10,752 100.0%
====== ====== ====== =====
For the three months ended March 31, 2001:
% of Total
SI Systems Ermanco Total Sales
--------------- -------------- -------------- --------------
Domestic sales $ 5,866 6,176 12,042 86.4%
International sales 358 1,530 1,888 13.6%
------ ------ ------ -----
Total sales $ 6,224 7,706 13,930 100.0%
====== ====== ====== =====
The Company also engages in sales with the U.S. government, which is one
of the Company's major customers. Sales to the U.S. government during
the three months ended March 31, 2002 and March 31, 2001 are as
follows (in thousands):
As a %
of Total Sales
-----------------
For the three months ended March 31, 2002 $ 1,519 14.1%
For the three months ended March 31, 2001 2,375 17.0%
The Company identifies operating segments based on the types of products
offered for sale as follows:
For the Three Months Ended
March 31, 2002 (In Thousands): SI Systems Ermanco Total
--------------------------------------- ------------ ------------ ------------
Sales $ 3,899 6,853 10,752
Earnings before interest expense,
interest income, equity in income
of joint ventures, and income taxes 697 106 803
Total assets 10,300 31,453 41,753
Capital expenditures 15 57 72
Depreciation and amortization
expense 70 100 170
For the Three Months Ended
March 31, 2001 (In Thousands): SI Systems Ermanco 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
10
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2002 and March 31, 2001
There were no intersegment sales for the three months ended March 31, 2002
and March 31, 2001.
(4) New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations." SFAS No. 141 requires that all business
combinations be accounted for by the purchase method and adds disclosure
requirements related to business combination transactions. SFAS No. 141
also establishes criteria for the recognition of intangible assets apart
from goodwill. This Statement applies to all business combinations for
which the acquisition date was July 1, 2001 or later. The Company had no
acquisitions subsequent to June 30, 2001. The Company intends to implement
the provisions of SFAS No. 141 in any future business combinations.
Effective January 1, 2002, the Company adopted Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"), which
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at least
annually. Impairment losses, if any, will be measured as of January 1, 2002
and recognized as the cumulative effect of a change in accounting principle
in 2002. FAS 142 also requires that intangible assets with determinable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values and reviewed for impairment in accordance
with Statement No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-Lived Assets to Be Disposed Of."
As of January 1, 2002, the Company had unamortized goodwill of $17,657,000,
all of which was attributable to Ermanco. The Company has not yet
determined whether an impairment exists, but expects to complete its
analysis in the second quarter of 2002. Due to the complexity, timing, and
scale of the process, the Company is currently unable to precisely
determine the amount of goodwill impairment, if any.
Comparison to Prior Year "As Adjusted"
-------------------------------------
The following table presents prior year reported amounts adjusted to
eliminate the effect of goodwill amortization in accordance with FAS 142.
Three Months Ended
March 31,
---------------------------------------
2002 2001
----------------- -----------------
Reported net earnings $ 343,000 126,000
Add back: goodwill amortization - 72,000
------- -------
Adjusted net earnings $ 343,000 198,000
======= =======
Basic net earnings per share:
Reported net earnings $ .08 .03
Goodwill amortization - .02
------- -------
Adjusted net earnings $ .08 .05
======= =======
Diluted net earnings per share:
Reported net earnings $ .08 .03
Goodwill amortization - .02
------- -------
Adjusted net earnings $ .08 .05
======= =======
11
Item 1. Financial Statements (Continued)
------- --------------------
Paragon Technologies, Inc. and Subsidiary
Notes To Consolidated Financial Statements
Three Months Ended March 31, 2002 and March 31, 2001
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Statement also supersedes APB No.
30 provisions related to the accounting and reporting for the disposal of a
segment of a business. This Statement establishes a single accounting
model, based on the framework established in SFAS No. 121, for long-lived
assets to be disposed of by sale. The Statement retains most of the
requirements in SFAS No. 121 related to the recognition of impairment of
long-lived assets to be held and used. The Statement is effective for years
beginning after December 15, 2001. The adoption of this Statement did not
have any impact on the Company's financial statements.
(5) Other Comprehensive Loss
------------------------
The Company is exposed to market risk from changes in interest rates, and
uses an interest rate swap to hedge this risk. The seven-year interest rate
swap has a notional amount of $5,175,000 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 (loss). The fair value of the
interest rate swap at March 31, 2002 was a liability of approximately
$343,000. The separate components of other comprehensive loss (income) are
as follows (in thousands):
Gross Tax Effect Net
------- ---------- -----
Accumulated other comprehensive
loss at December 31, 2001 $ 412 159 253
Other comprehensive loss (income) (69) (28) (41)
--- --- ---
Accumulated other comprehensive
loss at March 31, 2002 $ 343 131 212
=== === ===
The Company uses derivative financial instruments as risk management tools
and not for speculative purposes.
(6) Long-Term Debt
-------------
As of June 30, 2001, the Company was in violation of the covenants related
to its Funds Flow Coverage Ratio and its subordination agreement. Effective
June 30, 2001, the Company received a waiver of certain loan covenants. On
September 28, 2001, the Company entered into an amendment to the term loan
and line of credit agreements relative to future covenant requirements, a
variable term loan interest rate increase to LIBOR plus 3%, and limitations
on the cash payment of interest on subordinated debt until the Company is
in compliance with all the financial covenants as originally set forth in
the Loan Agreement with the Company's principal bank. However, the bank
waived the restriction from paying interest on the subordinated debt in the
form of cash for the quarter ended December 31, 2001 and the quarter ended
March 31, 2002. The Company intends to satisfy its quarterly interest
obligations on subordinated debt with the issuance of the Company's common
stock in the event the Company's principal bank does not grant waivers
regarding the making of cash payments of interest on subordinated debt.
12
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 $6,021,000 at March
31, 2002 from $6,114,000 at December 31, 2001. The decrease resulted from the
repayment of long-term debt of $578,000 and purchases of capital equipment of
$72,000. Partially offsetting the decrease in cash and cash equivalents from
these uses was cash provided by operating activities totaling $201,000, proceeds
of $198,000 from the disposition of equipment, and proceeds of $125,000 from the
divestment of a joint venture. Funds provided by operating activities during the
three months ended March 31, 2001 were $221,000.
Acquisition of Ermanco Incorporated
-----------------------------------
On September 30, 1999, the Company acquired of all of the outstanding
common stock of Ermanco. Under the terms of the Stock Purchase Agreement, the
Company acquired all of the outstanding common stock of Ermanco for a purchase
price of $22,801,000 consisting of $15,301,000 in cash, $3,000,000 in promissory
notes payable to the fourteen stockholders of Ermanco, and 481,284 shares of the
Company's common stock with a value of $4,500,000 based on the average closing
price of $9.35 of the Company's common stock for the five trading days
immediately preceding the date of the Stock Purchase Agreement, August 6, 1999.
In order to complete the Ermanco acquisition, the Company obtained
financing from its principal bank. The Company entered into a three-year line of
credit facility which may not exceed the lesser of $6,000,000 or an amount based
on a borrowing base formula tied principally to accounts receivable, inventory,
fair market value of the Company's property and plant, and liquidation value of
equipment. This amount will be reduced by the unpaid principal balance of the
term loan described below. The line of credit facility is to be used primarily
for working capital purposes. As of March 31, 2002, the Company did not have any
borrowings under the line of credit facility.
The Company financed $14,000,000 of the acquisition through a seven-year
term loan from its bank. During the first two years of the term loan, the
Company was obligated to repay equal quarterly payments of $312,500 plus accrued
interest. After September 30, 2001, the Company commenced making equal quarterly
payments of $575,000 plus interest, continuing until the loan is fully repaid.
The interest rate on the term loan is variable at a rate equal to the
three-month LIBOR Market Index Rate plus three percent, which was 5.04% as of
March 31, 2002. The Company also entered into an interest rate swap agreement
for a portion of the term loan to hedge the floating interest rate. The
seven-year interest rate swap for $5,175,000 is at a fixed rate of 9.38%. As of
March 31, 2002, the liability associated with the fair value of the cash flow
hedge was approximately $343,000. Since the inception of the term loan, the
Company prepaid, without penalty, $1,725,000 of the term loan.
To obtain the line of credit and term loan, the Company granted the bank a
security interest in all personal property, including, without limitation, all
accounts, deposits, documents, equipment, fixtures, general intangibles, goods,
instruments, inventory, letters of credit, money, securities, and a first
mortgage on all real estate. The line of 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 March 31, 2002, the Company was
in compliance with all covenants, as amended (see Note 6).
On September 30, 1999, the Company also issued promissory notes to fourteen
stockholders of Ermanco, two of which are directors of the Company, 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 through September 30, 2002,
twelve percent from October 1, 2002 through September 30, 2004, and fourteen
percent from October 1, 2004 through September 30, 2006. The weighted average
interest rate on the promissory notes is 11.714% over the term of the notes.
Interest shall be payable quarterly, in cash or under certain conditions, in the
Company's common stock upon
13
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Acquisition of Ermanco Incorporated (Continued)
-----------------------------------
approval of the Company's Board of Directors. The promissory notes may be
prepaid prior to the end of the seven-year term provided that there is no debt
outstanding under the Company's line of credit facility and term loan. Since
July 1, 2001, the Company has been and will be prohibited from making any cash
payments on subordinated debt and interest until the Company is in full
compliance with all the financial covenants as originally set forth in the term
loan agreement with the Company's principal bank. However, the bank waived the
restriction from paying interest on the subordinated debt in the form of cash
for the quarter ended December 31, 2001 and the quarter ended March 31, 2002.
The Company intends to satisfy its quarterly interest obligations with the
issuance of the Company's common stock in the event the Company's principal bank
does not grant waivers regarding the making of cash payments of interest on
subordinated debt.
Commitments and Contingencies
-----------------------------
Ermanco's operations are located in an 113,000 square foot steel building
in Spring Lake, Michigan. The building is leased from an organization that is
affiliated with the Company through a common director and officer of the
Company, Messrs. Shulman and Kirschner. The leasing agreement requires fixed
monthly rentals of $32,858 (with annual increases of 2.5%), which includes a
variable portion based on the lessor's borrowing rate and the unpaid mortgage
balance. The terms of the lease require the payment of all taxes, insurance, and
other ownership related costs of the property. The lease expires on September
30, 2004.
The Company also leases certain automobiles and office equipment, office
space, computer equipment, and software under various operating leases with
terms extending through July 2005.
Financing agreements related to the lease of computer software have been
recorded as capital leases. These agreements had a total initial contract value
of $36,000. As of March 31, 2002, the contract value of the agreements is
approximately $2,000.
On March 4, 1996, SI/BAKER established a $3,000,000 line of credit facility
(the "Facility") with its principal bank (the "bank"). Under the terms of the
Facility, SI/BAKER's parent companies, Paragon Technologies, Inc. and McKesson
Automation Systems Inc., have each provided a limited guarantee and surety in an
amount not to exceed $1,000,000 for a combined guarantee of $2,000,000 to the
bank for the payment and performance of the related note, including any further
renewals or modifications of the facility. As of March 31, 2002, SI/BAKER did
not have any borrowings under the Facility, and the Facility expires effective
August 31, 2002.
Other Liquidity and Capital Resource Matters
--------------------------------------------
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 fiscal year.
Sales volume, as well as cash liquidity, may experience fluctuations due to the
unpredictability of future contract sales and the dependence upon a limited
number of large contracts with a limited number of customers. 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 all strategic alternatives to increase
stockholder value, including expansion opportunities as they arise, although the
ongoing operating results of the Company, the restrictive covenants associated
with the financing obtained from the Company's principal bank, the economics of
the expansion, and the circumstances justifying the expansion will be key
factors in determining the amount of resources the Company will devote to
further expansion.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Results Of Operations
---------------------
Three Months Ended March 31, 2002 Versus Three Months Ended March 31, 2001
--------------------------------------------------------------------------
The Company's net earnings for the three months ended March 31, 2002 was
$343,000 compared to net earnings of $126,000 for the three months ended March
31, 2001. Contributing to the net earnings for the three months ended March 31,
2002 was other income from the short-term licensing of certain real property of
$150,000, and a gain on the sale of excess fixed assets of $108,000, and the
application of the non-amortization provision of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," whereby
goodwill is no longer amortized thereby resulting in an increase to pre-tax
income of $117,000.
Net Sales and Gross Profit on Sales
-----------------------------------
Net sales of $10,752,000 for the three months ended March 31, 2002
decreased 22.8% compared to net sales of $13,930,000 for the three months ended
March 31, 2001. The sales decrease of $3,178,000 was primarily attributable to a
lower volume of orders associated with the current economic slowdown and
competitive pricing pressures. The net sales decrease was comprised of a
decrease in SI Systems branded sales of approximately $2,325,000 and a decrease
in Ermanco branded sales of approximately $853,000 for the three months ended
March 31, 2002 when compared to the three months ended March 31, 2001. The
decline is SI Systems branded sales was primarily due to the prior year
comparable period containing a greater amount of sales related to the Lo-Tow(R)
product line. Contributing to the reduction of approximately $1,800,000 in
Lo-Tow(R) sales for the three months ended March 31, 2002 was a decrease of
approximately $850,000 in sales to the U.S. Postal Service. The Company's
business is dependent upon a limited number of large contracts with a limited
number of customers. This dependence can cause unexpected fluctuations in sales
volume. Various external factors affect the customers' decision-making process
on expanding and upgrading their current production or distribution sites. The
customers' timing and placement of new orders is often affected by factors such
as the current economy, current interest rates, and future expectations. The
Company believes that its business is not subject to seasonality, although the
rate of new orders can vary substantially from month to month. Fluctuations in
the Company's sales and earnings occur with increases or decreases in major
installations, since the Company recognizes sales on a percentage of completion
basis for its systems contracts.
Gross profit, as a percentage of sales, was 26.9% for the three months
ended March 31, 2002 compared to 25.8% for the three months ended March 31,
2001. Gross profit on sales for the three months ended March 31, 2002 was
favorably impacted by approximately 2.1% as a result of the reversal of
previously established contract accruals due to changes in cost estimates.
Partially offsetting the favorable impact of the reversal of previously
established contract accruals was the underabsorption of overhead costs due to a
decline in sales volume that accounted for a 0.7% reduction in the gross profit
percentage.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses of $2,341,000 were lower by
$600,000 for the three months ended March 31, 2002 than in the three months
ended March 31, 2001. The decrease of $600,000 was comprised of cost savings of
$412,000 attributable to the Company's restructuring of its business operations
in the prior fiscal year and continued emphasis on cost reduction. Also
contributing to the reduction in selling, general and administrative expenses
was a decrease of $172,000 in marketing expenses, primarily associated with the
Company's participation in a biannual industry trade show in the prior fiscal
year.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
---------------------
Three Months Ended March 31, 2002 Versus Three Months Ended March 31, 2001
--------------------------------------------------------------------------
(Continued)
Product Development Costs
-------------------------
Product development costs, including patent expense, of $66,000 were lower
by $133,000 for the three months ended March 31, 2002 than in the three months
ended March 31, 2001. Development programs in the three months ended March 31,
2002 were aimed at improvements to the Company's sortation and accumulation
conveyor technologies. Development programs in the three months ended March 31,
2001 included enhancements to the Company's Order Picking, Fulfillment, and
Replenishment product line and development efforts related to the NBS 30(TM) and
NBS 90(TM), narrow belt sorters, that were introduced in the material handling
marketplace during the first quarter of 2001.
Amortization of Goodwill
------------------------
Amortization of goodwill represented costs associated with the acquisition
of Ermanco. Due to the application of the non-amortization provision of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," goodwill is no longer amortized after December 31, 2001 as
compared to amortization expense of $117,000 for the three months ended March
31, 2001.
Interest Expense and Interest Income
------------------------------------
Interest expense of $272,000 was lower by $92,000 for the three months
ended March 31, 2002 than in the three months ended March 31, 2001. The decrease
in interest expense was attributable to the reduced level of term debt due to
principal prepayments and lower interest rates.
Interest income of $36,000 for the three months ended March 31, 2002
decreased by $78,000, when compared to the three months ended March 31, 2001.
The decrease in interest income was attributable to a reduction in the level of
funds and interest rates pertaining to short-term investments.
Equity in Income of Joint Ventures
----------------------------------
Equity in income of joint ventures represents the Company's proportionate
share of its investment in the SI/BAKER joint venture and prior to January 1,
2002 its investment in the SI-Egemin joint venture, that are accounted for under
the equity method. The net unfavorable variance of $22,000 in the equity in
income of joint ventures for the three months ended March 31, 2002 as compared
to the three months ended March 31, 2001 was comprised of decreased earnings of
approximately $56,000 attributable to the SI/BAKER joint venture and decreased
losses of approximately $34,000 attributable to the SI-Egemin joint venture.
The unfavorable variance of $56,000 for the three months ended March 31,
2002 in the equity in income of the SI/BAKER joint venture was primarily
attributable to increased product development costs of approximately $317,000 in
the three months ended March 31, 2002 as compared to the three months ended
March 31, 2001. Partially offsetting the increase in product development costs
was the favorable performance on several contracts initiated in prior fiscal
years that were completed or nearing completion during the three months ended
March 31, 2002.
The Company divested of its investment in the SI-Egemin joint venture at
the end of calendar year 2001. The favorable variance of $34,000 for the three
months ended March 31, 2002 in the equity in income of the SI-Egemin joint
venture was attributable to the prior fiscal year containing operating expenses
of the joint venture.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
---------------------
Three Months Ended March 31, 2002 Versus Three Months Ended March 31, 2001
--------------------------------------------------------------------------
(Continued)
Other Income, Net
-----------------
The favorable variance of $231,000 in other income, net for the three
months ended March 31, 2002 as compared to the three months ended March 31, 2001
was primarily attributable to the short-term licensing of certain real property
of the Company's Easton, Pennsylvania facility of approximately $150,000 during
the first quarter of 2002. Also contributing to the favorable variance in other
income, net for the three months ended March 31, 2002 was a gain on the sale of
excess fixed assets associated with the Company's Easton, Pennsylvania facility
of approximately $108,000. Partially offsetting the favorable variance in other
income, net was a reduction of revenue-based royalty income from the Company's
SI/BAKER joint venture of approximately $10,000.
Income Tax Expense
------------------
The Company recognized income tax expense of $230,000 during the three
months ended March 31, 2002, compared to income tax expense of $78,000 in the
comparable prior year period. Income tax expense was generally recorded at
statutory federal and state tax rates.
Backlog of Orders
-----------------
The total backlog of orders at March 31, 2002 was approximately
$12,985,000. During the three months ending March 31, 2002, the Company received
orders totaling approximately $10,395,000.
------------------------------
Cautionary Statement
--------------------
Certain statements contained herein are not based on historical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 or by the Securities and Exchange Commission
rules, regulations, and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. Among other things,
they regard the Company's acquisition activities, earnings, liquidity, financial
condition, and certain operational matters. Words or phrases denoting the
anticipated results of future events, such as "anticipate," "believe,"
"estimate," "expect," "may," "will," "will likely," "are expected to," "will
continue," "should," "project," and similar expressions that denote uncertainty,
are intended to identify such forward-looking statements. The Company's actual
results, performance, or achievements could differ materially from the results
expressed in, or implied by, such "forward-looking statements": (1) as a result
of risks and uncertainties identified in connection with those forward-looking
statements, including those factors identified herein, and in the Company's
other publicly filed reports; (2) as a result of risks associated with the
Company's restructuring, including the failure to achieve anticipated operating
savings, and the possibility that the restructuring charges will be greater than
anticipated; (3) as a result of factors over which the Company has no control,
including the strength of domestic and foreign economies, sales growth,
competition, and certain costs increases; or (4) if the factors on which the
Company's conclusions are based do not conform to the Company's expectations.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Quantitative and Qualitative Disclosures
----------------------------------------
The Company's primary interest rate 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.
------------------------------
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits-- None.
(b) The following reports on Form 8-K were filed during the
quarter ended March 31, 2002:
Effective March 13, 2002, Elmer D. Gates resigned his
positions as a Director and Chairman of the Board of
Directors of Paragon Technologies, Inc. Additionally, Anthony
W. Schweiger was elected Chairman of the Board, replacing Mr.
Gates, and Theodore W. Myers was elected as a Director of the
Company. A Form 8-K was filed on March 13, 2002 regarding
these changes to the Board of Directors.
A Form 8-K was filed on March 18, 2002 regarding the
announcement of the Company's financial results for the
fourth quarter and year ended December 31, 2001.
18
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 15, 2002
------------------
19