Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(1) Basis of Financial Statement Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the requirements for Form 10-Q and Article 10 of Regulation
S-X and, accordingly, certain information and footnote disclosures have
been condensed or omitted. In the opinion of the management of Paragon
Technologies, Inc. ("Paragon" or the "Company"), the unaudited interim
financial statements furnished reflect all adjustments and accruals that
are necessary to present a fair statement of results for the interim
periods. Certain prior year amounts have been reclassified to conform to
the current year's presentation. Results for interim periods are not
necessarily indicative of results expected for the full fiscal year.
This quarterly report should be read in conjunction with, and is qualified
in its entirety by reference to, the Consolidated Financial Statements of
the Company and the related Notes thereto appearing in the Company's annual
report on Form 10-K for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission on March 30, 2007. Refer to the
Company's annual report on Form 10-K for the year ended December 31, 2006
for more complete financial information.
Use of Estimates
The preparation of the financial statements, in conformity with U.S.
generally accepted accounting principles, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. The judgments made in assessing the appropriateness of the
estimates and assumptions utilized by management in the preparation of the
financial statements are based on historical and empirical data and other
factors germane to the nature of the risk being analyzed. Materially
different results may occur if different assumptions or conditions were to
prevail. Estimates and assumptions are mainly utilized to establish the
appropriateness of the inventory valuation, warranty reserve, and revenue
recognition.
(2) Short-Term Investments
The Company's short-term investments are comprised of debt securities, all
classified as available for sale, that are carried at cost, which
approximates fair value of the investments at period end. The debt
securities include state and municipal bonds. The short-term investments
are on deposit with a major financial institution and are supported by
letters of credit.
(3) Accrued Product Warranty
The Company's products are warranted against defects in materials and
workmanship for varying periods of time depending on customer requirements
and the type of system sold, with a typical warranty period of one year.
The Company provides an accrual for estimated future warranty costs and
potential product liability claims based upon a percentage of cost of
sales, typically two percent of the cost of the system being sold, and a
detailed review of products still in the warranty period is performed each
quarter.
A roll-forward of warranty activities is as follows (in thousands):
Beginning Additions (Reductions) Ending
Balance Charged to Balance
January 1 Costs and Expenses Deductions September 30
-------------- ---------------------------- -------------- ------------------
2007................... $ 192 127 (79) 240
2006................... $ 189 135 (43) 281
|
6
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(4) Business Operations
Company Overview
Paragon, based out of Easton, Pennsylvania, provides a variety of material
handling solutions, including systems, technologies, products, and services
for material flow applications. The Company's capabilities include
horizontal transportation, rapid dispensing, order fulfillment, computer
software, sortation, integrating conveyors and conveyor systems, and
aftermarket services. The Company is a Delaware corporation, originally
incorporated in 1958.
The Company (also referred to as "SI Systems") is a specialized systems
integrator supplying SI Systems' branded automated material handling
systems to manufacturing, assembly, order fulfillment, and distribution
operations customers located primarily in North America, including the U.S.
government. SI Systems is brought to market as two individual brands, SI
Systems' Order Fulfillment Systems (hereafter referred to as "SI Systems
OFS") and SI Systems' Production & Assembly Systems (hereafter referred to
as "SI Systems PAS"). Each brand has its own focused sales force, utilizing
the products and services currently available or under development within
the Company.
The SI Systems OFS sales force focuses on providing order fulfillment
systems to order processing and distribution operations, which may
incorporate the Company's proprietary DISPEN-SI-MATIC(R) and automated
order fulfillment solutions and specialized software from the SINTHESIS(TM)
Software Suite. SINTHESIS(TM) is comprised of eight proprietary software
groups, with 26 extendible software modules that continually assess
real-time needs and deploy solutions to accurately facilitate and optimize
planning, warehousing, inventory, routing, and order fulfillment within the
distribution process. The SI Systems PAS sales force focuses on providing
automated material handling systems to manufacturing and assembly
operations and the U.S. government, which may incorporate the Company's
proprietary LO-TOW(R) and CARTRAC(R) horizontal transportation
technologies.
The Company's automated material handling systems are marketed, designed,
sold, installed, and serviced by its own staff or subcontractors as
labor-saving devices to improve productivity, quality, and reduce costs.
The Company's integrated material handling solutions involve both standard
and specially designed components and include integration of
non-proprietary automated handling technologies to provide turnkey
solutions for its customers' unique material handling needs. The Company's
engineering staff develops and designs computer control programs required
for the efficient operation of the systems and for optimizing
manufacturing, assembly, and fulfillment operations.
The Company continues to review opportunities with the goal of maximizing
resources, increasing stockholder value, and considering strategies and
transactions intended to provide liquidity. At this time, the Company
believes that an increase in stockholder value will be best obtained
through increases in the Company's internal technology base, strengthening
the Company's sales and marketing capabilities, growth of the Company's
continuing operations and other higher growth markets, by the enhancement
of the Company's products with advanced proprietary software capabilities
through research and development efforts and/or possible acquisitions,
mergers, and joint ventures. Although the Company enters into preliminary
discussions and non-disclosure agreements from time to time, the Company
does not have any material definitive agreements in place. There is no
assurance that the Company will be able to consummate any such acquisition.
7
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(4) Business Operations (Continued)
The Company's systems vary in configuration and capacity. Historically,
system prices across the Company's product lines have ranged from $100,000
to several million dollars per system. Systems and aftermarket sales during
the three and nine months ended September 30, 2007 and 2006 are as follows
(in thousands):
For the three months ended September 30, 2007 and 2006:
September 30, 2007 September 30, 2006
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
Systems sales................. $ 6,352 87.0% $ 4,414 84.7%
Aftermarket sales............. 946 13.0% 795 15.3%
-------------- ------------- -------------- --------------
Total sales................ $ 7,298 100.0% $ 5,209 100.0%
============== ============= ============== ==============
|
For the nine months ended September 30, 2007 and 2006:
September 30, 2007 September 30, 2006
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
Systems sales................. $ 14,275 84.3% $ 11,845 83.1%
Aftermarket sales............. 2,649 15.7% 2,407 16.9%
-------------- ------------- -------------- --------------
Total sales................ $ 16,924 100.0% $ 14,252 100.0%
============== ============= ============== ==============
|
The Company's products are sold worldwide through its own sales personnel.
Domestic and international sales during the three and nine months ended
September 30, 2007 and 2006 are as follows (in thousands):
For the three months ended September 30, 2007 and 2006:
September 30, 2007 September 30, 2006
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
Domestic sales................ $ 4,793 65.7% $ 4,787 91.9%
International sales........... 2,505 34.3% 422 8.1%
-------------- ------------ -------------- --------------
Total sales................ $ 7,298 100.0% $ 5,209 100.0%
============== ============= ============== ==============
|
For the nine months ended September 30, 2007 and 2006:
September 30, 2007 September 30, 2006
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
Domestic sales................ $ 12,111 71.6% $ 13,688 96.0%
International sales........... 4,813 28.4% 564 4.0%
-------------- ------------- -------------- --------------
Total sales................ $ 16,924 100.0% $ 14,252 100.0%
============== ============= ============== ==============
|
8
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(4) Business Operations (Continued)
Sales from external customers for each of the Company's products during the
three and nine months ended September 30, 2007 and 2006 are as follows (in
thousands):
For the three months ended September 30, 2007 and 2006:
September 30, 2007 September 30, 2006
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
LO-TOW(R) sales.............. $ 2,287 31.3% $ 1,968 37.8%
CARTRAC(R) sales.............. 64 .9% 1,012 19.4%
DISPEN-SI-MATIC(TM),
SINTHESIS(TM), and
related order fulfillment
sales...................... 4,001 54.8% 1,434 27.5%
Other sales................... - - - -
Aftermarket sales............. 946 13.0% 795 15.3%
-------------- ------------- -------------- --------------
Total sales................ $ 7,298 100.0% $ 5,209 100.0%
============== ============= ============== ==============
|
For the nine months ended September 30, 2007 and 2006:
September 30, 2007 September 30, 2006
------------------------------ ------------------------------
% of Total % of Total
Sales Sales Sales Sales
-------------- ------------- -------------- --------------
LO-TOW(R) sales.............. $ 5,693 33.6% $ 4,539 31.8%
CARTRAC(R) sales.............. 119 .7% 1,924 13.5%
DISPEN-SI-MATIC(TM),
SINTHESIS(TM), and
related order fulfillment
sales...................... 8,428 49.8% 5,382 37.8%
Other sales................... 35 .2% - -
Aftermarket sales............. 2,649 15.7% 2,407 16.9%
-------------- ------------- -------------- --------------
Total sales................ $ 16,924 100.0% $ 14,252 100.0%
============== ============= ============== ==============
|
All of the Company's sales originate in the United States, and there are no
long-lived assets existing outside the United States.
The Company's backlog of orders at September 30, 2007 and September 30,
2006 were $7,172,000 and $4,879,000, respectively.
The Company's business is largely dependent upon a limited number of large
contracts with a limited number of customers. This dependence can cause
unexpected fluctuations in sales volume. Various external factors affect
the customers' decision-making process on expanding or upgrading their
current production or distribution sites. The customers' timing and
placement of new orders is often affected by factors such as the current
economy, current interest rates, and future expectations. The Company
believes that its business is not subject to seasonality, although the rate
of new orders can vary substantially from month to month. Since the Company
recognizes sales on a percentage of completion basis for its systems
contracts, fluctuations in the Company's sales and earnings occur with
increases or decreases in major installations.
9
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(5) Recently Issued Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109, Accounting for Income
Taxes, which clarifies the accounting for uncertainty in income taxes. FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation requires that the
Company recognize in the financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. The Company adopted the
provisions of FIN 48 on January 1, 2007 as described in Note 11 of the
Notes to Financial Statements.
In September 2006, the Financial Accounting Standards Board issued SFAS No.
157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair
value, establishes a market-based framework or hierarchy for measuring fair
value, and expands disclosures about fair value measurements. SFAS No. 157
is applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value. SFAS No. 157 does not
expand or require any new fair value measures. The provisions of SFAS No.
157 are to be applied prospectively and are effective for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact, if any, the adoption of SFAS
No. 157 will have on the Company's financial statements.
In February 2007, the Financial Accounting Standards Board issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial Liabilities
- Including an Amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS
No. 159 permits entities to elect to measure many financial instruments and
certain other items at fair value. Upon adoption of SFAS No. 159, an entity
may elect the fair value option for eligible items that exist at the
adoption date. Subsequent to the initial adoption, the election of the fair
value option should only be made at initial recognition of the asset or
liability or upon a remeasurement event that gives rise to new-basis
accounting. The decision about whether to elect the fair value option is
applied on an instrument-by-instrument basis, is irrevocable and is applied
only to an entire instrument and not only to specified risks, cash flows or
portion of that instrument. SFAS No. 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be
carried at fair value nor does it eliminate disclosure requirements
included in other accounting standards. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 159 will have on
the Company's financial statements.
(6) Sale-Leaseback
The Company's principal office is located in a 173,000 square foot,
concrete, brick, and steel facility in Easton, Pennsylvania. In connection
with the February 2003 sale of the Company's Easton, Pennsylvania facility,
the Company entered into a leaseback arrangement for 25,000 square feet of
office space for five years. The leasing agreement requires fixed monthly
rentals of $19,345 (with annual increases of 3%). The terms of the lease
also require the payment of a proportionate share of the facility's
operating expenses. The leasing agreement is secured with a $200,000 letter
of credit. The lease expires on February 21, 2008.
10
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(6) Sale-Leaseback (Continued)
In accordance with SFAS No. 13 and SFAS No. 28, the leaseback does not meet
the criteria for classification as a capital lease; hence, it is classified
as an operating lease. The sale-leaseback resulted in a total gain of
$2,189,000, of which $1,363,000 was recorded as a gain in 2003. The
seller-lessee (Company) retained more than a minor part (25,000 square
feet) but less than substantially all of the use of the property (173,000
square feet) through the leaseback and realized a profit on the sale in
excess of the present value of the minimum lease payments over the lease
term. The present value of the stream of lease payments utilizing the
Company's incremental borrowing rate of 10.0% was $826,000. The $826,000 of
deferred profit is amortized in equal amounts as a reduction in rent
expense over the five-year term of the lease. The amortization of the
deferred profit will expire during the first quarter of 2008. During the
three months ended September 30, 2007 and 2006, $41,000 and $41,000,
respectively, of the deferred gain was recognized. During the nine months
ended September 30, 2007 and 2006, $124,000 and $124,000, respectively, of
the deferred gain was recognized.
(7) Line of Credit
The Company has a line of credit facility which may not exceed $5,000,000
and is to be used primarily for working capital purposes. Interest on the
line of credit facility is at the LIBOR Market Index Rate plus 1.4%. As of
September 30, 2007, the Company did not have any borrowings under the line
of credit facility; however, the leasing agreement associated with the
Company's principal office is secured with a $200,000 letter of credit.
Therefore, as of September 30, 2007, the amount of available line of credit
was $4,800,000.
The line of credit facility contains various non-financial covenants and is
secured by all of the Company's accounts receivables and inventory. The
Company was in compliance with all covenants as of September 30, 2007. The
line of credit facility expires effective June 30, 2008.
(8) Stock Repurchase Program
On August 12, 2004, the Company's Board of Directors approved a program to
repurchase up to $1,000,000 of its outstanding common stock. The Company's
Board of Directors amended its existing stock repurchase program on several
occasions during 2005 and 2006 by increasing the amount it has authorized
management to repurchase from up to $1,000,000 of the Company's common
stock to up to $14,000,000.
On January 7, 2007, the Company's Board of Directors amended its existing
stock repurchase program by increasing the amount it has authorized
management to repurchase from up to $14,000,000 of the Company's common
stock to up to $15,000,000.
There were no repurchases during the three months ended September 30, 2007.
During the nine months ended September 30, 2007, the Company repurchased
99,699 shares of common stock at a weighted average cost, including
brokerage commissions, of $5.68 per share. Cash expenditures for the stock
repurchases during the nine months ended September 30, 2007 were $566,732.
Through September 30, 2007, the Company repurchased 1,637,718 shares of
common stock at a weighted average cost, including brokerage commissions,
of $8.62 per share. Cash expenditures for the stock repurchases since the
inception of the program were $14,116,143. As of September 30, 2007,
$883,857 remained available for repurchases under the stock repurchase
program.
11
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(8) Stock Repurchase Program (Continued)
Based on market conditions and other factors, additional repurchases may be
made from time to time, in compliance with SEC regulations, in the open
market or through privately negotiated transactions at the discretion of
the Company. There is no expiration date with regards to the stock
repurchase program. The purchase price for the shares of the Company's
common stock repurchased was reflected as a reduction to stockholders'
equity. The Company allocates the purchase price of the repurchased shares
as a reduction to common stock for the par value of the shares repurchased,
with the excess of the purchase price over par value being allocated
between additional paid-in capital and retained earnings. All shares of
common stock that were repurchased by the Company since the inception of
the program were subsequently retired.
(9) Unearned Support Contract Revenue
The Company offers its Order Fulfillment customers one-year support
contracts for an annual service fee. The support contracts cover a
customer's single distribution center or warehouse where the Company's
products are installed. As part of its support contracts, the Company
provides analysis, consultation, and technical information to the
customer's personnel on matters relating to the operation of its Order
Fulfillment System and related equipment and/or peripherals.
The Company records advance payments for unearned support contracts in the
balance sheet as a current liability. Revenue on individual support
contracts is deferred and recognized on a straight-line basis over the
one-year term of each individual support contract.
(10) Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123R and began
expensing the grant-date fair value of employee stock options over the
related requisite service period.
The Company adopted SFAS No. 123R using the modified prospective transition
method. Under this transition method, compensation cost associated with
employee stock options recognized after December 31, 2005 includes
attribution of the fair value related to the remaining unvested portion of
stock option awards granted prior to January 1, 2006, if any, and
attribution related to new awards granted after January 1, 2006.
The expense associated with stock-based compensation arrangements is a
non-cash charge. In the Statements of Cash Flows, stock-based compensation
expense is an adjustment to reconcile net income to net cash provided
(used) by operating activities. SFAS No. 123R requires that certain cash
flows resulting from tax deductions in excess of compensation cost
recognized in the financial statements be classified as financing cash
flows. For the nine months ended September 30, 2007 and for the year ended
December 31, 2006, no excess tax benefits were generated.
12
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(10) Stock-Based Compensation (Continued)
1997 Equity Compensation Plan
The Company's stock-based compensation program, the 1997 Equity
Compensation Plan ("ECP"), expired in July 2007. Prior to the expiration,
the ECP provided for grants of stock options, restricted and nonvested
stock, and stock appreciation rights to selected key employees, key
advisors who performed valuable services, and directors of the Company. In
addition, the ECP provided for grants of performance units to employees and
key advisors. Prior to the expiration, the ECP, as amended by stockholders
in August 2000 and June 2001, authorized up to 1,012,500 shares of common
stock for issuance pursuant to the terms of the plan. No further grants are
available under the plan.
Under the Company's ECP, officers, directors, and key employees have been
granted options to purchase shares of common stock at the market price at
the date of grant. Options vest in four equal annual installments beginning
on the first anniversary of the date of grant; thus, at the end of four
years, the options are fully exercisable. Vested stock option awards may be
exercised through payment of cash, exchange of mature shares, or through a
broker. As of September 30, 2007, 7,500 options are outstanding under the
plan, and all options have a term of seven years.
Stock-based compensation expense recognized during the three months ended
September 30, 2007 and 2006 for stock-based compensation programs was
$6,000 and $10,000, respectively. Stock-based compensation expense
recognized during the three months ended September 30, 2007 and 2006
consisted of expensing $1,000 and $2,000, respectively, for employee stock
options, and $0 and $0, respectively, for directors' stock options, and
$5,000 and $8,000, respectively, for nonvested stock.
Stock-based compensation expense recognized during the nine months ended
September 30, 2007 and 2006 for stock-based compensation programs was
$8,000 and $28,000, respectively. Stock-based compensation expense
recognized during the nine months ended September 30, 2007 and 2006
consisted of expensing $4,000 and $5,000, respectively, for employee stock
options, and $0 and $5,000, respectively, for directors' stock options, and
$4,000 and $18,000 respectively, for nonvested stock.
All of the stock-based compensation expense recognized was a component of
selling, general and administrative expenses. Income was recognized during
the three months ended March 31, 2007 as a result of the forfeiture of
5,000 shares of nonvested stock due to the resignation of Mr. Hoffner from
the Company effective March 1, 2007.
13
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(10) Stock-Based Compensation (Continued)
Stock Options
A summary of stock option activity is presented below:
Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Exercise Term Intrinsic
Options Price (In Years) Value
------------- --------------- ---------------- ---------------
Outstanding at January 1, 2007........... 32,500 $ 8.89
Granted................................ - -
Exercised.............................. - -
Forfeited.............................. (25,000) 8.56
------------- ---------------
Outstanding at September 30, 2007........ 7,500 $ 10.01 5.4 $ 19,500
============= ===============
Exercisable at September 30, 2007........ 1,875 $ 10.01 5.4 $ 4,875
|
There were no stock options granted during the nine months ended September
30, 2007.
The compensation expense charged against income during the three months
ended September 30, 2007 and 2006 for stock options was $1,000 and $2,000,
respectively. The compensation expense charged against income during the
nine months ended September 30, 2007 and 2006 for stock options was $4,000
and $10,000, respectively. The total compensation expense of $23,000 is
expected to be recognized on the straight-line basis over the stated
vesting period consistent with the terms of the arrangement. As of
September 30, 2007, there is unrecognized compensation cost of $12,000 on
the stock option awards which will be recognized over the next 2.4 years.
As of December 31, 2005, there were no unvested employee stock options.
Therefore, no compensation cost related to stock options granted to
employees prior to January 1, 2006 was recognized.
Nonvested Stock
The grant-date fair value of nonvested stock is determined on the date of
grant based on the market price of the stock, and compensation cost is
generally amortized to expense on a straight-line basis over the vesting
period during which employees perform related services.
On March 8, 2006, the Company issued 12,500 shares of nonvested stock to
its executive officers. Participants are entitled to cash dividends and to
vote their respective shares. The shares are subject to forfeiture if
employment is terminated prior to March 8, 2010.
On March 1, 2007, Mr. Hoffner resigned from his positions as President and
CEO and as a director of the Company. Due to his resignation from the
Company, Mr. Hoffner forfeited his 5,000 shares of nonvested stock.
14
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(10) Stock-Based Compensation (Continued)
A summary of nonvested stock activity is presented below:
Nonvested Grant Date
Shares Fair Value
-------------- ------------------
Nonvested at January 1, 2007.............................. 12,500 $ 10.01
Granted................................................ - -
Vested................................................. - -
Forfeited.............................................. (5,000) 10.01
-------------- --------------
Nonvested at September 30, 2007........................... 7,500 $ 10.01
============== ==============
|
The compensation expense recognized during the three months ended September
30, 2007 and 2006 for nonvested stock awards was $5,000 and $8,000,
respectively. The compensation expense recognized during the nine months
ended September 30, 2007 and 2006 for nonvested stock awards was $4,000 and
$18,000, respectively. The total compensation cost of $75,000 is expected
to be recognized on the straight-line basis over the four-year vesting
period consistent with the terms of the arrangement. As of September 30,
2007, there is unrecognized compensation cost of $45,000 on the nonvested
stock awards which will be recognized over the next 2.4 years.
(11) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
On January 1, 2007, the Company adopted the Financial Accounting Standards
Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109, Accounting for
Income Taxes, which clarifies the accounting for uncertainty in income
taxes. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation requires
that the Company recognize in the financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure.
As a result of the implementation of FIN 48, the Company recognized a
decrease of $37,000 in the liability for unrecognized tax benefits, which
was accounted for as an increase to the January 1, 2007 balance of retained
earnings. As of the date of adoption and after the impact of recognizing
the decrease in liability noted above, the Company's unrecognized tax
benefits totaled $692,000, of which $590,000 would impact the effective tax
rate if recognized.
The Company recognizes interest and penalties to income tax matters in
income tax expense. In conjunction with the adoption of FIN 48, the Company
recognized approximately $117,000 ($80,000, net of federal benefit) for
potential interest and
15
Item 1. Financial Statements (Continued)
Paragon Technologies, Inc.
Notes To Financial Statements (Unaudited)
For the Three and Nine Months Ended September 30, 2007 and 2006
(11) Income Taxes (Continued)
penalties at January 1, 2007 which is included as a component of the
$692,000 unrecognized tax benefit noted above. To the extent interest and
penalties are not assessed with respect to uncertain tax positions, amounts
accrued will be reduced and reflected as a reduction of the overall income
tax provision.
During the three and nine months ended September 30, 2007, unrecognized tax
benefits decreased by approximately $315,000 due to the expiration of
statutes of limitations. As of September 30, 2007, the Company's
unrecognized tax benefits totaled $358,000, of which $275,000 would impact
the effective tax rate if recognized.
During the three and nine months ended September 30, 2007, the Company
recognized approximately $69,000 ($53,000, net of federal benefit) for
potential interest and penalties, which is a component of the $358,000
unrecognized tax benefit noted above.
The Company estimates that the total unrecognized tax benefits may decrease
by approximately $30,000 due to the expiration of statutes of limitations
prior to September 30, 2008.
With few exceptions, the Company is no longer subject to examination by
major taxing authorities and jurisdictions (including U.S. Federal) for
years prior to 2004.
The Company recognized an income tax benefit of $217,000 during the three
months ended September 30, 2007 compared to income tax expense of $44,000
during the three months ended September 30, 2006. The income tax benefit
for the three months ended September 30, 2007 was higher than statutory
federal and state tax rates primarily due to the reversal of accruals for
the expiration of tax return statutes, the effect of tax-exempt interest on
certain investments on the annualized effective rate, and an adjustment in
the effective income tax rate expected to apply based on the projected
profitability of the Company for 2007. Income tax expense for the three
months ended September 30, 2006 was lower than statutory federal and state
tax rates primarily due to the effect of tax-exempt interest on certain
investments on the annualized effective rate.
The Company recognized an income tax benefit of $315,000 during the nine
months ended September 30, 2007 compared to income tax expense of $1,000
during the nine months ended September 30, 2006. The income tax benefit for
the nine months ended September 30, 2007 was higher than statutory federal
and state tax rates primarily due to the reversal of accruals for the
expiration of tax return statutes, the effect of tax-exempt interest on
certain investments on the annualized effective rate, and an adjustment in
the effective income tax rate expected to apply based on the projected
profitability of the Company for 2007. Income tax expense for the nine
months ended September 30, 2006 was lower than statutory federal and state
tax rates primarily due to the reversal of accruals for the expiration of
tax return statutes and the effect of tax-exempt interest on certain
investments on the annualized effective rate.